The reaction to BYD, WMS, and especially WYNN's Q3 taught us that expectations were pretty darn high for this sector. With LVS off 20% this week, they've probably come down.



One has to have brass bones to own a gaming company into Q3.  We think LVS is going to post a solid quarter but what does that mean?  We felt the same about WYNN.  Understanding that expectations were high, we weren't expecting a positive reaction in the stock, but an 11% plunge?  Now that would've been a great call.  Unfortunately, we didn't see it.


So back to LVS.  We are projecting total company EBITDA of $266 million versus the Street at $245 million.  Once again, we are above the Street, but will it matter if we are right? 


In Macau, we think Sands EBITDAR will come in around $65 million, up significantly over last year's $43 million due to significantly higher hold percentage on RC, which was only 2.35% in 3Q08, and deep cost cuts.  As a partial offset, table drop will be down in both RC and mass y-o-y. For Venetian we have EBITDAR increasing to 8.4% to $147 million, with the increase driven almost entirely by cost cutting at the property level. Four Seasons, on the other hand, experienced a huge ramp in table drop this quarter, especially on the RC side. High hold didn't hurt either. We estimate $16 million of EBITDA at FS versus just $3 million in 3Q08.


Las Vegas is Las Vegas and we don't feel like we have much edge on the number for Q3.  We are at $76 million, pretty close to the Street consensus, and slightly above last year.  Remember that in last year's Q3 LVS held at a very low percentage, which cost the company about  $30 million in EBITDAR.  It's not like we are saying business is better in Las Vegas.









“At Marina Bay Sands in Singapore, construction, development and pre-opening activities continue on pace, and we are targeting an opening of the property in the first quarter of 2010.”





“We have now increased our cost saving initiatives to more than $500 million of annualized savings. This is $30 million more than we had previously targeted. And we will continue our efforts to identify additional opportunities to increase that $500 million number. As of June 30, we have successfully implemented approximately 69% of these identified costs, eliminating $345 million of costs from our running rate.”


“We expect to have fully implemented approximately $200 million in annualized cost savings across our Las Vegas operations by end of this year.”


“The three prong strategy for the Venetian Macao continued throughout 2009 with the first initiative, the rightsizing of our business and the full implementation of our cost savings program, as well as other efficiency initiatives front and center. We have now expanded that program to target at least $300 million in annualized cost savings across our Macao operations…As of June 30, 2009, we have implemented approximately 70% of our targeted savings. That is up to $210 million from our annual run rate.”





“Looking ahead, we hope to benefit from both the launch of new marketing programs at the property [Four Seasons] and a natural increase in visitation to Cotai as our neighbor the City of Dreams continues to mature. We should also benefit from the recent addition of our 19 luxurious Paiza mansions, which have been full since they have opened.”

“We expect to increase visitation and play at the property [Sands Bethlehem] as our player development, promotion and bussing programs mature in the months ahead, particularly in the mid-week businesses situation.”

“So we expect overall that our original business plan will be amply executed in Singapore by selling the cash flow of the retail mall in Singapore and either substantially reduce or eliminate the total debt to build Singapore. In the case of Macao, the cash flow and the sale, of course, we have to wait until the current real estate property market improves, but it is going better in Asia than it is in the United States, and when it gets back to normal, we will sell our retail – we will consider selling our retail, if we can get the exaggerated price we are looking for.”

“And we do intend to start selling the Four Seasons apartments, serviced apartments as condominiums, hopefully by the end of this year. And I was in China, this past week… people are opening up – they are picking up their mattresses, taking their money out, and they are starting to buy apartments, and they made reference to the old style of Hong Kong apartment sales that several projects get sold out within two or three days of they being exposed to the market. So we do expect a very good response on the Four Seasons apartments.”

“And in Las Vegas, as the market returns to normal, and you're guess is good as ours, but things appear to be appearing more normal in today's – currently than has been over the last six to twelve months, then we would be able to hopefully restart our condominium project, the St. Regis project for condos and then substantially reduce our debt in the Las Vegas market plus upstreaming money from Macao and Singapore.”




"The good news is demand is certainly there, it is returning, it is getting better for both the balance of this year and in 2010 and 2011. The issue is going to be rate because, obviously, we love to go back to running 45% of our mix being group driven, and it enables us maybe to fill and fill it fast, ADRs, and the banker revenues with it."

Sheldon: “But listen, we have got to – we can’t be as strong as we were in the past. We will have to take a little bit of time to ramp up to get back to normal.”



Sheldon: “So I want to emphasize that there is no question whatsoever that in the near future we are going to have a decision on which is the best opportunity for us to create the liquidity that we would like to have. So this is not a question of if, it is only a question of when, and what are the most favorable terms for us. So when we come out with the answer, it will be an answer that will be the best answer available in the market today.”




Sheldon: "they said it is likely to pass by the end of the summer, and if doesn’t, it will pass for sure in the fall."





Sheldon: we think we can get away with something $50 or $75 more than what just a plain hotel room can get. So not all hotels, not all Vegas properties are created equal. We think we are created a little more equal than others and our ability to get back to normalized ADR is probably better and faster than our competitors. Of course, The Palazzo and Wynn are – still have a very, very high level of appreciation.



No Rush?

“While I will never hesitate to use force to protect the American people or our vital interests, I also promise you this — and this is very important as we consider our next steps in Afghanistan: I will never rush the solemn decision of sending you into harm’s way.” –President Obama addressing a Naval Air Station in Jacksonville Florida on 10/26/2009


The Washington Post today wrote a story entitled, “U.S. Official Resigns Over Afghan War”, that discusses former Marine  Captain Mathew Hoh resigning from the Foreign Service.  According to the story:


“ . . . in a move that has sent ripples all the way to the White House, Hoh, 36, became the first U.S. official known to resign in protest over the Afghan war, which he had come to believe simply fueled the insurgency.”


In many ways Hoh’s resignation is emblematic of the Obama Administration struggle with Afghanistan.  Early on, they had identified it as the good war and the war worth fighting, but have shown little, at least publicly, willingness to implement the strategy its military leaders believe will be required for success. 


In his resignation letter, Hoh wrote:


“I have doubts and reservations about our current strategy and planned future strategy, but my resignation is based not upon how we are pursuing this war, but why and to what end."


This statement, of course, is a broader reflection of the public view of Afghanistan.  How? Why? And to what end? Obviously, President Obama inherited this war, so to some extent we can’t blame him in totality, but the fact remains the uncertainty around this war is a drag on his approval, which will impede his ability to implement broader policy in the coming months and years of his term.


Currently the Rasmussen Daily Tracking poll has a -11 rating for President Obama’s approval.  This rating is calculated by subtracting the difference between strongly approve and strongly disapprove, which, as of today, is currently at 41% Strongly Disapprove and 30% Strongly Approve.  While President Obama did received a bounce in polls after receiving the Nobel Peace Prize, that bounce, which is typical for polls, was short lived based on its one-time nature.  That is, it didn’t change the ingrained view of the polling public’s view of the President. Except for one day (in which the poll was at -9), President Obama has double digit negative ratings in the Rasmussen Poll since October 16th, a point we’ve outlined in the chart below.


In addition to the war in Afghanistan, which is becoming a defining point for his administration, President Obama is also currently struggling with the healthcare bill and the economy in terms of his popularity.  In effect, he now has a triumvirate of political footballs that he has to juggle, which, as outlined above, is weighing on his popularity in terms of approval rating.


The U.S. Today published another interesting poll today which asked respondents whether they would be better or worse off today or in three/four years from now, 37% believing they will be worse off. Compared to the same poll shortly after President Obama’s election in November 2008, 25% said the would be worse off. Obviously, this poll has coincided with the dramatic spike in unemployment, so it may not be totally a reflection of the respondents view of the President and his policies, but is likely a reflection of how the broad electorate feels about their personal economic future.


In the quote at the start of this note, the President mentioned that he will not rush into a decision of sending more troops to Afghanistan.  To some extent that is a metaphor for many of his policies: even if he is seeing a negative score in the short term, he is not going to rush to change strategy on important issues.  Ultimately, this type of conviction may pay off for the President, even if his approval rating suffers in the short term, which leads to the question that we titled this note with, which is, ‘Does Approval Matter?”


The simple answer is, the President’s approval rating means very little for him in the short term.  He will not be facing another election for over three years.  That said, it does mean a lot for his party.  Another interesting poll we’ve been watching is the generic congressional poll, which compares broad support for Republicans versus Democrats in congressional races.


From President Obama’s election last fall up until late June of this summer, Democrats held a consistent lead over Republicans in this Rasmussen Poll.  Since June, which coincided with the decline in the President’s sky high approval ratings, the Republicans have held a steady lead, which in the past two weeks has been 5 and 4 points respectively.  This poll obviously begs the question: President Obama isn’t in a rush, but should he be?


Daryl G. Jones
Managing Director


No Rush? - a1


No More Free Moneys?

Indian equities have broken the immediate term TRADE line…


As India’s central bankers shift to a more hawkish rate stance and government stimulus programs expire, the bloom appears to be disappearing from the equity market.


If inflation levels revert towards positive readings, the storm clouds could grow darker as consumer inflation has continued to remain stubbornly high despite record low wholesale prices this year. Consumers are already bracing for higher staple prices in the wake of another disappointing harvest cycle. Another weak crop next year could create real pressure.


From a quantitative perspective, the SENSEX has broken down. There is no support for the BSE Sensex until the TREND line outlined below.


Andrew Barber



No More Free Moneys? - a1

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Bombed Out Buck: Changing Dynamics

When we first began pounding the table about the relationship between the US Dollar and the equity market  (“Breaking the Buck” Q1 09, “Burning the Buck”  Q2/Q3 09 and our present “Bombed out Buck” thesis)  what was a matter of debate has become consensus and it seems like every pundit on CNBC has been talking the subject up. We were early to the game on this call, we are also now likely to be among the first to walk off the court: as the facts change, so do we.


The reality is that over time the Dollar oscillates between a role as a driver and that of a reflection of the US asset markets (including equities) with great frequency.  To help illustrate this point, I have put together the crude illustrations below. The chart shows the rough correlation between the S&P 500 and the US Dollar Index on a rolling 250 day basis.


As you can see, the relationship flips between strong positive and negative correlation with a very high frequency.  In the background of the second chart I have charted a rolling measure of the absolute difference between year-over-year returns for the two indices to map out periods of long term performance convergence/divergence. Intuitively the periods of broadest divergence tend to coincide with period of strong negative correlation and vice versa (with the notable exception of Volker’s interest rate crusade in the early 1980’s).


Obviously there is a huge difference between calculating positive and negative correlation and understanding when the dollar is the driver for this, but it does serve to illustrate how volatile this relationship is. 


Bombed Out Buck: Changing Dynamics - barber1


Bombed Out Buck: Changing Dynamics - barber2


Early this year we realized that the US Dollar was setting up to assume the role of equity market driver and the strong negative correlation between the two indices has proved us right. We now see the fundamental dynamic between shift starting and expect that –just as the USDI/SPX relationship can easily revert to a reflective measure as we move forward, so too can the correlation between the two weaken. This is supported by recent declines in shorter term r2 calculations.


Our point is simply, it would be a mistake to assume that the relationship between US equities and the dollar is static. Our process is one of risk management and a critical part of that is understanding when a trend is changing.


Andrew Barber



I see no reason to fight the trends at PNRA.  The concept operates in a segment of the industry that has very little direct competition.  The breakfast day-part is being challenged by rising unemployment but PNRA’s customers appear more loyal than the bottom feeder customers that are causing MCD some difficulties.


PNRA reported 3Q09 earnings after the close yesterday and there was little not to like.  Following the recent trend in restaurant earnings, PNRA’s earnings of $0.65 per share easily beat the street’s $0.58 per share estimate.  Bucking the trend, however, PNRA’s same-store sales growth at both the company and franchise operated restaurants also came in better than expectations.  And, the good news did not end there.

  1. Same-store sales have improved sequentially on a 2-year average basis each quarter this year.
  2. Same-store sales growth also improved on a sequential basis throughout the quarter (+2.6% in July, +3.0% in August and +4.4% in September).
  3. Unlike its peers, this growth was fueled by both traffic growth (+1.8%) and average check growth (+1.5%).  This transaction growth represented a significant sequential improvement from 2Q’s 1.4% decline.
  4. Same-store sales continued to improve in Q4 with quarter-to-date underlying trends up 6.9%.  This is a strong number on its own, but it is even more impressive relative to the soft October trends cited by both SONC and MCD. 
  5. Q4 same-store sales guidance was difficult to decipher as the company provided both calendar and fiscal ranges but the given 5%-6% range seems to be the more important range to consider as it represents underlying business trends.  This guidance assumes continued sequential improvement in both transaction and average check growth in Q4.
  6. Mix turned positive in September and has remained positive in October.  Management attributed this mix improvement largely to the tick up in catering trends.  PNRA’s soft catering trends have been a drag on mix as it is typically a low transaction/big ticket business.  PNRA expects catering to be up 5%-10% in Q4 (was running -5% in 1H and positive in Q3), which should add about 30 bps to average check growth.
  7. Operating margins improved 230 bps in the quarter and PNRA is guiding to an additional 75-125 bps of improvement in Q4 and 25-75 bps in 2010.
  8. PNRA’s full-year 2010 EPS guidance of $3.05-$3.15 is above the street’s $3.03 estimate and assumes 3.0%-5.0% same-store sales growth (flat to 2% transaction growth).

Being the resident bear, I have a hard time believing this Q4 and 2010 guidance but the company’s Q3 same-stores sales and traffic trends were pretty unbelievable as well!  This company is driving both traffic and average check growth in an extremely challenging environment.


I would say the only somewhat concerning issue discussed today stems from the company’s decision to accelerate company-owned unit growth next year.  PNRA announced that it would increase its new company-owned units by more than 50%.  Yes, the company’s margins have gotten significantly better in the last two years, but I would attribute a lot of that improvement to its having slowed new unit development.  PNRA opened 89 company-owned restaurants in 2007, 35 in 2008, an estimated 25 in 2009 and is now forecasting about 40-50 new units in 2010. 


Management said it must take advantage of the current real estate opportunities and that current returns warrant becoming more aggressive with growth now.  Management also highlighted my concerns about doing so, however, when it said that new stores often generate lower returns initially due to opening costs and higher training costs.  This accelerated growth will lead growth-related costs right back into the P&L and put increased pressure on returns.  This might help explain why the company is forecasting 25-75 bps of margin growth in 2010 with 3%-5% same-store sales growth after driving nearly 180 bps of growth on only 1% comparable sales growth year-to-date.


 I am not saying that growth is never warranted, but I would have preferred to see the company take up its new unit growth goals in a more conservative manner.  That being said, this company’s current trends continue to surprise me and time will tell whether returns will hold.






Relax: SP500 Levels, Refreshed...

The tones and frequencies of my inbox are relatively good indicators of the behavioral side of this market. Some people are a little freaked out here. So, take a deep breath, and realize that what you are feeling isn’t unique.


The Bad, the Good, and the Relax lines (see chart below):

  1. Bad – two days ago, the SP500 broke our immediate term TRADE line at 1067; that’s not new
  2. Good – the SP500 has an immediate term TRADE line of 1049; that’s the same line I had in this morning’s note
  3. Relax – the intermediate term TREND line = 1017

TRADEs are what they are, trades. They are 3-weeks or less in duration. They matter.


TRENDs are much more dominant. They are 3-months or more in duration. They are very difficult to break.


Understanding that I only have a 6% Allocation to US Equities means I can probably be more relaxed here than the guy who got fully invested at the top of October 19th. But the fact of the matter remains that Mr. Macro Market couldn’t care less about my or his individual portfolio position.


As risk managers, all we can do is manage the risk that’s in front of us. From the lows of this morning (1054 on the SP500 as I type this), you have another -0.5% of immediate term TRADE downside, and another -3.5% downside to a fortified TREND line.


Relax, and wait for your price. This is not a crash, yet…



Keith R. McCullough
Chief Executive Officer


Relax: SP500 Levels, Refreshed...  - SP10 28


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