Of the 40 companies we track, 70% of the companies saw an increase in short interest in the past month (43% of the companies were in the QSR sector).
May seems to be a weak month in the East for gaming and we are hearing similar things across the country. Here are our notes from our 2 day trip.
Sands Bethlehem (5-24-2010)
PENN MGMT meeting notes: 5/24/2010
Harrah’s Chester 5-24-2010
Tim Wilmont, CEO of PENN (5/25/2010)
Position: Long Germany (EWG); Short France (EWQ)
As part of our Q2 theme Sovereign Debt Dichotomy, we advised that one possible play on sovereign debt risk in Europe is to be paired off long Germany and short Spain. Our bullish thesis on Germany included a tighter fiscal balance sheet than many of its European peers, the advantage of a weaker Euro for an export-heavy economy, low inflation, and a stable rate of employment. While we’ve seen significant divergence in the underlying German and Spanish equity markets over the last weeks, including a spread as wide as 2000bps between the DAX and IBEX 35 on May 7th, the increasingly larger share of the ‘bill’ that Germany will bear for the Eurozone’s collective bailout is bearish for German capital markets (see chart 1 below).
Since our initial conference call on the dichotomy on 4/16 we’ve traded around Spain on the short side (we are current short France in our model portfolio) and recently have seen weakness in reported German fundamentals. Further, from a tactical position, our TAIL line of support for the DAX at 5,639 could soon be tested with a close today of 5,758.02, and our TREND line of support at 5,928 is already broken (chart 2).
Today, the GfK German Consumer Confidence survey for June fell to 3.5 from 3.7 in May (chart 3). Last week German PMI contracted; services fell to 53.7 in May from 55.2 in April and manufacturing dropped to 58.3 versus 61.5 in the previous month. Also, earlier last week, the ZEW economic sentiment survey, which forecasts for 6 months ahead, fell to 45.8 in May versus 53.0 in April.
While the German unemployment rate remains positive, declining in the latest reading to 7.8% (versus the Eurozone average of 10% and 20% in Spain) and is underpinned by the government’s successful part-time labor programs, contagion from European sovereign debt risk persist despite the $1Trillion European loan/debt buy-up facility issued on 5/9. Additionally, Germany’s unilateral ban on naked short selling on 5/25 is adding fuel to the fire and enhancing market volatility.
On the margin, the fundaments we’re following in Germany and the broader stock market suggest a downward reversion to the mean, especially as risk in Europe (and globally) is pushed further out. One area to look to for confirmation of this is the bond market (chart 4), where we’re starting to see German yields rise.
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This morning, I’m the one getting squeezed. On the SPY short position I put on into yesterday’s close that is. That’s what we You Tuber’s of America call a mistake and that’s no one’s fault but my own.
When you make a short term mistake, the goal is to not immediately make another one. Over the immediate and intermediate term, compounding your mistakes gets easier if you don’t have a proactive risk management plan.
My plan in shorting the SPY yesterday was to short strength up to the two lines in the chart below:
While the long term TAIL line of support has held (1074), that doesn’t mean it can’t be broken. When markets that are broken on short and intermediate term price momentum rally to lower-highs on decelerating volume, the probability of long term support being broken increases.
Probability and scenario analysis needs to be measured dynamically if you want to have a shot at winning this game. I personally learn a lot more from my losses than I do from my wins. Today’s mistake is different than ones I’d make 3 and 5 years ago, in that time and mistakes help a man’s risk management model evolve.
If SPX 1074 breaks and VIX $26.19 holds, there will be a very high probability that we see 1048 in the SPX in the very near term. We shorted QQQQ on this morning’s opening market strength as well.
Keith R. McCullough
Chief Executive Officer
Sell side analysts not only follow stocks but their contrived – sorry I mean derived – price targets also seem to follow stock prices.
We’ve written a little about the shaky methodology and assumptions that have been used by the sell side recently to justify hotel stock valuations. The gaming sell side seems to be equally as momentum oriented. Maybe it’s a function of the 2008 stock market crash followed by a huge recovery. If it’s working, then stick with it, right?
The problem is who is paying the sell side for momentum calls? I never did. Anna never did. Keith never did. Adjusting price targets up or down following big stock moves to maintain a 25% spread to justify ratings does not seem to be much of a value-added service. Rather, the sell side should be about providing unique fundamental research and analysis.
Case in point, GS lowered its price target on MGM and took the stock off its Conviction Buy List today. MGM was added to the List in late April at roughly $14 after a monster move up. The removal today at $11.95 follows a 28% three week decline. The analyst’s price target was taken down from $17.50 to $14.00. Some investors have made a lot of money in a momentum oriented way. I’m fine with that but let’s call a spade a spade.
Conclusion: Good number overall, with upside to EPS almost entirely driven by 16% retail comps, while finally growing wholesale sales. GM +278bps, due to better sell-through, better product with higher margins, fewer promotions and lower markdowns. Good read-through for PSS here headed into next week’s print.
Guidance: Raised 2010 sales growth targets to high-single/low-double from prior guidance of mid-single. Guides Q2 net sales growth to low/mid teens range.
Street $1.06. Net revenue guidance increased to high-single/low-double from prior guidance of mid-single. Lowered SG&A guidance by ~50 bps, lowered interest expense, raised taxes, and raised the lower side of Cap Ex guidance.
Sales growth: +10.9%. Sq footage -3.1%, Brown Shoe Comp 15.5%, Specialty Retail Comp 16.2%, Wholesale +3.5%. New store productivity at Famous Footwear 95% -- - improving on the margin. Revs on the higher side of guidance across all segments.
GM %: 41.4%, up 278bps yy. 1 year sequential erosion but 2 year improvement due to a slightly more difficult comp. Comps get harder going forward. Famous Footwear GMs improved 230 bps from improved sell-through – more trend-right merchandise, and fewer promos (not sure if it’s by accident or solid proactive planning). Wholesale GMs increased 310 bps due to lower markdowns and improved sell-through and higher margin brand growth. Specialty Retail increased 150 bps from better product and more full priced selling.
SG&A: +5.5%, 2 year slowdown. SG&A margin -192 bps. Increase due to higher incentive compensation but offset by 62 fewer stores in operation.
Balance sheet: Inventories up 6% on 11% sales growth. Good spread, though sequential erosion. Capex inflected, now growing as a % of sales, currently at 0.9% of sales ttm. That’s absolutely not sustainable. Average inventory on a per-store basis at Famous Footwear increased 15.9% at quarter-end, reflecting recent sales trend and near-term outlook including its investment in higher-priced categories. Inventory at its Wholesale division decreased 3%.
SIGMA: In clean up mode, negative SIGMA move. Sequentially worse sales-inventory growth ratio and margins.
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