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A HOT DECEMBER IN MACAU

We’ve got the property detail for Macau for the month of the December.  The whole market performed well  - up 49% - but Wynn Macau blew the doors out.

 

 

Total table revenue increased 49% in December with VIP up 57% and Mass up 33%.  VIP hold percentage was consistent with the average for the year.  Wynn Macau expanded its market share driven primarily by a 570 bp sequential improvement in VIP share and a 190 bp improvement in Mass.  Crown, Galaxy, and MGM gave up share from November.  On a y-o-y basis, Galaxy, MGM, and Wynn were the big winners.  Here are the property/company commentary with market share charts below.

 

Sands Macau

Sands was one of two major properties that experienced a y-o-y decline in table revenues, down 4% in December.  The opening of SJM's Oceanus next door in mid December 2009 probably impacted the casino.  Sands' market share dropped 50 bps sequentially in December and 390 bps y-o-y.  VIP hold % looked normal.  We continue to believe analysts may be too aggressive in projecting EBITDA growth at the property next year given the Oceanus presence.

 

Venetian Macau

Market share increased slightly from November to 12.0% in December, still well below the 16.6% achieved in December 2008.  The Venetian did generate 8% y-o-y revenue growth with Mass revenue up 18%.  On a relative basis, Venetian’s VIP business remains weak (in part intentional) as revenue increased only 8% despite a high hold percentage.

 

Wynn Macau

Wow - what a month.  Wynn Macau generated a whopping 71% increase in table revenue.  Hold was a little above normal but VIP rolling chip still increased 71%.  Market share climbed 450 bps to 16.5%, and even better than the 14.4% experienced in December 2008.  As discussed above, market share gains came in both VIP and Mass.  Most of the y-o-y gain was derived in the VIP segment, but a 29% increase in the high margin Mass business is not too shabby.

 

MPEL

The good news is that Crown’s market share increased slightly y-o-y in December.  The bad news is that it was the lowest share since City of Dreams opened in June.  While 50 bps off the November record, CoD’s Mass market share was the second highest of its short history.  CoD did hold below normal in the VIP segment.  Altira had another tough month with total table revenue down 37% and hold percentage was also below normal.

 

MGM

MGM grew revenues 81%, primarily by more than doubling VIP revenues.  The comparison was very easy.  Indeed, December market share of 6.4% actually declined from 9.3% in November and was the property’s lowest share since February.  Mass share declined 140 bps to 6.2%.

 

SJM

Despite the opening of Oceanus mid-month, SJM experienced a sequential decline in market share of 120 bps to 31.9%.  Oceanus, a Mass oriented property, didn’t impact SJM’s Mass share which stayed relatively flat.  On a y-o-y basis, however, SJM continues to garner a higher share as evidenced by the company’s 58% total table revenue growth versus the market at 49%. 

 

Galaxy

December was a nice month for the Galaxy properties as market share continues to accelerate in recent months.  In total, Galaxy generated an 83% increase in table revenues, almost exclusively from VIP.  The Galaxy properties benefited from higher-than-normal table hold percentage in December.  VIP chips were still up 62%.

 

A HOT DECEMBER IN MACAU - Macau Total Bac Rev Share Dec

 

 

A HOT DECEMBER IN MACAU - Macau Total Mass Rev Share

 

 

A HOT DECEMBER IN MACAU - Macau RC Turnover Share Dec


RT - GOOD, NOT GREAT

RT’s 2Q10 earnings of $0.01 per share came in better than both my EPS estimate of a loss of $0.01 and the street’s estimate of a loss of $0.02.  More important in the current environment is that the company beat on a top-line basis as well with company same-store sales declining only 1.7%, 30 bps better than my estimate and 100 bps better than the consensus estimate.  Going forward, I think the most important takeaway from yesterday’s earnings release and conference call was the fact that management maintained its full year comparable sales growth guidance of -1% to -3%; though management did say the low end of the range is more likely.

 

I think that many investors were concerned that this guidance range could be at risk as it assumed a significant acceleration in 2-year average trends.  In this volatile demand environment, it is hard to get comfortable with any expectations that rely on a sales recovery.  The fact that we are about 6 weeks into the third quarter and management is still comfortable with its prior expectations seems to be helping the stock today.  Mimicking the comments of both SONC and CKR, RT did say that trends in December made for a challenging start to the third quarter as weather was an issue, particularly in the weekend prior to Christmas.  I think this comment about December could have put a damper on the stock’s performance today despite the better than expected 2Q10 sales and earnings, but management went on to clarify later in the call that even if trends did not improve from the level the company experienced in December that it could still achieve its same-store sales goal of -3%.  This guidance is still by no means a given as it assumes a significant improvement in 2-year average trends, but I think management’s current outlook, particularly in light of the weaker December, gives investors some comfort.

 

In the second quarter, RT’s 1.7% decline in same-store sales was driven by a 1.8% increase in traffic, offset by a 3.5% decline in average check.  It was encouraging that the decline in average check improved from the first quarter when it declined more than 6%.  Management attributed this sequentially better number to a new menu introduction in early November that included an innovative beverage program and to the recent roll out of its expanded brunch program.  RT’s traffic has increased for the last three quarters so getting average check to move higher while sustaining this traffic growth is key to RT’s top-line story going forward.  RT maintained its goal to increase average check to the $12.50-$14.50 from the current $11.50-$12 range.  For reference, management cited its average check last quarter as being in the $11 range so it appears that average check did move sequentially higher in the second quarter as opposed to it being only a function of easier YOY comparisons in 2Q10 versus 1Q10.  Keep in mind that RT will be lapping its more promotional efforts from January 2009 in fiscal 3Q10 so it will be important to see how same-store sales play out from both a traffic and average check standpoint.

 

Going into the quarter, I thought the company’s outlook for restaurant level margins to decline only 50 to 150 bps was a bit of a stretch.  Obviously, same-store sales in 2Q10 came in slightly better than I was modeling, but both food costs and payroll and related costs as a percentage of sales came in much more favorable than I was modeling.  Food costs as a percentage of sales, specifically, improved rather significantly from the first quarter on a 2-year average basis.  The higher average check helped in this regard.  Based on these better results in the second quarter relative to my estimates, management’s guidance seems much more achievable; though the lower end seems more reasonable.

 

As I said prior to the quarter, comparisons get increasingly more difficult in the back half of the year from both a top-line and EBIT margin perspective.  RT will be lapping some of its labor and span of control cost savings initiatives in the second half of the year.  And, even if same-store sales trends continue to improve on a 2-year average basis, comps are likely to come down sequentially from the second quarter on a 1-year basis.

 

RT - GOOD, NOT GREAT - RT Gap to Knapp


1Q10 THEME - THE “BUCK BREAKOUT” AND JOBLESS CLAIMS

One of our themes for 1Q10 is “BUCK BREAKOUT.”  We are Dollar bulls and currently long the dollar!

 

We are bullish on the dollar for the intermediate term 3 months or more.  It’s one of the best ways to be long the Fed having to have a mea culpa on interest rates.   Right now the new TREND line for the Dollar Index is 76.21.

 

The 434,000 Jobless number this morning continues the positive trend we've been seeing since March and more importantly is bullish for the Dollar. 

 

The question now is not are we going to see 11-12% unemployment but how quickly does it go to 9%.  In the short-term expectations are for unemployment at 10.1%, and that is still too high, especially for 1H10.  Referring to Josh Steiner’s note on the census hiring this year, the government is going to add 1.2 million job additions in this country in the next 3-4 months.  Yes they are short term jobs but they are going to be in the reported data and unless you submit that weekly jobless numbers and monthly unemployment numbers don’t matter, how they are accounted for MATTERS.

 

On the margin we are going to be bullish on the jobless numbers and the unemployment rate for the foreseeable future. 

 

 

The following comments on the jobless claim number are from Josh Steiner – Sector Head of Financials for Research Edge.

 

The rolling average claims improved this week to 450k from 460k last week - an improvement of 10k, well ahead of the slope of 5.4k/week since March (9 months of data). We are keeping a close eye on this metric as rolling claims are the leading indicator for ongoing recovery in the economy and, by extension, the loan books for consumer lenders. Claims are seasonally adjusted, but the seasonal adjustment factor doesn't fully normalize. As such, we've seen in the last few years claims trend lower around the holidays and for the first few weeks of January. We would expect this to continue so this morning's data is no surprise. We will be watching closely the trajectory in the back half of January and early February, as this has historically been when claims tend to rise.

 

1Q10 THEME - THE “BUCK BREAKOUT” AND JOBLESS CLAIMS - CLAIMS

 

For those wondering how to interpret a possible inflection in rolling claims should we see one in late January/February, we would suggest using a positive slope of 7.2k/week as an outer risk band. This is the fastest weekly rate at which rolling claims increased over a two week period since the trend of improvement began in March. Alternatively, in the absolute, one can use 475-480k as a near-term rolling upper limit based on the downward channel that's been in place since March.

 

Howard Penney

Managing Director


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SONG REMAINS THE SAME - CLAIMS FURTHER BOOST CREDIT OUTLOOK

The 434k print this morning continues the positive trend we've been seeing since March. This compares with 432k last week.

 

The rolling average claims improved this week to 450k from 460k last week - an improvement of 10k, well ahead of the slope of 5.4k/week since March (9 months of data). We are keeping a close eye on this metric as rolling claims are the leading indicator for ongoing recovery in the economy and, by extension, the loan books for consumer lenders.Claims are seasonally adjusted, but the seasonal adjustment factor doesn't fully normalize. As such, we've seen in the last few years claims trend lower around the holidays and for the first few weeks of January. We would expect this to continue so this morning's data is no surprise. We will be watching closely the trajectory in the back half of January and early February, as this has historically been when claims tend to rise..

 

SONG REMAINS THE SAME - CLAIMS FURTHER BOOST CREDIT OUTLOOK - 1

 

For those wondering how to interpret a possible inflection in rolling claims should we see one in late January/February, we would suggest using a positive slope of 7.2k/week as an outer risk band. This is the fastest weekly rate at which rolling claims increased over a two week period since the trend of improvement began in March. Alternatively, in the absolute, one can use 475-480k as a near-term rolling upper limit based on the downward channel that's been in place since March.

 

Joshua Steiner, CFA

 

 


US STRATEGY – The Chinese Ox in a Box

One of our key themes for 1Q10 is – CHINESE OX IN A BOX – and it’s important to watch what the Chinese are saying.  In simple terms, they are all about QUALITY GROWTH not SPECULATIVE GROWTH.  Right now in “real time” the Chinese self imposed slowdown in lending has the Chinese market down for 3 of 4 trading days in 2010.  The Shanghai A share index declined 1.89% last night and is now down 2.58% so far in 2010.

 

In the USA, after three days of trading all nine sectors are positive on TRADE AND TREND!  There was generally a positive tone to the performance of the S&P 500 yesterday with seven of the nine sectors outperforming.  The volume is still on the light side as it seems like market participants are looking for guidance on which way to turn.  The MACRO calendar could paint a clearer picture with some direction from December same-store sales data and Friday's release of December nonfarm payrolls.

 

Yesterday’s MACRO calendar did not support the momentum provided by Monday's release of better-than-expected manufacturing data.  Yesterday, the sectors that benefit the most from the RECOVERY trade - Materials (XLB) and Energy (XLE) - extended their outperformance in 2010. 

 

Additional support to the RECOVERY trade came from the Dollar Index sliding to 77.49, down 0.16%.  The RISK trade continues to come out of the market with the VIX down (-0.98%) yesterday and has declined every day this year, but the higher beta NASDAQ and Russell underperformed yesterday. 

 

Yesterday, the ISM non-manufacturing index moved into expansionary territory last month, rising to 50.1 from 48.7 in November.  However, the reading was slightly below the consensus of 50.5 and the forward-looking new orders component fell to 52.1 from 55.1. While employment improved to 44 from 41.6, it remained firmly in contraction territory.

 

Also on the MACRO calendar, the ADP private payrolls fell by 84,000 in December, a figure that was weaker than 75,000 decline expected by economists in a Bloomberg survey.  Yesterday’s reported decline in the ADP numbers was a significant improvement from the 145,000 decline reported in November 2009.  In addition, December marked the ninth consecutive month in which the pace of job cuts slowed.

 

The Materials (XLB) was the best performing sector yesterday and extended 2010 outperformance to 320bps.  The CRB was up 1.45% yesterday as commodities and commodity equities remained underpinned by the global recovery trade.  Precious metals stocks were also a bright spot, and the fertilizer stocks put in another day of outperformance.

 

While the XLF was not one of the top three performing sectors, it did outperform.  The BKX in now up three days in a row, up 5.79% so far this year.  The laggards in the sector were names such as ICE (3.1%), MCO (2.1%) and IVX (2.1%). 

 

The notable laggard yesterday was Technology (XLK) down 1.1% on the day.  While there was no visible catalyst, telecom and software stocks were the weakest group in the XLK.  

 

The range for the S&P 500 is 14 points or 0.4% (1,141) upside and 1.0% (1,127) downside.  At the time of writing the major market futures are trading lower on the day.    

 

Copper fell 0.93% yesterday and is trading lower today on concern that demand may wane as China moves to curb growth in bank lending.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.35) and Sell Trade (3.50).

 

Gold fell the most in a week in London as a stronger dollar curbed demand for the metal as a hedge against weakness in the currency.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,086) and Sell Trade (1,137).

 

Crude oil fell in New York, snapping 10 days of positive performance.  The Energy Department said crude inventories rose 1.3 million barrels last week, the first increase in five weeks.  The Research Edge Quant models have the following levels for OIL – buy Trade (79.72) and Sell Trade (83.57).

 

Howard Penney

Managing Director

 

US STRATEGY – The Chinese Ox in a Box - sp1

 

US STRATEGY – The Chinese Ox in a Box - usdx2

 

US STRATEGY – The Chinese Ox in a Box - vix3

 

US STRATEGY – The Chinese Ox in a Box - oil4

 

US STRATEGY – The Chinese Ox in a Box - gold5

 

US STRATEGY – The Chinese Ox in a Box - copper6

 


Shaky Foundations

“If you establish a democracy, you must in due time reap the fruits of a democracy. You will in due season have great impatience of the public burdens, combined in due season with great increase of the public expenditure. You will in due season have wars entered into from passion and not from reason; and you will in due season submit to peace ignominiously sought and ignominiously obtained, which will diminish your authority and perhaps endanger your independence. You will in due season find your property is less valuable, and your freedom less complete.”
–Benjamin Disraeli
 
Keith has tightened up his hockey hair this morning and will be appearing on Bloomberg TV as co-anchor, as a result I’ve been handed duties as lead author of the Early Look.  I was recently in Colorado visiting some old friends and had the opportunity to stay in their beautiful home with a mountain view, located half way in between Vail and Aspen.  Everything about their home, and life for that matter, is quite picturesque, including a cute puppy named Riggs, except for one thing, their house. Due to no fault of their own, it has a less than stable foundation.  This unstable foundation is leading to premature cracks in the walls.  In many respects, I think it is the perfect analogy for the U.S. economy.
 
Any economy, or company for that matter, is only as solid as its balance sheet, which is equivalent to the foundation of a house.  As a balance sheet’s debt ratios increase, the very foundation of the economy or company begins to crack.  We’ve recently handed the responsibility of surveying sovereign debt loads to Darius Dale, a recent Yale grad who joined our team about 6-months ago.  Every morning Darius emails out, by 630a.m., Darius’ Debt Download. After reviewing these reports for the last week, there is an obvious conclusion, the economic foundation of the United States is crumbling.
 
I discussed this in some detail to our subscribers yesterday in a note, but wanted to replay the key facts again this morning.  These are facts that every investor of every asset class needs to keep front and center.  They are as follows:
 
·        Total current U.S. National Debt - ~$12.17 trillion;

·        Total current U.S. National Debt per taxpayer - ~$111,622; and

·        Debt to GDP ratio – 83.5%.

 
These numbers are subject to some debate and we have sourced them from usdebtclock.org and government data sources.  Setting aside specific debate on the precise numbers, the irrefutable point remains: the U.S. National Debt is massive and expanding.  The key components of this debt are as follows:
 
·        Medicare and Medicaid 21.9%;

·        Social Security 19.2%; and

·        Defense and Wars 19.1%.

 
U.S. National debt as a percentage of GDP has been climbing steadily since 2000, and has seen exponential growth in the last two years.  At the current ratio of ~83.5% debt to GDP, we are at a level not seen since the 1950s. In lieu of our etf portfolio this morning, we have outlined this metric in the chart below going back 90 years. By the end of 2010, this ratio is projected to be near 100% of GDP absent a dramatic shift in domestic budgetary policy.  As with any borrowing, the more a person, entity or company borrows, even the United States of America, the higher their cost of borrowing will go, all else being equal.  
 
Interestingly, the national debt of ~$12.17 trillion, actually excludes Fannie Mae and Freddie Mac debt. The U.S. government became the effective conservator of both of these entities with the Housing and Economic Recovery Act of 2008.  The estimated combined on and off balance sheet debt of Fannie and Freddie is purported to be just over ~$5 trillion. Including this additional ~$5 trillion in debt, U.S. Government debt as a percentage of GDP is actually more than 120%.  On that basis, U.S. government debt as a percentage of GDP is the highest ratio it has ever been, or at least since the numbers have been recorded, which is since 1792.  Needless to say, both ever, and since 1792, are a long time.
 
Globally, this data hasn’t been updated since 2008, but based on 2008 data, the U.S. has the fifth highest indebtedness as a percentage of GDP, just barely above Singapore and just below Jamaica, man.  The only other countries more indebted than the U.S., on this basis, are the economic stalwarts of Zimbabwe, Japan, and Lebanon  . . .
 
Keep your eyes on U.S. government debt . . . this Queen Mary is not turning any time soon and will hold investment implications related to many asset classes for years to come. We cannot increase our debt exponentially without increasing our borrowing costs.  
 
Setting aside actually investment considerations, as former British Prime Minister Benjamin Disraeli states above, there are also implications for our very freedom and prosperity. Specifically, even if she had to, America couldn’t afford to fight another large scale ground war.  The only positive from this situation is that the government may be constrained from implementing policy “from passion and not from reason”.  And that, at the end of the day, is a good thing.
 
Keep your head up and stick on the ice,
 
Daryl G. Jones
Managing Director

 

Shaky Foundations - image001


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