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With Q2 under our belts, we’re taking a look at the important Direct VIP business in Macau.  Why didn’t Wynn’s share go up with Encore?



Direct VIP is an important part of the Macau marketplace, representing 17% of total Rolling Chip volume.  The profit contribution is even higher.  Instead of paying an average of 1.25% of roll to the junkets, the operators rebate only 0.7% to 1.1% back to the players.  This results in a 1,200bps higher EBITDA margin from the midpoint given the differential.  The American operators are the most successful in this segment, particularly LVS, while Macau’s largest operator, SJM, does not participate in Direct VIP.


Following the end of earnings season, we are now able to back into the Q2 Direct VIP contribution.  The following chart shows the market shares in Direct VIP. 




LVS continued to grow its Direct VIP share – the only segment where its market share has grown.  However, LVS recently announced it would be refocusing its efforts on the junket business so we would expect Direct VIP share to decline.  The most puzzling market share move is Wynn.  Despite the April opening of the predominately Direct VIP marketed property, Encore, Wynn’s share declined slightly in Q2.  Combined with July/August overall market share sequential declines, Wynn’s Direct VIP share may further the narrative that Encore has not been additive.  The next chart shows each company’s percentage of Rolling Chip volume attributable to Direct VIP.  Again surprisingly, Wynn’s VIP % barely budged following the opening of Encore.  MGM still generates a higher percentage of its RC from Direct VIP than Wynn, although this is partly due to MGM’s woeful junket performance.




The good news: the Conference Board Consumer Confidence index improved moderately in August from July - the Index now stands at 53.5, up from 51.0 in July.

  1. The Present Situation Index decreased to 24.9 from 26.4.
  2. The Expectations Index increased to 72.5 from 67.5.
  3. Consumers are less confident today as they were a year ago – consumer confidence was at 54.5 in August 2009.
  4. The proportion of respondents saying jobs are “hard to get” increased to 45.7% from 45.1%, while those claiming jobs are “plentiful” declined to 3.8% from 4.4%.

In summary, consumers’ expectations improved moderately in August, but overall most remain pessimistic and there is no improvement in the labor market.  There is nothing in today’s confidence reading that leads us to expect acceleration in consumer spending.


TRACKING THE 3Q GDP SCORE CARD - conf board con conf aug10


Also in the “good-news-for now-and-meaningless-to-3Q GDP” camp is the Case/Shiller data for the month of June.  The data came in strong with a non-seasonally adjusted increase of 1.0% sequentially (+0.3% seasonally Adjusted) and a NSA increase of +4.2% vs. last year, down from +4.6% last month. 


See Josh Steiner’s post for all of the details, but starting next month a roll over in the Case/Shiller data is all but assured.   June’s Shiller data point reflects contract activity for February, March, and April – strong months in the housing market going into the expiration of the housing tax credit.  From Josh Steiner’s post today: “Starting next month, however, February will be replaced by May and the month after that March will be replaced by June and finally April will be replaced by July. As demand dried up in those ensuing months and we would expect to see prices begin to reflect that.”


The bad news: Chicago PMI - the Chicago ISM number fell to 56.7 in August from 62.3 in July, the lowest since November 2008.  With new orders declining to 55.0 in August from 64.6 in July, so does the inventory correction.  Inventories fell to 46.5 from 50.8 in July.  As seen in the chart below, the ISM inventory Index track closely to the inventory contribution to GDP chart we published yesterday. 


Due for release on Friday is the August payroll employment change and unemployment rate, which are likely to be disappointing to current expectations.  According to Bloomberg, the current consensus estimate for the August payroll employment change is (100,000) – a slight improvement from 131,000 jobs lost in July.  As an aside, the news of the MON restructuring is a real-time indicator as to how difficult the job market remains for the unemployed.  The reporting risk to the downside of expectations is in place for an outright payroll contraction in August (net of census impact), with the total jobs lost likely to exceed 100,000.  The consensus also calls for the August headline unemployment rate to be 9.6%, up from 9.5% in July. 


TRACKING THE 3Q GDP SCORE CARD - gdp inventory pmi w 3q est


Howard Penney

Managing Director

Two Charts: Case-Shiller and Swiss Franc

Conclusion: Case-Shiller has hit an inflection point as improvement slows and the rise in the Swiss Franc may be signaling bad news for the Euro Zone.


Sometimes a picture is worth a thousand words.  In that vein, we have two pictures that we want to share this morning that highlight a couple of important, even if unrelated global macro trends.


First, the Case-Shiller data from this morning.  This data showed that prices rose for the third straight month in June and pushed prices up 4.4% on a year-over-year basis for the full quarter.  The second quarter data, obviously includes a benefit from the tax credit, so should be viewed with some reservation given that  the recent housing data has turned quite bearish (See our note on 8/25/2010 entitled “Where Are The Housing Bulls Now?”).  Most noteworthy though, was the June data was actually the first time that year-over-year increases declined sequentially in 16 months.  That is, the rate of improvement in home prices slowed in June from May.  This point is highlighted by the red arrow in the chart below.


Two Charts: Case-Shiller and Swiss Franc - 1


Second, we want to highlight the rapid rise in the Swiss Franc versus the Euro.  In the course of three weeks, we have seen a ~7% appreciation of the Swiss Franc versus the Euro.  Traditionally, this would be considered a safety trade as Switzerland is considered to be a nation that is well capitalized and has solid financial reserves versus the rest of Europe.  The last time the Swiss Franc saw such a rapid move was May and June of this year when European sovereign debt concern was at its frenzied peak.  Interestingly, the media seems less focused on Europe but the markets, as is evident in certain credit default spreads and the strength in the Swiss Franc, appear to be foreshadowing a renewed focus on issues in Europe and for the Euro.


Two Charts: Case-Shiller and Swiss Franc - 2


Daryl Jones

Managing Director

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


Disappointing numbers from ISLE; August trending similar to soft July.



"We have again demonstrated the agility of our business by increasing retail play, managing costs and maintaining our average customer spend and visitation.  We did experience a modest decline in our overall number of database customers, as residents in our markets have continued to feel the squeeze of the economic contraction and the unemployment and housing pictures have not improved.  We are confident that our branding and marketing programs have been successful in influencing customers across the portfolio during the quarter, which stands to have a positive impact on profitability upon economic recovery."


--Virginia McDowell, president and COO




  • Nemacolin Woodlands Resorts project: 1st of 2 hearings next week
  • Meeting tomorrow with Nevada Gaming Commission for opportunity in Nevada
  • Non-recurring expenses cost 7 cents per share: attempted equity offering, Rainbow acquisition, and interest rate swap expenses


  • Slot capex for 2011: $20MM (new machines, signage, conversions, etc.)
  • Capex expenditure for this year: $40MM (will spend $8.5MM on BYI system for Pompano and Waterloo)
  • Consumer spending trends:
    • Win per trip and win per guest flat
    • Not marketing to customers in lower-end of database hurt revenues
    • July--softest of the 3 months; in August, similar to July--"bumping along the bottom"
  • Florida
    • net effect of tax change was $545,000 (25 days law was in place)
    • change in tax rate resulted in $1MM in higher revenue but there was a $400,000 charge related to loss of tax benefit (due to lower tax rate) on progressive liability--which is an one-time item
    • Poker will take time to ramp up.
  • Iowa Market: Waterloo results were good; Bettendorf pressured by road construction
  • Increase in retail play--spent more money on broadcast marketing
  • Corporate expense: $8.5 MM run rate
  • Swap: $2MM will run off by end of FY2011 and will trickle down in FY 2012
  • Davenport run rate going forward is similar to FY1Q; road construction will be over in October
  • Vicksburg market: a lot of free play in this market
  • Cape Girardeau project: $125MM estimate; if license awarded, it will take 2 years to build it out
  • Opportunity for margin improvements and EBITDA growth will depend on when unemployment/housing turns around
  • Biloxi: any positive impact from Alabama shutting down?
    • Yes, lower local traffic was offset by more visitors from Alabama
  • No concerns with debt covenants (interest coverage: 2x)
  • Maintenance capital will be much higher this year compared with last year
  • Leverage ratio: 6.8x to 6.9x
  • More promotional allowances at Pompano in FY1Q
  • Available credit facility at end of FY1Q: $125MM


This note was originally published at 8am this morning, August 31, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK in real-time, published by 8am every trading day.




“What’s good about the contemporary world? You can say something around the corner from a public toilet and the whole world will hear because all the television cameras will be there.”
-Vladimir Putin





In context, this quote is taken from comments yesterday by Russian Prime Minister Putin in which he said that dissidents would keep getting beaten if they continued to hold unauthorized rallies.
The quote struck a chord with me on two fronts: 1.) it’s representative of the “closed” world Russia’s brass intends to promote, and 2.) it flies in the face of everything that Hedgeye’s founder, Keith McCullough, believes in, namely that an investment environment governed by transparency, accountability, and trust will help to increase the flow of ideas and hold market participants (and politicians) to higher standards--both of which will ultimately lead to a more even playing field for market participants and society at large.
Sticking to the first point, I’ve had the recent pleasure of working with our new Energy sector head, Lou Gagliardi, to analyze investment positions on the often “slanted” Russian playing field. While I’ll save the company-specific calls for Lou’s sector launch on September 16th, I do want to highlight some of the macro fundamentals and TREND and TAIL themes that may play out in Russia over the intermediate to longer term.
While we’d be duration sensitive in adding Russia to our virtual portfolio (we’re currently bearish over the intermediate term on oil), which we’ve previous played via the etf RSX, and we’re generally cautious on investment risk in Russia, the fundamentals suggest that Russia could outperform should commodity prices (in particular oil and gas) remain around current levels.  Further, we see the country’s increasingly larger share of geopolitical influence as a bullish indicator for domestic and global stability and like its growth profile of ~4% in 2010 (IMF), versus 1% in the Eurozone and 3% in the US.


Fundamentals First
The first fundamental point to consider when discussing Russia is an obvious one, but one worth stating: the country is levered to the mighty Petrodollar. Russian President Dmitry Medvedev has been quick to issue decrees over the last year that the country will work to diversify its growth away from sole reliance on energy commodities, yet it’s clear to us across multiple metrics just how important the oil and gas industries have been for the country’s growth, a set-up we don’t expect to change over the next 3-5 years.
As a point of reference, oil and gas exports accounted for roughly two-thirds of all Russian exports by value, with oil and gas revenue contributing ~1/3 of general government revenue. Further, reviewing estimates on the marginal tax rate on petroleum, the government pulls in an average of 90 cents on every dollar of exported crude selling above $25/barrel, a favorable set-up should the price of oil remain around the current level of $75/barrel. [Note: under $25 the government also receives its share, albeit a proportionally smaller one on a tiered basis].
The chart below shows the tight correlations between the price of a barrel of oil, foreign direct investment in Russia, and the RUB-USD, and an inverse relationship to GDP over the last 10 years, which helps to outline the importance of the US Dollar in determining the price of oil, and therefore Russia’s economic outlook.  The chart also implies an interesting trend in investor behavior: foreign direct investment piles in or out of Russia based on the price of crude.  [As a side note, natural gas prices (not charted) fell in 2009 while oil ramped higher, a function of both separately priced global markets and supply and demand drivers that differ from crude.]





And if we’re right on our short call on the USD due to such factors as rising deficit and debt levels in the US and the potential for further QE packages (money printing) combined with our Housing call for a 15-50% decline in US home prices, a weak dollar may help buoy crude prices, and therefore Russian growth. The r-squared for the US Dollar Index versus crude is currently at 0.86 over a three week duration or a negative correlation of -0.93.
Sifting through Russian Tail- and Headwinds, in brief



  • Gas and Oil Cards: Russia holds the largest natural gas reserves in the world and is 2nd largest global producer of crude at ~9.7 MMB/d and the 2nd largest global exporter at ~7.0 MMB/d.
  • Gas Influence: Europe relies on 1/4 of natural gas supply from Russia (40% in Germany).  Gazprom’s 51% ownership stake in the natural gas Nord stream pipeline, which runs across the Baltic Sea, will add significant supply (est. 26 Million households) when the first line comes online in 2011.
  • FX Reserves: 3rd largest in the world at $475.2 Billion.
  • Geopolitical Influence: (Europe) political dominance over Ukraine, Belarus, and Moldova, important natural gas and oil transit countries and Russia’s window to the West, and an increasingly tighter grip over Kazakhstan, an energy rich country and world’s 5th largest grain exporter. (China) strategic and expanding partnership with China. China lent Russia $25 Billion in exchange for guarantees of crude last year.
  • Consumer Demand: from QSR operators to automobile manufactures, select companies are highlighting a positive outlook on Russia.  Ford’s Russia Chief Mark Ovenden recently said that “our view of Russia is that it will certainly be the most significant growth market in Europe and a very significant growth market globally.” For reference, Russian car deliveries increased 9% in the first seven months of the year (versus +0.6% in 1H for the rest of Europe) and jumped 48% in July, spurred by the economic recovery and the government’s cash-for-clunkers program, according to the Moscow-based Association of European Businesses.



  • Demographics: the country’s demographic outlook is grim. The World Bank reported that by the end of 2009, 17.4% of the population (24.6 Million) will live beneath the subsistence level of $185 per month, about 5% more than before the global recession. The Economy Ministry said Russia’s working population will annually decrease by ~1 Million every year over the next three years, and the population has been in decline over the last 14 years, falling to 141.0 Million in 2010.
  • Inflation: The Economy Ministry raised its 2010 inflation forecast to 7-8% from the previous estimate of 6-7% after the drought is set to crimp agricultural production and push up consumer prices (negative domestically).
  • Political friction with the USA: talks with President Obama to “restart” relations have largely stalled and relations between Washington and Moscow have parted ways following the exchange of spies in July.  Ongoing Russian fears that US will install antiballistic weapons in Poland and Czech Republic persist.


As Lou often says in our morning meetings, we want to be long energy long countries like Russia. While multiple factors play into our analysis, the root of Lou’s comment implies an investment bias towards countries that produce more oil (or natural gas) than they consume.  Brazil is another country that follow this mold.
Despite the political curtain that is often drawn in Russia, the country’s natural resources offer a compelling investment opportunity with a commensurate risk premium.  Stay tuned as we look to add Russian energy names to the Hedgeye Virtual Portfolio.  To get access to Lou’s energy launch please contact sales at sales@hedgeye.com.
Matthew Hedrick

R3: Big Move in China Retail



August 31, 2010


With Li Ning making a clear statement that's entering apparel and Kappa accelerating both store growth and acquisition cadence, this is a major sign that Chinese competition is one of the top three issues in footwear and apparel. 




Li Ning Sponsors USA Diving Team - Li Ning Company Limited has officially added the USA Diving Team to its evolving lineup of global talent, further expanding its presence on the main stage of the Olympics as USA Diving Team’s official apparel sponsor through 2012. <sportsonesource.com>

Hedgeye Retail’s Take: Following the ultimate ‘coming out’ party at the 2008 Beijing Olympics when the company sponsored teams from China, Spain, and Sweden, we expect several more of these announcements by the time the 2012 London games get underway. In addition to the company's first U.S. sponsorship, this is a major indication of the brands intentions of becoming an apparel brand as well (you don't need shoes to swim). Speedo - are you paying attention? 


Chinese Sportswear Brand Kappa Expanding, Looking to Buy European and US Brands - China Dongxiang Group Co., owner of rights to the Kappa sportswear brand in China, forecast second- half sales growth of more than 20% as its store network expands outside major cities such as Shanghai and Beijing. The company plans to open more than 300 stores in China in the six months through December, mostly in so-called third- and fourth- tier cities. China Dongxiang is in talks to acquire sportswear brands in Europe and the U.S. that are suitable for the consumer market in China.  <bloomberg.com>

Hedgeye Retail’s Take: A relative upstart founded in 2007, here’s another Chinese footwear company that should be on everyone’s ‘watch list’ – particularly one with such an aggressive store growth forecast.





India Ministries to Chalk Out Cotton Export Quotas - India’s Commerce Ministry and the Agriculture as well as Textile Ministry will be held to discuss quotas on exports of cotton, with an emphasis on local farmers’ interests. The Commerce Ministry has recently removed all restrictions on exports of cotton as well as cotton yarn beginning from the coming October. <fashionnetasia.com>

Hedgeye Retail’s Take: As the #2 global cotton producer of 23.5mm bales annually, all eyes will be on the outcome of the meetings held Wednesday September 1st with cotton up another ~10% here in August.  


Sports Authority Extends Agreement with GSI Commerce - Sports Authority reached an agreement with GSI Commerce that extends and expands the relationship between the two companies. As part of the new arrangement, Sports Authority will buy and own all merchandise sold through its Web store, and will become the seller of record for its e-commerce business in the first half of 2011. <sportsonesource.com>

Hedgeye Retail’s Take: With the relationship proven between the two companies, TSA is now taking over control of its e-commerce business much like DKS did last year – the end result, modestly more risk (inventory primarily), but higher margins as well. This all plays into the narrative of TSA going public.


Adidas Extends MLS Deal - Adidas and Major League Soccer (MLS) announced an extension to their partnership agreement aimed at "further elevating soccer in the United States and developing opportunities for young players." The partnership extends Adidas' position as the official athletic sponsor and product supplier for the MLS through 2018. <sportsonesource.com>

Hedgeye Retail’s Take: another example of the strategic difference between how Adi approaches endorsements compared to just about everyone else (i.e. Nike, Puma, UA, etc.) by being more geared towards investing in leagues and events.


Hugo Boss Plans Global Retail Expansion - Premium menswear label Hugo Boss is set to open up to 250 stores by 2015, with a focus on ramping up its expansion in China. <drapersonline.com>

Hedgeye Retail’s Take: With approximately 330 owned retail stores globally, this is notable shift for the brand known primarily as a wholesale brand domestically.


Target Beefs Up an Online Ad Tool - Target Corp. has unveiled the MyTargetWeekly tool that allows customers to view the retailer’s specials online, pick out products and set up deal alerts tied to specific items. With MyTargetWeekly, customers can see the top 10 deals or view specials in different ways such as by category, brand, popularity or price. They can also pick specific products to put on a weekly list or access online or through mobile devices. In addition, MyTargetWeekly displays the number of days for which the specials on the customer’s weekly list are available. <internetretailer.com>

Hedgeye Retail’s Take: Catering to the consumer who’s now conditioned to shop discounts and in seek of ‘value’ is a sharp move. It won’t be long before competitors follow suit.


Macy’s Teams With Greg Norman For Golf Lifestyle Collection - The retailer has teamed with golfer Greg Norman to launch a co-branded golf lifestyle collection under its Tasso Elba private label beginning in January. The performance-based, golf-inspired men’s sportswear line will include shirts, shorts, pants, outerwear, belts, socks and hats. The core product will be carried in all stores, and the top doors will carry the entire Greg Norman for Tasso Elba collection in an extension of the Tasso Elba shops. In an undetermined number of stores in strong golf markets, the collection will stand alone and be merchandised with other golf brands. Retail prices will range from $30 to $120. <wwd.com/retail-news>

Hedgeye Retail’s Take: Like we need another gold brand. We’d argue that further consolidation is needed in the industry before growing branded product, however as a retailer if you’re going to partner up, The Shark is still one of the most recognizable brands in the business.








































Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
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