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HOUSING: Euphoria is getting priced in!

U.S. home prices as measured by the S&P Case-Shiller 20-city home price index fell by a smaller than expected 13.3% year-over-year to a level of 144.23 in July.  The consensus economist view was expecting prices to fall by a larger 14.2% year-over-year.  Looking at the month-to-month trends, the 20-city home price index rose 1.6% for the month after increasing 1.4% in June.

 

Case Shiller is a very important data point when looking at the health of the housing market, and we used it successfully early in the year to call the bottom in the housing market.  It is important to understand, however, that by the time of release the data is so old that it is primarily relevant as a historical trend indicator.   

 

As such, the data that was reported today is a lagging data point – it is July data - and we are in September.  To that end, it really shows the rear-view that people are imputing into the forward look for equity prices: Bullish confidence that the worst is behind us.

 

While it is too early to get bearish on the marginal change in housing, we are getting closer.  To give you a preview for one of our themes as we look toward 2010 is a bearish stance on housing.  We will continue to monitor how things progress, but the acceleration in month-to month trends should begin to slow at the end of 1Q10.

 

Howard Penney

Managing Director

 

HOUSING: Euphoria is getting priced in! - hp1a

 

HOUSING: Euphoria is getting priced in! - hp2b

 


Flailing Volumes: SP500 Levels, Refreshed...

Yesterday’s +1.8% meltup in the SP500 was one of the more frustrating for the short selling community. It came on bone dry volumes, into both month and quarter end.

 

It’s always easier to make sales when things are green, and that’s what we have been doing all day in the Virtual Portfolio (2 long sales, 3 short sales). Volumes in this market are flailing up here as we test making YTD highs. At this stage of the game, that’s plenty reason enough for me to start unloading of illiquid longs. Being long illiquidity up here on the high-wire is not the risk management move of choice for me.

 

Into tomorrow, the range of probabilities in the SP500 is relatively right. I have immediate term TRADE support at 1045 and immediate term resistance at 1077 (see chart below). Manage risk around that range and be patient. Month and quarter end will be behind us soon enough.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Flailing Volumes: SP500 Levels, Refreshed... - a1


CONSUMER CONFIDENCE - NOT SO FAST!

As we previewed yesterday, the Conference Board reported a disappointing consumer confidence number in September.  The Index now stands at 53.1, down from 54.5 in August.  The Present Situation Index decreased to 22.7 from 25.4. The Expectations Index declined to 73.3 from 73.8 last month.
 
The consensus forecast reading of 57 had suggested another significant sequential improvement.  The consensus optimism was based on higher stock prices, lower gas prices and fewer layoffs.  Our call was that "while energy prices are less of a concern for most consumers today, more of them are focused on other factors such as employment, housing and credit concerns." 
 
More importantly, most consumer companies that have spoken publicly on the topic have stated that they do not believe that consumers are ready to buy into the economic recovery narrative. 
 
After falling to an all-time low in February, the overall index has been trending higher as more upbeat economic news helped improve the current situation, but we still have significant headwinds facing more and more consumers.  In some respects, Q4 '09 is shaping up to mirror Q4 '08, when looking at consumer centric issues.  I still believe that most consumers are focused on needs over wants, which remains in step with where we were a year ago. 
 
While more consumers are saving for future needs, a growing number of consumers are in precarious positions when it comes to personal finances.  As such, more and more are placing a priority on paying down debt and focused on decreasing overall spending.

 

It is these current consumer trends that leave me concerned that easy comparisons in 4Q09 may not translate into the improved YOY restaurant sales trends that so many investors are banking on.

 

CONSUMER CONFIDENCE - NOT SO FAST! - consumer confidence


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CONSUMER CONFIDENCE – NOT SO FAST!

As we previewed yesterday, the Conference Board reported a disappointing consumer confidence number in September.  The Index now stands at 53.1, down from 54.5 in August.  The Present Situation Index decreased to 22.7 from 25.4. The Expectations Index declined to 73.3 from 73.8 last month.

 

The consensus forecast reading of 57 had suggested another significant sequential improvement.  The consensus optimism was based on higher stock prices, lower gas prices and fewer layoffs.  Our call was that “while energy prices are less of a concern for most consumers today, more of them are focused on other factors such as employment, housing and credit concerns.” 

 

More importantly, most consumer companies that have spoken publicly on the topic have stated that they do not believe that consumers are ready to buy into the economic recovery narrative. 

 

After falling to an all-time low in February, the overall index has been trending higher as more upbeat economic news helped improve the current situation, but we still have significant headwinds facing more and more consumers.  In some respects, Q4 '09 is shaping up to mirror Q4 '08, when looking at consumer centric issues.  I still believe that most consumers are focused on needs over wants, which remains in step with where we were a year ago. 

 

While more consumers are saving for future needs, a growing number of consumers are in precarious positions when it comes to personal finances.  As such, more and more are placing a priority on paying down debt and focused on decreasing overall spending. 

 

Howard W. Penney

Managing Director

 

CONSUMER CONFIDENCE – NOT SO FAST! - a1

 


WYNN MACAU IPO: CHEAPER THAN IT LOOKS

Tax efficiency may not be Steve Wynn’s main incentive but it sure makes this IPO look attractive. If it weren’t for all those corporate/branding fees the IPO pricing, would be downright cheap.

 

 

From an investor’s perspective, we like the Wynn Macau IPO and would try and get as much stock as possible even at the high end of the stated range.

 

Not all EBITDA streams are created equal.  Buying into WYNN’s Macau operations at the same multiple at which WYNN is trading is a deal in our opinion.  The main reason?  Macau has a 5 year corporate income tax holiday on gaming profits, which is likely to get extended in perpetuity.  In the US, taxes are assessed at 35% of net income.  That’s a big difference. 

 

Presently the US only taxes repatriated income but over the long term, if one holds WYNN stock, the tax differential will come into play.  President Obama and many democrats controlling Congress would like to tax ALL income at the US rate regardless of where earned or whether repatriated or not.  That’s a subject for another post but it seems likely WYNN, LVS and many other US companies with significant international operations would domicile overseas in that case.

 

The following table attempts to equate taxable and non-taxable EBITDA streams to provide a better comparison.  At HK$10.08 per share, the high end of the range, we calculate an EV/EBITDA multiple of 14.6x (EBITDA includes a full year of Encore).  However, adjusting for the tax advantage, the multiple falls to 9.5x.  On top of a 9.5x tax equivalent multiple of current operations, Macau IPO investors would also receive a free option on a Cotai development, worth $1.2bn in our opinion.  Excluding this from the enterprise value yields an even lower multiple of 8x.  Think how cheap it would be if WYNN wasn't charging the new entity over $60 million in branding fees on top of the $46 million in coporate allocations, design, marketing, and employment fees!

 

 

WYNN MACAU IPO: CHEAPER THAN IT LOOKS - Wynn IPO Table8

 

 

We can argue about whether there is a better way to account for the tax efficiency (free cash flow – see below) but there is no doubt that, all things held equal, buying into a Wynn Macau IPO is more attractive at the same multiple than buying WYNN in the US.

 

WYNN MACAU IPO: CHEAPER THAN IT LOOKS - Wynn FCF Table6

 

 

On a free cash flow basis, we calculate a yield of 6.7%.  After adjusting the equity value for the Cotai option value, we estimate a “true” yield of 8.1% which is pretty attractive.

 

We’re hearing that they may close the books tonight with a 10/1 pricing.  The IPO is oversubscribed and Hong Kong tycoons and long only funds are in the driver's seat.  We think it will be a successful IPO and may even be worth a look when the stock commences trading.

 


RESTAURANTS TODAY

DRI will report 1Q10 EPS after the market closes. Importantly, Darden is one of the first casual dining companies to report June, July and August numbers.  Consensus estimates for same-store sales: Blended (2.6%), Olive Garden (1.2%), Red Lobster (2.3%), LongHorn Steakhouse (6.5%), Capital Grill (16.4%) and Bahama Breeze (5.1%).

 

DRI did not provide same-store sales guidance for the first quarter, but said that comparable sales growth at Olive Garden, Red Lobster and LongHorn Steakhouse on a blended basis would be flat to down 2% for the full-year. 

 

Please see Sept 1 post titled “DRI – A Closer Look At the Numbers” for more details.

 

 

 

RESTAURANTS TODAY - qsr

 

RESTAURANTS TODAY - fsr


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