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The Macau Metro Monitor.  November 13th, 2009.




DM praises the job that Sheldon Adelson and his LVS executives have done in setting up the IPO of Sands China and raising US$1.45 billion in loan commitments to complete construction of Lots 5&6.  Compared to the situation LVS found itself in one year ago – staring down bankruptcy speculators – the company is in a strong position.  When Lots 5&6 comes online in mid-2011, Sands China will have the critical mass of hotel rooms needed to dominate every segment of the mass market from the cheap (Traders) to the mid-priced (Sheraton) to the luxury (Shangri-La). 


DM sees several bullish factors pertaining to the value of the company:

  • The Plaza is only just getting going
    • This is where the company will have a discernible advantage in the market for direct VIP players (2x as profitable as junket play)
    • The Venetian is putting Macau on the map  in new long-haul markets such as India and Japan, bringing in high-margin mass and premium-mass visitors
    • The Cotai Arena is booked solid for more than six months in advance and the MICE market is recovering and will be boosted by the completion of Lots 5&6
    • The company accounts for around 40% of Macau’s total EBITDA share and is best-placed to grow that share

While there is political risk, and the threat of lawsuits, DM believes that the IPO of Sands China will be a success.




Although cost estimates for Galaxy are now at HK$14 billion, up from HK$10 billion, DM points out that it is still HK$10 billion cheaper than City of Dreams and likely to generate similar revenues.  The stock has been downgraded recently due to the company not having enough money to finish what it has started.  


The company’s track record with StarWorld, and the ambition of the project on Cotai, demonstrates Galaxy’s ability to focus on ROI.  Over the past five quarters alone, it has earned enough EBITDA at StarWorld to pay the entire US$300 million it spent constructing the property three years ago.  Whereas junket play has been the lifeblood of StarWorld, on Cotai the company must make the leap to the mass and direct VIP play segments.  Galaxy needs a great property and marketing team to draw customers.  DM is convinced it has the former and that will provide a very attractive experience for punters.




RESORTSWORLD: ANOTHER HK DISNEY? destination-macau.com

ResortsWorld Sentosa, due to open in 2010, has been touted by many analysts as having the capability to carve out a big slice of the Asian gaming market.  The design of, and marketing behind, the resort is strong and observers are clearly impressed by the prospects of the resort.  However, DM believes that all of the marketing for RWS thus far has suggested that the company is not adept at the gaming business – certainly not in comparison to the people who will be running Marina Bay Sands, its future competitor.  If ResortsWorld Sentosa is planning on providing a theme park experience, DM points to the travails of Hong Kong Disneyland as a cautionary tale. Disneyland has been a flop in Hong Kong and Marina Bay Sands, although behind schedule, will have a far more powerful marketing machine than RWS.




LOW-COST TOURS ARE BACK destination-macau.com

DM believes that the restrictions placed on low-cost tour groups have been eased and that the next step is to end the ban on twin-city visas for individuals – which dried up ferry traffic for a while as IVS visitors couldn’t visit Macau via Hong Kong.  Traffic numbers in Macau have held up despite the recent tightening of visa restrictions by Guangdong.  However, the cooling of the credit markets by the People’s Bank of China could stymie the growth in Macau seen as more than two-thirds of its revenues comes from VIPs playing on credit from junket operators.

Say It Ain't So

“It ain’t what you don’t know that gets you into trouble.  It’s what you know for sure that just ain’t so.”
-Mark Twain  
Mark Twain died in 1910, but my guess is he would have been a contrarian investor.  
I have been early on being the bearish one, but the facts have not changed to support a different conclusion so I’m sticking to my guns.  For the record, I was officially bearish when the S&P 500 was at 1066 and it closed yesterday at 1087. The issues that cause me to be cautious are TAIL related – 3 years or less – and on the margin things are slowing in my favor.  
The central thesis is not new, the Federal government’s attempts to sustain a $14 trillion economy cannot continue without implications on inflation and the dollar.  Inflation is on its way (Inflation Rotation) and the dollar is bottoming, or what we call the “Bombed Out Buck.”  Neither is good for equity prices.
Since 10/26 we have had multiple M&A transactions, a blow-out GDP number, and a number of MACRO data points in the US and China that are very supportive of the RECOVERY/REFLATION themes and still the market is up less than 2%.  Today we are waking up to some GDP numbers out of the Euro zone that are supportive of the global recovery theme and the futures are up small.
That could change at 10 am.  Today we are going to get the preliminary November University of Michigan confidence numbers.  The consensus is expecting a slight improvement to a 71.0 reading.  A slowing to below the prior reading of 70.6 is more likely.   
During my short tenure as being the bearish one, the dollar index has fallen to 75.60 from 76.13, and our TRADE line of support is 75.92. The dollar looks to be down again today despite some of the biggest emerging economies in the world trying to arrest the decline and President Obama’s shaking hands with the Client.  While the President is doing the right thing, there should have been a hand shake in the first 100 days.  Right now the Chinese don’t care!  
Under the surface of all the good news of a 3.5% GDP number and a 61% rally in the S&P 500 are the rumblings of uncertainty that are not being factored in.  Part of the “Bombed Out Buck” process is that there is “risk” in the system that is not being accounted for that will provide some support to the dollar.
Given where we came from relative to the 3Q08 “depression” scenario, the recently reported 3.5% 3Q09 GDP number is truly amazing and we have unprecedented federal deficits to thank.  If the 3Q GDP number was company earnings, the quality would be low and “the equity” would be a short.  The 3Q09 number included a 1.7% gain from the “cash for clunkers,” a 0.6% gain from the government throwing tax dollars at the real estate market and a 0.9% gain from a largely-involuntary inventory build-up.  All those “one-time” stimulus items represent 92% of the reported growth and it’s not sustainable.
On the margin, GDP looks to be slowing from here as the 4Q09 GDP estimate is now at 2.5% according to a Bloomberg survey.  Adjusting for “one-time” items in 4Q09, we are still in a recession. The money the government is spending on stimulus programs is borrowing from the future and not generating real growth.  
At Research Edge, we generally believe that the Healthcare reform madness will not happen.  And I would say with the S&P 500 at 1087, the market generally believes that it’s not going to happen either.  The uncertainty of how healthcare reform will impact consumer spending and corporate profitability is an unknown.    
Healthcare reform is a TAX on society that will require an adjustment period that will likely be a drag on consumer spending.  The increased TAX burden on small business owners is massive and creates uncertainty about profitability.  In fact, it could lead to further job losses as businesses adjust labor costs to maintain margins.  
For most small businesses, the number of employees required to be covered is unknown because the definition of “full-time, part-time and seasonal” employees would be left to a newly created “Health Benefits Advisory Council” who will figure it out at a later date. The uncertainty of the unprecedented employer mandate TAX would give small business owners no choice but to cut jobs, not create them.  
If health care reform passes, I could be out of a job as a restaurant analyst because nobody would want to own restaurant stocks. The current economic downturn did not weed out many of the marginal players in the industry, but Healthcare reform will!  This is not good!
Howard Penney

XE – CurrencyShares Euro TrustWe bought the Euro on 11/12 on a down move against our short position in the British Pound. A bullish formation in the Euro remains and we think the ECB could hike before the Fed does.

EWT – iShares Taiwan
With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

XLU – SPDR Utilities
We bought low beta Utilities on discount on 10/20. TRADE and TREND bullish.

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.   

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.

EWY – iShares South Korea
South Korea has joined Japan in the ominous position of broken TREND and TRADE. This is not China or Taiwan. This is an early cycle economy that we want to be short against China/Taiwan.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

EWU – iShares UK
Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. TRADE and TREND bullish.  

FXB – CurrencyShares British Pound Sterling
The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.

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.

Research Edge Sees 30%-40% Upside for Motorola Shares

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Great Canadian beats EBITDA expectations and blows away margins on better expense control.



"Our third quarter results provide further evidence of how our various expense reduction initiatives have created both a significant and sustainable improvement in the efficiency of our operations.  Our quarterly EBITDA and EBITDA as a percentage of revenues are both very impressive, despite continued revenue challenges.  I’m also pleased by our three major redevelopments, all of which reached their initial phases of completion on-time and on-budget."




  • EBITDA margins should improve even more when the economy begins to recover
  • River Rock's had a difficult hold comparison from 3Q08 (24.8%)
  • Slot handle was particularly weak at Boulevard and View Royal (despite the addition of new slots)
  • Initial Canada Line impact on River Rock appears positive - as seen by the sequentially better results from 2Q09
  • On Nov 19th GC will complete the remaining redevelopment at River Rock and should help revenues (atrium reopening, connecting sky bridge)
  • At View Royal they will increase their marketing so that people will be aware of the redevelopment and the new slot product
  • At Boulevard they will remodel the slot floor
  • Now that most of the cost control measures are complete they are beginning to focus on increasing revenues
  • While expenses will grow when revenues begin to increase they should still experience better flow through which will benefit EBITDA margins



  • Quite confident that a substantial part of their cost reductions are permanent in nature.  Think that the current cost structure is appropriate for the current revenue environment.  If revenues increase then costs will also increase, but margins will increase as well. If revenues get worse, they will look for more cuts
  • Too early to raise the margin guidance range of 29-34%
  • Why is the decline in slot handle worse at Boulevard vs River Rock?
    • Partly from Villa impact, partly from demographics near Boulevard (more "blue collar-ish" and more retirees)
    • River Rock has more high end play, Canada Line helped
  • Stupid question on mix impact from Canada Line
  • Have cost cuts impacted revenues at all?
    • No
  • #1 job next year is focusing on marketing
    • Expect positive ROI on marketing...doesn't everyone?
    • They are not increasing their marketing expenses - just trying to market smarter...glad he clarified, I was getting nervous
  • Excluding River Rock, there has been some drop off in visitation as well as spend per patron.  Hopefully that ongoing product refresh will help
  • Paid down the R/C to $22MM in October, expect that they will continue to delever through 4Q09 and should pay down R/C by Q12010.
  • Once they delever, what will they use cash for?
    • Biggest priority is keeping their eye on the ball and working on the newly opened expansions
    • Nice answer Milt... much better than restarting projects
  • Use of leased slots at Nova Scotia?
    • In BC the BCLC buys all the slots vs. in Nova Scotia they are responsible for slot capex
    • By leased they mean getting some hot participation titles (I guess they aren't familiar with those in Canada)
  • Why is McFadden complaining about deeper cost cuts? It's called guiding conservatively... That's how you get paid - set conservative expectations and beat them
  • Can they hit 40% margins if the revenue environment improves?
    • NC... just do the math....
  • Georgian Downs saw some good results for the first 2-3 weeks and since then has dropped off a little.  I guess we'll have to wait and see
  • Refresh and layout change?
    • River Rock will get some new slots - they haven't had any new product since 2004.  The refresh will take them to 1,000 from 850.  No real disruption
    • At Nova Scotia they increased theatre seating by 35%
  • Historically what has a slot refresh done for them?
    • They haven't done something on this scale before
    • I personally this is a stupid question - it makes your product more competitive and gets rid of the least productive product on your floor. Some of the stuff they are removing does as little as $50/day in win
  • Katz is asking if they are going to look at any distressed opportunities given their strong balance sheet....
    • If it's a great deal they would have to think about it.  Not out there looking to make an acquisition just for the sake of it
    • Haven't seen anything so far, but wouldn't say that the pickings are slim.  Can't name names - because if they signed a confidentiality agreement ... Sounds like they are looking at some stuff - I liked Milt's answer better
  • Until the skywalk is open they won't really know the full benefit of the Canada Line, since today you have to "jaywalk" to get to River Rock.   Marketing department is "working fervorishly" to tap that customer base
  • Maintenance capex is very low - $5MM or so plus $3MM left to spend at Georgian Downs
  • Deferred projects will remain deferred until they see the macro economy stop deteriorating, and while things aren't as bad as they were earlier, things haven't "stabilized" yet.  Likely that the deferred projects will stay deferred in 2010
  • Saw a very clear increase in slot coin in and visitation since the opening of the Canada Line which has been sustained through today

Footwear/Apparel Divergence Narrows

The divergence between apparel and footwear sales narrowed considerably this week as apparel rolled while footwear stabilized. The most notable change over last week is the trajectory in apparel, which posted its second consecutive decline in sales after 3-months of consistent growth. Buoyed recently by cold weather apparel, a closer look at recent weather trends reveals an unmistakable reversal in temperatures so far in November that has likely cooled demand. Meanwhile, athletic footwear trends are stabilizing (albeit still weak relative to other categories). Given relative price stability, the implication is that traffic is less bad mirroring what we’ve been hearing recently from retailers. However, it’s still apparent when taking the ICSC weekly retail sales into account that the sporting goods channel continues to underperform.



Footwear/Apparel Divergence Narrows - Footwear Apparel 11 09


Footwear/Apparel Divergence Narrows - Footwear Apparel ICSC 11 12 09



Footwear/Apparel Divergence Narrows - Weather 11 09


Footwear/Apparel Divergence Narrows - Weather 10 09

Buck Bullish: But Is It Bullish Enough?

This morning’s better than expected weekly US jobless claims report finally got the Bombed Out Buck to make a consequential move to the upside.


At 502,000 claims, this week’s print was both better than last week’s (514,000) and below the 4-week moving average (see chart below). What matters most to our macro model is what happens on the margin. On the margin, this is Buck Bullish!


Our risk management process takes one of 3 positions on a market: Bullish, Bearish, or Not Enough of one or the other.


Is this weekly claims report Bullish Enough to get the US Dollar to move above our immediate term TRADE line of $76.20?


We don’t think so. Not yet. Until we get comfortable with making a call that last month’s 10.2% unemployment rate was a cycle peak, I am not going to go there.


Employment is a lagging indicator. But this morning’s weekly print needs to be respected as a concurrent indicator. Ask those who are still short the US Dollar about that (we covered our short position in the USD a few days ago).




Keith R. McCullough
Chief Executive Officer


Buck Bullish: But Is It Bullish Enough? - Claims

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