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MACAU UPDATE FROM THE GROUND

Two nuggets from our sources stationed in Macau:

1. The Macau Government seems to be serious regarding a potential 5,000 table cap per license. They may have already set up an investigative committee to look at the cap. If implemented I think there would be some sort of grandfathering for already permitted developments. A cap would obviously result in a pretty big boost to same store revenues.
2. It appears that traffic at the Venetian Macau has actually picked up recently despite the new Visa restrictions. Assuming it translates into volume this would be a pretty nice boost given the lower than expected market share and margins at the property thus far.
I’m still not quite ready to jump on the Macau bandwagon just yet. Overall mass market traffic growth will slow due to the Visa restrictions and I’m not sure the Junket rate cap will hold. Also, putting a 14x terminal multiple on Macau EBITDA, as some analysts do, seems a bit excessive. However, there are a number of positive catalysts that could make these stocks interesting from a long perspective again including the table cap and a potential tax rate reduction in advance of Singapore opening up (with substantially lower tax rates.)

Vietnamese Inflation Backs Off

Recall that Vietnam signaled the global inflation cycle very early, back in November of 2007. Today’s inflation report for July could very well signal the top of inflation becoming consensus. Inflation in Vietnam slowed for the 1st time since October 2007, coming in at +1.1% month over month, versus last month’s +2.1% increase.

While +27% year over year inflation is hardly deflationary. The point here is the sequential monthly rate of change. I think this will be broad based across country level inflation reports as the July data is released in August.

Inflation is consensus. Now the focus shifts to trying to find when/if it slows.
KM

EYE ON AGRICULTURE - CORN

RISK REMAINS! Corn plant roots are shallow due to flood conditions earlier in the year and are currently more vulnerable to dry weather conditions. This year's crop is pollinating later than normal which puts it in harm’s way for hotter/dryer August conditions. The lateness of the growth could potentially expose the roots to frost. The same situation holds true for Soy.
  • Texas: EPA Administrator Stephen Johnson and Texas Governor Rick Perry agreed to delay the renewable fuels waiver decision - if prices continue to drop during the delay period it becomes more likely that the EPA will deny the waiver (7/24 was original deadline.) Cattle lobbyists maintain that current RFS mandate, coupled with any unforeseen weather issues, could drive corn to $8 for 2009 season when mandatory blending goes into effect. To put it in context: There are 162 operating ethanol plants with 41 under construction or expansion In the US, with almost all running at significantly less than total capacity. Total US ethanol capacity is estimated at 9.4B gallons currently.
  • Canada: C.D. Howe Institute (economic think tank) sponsored study by University of Guelph (top agricultural sciences school in Canada) has stirred protest from bio-fuels industry groups. Study contends that there are no demonstrable environmental benefits of current bio-fuel process. Canadian media have linked study to World Bank report earlier this year which contended that bio-fuels were responsible for 75% of global food inflation.
  • South Korea: Increasing use of black sea barley for stock feed -Ukraine/Russia harvest expected to be good. This potentially has a negative pressure on Barley buyers in NA as Canadian farmers were more focused on Corn & Wheat due to pricing.
This chart shows pricing levels for the most recent closing price next to the prior closing price for CBOT corn futures contracts maturing between September 08 and December 10.
This chart shows pricing levels for the most recent closing price next to the prior closing price for CBOT wheat futures contracts maturing between September 08 and December 10.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

Jobless Claims Ramp - The "Trend" Moves Higher

US weekly jobless claims came in at 406,000 this week, up from last week's revised print of 372,000. Both the absolute level of claims and the 4 week average re-assert the concerning "Trend" of a deteriorating US employment picture.

Inflation is dampening, but so is US economic growth. That dynamic needs to be understood.
KM

MCD - MICKEY D’S DILEMMA!

In the second quarter, MCD’s same-store sales increased 3.8% - that’s the good news. The bad news is that 75% of MCD’s same-store sales gain was traffic. With MCD having raised prices by 4%, the average check is declining significantly. Can you imagine what the franchise community is thinking! Inflation is everywhere and people are spending less in our restaurants. But we have more of them!

So what is driving the check lower?

First, the average check at breakfast is lower than the rest of the day. Second, the focus on beverages is putting downward pressure on the check as not every purchase is with a full meal. Third, the push to advertise the dollar menu at the expense of full priced items is putting pressure on the check.

Senior management at MCD believes this is “healthy.” Healthy for whom? To help stabilize margins MCD is dependent on raising menu prices. So the trend is for customers to buy lower priced items and at the same time the company is raising prices.

  • Something has to give!

IN CASE YOU FORGOT!

The federal minimum wage will rise to $6.55 an hour on July 24th, the second of three annual 70-cent increases passed by Congress last May. With housing markets collapsing, financial markets in disarray and the economy looking at a consumption recession, the increase in minimum wages could complicate a challenging environment.

Raising the minimum wage over the next two years regardless of changes in economic conditions could accelerate inflationary pressures. In addition to increased labor inflation, restaurants and retailers are among the sectors impacted the most by rising commodity prices and slower consumers spending. If companies try to raise prices to offset minimum wage hikes, on top of current pricing trends, they run the risk of lower guest counts.

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