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Don’t Ignore TGT Credit

People focus on TGT’s credit stats relative to its history. But let’s also not forget to do so relative to bank card issuers. TGT’s charge-offs are getting better, but at a slightly lower rate than these peers. Delinquencies (better indicator of future charge-offs) are still rising, and at a slightly higher rate than peers.  Is this any reason to derail any thesis a bull might have on Target? We don’t think so. But it can’t be ignored either.


Target reported October Monthly Master Trust data this morning. Net charge-offs declined 88 bps vs. September to 13.49%. This compares with a 70 bps decline for the top six credit card bank-issuers. On an apples to apples basis, the magnitude of the improvement as a percentage was slightly smaller at Target: 6.1% vs. 7.0% for the bank card issuers.


Don’t Ignore TGT Credit - TGT NCO Oct 09


On the delinquency front, a more forward looking indicator, Target reported a rise in delinquencies of 36 bps vs. September to 9.34%. This compares with a 17 bps increase for the top six credit card bank-issuers. Again, looking at it on an apples to apples basis, the magnitude of the deterioration as a percentage was slightly larger at Target: 4.0% vs. 3.1% for the bank card issuers.


Don’t Ignore TGT Credit - TGT DQ Oct 09


MPEL missed our EBITDA estimate but there were some encouraging signs. Mass drop was better than we thought in Q3 and November volumes look better than October.



"Our grind mass market business has demonstrated sequential volume improvements across the reporting quarter and this growth trend has continued into the fourth quarter of this year. We have not yet reached our full potential in this segment and the recent opening of the Grand Hyatt Macau is now having a positive impact on performance. We remain on target to complete and open a number of major new entertainment attractions at City of Dreams in the coming months as part of the second phase of development, which will culminate in the launch of the Dragone-inspired show at the Theater of Dreams in approximately six months' time. We remain confident in our outlook for Macau and believe our assets are strategically positioned to capitalize on the expected growth in the market."




  • Have held commission levels at proposed levels since opening
  • Doing great in the RC segment
  • Premium direct VIP business has been strong and they estimate that their share is as high as anyone else in Macau
  • They have some heavy lifting to do on the grind side of the Mass business
  • Remain confident that their Mass business will continue to build over the next 6 months and the expansion of the amenities yet to open (night club, 50% of their retail, Dragone show)
    • LVS does say that the Cirque show is a big money loser and hasn't driven traffic
  • Grand Hyatt was a "phased delivery" - have about 400 rooms available as of today and expect all rooms to be ready by year end
  • Too early to determine impact of Grand Hyatt on their Mass business but expect it to be benefcial
  • Expect that 2H09 will be a lot better than 1H09 and expect 2010 to grow 20% for the market as a whole (assuming no financial crisis)
  • Expect to spend 115MM on completing construction
  • 4Q09 guidance:
    • D&A $75MM
    • Net Interest expense $20MM
    • Pre-opening negligible
  • Will accelerate timing of quarterly results going forward
    • I bet they got a lot of complaints from the G2E contingent... myself included!


  • MPEL market share in Oct down due to lower hold on RC.  Oct is distorted to Mass typically, which makes their share look weak
  • They are seeing better volume in Nov than Oct
  • Any expected changes from new CE in 1 month?  Lots more talk about infrastructure resumed.  Remain very encouraged
  • Covenant on Macau credit facility?
    • Kicks in 4Q2010, needs to be under 4.5x.  Have $1.4BN net drawn now, and then will use cash from ops to lower leverage
  • If hold was normalized on CoD Mass?
    • Hold is just below 16% through the 3rd quarter.  Low hold is a function of lower length of play.  Would expect that hold will move up over time as the property matures.  Mature Mass properties have holds as high as 21%
  • Where do they think Mass drop gets to? NO COMMENT, but they have seen a 35-40% increase in drop over last 4-5 months.  Believe that they will continue to see solid growth in drop and hold there
  • New Capex at CoD?
    • End of 3Q09 - have $150MM capex liabilities which they will cash settle $115MM in the 4Q09.  The remaining are retention payments and won't get settled until the 1H2010. Then there is another $40MM of capex associated with Dragone Theatre fit out which will occur in early 2010.  Then have another $40-50MM of capex maintenance to "spruce up amenity development"
  • Have 135 VIP tables, remaining Mass at CoD. 
  • CoD hold percentage was slightly above 3% and at Altira it was just below 2.7%
    • I don't understand why they are so coy with this number
  • Grand Hyatt full range of inventory handed over the next 4-6 weeks
    • Heard that is was as low as 50 available rooms in early Nov
  • Based on their commentary on Mass Drop in July - it doesn't look like August and September grew sequentially
    • Over the last 8-10 weeks they have seen some positive volume growth and some improvement in hold as a result of better marketing and Hyatt opening. They had a very good Oct which continued into Nov
    • We did see a pickup in Mass in Oct for CoD
  • What happened with AMA agreement?
    • They are neutral on hold under the AMA agreement so there is no make whole payment due to them
  • Cost structure is roughly $1.3MM per day for both properties including corporate and centralized costs.  Hyatt pushed that number to just shy of $1.4MM per day
  • Direct VIP business at CoD is about 17% right now
  • View on 5 & 6 - would be "delighted to see them finish the building"



The first lesson I learned in this business was “don’t fight the Fed!”  Oh how quickly we forget some simple but important lessons about the market.  Don’t let the facts get in the way of a great bull run.  The bears are getting run over and it’s painful.   


Yesterday, the S&P 500 finished higher by 1.5% and closed at a new year to date high – that is bullish.  For the month the S&P 500 is up 7.1%.  Stocks moved higher on the back of the RECOVERY trade as the global stimulus flag is being carried around the world.  This current market dynamic is exacerbating the weakness in the dollar.  In addition, Fed Chairman Bernanke, who specifically addressed the dollar weakness yesterday in NYC, reiterated that “economic headwinds will dampen the pace of recovery and mandate an extended period of low interest rates.”


As you would expect, dollar weakness contributed to the outperformance of Energy (XLE), Materials (XLB) and Industrials (XLI); the three best performing sectors on the day.  On the MACRO front, the market benefitted from the headline retail sales number, while the Retail sales less Autos was 0.2% versus the consensus of 0.4%. 


The Dollar index (DXY) closed down 0.58% yesterday and the VIX declined by 2.0% on the day.


While every sector was up on the day, the three worst performing sectors were Financials (XLF), Healthcare (XLV) and Consumer staples (XLP). While the XLF lagged the overall market, the banking stocks snapped a two-day losing streak.  Citigroup rallied +3.2% on the news that John Paulson had taken a stake.   Credit-card stocks all rallied after reporting declines in net charge-offs in their October master trust data.  Despite the dampened risk aversion in the market, the bulk of the mortgage insurance names remained under pressure yesterday.


Consumer Discretionary (XLY) outperformed slightly, up 1.6% on the day. As I said above, October retail sales rose a better-than-expected 1.4%, though excluding autos, sales were up just 0.2% vs expectations for a 0.4% gain.  That said, the 0.2% ex-auto sales number represents three straight months of improvement, but down from the revised 0.8% (revised down from 1.1%) in August. 


Today, the set up for the S&P 500 is: TRADE (1,084) and TREND is positive (1,041).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 8 of 9 sectors are positive from the TRADE duration.  The Financials (XLF) is the only sector broken on the TRADE duration. 


The Research Edge Quant models have 1% upside and 2% downside in the S&P 500.  At the time of writing the major market futures are poised to open down small.   


Howard Penney

Managing Director


US STRATEGY – OUCH! - sp11 17


US STRATEGY – OUCH! - svchart


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“It is better to have less thunder in the mouth and more lightning in the hand.”
–Apache Proverb
Keith and Howard are flying to Western Canada this morning to meet me for meetings in Calgary and Vancouver, so I’ve been handed the duty of writing the Early Look this morning.  Over the course of the past week, I’ve spent a good deal of time in proximity to Native Americans. I’ve been down in Phoenix, Arizona, which is of course a bastion of Native arts and culture, and have visited my hometown of Bassano, Alberta, which borders the Siksika Nation, a Blackfoot Reservation in Southern Alberta.
The indigenous populations of North America are a proud and storied people.  Their traditions and culture have survived and thrived despite many hardships over the past few centuries.  Geronimo is perhaps one of the most well known Native Americans.  He was an Apache military leader, medicine man and the last Native to surrender to U.S. Army forces at Skeleton Canyon, Arizona on September 4th, 1886.

Geronimo was known for his bravery and fought both American and Mexico troops for over 26 years until his capture.  He lived until 1909 when, at the age of 80, he died after being bucked off a horse. Since his death, Geronimo has been given many honors, including having three towns named after him. Most notably though was the attribution of the slogan and motto of the 501st Parachute Infantry Regiment, the first airborne unit in the United States military, after him, hence the use of “Geronimo!” when leaping from high heights.  An expression that could also be used to describe a chart of the U.S. dollar . . . Geronimo!
The global macro news event of the day yesterday was, of course, Chairman Bernanke’s comments at the Economic Club of New York. The Chairman’s prepared remarks were somewhat predictable and defended the need for an emergency level of interest rates well into 2010, but one comment from the Q&A session in particular caught our eyes.  When asked whether he saw any misalignments developing in the U.S. economy (i.e. bubbles), Chairman Bernanke stated:
"It's extraordinarily difficult to tell, but it's not obvious to me ... that there are any large misalignments currently in the U.S. financial system."

The good Chairman likely has a different process than us lowly hockey heads at Research Edge, but one simple thing we do every morning is review market prices across asset classes and geographies.  Thinking about Bernanke’s comment above had me wondering if the asset class moves below could, perhaps, be classified as “misalignments”.

  1. The year-to-date performance of oil is +73%
  2. The year-to-date performance in copper is +124%
  3. The year-to-date performance of gold is +29%

These commodities have one thing in common, they are priced in U.S. dollars. On the margin, fundamentals may have improved for gold, copper, and oil year-to-date, although some would debate that point, but fundamentals certainly haven’t improved in line with the price performances.  While we smell a bubble, Chairman Bernanke sees no “misalignments”.  In honor of our difference of opinion, and as a tribute to our Native American friends, we have given the Chairman a Native nickname, “He Who Sees No Bubbles.”
From an investment perspective, the fact that Bernanke sees no “misalignments”, despite the massive move in some of the commodity markets outlined above, is supportive of an investment thesis that continues to see these global commodities priced in U.S. dollars inflate.  If I were able to read Chief Bernanke’s totem, he seems to be signaling that a continued weak and weakening dollar is not a bad thing, nor leading to any bubbles. So invest accordingly!
A couple of other quotes from "He Who See No Bubble’s" speech that provide a juxtaposition of what is happening economically in the United States are outlined below:
1. “In particular, borrowers with access to public equity and bond markets, including most large firms, now generally are able to obtain credit without great difficulty.”
2. “However, access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses.”
In the longer term, credit will have to start flowing again for households and small businesses for GDP growth to sustain.  While the Bankers, Debtors and Politicians are getting paid, the facts remain.  Small businesses comprise almost 50% of American GDP. A sustainable stimulus will have to reach households and small businesses and not just with “thunder in the mouth”, but also “lightning in the hand.”
Keep your head up and stick on the ice,
Daryl G. Jones
Managing Director


FXE – 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.

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

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.   

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.

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.

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 and 11/16.

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.


The Macau Metro Monitor.  November 17th, 2009.



A document filed Monday with the SEC revealed that LVS has agreed to make an initial payment to the Macau government of MOP 700 million, or about US$90 million, for the land on which it is developing its new megaresort on the Cotai strip.   Construction on Lots 5&6 was halted last year but, under the terms of the new deal, the company now has 48 months to complete development of the site. 


No real changes yet despite Dan Lee’s departure.  The potential is there for a higher ROI focus and possibly a sale of the company, in our opinion.  November a little sluggish.  Here are our notes.




Interim CEO

  • Temporary
  • Already met with the search committee.   
  • They want an operations backbone and cultural fit and there will be some development as well.  They believe that there is some value in the LA licenses given the low tax rate so development background is helpful.  
  • Wade Huntley (former COO) is the #1 name that has popped up - doesn't even know if he's interested.  Want both an operations and development guy (Kentucky/Massachusetts).
  • Interim CEO is doing a lot - making rounds to all gaming commissions.  The interim CEO was fairly involved in operations before.


No real changes since Dan Lee left.  The balance sheet is all Steve Capp anyway.  Operations are, of course, overseen by the COO.  Dan was really development focused and River City is in great shape.    


Credit extension by December - unclear how the Dan Lee issue affects this.  It was going very smoothly – it’s only 18mm drawn - and if they don't populate Sugarcane Bay gets stalled. 


What is the board's view on development?  There was always some push back.  River City should open in March or April. Sugarcane bay is really just piling work right now.  Baton Rouge is paper shuffling.  The new CEO will reevaluate everything that's going on.  Piling work will take them through 2Q2010.  They were targeting 2H2012.  


Even if they wanted to, it’s unclear whether LA will allow them to lower the budget on sugarcane. Need approval.


At River City slots are already there and some are being tested.


November trends have been typically slow and consistent with what they have seen over the last few months.  They are not worried about gas prices.


Admiral – the gaming commission told them they could repair the boat.  Trying to figure out how much that would cost. Probably somewhere in the mid-to-high single digit MMs.  Elections are in April - hull expires July 2010.  It’s too risky to wait till April when the guy in office gets kicked out.  Risk is where that boat goes - can't move license with gaming commission approval.  Rumor has it that Gene McNarry has ties to North County which is trying to get a casino.


It’s easier to get extensions on the backend.  Something as simple as getting the boat under construction which would cost $30mm and can always be moved. 


Will management now be required to actually own stock in the company rather than just options?

He does agree that they are in the dog house regarding this issue.  However no one has exercised any stock at a profit. Restricted stock - ISS dings them for owning restricted stock versus options.  Stupid answer, I think.  Issue of no downside from stock declines, just options.


He thinks that the property level management and capital allocation strategy could change.

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