In our 6/21/09 post "MAY STRIP REVS SHOULD LOOK BETTER THAN THE AIRPORT #S" we predicted a 5% decline.  As announced yesterday, Strip revenues actually fell 6%.  We could've done better.

The takeway here is that May wasn't bad but did benefit from an easy comp.  In May 2008 gaming revenues fell 16% driven in part by low hold % on both slots and tables.

Despite the excitement following the release of May numbers, Las Vegas is not getting better.  The June comp is difficult, down 3% in 2008, and anecdotally we are hearing a theme of softness.  Here is the trend:



The Client: Chinese Momentum


CAAM June sales data released today show that total motor vehicle sales exceeded 1 million for the 4th consecutive month registering a year-over-year increase of 36.48% (see chart below). Critically, this marks 2Q of 2009 as the first quarter ever with reported sales in excess of 3 million units and, at 3.4 million in total, the CAAM target of 11 million for the year seems achievable. Passenger car sales as a category of the total experienced a 48% increase in June as tax rebates and improving vehicle quality selection continue to draw consumers to showrooms.

 (continued below chart)

The Client: Chinese Momentum  - a1

The latest NBSC production estimates, for May, show that total vehicle production increased by 28% for that month. Although NBS data production is notoriously sketchy, there is a very clear trend emerging. Domestic Chinese passenger automotive sales are outpacing commercial sales, and sales in total are outpacing production growth by a significant measure.  Add in anecdotal reports on engine component imports and individual reporting by foreign JV partners and we have a clear vision that retail Chinese automotive consumer strength is outperforming all but the most bullish expectations -and that it is driving rapid capacity growth by producers.

We have been consistently bullish on The Client's internal demand dynamics, and the consumer discretionary categories that should logically be feeling the biggest impact of the stimulus programs at this stage of the development cycle  -big ticket durable goods, appear to be  proving out our thesis.  As Chinese consumers continue to enter the car market for the first time or to trade up from inferior vehicles, we expect that they are also eyeing government sponsored incentives for household appliances, consumer electronics and small farm agricultural equipment.

Take note: as strategic investors we are China bulls, but as tactical investors we are pragmatic risk managers and will actively seek to trade in an out of a market that has experienced an intense short  term rally capable of correction with unchanged fundamentals.  With a process that employs overlapping durations we have the luxury of picking intermediate entry and exit points while remaining focused on the horizon -if you are married to a single duration by choice or circumstance you should be prepared for volatility as the complex recovery story continues to unfold in China.

As always we are here to answer any questions and welcome the opportunity to share ideas.

Andrew Barber



HOT has done a great job cutting costs in a deteriorating demand environment.  This time they may have run out of dry powder.  This may be the first quarter without a substantial beat.  We believe forward numbers once again need to come down, despite favorable currency movements.  The Street continues to project flat 2010 RevPAR versus our projection of -5% and our EBITDA estimate is 11% below the Street at $790 million.  Here are the details ahead of the earnings release on 7/23.


-For 2Q09 we're in line with HOT's guidance but below street:

  • We're at 190MM of EBITDA (3.5% below street & guidance of 180-195MM) and $0.15 EPS (16% below street & guidance of $0.14-$0.20 EPS


-For full year 2009 we're still below consensus as we are less positive regarding HOT's ability to further cut costs.  Last quarter HOT stopped giving explicit guidance on EBITDA & EPS for full year 2009 due to the "uncertain environment":

  • $750MM of EBITDA (5.5% below street) and EPS of $0.65 (17% below consensus)
  • We assume owned RevPAR decreases 25% in 3Q09 and 15% in 4Q09and owned EBITDA margins decline 8.5% & 7.5% respectively
  • We assume world-wide RevPAR decreases 20% in 3Q09 and 8% in 4Q09, for a 2009 20% RevPAR decline (in line with management guidance)
  • 4Q09 improving RevPAR comparisons are driven by occupancy
  • Our owned EBITDA margin for 2009 is down almost 900 bps driven by difficult cost cut comparisons in the back half - we believe this is where we differ from consensus
  • Given the opaque nature of timeshare, we're in-line / slightly better than management's guidance
  • Total reported fee income down -16.5% (probably worse than street expectations)
  • We assume that HOT can reduce SG&A by $100MM (better than the $70MM guidance)


-2010 - We're still 11% below the street EBITDA estimate of $790m which is flat with 2009 due to approximately 5% lower RevPAR estimates.


-RevPAR 2Q09 Assumptions:

  • Branded Same-Store Owned Hotels in North America: we're in-line with an estimate of -30% vs. HOT guidance of -30% to 32%
  • We estimate that total revenue (not SS) will decrease 24.5%, which compares somewhat to HOT's guidance of SS worldwide company operated hotels of -24% to -26% (-18% to -20% in constant dollars).


-Foreign Currency:

  • Since HOT reported 1Q09 results, the dollar has depreciated against almost all of the currencies that HOT has exposure to
  • We estimate that vs. guidance given on April 30th the dollar depreciated about 3.5% against most of HOT's portfolio of owned hotel and 6% vs current spot
  • Euro: 1.32 on April 30th vs an average rate of 1.36 in 2Q09 and spot of 1.40
  • A weak dollar will have a positive impact on reported RevPAR relative to expectations on April 30th when Starwood gave guidance

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


We've been pretty negative on LVS over the last month so some may be surprised to see us pull a u-turn.  The issues haven't changed but price and duration have.  Q2 margins in Macau will look better than people think as the company readies itself for an IPO and pushes itself to limbo underneath the covenant bar.

LVS has fired and laid off many employees in Macau, including a number of senior level management folks.  Look for a decent size number in the one-time expense bucket for Q2 and Q3.  The layoffs and charge-offs should have the effect of pumping margins.  Sustainability is certainly a question mark but given the high short interest and volatility, investors likely won't scrutinize that aspect over the near-term.

Better Macau margins will also partially alleviate covenant concerns.  Moreover, LVS can exclude one-time charges from the leverage covenant calculation - even more incentive to fill the 1x bucket.  A Q3 covenant bust has been all the talk from the sell side.  However, Sheldon is right.  LVS will not bust a covenant.  Even though a Macau IPO will not likely float until Q4, the promise of one will allow the banks to be much more flexible with a covenant waiver or amendment.  LVS still has the debt buyback lever per the 4/15 amendment that allows them to repurchase up to $800 million of its term loan debt (trading at a discount).  Investors should worry about borrowing costs going up, but not a covenant bust or imminent bankruptcy.  We will have a more detailed, numbers-oriented post on the covenant issue coming soon.

The stock looks like it is going a lot higher over the near-term, at least through the Q2 earnings release in early August.  We still harbor concerns with MASSive amount of table supply entering the Macau market, particularly Oceanus next to Sands.  The Singapore ramp is also a worry especially considering the uncertainty of the junket situation - can they get licensed and can they offer credit?  However, keep a trade a trade as they say.

US Employment Bears, Waky Waky...

I think we we're the only Macro Team who read the June unemployment report as bullish, on the margin. That was not born out of a self perpetuating Wall Street narrative fallacy; it was born out of the math.

On the margin is where things matter in our Macro Model. Here are the two most recent data point that matter on US Employment:

1.       The US unemployment rate flashed a double top in the rate of month/month acceleration in February and May (+50bps m/m)

2.       The US jobless claims data (weekly, and less of a lagging indicator as unemployment is), continues to improve, sequentially (see chart)

Please send the chart below to the qualitative journalist who doesn't do calculus (derivatives). This is very straightforward.

At 565,000 claims, the first week of July broke the 600,000 line for the first time since the second half of January and represented a  52,000 improvement (8%) over the prior month. US jobless claims were also 41,000 below the 4-week moving average.

It's time for the one-factor model bears (200-day moving averages) to wake-up here.


Keith R. McCullough
Chief Executive Officer

US Employment Bears, Waky Waky...  - unempl45

SSS: Quick Initial Read

While the smaller companies that are less representative of the overall environment are out of the box first with sales results, here's our initial read. Overall net positive thus far.


  • June sales coming in largely in line with weather-reduced expectations. Overall, it appears that underlying consumer demand is status quo here, if you incorporate last year's stimulus benefits and this year's record rain. So far, it appears that the haves and have-nots remain unchanged, as those companies such as HOTT and BEBE continue to struggle while others like TJX and GYMB continue to outperform.


  • In general, the absence of earnings revisions either way for most companies suggests to me a net positive. With nine weeks in the bag, the this would surely be an opportunity for retailers to lower EPS if they had to. Expectations were low enough heading into today, which in theory would have provided a decent backdrop to massage earnings lower. However, we are not seeing wholesale earnings revisions to the downside. Clearly, tight inventory controls, careful planning against LY, and a fairly rational promotional environment are the keys to current earnings visibility.


  • Finally, June confirms once again that the consumables driven retailers continue to drive traffic and grow share at the expense of the traditional grocers. Despite the weather, retailers including COST, FDO, BJ, etc continue to benefit from aggressive pricing, supplier discounts, and their overall value-driven strategies.

Eric Levine

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