Gaming revenues tracked through April 19th of HK$8.1bn and other tidbits we picked up this week.



We think Macau gaming revenues were HK$8.1bn through April 19th which puts the full month on the pace of a little over HK$12bn.  On a year over year basis, Macau is looking at around a +50% month off of an easy -7% comp last year.  Total gaming revenue was up 66%, 73%, and 42% in January, February, and March, respectively.


April growth looks strong.  Foot traffic has been good.  One caveat is that we heard volumes at LVS were not as strong as win due to higher than normal hold percentages.  We are trying to get a feel for the luck factor at other properties.  Going forward, with a full Golden Week (9 days vs only 3-5 last year because of financial crisis) May should be another strong month.  Also, Wynn Encore opened this week which should boost volumes but potentially hurt same store results.


In conjunction with the Wynn Encore opening this week, the company announced the development of Wynn Cotai with an opening timeframe of early 2013.  The sense from people on the ground in Macau is that early 2013 might be a bit aggressive but Wynn may be trying to appease the government. 


Here are some initial thoughts on Wynn Encore:

  • Given the day of mourning in China they don’t expect PR to be as aggressive but volumes shouldn’t be impacted that much.
  • Claim that Encore isn’t assuming any dilution in win per table… taking some of Starworld’s VIP business – but it’s hard to know
  • Our guy thinks that win per table will be down though (although hold comps were easy last year). 
  • Margins should get thinner – since VIP will become a larger % of total profits at the property
  • Mass numbers should drop as a result of credit falling away for premium players – and a lot of Wynn’s Mass play is “premium mass.”  Unclear if the new offering will help them – a lot of that will be impacted by credit policy

Other tidings:

  • Grand Lisboa's head of table games and  VP casino manager are leaving and going to Galaxy Cotai.
  • No word on visa restrictions. There are talks of additional tightening on the mainland – but nothing has happened.

Financial Reform Playbook

Financial Reform Playbook


Our Financials Sector Head Josh Steiner sent the note below to his subscribers yesterday.  Given the importance of financial reform as factor in the market currently, we thought it was important to highlight, specifically relating to the potential catalysts in the calendar relating to reform over the coming weeks.  As you are positioning and thinking about how the next few weeks could play out on the financial reform front, this note is worth more than a crackberry minute to read.




Daryl G. Jones

Managing Director



04/20/2010 06:32 AM


With Financial Reform "Part One" now potentially just a few weeks away, and in light of the SEC's fraud allegations directed at Goldman Sachs, we thought it a worthwhile time to get investors back up to speed on what to expect.


First, our take on what's going on.


Financial Reform "Part One" is seemingly now moving full steam ahead, made possible largely by the curiously opportune timing of the SEC Goldman case. What had been a reasonably high probability of a filibuster of the current Dodd Bill just days ago will now likely not stand up in the face of blistering sentiment in the court of public opinion around the Goldman situation. The GOP position will only be made more difficult by the Administration removing the $50bn bank tax, which Senate Minority Leader Mitch McConnell (R-KY) likened to a government-approved future bailout - the one, already-bent arrow left in the GOP quiver.


The two key events to watch for will be (a) the Senate Agriculture Committee vote on whether to ban bank trading of derivatives (this Wednesday) and (b) whether republican Senator Collins will vote in favor of Senator Dodd's Financial Reform bill - likely to play out in the near future as Treasury Secretary Geithner met with her just yesterday afternoon.


Financial Reform "Part Two" deals with the implementation and enforcement of Financial Reform once passed into law. We address this later in the report.


Second, a timeline and list of upcoming catalysts/key dates relevant to Financial Reform.


1) Yesterday afternoon - Treasury Secretary Geithner was meeting with Senator Collins (R-ME) to try and get her to break ranks with her GOP colleagues and support the Senate reform bill as proposed. 


Update: Susan Collins is no longer on the fence / she has sided with the rest of the GOP on this issue.


2) This morning (4/20/10) - GS reports before the open / conference call at 11am. All eyes will be directed their way looking for any incremental information in light of the SEC's recent fraud accusations.


3) Wednesday (4/21/10) - Senate Agriculture Committee will hold a markup of its comprehensive OTC derivatives regulation bill with the goal of passing the measure out of committee on Wednesday.


4) Thursday (4/22/10) - Senate likely to begin debate on Senator Dodd's (D-CT) Financial Reform bill.


5) Thursday (4/22/10) - UK general election debate between PM Brown and Conservative Candidate Cameron will likely focus heavily on the GS/Financial Reform issue. US politicians may watch closely to gauge voters response to different posturing around this issues.


6) Thursday (4/22/10) - President Obama will visit Manhattan to deliver a speech on the importance of Financial Reform at Cooper Union; an interesting choice of location, for it was there that President Abraham Lincoln galvanized New Yorkers for the first time in his quest to become President with one of his most famous speeches decrying slavery. 


7) Thursday (5/6/10) - UK general election for Prime Minister.


8) Memorial Day (5/31/10) - This is the Date President Obama has given to Congress to have a Financial Reform bill on his desk. After Memorial Day, Congress will go into full swing campaign mode, and passing any meaningful legislation will become difficult.



Third, a summary of the key developments of late and what to watch for.


1) Dodd's Odds. Senate Banking Committee Chairman Chris Dodd (D-CT) announced prior to the recent legislative break that he was abandoning efforts to strike a bipartisan compromise after separate attempts to negotiate with committee republican Shelby (R-AL) and committee republican Corker (R-TN) failed to yield an acceptable compromise. Senator Dodd chose a go-it-alone strategy, which will require a 60-vote filibuster-proof majority in the Senate. With the election of Scott Brown (R-MA), there are now 57 Democrats plus 2 Independents (who caucus with the Democrats), and 41 Republicans currently in the Senate. The Democrats are short one vote to avoid a filibuster. Enter Senator Susan Collins (R-ME).


Update: The GOP is now saying that they’re close to a deal. Senator Shelby is putting forward an optimistic tone for the first time since 2009.


2) Senator Collins. Senator Collins (R-ME) is perceived as the low-hanging fruit by the administration for the 60th vote in favor of Dodd's bill. While she has come out against the bill, and has signed the GOP letter to the Democrats calling for a reopening of bipartisan talks on the issue, she was the last republican senator to do so, and has a history of breaking with her party at times. As the following excerpts from her voting record show, Senator Collins has acted independently of the GOP many times, making her a plausible candidate to do so again on Financial Reform.


Update: Susan Collins is no longer on the fence / she has sided with the rest of the GOP on this issue.


3) Senate Agriculture Committee. Senate Agriculture Committee Chairman Blanche Lincoln (D-AR) has proposed a ban on derivatives trading by banks. Specifically, her bill would require that financial firms spin out their derivatives business in order to remain banks - a modern day version of Glass-Steagall. In addition, it requires that derivatives be traded on an exchange and be approved by a clearinghouse. Further, firms would be required to disclose to regulators and the public their derivatives positions. This goes considerably farther than the Dodd bill, which would not require such a breakup or require public disclosure of positions. As we understand it, Dodd's view is more in-line with the administration's thinking on this issue. To reiterate, the Senate Agriculture Committee will hold a markup of its comprehensive OTC derivatives regulation bill with the goal of passing the measure out of committee this Wednesday (4/21/10). It is possible that the bill could be amended to the Dodd bill.


Update: The Senate Agriculture Committee will likely pass their bill today. The real question now becomes what elements of it get included in the Dodd bill.


4) Latest give and take. The latest concession being reported is that Dodd may, at the Administration's request, remove the $50 billion bank tax from the bill. This has been an area of heated recent exchange, where Senate Minority Leader Mitch McConnell (R-KY) has been using the bank tax as the basis for an argument that the Dodd bill will support future bailouts. Recall that the House version of financial reform has a similar provision calling for a $150 billion bank tax. 


5. Conference Committee. This may not be as challenging as many had anticipated. For those unfamiliar, the Conference Committee is the process in which the House and Senate bills are merged into one bill for the President to sign. Given the differences that were anticipated to emerge between the House and Senate bills for Financial Reform it was being speculated that the House would not acquiesce to the Senate's less stringent changes. However, now that Chairman Dodd's bill appears to have a higher likelihood of passage without broad Republican support, we think this may not be much of a challenge.


6. The UK Election. One interesting additional note is that the UK General Election will be held on May 6. Prime Minister Gordon Brown is set to lose by a wide margin according to, which has his contract for re-election priced at 20, while that of his competitor, conservative candidate Cameron is priced in the low 70s. This is significant for a few reasons. First, this could lead PM Brown to take off the gloves at their upcoming debate this Thursday and really lay into GS, among other Financial firms, in an effort to try and shore up his share of the populist vote. Second, politicians in the US will be paying careful attention to both the rhetoric and outcome of the UK election on this front as they devise their own political calculus heading into the November midterm elections. Finally, a surprise win by Brown would almost certainly represent an additional negative for the sector.


Fourth, Financial Reform Part Two.


The two bills proposed give regulators the option of breaking up firms deemed too-big-to-fail, but does not require it. Further, there is an element of this discretion woven throughout much of both the House and Senate bills, which is why we think it's again worth revisiting the role the Financial Services sector plays from a contributions standpoint, as it is a general truism that politicians rarely bite the hand that feeds them. Have a look at the following charts to get a sense for who is involved in this process, and where they receive campaign contributions.


The following chart shows Securities Industry contributions to Senators for the 2010 election cycle - the one underway right now. The interesting takeaways are that Democrats actually held 12 of the top 18 spots for donations, and the top four most heavily financed Senators were all Democrats: Senators Schumer (D-NY), Gillibrand (D-NY), Reid (D-NV), Dodd (D-CT). Interestingly, Senator Dodd has announced he will not seek re-election and Senator Reid is facing a 20-30 point gap in the Nevada polls, suggesting it may be unlikely that he'll seek to run again. The point is simply to show that the Securities Industry is a major Democratic contributor.


Financial Reform Playbook - Top Senatorial Contributions 2010



In fact, overall, the Financial Services industry contributes 32% of all Washington donations, making it more than twice the size of its nearest competitor.


Financial Reform Playbook - overall industry contributions



Here's a look at the contribution levels by recipient for a few of the senior Representatives and Senators who matter most to this process. Overwhelmingly, Financial Services is their principal source of campaign money.


House Financial Services Chairman Barney Frank (D-MA)

Financial Reform Playbook - 1 Barney Frank by industry



Senate Banking Committee Chairman Chris Dodd (D-CT)

Financial Reform Playbook - Dodd



Influential Democratic Senator Chuck Schumer (D-NY)

Financial Reform Playbook - 2 chuck schumer by industry



Potential Swing Voter Senator Susan Collins (R-ME)

Financial Reform Playbook - collins



Interestingly, the one Senator who seems to have no reservations about breaking the banks apart in so far as prohibiting them from trading derivatives is Senator Blanche Lincoln - Chairman of the Senate Agriculture Committee, who has not one major financial campaign supporter. In fact, her only quasi-financial contributor is the Intercontinental Exchange, which is a potential beneficiary of forcing the OTC derivatives market to clear through either CME or ICE.This was clearly a major oversight on the part of the Financial industry not contributing to Senator Lincoln.


Senator Lincoln's top campaign contributors for the 2008 election cycle.

Financial Reform Playbook - Senator Blanche Lincoln   SAC Chairman



Finally, a look at Goldman's contributions to the 2010 Senate election cycle relative to other companies within the Securities Industry. Clearly, GS stands at the top of the list. What's interesting is that GS actually allocated 75% of its contributions in this cycle towards Democratic candidates - a higher percentage than virtually any other firm on the list.

Financial Reform Playbook - GS relative to others for 2008



It's our view that such substantial campaign resources generate considerable influence, and that influence has been years in the making and represents significant inertia that will be difficult to overcome, most notably in Financial Reform Part Two. In other words, we expect Congress to pass Financial Reform Part One, but the Devil will be in the details, as it most often is. In this case we would expect to see little follow-through support for any excessively punitive measures once "reform" is passed, and candidates can campaign solely on the passage, rather than the merits, of that reform.



Fifth, a summary of the key points of the two bills.


A few of these provisions are in flux, but the following are a good representation of the Bills as they stand now.


Senate Bill

  • Consumer Financial Protection Bureau:
    • The agency will be housed within the Federal Reserve and the agency's Director will be appointed by the President and confirmed by the Senate.
    • The bureau will have a dedicated budget paid by the Federal Reserve Board and will be tasked with autonomously writing rules for consumer protections governing all entities offering consumer financial services or products.
    • The agency will examine and enforce consumer rules for banks and credit unions with assets above $10B and will also have authority over mortgage-related businesses and large nonbank financial firms.
  • Systemic Risk:
    • The bill sets up a 9-member council of regulators, chaired by the Treasury Secretary, to oversee systemic risk in the financial system.
    • The measure empowers the systemic risk council, by 2/3 vote, to assign high-risk nonbank financial firms to fed oversight and says the council, by 2/3 vote, may approve a Fed decision to order the break-up of large firms that threaten the economy's stability.
    • Large bank holding companies that have received TARP funds will not be able to avoid Federal Reserve supervision by simply dropping their bank status.
  • Ending Too Big To Fail:
    • The Financial Stability Oversight Council will monitor systemic risk and make recommendations to the Federal Reserve for increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.
    • Creates an orderly liquidation mechanism for the FDIC to unwind failing systemically significant financial companies. Shareholders and unsecured creditors will bear losses and management will be removed.
    • Requires Treasury, FDIC and the Federal Reserve all agree to put a company into the orderly liquidation process. A panel of 3 bankruptcy judges must convene and agree within 24 hours that a company is insolvent.
    • Charges the largest financial firms $50 billion for an upfront fund, built up over time, that will be used if needed for any liquidation.
  • Volcker Rule:
    • Requires regulators to implement regulations for banks, their affiliates and bank holding companies, to prohibit proprietary trading, investment in and sponsorship of hedge funds and private equity funds, and to limit relationships with hedge funds and private equity funds.
    • Nonbank financial institutions supervised by the Federal Reserve will also have restrictions on their proprietary trading and hedge fund and private equity investments.
    • Regulations will be developed after a study by the Financial Stability Oversight Council and based on their recommendations.
  • Banking Regulations:
    • The Federal Reserve will regulate bank and thrift holding companies with assets of over $50B. The Vice Chair of the Federal Reserve will be responsible for supervision and will report semi-annually to Congress.
    • The FDIC will regulate state banks and thrifts of all sizes and bank holding companies of state banks with assets below $50B, whle the OCC will regulate national banks and federal thrifts of all sizes and the holding companies of national banks and federal thrifts with assets below $50B.
    • The Office of Thrift Savings is eliminated, existing thrifts will be grandfathered in, but no new charters for federal thrifts.
  • Executive Compensation and Corporate Governance:
    • Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation.
    • Gives the SEC authority to grant shareholders proxy access to nominate directors.
  • Derivatives:
    • Requires central clearing and exchange trading for derivatives that can be cleared.
    • Provides the SEC and CFTC with the authority to regulate the OTC derivatives market.
  • Hedge Funds:
    • Raises the assets threshold for federal regulation of investment advisers from $25M to $100M so that those funds that manage over $100M will be required to register with the SEC as investment advisers and to disclose financial data needed to monitor systemic risk and protect investors.
  • Credit Rating Agencies:
    • Creates a new Office of Credit Rating Agencies at the SEC and requires NRSO to disclose their methodologies, their use of third parties for due diligence efforts, and their ratings track record.
  • Securitization:
    • Requires companies that sell products like mortgage-backed securities to retain at least 5% of the credit risk, unless the underlying loans meet standards that reduce riskiness.
    • Requires issuers to disclose more information about the underlying assets and to analyze the quality of the underlying assets.


House Bill

Consumer Protections: Creates the Consumer Financial Protection Agency (CFPA),

a new, independent federal agency solely devoted to protecting Americans from

unfair and abusive financial products and services.


Financial Stability Council: Creates an inter-agency oversight council that will

identify and regulate financial firms that are so large, interconnected, or risky that

their collapse would put the entire financial system at risk. These systemically risky

firms will be subject to heightened oversight, standards, and regulation.


Dissolution Authority and Ending “Too Big to Fail”: Establishes an orderly

process for dismantling large, failing financial institutions like AIG or Lehman

Brothers in a way that ends bailouts, protects taxpayers, and prevents contagion to the

rest of the financial system.


Executive Compensation: Gives shareholders a “say on pay” – an advisory vote on

pay practices including executive compensation and golden parachutes. It also

enables regulators to ban inappropriate or imprudently risky compensation practices,

and it requires financial firms to disclose any compensation structures that include

incentive-based elements.


Investor Protections: Strengthens the SEC’s powers so that it can better protect

investors and regulate the nation’s securities markets. It responds to the failures to

detect the Madoff and Stanford Financial frauds by ordering a study of the entire

securities industry that will identify needed reforms and force the SEC and other

entities to further improve investor protection.


Regulation of Derivatives: Regulates, for the first time ever, the over-the-counter

(OTC) derivatives marketplace. Under the bill, all standardized swap transactions

between dealers and “major swap participants” would have to be cleared and traded

on an exchange or electronic platform. The bill defines a major swap participant as

anyone that maintains a substantial net position in swaps, exclusive of hedging for

commercial risk, or whose positions create such significant exposure to others that it

requires monitoring.


Mortgage Reform and Anti-Predatory Lending: Would incorporate the tough

mortgage reform and anti-predatory lending bill the House passed earlier this year.

The legislation outlaws many of the egregious industry practices that marked the

subprime lending boom, and it would ensure that mortgage lenders make loans that

benefit the consumer. It would establish a simple standard for all home loans:

institutions must ensure that borrowers can repay the loans they are sold.


Reform of Credit Rating Agencies: Addresses the role that credit rating agencies

played in the economic crisis, and takes strong steps to reduce conflicts of interest,

reduce market reliance on credit rating agencies, and impose a liability standard on

the agencies.


Hedge Fund, Private Equity and Private Pools of Capital Registration: Fills a

regulatory hole that allows hedge funds and their advisors to escape any and all

regulation. This bill requires almost all advisers to private pools of capital to register

with the SEC, and they will be subject to systemic risk regulation by the Financial

Stability regulator.


Office of Insurance: Creates a Federal Insurance Office that will monitor all aspects

of the insurance industry, including identifying issues or gaps in the regulation of

insurers that could contribute to a systemic crisis and undermine the entire financial system.



Conclusion. Democrats and the Administration may well have the needed ammunition to get Financial Reform legislation over the goal line on the heels of the SEC charging GS with fraud. The real question will be, once all the ink is dry, what will this mean for the sector. We remain somewhat simplistically convinced that the amount of campaign contributions the industry floods Capitol Hill with each year is likely to keep the wolves at bay to a greater extent than most assume. As such, we think there will be negative headline risk for the next month or so through Memorial Day, but after that the sector could lift on the realization that Congress' bark is worse than its bite.



Joshua Steiner, CFA


Allison Kaptur

R3: JCP: new look. new day. what’s new.


April 21, 2010





We spent the better part of yesterday at the JC Penney analyst day in New York. In aggregate it was solid big picture way to get a sense of where the company is heading, both near and longer term.  There weren’t any “Aha” moments or revelatory comments, but still it was worth hearing the $18 billion retailer’s senior leadership share their insights.  After about 4 hours of presentations and Q&A , management took the time to outline the company’s strategic long range financial goals and plans.  If they had released the financial part at the beginning of the meeting, then it’s likely that most analysts (at least the buy-side) would have left early, with the company’s five year guidance firmly in hand.


For us, there were actually some subtle but interesting takeaways from the “meat” of the morning.  A few points were clear.   JC Penney is working hard to position itself and its products for growth with the 25-35 year old consumer.  Almost every merchandising discussion was centered on driving traffic from this key (and elusive) demographic. Secondly, the general and free flowing use of the term “growth” was used on numerous occasions.  Growth in new stores, growth with new Sephora shops, growth with new customers, etc, etc…We got the message loud and clear.  Management believes that this is growth story.  We can’t say that we agree with that, but we can say that at least they aren’t sitting still.  More highlights and interesting callouts below:


- Lots of excitement surrounding the launch of Liz Claiborne.  Customer research shows that Liz loyalist who have shopped the brand elsewhere in the past, but who don’t shop Penney’s, plan on shopping for the brand in its new home.  The Fall launch will incorporate 30 categories across the store.  JCP sourcing gives the company a 400-500 bps gross margin advantage on Liz products, which should be accretive given the likelihood that unproductive merchandise is being shed to make room for this initiative.


- MNG by Mango is just one of the many initiatives highlighted to target the under-35 customer.  Initially the store in store concept with launch in 77 doors, ramping to 600 by Fall 2011.  What’s most interesting here is that JCP intends to flow new goods on a similar time frame as its fast-fashion partner- with deliveries and newness offered multiple times per month.  As it stands now, the fastest cycle time for any JCP line is about 12 weeks. 


- Interestingly, the company’s head of intimates admitted that her division became too focused on gross margin rate during the recession, which in turn led to less competitive pricing on national brands.  Moving forward the company aims to be competitive on price (at or below) and will be increasingly focused on gross margin dollars.  The offset to profitability will come from emphasis on private brands.


- An overriding theme across all division head presentations was reducing/editing assortments.  This is happening across all categories, on the floor and in marketing collateral.  Additionally, price points and the pricing message continues to be simplified.  “Over assortment” and “key item focus” were common buzzword used throughout the morning.


- Curiously, the American Living Brand was not mentioned at all until a question was asked about it from the audience.  Recall, that last year the meeting addressed some of the learnings from the brand’s first year and ultimately where the challenges existed for the brand.  Yesterday, CEO Mike Ullman reiterated that the launch was “ambitious” and they are more confident in the brand today.  With that said, it was clear that there is still much work to be done here and Ralph Lauren is working very closely with its JC Penney counterparts to get this right.  This Q&A dialogue was the only mention of American Living, which spans 40 categories, throughout the entire formal presentation.


- While most bricks and mortar retailers are seeing their .com subsidiaries outpace core retail growth, JC Penney is moving sideways.  Management presented strategies in which they plan to employ to reinvigorate growth in the $1.5 billion platform.  A completely revamped site will be launched in 18 months. Interestingly, JCP is trying to embrace emerging technologies in a big way and made it a point to mention “Facebook” numerous times.  In fact, JCP held its February board meeting at Facebook’s headquarters in an effort to educate its leadership on the changing and growing world of social media.  CEO Ullman sits on Starbuck’s board with Facebook’s CEO, hence the connection.


- Finally, management presented its 5 year plan to grow same store sales at a 5% CAGR, return EBIT to peak levels of 9-10%, and commensurately grow EPS at a 25% CAGR through 2014.  This is the benchmark for which the Street will judge results for the next few years.  Perhaps most interesting is the fact that the company has not posted a 5% CAGR in same store sales as far back as we can track. 


Eric Levine






- Sometimes things in retail just don’t make sense. On Coach’s quarterly conference call, management explained how goods have been distributed in Asia, ex-Japan. Essentially, product is shipped from Asian factories to Florida, and then back to Asia for resale! Good thing the company is opening an Asian distribution facility to support local growth. The new building/process is expected to take 6-8 weeks out of the supply chain process as well as likely reduce costs.


- Wolverine World Wide noted that it is seeing a noticeable shift in order patterns from its retail partners, which favors futures orders at the expense of at-once orders. Recall that this is quite the opposite of the trend we had seen for a year now, where retailers were waiting closer to need to place orders. Management believes this “order behavior” is due to two factors: 1) retailers feeling increasingly confident about the back half of the year and 2) a growing concern from retailers that Asian factory capacity may become scarce as the recovery continues and factory capacity does not come online commensurate with demand requirements.


- In her latest move to permeate the mass market, Vera Wang has signed a deal to create a bridal line for David’s Bridal. Given that Wang launched her career with great success in the high end bridal market, this should be an obvious extension of her growing fashion empire. The dresses are expected to be priced at $1500 and below, vs. her main bridal line which is priced at $6,000+.





R3: JCP: new look. new day. what’s new. - Calendar





Gap Launches Another Pant Style - On the heels of last year’s denim reboot, Gap is launching another major pants initiative. The men’s and women’s Premium Pant collection is inspired by “the big part of life that is work.” The pants will sell between $49.50 and $59.50. Anchored in tailoring, the seven women’s fits range from the Really Skinny to a slouchy Boyfit to a flared leg trouser style and the Curvy fit for fuller figures, and will be merchandised with a selection of filmy white blouses, cashmere sweaters, shearling and leather aviator jackets, as well as Pierre Hardy for Gap lace-up, peep-toe wedges. The three men’s fits include tailored khaki in straight, relaxed or slim cuts; classic khakis in straight or relaxed fits, and vintage khaki, which sports a button closure and loose, standard or straight fits. <>


Kellwood Looks to Acquire - Kellwood Co.’s new revolving credit facility lets the firm take a deep breath and plunge into acquisition mode. Chief executive officer Michael Kramer said the new revolver, an asset-based loan, was closed last week. The facility is used for seasonal operating needs, with the draw-down during the year to build inventory levels, and repayment as soon as retail customers pay their bills. With its bank loan established in a still-tight credit market, Kellwood can focus on completing more acquisitions. Kellwood is looking at firms with annual volume of between $25 million and $300 million.  <>


Skechers Gets Cartoon Animated - Skechers is developing two direct-to-DVD cartoon features, entitled "Hydee and the Hy-top" and "Twinkle Toes." The move follows its subsidiary Skechers Entertainment's deal to produce its first animated-series, "Zevo-3." <>


Mountain Lodging Occupancy Rose 9.6% in March - In some of the most solid results seen in the mountain travel industry during the past 12 months, lodging occupancy was up 9.6% y/y in March. Improving economic indicators have been credited with the recent upswing in mountain travel. The Consumer Confidence Index (CCI) increased sharply, up 13.1% in March, recovering most of February’s losses and settling at 52.5 points but remains unstable. Currently, April reservations are down 4.6% compared to April 2009 while lodging rates are up 4.2%. Has implications for outdoor brands: COLM, VFC, TBL, DECK, WWW, BOOT, etc. <>


Department Stores and Sports Retailers Drive March Retail Sales Increase - The average value of online orders increased to $180.95 in March, up 7.6% from $168.23 in January, according to Coremetrics. <>


E-retailers Plan to Use Targeted E-mails to Improve Web Sales - 79% of retailers plan to send more targeted e-mails to customers to improve web sales, The E-tailing Group says in its 8th Annual Merchant Survey. 72% will refine site search and 70% will enhance web site merchandising. <>


Indian Shoe Company to Jointly Manufacture in Bangladesh - Indian conglomerate Tata Group has signed an agreement with Nitol-Niloy to jointly manufacture shoes in Bangladesh. As per the agreement, both companies will set up a footwear factory with a daily capacity to produce 5,000 pair of shoes. Since Bangladesh has favorable trade access in Europe and North America, the new partnership aims to export the entire production from these plants there. <>


Outdoor brand Ahnu is getting a little dressed up for fall ’10. The Alameda, Calif.-based brand (a division of Deckers Outdoor Corp.) has brought vibrant purples and soft blues and grays into its women’s line of performance wedges on boots and slip-ons, as well as added styling to its hiking product. On the men’s side, the brand is showing chukka silhouettes and rugged styles that cross over for casual use. Ahnu styles, priced between $100 and $150 at retail, are available at outdoor, independent and department stores. <>


R3: JCP: new look. new day. what’s new. - Ahnu Fall Shoes



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The Macau Metro Monitor, April 21rst, 2010



Steve Wynn, speaking in an interview ahead of the opening of his new hotel and casino, Encore at Wynn Macau, said construction on the Cotai project would start next year, in time to open as early as the end of 2013, and would feature a single hotel and likely include no more than 450 gambling tables. "In the past few years, Cotai players have built very ambitious projects, but they had little experience in gaming," Wynn said. "We have 42 years...and we will land on Cotai and the competition with all of that experience."


Wynn's Encore Macau is the only opening by a major casino operator this year in the Chinese territory, but it is relatively modest; the $600 million Encore Macau has 61 gambling tables, and Wynn described the project Tuesday as a "boutique hotel" meant to cater to Macau's highest-end visitors. In addition, Wynn declared his stance on a potential threat from Singaporean casinos, "Singapore as a competitive jurisdiction is irrelevant."


Wynn dismissed worries that Macau government officials could limit the number of gambling tables, calling recent remarks by top officials part of "a conversation, not a reality." "Is the table cap a fait accompli? The answer is no," Wynn said. He added that he is in regular dialogue with top Macau officials and said officials wouldn't approve projects by holders of casino licenses unless they were comfortable with the idea of more gambling tables.


Wynn called the New Jersey recommendation against Ms. Ho "ridiculous," saying regulators were overreaching to make a political statement."What has she done wrong? The fact that Stanley is her father?" Mr. Wynn said. "Pansy's as suitable as you are, except for her name. So what if a father gives money to his daughter?"


Wynn Resorts is also considering moving its global headquarters from Las Vegas to Macau, said Wynn. “It is not improbable or unrealistic considering so much of our revenue is from China that it makes sense that I spend most of my time here,” said Wynn. “I'm seriously considering that and I am weighing the implications of how I engineer that.” “What matters is not how many places get built but how good are they. The more fanciful, the more appropriate they are, they grow the market… I don't think bigger is better. I think better is better.”



Asian Coast Development Ltd. hired Lloyd Nathan, formerly president of MGM Mirage Global Gaming Development, to run the first Las Vegas-style casino in Vietnam.  Asian Coast, a Vancouver-based development group backed by Philip Falcone’s Harbinger Capital Partners LLC of New York, has a 50-year license to build a $4.2 billion casino and resort 130 kilometers from Ho Chi Minh City. MGM Mirage will manage the first property, which will be called the MGM Grand Ho Tram, Asian coast said. The first phase of the project is scheduled to open in January 2013.


Because gambling is illegal for Vietnamese, the casino will be off-limits to most of the communist nation’s 86 million people apart from overseas Vietnamese holding foreign passports. "VIP customers will account for more than two thirds of gaming revenue in the Ho Tram strip," Nathan said.


The first phase of the beach-side Vietnamese resort will include 550 rooms, 90 gaming tables and 500 slot machines, Gavin Davidson, a spokesman for Asian Coast, said in a telephone interview from Ho Chi Minh City. The development is licensed for up to 180 tables and 1,000 slot machines, he said.


The company released details of the oversubscribed ‘club loan’ syndicate deal announced on April 12 which has now been upsized to HK$9bn, meaning that the HK$14.1bn Galaxy Macau development is now fully funded.






Next Gen Mathematics

“Do not worry about your difficulties in Mathematics. I can assure you mine are still greater”

-Albert Einstein


The good news about the difficulties associated with applying chaos theory to financial markets is that it’s getting less difficult as access to information expands. That said, everything is relative. These are still very early days in terms of how governments, institutions, and individuals apply Next Gen Mathematics to managing risk in a globally interconnected marketplace.


One of the main roadblocks to successfully applying chaos theory to asset allocation models and cross-country analysis is that many fixed income and derivatives markets do not trade transparently. That is, unlike most natural systems where chaos theory is applied (like the weather), only a select group of buyers and sellers of derivative securities know whether it is sunny out or raining.


I have heard many people argue over the course of the last 72 hours that allowing derivatives to trade over-the-counter is going to “hurt liquidity.” In the short run, for the narrow marketplace of players interacting, that may very well be the case. In the long run, arguing against an expansion of markets and the subsequent reduction in costs to transact in those markets is basically arguing against transparency. In principle, and in science, I don’t buy it.


Having lost the odd toe attempting to trade everything from currencies in swap to making short sales in illiquid Chinese shell companies, I can at least tell you that one of the main reasons why a buy-sider might argue for not regulating markets is that you can make yourself a ton of money by picking off the monkeys out there who not only don’t know what they don’t know, but they can’t see someone who is supported by a multi-billion dollar cost structure.


I have worked with some hedge fund portfolio managers who are not mathematically oriented,  but by trading markets have a form of chaos theory embedded in their practitioner’s experience. They learned by doing. This is good, for them. But not for our economic system. If an asset manager finds an edge, the last thing she is going to do with that is share it with a world of wannabes looking to evolve.


Let’s consider this as a practical matter and look at how different people I have worked with consider “earnings season”:

  1. You start with a market narrative that “earnings season is going to be great”
  2. Stocks start to discount this positive expectation (SP500 up 78.6% since last year’s low)
  3. Earnings season hits, and there is price action that follows the “news”

So, a really good risk manager will consider the driving part of the Street’s story line (“earnings are going to be great”) and score that, quantitatively, relative to the price action born out of the “news.” I have seen some managers build a base of “hot” inventory that measures price moves on a 1-3 day basis into/out of news. I have seen others overlay that with volume and volatility studies. I have seen some people ignore all of the aggregated data and only focus on the stock they own.


The upshot of how all of these different personalities measure different kinds of data is the definition of chaos theory – “studying the behavior of dynamical systems that are highly sensitive to initial conditions” (Wikipedia). As opposed to waking up thinking you know exactly what is going to happen, you should wake up accepting that everything is grounded in uncertainty.


Back to the real-time example…

  1. The SP500 has rallied +15% since the initial February Freakout about Greece.
  2. The Street’s narrative is “earnings season is going to be great”
  3. Coke and IBM report earnings before yesterday’s open, and both stocks close down almost -2% on the day

So now what? What if you only follow AAPL and you are right convinced that the company is going to be the largest on the planet and that yours is a differentiated thesis that you should be paid 5 and 50 for? What if you didn’t see GS have a huge intraday reversal to the downside on big volume after a monster earnings report? What if you did see all of this and you are waking up to the following price reactions to earnings reports from last night?


A)    Trading up on earnings: TPX +10%, AAPL +5%, ALTR +5%, TUP +4%, STX +3%, TCK +3%, TSS +3%

B)    Trading down on earnings: VITC -31%, TSFG -29%, CSIQ -9%, SNV -8.%, JNPR -8%, CREE -6%, NUVA -6%, YHOO -4%, GILD -3%, PLXS -3%.


Now everything, of course, should be scored relative to the last trading price. No, that’s not the calculus the US Government uses when inflating your property taxes relative to marked-to-market trading prices of homes. It’s certainly not the ideology that Tricky Dick Fuld upheld as the written gospel of marked-to-model at Lehman Brothers. It’s just real-time math, and you need the Next Gen of Mathematics to solve for what to do.


How you interpret these real-time prices in your mathematical models relative to the one-factor we have briefly addressed (earnings season) is up to you. To me, chasing a market that has responded this poorly to earnings news because AAPL was “great” is plain reckless.


When we overlay the degradation in the earnings narrative with global risk factors like sovereign debt (Greece 10-year bond yields blasting to all time highs this morning) or the rise of short term US Treasury yields to 1.02%, this really starts to get interesting.


Don’t worry about the difficulties associated with evolving. There is much work to be done out there on the proverbial ice of market transparency, and I can assure you that my team’s issues are still greater. We know what we don’t know.


My immediate term support and resistance levels for the SP500 are now 1199 and 1214, respectively.


Best of luck out there today,



Next Gen Mathematics - AAPL



The market’s retracement following the GS selloff is centered on the upbeat sentiment surrounding Q1 earnings season, which continues to beat analysts' expectations. 


According to Bloomberg, 82% of the S&P 500 companies that have reported first-quarter results beat the average analyst earnings estimate, up from 79.5% in the fourth quarter of 2009.  So far in 1Q, operating profit for the S&P 500 is up 35% year-over-year.  Volume declined 10% day-over-day and the VIX declined 9.2%, bringing its two day slide to 14.8%.  The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (14.62) and sell TRADE (16.95). 


On the MACRO front Greek sovereign issues, China’s measures to curb real estate speculation and hawkish comments from India and the Bank of Canada are having little lasting impact on the risk/recovery trade.  Earlier today, Bundesbank President Weber's comments that Greece may need up to €80B of bail-out money is putting pressure on Greek sovereign spreads again today, rising to all time highs.


Yesterday, Energy (XLE) was the best performing sector.  The oil services group fared particularly well, with the OSX posting its biggest one-day gain since August 3rd, +4%.  The drillers and the E&P group outperformed the broader market with the EPX rising 2.1%.  In early trading, Crude is trading higher on speculation that supplies are shrinking.  The Hedgeye Risk Management model’s levels for the OIL are: buy TRADE (83.54) and sell TRADE (84.99). 


On the back of a busy day for bank earnings, the banking group provided some upside leadership for the Financials (XLF), with the BKX up 2.7% and up 11% over the past month.  The upside was largely driven by better-than-expected credit quality.  There was some disappointment surrounding results in investment banking and asset management, though the pullback was attributed to the fact that a beat was widely expected, while regulatory concerns also remained on the front-burner.


While Technology (XLK) was higher yesterday, the sector lagged the S&P 500. The big headwind came from IBM (1.9%), even though the company beat on both the top- and bottom-line and raised full-year guidance above the consensus.  On the positive side, the Semis snapped a two-day losing streak today with the SOX +1.6%.


Parts of the SAFETY trade continue to lag the market.  Healthcare and Consumer Staples were the two worst performing sectors yesterday.  The packaged food and soft-drink names were among the worst performers in the staples sector yesterday following the top-line miss from KO.  In addition, SVU was another big decliner  after becoming the latest grocer to offer disappointing guidance.


Additionally, a stronger dollar is putting some pressure on the REFLATION trade and the commodity related sectors.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.86) and sell TRADE (81.52). 


In early trading, gold is trading higher for the second day in a row on the back of its safe haven status.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,126) and Sell TRADE (1,168).


In early trading, copper is trading slightly lower despite bullish news from China.  Copper imports by China for the month of March rose 53% over February and 14% year-over-year.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.50) and Sell TRADE (3.64).


In early trading, equity futures are trading above fair value and look continue the earnings season upside momentum.  On the MACRO front it’s a light day, but a heavy day for earnings with 35 S&P 500 companies reporting, including Morgan Stanley and Wells Fargo before the bell.  As we look at today’s set up, the range for the S&P 500 is 15 points or 0.7% (1,199) downside and 0.6% (1,214) upside. 


On the MACRO calendar today, Mortgage applications in the U.S. rose by the most in seven weeks.  The Mortgage Bankers Association’s index increased 13.6% in the week ended April 16th. Last night after the close, the ABC consumer confidence index declined to -50 from -47 the week before. 


Howard Penney

Managing Director













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