“All politics is local”. This quote is often attributed to former Speaker of the House Tip Oneill but actually was coined by his father. My analysis in the gaming sector has proved that “All economics is local”. Yes many components of the national economy are in rough shape, particularly consumer spending. However, the performance of the local economy is what is important. Gaming markets exposed to the energy economy (Louisiana via Texas) are outperforming others such as the Las Vegas locals market. Diving deeper I was quite surprised by the relative importance of individual economic factors.
  • The commonly held belief espoused by analysts and casino executives is that the unemployment rate is the major economic driver for gaming revenues. I think I’ve debunked that theory with some hard math. Over the last 10 years local median housing prices are more statistically significant in predicting local gaming revenues, not unemployment and not gross metro product (GMP).
  • The first chart clearly shows the strong correlation between average housing price changes across the locals casino markets (riverboat and LV locals) and average gaming revenue growth. With this in mind, look for LA to continue to outperform and the LV locals market to continue to struggle. In terms of stocks, PNK appears to be the prime beneficiary of the Texas regional strength with over 50% of its revenue derived from Louisiana.

  • The second chart provides a snapshot of the locals Las Vegas historical economic and revenue picture. Here, GMP actually proves to be the most important driver of gaming revenue historically in this market. Check out the economic volatility. Boom or bust in LV I guess. It’s no secret that Boyd Gaming and Station Casinos have been struggling during the local recession there.

    You can bet that we’ll continue to have our eye on local housing prices.

LEH: 72 Hours Later...

Lehman is up +52% from its closing price on July 14th. Was today’s +14% move the end of the pain trade, or just the beginning? I have a critical resistance level of $21.63, and would not be surprised to see LEH test that. If it fails there, on volume, it could go back to $10.11 in a hurry.

This stock epitomizes what we were talking about this morning. Very few US centric hedge funds have a risk management process to handle this kind of stock specific volatility. Winners and Losers will emerge.

If you’re not a trader. Don’t trade this stock.
  • LEH +14% Today on 72M shares
LEH 72 Hour Squeeze

Oil Futures Charts...

Contango remains in the Oil Futures market. Now things get really interesting.

Andrew Barber
Research Edge
The sell-off in oil hit the front month hardest with heavy volume in the August contracts.
Although the liquidity gap is profound, as volatility has driven out smaller speculators and larger players increasingly build capacity in the physical market, the divergence in liquidity between front and back month contracts has actually CONTRACTED over the long term historical -narrowing contango.

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China's Economic Growth Has Finally Slowed On A Reported Basis

China’s slowdown is finally on the tape, and we don’t have to engage in a debate about its probability of coming to fruition or not anymore. Chinese GDP was reported today at +10.1%. This is a sequential slowdown from the Q1 report of +10.6% year over year growth, and the second consecutive quarter of decelerating economic activity.

The Chinese Yuan reacted very negatively to the news, having its biggest down day since May 26th.

This of course, is better than bad for the US Dollar, which has been begging for a data point to go in its favor.
  • Chinese Growth Has Slowed


US weekly Jobless claims came in at 366,000 and that was higher than last week's 348,000, but the number was low enough to take the 4 week moving average lower for the 2nd week in a row.

As the facts change, we do. This number being more bullish than bearish, on the margin, implies that its more "OK" today for the Fed to do what I think they need to do, raise rates.

The US Dollar has reacted positively again today, trading up to 72.22.


YUM raised its FY08 U.S. same-store sales guidance to up at least 3% (versus its prior expectation of up 2%-3%) after reporting a 4% number in 2Q. While we are happy to see this improved top-line number, it is important to note that the company also took down its U.S. operating profit guidance to down 3% from up 5%.

Management highlighted that U.S. commodity inflation is having a more negative impact than they initially forecasted (now expecting inflation of over $100 million versus their original forecast of $55 million). Although the company will take pricing actions to offset some of these incremental costs, this $45 million of additional expenses represents about a 6% hit to YUM’s U.S. operating profit growth relative to management’s initial guidance. Management, however, took guidance down by 8% while raising top-line expectations, which leads me to believe that the company’s Why Pay More value initiatives at Taco Bell and new pasta products at Pizza Hut are driving traffic at the expense of margins. Management alluded to the margin tradeoff between its new pasta products versus pizza, but called it “minimal” and said that “you can have a little margin degradation as long as you’re making more cash.”

  • I understand the motivation for using value to drive traffic, but think the risk to margins, particularly relative to the current commodity cost environment, is a real concern.
  • YUM also raised its operating profit targets for China and YRI. The company now expects at least 27% growth in China (versus initial guidance of 20%) and at least 11% growth at YRI (from 10%). YUM has consistently posted solid operating profit results from both of these segments on a reported and currency-neutral basis.
  • I think it is worth noting, however, that the currency benefit has grown over time for both China and YRI and helped by 12% and 9%, respectively, in 2Q08. Investors have become accustomed to these high, double-digit reported operating profit growth results and this favorable currency impact may not be around forever.

  • As an aside, yesterday the Yuan had its biggest down day since May 26
The trends for KFC look dismal
The Currency Benefit

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