The Macau Metro Monitor, June 25th, 2010



 IM would not be surprised if Adelson decides to scratch Lots 7&8 off and focus on other Asian opportunities such as those in India, Japan, and Korea. Focused on the higher margin mass and premium-direct businesses, the Venetian, Plaza, and Sands casinos have been steadily losing share of rolling-chip junket play in recent months due to their stubbornness in not discounting heavily enough to the junkets. However, increasing the junket discounts would also mean increasing direct VIP rebates, which would hurt margins.  IM believes Adelson may throw in the towel and give in to higher commissions if Sands China's market share falls below 20% this month.



In May, MGM Macau recorded a 30% jump in mass.  Why?  IM attributes the rise to higher hold, traffic from Encore opening (MGM's entrance sits directly across the road), easy comps, and perhaps, the mass floor reaching critical mass.  IM also believes strong mass numbers from Grand Lisboa bodes well for Wynn, MGM ,and Sands.


Statistics released by the Zhuhai government showed that the property market in Zhuahai saw average prices drop 12% in May, compared with April.  Trading volume tumbled 50% from 2,585 to 1,327 transactions.

Seeing Housing As It Is

“Some men see things as they are and say why.  I dream things that never were and say why not.”

-Robert F. Kennedy


Keith is out this morning, so I’ve been handed the pen on the Early Look.  I will start with this simple admission: getting up every morning and writing an investment strategy note every morning is not an easy thing to do.  Now you know.


Luckily, our Financials Sector Head Josh Steiner is providing ample and interesting fodder for me this morning.  He and his team are hosting a call this morning on the U.S. housing market at 11am eastern.  The title of the call is, “Housing Double Dip: A Game Changer for Financials.”  And the title basically says it all.


Suffice it to say, despite many investors “seeing housing data points as they are”, Josh and his team see the housing market “as it never was.”   In this context, “never was” means a potentially serious double dip.  If you are a qualified institutional prospect and would like to dial in to the call, please email us at .


We have started to see data points that reflect a slowing of the domestic housing market.  In fact, on Wednesday, new home sales collapsed coming in at 300K, which was down 40% month-over-month.  In terms of context, this was the worst new home sales number since 1963, which was when record keeping began.  So, this was the worst number . . . ever.  And ever, as they say, is a long time.


The housing bulls, or even those that don’t buy into the double dip call, rightfully note that this recent data has turned negative in conjunction with the expiration of tax credits.  And, ostensibly, they are correct. This expiration likely does account for the extreme negativity of the these recent data points, but let’s also keep in mind that mortgage rates, so affordability from a financing perspective, remains at near all time lows, which one would expect to continue to encourage purchasing.


In the Chart of the Day below we’ve highlighted MBA Mortgage Purchase Index Applications Indexed to 100 from the start of 2010.  For the past four weeks, mortgage applications have been down -33%, -28%, -29%, and -30% week-over-week sequentially.  Mortgage applications are, obviously, leading indicators for housing purchases.  These applications are clearly indicating it is going to be, at the very least, a long hard summer for home sales.


Without stealing his thunder, and the thunder of the 100+ page presentation he and his team have put together, I think it’s fair to say Josh’s view will be much more draconian than just a tough summer for housing.  Three key points that will be highlighted in the presentation and conference call are:


1)      Housing supply is near record highs and demand has fallen to levels of the mid-90s, which will have a direct and negative impact on housing prices given the high correlation between demand and future pricing with an r-squared of 0.80.

2)      Economics are interconnected, and the decrease in demand is being driven by tight lending standards and an abysmal employment market that shows underemployment at more than 16% currently.

3)      Supply of housing is in the top two deciles of inventory levels, and historically prices have typically fallen more than 15% over the following 15 months when at these levels.  The correlation on an r-squared basis of supply and future pricing is 0.83.


The points above are negative in and of themselves, but there is also a macro elephant in the room in the way of shadow inventory.  Based on our estimates, there are an additional almost 6 million homes of potential shadow inventory on the market.  This is based on looking at homes in foreclosure or mortgages that are seriously non-current (multiple months of being non-current).


One of the primary issues with the case outlined above is that it is likely there is another leg down in housing prices to the tune of double digits.  This creates negative equity, and negative equity changes behavior of home owners.  According to a quote from CoreLogic on 2/23/2010:


“Once negative equity exceeds 25 percent or $70,000, owners begin to default with the same propensity as investors. The aggregate dollar value of negative equity was $801 billion in 4Q09. The segment of borrowers that are 25 percent or more underwater account for over $660 billion in aggregate negative equity.”


In effect, as homeowners get dramatically underwater, their psychological perception of their home changes and they view it more as an investment in which they may have to sell to cut losses.   As negative equity increases so does the propensity to default.  This creates even more home inventory.  According to Josh’s estimates, almost 4.9 million people are underwater by more than 25%.  Not good.


After painting a completely morbid picture of housing, I’ll leave you with a slightly more inspirational quote from Robert Kennedy:


“All of us might wish at times that we lived in a more tranquil world, but we don’t.  And if our times are difficult and perplexing, so are they challenging and filled with opportunity.”


We do not live in easy times, but opportunities to make money and protect our capital remain abundant.


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


Seeing Housing As It Is - p


U.S. stocks fell, sending the S&P 500 to its longest losing streak in seven weeks, as the REFLATION trade burst.  Earlier in the week that news that China would pursue a more flexible exchange rate policy boosted the REFLATION trade, but the reality appears to be that that Beijing was more interested in deflecting criticism ahead of the G-20 meeting this weekend.  Europe was one of the more influential drivers of incremental concerns with much focus on the recent widening in CDS and bond spreads.  In addition, the Consumer Discretionary (XLY -2.4%) underperformed as spending trends continued to deteriorate in retail and the Restaurant sectors.


The S&P Retail Index declined 2.7% with the focus on BBBY and guidance that suggested that trends will slow over the next few quarters.  Darden (DRI) guidance for improving trends did not get much support.  Darden guided to 2% to 3% blended same-store growth in FY11. Seeing that the company’s two-year average same-store sales growth already slowed during the fiscal fourth quarter with trends, for the most part, decelerating more in May, this full-year guidance seems aggressive.  Housing and housing derivative names were under pressure again yesterday as LOW and HD declined 2.8% and 2.7%, respectively. 


The Financials (XLF) also underperformed; as the BKX declined -2.2% on financial regulation concerns and after the cost to protect from a Greek default surged to a record level (BOA and JPM dropped 2.7% and 2.2%, respectively).  Washington reached a compromise that will force banks to move their swaps-trading desks to subsidiaries, clearing the way for a final agreement on the biggest overhaul of financial regulation since the 1930’s.


Initial claims fell week-over-week by 19,000 after upwardly revising the prior week by 4,000, suggesting the actual improvement was 15,000.  As our Financials analyst Josh Steiner noted, “More important to us is that the level of jobless claims - 457k - remains right in line with its trend year-to-date in the 450k-460k range.  As a reminder, this level is too high for unemployment to materially improve. The level would need to be in the 375k-400k range by our estimates for unemployment to make real headway in the right direction. On a rolling basis, claims fell by 1.5k to 463k from 464.5k last week. On the margin, this morning's data is slightly positive, but it's only a small step in the right direction so we'll reserve our enthusiasm for the time being.”


Treasuries put in a mixed performance yesterday, despite the pickup in RISK aversion. The dollar index traded flat on the day and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.35) and Sell Trade (86.66).  The VIX surged 10.5% yesterday and is now up 18% over the last five trading days.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (26.44) and Sell Trade (31.72).


The Euro moved higher by 0.82%, despite increased concerns of Greek bond default.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.22) and Sell Trade ($1.25).


The Materials (XLB) and Energy (XLE) sectors were two of the three worst performing sectors yesterday.  The REFLATION trade, as I noted earlier, was boosted by the news of China’s announcement that they would pursue a more flexible exchange rate policy.  In the energy sector, both the oil services and E&P groups fell for a fourth straight session, with the OSX and the EPX down 2.5% and 2.4%, respectively.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (75.59) and Sell Trade (79.12).  


Yesterday, Copper rallied 2.3% to close above 3.00. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.97) and Sell Trade (3.06).


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,237) and Sell Trade (1,256).  


As we look at today’s set up for the S&P 500, the range is 18 points or 03% (1,071) downside and 1.4% (1,089) upside.   Equity futures are trading below fair value before a busy MACRO calendar today:

  • US GDP (Q1 Final) - consensus 3.00%
  • US Core PCE (Q1 Final) - consensus 0.6%
  • US GDP Price Index (Q1 Final) - consensus 1.17%
  • US GDP deflator (Q1 Final) - consensus 1.05%
  • U. of Michigan Confidence (June Final) -  consensus 75.4

Howard Penney













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Although we were disappointed by same-store sales trends during the first quarter, we are confident COSI will put up sequentially better numbers during 2Q10 as the company began the quarter with positive momentum and is lapping a sequentially easier same-store sales comparison.  During the first quarter, trends were adversely impacted by severe weather with February company-owned same-store sales -9.4% and traffic down more than 10%. 


Same-store sales turned positive in March and were up 2% for the system, however, and management stated that trends remained positive in April and through the early weeks of May.  I expect June to show a similar trend.    



Despite the weaker than expected comparable sales result in 1Q10, average check turned positive after being negative for all of full-year 2009.  Helping average check growth was the 2% increase in catering sales during the quarter.  This positive catering sales growth followed a 27.5% decline in both 2Q and 3Q09 and a 13.5% decline in 4Q09.




PRODUCT INITIATIVES: In late March, the company rolled out three breakfast wraps in an attempt to drive revenue growth during the breakfast daypart and in April, COSI launched its spring LTOs.               


CATERING: Not only is COSI facing an easy YOY comparison in 2Q10, but the company also recently stepped up its direct sales initiatives, expanding efforts in its Chicago market late in the first quarter, and more recently, in its Philadelphia market.


MARKETING: COSI will see the benefit of additional and refocused marketing dollars during the second quarter after shifting its marketing dollars away from the extreme winter months of 1Q.  Specifically, the company is increasing its out-of-store media activities in an effort to reach new guests and drive traffic.  Along with its spring LTO and breakfast wrap rollout, COSI launched a transit advertising initiative in its major urban markets.   According to management, the initial feedback was favorable.


COSI is working to extend its social media outreach, and tested the social media channels with a free smoothie and drink promotion on April 29th.  Management commented that sales in the promoted categories experienced significant transaction growth in the days following the promotion.


Relative to margins, comparisons are more difficult in the second quarter but it will be important to see how much leverage the company achieves in 2Q10 with what should be significantly better top-line trends. 



Banks Will Adapt and Avoid Losses, Analysts Say

The Long Decline of Savings

Conclusion: The decline in national savings is a structural impediment that will cause an increased reliance on foreigners to fund U.S. deficits.


The long decline of the savings rate in the United States has been a widely discussed topic.  In fact, we highlighted this in the Early Look yesterday morning with a chart showing savings as a percentage of GDP, which in the 1970s and 1980s was in the 5 – 7% range and has since declined to the 1 – 3% range.


Many pundits suggest the decline in savings is a non-issue, while others, more on the extreme, believe that it one of the primary economic issues currently facing the United States.  While the implications can be debated, the fact remains that the savings rate has declined dramatically over the past few decades and is among the lowest of any modern nation state.


As a refresher, the basic formula used to calculate savings rate is as follows: 

  • (Income – Federal Taxes – Expenditures = Savings) / Disposable Personal Income

The Bureau of Economic Analysis keeps this statistic via its NIPA (National Income and Product Accounts) savings rate, which is computed by that savings output as outlined above divided by disposable personal income.  The expenditures include interest payments, but exclude mortgage payments.


Critics of this calculation suggest there are a couple of major factors that are excluded from the above calculation that should, arguably, be included, which are: homes and capital gains on stock sales.  That is, as we purchase a home and pay down our mortgage, and the home appreciates in value, it is a form of savings.  As it relates to stock sales, when we realize capital gains this inherently increases our net worth and, ostensibly, our savings; although arguably this is just a return on prior savings.


The reality, though, is that savings rate is still a decent proxy for the American consumer’s savings rate and, more importantly, the direction of those savings, especially as it has been calculated with some consistency by the Department of Commerce over time.


In the first chart below we show the savings rate versus the Fed Funds Rate – which we use as a proxy for the interest earned in savings accounts.  Long term, and not surprisingly, as the interest rate has decreased, so, too, has the rate that American consumers have saved at as they have attempted to find higher returns for their hard earned capital.   In the short term, the savings rate has increased slightly, but based on the long term trend of interest rates down and savings rate down, it seems that a more sustained increase in savings is unlikely until consumers are incentivized to save via higher interest rates.


In the second and quite honestly more alarming chart, we’ve outlined the broad savings rates within the U.S. economy.  This is a combination of consumer based savings, government savings via surpluses (or lack thereof), and corporate savings.  In early 2009, savings in aggregate as a percentage of GDP went negative for the first time since 1952, and has continued its downward trend.


One potential economic risk to the low savings rate is that U.S. consumers retrench and opt to change their consumption patterns and instead of spending, they aggressively begin to save.  This would be the reversion to the mean theory of savings and is somewhat fanciful absent an increase in interest rates.


There are also some serious headwinds facing the United States in increasing its savings rates related to demographics.   Specifically, old people save less than young people.  Therefore as a population ages the savings rates will naturally decline, and create a headwind to increasing that rate.  In the United States, this is the trend.  According to a 2006 report on demographics from Congress, by 2025 18% of the population will be over 65 years old, versus 12% in 2000.


More broadly, the primary risk of a lack of savings in the United States, be it personal, corporate, or governmental, is an inability to fund, via domestic means, the large deficits being run by the federal government – currently at north of 10% of GDP.


While the issue of dependence on foreign oil is accurately raised as a real economic and strategic risk to the United States, what about the risk related to a dependence on foreign debt financing? The combination of a low domestic savings rates and lack of government savings (i.e. a massive deficit) means that the United States will continue to rely on foreign financing to bridge deficits well into the future. Considering, any external shift on the margin in perception of the U.S.’s credit quality is likely to have a substantial impact on Treasury yields.


Daryl G. Jones

Managing Director


The Long Decline of Savings - US Savings Rates


The Long Decline of Savings - US Net National Savings

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