DRI – Comments on September sales

Senior management at DRI just made comments about sales trends in September.  In September, DRI blended SSS are running similar to August levels (OG -2% to -3%, RL -6% and LH -8% to -9%).  They also believe the industry trends in September are running similar to August (MK SSS – 5.4%).


The chances that same-store sales for the industry are positive in Q4 are looking slimmer every day. 








Despite a recent “glut of Asian stock deals”, Wynn Resorts sold 1.5 billion Hong Kong listed shares in its Asian IPO at the top of its price range to raise $1.63 billion.  The IPO’s range was HK$8.52 to HK$10.08, with Wynn selling 25% of the business to the public.  Some commentators are see valuations as being too high and believe that a strong debut will be difficult for Wynn.  Wynn’s successful sale will now put pressure on Las Vegas Sands ahead of their public offering at the end of November or early December. 





The Finance Services Bureau announced that the government’s income from direct gaming taxes fell 9.5% in the first eight months of the year when compared to the same period in 2008.  Gaming taxes accounted for 73.6% of the government’s total receipts during the same period, as compared to a share of 80.2% in the same period of last year. 





LVS’ halting of their construction projects on Macau’s Cotai Strip brought the city’s explosive construction activity to a standstill.  Some real estate funds, such as Telok Macau Real Estate Fund, are now focusing on going “back to basics” and building residential projects rather than the large “glamour projects” that typified the construction boom of a few years ago. Genevia Lam, a VP at Telok, says that the developers at the time ignored the reality that the luxury apartments, measuring from 1,200 to 2,700 square feet and priced at upwards of HK$3 million each, were “beyond the reach of the general public.”


To get back to basics, Telok Macau Real Estate Fund is building a residential project, scheduled for completion in October 2010, where units will be prices between HK$1.3 million and HK$3.5 million or at an average of HK$3,000 per square foot.  Commentators are predicting that mass residential prices in Macau will rise to between HK$3,500 and HK$4,000 per square foot from the present average of HK$2,800 per square foot.  Residential prices in Macau are said to be 30% below the market peak of December 2007.





Tomorrow is the 60th anniversary of the establishment of the People’s Republic of China.


“Yes, we have to divide up our time like that, between our politics and our equations. But to me our equations are far more important, for politics are only a matter of present concern. A mathematical equation stands forever.”
-Albert Einstein
Math is important. Economics isn’t math, yet. It’s a social science that continues to evolve, particularly in Washington and on Wall Street.
In the last 3 market days, we have had 3 Fed Heads come out hawkish. Warsh, Plosser, and Fisher – I’ll call them The New Reality’s 3-some.

When I think about the interconnectedness of politics and equations, I really use one as a backboard to make a macro call on the other. After all, politicians are proactively predictable. Math is marked-to-market.
I’ve been calling for a Reflation Rotation in Q3. Every quarter, my Macro Team here at Research Edge comes out with 3 intermediate term Macro Themes. Intermediate term, by our definition is 3 months or more in duration.
Reflation Rotation simply means moving from year-over-year DEFLATION in Q3 to accelerating year-over- year inflation in Q4. Because everything that really matters in our Macro models happens on the margin, this directional move from depressed/deflated prices to reflating ones becomes math that the Fed Heads aren’t allowed to ignore.
Charles Plosser is the President of the Federal Reserve Bank of Philadelphia. He’s a business cycle economist. So am I. He earned both his Ph.D. and MBA at the University of Chicago. My teammate, Todd Jordan, got his MBA there too and, as Jordan likes to say, “we’re math guys”…
Plosser found a special place in Research Edge’s heart last night while speaking at Lafayette. First, he used 2 of our 3 durations. In speaking about inflation risks, he talked about the “intermediate term and long term.” In Research Edge speak, those are called TRENDs and TAILs.
Secondly, he went on to say that “Our credibility depends on it”…
“Our”, being the Fed, and “it”, being the math.
Thirdly, and most emphatically, Plosser reminded Americans that the US Federal Reserve must “take the necessary steps to prevent a second Great Inflation”… Finally, he said that the Fed would need to raise rates “well before unemployment rates and other measures of resource utilization have returned to acceptable levels”…
Now, combined with Fed Governor, Kevin Warsh’s comments on Friday and President of the Federal Reserve Bank of Dallas’ (Richard Fisher) comments yesterday, this 3-some is teeing us up for a Q4 from the TIPs!
Pardon the pun, but TIP (Treasury Inflation Protected Bonds), is where we have had our highest allocation in our Asset Allocation Model for the better part of the last 3 months. The “tips”, are also where the world’s greatest golfers hit the ball from. For the Credibility Crisis facing America’s Financial System, this is some serious progress.
The Fed doesn’t change it’s rhetoric haphazardly. Never forget that this is an extremely politicized organization. Explicit changes in Fed rhetoric are more important than interest rate changes themselves. Markets move on expectations, not yesterday’s news.
This morning, you are seeing the Macro Market move like this 3-some just did off of the tee. US Treasuries are getting pounded into the sand trap and the Piggy Banker Yield Curve continues to compress. You know we math guys like 3s. I like this 3-some, and I’d like to give you these 3 macro lines to consider:
1.      Rates: Immediate term TRADE breakout line for 2-year US Treasury Yields = 0.97% (the market has driven the green here to 1.03% this morning).

2.      Spreads: Yield Spread is 229 basis points. For the Bankers, that’s a bunker (10-year minus 2-year UST yields peaked at 276bps in May of Q2 – as good as it gets).

3.      Currencies: immediate term support for the USD is now at a higher-low for the 1st time this year; $75.97 on the USD Index needs to hold the green!

While this 3-some has every opportunity to get hammered by a Bernanke ball from behind, understand that the game has changed here this morning. We, as risk managers of this crash course of US politics and equations, are being paid to pay attention.
I have sold out of all of my Commodity exposure other than Gold (gold price had a fantastic Q3, tacking on an impressive +8% gain). As Reflation Rotation finds its way into US Q4 CPI and PPI reports, I do not want to be long everything oil and copper anymore. This 3-some is finally fighting that REFLATION wind with 3 extra clubs.
My immediate term TRADE lines of support for the SP500 are now 1044 and 1077, respectively.
Best of luck out there today,




EWG – iShares Germany
Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats over the weekend. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

CAF – Morgan Stanley China Fund
A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.


GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XLP – SPDR Consumer Staples Looking for low-beta short exposure to US Consumer spending. Consumer Staples short interest is low, and the stocks are over-owned.  

LQD – iShares Corporate Bonds Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.

DIA  – Diamonds Trust In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


Despite an easy comparison – slot hold % was abnormally low last year – Strip revenue may decline in the mid-teens in August based on an ugly 10% passenger drop at McCarran Airport.


McCarran airport announced that August passenger traffic declined 9.8% year-over-year.  We’ve run our model and conclude that, assuming normal table and slot hold percentages, Strip gaming revenues will have declined 16% when Nevada releases the monthly figures in two weeks.  A decline of this magnitude is not pretty under any circumstances but considering that slot hold percentage in August of 2008 was only 5.9%, well below the typical 7%, the 16% drop is particularly telling.  As a result of the slot hold delta, slot revenue declined 15% on a volume decline of only 3.5% last year.


The chart below provides our projections.  We expect slot and table volumes and table revenues to each decline over 20%.  The only bright spot will be slot revenue which we believe will fall by only 8%.  The August downturn is exacerbated by this year’s calendar when most of the Labor Day weekend fell in September of this year versus August of last year.  If we’re right, August could be the worst performing month since February when Strip gaming revenues fell by 23%.







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.



Keith R. McCullough
Chief Executive Officer


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

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