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PNK MAKING THE ROUNDS

No impact from oil spill and impact may turn out to be a positive. This isn’t an original call today; but earnings visibility is good, management continues to do the right things, and the stock has gotten creamed.

 

 

PNK management is making sure people know that the impact from the Gulf oil spill is nonexistent and could actually turn out to be a a positive if the relief workers gamble as they have in the past.  This clears up the near-term earnings picture which we had thought was good, prior to the BP disaster.  Meanwhile, the stock is off 24% from its recent high only one month ago and now trades at 6.5x 2011 EBITDA.

 

Aside from chronic unemployment, the only negative to the story, at least relative to initial expectations, is the April performance of River City (RC).  RC generated only $13 million in gaming revenues in April after putting up a solid $15.9 million in March.  We expect RC to rebound somewhat in May and build from there.  However, we have taken our numbers down to reflect a slower ramp.

 

Despite lower projections for RC, we remain above the Street in company EBITDA.  For 2010 we are projecting $206 million in EBITDA versus the Street at $203 million.  Since we wrote our note “PNK: ANOTHER CALL FOR HIGHER ESTIMATES” in late April, the Street has come up from its $192 million. Margins remain the story on EBITDA.  The removal of Dan Lee expenses in corporate and the sustainable cost cutting and rationalization generated in Q1, especially in the marketing area, provide visibility and maybe upside to current estimates.


JOBLESS CLAIMS SLIGHTLY BETTER BUT REMAIN IN THE 450K RANGE

Consistent with the trend year to date, claims remain in their ~450k range, too high for unemployment to improve meaningfully. This morning the reported number fell 10k to 453k, down from last week's revised print of 463k (revised up 3k), but roughly in line with consensus for 450k. Rolling claims climbed 1k to 459k week over week.  Remember, we need to see initial claims fall to a sustained level of 375-400k in order for unemployment to fall meaningfully and, by extension, lenders' net charge-offs to return to normalized levels.  We remain well above that level.  

 

As a reminder around the census, May was the expected peak employment month. Starting now, the census will become a headwind for job creation.  

 

JOBLESS CLAIMS SLIGHTLY BETTER BUT REMAIN IN THE 450K RANGE - rolling claims

 

JOBLESS CLAIMS SLIGHTLY BETTER BUT REMAIN IN THE 450K RANGE - raw claims

 

 

The following chart shows the census hiring timeline.  If the past two cycles are an appropriate model for this year's census, we should start to see Census employment draw down as we move further into June, creating a headwind for employment. 

 

JOBLESS CLAIMS SLIGHTLY BETTER BUT REMAIN IN THE 450K RANGE - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


Triple-A USA

"If the federal government will step in to help them, they are triple-A. If the federal government won’t step in to help them, who knows what they are.”

-Warren Buffett

 

Yesterday was neither a good day for the Thunder Bay Bears nor the once revered definition of “American Capitalism.” As I am sure US economic historian and author of “Buffett: The Making of An American Capitalist”, Roger Lowenstein, would agree, altogether it was a historical day for finance in this country. Never before has the US portfolio patriarch, Warren Buffett, been forced to answer questions about his market positioning against his own will.

 

If any of us Buffett fans thought the man was going to be forthright and transparent about what it is that the ratings agencies actually do, we should think again. I felt like I was listening to a professional politician when Buffett excused Moody’s by suggesting that they simply “made a mistake that 300 million other Americans made.”

 

We get what Buffett gets – politicians created and perpetuated a ratings system that could be gamed. What Buffett is really doing is playing the game that’s in front of him. Current conflicts, compromises, and constrains aside, his mandate is to make money – not to make you believe how he is making money is “right.”

 

To contextualize Buffett’s aforementioned quote about whether or not the states of America should be rated AAA, let’s take a quick step back and understand where this designated ratings system of Perceived Wisdom comes from.

 

In 1909 a gentleman by the name of John Moody (who is currently rolling in his grave) started selling independent research like Hedgeye’s (he was paid by subscription, not by the issuers of bonds he was rating). Over the course of time, independent research became a profitable business and it, predictably, found competition with firms like Poor’s Publishing.

 

By the time the 1970s rolled around and the USA was newly minted with its endowment of the world’s reserve currency (1971), the SEC “decided to penalize brokers for holding bonds that were less than investment grade. The SEC then faced the question of investment grade according to whom? The agency decided to create a new category of officially designated ratings agencies and grandfathered the big three – S&P, Moody’s, and Fitch.” (Roger Lowenstein, The End of Wall Street, page 39).

 

This, of course, created the kind of business that I, the Saudis, and Warren Buffett love – cartels who have a lock on supply and pricing via government mandate. All you needed to make this the “bubble that none of us saw coming” (Buffett) was more and more government intervention and price supports. Enter Greenspan and some moneys from the heavens and you can all of a sudden see how, from 2002 to 2006, that a conflicted firm like Moody’s saw profits triple and MCO stock go to $74/share.

 

“Given the agencies profits were soaring it paid for them to stay on good terms with Wall Street. Moreover, when Lehman took a mortgage pool to Moody’s, it paid the fee only if it was pleased with the rating.” (Lowenstein, The End of Wall Street, page 41).

 

Sure, even though some of us actually did see this coming… Mr. Buffett, with all due respect, maybe it was because we weren’t being paid to be willfully blind to the problems, in principle, that are obvious here…

 

So, after another great low-volume rally to lower-highs in the US stock market yesterday - fully trusting in the good faith of the USA’s Triple-A rating, we should chase stocks higher here on the open, right? C’mon. Let’s get serious here folks. This time there will be no finger pointing at 300 million Americans. No one will be allowed to say they didn’t see this US Sovereign Debt crisis coming with a straight face.

 

For a preview of what is coming down the pike in terms of US deficit spending and debt obligations, don’t ask Moody’s or Blackrock’s Larry Fink for their forecasts. Just this morning, Fink, who runs a massive asset management business in America’s politically infested waters said that it’s time to “rock n’ roll”…

 

Maybe we should dial up Chucky Prince and have a ourselves a little dance with the Thunder Bay Bear

 

The Fiat Fools in Europe are already providing a play-by-play preview for all Americans who still aren’t being paid to be willfully blind to see. As a reminder, we think the US deficit/debt problems come home to roost within 3-6 months, so it’s critical to analyze the sequence of events that Western European stock markets and populations alike are currently enduring.

 

The road from austerity to the forced selling of sovereign assets leads through the Rubicon of civil unrest…

 

Greece’s deficit-to-GDP ratio isn’t much different than Triple-A USA’s, but their scheduled debt maturities were closer/larger in duration (and they didn’t have in-house Fiat Fools running the world’s reserve currency with moneys dropping from helicopters), so they are going through the ringer first. Here’s a recap of the forced selling side of the game Buffett would recognize as Monopoly in Europe this morning:

  1. Greece – selling 3B Euros ($3.7B) worth of sovereign held stakes in railroads, water utilities, and postal services...
  2. Spain – Cajas Murcia is leading another 4 problem banks to merge approximately 75B Euros ($89B) in assets before the June 30th “rescue” date…
  3. Portugal – parliament approved austerity measures last night (ie. raising taxes and the like)…

“Rock n’ Roll” maybe for professional politicians or someone who recognizes that the art of the money management business is having money to manage… but for the citizenry of socialized nations… this looks more like a sneak preview of the “Road to Perdition” to me.

 

My immediate term support and resistance lines for the SP500 are now 1077 and 1106, respectively. We’d be a seller of all US and European equity strength today, ahead of another ominous reminder that big government employment reports are not too big to fail.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Triple-A USA - Buffett


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US STRATEGY – SOME BRIGHT SPOTS FOR NOW

The S&P finished higher by 2.6% and closed near its best level of the day.  The sectors with the most leverage to the RISK/RECOVERY trade outperformed. The MACRO calendar was a net positive with better-than-expected April housing data.  The enthusiasm is likely to be short lived with the expiration of the homebuyer tax credit.  The May auto sales number also came in ahead of expectations.

 

Treasuries were weaker yesterday with the RISK trade back in vogue, while the dollar index was lower by 0.17% on the day.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.38) and Sell Trade (87.11).  The VIX declined by 15.0%, but still remains in a bullish formation.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (29.86) and Sell Trade (45.21). 

 

Eurozone sentiment remains fragile as investors’ concerns about the effectiveness of the 750 billion euro rescue package mount.  Banks fear that the package may fail to stop the crisis spreading into the banking industry.  Over the last five days, banks have been depositing record amounts of cash with the European Central Bank.  According to media reports, this is because “nobody knows who the exposed individual financial institutions are”.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.23).

 

The Energy (XLE) sector recovered the bulk of Tuesday’s selloff and is now up 1.6% over the past week.  Energy commodities were among the best performers in the CRB, on the back of better economic data.   Yesterday, Natural Gas rallied 4% to close at $4.42.  The outperformance of natural gas seemed to provide additional support for the EPX up 6.8% and the S&P Coal Index up 7.8%.  BP was downgraded by Fitch to AA from AA+ on the heels of more negative developments regarding the oil spill.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.74) and Sell Trade (75.34).

 

The Financials (XLF) sector was another bright spot yesterday.  The banking group rebounded with BKX up 3.3%.  The regionals were among the best performers, fitting with the tendency to outperform with a pickup in risk.  Exchange stocks ICE +4.8% and CME +3.6% rallied on the back of strong May volume data. 

 

The Consumer Discretionary (XLY) slightly underperformed yesterday, but is the first sector to move back to positive on the TREND duration.  The retail group was another laggard today with the S&P Retail Index +1.5%.  Within XLY, the Homebuilders largely fared better however, with notable gainers such as DHI +3.1% and TOL +3%.  Yesterday we shorted TOL.   

 

Pending home sales rose a better-than-expected 6% in April, driven by the homebuyer tax credit expiration.   We've been beating the drum that home sales post the tax credit expiration would be anemic.  The MBA Mortgage Purchase Application Index - a leading indicator for home sales activity - continued its slide. The index declined 4.1% from last week, bringing the decline since April to 28.8%. The decline for the entire month of May is 18% vs. the month of April.

 

The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.03) and Sell Trade (3.16).    

 

The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,204) and Sell Trade (1,237).   

 

As we look at today’s set up for the S&P 500, the range is 29 points or 1.9% (1,077) downside and 0.7% (1,106) upside.  Equity futures are trading above fair value in a continuation of Wednesday's solid gain which saw a return of the RISK trade.  Overnight, positive trends have been seen across Asia and Europe where risk appetite is returning.  A notable divergence was the 0.7% decline in the Shanghai Composite stock market. 

 

On the economic front to be reported today will be:

  • May ADP Employment Change
  • Initial Jobless Claims
  • April Factory Orders
  • May ISM Non-manufacturing Composite
  • Weekly natural gas inventories
  • DOE crude oil inventories

Howard Penney

 

US STRATEGY – SOME BRIGHT SPOTS FOR NOW - S P

 

US STRATEGY – SOME BRIGHT SPOTS FOR NOW - DOLLAR

 

US STRATEGY – SOME BRIGHT SPOTS FOR NOW - VIX

 

US STRATEGY – SOME BRIGHT SPOTS FOR NOW - OIL

 

US STRATEGY – SOME BRIGHT SPOTS FOR NOW - GOLD

 

US STRATEGY – SOME BRIGHT SPOTS FOR NOW - COPPER


MAY IN MACAU

Here are the property specifics driving the 93% y-o-y increase in May Macau gaming revenues.

 

 

As we wrote about mid-month, May was likely to be a blowout month – and it was, up 93%.  Yes, the casinos held well on the VIP side, but even if the hold percentage was normal in May 2009 and 2010 and if we adjust for higher levels of direct play, total Macau gaming revenues would still have increased 71%.  While VIP was again the standout – up 121% - Mass did increase 44%, owing in part to a strong Golden Week.  We estimate that direct play accounted for 8% of RC turnover in May vs 7% last year.  A small part of the explanation for the explosion in VIP growth can also be attributed to last May's weakish hold (2.6%) and this May's relatively high hold of 3%.  Assuming both period held normally at 2.85%, VIP revenues would have still growth 86% y-o-y.

 

In terms of market share, Wynn and MPEL were the clear winners while LVS showed the biggest sequential drop.  Wynn obviously benefited from a full month of Encore while MPEL was able to grow its market share sequentially in both Mass and VIP.  LVS lost share in both VIP and Mass.  We remain concerned with the continued share losses by LVS but until market growth stops growing 60-95%, few are likely to care. 

 

 

Y-o-Y Table Revenue Observations

 

LVS table revenues increased 82%, with growth coming from a 140% increase in VIP revenues (hold was very low last year) but only a 21% increase in Mass revenues.

  • Sands grew 73%, driven by a 132% increase in VIP revenues and an 15% increase in Mass revenues
    • Junket RC increased 77%. 
    • Hold looks high - roughly 3.1% compared with low hold last May of roughly 2.25%, assuming 12% direct play levels in both period.
  • Venetian was up 61%, driven by a 95% increase in VIP revenues and a 24% increase in Mass revenues
    • Junket RC decreased 10% y-o-y, however, hold more than made up the difference.  Assuming 20% direct VIP play volume, we estimate that hold for May was 3.7%.  Last May, assuming 16% direct play, the hold percentage was only 1.7%.
  • Four Seasons was up 342% y-o-y entirely driven by 703% VIP growth and Mass growing a relatively small 30% 
    • Junket VIP RC increased 446% to $989MM.  If we assume 35% direct VIP play then overall VIP turnover likely had a record month of approximately $1.5BN

Wynn Macau table revenues were up 78%, primarily driven by a 92% increase in VIP revenues and a 23% increase in Mass revenues.

  • Junket RC volumes increased of 81%
  • Assuming that direct play percentages increased by 20%, hold was similar to last May

MPEL table revenues grew 159% with the growth fueled by 675% growth in Mass and 131% growth in VIP

  • Altira was up 18%, due to an 18% increase in VIP revenues and a 19% increase in in Mass
    • VIP RC was down 4%, but hold comparisons were favorable.  For the second consecutive month, Altira seems to have held high at 3.5%, compared to normal hold of 2.8% last May
  • CoD table revenue increased 40% sequentially, due to a 54% increase in VIP win and a 9% increase in Mass revenues
    • Mass was $37MM
    • Junket VIP RC increased 12% sequentially
    • If we assume 18% direct play at CoD (in line with what MPEL said on their earnings call), then total VIP RC would be $4.5BN.  However, hold in May hold appears weak at only 2.5%

SJM continued to grow above market growth rates for the 9th consecutive month, with table revenues up 106%

  • Mass was up 40% and VIP was up 154%
  • Junket RC volumes increased 123%

Galaxy table revenue was up 82%, driven by a 86% increase in VIP win and Mass increase of 47%.

  • Starworld's table revenue was up 159%, driven by 165% growth in VIP revenues and 44% growth in Mass

MGM table revenue was up 83%.

  • Mass revenue growth was 44%, while VIP grew 103%
  • VIP RC grew 85%

 

Table Market Share

 

LVS table share increased 200bps sequentially to 18.9% with most of the share loss coming from VIP.  Despite impressive y-o-y results, May 2010 marked LVS's lowest table share since March 2008.

  • LVS's share of VIP revenues decreased to 16.5% from 18.7% in April.  LVS's share of Junket RC increased 20 bps to 12.2% from the lows of last month
  • Mass share decreased by 80 bps to 26.6%
  • Sands market share dipped to its lowest levels since we've been tracking the data (and likely an all time low) of 6.3% down 60bps sequentially.  Sands lost share across both VIP and Mass.
  • Venetian lost 60bps to 9.9% sequentially
    • Venetian lost share across both Mass and VIP
    • Junket RC fell 22bps to lows of 5.3% - Venetian's lowest share since opening.
  • FS share decreased 85bps to 2.7% off of April's record share of 3.5%.
  • After SJM, LVS still commanded the second highest share of the overall market (including slots) of 19.4%,  followed by Wynn at 15.7%.

WYNN's share (including slots) increased to 15.7% from 14.4% in April.

  • VIP revenue share increase 155bps to 17.3% sequentially while Mass revenue share increased 50bps to 9.9%
  • Wynn's VIP share is second only to SJM at 30.8%, followed by LVS at 16.5%
  • Wynn Junket RC share increased 177bps to 16.2%, its highest share since last May

Crown's market share increased by 110bps to 13.7% in May.

  • CoD's bounced back to 7.5% and gained back what it lost in April due to low hold
  • Altira's share increased to 6.3% from 6.2% in April.  However, Junket RC share decreased by 110bps to 7.1% which is the lowest share Altira has garnered since July 2007

SJM's share (including slots) slipped by 110 bps to 32.3%.

  • SJM Mass share decreased by 210bps to 41.1% sequentially, while VIP share slipped 40bps

Galaxy's share was flat at 11.7%, although Mass share increased while VIP share slipped a little

  • Starworld's market share was decreased 30bps sequentially to 9.2%, due to a 90bps hold driven decline in VIP share which was somewhat offset by a gain of 60bps in Mass
  • Junket RC share increased 20 bps sequentially to 13.1%

MGM's share increased by 50bps (including slots) to 7.2%.

  • MGM's share gain can be attributed to a 1.2% sequential increase in Mass share to 8.5%, its best share since August 2008
  • VIP share increased 20 bps to 6.5% despite a 30bps decline in Junket RC

 

Slot market commentary

  • Slot win grew 29% y-o-y to $89MM
  • LVS's slot win grew by 29% y-o-y to $29MM
  • Wynn slot revenues increased by 11% y-o-y to $17MM
  • Melco's slot win grew 118% y-o-y to $19MM
  • MGM's slot win grew 16% y-o-y to $11MM
  • SJM's slot win decreased 1% to $12MM
  • Galaxy's slot win grew 25% to $2MM

MAY IN MACAU - macau rev share

 

MAY IN MACAU - macau mm

 

MAY IN MACAU - macau RC


JUST CHARTS: UNEMPLOYMENT

A collection of telling charts on the state of the U.S. employment environment.

 

JUST CHARTS: UNEMPLOYMENT - 1

 

JUST CHARTS: UNEMPLOYMENT - 2

 

JUST CHARTS: UNEMPLOYMENT - 3

 

Christian B. Drake

Analyst - Healthcare


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