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Bernanke Panders, Again!

Three minutes prior to the FOMC release, the Buck was Burning to the tune of -0.76%, down to $75.81. That’s -15% lower than where the price of what was once the world’s reserve currency was in March. Three minutes after the release, the US Dollar didn’t really budge.


The Fed made NO changes to the statement other than a token shift in the agency debt plan. The plan on rates is to keep pandering to the fear-mongering politics the moment, keeping rates “exceptionally low” for an “extended period” of time. Citizens of America who hope to save at a real rate of return, shame on you. Go back to your day jobs, if you still have one.


Although the marked-to-market facts have changed (GDP, stocks, credit, gold, oil, etc…), unfortunately Mr. Bernanke’s plan has not. He is being who they hired him to be. A conflicted and compromised head of the US Federal Reserve who is crushing the credibility of the currency, in search of short term political gain.



Keith R. McCullough
Chief Executive Officer


Bernanke Panders, Again!  - BernGeith

A Referendum? Not So Fast . . .

Many popular media outlets this morning are reporting on yesterday’s elections and suggesting that the results were an early referendum on President Obama.  Most pundits are focused on the gubernatorial races in New Jersey and Virginia and the facts don’t lie.  In both states, Republicans won despite fighting against Democratic incumbency. In New Jersey, Corzine’s advantage was solidified even more by the amount of money he spent on the race.  According to the New Jersey state Election Law Enforcement division, he spent $23.6MM compared to Christie’s $8.8MM, an almost three-fold advantage.  Yet despite these monetary and incumbency advantages, Republicans ruled the day, but what conclusions can we draw from these results?


The exit polling in both states provides some interesting insights.  In the table below, we’ve outlined percentage of the vote that each candidates received versus President Obama’s job approval rating in each state based on the exit polls, and then compared that to the 2008 Presidential election results.


A Referendum? Not So Fast . . . - table


Interestingly, President Obama has incredibly strong job approval ratings in New Jersey and solid approval in Virgina.  In fact, based on the exit polls, more people approve of the job that President Obama is doing in New Jersey than voted for him in 2008.  While the Virgina numbers look less supportive as President Obama’s approval rating is well below his margin of victory in 2008;  the devil is once again in the details.  The exit polls for Virginia also showed that for those who voted in this gubernatorial election, 43% voted for Obama in 2008 and 51% voted for McCain.   So the issue in Virginia was one of turn out, which admittedly does has some implication relating to approval for the President, rather than some broad based sea change relating to approval of President Obama.  In fact,  one could actually argue that President Obama’s favorability went up with those who voted in Virginia as his approval rating in exit polls was 48%, while only 43% of those polled voted for him in 2008.


Was this election an indictment of Obama? No, far from it. If anything, the elections suggest that President Obama continues to maintain an almost Teflon like status despite declining numbers in some national polls.  So, what can we take from these elections as we look towards the 2010 mid-terms? Perhaps not much.  In fact as the Washington Post reported today:


“In the 15 gubernatorial elections since 1949, the voters of New Jersey and Virginia have chosen governors belonging to the same party 10 times (seven Democrats, three Republicans). In five of those 10 elections, the party winning both governorships went on to pick up seats in the House and Senate the next year. In three, a sweep of the statehouses augured precisely the opposite result in the subsequent congressional election. Once, Democrats won both governors' races and went on to get a split result (losing seats in one house, gaining them in another). Once, the same thing happened to Republicans. Not a particularly compelling pattern.”


If anything these elections may be an early indicator of a shift in sentiment back towards the Republicans, buts as former Speaker of the House Tip O’Neill famously said, “All politics is local”, which is the key takeaway, along with the amazing approval resilience of President Obama.



Daryl G. Jones
Managing Director  

Sales Growth ≠ Consumer Health

Sales Growth  ≠ Consumer Health


Last week’s sports apparel numbers were not pretty. But underlying near-term trends are sound. Good news heading into Sales Day tomorrow. That said, this is rather meaningless as it relates to the true health of the consumer.


Not a good week for the sports apparel retailers last week. Are we alarmed? Nah.  Look at the relationship between trailing 5-week sales for this group and the ICSC comp set. Pretty good.


Are we bullish on the Consumer?  No way. As we noted in our 4Q themes call on Friday, we might be looking at impressive yy sales results, but on an underlying multi-year trend basis, they’re stagnant. The market won’t care about this while numbers are going up – which should continue to happen as this calendar year progresses.


Sales Growth  ≠ Consumer Health - Third Chart


Sales Growth  ≠ Consumer Health - Consumer Chart 1yr


Sales Growth  ≠ Consumer Health - Consumer Chart 3 yr


Sales Growth  ≠ Consumer Health - Table sportsapparel


Sales Growth  ≠ Consumer Health - chart sports apparel



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Team Consumer Data Check: Short XLY

All the data points we monitor on the health of the consumer continue to flash RED.


HOUSING CONCERS CONTINUE - Today, the Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased 8.2% to 608.3 from 562.3 last week; this was the first increase in a month on the back of lower mortgage rates.   The refinancing gauge jumped 15%, while the index of purchases fell for the fourth consecutive week.   The purchase Index includes all mortgages applications for the purchase of a single-family home.  It covers the entire market, both conventional and government loans.  The trends in the purchase index does not bode well for the next data point, existing home sales.



CONSUMER SPENDING PATTERNS - The Research Edge Retail team pointed out that the current results from MasterCard do not support a rebound in underlying consumer discretionary spending patterns. 


From the Retails team’s post today – “While showing continued progress on a number of fronts this quarter, MasterCard’s US credit card volume continues to show no meaningful signs of turning around. In fact, credit card volumes for the last three quarters now, on a year over year basis, have been: -16.9%, -18.9% and -17.9%; not the kinds of numbers that signal a recovery. Granted, the volumes have stabilized and importantly they have arrested the decline that was in place from 2Q08 through 1Q09, but since then we have yet to see them move decisively back towards the positive column, which is what we’d expect to see amid the backdrop of a real (vs. perceived) recovery.   For reference, credit card volumes are a better proxy than debit cards for the discretionary side of the US consumer’s wallet, as consumers tend to revolve discretionary items, whereas they put staples on debit cards which are paid in full at the time of purchase.”


Team Consumer Data Check: Short XLY - cc1



A DECLINE IN NON-ESSENTIAL CONSUMER SPENDING – The following is from a post that the Gaming, Lodging and Leisure team did on the subject of consumer spending:



Our macro math suggests declining discretionary spending over the next 5 quarters.  It could be even worse for casinos since their share of the discretionary wallet is already on the decline.


GDP = C + I + G + (EX – IM).  While the G may be expanding, C probably won’t.  Discretionary sectors are likely to see a smaller and smaller proportion of the consumer’s “wallet” over the next year or so.  As shown in the table below, our macro forecasts and healthcare cost projections indicate that 2010 will bring an accelerating drop in non-essential consumer spending, culminating in a $124 billion year over year decline (-11.4%) in Q3 of 2010.  Q3 2009 is looking more and more like an anomaly which makes it a very difficult comparison.  Due to leisure spending, both lodging companies and the cruise lines reported better than expected Q3 revenues.  For all of 2010 Research Edge projects a 5.2% decline. 


Team Consumer Data Check: Short XLY - CCC2


Despite GDP growth and the market rally since March, unemployment continues to increase.  As we have written about at length recently, gas prices are also going to negatively impact consumers’ spending power for the remainder of 2009 and into 2010.  For consumer spending on casino gambling and hotels, in particular, our post, “WHAT GOES UP…” (09/10/2009), shows that gaming is in a mean reversion period in terms of a percentage of personal consumption expenditure.  Gaming was strongly levered to the fifteen-year rip in housing-fueled PCE that ended in 2008.  A one-two punch of a smaller allocation of a more frugal consumer’s wallet could meaningfully impact the gaming industry’s top line next year.





The Consumer is a dominant factor in understanding the future of Healthcare spending and Healthcare equities.  What is typically thought to be a defensive sector and a safe haven in turbulent times, has been tightly linked with the health of the consumer since the beginning of 2009.  Healthcare consumption has been taking larger percentages of consumption, currently riding above 21.8% today.  There is a limit to how high this percentage can go, and further deceleration in consumer spending will accelerate the discovery process.  The leverage points vary across the Healthcare landscape.  There are the obvious Healthcare Discretionary stocks such as Aestheticsn (AGN, MRX) where the consumer impact is well known, but virtually no Healthcare Subsector has been left untouched in 2009.  Managed Care is the only group positively exposed to pressure on healthcare consumption through the Medical Loss Ratio.   Knowing where the consumer is heading will tell us where we need to be focusing both long and short. 


Team Consumer Data Check: Short XLY - cccc3


Team Consumer Data Check: Short XLY - cccc4



We remain short the XLY (Consumer Discretionary ETF) in the Virtual Portfolio.


Howard W. Penney

Managing Director



After being bearish for the better part of two years, we have been hearing from the field more data points that are incrementally positive for Burger King.  The industry issues remain, but the increased focus on value gets the brand back in the game. 





ASCA misses consensus due to surprisingly higher promotional spend.  After PENN, PNK, and BYD, expectations were pretty low 




  • Think they had a pretty solid quarter.  They are very pleased with the margin performance
  • Huge synergies at Black Hawk, full quarter of regulatory reforms can be seen in 3Q and in the 4Q there is a substantial improvement in revenues and EBITDA as a result of the hotel opening
  • East Chicago was flat, which was a "pretty outstanding result" given the new competition and the fact that a competitor was closed last year
  • Vicksburg was impacted by a new competitor but they are seeing some improvement as a result of management efforts
  • Are in the process of working with lenders on an extension of their R/C ... "we are in striking distance of getting it done..."
  • Blackhawk:
    • So far they are very encouraged, and the initial results are exceeding expectations
    • Characteristics in the first month of hotel performance are more in line with a mature property
      AKA margins will be good
    • Very pleased with the reception from the Denver market
  • Seeing a little less spending per trip per patron and continued impacts of the weak economy across their portfolio (aside from Black Hawk)
  • Margins improved at all properties except at Vicksburg
  • Don't expect borrowing any funds on R/C in 4Q
  • Fixed charge covered was 3.12x, but expected to decline slightly as a result of higher interest from unsecured note offereing
  • Expect Black Hawk margins to improve going forward



  • Blackhawk - when they started the project they thought they could get a 15-17% ROI, putting them in the $60-65MM range, but since then, smoking ban was implemented offset by favorabl regulatory changes and hotel
    • Customer base in the "metro area" has been waiting for a first class facility
  • Vicksburg - significant impact from the economic weakness, impact from new competition
    • Some light at the end of the tunnel from operating the facility better.  Are starting to see some margin improvement there.  Making some adjustments to increase customer satisfaction and profitability
  • 2010 capex in the neighborhood of $75-80MM including several projects to increase air quality and site stabilization in Vicksburg ($20MM for those two - which is front-ended)
  • Capitalized interest will be very minimal
  • What's in the 4Q09 maintenance number? What was it for 3Q09?
    • 4Q09 number is a cash number, and a number of FF&E purchases made in the 3Q are being paid for in 4Q
    • Run rate is still approximately $11 million per quarter
    • Growth Capex is mostly carryover from Blackhawk - have about $15MM of payments to make ... some may flip over to Jan ($5-6MM)
  • What is the new normal for Vicksburg and East Chicago?
    • In Vicksburg - consumer confidence is still weak
    • Some lag affect there too, between Wall street and regional economies
    • Are seeing some encouraging signs of consumer confidence coming back a little bit, think it will be a longer and slower recovery in consumer spending.  Too soon to say that the recession is over and all economies are local
    • East Chicago - for 9 days in July Horseshoe was closed as they transitioned to new facility.  Still see unemployment going up for the next quarter or 2 which will impact them
  • Still in the process of making changes in Vicksburg but began making those changes a quarter ago
    • Hope that 3Q09 will be a trough in margins, especially taking seasonality into account
    • Changes they are making there will be completed in 4Q.  Adjusted the casino layout and the F&B outlets to make them more attractive.  Costs will be adjusted for seasonality
  • Modified stock forfeiture rate.  Last year they had a substantial reduction in work force which positively impacted the forfeiture rate.  Normalized run rate is going to be around $4MM
  • Tax rate was very low in Q3.  A few years ago they booked a deferred tax liability, and now the statute of limitations has expired so now they were able to make the permanent adjustment in the quarter.  Next year it will still be 42-43%
  • Increase promotional spending for next year?
    • Because of hotel at Black Hawk (comped rooms), but saw a higher cash occupancy then they expected
    • Will be higher in terms of dollars but similar as a % of revs
  • Hotel in Blackhawk is performing pretty well, occupancy rate consistant with other properties that have similiarly sized hotels. Rate has been strong with more cash rooms.  However, its still very early.  The increased bet limit, being able to add more table games, coupled with hotel all add up to the expectation of higher margins going forward
    • Huge increase in table game play
    • With the hotel opened the day time mid-week play is also improving
    • Attracting some new guests and the ones that were coming before are staying lower and spending more
  • Uptick in promotional allowances?
    • As long as it continues to produce EBITDA they are ok with it being a little higher.  Believe that any change they see to the promotional line item will be efficiently spent on increasing reveneues
    • There are some competitors that have chosen certain markets to be more competitive in.  "Sporadic fighting" but "they are choosing not to engage in it,"  that said they "do test marketing initiatives" on a continuous basis
  • Interest payments are made semi-annually, that's part of the "better cash flow"
  • Debt?
    • Have over $500MM of R/C commitments, will likely close next week
    • Confident that they won't need to issue anymore senior notes
    • Won't comment on increased cost but it will be "more of a footnote than a headline"
  • Market share in Vicksburg is down bc of the impact of Riverwalk.