The online travel company Expedia put up a good quarter last week.  Here are some broader takeaways from the call:


  • Leisure travelers have responded to better value
  • Ticket sales up double digits for the March-April period y-o-y. January and February sales were down 9% y-o-y. 
  • International transactions were up 16% internationally but the two countries looking the weakest were the UK and Germany
  • Aggressive fare sales from air carriers were partly responsible for the uptick in demand 
  • EXPE expects bookings, revenue, and free cash flow to decline y-o-y for 2009 
  • Based on the economic conditions, etc., consumers were becoming more price sensitive and that is why promotions on the air booking fees [and other booking fees] made sense 
  • "On the other side of the equation, for example, London as a destination for us has been very, very strong. So again, that's another response to FX rates as far as where consumers are going. As far as a booking window goes, we do see some compression there, and as a result unfortunately our visibility is not what it used to be." 
  • "The OPEG channels continue to be very strong. Hotwire unique visitors are up very nicely, transactions were up 30% or so in Q1 so that's a continuing trend that hasn't changed. I'd say one other trend that has changed is that U.S. consumers are starting we're seeing some increase in U.S. demand going into Europe because of the strength of the dollar." 
  • Leisure market has been stimulated by the aggressive actions of suppliers 
  • The effects of the swine flu are yet to be determined but momentum was even stronger before the breakout occurred.



MGM's Q1 was likely good enough to keep the rally going.  We are not going to bore you with property by property revenue and EBITDA analysis.  We'll leave that to the 15 sell side analysts covering the name.


Similar to other gaming earnings reports, MGM's Q1 was light on revenues but heavy on cost cutting.  Margins were better than we projected.  We don't find that particularly interesting.  What we found interesting were the tremendous margins at MGM's non-core properties of MGM Detroit, Beau Rivage, and Monte Carlo.  Coincidentally or not, these three properties are also for sale.  MGM Detroit and Beau Rivage are officially on the block, while MGM appears to be in negotiations for the sale of Monte Carlo.


Check out the chart below.  These properties blew us away on EBITDA and it was all from margin.  Monte Carlo increased its margin by 2,460bps YoY and was 2,400bps above our estimate.  Can cost cutting alone explain 2,400bps of margin?



Selling Early

"If you want to succeed in the world, you don't have to be much cleverer than other people. You just have to be one day earlier."
-Leo Szilard
Today is Cinco de Mayo in Mexico; its Liberation Day in Denmark, Ethiopia, and the Netherlands; and it's Children's Day in Japan and South Korea. Yesterday, here in the USA, was the day that I started selling as aggressively as I have since January. No matter where you go in this interconnected world of global macro today... or where you went yesterday... there you are.
Here I am this morning, staring at my greatest weakness which, at times, can also be my greatest strength. Selling early is what I do. As I evolve as a professional in this game, my challenge is to narrow the gap between the time that I hit those sell/short buttons and immediate term peaks. People have always told me that you can't "time markets" - so I have made it a personal challenge to have my feet on the floor early enough every morning to prove that I can do that better than they can.
For me, being a global markets operator is a risk management exercise. I am tasked with not losing capital first, and then earning a risk adjusted absolute return where I see fundamental opportunities. Every morning I have a stare down with these arthritic hockey knuckles of mine and this keyboard. There is nowhere to run - and I wouldn't run away from being held accountable for my actions if there was. I play this game for these moments.
On balance, for the better part of the last 2 months I have been bullish. Notwithstanding that context, being wrong, on my scorecard at least, is not a relative exercise - everything is absolute. After all, in order to sell too early, one must already be in possession of something to sell. I sold my long position SP500 position (SPY) yesterday at 10:21 AM at $89.78. The SPY's gapped up into yesterday's market close, going out at $90.88 (SP500 907). That makes me wrong by -1.2%, so far...
When I made my decision to start selling yesterday, it had nothing to do with calculating how far we had run from the Depressionista low. It had everything to do with the moment that markets were in. I play the game that's in front of me, not the one that's behind me. I said that I was selling the SP500 because it was "overbought at the 896 line." The time and my reasoning has a time stamp on our web portal.
Understanding that most of the said savants of money making in this business can (and should) poke holes at what I do and when, I rarely see the time stamps on every decision they make... and I doubt I ever will...The point here isn't to belabor what it is that other people do. My simpleton advice is to focus on doing whatever it is that you do.
What I do is use a multiple factor global macro model that spans countries, asset classes, and companies. Everything is marked-to-market, and real-time prices rule the timing of my decisions. Understanding that I have not been of the "overbought" camp until yesterday, here are the assets prices in my model that remain clearly overbought on an immediate term basis as of last night's close and overnight trading:
1.       China's Shanghai Composite Index
2.       Hong Kong's Hang Seng Index
3.       India's BSE Sensex Index
4.       London's FTSE Index
5.       Russia's RTSI Index
6.       Brazil's Bovespa Index
7.       West Texas Crude Oil
8.       Copper
9.       The USA's SP500
For me, the immediate term means today. Every day, as prices change. I do. While I thought the SP500 was overbought when I started selling yesterday, as prices rose, so did my upside targets. Now I see the SP500 overbought line at 903. My name is McCullough, not Madoff - and only the former would be provide one the investment opportunity to be right no matter what prices do.
In conjunction with the aforementioned 9 factors being overbought, the Volatility Index (VIX) is oversold, so I bought the VXX yesterday as well. Too early? We will have to see, won't we. My positions are all live and ticking, real-time, on the portal.
In credit land, the Fed's Senior Loan survey reminded us of what we have been seeing on the margin since the beginning of March. Only 40% of the senior lending officers in the quarterly survey said they had tightened lending standard - that was the lowest percentage reported since the January 2008 survey. Was this new news to the market? Apparently to those who have been running late in covering their shorts it was, indeed.
Much like being accused of waking up too early, selling too early is the kind of criticism that I want to be beating myself up with. The Alternative Investment solution, of course, is being late.
My downside support level for the SP500 is now 867. Look for me to be data dependent on the way down, but proactively preparing to buy back what I sold as we continue to make higher lows.
Best of luck out there today,



VXX - iPath VIX-The VIX is inversely correlated to the performance of US stock markets. For a TRADE we bought some of the Street's emotion on 5/4, getting long their fear of being squeezed.


EWC - iShares Canada- We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resourcerich Vancouver should provide a positive catalyst for investors to get long the country.   


EWA - iShares Australia-EWA has a nice dividend yieldof 7.54% on the trailing 12-months.  With interest rates at 3.00% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.


TIP - iShares TIPS-The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%.  We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.  


GLD - SPDR Gold-We bought more gold on 4/02. We believe gold will re-assert its bullish TREND as the yellow metal continues to be a hedge against future inflation expectations.


DVY - Dow Jones Select Dividend-We like DVY's high dividend yield of 5.85%.


EWW - iShares Mexico- We're short Mexico due in part to the media's manic Swine flu fear. The etf was up 7% on 5/4, giving us a great entry point.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.
DIA  - Diamonds Trust- We shorted the Dow on 5/4 for a TRADE. Everything has a time and price. 

IFN -The India Fund-We have had a consistently negative bias on Indian equities since we launched the firm early last year. We believe the growth story of "Chindia" is dead. We contest that the Indian population, grappling with rampant poverty, a class divide, and poor health and education services, will not be able to sustain internal consumption levels sufficient to meet targeted growth level. Other negative trends we've followed include: the reversal of foreign investment, the decrease in equity issuance, and a massive national deficit.


LQD  - iShares Corporate Bonds-Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.  


SHY- iShares 1-3 Year Treasury Bonds- If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries.


EWL - iShares Switzerland - We believe the country offers a good opportunity to get in on the short side of Western Europe, and in particular European financials.  Switzerland has nearly run out of room to cut its interest rate and due to the country's reliance on the financial sector is in a favorable trading range. Increasingly Swiss banks are being forced by governments to reveal their customers, thereby reducing the incentive of Switzerland as a tax-free haven. 


UUP - U.S. Dollar Index -We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is down versus the USD at $1.3376. The USD is up versus the Yen at 99.1540 and down versus the Pound at $1.5072 as of 6am today.

 Visit for more.

Keith R. McCullough
Chief Executive Officer

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Gaming stocks are rolling.  The opening of the credit markets suggest they may continue to roll.  We've fielded a lot of questions lately on Boyd Gaming and why this stock has outperformed.  Sure we've gotten the calls on LVS and MGM, which have actually done better than BYD since the March lows.  Those stocks were essentially stock options back in March so the fact that they have outperformed is not surprising.


The BYD analysis is instructive because there were a lot of misunderstood and moving parts and, more importantly, more oil left in those parts to keep this engine humming.  Here were and are the drivers in order of importance:


  • Unsustainably high FCF yield - On our numbers BYD traded at a free cash flow yield approaching 50%, in part due to number 2 below. BYD still has upside to over $16 to reach a 15% FCF yield and quantitatively/technically can go to $18 pretty easily per our Quant/Macro guru Keith McCullough.


  • Understanding BYD's "misunderstood" financial leverage - Their credit situation is an asset not a liability. We tried our best to focus investors on the details behind BYD's seemingly high leverage of 6x. The market is beginning to understand that with $2 billion of availability on the credit facility, an incremental borrowing rate of just 2% above LIBOR, and an insignificant amount of Capex, BYD is in great shape financially. The only potentially derailing factor would be a covenant breach but the company has enough levers to get through 2009 to 2010 when the maximum leverage covenant actually steps up. It is not fully reflected in the stock price yet but BYD has a phenomenal asset in its credit facility that doesn't mature until 2013. By that time, BYD could be only 3-3.5x levered.


  • Opening of the credit markets - I don't want to totally re-hash our 5/1 note, "CREDIT MARKETS OPEN FOR BUSINESS", but suffice it to say, the opening of the credit markets allows the companies to improve their liquidity position and shore up their balance sheet. Multiples expanded because they should. FCF is more believable and the bankruptcy discount is fading.


  • Cost cutting - Every gaming company that has reported Q1 earnings has shown significant evidence of meaningful and sustainable cost cuts. BYD should do the same.


  • The rotting of the "LV Locals is a tough market" thesis - The LV locals is in for a tough 2009.  Yeah, we get it.  So does everyone else.  Let's talk about 2010 and how there is still population growth, and new projects are boosting employment.  Housing is affordable and retirees still want to come to Las Vegas, and so do people who don't like paying taxes.


  • Strong regional Q1 EPS - PENN, PNK, and ASCA all blew out earnings. The regional markets have stabilized and some are even showing growth. BYD is a regional gaming operator with exposure to some attractive markets. I'm not necessarily making a Q1 earnings call on BYD, although I do think the margins will look impressive.


  • Takeout rumors - I'm throwing this one in there because the rumors are out there. I don't have any insider information but I don't need it to see that the FCF yield is 25%, despite the run, which leaves significant upside to a target yield of 15%.




Nobody wants to believe that the housing market has turned.


If you are just generally bearish, it's centered on the consumer's inability to buy anything.  The theory goes that the consumers are not going to go out to eat, buy new clothes and certainly not going to buy a new home.    Even the greatest investor on the planet Warren Buffett said this weekend, "There's no sign of any real bounce at all in anything to do with housing, retailing, all that sort of thing."


Today, the National Association of Realtors, said the Pending Home Sales Index, (a forward-looking indicator based on contracts signed) increased in March by 3.2% to 84.6 from 82.0 in February.  Surprisingly, the index is 1.1% percent higher than March 2008.


While two months is not a trend, what has occurred over the last two months could be the leading edge of turn in the housing market.  As we said in our 4/24/09 post - HOUSING - Which way is up? -  affordability conditions is at a 40-year high when looking at median home prices, mortgage rates, monthly mortgage payment, and median family income.   In addition, a government $8,000 tax credit has the ability to increase buying power where there are special programs offered that allow buyers to use it as a down payment.


It was just two weeks ago that we learned the sales of new homes are also showing indications that the housing decline may be near a bottom.  The Research Edge MACRO process is built around changes at the margin.  While Mr. Buffett and others might not see what is happening on the margin to the housing market, the turn is gaining momentum. Looking at the market 2.5% move today; market prices don't lie, people do. 


The market is confirming that the US Housing bottom will be in the rear view soon.


Howard Penney
Managing Director



VFC Acquisition Comments Live From Lunch

Very actively looking. "very busy" looking. Action sports and outdoor top priority, comtemporary not at the top of list given challenges there in marketplace. Got a chuckle from CFO when directly asked about an action sports deal. (ie DC Shoes).