Pain Trade Continues: SP500 Levels, Refreshed...

What I should have done was cover my SPY short position on Thursday’s market open down at 1176. Should have, a bag of pretzels, and something cold will render me just about useful enough for the world horse-shoe throwing championships down at Pass Lake.


Now the math is new and so are my updated immediate term TRADE ranges for the SP500. We’ll be immediate term overbought again at higher prices than those who are still in this Pain Trade may be able to bear. There is no resistance until 1202, which is obviously 2 points above a big round number that the monkeys are staring at.


Monkey-see, monkey-do, and we know that plenty a monkey can make money on the long-side of a market. So don’t be the horse-shoe that these monkeys are flinging or you’ll end up looking silly like I do right now being short. Wait for your spot.


Once this low volume Pain Trade rids itself of all its passengers, the move lower will be sharp and swift. Volatility (VIX) hasn’t been this low since May of 2008 and that’s an ominous sign in and of itself, particularly if you consider Greece the Bear Stearns of this market with the real show being a Spanish Lehman over the intermediate term.


Key support lines under 1184 is the intermediate term TREND line down at 1128 (-6.1% lower from 1202 if that’s where you get your next SP500 short off). Don’t disrespect the similarities that this current 2-month rally has to the one that ended, abruptly, on January 19th.  Just when you can’t take it anymore, the music stops.



Keith R. McCullough
Chief Executive Officer


Pain Trade Continues: SP500 Levels, Refreshed...  - S P

R3: Does Traffic Breed Traffic?


April 12, 2010


‘Traffic’ has referred largely to consumers walking into stores. But now the bigger ‘traffic’ metric to watch is the container traffic coming into the US. We just saw the biggest sequential uptick in 15+ years.





After last month’s sales report, it’s going to be tough to find any retailer say ‘we’re planning conservatively for summer/fall.’  In fact well before the sales numbers were known, we started to see a sequential uptick in container traffic into Long Beach, the best proxy for retail goods coming in from Asia. This past month, however, we saw TEUs (twenty-foot-equivalent units) grow at a yy rate not seen since early 2005, with a sequential 3-month acceleration the strongest in over 15-years. The point here is that the goods are coming…the consumer needs to be there waiting.


R3: Does Traffic Breed Traffic? - traffic chart shipping





  • Score one for fast fashion retailer, Forever 21. With value and price consciousness still very much on the mind of teen consumers, the company is promoting its “prom collection”. The dress offering includes 44 styles ranging from $13.50 to $42.80. Given that a prom dress is likely to be worn only once, we suspect these price points will make prom 2010 a “throwaway” for those a dress at Forever 21.


  • After hinting that the company was exploring the opening of bridal boutique, it has been confirmed that J Crew will open its first freestanding store focused on the bride this summer. The new store is slated to open on 66th St and Madison Avenue in New York in late May or early June. Interestingly, the store will be set amongst some pricey competition. Donna Karan, Oscar de la Renta, and Vera Wang are all located within 10 blocks of the new store.


  • Add Mintbox to the growing list of online “flash sale” operators. However, the latest entry into limited time, discounted fashion sales is aiming to bridge the gap between the on and offline worlds. Shoppers will receive loyalty rewards for their purchases, which in turn can be used towards gaining access to in-store VIP events, fashion shows, and exclusive preview sales. The site aims to build better relationships between retailers, designers, and consumers beyond simply selling goods off-price.





R3: Does Traffic Breed Traffic? - Calendar 





Health Care Reform & Retail - Health care reform is translating to more spending for companies of all sizes. How much more won’t be clear for some time and this kind of general muddiness should continue as officials decide how to apply the new laws, reforms phase in and insurance providers and individuals choose their paths. The plan will dramatically boost benefits for some and costs for others. But the net effect of the sweeping changes is the province of future historians — despite the highly politicized debate in Washington. Most companies would have to start to provide health insurance for employees’ dependants up to the age of 26 and for dependants who are under 19 and have preexisting medical conditions. By 2014 all legal U.S. residents will be required to have health insurance or pay a tax penalty. Under the employer mandate, retailers with more than 50 full-time employees who don’t offer insurance to their full-time workers will face a $2,000 penalty per full-time employee after the first 30 such workers. <>


Indian garment exports from India to the US, Europe and Japan are likely to pick up in the coming months ahead due to the gradual recovery of their retail markets, according to the Confederation of Indian Textile Industries. "Indian and Bangladeshi garment exporters have started getting better prices now in the US. There are signs of improvement even in the retail market of the EU, all of which indicates that garment exports are slated to improve in the coming months," said Confederation of Indian Textile Industries General Secretary D K Nair.

The Apparel Export Promotion Council also expects the April export figures to show improvement, even though the industry went through a rough time with outbound shipments dropping 10.16% to $7.92 billion in April-January period of fiscal 2009-10 over the last one. However, the strength of the Indian currency is a cause of concern for exporters.  <>


 R3: Does Traffic Breed Traffic? - Apparel Imports Table


Hong Kong's Luxury Markets Boom as Rich Mainlanders Snap Up Watches, Flats - Ju Wei, the owner of an advertising company in China’s north-western Gansu province, makes an 1,800 kilometer (1,100 miles) trek to Hong Kong at least six times a year to go shopping. <>


Home Retail Advances to Four-Month High on Report Wal-Mart's Asda May Bid - Home Retail Group Plc rose to a four-month high in London trading after the Mail on Sunday reported that Wal-Mart Stores Inc.’s Asda may be interested in making an offer for the U.K. company. <>


MasterCard Is Set to Launch an Online Shopping Mall - MasterCard plans to launch Monday the MasterCard MarketPlace, an online mall with more than 28,000 merchants. The payment card network is collaborating on the project with Next Jump, an Internet company that specializes in personalized shopping. <>


Costco vs. Omega, Big Implications for Industry - The Supreme Court is expected to meet on Friday to decide whether to hear a case brought by Costco Wholesale Corp. against Omega SA challenging whether Omega can use copyright law to control the distribution and resale of watches made lawfully abroad and imported into the U.S. The case has significant implications for off-price retailers and discounters that often purchase imported goods from middlemen and distributors at cheaper prices, rather than purchasing directly from a manufacturer or its authorized U.S. distributor, and then sell them in the U.S. below the brand’s official price. Online auction sites such as eBay also could be impacted by the case. <>


Wisco Badgers Drop Nike - The University of Wisconsin-Madison said today it has ended its licensing agreement with Nike Inc. as a result of issues the school has with how the shoe company handled problems with contract factories in Honduras. The school alleged that Nike has failed to adequately address problems resulting from the closure of two Honduran factories in January 2009. The licensing relationship between the school and Nike generated $49,000 in royalties last year. The university has a code of conduct that governs the activities of companies under contract. <>


Gossip, Glitz, P&G, and Progressive - Procter & Gamble’s Gain detergent and Progressive Insurance have signed on for Starlicious, an online game show that plays on America’s fascination with celebrities. The show, now running on the News Corp.-owned celebrity gossip site,, tests contestants’ knowledge of celebrity trivia with two press-the-button, answer-it-first rounds, followed by a 30-second “speed round” before advancing to the final prize. Those who are not content with merely watching Starlicious—which enters episode five of its first season this week—can also compete with other online viewers for a chance to appear on the show. (The criteria involves notching the top score in its “Celebrity Trivia Challenge.”) <>


A Look at Rock & Tone and Truebalance by New Balance - New Balance Athletic Shoe Inc. last week launched its first toning collection, Rock & Tone, and in July, the company will bow another toning franchise called Truebalance. Wendy Yang, GM of wellness at New Balance, said the firm’s background in walking and comfort will be an advantage as it enters the category. “Comfort is in everything we do. It’s that first feel. You want your foot to feel as good at the end of the day as it does at the beginning,” she said. <>


R3: Does Traffic Breed Traffic? - new balance image 


K-Swiss California Music Month - Move to the music with California Music Month, presented by K-Swiss Inc. The Westlake Village, Calif.-based company is honoring its home state with a series of online programs and a five-part video series, out this month. The brand explores some of the area’s best music, including classics from the 1960s to present day hits, featuring artists such as The Beach Boys, Guns N’ Roses, The Red Hot Chili Peppers and Green Day. The release comes simultaneously with the launch of the Vintage California sneaker. To access the tunes, visit or, where the site will host an Album of the Week interactive feature. <


R3: Does Traffic Breed Traffic? - K Swiss Image


Card Activation Technologies Sues Apparel Retailers - Card Activation Technologies Inc., which holds a patent on debit card-related technology and has a reputation for litigiousness, again has filed an infringement lawsuit against several apparel retailers. Macy’s Inc., J.C. Penney Co. Inc., Nordstrom Inc., Guess Inc. and the Fashion Bug and Lane Bryant divisions of Charming Shoppes Inc. were among 10 defendants the company accused of violating its patent in a suit filed in U.S. District Court in Kansas City, Mo., in February. Card Activation Technologies alleged the retailers have processed debit and gift cards in ways that infringe on a patent it received in 2000. <>


Christine Su and Elizabeth Yoon  met while working at the Adidas USA headquarters in Portland, Ore. Their new line, Su-Yoon, has a little extra style: “What we are ultimately trying to do is create a holistic collection where fashion fuses and submerges with sportswear athleticism, and where clean and classic styles are refined with slightly provocative athletic details,” Yoon said. Launching for fall ’10, the line of pumps, wedge booties and flat over-the-knee boots takes an athletic look at women’s shoes. The $250-to-$600 styles are made on custom-built lasts (Su’s family owns factories in China, which gave the self-financed startup a head start in product creation) and incorporate flex-built midsoles, EVA heel inserts and cupsole constructions to offer sneaker comfort. <


Puma to Sponsor Top Sailing Event Again - Puma Ocean Racing, which finished second overall in the 2008-09 Volvo Ocean Race, has confirmed its entry for the next edition of the event. Puma will also be the official supplier of footwear, clothing, and accessories to the Volvo Ocean Race <>


R3: Does Traffic Breed Traffic? - PUMA image


GS ended up on the right side of the MGM stock call but the analysis was full of holes.



Fitting perfectly in the apples vs. oranges category, Goldman Sachs made an aggressive buy call on MGM based in part to the valuation discrepancy between LVS/WYNN and MGM.  No I’m not kidding.  That’s like buying a bottle of Riunite because it’s cheaper than a 1997 Brunello (with no sales or alcohol tax!).  Sure Bellagio is a great asset but how can one compare EV/EBITDA multiples of Excalibur/Monte Carlo/Circus squared etc. operating in the highest corporate income tax jurisdiction (USA) vs Wynn Macau/Venetian Macau paying no income taxes on gaming profits?


At 9x leverage, the MGM equity is essentially a call option.  MGM the company is back to being a domestic gaming company and should be valued as such.  Despite management’s attempt to position it as a “Convention Company”, it is not.  Convention rooms booked represent 11% of total and rates are so low that the casino business drives most of the profits.  It is clear that MGM never became a hotel company, a brand company, an international company, etc., or the past iterations.  Back to basics fellas.


Our point in this note is not just to trash Goldman Sachs.  The point is that MGM’s stock is on a tear and some of that is based on faulty analysis.  MGM’s stock may continue to run but at least investors should be focused on the right issues and not on the company trading at Macau/Singapore multiples. 


Here are some assertions from the Goldman Sachs report and our commentary:



“New analysis shows MGM shares undervalued relative to its peers”

  • In other words, using the inflated values of other companies to justify ‘buy rating’ 


“Las Vegas operation for Las Vegas Sands is trading at a seven point premium to MGM shares on 2011 estimates (LVS 16X EBITDA, vs. MGM 10X).  We arrived at this by backing out the Macau portion using the current stock price of Sands China and then applying a Genting Singapore multiple to our 2011 Marina Bay Sands EBITDA estimates.”

  • Well, he’s using an 11x multiple for Singapore which is too low in our opinion and hence he’s getting a much higher implied value for Vegas.  We have Singapore & US at an implied multiple of 14.8x but there is no question that Singapore deserves a much higher multiple than Vegas.  Another issue with this valuation is making the statement that MGM’s Vegas business should trade at the same multiple as LVS’s.  LVS has two nice 5 star properties – MGM has Bellagio and 50% of Aria and a bunch of impaired assets that are never going to fully recover.  We know that those assets wouldn’t trade for more than 8x – since we have the TI comp (sold last year) which is a better asset than Excalibur/Circus Circus/Monte Carlo. 
  • You can pull out Singapore if you want and try to isolate it, but a few points.  Singapore should have a huge ramp in earnings over several years, operates in a duopoly market, and it’s a pristine trophy asset.  Moreover, the corporate income tax rate in Singapore and Macau is so much lower than in the US so if you use EV/EBITDA, that should account for 3-4 multiple points.  I can see someone saying 15x on it easily for 2011 EBITDA which should grow double digits for years to come.  Singapore will be over 60% of the “Singapore / Vegas” EBITDA as well so if you put an 11x multiple on it – of course you get a huge Vegas number.


“Carrying out the same analysis for Wynn’s Las Vegas operations, we find that again MGM shares are trading at a discount (WYNN 15X 2010 EBITDA vs. MGM 10X). Again we are not sure if this calculation truly reflects what investors really believe Wynn Vegas assets are worth but even if the discount was “discounted,” MGM shares are trading well below other Vegas assets.” 

  • We actually have WYNN Vegas at 16x 2011 – but maybe our numbers are too conservative.  Again, it’s like valuing a Porsche and a Toyota – you can’t compare Wynn’s 2 top notch assets to MGM’s portfolio.  WYNN also has a pristine balance sheet – while MGM has a load of debt issues down the road.  WYNN also pays special dividends while, with MGM you face the risk of being diluted in an equity offering.


“We could argue that MGM, with the dominant position on the Vegas Strip, might merit a premium to the other companies’ Vegas operations given the value that dominance in a city can create. We also admit that MGM’s balance sheet and exposure to currently weak Las Vegas could make some investors hesitant, but the discount is so significant it suggests MGM shares are undervalued from a relative value basis.” 

  • Yea you can argue that but it’s kind of a silly argument when you compare their real estate to WYNN or LVS.  Sorry but there is no way anyone pays the same multiple for Monte Carlo/Excalibur/New York NY/ Circus Circus/ etc as they would for Venetian.  Cross marketing on the Strip has not helped those properties much or at least you wouldn’t know it from the numbers.


“We would also point out that MGM trades at a big discount to other hotel companies. Starwood, Marriott and Hyatt all trade at 12X to 13X 2011E EBITDA. Even with Vegas oversupply issues, financial leverage and concentrated market it appears to us that MGM is one of the least expensive ways to invest in a strong business and leisure travel rebound.”


  • Yeah and if my Aunt was a man he’d be my Uncle.  The fact is those hotel companies have very modest leverage, are diversified, and control supply.  They also generate much more business from convention and business travelers (which GS is very high on) than MGM.  This is almost like saying if Riunite wasn’t such a bad wine it would be more expensive.  Those are real issues for MGM that the hotel companies don’t have.


“Macau IPO seems to moving along …Regarding Macau, the company stated in its 4Q2009 earnings conference call the following regarding its JV in Macau: ‘Our partner and we are very engaged in this and we think going public makes sense, and we have been always articulating the fact that we'd like to go public by midyear.’  Additionally, just last week news sources reported that MGM has hired five banks to manage a planned $500 million Hong Kong listing.  This implies a 14X multiple on our 2010E EBITDA, which would be roughly in line with where Las Vegas Sands (Sands China) and Wynn (Wynn Macau) Hong Kong listings initially priced last Fall.” 

  • We don’t think MGM deserves the same multiple:  1) only a short and poor track record, 2) it’s a JV, 3) no visibility on when asset #2 will come along, and 4) all the investigations.


“…As does the sale of The Borgata...

In Atlantic City, MGM also owns 50% of Borgata and on March 12, 2010 put its stake into a Divestiture Trust to be sold within the next 30 months. Borgata’s peers – the regional operators – are trading at an average 2010E EV/EBITDA multiple of 9X. We forecast The Borgata to generate 2010 EBITDA of $182 million. Borgata EBITDA peaked in 2005 at $252 million. The Borgata joint venture currently has $586 million of net debt. Using the average peer multiple and our forecasted EBITDA (discounted to account for the impact of table games coming online in Pennsylvania) would suggest a value of $1.6 billion.” 

  • A forced seller of a non-controlling/managing stake?  We’re going to go out on a limb and say they won’t get a good multiple here.  Oh, and AC is being squeezed by competition on all sides with no signs of abating.  Where do I put my bid?


“CityCenter JV has monetization opportunities...

MGM may also look to monetize its stake in the CityCenter joint venture of which it owns 50%. Options include increasing leverage (current debt levels at $1.8 billion), selling a hotel/condo tower, or selling the retail.


While the main Aria hotel tower (4,000 rooms) is likely to remain at the joint venture, the venture could explore selling one of the other towers such as the 400-room Mandarin Oriental or the 1500 room Vdara.  With the economic slowdown, transactions within the hotel space have understandably been very limited.  However, there were some transactions in 2009 among which include the St. Regis Monarch Beach $245 million acquisition ($612,500 price/room), the Hyatt Regency Boston’s $133 million acquisition ($226,900 price/room) and the W San Francisco’s $90 million acquisition ($222,770 price/room).  The second option for CityCenter could be to increase the leverage on the property. With $1.8 billion in debt and an estimated $400 million in EBITDA for 2010, the property could potentially take on more debt, possibly up to a 6X level.”


  • If they do $400MM in 2010 that will be a heroic act – we’ll take the under on that bet (but only in Vegas because gambling is illegal in CT).  Don’t forget that they spent well north of the quoted per key rates above in building these wonderful rooms.  Small point but Harmon isn’t even finished yet and that’s because it costs more to complete than what they can “monetize” this “hidden” asset for.

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On March 17, we posted a note titled “Feels like 2007” - in that post we provided a list of restaurant companies that could be on the “A” list for a private equity transaction and/or for becoming victim of the rumor mill.  Here is the list again: CAKE, PFCB, MSSR, TXRH, BOBE, EAT, CHUX, RRGB, PEET and CPKI.


Late Friday, the WSJ reported that private equity firms are among those considering an acquisition of CPKI.  In the CKE Restaurants proxy filed back on March 17, it was revealed that three other private equity firms were taking a look at the books of CKE Restaurants.


Today CPKI announced 1Q10 same store sales of (2.7%) and revenues of $156.7M vs. consensus of $157.2M. It is also guiding 1Q10 EPS to $0.07 vs. prior $0.05-0.07; EPS excludes an approximate $0.03 benefit for gift card breakage - consensus is $0.07.  More importantly, the company CPKI announced that its board has authorized management to consider a wide range of financial and strategic alternatives to enhance shareholder value.  Included in the announcement was the statement that “Financial and strategic alternatives may include, but are not limited to, changes in the company's capital structure, or a possible sale, merger or other business combination.”


If management is looking to sell the company because they want liquidity (the co-CEO owns 8% of the company) I can understand that, but changing the capital structure will not create shareholder value.  Moelis & Company are going to produce a table for management that will look something like the table below.  The format is taken from the CKE Restaurants proxy as part of the fairness opinion that was used to justify the THL offer for CKE.  


For the purposes of a comparative valuation for CPKI, we used BJRI, TXRH, CAKE, BWLD, DRI, PFCB, RUTH, EAT, BOBE and RRGB.  These companies represent a mixture of regional and national brands that have both meaningful and limited growth opportunities.  CPKI’s presence in the supermarket channel gives it national brand characteristics, with a regional concentration of restaurants.  Given the turmoil of the past year, historical numbers are important for context to the risks of the business but, not that representative of the growth potential over a typical 5-7 year holding period for a private equity firm.  That being said, a fair range of $20 to $25 is possible, with $22 looking likely.   



Lastly if a bidder does emerge for CPKI in a range of $20-$25, the acquisition price will be significantly higher than what THL is offering for CKE restaurants.  THL is currently offering $11.05 for CKE, which I think not a great price for shareholders.  I think the price should be closer to $14-$15. 




Howard Penney

Managing Director


Galaxy Entertainment hosted a conference call to provide a financing update.  Here are our notes.




  • Galaxy announced that it procured a HK$8.8BN secured club loan with a consortium of Asian banks that will provide enough financing to complete the HK$14.1BN Galaxy Macau development scheduled to open in early 2011.
    • Loan was oversubscribed
    • Banks will not syndicate the loan
    • "Terms represent lowest cost of capital available in the current market" - H + 4.5% (4.7% today) with a Term of 6 years (compares to their 9.7% current rate on their debt)
  • Detailed Annual & 4Q09 update on 4/20/2010


  • The facade of building is almost complete. They have over 2,000 workers there currently.  Don't need 3-4,000 people for the project.
  • Have a full master plan for the site that they have submitted to the government - there will be at least 4 phases.  Decided not to build it all at once
  • Closing on the transaction? Final stages of the documentation stage now, closing end of April /early May closing
    • Covenants? Taken lessons from others to avoid mistakes
  • Why no syndication?
    • Vote of confidence in their strategy.  The entire amount is being held with no sell down for the entire term
  • Any shift to profit share from 1.25% RC programs? Not really
  • Cotai project isn't impacted by the table cap


The Macau Metro Monitor, April 12th, 2010


Galaxy Entertainment Group Ltd., the casino operator part-owned by Permira Advisers LLP, received a six-year HK$8.8 billion ($1.13 BN) loan for the construction Galaxy Macau. Seven banks including Industrial & Commercial Bank of China Ltd. and HSBC Holdings Plc helped structure the club loan. The facility will pay 4.5% + HIBOR. The resort is scheduled to open in early 2011. The company is accelerating construction and may have a “soft opening’ as soon as the end of this year, Chairman Lui Che Woo told reporters in Hong Kong today.


The facility “fully funds” the resort’s development, Galaxy said. “The terms of the club loan are significantly more favorable than the group’s existing bonds,” the company said. “This proposed agreement significantly lengthens the group’s debt-maturity profile as well as enhances its financial efficiency and flexibility.”


Galaxy Macau will be able to accommodate 600 casino tables, Chief Financial Officer Robert Drake said today. The resort will contribute a “significant amount” to the company’s balance sheet from 2011, he said.



There is an opening of an air operating licence following the dispute between Viva Macau and the Macao government. According to people close to the situation, interested parties include Malaysian budget carrier AirAsia, which has held preliminary talks about establishing a joint venture in the Chinese special administrative region. Macao’s civil aviation authority revoked Viva’s air operator certificate on March 28.


Viva maintained last week that it stood “ready to resume service with our reinstated AOC”, and some of the airline’s financial backers are scheduled to meet Fernando Chui, Macao’s current chief executive, today. The Macao government could choose to reinstate Viva’s AOC, with or without new partners, or pursue discussions with other airlines about entering the market, which is dominated by state-owned Air Macau.


While AirAsia considered becoming involved with Viva at the time, talks had not progressed beyond initial stages. AirAsia would also insist on operational control over any joint venture with Viva, along the lines of its existing joint ventures in Indonesia, Thailand and Vietnam. “Most likely AirAsia won’t go in because of this and other considerations, but the idea is still being considered,” one person involved said. He added that the Malaysian airline was “fully occupied” with the Vietnam joint venture with Vietjet Air, which was cleared last week by Hanoi.


A Macao deal would also offer the possibility of taking advantage of Macao’s “fifth freedom” rights to operate flights to the US.

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