A drop in tourist numbers affected Macau’s casino revenue in the second quarter.  Casino revenue fell by 2.3% quarter on quarter to MOP 25.4 billion, according to the Macau Gaming Inspection and Co-ordination Bureau Website.  The year-over-year change was down 12%.  Visitor arrivals in May fell 20.4% from 2008 and visitor arrivals for the year to date fell 10.6% from a year earlier.



Las Vegas casino company Wynn Resorts is reported to have submitted an application to list its Macau unit on the Hong Kong exchange.  The company hopes to raise between US$500 million and US$1 billion. 

Rival operator Las Vegas Sands is preparing an IPO of its own Macau entity which is expected to raise more than US$3 billion.  Commentators see this strategy as being primarily aimed at supporting struggling operations in Las Vegas. 


Only a 560 bps margin decline on a 26% decline in RevPAR? Are these guys great mechanics or is something else going on?


When MAR reported only a 560 bps margin decline on a 26% drop in RevPAR this past Thursday, it seemed almost heroic.  This masterful cost cutting spurred several analyst questions of whether this kind of massive property level cost cutting can continue. 

If you look under the hood there’s a lot of “other stuff” in Owned, Leased, Corporate Housing & Other.  The “Other” bucket skews the margins and doesn’t exactly paint a true picture of what’s really going on from a cost cutting standpoint. “Other” includes branding fees and termination fees, which have zero associated expenses.  “Other” also includes some application fees which franchisees pay to procure a contract, and re-licensing fees which get paid on properties when ownership changes but the MAR flag is retained.  Marriot doesn’t disclose application or re-licensing fees, so for the purpose of this note we will just ignore them.

Branding fees come from two primary sources: affinity fees on Marriott rewards credit cards and licensing fees on branded Ritz Carlton residences developed in conjunction with Ritz hotels.  As can be seen below, branding fees have become a larger portion of profits from Owned, Leased, Corporate Housing & Other each year since 2006, accounting for 47% in 2008 and 90.5% in 2Q09. 


Termination fees on managed and franchised hotels are typically collected when MAR branded hotels trade hands and the new owners want to reflag or simply terminate the existing management or franchise contract.  Termination fees have been declining as the transaction environment for hotels has cooled.  MAR recognized $26MM, $19MM, and $15MM of termination fees respectively in 2006, 2007, and 2008.  MAR does not disclose termination fees on a quarterly basis but they did disclose that they were down y-o-y for the first two quarters of 2009. 

On a combined basis, branding and termination fees accounted for 58% of Owned, Leased, Corporate Housing & Other profit in 2008, up from 47% in 2007.  In 1Q09, MAR reported branding fees of $14MM and some small amount of termination fees.  When you strip those out, it implies that Owned, Leased, & Corporate Housing profits were actually negative and declined around 500bps vs the reported 370 bps decline.  This past quarter MAR reported $19MM of branding fees out of $21MM of total profit for Owned, Leased, Corporate Housing & Other.  Even if there were no termination fees, margin excluding branding fees was less than 1%, implying around an 800-900 bps decline in margins (net of fees). 

Affinity fees are pretty stable and most likely growing.  However, we would wager that branding fees on Ritz condos are at best likely to slow along with the entire condo market.  Termination and re-licensing fees are also likely to be down for 2009 and 2010 unless you believe transactions will accelerate.  Finally, application fees should also be on the decline as new builds come to a grinding halt.  As the cost cuts comps become more difficult we expect some negative margins for this business net of fees. 


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PSS: Point/Counterpoint

Keith: PSS looking to breakout again from its TRADE line 13.99.



  • The consensus is off by a buck next year – no kidding.
  • PSS was investing in SG&A and PP&E while comps were down, product costs were heading up, and cost of capital was turning unfavorably.
  • 96% China exposure is Big. Yes it hurt while costs were rising, but we’re going the other way as capacity opens up again in China.
  • Leverage is still a concern. I don’t like it one bit. But comps are stabilizing, and both FOB and rent is coming down dramatically.
  • On a flat comp, these 2 items result in $0.55 in EPS over 12 months.
  • I buy into the ‘white space’ argument, meaning that the company can take up ASP to the high teens as it improves product mix.  Opportunities at Sperry and Saucony are gravy.
  • Tough to find a company with this much earnings upside.

Chart of the Day: Burning The Buck

While it is somewhat amusing to watch all of the perpetually bullish talking heads find the microphone again today, please don’t confuse our amusement with the math.

Today’s move wasn’t about the US stock market’s “great valuation.” Assuming that something you could have purchased 4 months ago 40% cheaper was actually cheap, you get the point. Valuation is a Wall Street narrative that ebbs and flows with price momentum.

Ultimately, today’s US market hitting fresh YTD highs is all about what’s been happening since March. The US Government is perfectly willing to Burn The Buck. I have outlined the levels of TRADE, TREND, and TAIL that support this view (see chart). No matter what your investment time horizon, the US Dollar remains as broken as the US Financial system’s credibility.

In the immediate term, this is REFLATIONARY.

In the intermediate term, this will morph into INFLATION.

In the long term, the American commoner and her government’s creditors, will be dead.


Keith R. McCullough
Chief Executive Officer

Chart of the Day: Burning The Buck - km45

Natural Gas: Where Art Thou Reflation?

We’ve phrased the title for this note in olde English, much as our competitor Dennis Gartman might use.  No, don’t worry, we aren’t going to give Dennis a hard time today.  He’s already had a tough time lately (we hear down -2.2% in July in his retirement and personal accounts) and, to be honest, we find him a likeable sort, despite his dependency on one factor models such as the 200-day moving average.  For those that have missed the commodity reflation theme in the year-to-date, the question above remains an interesting one.  That is, is natural gas the next commodity to make a big move?

The pricing for natural gas is much more locally based then its global brethren, such as oil and copper.  Therefore, a weak US dollar and an increase in Chinese demand will not necessarily sway the price of natural gas in the United States.  These are the primary factors as to why natural gas has been a laggard in the year-to-date.  In fact, prices at the Henry Hub are down 40% year-to-date from $5.63 per MMBtu at the start of the year and 70% from the year-ago closing price from $11.15 per MMBtu.  The natural derivative of this decline in gas prices, is the decline in drilling.  According to Baker Hughes, gas rotary rig count is down 47% from the start of the year to 672 currently and at their lowest level since May 10th, 2002, which obviously should lead to supply declines in the future.

The major bearish factor continues to be supply.  Natural gas in storage is 25.6% above inventories of 2,297 BCF from one year ago, and 18.7% above inventories for the 5-year average.  In fact, according to the Energy Information Administration, “natural gas in storage is now at its highest level for any week in the month of July since collection of weekly storage began in 1994.”  This is obviously bearish, but is also a backward looking indicator.  As always, what will drive natural gas futures will be the next marginal change, even if only bullish on the margin.

The next marginal bullish shift will likely be a sustainable decline in the rate of the building of storage, which will be a function of weather being warmer than expected, which lead to demand for more cooling, or an eventual declining in production due to declining drilling rates.  While the rate of storage growth y-o-y has wavered from week-to-week, in aggregate we have seen a consistent build throughout the year.  Of course November 1st will be the key date to watch on storage levels, as it marks the end of the 7-month injection season.

According to Keith the quantitative set up is as follows (see chart):

“TAIL, broken = $5.45. TREND and TRADE = the same level, $3.82 (ie right where it closed on Friday. The setup is for a big move next (failure to breakout or a big time breakout)… if we see the breakdown, there is zero support until $3.11; breakout resistance is the TAIL line.”

On a percentage basis, this commodity has the potential for pin action and while the fundamentals favor an overly loose market at this point, a bullish shift in fundamentals could lead the potential for a test of the TAIL line at $5.45, which is 42% upside.

Daryl G. Jones

Managing Director

Natural Gas:  Where Art Thou Reflation? - gas


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