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Oy Vey

“Maturity is achieved when a person postpones immediate pleasures for long-term values.”

-Rabbi Joshua Loth Liebman

 

Since we actually have a Rabbi on staff at Hedgeye Risk Management (for compliance purposes and not for reasons of faith), one would expect that he would be the one to take the lead in quoting a Jewish religious leader to start off the Early Look.  Ironically, it is not Moshe Silver, but Daryl Jones, the hockey playing goy, who has decided to quote Rabbi Liebman this morning.

 

For those who didn’t know, Rabbi Liebman was the author of book entitled, “Peace of Mind”, which was on the New York Times best seller list for more than a year and in fact reached the top of the list for a period of time.  To say Rabbi Liebman was no schlepper, would be an understatement.  He graduated from the University of Cincinnati at 19.  By the time he was 27, he was an ordained Rabbi and leading his own synogogue.

 

Despite passing away at the early age of 41, Rabbi Liebman left us with some memorable quotes from his writings.  As I was reflecting on the disparities of fiscal policy among nations, this quote stuck with me.  One on hand we have central bankers in some nations that are acting prudently and “postponing immediately pleasures for long-term values.”  While on the other hand there are certain central bankers and government leaders that continue to endorse erroneous fiscal policy with such chutzpah that we can only be concerned.

 

Chinese Premier Wen Jiabao of China, who is no schmendrik in our books, of course has been on the proactive and rational end of endorsing prudent fiscal and monetary policy.  Yesterday, while speaking to his colleagues in the Chinese government, he indicated that the Chinese economic growth path was “unbalanced, uncoordinated, and unsustainable.”  This morning the news out of China is that Jiabo is warning of the “latent risk” in Chinese banks and is pledging a crackdown on property speculation.

 

So, not only does Premier Jiabao see bubbles, he is trying to proactively prevent them.  Whether he will be successful before we have some sharper correction in China is yet to be seen, but the reactions we are getting from the private sector in China (if we can call it that) are certainly positive. Specifically, two major Chinese banks, ICBC and Bank of China, announced this morning they will slow lending after a record year in 2009.  While there are many investors that still aren’t kosher with China, we like this proactive fiscal leadership.

 

The risk of being a klutz as it relates to managing your budget and fiscal policy is that on the day of reckoning, when you are on the verge of default, is that there may not be anyone to support you.  Greece has its well publicized issues, which were emphasized by the egregious rates that it had to pay for debt yesterday in its $5BN Euro offering of 10-year notes (300 basis points above Berlin), and today we see where its neighbors stand on a bailout for the nation.  According to the German economic minister, Germany will not be offering Greece “even one cent.”

 

In contrast to China, yesterday we had two members of the U.S. Federal Reserve system, Chicago Fed President Charles Evans and St. Louis Fed President James Bullard give spiels on the economy.  Evans indicated that he needs to see “signs of sustainable growth” before supporting tightening and Bullard stated he thinks policy makers should remain “very accommodative”.  The leaders of the Fed continue to prove one thing, they are great shmoozers, but in terms of showing proactive leadership and moving past Depressionista level interest rates, they continue to fall short.

 

While we may be Fed Up With The Fed, there are nations and leaders that continue to show fiscal leadership.  With the mazel tovs barely behind them for winning a gold men in Men’s Ice Hockey, Prime Minister Stephen Harper of Canada proposed a budget yesterday with aggressive federal spending cuts.  The budget would position Canada to be the first member of the G-7 to erase its deficit by 2014. 

 

Not everyone is receiving this budget well.  As a columnist in Toronto’s Globe and Mail wrote today about the Harper strategy:

 

“We're going to ignore the environment, because you don't care. We're going to balance the budget, because you do care. We're willing to risk a fight with public servants, because you want us to. We're not going to spend money on anything new, because you don't want us to.”

 

Prime Minister Harper’s leadership here is admirable.  We continue to be bullish on Canada.

 

Focusing on a nation’s fiscal and monetary policy is critical before making an investment in any nation.  We need this policy to be “mature” and to “postpone immediately pleasures for long-term values.” After all, as history tells us, countries cannot issue debt in perpetuity without consequences.

 

Shalom,

Daryl G. Jones

 

 

LONG ETFS

 

XLF – SPDR Financials — With sentiment negative and a Piggy Banker Spread hitting a record wide spread on 2/23/10, we bought red. 

 

XLK – SPDR Technology — Technology is underperforming the SP500 YTD; a down day on 2/22/10 prompted us to buy more. We expect to see some positive mean reversion for Technology as M&A picks up.

 

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

 

EWP – iShares SpainThe etf bounced on 3/3/10 in part from a strong day from Banco Santander, the fund’s largest holding in the Financials-heavy (43.8%) etf. We shorted Spain for a TRADE, and have a bearish bias on the country. Massive unemployment, public and private debt leverage, and a failed housing market remain fundamental concerns.

 

IWM – iShares Russell 2000With the Russell 2000 finally overbought from an immediate term TRADE perspective on 3/1/10 and added to it on 3/2; we got the entry price that the risk manager makes a sale on strength.

 

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.

 

XLP – SPDR Consumer Staples Another capitulation squeeze is in full motion for the short sellers of everything "consumer". Shorting green as inflation starts to creep into the system again.

   

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.


MACAU 2-YR COMPS NOT ACCELERATING

Its not a surprise that Macau comps get a lot tougher in 2H 2010. What may be a surprise is that two-year comps have not really accelerated in recent months despite the big headlines. 

 

 

Macau has been gangbusters since August of last year and the trend line has been upward sloping.  Of course, the first half of 2009 was a disaster so the comps have been quite easy and will continue to be through June.

 

MACAU 2-YR COMPS NOT ACCELERATING - macau 1 yr comps

 

Given the volatility in the one year comps, we thought it would be instructive to look at the revenue change on a two year basis.  Here the recent monthly revenues for both VIP and Mass still look impressive on an absolute basis – Mass up 30% and VIP up almost 50% in February.  However, the February 2-yr comp for Mass is actually at the low end of the range while VIP is in the middle.  The 2-month moving average line is not upward sloping either.  So has Macau growth accelerated in recent months or just held steady?  It depends on your perspective.

 

MACAU 2-YR COMPS NOT ACCELERATING - macau 2 yr comps

 

MACAU 2-YR COMPS NOT ACCELERATING - 1

 

Conclusion:  comps matter.  The question is will the sequential slowdown in growth in 2H 2010 impact investor sentiment?


US STRATEGY – Inching Up

The S&P 500 is looking to end the week with another move to the upside.  Yesterday, the S&P 500 finished quietly higher by 0.4% on very light volume.  The S&P is now up 1.8% over the past five trading days. 

 

On the global MACRO front the risk trade continues to abate on the back of the upbeat developments out of the Eurozone, as Greece's sale of 10-year notes was supposedly more than three-times oversubscribed (according to StreetAccount).  The VIX continues to confirm the RISK AVERSION trade.  The VIX declined 0.6% yesterday and continues to be broken on all three durations – TRADE, TREND and TAIL.

 

On a number of different MACRO factors, price trends point to a continued recovery, though even with the S&P less that 3% from its recent high, there still seemed to be a lack of conviction.  Other positive MACRO moves yesterday included better-than-expected February comps, dampened regulatory concerns in the financial sector and a downturn in initial claims.  The two best performing sectors yesterday were the Financials (XLF) and Consumer Discretionary (XLY). 

 

The retail momentum continues with the S&P Retail Index +1.3% yesterday.  The index was underpinned by better-than-expected February same-store sales data, despite the fact that consensus was already fairly upbeat going into the day. 

 

Parts of the REFLATION trade outperformed yesterday; the Materials (XLB) was the third best performing sector yesterday despite renewed tightening fears that led to a selloff in China and a very strong dollar.   

 

The market seemed to ignore another round of weaker-than-expected housing data, as pending home sales fell 7.6% month-to-month in January vs. expectations for a 1% increase.   The January decline, which followed a 0.8% increase in December and 13.7% plunge in November, was broad-based, as all four regions posted lower sales.  Seasonal issues and weather is a partial explanation for the weakness in the recent trends.  Expectations are now for sales to surge in existing-home sales in April, May and June.

 

Yesterday, the best performing sector was Financials (XLF).  The sector benefited from the waning effort to overhaul the financial system.  This dynamic seemed to be particularly supportive for investment banks and money-center names.  

 

As we wake up today, equity futures are trading above fair value in a continuation of Thursday's rally on the back of the strong retail sales numbers. Today's focus will be on the February employment data.  On the MACRO calendar today we have:

 

February Nonfarm Payrolls

January Consumer Credit

 

In early trading, copper is trading higher and headed for a third weekly gain in four weeks.  Gold is little changed in London and looking to advance advance as demand strengthens on concern about European sovereign debt.  Yesterday, crude fell for the first time in two days as the dollar strengthened.  Oil is trading slightly higher today. 

 

Howard Penney

Managing Director


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FL: Proactive Predictability

We’ve spent a ton of time on Foot Locker recently, working to understand the opportunities ahead and to proactively predict the company’s strategic moves.  This morning we received confirmation on a few areas of focus as well as few positive surprises:

 

  • The Nike relationship is alive and well.  We’ll see a collaborative effort in the Spring around Nike’s Fresh Air launch.  In addition, House of Hoops highlighted as an example of an already successful collaboration.  Management sounded upbeat about 2010 as it pertains to Nike and we suspect there are more programs yet to be announced.  A definite positive and also a prerequisite for this turnaround to work.
  • RUN by Foot Locker was acknowledged as a test and as an opportunity to tap into the large and growing running category.  Clearly management believes there is an opportunity to build share in performance/technical running.  It was also acknowledged that service levels are key to this concept’s success and there is much to learn there.  Staffing levels aside, any improvement in customer service across the chain will be a big deal. 
  • Apparel was the most often mentioned opportunity on the call but also the one with the least details.  An upgrade towards more performance oriented apparel, especially in women’s (at Lady Foot Locker) sounds like it’s in the works.  Importantly, a change in the company’s approach to clearing aged inventory (faster) will clear the decks. This was evidenced by a charge taken in the quarter to jump-start the process.  Current apparel trends are under-performing.  CEO, Ken Hicks, alluded to the “new apparel team”, which we hope to learn more about at Tuesday’s analyst day.
  • Europe continues to outperform, posting positive mid single digit comps for the quarter with strength carrying into 1Q.  Interestingly, an uptick in the basketball category was noted.  Historically, Europe has been more driven by low profile and running silhouettes.  This trend is noteworthy, as ASP’s in basketball are higher and this would present a great near term growth opportunity for the chain.  Perhaps, the proliferation of European basketball players throughout the NBA is finally starting to take hold…
  • Inventory well managed down 7.4% on an absolute basis, 10% in constant currency, and down 6% per foot- all against total sales that increase 0.6%  Expect to hear more about a focus on turning goods faster next week. 
  • Again, we believe this not a massive store closing story at all costs.  With that said the unprofitable, unproductive stores slated for closure are adding up.  Another 150 announced for 2010, mostly tied to lease expirations.  Lease attrition is clearly the preferred (and cheapest) method the company will use to right size the base.
  • Same-store Sales are trending even better post-quarter, giving management confidence to put out a low single digit forecast for year.  February comps were up mid single digits across all divisions, even against tough compares.  A word of caution here. While it’s good to see comps accelerating, let’s not forget that the entire retail universe had a great February.  A rising tide lifts all boats and in this case Foot Locker is back in the water. 
  • More to come on Tuesday with the official unveiling of the “strategic plan”.  We expect to hear much more detail about product collaborations, marketing plans, store segmentation, and internal personnel changes.

Eric Levine

Director


RESTAURANTS – DIVERGENCE BECOMING A TREND

MRT reported better than expected 4Q09 earnings yesterday and a -5.3% decline in same-store sales (on a comparable 13-week basis).  This -5.3% marks a significant improvement from the -16.8% in 3Q09.  Easier comparisons drove a lot of this improvement, but trends also got sequentially better on a 2-year average basis.  Comparable restaurant sales turned positive in December and have continued to get better since then (+1.5% in January and +4.4% in February to date).  Management said it is seeing increased business travel and as a result, improved Monday-through-Thursday business.  For reference, in the past, MRT has said that about 80% of guest checks are on expense accounts, but that mix has fallen off throughout this economic downturn.  MRT also said that in response to increased corporate spending, it experienced a pickup in holiday party bookings during the fourth quarter; though many businesses hosted lunch events in place of dinner events, lowering the holiday party average check. 

 

This increase in expense account dining at MRT supports PFCB’s expectation for marginally better business trends going forward (30% of tickets at the Bistro).  This also increases my conviction that we will continue to see a divergence in performance between casual dining and QSR names, particularly for those concepts that target higher income consumers.  Even after the most recent fall off in consumer confidence, confidence levels remain highest among consumers in the $50K+ income bracket.  The price action in the stocks, along with management commentary, has confirmed this thesis.

 

RESTAURANTS – DIVERGENCE BECOMING A TREND - FSR QSR

 

RESTAURANTS – DIVERGENCE BECOMING A TREND - consumer confidence income

 

As the Hedgeye Retail team said in our internal meeting this morning, February retail sales came in better than expectations across the board, but one of the biggest positive divergences came out of Nordstrom.  “Both Nordstrom and Neimans had solid months and although Saks missed relative to expectations, comps came in positive for the month, which is a victory in itself.”

 

Hedgeye’s Financial Analyst, Josh Steiner, also recently highlighted on February 25th following JPMorgan’s investor day that “The recovery is happening disproportionately at the high end of the income spectrum. The following chart shows that households with income greater than $125k spent +4.8% more in 4Q09 than in the prior year. This compares with +3.3% for families with between $75-125k and just +0.8% for those with less than $75k in household income.”

 

RESTAURANTS – DIVERGENCE BECOMING A TREND - sales growth


GC: POTENTIAL 4Q09 UPSIDE

With capital projects behind it, potential earnings upside, and a solid balance sheet, Great Canadian appears to have a favorable set up in front of it.  Q4 is next on the docket.

 

 

Great Canadian is scheduled to report its 4Q09 results after close this Monday, and we believe they will once again beat expectations.   More importantly, we think that consensus numbers for 2010 are reasonable.  Going forward, all of the projects are either completed or wrapping up and the balance sheet should remain in great shape.  All Great Canadian needs to do it simply operate their properties.

 

We think Great Canadian will report $32.3MM of EBITDA on $97MM of revenues, compared to consensus expectations of $31MM of EBITDA and revenues of $96.25MM.  Canadian provinces don’t report monthly gaming numbers like most states in US, but the BCLC does put out a quarterly report of payments it makes to local governments representing their stated share of casino and community gaming centre revenues.   While it hasn’t been “spot on,” the BCLC numbers have been a good directional indicator on trends at GC’c British Columbia casinos (see charts below).  According to the 4Q09 data, 6 of the 7 BC-located Great Canadian properties showed material sequential improvement in y-o-y trends and 3 of the properties had y-o-y revenue increases.

 

This quarter’s results should benefit from the recent slot refresh, completion of expansion projects at River Rock, View Royal and Ph1 at Georgian Downs, and better weather comparisons, as December 2008 had severe snowstorms.  While all of this sounds very “bullish”, we’re under no delusion that things are rosy in Canada and that GC’s customer is in recovery mode. Despite all the positives, we’re projecting less than 1% growth in y-o-y revenues.  However, when you combine that with massive cost reductions, some pretty good results should be in the wings for GC.  The stimulus pumped into the Vancouver economy from the Olympics won’t hurt 1Q2010 results either.

4Q09 DETAIL

 

River Rock: $30.7MM of revenues and $14.3MM of EBITDA

  • The Canada Line, walkway opening, expanded parking, slot refresh, and the end of construction disruption should produce a lift in revenues at River Rock.  According to the Local share data, monies paid to Richmond (where RR is located) increased 17% y-o-y. 
  • Easy weather comparisons should also make for healthy increases in 4Q09. In Dec 2008 revenues plummeted 23% y-o-y compared to a 6% average decline in October & November 2008. 
  • We’re projecting gaming revenues of $23.6MM and $7.1MM of hospitality revenues. 
    • Table revenues up 12% assuming a 3% increase in table drop and 22% hold. Table hold in 4Q08 was 20%, which is 1.6% below the properties’ nine-quarter average. 
    • 12% increase in slot win assuming a 10% increase in slot handle, which was down 17% last year.  
  • Operating expenses (including promotional expenditures) down 18%  y-o-y to $16.4MM. Operating expenses were down 26% y-o-y in 3Q09 

 

GC: POTENTIAL 4Q09 UPSIDE - River Rock 

 

Boulevard: $17.0MM of revenues and $8.3MM of EBITDA

  • We’re projecting gaming revenues of $14.4MM and $2.6MM of F&B revenues 
    • Table revenues down 6% assuming a 1% increase in table drop and 20.6% hold. Table hold in 4Q08 was 22.2%, above properties’ nine-quarter average of 19.4% 
    • 4% decrease in slot win assuming a 8% decrease in slot handle and 7% win, compared to 6.7% win last year  
  • Operating expenses (including promotional expenditures) down 14% y-o-y to $8.8MM compared to a 15% decrease to $8.6MM in 3Q09 

 

GC: POTENTIAL 4Q09 UPSIDE - Boulevard

 

Vancouver Island: $10.7MM of revenues and $6.24MM of EBITDA

  • In August 2009, View Royal’s gaming expansion was completed, adding 120 slots. However, there was also construction disruption in the third quarter. 
  • The Local Share data implies 5% increase at View Royal, offset by a 4% y-o-y decline at Nanaimo
  • We’re projecting gaming revenues of $9.8MM and $0.9MM of F&B revenues
    • Table revenues down 13% assuming a 5% decrease in table drop and 23.5% hold.  Table hold in 4Q08 was 25.8%, 230bps above properties’ nine-quarter average.
    • 6% increase in slot win assuming a 3% increase in slot handle and 7.25% win, compared to 7% win last year
  • Operating expenses (including promotional expenditures) down 12% y-o-y to $4.4MM compared to a 18% decrease to $4.3MM in 3Q09

 

GC: POTENTIAL 4Q09 UPSIDE - Vancouver island casinos

 

Nova Scotia Casinos: $9.7MM of revenues and $2.4MM of EBITDA

  • We’re projecting gaming revenues of $9.5MM and $1.35MM of F&B revenues 
    • Table revenues down 7% assuming a 1% decrease in table drop and 19.2% hold. Table hold in 4Q08 was 20.4%, 140bps above properties’ nine-quarter average 
    • 1% increase in slot win assuming a 4% decrease in slot handle  

 

Other:

  • Georgian Downs should benefit from its slot expansion which added about 350 slots in August.  We’re projecting $2.8MM of revenues from gaming at Georgian Downs, compared to $3MM in the 3Q09 (which is typically a seasonally stronger Q)  
  • Great American Casinos will benefit from a strong Canadian Dollar for the first time in 2009.  The Canadian Dollar strengthened 14% against the dollar in 4Q09 compared to 4Q08.  At current rates, the Canadian dollar is 9.6% stronger than the FX rate in 2009.  For 4Q09 we’re expecting $6.2MM of revenues and $0.8MM of EBITDA at the Great American Casinos 

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