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Men With Brooms

“It's not just a rock.  It's forty-two pounds of polished granite, with a beveled underbelly and a handle a human being can hold.  Okay, so in and of itself it looks like it has no practical purpose, but it's a repository of possibility.”

-Paul Gross

 

Keith and I have enjoyed watching the first few days of the Winter Olympics in Vancouver.  The opening ceremonies were breathtaking despite a few minor glitches and Canada has already had a strong showing in competition.  In fact, Canada is currently sitting in fourth place in medal count and has won two gold medals.

 

While this is a great start to the Olympics, most Canadians are of course waiting for the medal round to begin for Canada’s most dominate sport.  That sport is, of course, curling.  While I’m sure most of you thought I was going to say hockey, and while we Canadians are pretty darn good at hockey, we dominate world competition in curling.  In fact, there have been 51 World Championships for curling and Canada has won 31 one of them and finished in the top three more than 90% of the time.  Never has a nation so dominated a major international sport!

 

In the short term, I am confident that Canada’s domination in curling will continue. In the longer term, for Canada to dominate, she will have to continue to do all the right things.  As we look around the global macro map this morning we see a number of countries that have dominated historically, and are now starting to lose, to use a curling term, “the hammer”.

 

Most notably this morning on that front is Great Britain.  For the first time since 1993, which is as long as records have been kept, Great Britain has recorded a deficit for the month of January.  Since January is typically the month of the most tax receipts, this is a concerning data point for Her Majesty’s fiscal health, as revenues should be higher than expenses in January. 

 

This burgeoning deficit is only one of many concerning factors in our economic model for Great Britain.  As our European Analyst Matt Hedrick wrote yesterday, Great Britain also has a growth problem (GDP up only 0.1% last quarter), an unemployment problem (7.8% unemployment which is the highest in 12-years), and looming inflationary pressures (CPI up 3.5% year-over-year in January).  Curling has a rule that allows a team to concede defeat when a win seems very unlikely.  While we are not sure Great Britain will concede defeat on her economy, we will remain short her in our virtual portfolio via the etf EWU.

 

As we prepare our virtual curling brooms for the market "bonspiel" to open this morning and review the global macro news from our “hack” here in New Haven, we are encountering a number of data points that are important to highlight before the “lead” throws the first few "rocks" today.

 

First, the dollar is up again to nearly a nine month high versus the Euro.  This is on the back of an expectation for better relative growth in the U.S.  While the U.S. probably doesn’t deserve much more than a golf clap for outgrowing the United Kingdom and the Eurozone in this year’s market bonspiel, the fact remains capital will flow to those economies that recover quicker.  The U.S. dollar price action this morning continues to support our long position in the U.S. dollar in our virtual portfolio via the etf UUP.

 

Second, the IMF announced its intention to sell just over $6BN in gold this morning.  This has gold selling off just over one percent this morning.  While this move has the gold bugs scrambling, it is obviously a supportive data point for our bearish case on gold based on an increase of supply into the markets.

 

Finally, we wanted to highlight a key point from the municipal bond world this morning.  We currently have no position in that market, but are starting to see signs that the domestic municipal bond market could be going the way of sovereign debt.  This morning the Los Angeles School district announced a $1.75BN bond offering.  While we are all for school improvements, selling massive amounts of debt when you are running a deficit (as Los Angeles is), is not the best strategy if you want to win in the last “end”.

 

“Hurry hard” is one of many expressions that curlers yell at their rocks as they are sliding down the ice.  While sweeping the ice in front of your curling rock will help it move faster, yelling at a rock will have a limited real impact and is really much more of a tradition.

 

The global macro market "bonspiel" is not dissimilar.  While we can hope that our positions go our way and we can yell at our Bloomberg screens, as “Skip” McCullough likes to say, “Hope is not an investment process.”  The best process is in fact to get your brooms on the ice early and prepare for the market "bonspiel" while your competitors are still celebrating yesterday’s successful “hit and rolls”.

 

Good luck at the rink today,

 

Daryl G. Jones

Managing Director

 

 

LONG ETFS

 

XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.

 

UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.
 
 

SHORT ETFS

 

EWU – iShares United KingdomThe TREND of higher y/y inflation and stagnant growth = stagflation. For a country with the UK's balance sheet and leadership problems, that’s not good.  

 

SPY – SPDR S&P 500We re-shorted the SP500 at an attractive re-entry point on 2/16/10. We are bearish on US Equities for the immediate term from this price. Shorting green.

 

XLE – SPDR EnergyWe remain bearish on Oil for the intermediate term TREND and bullish on the US Dollar on the same duration. Everything has a time and a price.  

 

GLD – SPDR Gold We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result. 

  

RSX – Market Vectors RussiaWe shorted Russia on 2/9/10 and maintain our intermediate term TREND bearish view on the price of oil.

 

XLP – SPDR Consumer StaplesThe Consumer Staples sector finally broke both our TRADE and TREND lines on 2/8/10. Given how many investors own these stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.

  

EWJ – iShares JapanWe re-shorted Japan on 2/2/10 after the Nikkei’s up move of +1.6%. Japan's sovereign debt problems make Greece's look benign.

 

IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.


THE M3: 4Q VISITOR EXPENDITURE SURVEY, CNY VISITATION

The Macau Metro Monitor, February 17th, 2010

 

VISITOR EXPENDITURE SURVEY FOR THE 4TH QUARTER 2009  DSEC

Per-capita spending of visitors increased by 1% YoY to MOP 1,807 in the fourth quarter of 2009.  Analyzed by place of residence, per-capita spending of Mainland visitors took the lead, at MOP 3,563; per-capita spending of those from Southeast Asia; Taiwan, China; and Hong Kong amounted to MOP 1,814, MOP 1,606 and MOP 1,212 respectively.The average length of stay of visitors held stable at 1.1 days, same as the fourth quarter of 2008, with Mainland visitors staying an average of 1.3 days.

 

90,000 MAINLAND VISITORS TO MACAU YESTERDAY  Macau Daily News

Preliminary estimates showed that 230,000 passengers, slightly lower number than Tuesday's, passed through the Gongbei border. About one in four, ~90,000, were Chinese mainland visitors. From Lunar New Year Eve to yesterday, a span of five days, the total number of passengers who passed through Gongbei reached 940,000, representing a 5% growth YoY (Mainland visitors increased by ~8,950 YoY). 

 



LVS: WHERE HAVE ALL THE CATALYSTS GONE?

Q4 was disappointing but that may be because expectations – including ours – got out of whack. The story now is Macau post Chinese New Year.

 

 

I must say that I’m shocked LVS missed Street EBITDAR projections and that’s with a higher than normal hold percentage.  We were above the Street and are usually closer to actual due to our proprietary Macau data and the fact that the Street doesn’t have Anna.  So what happened?

 

First, Las Vegas was a disaster.  It looks like Venetian and Palazzo tried to hold rate in a bad environment and occupancy suffered – down to 78% and 85%, respectively.  This lowest occupancy quarter in their history impacted slot volume –  down 31% and – non-gaming revenues which were down 23.7%.  Also, the gaming components are not adding up, indicating that cash back programs to high end players were aggressive as they may be accounted for directly as a contra revenue and not grouped in promotional allowances.  Finally, the YoY cost cutting impact has moderated.

 

In Macau, The Venetian at $175 million was in-line with our estimate.  Sands Macau, however, was a little funky.  Even excluding the $12 million bad debts hit - $5 million would’ve been normal bad debt expense – EBITDA was way off.  Net gaming revenues were $49MM higher than 3Q09, and hold was 21 bps better, yet EBITDA was $5MM worse.  Either junket commissions were a lot higher or fixed operating expenses climbed $16 million sequentially.

 

So those are the Q4 takeaways.  Let’s look forward.  Las Vegas looks better.  Better than bad may not be great but at least it appears to be moving in the right direction.  Whether comparisons are just getting easier or the underlying fundamentals are actually improving remains to be seen.

 

Management said they couldn’t give Q1 commentary on Macau but, wink, wink, “we are smiling, not frowning”.  No doubt.  We know exactly how well they did in January and the casinos are packed over the Chinese New Year celebration.  What happens after remains our concern as we pointed out in our post yesterday, “THE FUTURE BECOMING THE PRESENT IN MACAU”.


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LVS 4Q09 CONF CALL: "TRANSCRIPT"

LVS 4Q09 CONF CALL: "TRANSCRIPT"


"I am pleased to report that we delivered record revenues and EBITDAR during the fourth quarter of 2009, led by our properties in Macau, which achieved a record $251.5 million in EBITDAR. That performance was driven by healthy gaming volumes in combination with the continued realization of cost savings from the efficiency initiatives we implemented throughout the year...  While our current quarter's results in Las Vegas reflect lower room and food and beverage revenues, principally because of less group business in Las Vegas, our gaming volumes have stabilized.... We believe 2010 will reflect a recovery in the group business in Las Vegas, as recent booking trends reflect increases compared to 2009."

- Sheldon G. Adelson, chairman and CEO

 

 

CONF CALL

  • Believe that the development of Sites 5 & 6 will be a "game changer"
  • Will announce the specific April opening date of Marina Bay Sands next week
  • The good news in Vegas is that Group business is improving
  • Eliminated over $500MM of costs from their cost base
  • $1.7BN of direct RC play at Venetian this past Q
  • At Four Seasons, direct VIP was $1.1BN or 29% of total RC
  • Sands Macau had $12MM of bad debt reserves related to one large player, which negatively impacted margins
  • Macau momentum continued into January 
  • Sands Bethlehem - will look to enhance EBITDA through marketing and the addition of 80 table games
  • Las Vegas - was negatively impacted by low table hold by roughly $20MM
  • January LV results are healthy and ADR results were higher y-o-y for Jan
  • Will realize more group rooms in 2010 than in 2009.  All signs except RevPAR indicate that 2011 will be better than 2010
  • In January realized a 17% y-o-y increase in group nights in LV
  • Gaming volumes in Vegas are trending above 2008 levels
  • Retired in excess of $1.1BN of debt in the quarter and have $800MM of R/C availability (primarily under the Singapore facility).  $1.5BN of their cash and R/C availability will be used to complete Singapore and $400MM will be spend in 2011.  $500MM towards Sites 5 & 6. 
  • Will close project finance facilities for Sites 5 & 6 in March
  • Weighted average interest rate was 4%
  • Covenants TTM $412MM/ $5.2BN cash balance $3BN. Leverage was 5.3x compared to Max of 6.5x covenant
  • For Venetian Macau facility leverage was 2.81x compared to max of 4.5x
  • Expect to execute on the sale of non-core assets in the near future to help them further delever their balance sheet

Q&A

  • Talk about the tightening in China and bad debt reserves in Macau
    • Have about $440MM of receivables with a 22% reserve against that - and a little higher in Macau (28%)
    • Clearly there is a lot of press and discussion about tightening - but the impact will be much greater on VIP than on Mass
    • If anything they have tightened their direct junket lending programs
  • What % of junket business is revenue share and where is the market?
    • of the 19 contracts out for renewal with junkets 15-16 opted for volume based (commission)
  • Net hold impact in the quarter?
    • little north of $50MM favorable to EBITDAR
  • Perceived degradation of margin at Sands?
    • $12MM receivable reserve (man was a junket rep) he is paying the debt but slowly and he's been a customer for 20 years
    • Incentive comp booked in the 4th Q which is typically accrued quarter to quarter, but they went ahead and reserved all of it in the 4Q
  • Are seeing a pick up in CoD's traffic due to their "get lucky" campaign which is very positive
  • Are they seeing heightened promotional activity in Vegas?  Market share issues with MGM
    • nothing exceptional - they continue to see pressure on the high end. The real problem is room rate
    • Gave MGM some share because they offered them an $80 room rate, but that group came back to them after one year
    • "We take more business from them then they do from us" (re: MGM's assertion of taking share)
  • QTD conditions in Macau?
    • No comment
    • "but lets put it this way we are smiling not frowning"
  • Commission war with SJM?
    • Not seeing anything yet, but its not specific to SJM
    • Can't buy business in Macau on a sustainable basis
  • Why did they take the entire bonus reserve in the 4Q this year?
    • there was no reserve last year - no bonuses
  • Think that the numbers out there on PA table impact by the sellside is in line with their expectations
  • Commission rates in Singapore
    • The Macau style commission rate - Genting says that they will pay 1.5% but the Singapore government says there will be no Macau style junket reps
    • They have received very few junket rep applications (for credit providers)
    • If there are junket reps they will be the ones that are capped at a few hundred thousands 
  • How about gambler cash back?
    • .7-.8% direct to the player
    • Will give them the option of the Las Vegas way or the chip way
  • Think their margins 30-40% better just from the tax differential and less junkets... they should have "extraordinary" EBITDA margins (in Singapore)
  • They put aside a big chunk of cash aside for credit extension
  • The Wynn ruling was a big deal (on collections - we wrote about it the other day)
  • They experience a 1-2% credit default rate
  • Rates at Venetian and Palazzo?
    • Trending down (they are in the $180 from $211 for group in 2009)
    • More rooms are being comped in Vegas as well
    • There is a lot of rate pressure
    • Hope they can maintain a better cash ADR - need to figure in the non-cash RevPAR rates that are quoted in the market 
    • FIT wholesale is more challenging than "large" group
    • RevPAR for 2010 will slightly be down but its too early to say - depends on how the summer looks like
      • Of course Sheldon thinks otherwise... "Im on the optimistic side" ...there's nothing like management disagreement on an earnings call
  • Ah Sheldon's claim of infinite Asian demand...."Supply creates demand" 
  • Once Sites 5 & 6 opens they will be able to host larger trade shows because they will have enough capacity for them - will finally have the threshold of critical mass
  • Four Seasons apartment sales?
    • North of $1BN of value tied up there but nothing to announce now
     

A REITailing Perspective

 

As the ensuing soap opera unfolds between Simon Properties, General Growth, and any other potential bidders, it’s worth taking a look at what a hypothetical combination of the two mall operators would look like from a retailers perspective.  A combined Simon/General Growth would own 1/3 of all mall space and virtually all ‘A-list’ properties.  Common logic says this is bad for retailers. We’re not so sure that’s the case – at least not for the good ones.  Here’s why…

 

A combination of the two would yield substantial control over U.S mall properties, with the combined entity owning 520+ centers and over 445 million square feet (not assuming any assets are sold as part of the deal).  To put that in perspective, the combined company would own approximately one-third of all mall-based/outlet store retailing in the U.S with a size approximately two-thirds of Wal-Mart’s domestic square footage.  So the obvious conclusion to make is that retailers will get squeezed on rents and will have one massive landlord to deal with.  However, one could argue that there is an efficiency to be had when dealing with one major landlord.

 

Historically, large companies such as The Limited or Gap have built large real estate teams to deal with multiple developers, regions, projects, brands, and geographies.  Even in the absence of true growth, there are hundreds of variables that need to be dealt with on the real estate front when it comes to retailing.  Whether it be lease renewals, store closures, or store remodels, the real estate component of retailing is 1) integral and 2) complex.  As such, even the most efficient retailers are dealing with numerous mall owners and landlords given the disparate ownership of the mall base and shopping center universe across the country.  Now along comes the mega-landlord.

 

All of sudden there actually may be a strategic benefit to dealing with the owner of one in three malls in the country, not to mention essentially every  A-list retail property.   Leverage certainly comes from both sides of the negotiating table, but the ability to plan and strategize a portfolio of say, Gap locations, from mall to mall with one owner could be meaningful.  Maybe Gap is looking to improve their position or downsize stores in a few malls, while looking to close stores in another mall. If this can be accomplished by dealing with one partner, there has to be some level of efficiency.  As it stands now, these discussions and planning sessions take place repeatedly with numerous landlords, over and over on a one-off basis. 

 

The game changer here is that the number of chess matches needed to manage a retailer’s store portfolio in theory should be reduced if a majority or large portion of their leases are held by one entity.  Partnering on such a grand scale is totally new to the retailer/mall-owner relationship and something that makes a ton of sense (in theory). Just ask most companies that do business with Wal-Mart. Is WMT evil just because it is so darn big? No. Margins might be tight, but they pay very quickly, and for an efficient vendor Wal-Mart tends to be among the highest return business partners. It’s the marginal vendors without a meaningful proposition (or Macro process) that end up getting pinched.

 

The risk of course is that the power of the mega-landlord leads to strong-arming on rent.  While this may seem obvious, the symbiotic relationship between a retailer and its landlord is really one of chicken and egg proportions.  This is especially true in the current environment, where growth in retail units and new concepts has slowed to a halt.  Landlords cannot afford to risk losing tenants at the expense of jacking up rents.  After all, what is mall really worth with numerous empty store fronts?  There are only so many movie theaters, kiosks, and food courts that can be positioned to mask vacancies.

 

Whether “the” deal or “a” deal goes through or not is really not up to us speculate on.  However, as the formation of a mega-landlord develops, it’s worth asking the questions about what this may mean down the road for those that make their living in the mall.  At first glance some may be skeptical of bigger is better in this case.  However, it appears that this may actually be a win from a strategic retail standpoint.  Yes, the weak economy and sluggish mall-traffic have swung the pendulum back to the retailer on lease costs for now, but the real opportunity lies ahead in the efficiencies of strategic planning and portfolio management, one-to-one. 

 

-Eric Levine

Director


PFCB – KEY TAKEAWAYS FROM THE CALL

PFCB reported 4Q09 EPS of $0.52, blowing away both the street’s and my $0.40 per share estimate (and the company’s internal expectations).  Management attributed the better than expected earnings results to stronger than anticipated sales trends.  Same-store sales at the Bistro declined 5.2%, much better than the 8.5% decline in 3Q09; though trends still declined about 40 bps on a 2-year average basis.  Relative to industry market share, this sequential YOY improvement enabled the company to narrow its Gap to Knapp at the Bistro to -0.3% from -1.7% in 3Q09 (as shown in the chart below). 

Comparable store sales at Pei Wei increased 3% during the quarter, impressive in this environment and implied a 20 bp sequential improvement in trends on a 2-year average basis.  Management stated that traffic trends at both concepts were actually better than the comps indicated due to lower check averages.  To that end, Co-CEO Bert Vivian stated that comps should continue to get better as we trend through 2010 and he would expect average check to be less of a drag in 2010 than in 2009.

 

Outside of providing full-year 2010 EPS of $2.00 (relative to the street’s $1.92 estimate), management maintained its prior outlook of roughly flat revenues (slightly negative comps at the Bistro and slightly positive at Pei Wei) and flat restaurant level margins.  Some YOY favorability in preopening, interest and G&A expense should lead to slightly better pretax margins. 

 

PFCB may be experiencing some pressure today because despite this in line guidance, management cautioned investors that 1Q10 would be the low point of the year from an earnings standpoint with 2H10 expected to come in stronger than 1H10.  I also think investors would like to see the Bistro outperform the Knapp index, not just narrow the gap.  Looking at quarter-to-date trends, Mr. Vivian stated that weather is always an impact but that the company has gotten off to a slower start in the quarter due to weather.  In the first 6 weeks, when weather was not a factor, however, he said that PFCB saw a continuation of the improvement in trends seen throughout the fourth quarter.  The 53rd week in 2009, which was the week between Christmas and New Year’s Eve, is a high volume week for the company and produced average weekly sales of roughly $119,000 at the Bistro relative to the average of about $90,000 for all of 4Q09.  The benefit of this critical week in 4Q09 will be offset in 1Q10. 

 

Margins were helped in 2009, particularly at the Bistro, by the company’s operational initiatives, allowing the company to achieve near peak margins with comparable store sales down nearly 7% for the full year.  The company will continue to look for additional cost savings in 2010, but does not expect the same magnitude of savings as in 2009.  Comps are not expected to turn positive in 2010, but the Bistro will be well positioned to grow margins once demand returns.  A continuation of positive comps at Pei Wei will only further leverage the improvements the company has made at this concept.  Management attributed the higher average weekly sales at its Pei Wei class of 2009 openings to more disciplined real estate decisions.  In 2009, the company opened 7 Pei Wei units relative to 25 new units in 2008 and 37 units in 2007.  In 2010, I would expect to see another solid class of openings and improved unit returns as the company will continue to be selective as it is only planning to open 3-5 Pei Wei restaurants. 

 

PFCB’s cash flow story remains intact with the company expecting to generate about $90 in free cash flow in 2010 after about $40 million in capital spending.  Management plans to use this money, along with some cash on hand (ended the year with a cash balance of roughly $63 million), to pay down its $40 million credit facility and to repurchase about $40 million of shares.  Additionally, the company initiated a quarterly variable cash dividend, starting in 1Q10.  The amount of the cash dividend will be computed based on 45% of the Company's quarterly net income and is expected to total approximately $0.90 per share relating to fiscal 2010, or about $20 million of free cash flow, based on the company’s current EPS guidance of $2.00. 

 

PFCB – KEY TAKEAWAYS FROM THE CALL - PFCB Gap to Knapp 4Q09

 

Howard Penney

Managing Director


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