Marriott's timeshare securitization announced on October 21rst is a perfect illustration on just how much the securitization market has improved over the last 6 months



Last week, Marriott completed a pretty attractive securitization deal. Since several transactions occurred, the attractiveness of the deal may have gotten lost in the details.


In March 2009, Marriott completed a private placement of $205MM floating rate Timeshare Loan Backed Notes with a commercial paper conduit administered by JPMorgan.  The rate on that deal was 9.87% and Marriott contributed $284MM in timeshare mortgages to the trust, retaining a 28% residual interest in the trust.  Not only was the advance rate a stingy 72%, but all the cash flow from the trust was being paid entirely to the holder of the Notes for 12 to 24 months; and only thereafter, Marriott was entitled to begin receiving a return on its residual interest.


Earlier this week Marriott bought back the the March deal for $233MM and then sold $218MM of those loans plus another $168MM of loans on its balance sheet into a trust which then issued $317MM of Timeshare Loan Backed Notes at a rate of 4.809%.  The new notes had an advance rate of 83% and paid a rate 50% below MAR's issue just 6 months earlier.  In addition, while any principal repayments on the residual accrue to the bondholder, MAR gets to keep the interest payments on the residual from day one.


Now that's a pretty good deal. If HOT's deal is anywhere as good they should book a healthy gain on their note sale in 4Q09.


Tempered expectations for the quarter but bullish outlook for 2Q2010 and beyond



After watching WMS and WYNN get slammed after reporting what we believed were solid results, our expectations for Bally's release Thursday after close are "tempered".  Then again, the stock go crushed yesterday and it's not like we've been touting the quarter.  For us, the play is long-term.  BYI has managed strong year over year growth in EPS in one of the worst periods for slot sales we've ever seen.  Not too shabby.


For the fiscal Q1, we're slightly below Consensus EPS of $0.53 for 1Q2010.  We're guessing that some fear of a miss or lower expectations are priced in given that the stock has traded off 9% since 10/23.


As we wrote about on October 23rd, in our "WMS 1Q2010 PREVIEW", there weren't a whole lot of new and expansion units shipped this quarter and replacements should be down sequentially due to seasonality.  We estimate that BYI's shipments to NA markets in 1Q2010 were roughly 2,750 down from 4,001 units in 4Q09. We expect international shipments to be down about 5% since shipments to Australia won't be material until 2Q2010.  Our total new unit sales are just shy of 4,100 units with ASP's around $14,600.  The higher mix of conversion kits sold in the quarter and higher ASPs should help margins which we expect to be slightly north of 48%.


BYI gave pretty good guidance regarding it's systems business on its last call; stating that the June quarter was a trough at $47MM and that while the September quarter should be better it probably won't be a mid 50's quarter revenue wise. Our estimate for systems revenues is $50MM in 1Q2010 with margins at 75%.


Despite the September quarter being a seasonally weak quarter for gaming operations, we think that BYI could actually report better than expected results in this segment given the large number of games that were introduced over the last few months.  We estimate $74MM of gaming operations revenue in 1Q2010 at a low 70's margin.


While BYI did not provide quarterly guidance on its last call, we do think that they are more likely to do so on this upcoming call, especially if they miss the street number.  On the last call (see the "YOUTUBE" section below), BYI spoke extensively on how good the December quarter is shaping up to be.  We agree; the December quarter does look good to the tune of EPS of $0.65 vs consensus of $0.58.  Here are our preliminary thoughts on FQ2 (Dec):

  • Systems business should have a record quarter given the backlog
  • Materially more openings and expansions, as well as a seasonal uptick in replacements
  • Shipments to new international jurisdictions like Australia and Singapore
  • Strong backlog for game ops




  • We expect margin on our game sales will be in the high 40's over the next several quarters
  • Year-on-year sales of conversion kits increased by about one-third. This is a testament to our improving video content, which remains an opportunity and should result in additional conversion kit sales moving forward
  • There will be new and exciting international opportunities for Bally over the next 12 to 24 months. We've been building infrastructure in anticipation and our team is ready to execute. Markets such as Australia, Singapore, Italy and certain European countries remain the key focus for us
  • Our product pipeline for both gaming operations and sale games is stronger than it has ever been. Q4 saw the initial release of many new products...We've just launched our new Digital Tower Series of products and our new Jumbo cabinet. Our Fireball™ Digital Tower game is performing at levels between 2x and 5x half average in its initial installation. More games will follow to support the Digital Tower Series of games, and we believe this could be a great opportunity for our Gaming Operations business
  • Commencing in Q2, a new spinning wheel game and DualVision™ cabinet will be available for gaming operations
  • In game sales, we continue to produce world-class mechanical reel products. This range will soon include transparent reels in the much-anticipated classics, designed to replace valued estimated North American footprint of 40,000 to 50,000 successful but aging pre-Alpha Hi-D [high definition] north steppers
  • While the sentiment of our customers seems to be firming at this time, we are not predicting a significant uptick in the game-buying patterns for the remainder of this calendar year
  • We expect our maintenance revenues will continue to grow in fiscal 2010 to a range of $58 million to $62 million
  • Since April 2009, we have seen a significant pickup in systems-related purchasing decisions. This seems particularly true with respect to competitive replacements. Casinos deciding to replace their current, not very well supported systems with Bally's core and supporting systems products. This increased sales activity should positively impact systems revenue reported starting Q2 of fiscal 2010
  • Fragile state of the current economy gives us less than optimal visibility in the current year. However, we do see several specific positives for Bally in our fiscal 2010 when compared to our fiscal 2009.
    • First, we entered the new year with a higher level of gaming operations and systems maintenance revenues, and 48% of our Q4 revenues were recurring revenues.
    • Second, we have a larger footprint of games in the field to attack with conversion kits and our new model.
    • Third, internationally, we will be selling in some jurisdictions that are new to Bally.
    • Fourth, we have an enhanced product offering in both games and systems.
    • And fifth, there are margin opportunities in game sales, interest and other expenses
  • These positives will be partially offset by fewer expected new casino openings and expansions

  • Currently expect our fiscal 2010 diluted earnings per share to be in a range of $2.25 to $2.50.  Due to normal seasonal variations in our business and our expectation that general economic conditions will begin to improve in calendar 2010, we believe the earnings power of the company will be greater in the second half of the fiscal year.
  • [RE: Systems] September quarter may also not be as strong as those mid-50 numbers that you had seen in prior quarters. But that said, beginning in the April time frame, we saw our systems pipeline begin to build, and it's now at record levels, which is why Ramesh was so optimistic about our December beyond quarters for systems
    • We certainly would hope that the systems business would maybe have troughed in the June quarter, although I could say we're not going to give any revenue guidance for the September quarter on systems
  • We still believe that between the high 60s and low 70s, varying quarter-by-quarter based on jackpots and some seasonality, is the right range for gaming ops. Same thing on the systems, we think between 70% and 80% is the right gross margin range


“I’d rather be hated for who I am, than loved for who I am not.”
-Kurt Cobain
Kurt Cobain was the lead singer and songwriter of Nirvana. He left this world early in life. He was 27 years old. His Nirvana lives on however, having sold over 50 million albums worldwide.
Other than living vicariously through the aforementioned quote, the only thing I have in common with Cobain was my college hair-do. I am not sure if he used a blow dryer, but I definitely did. I think that’s when I first thought about risk management. Of the hockey mullet that is…
Per our friends at Wikipedia, Nirvana is a “Pali word that means blowing out – that is, blowing out the fires of greed, hatred, and delusion.” When I think about the US stock market rally of 2009, I think of the opposite of that. This may be the most hated rally ever.
Hate? Yes, newsflash: people hate this rally. They hate that they missed it. They hate who gets paid by it. They hate everything about it.
I think he was quoting Neil Young, but another Cobain line that I have taped in my notebooks is that “it’s better to burn out than fade away.” That’s definitely the way that some of the short sellers of everything Depressionista better feel right here and now. If they genuinely believed in their shorts that is. As my Resident Bear, Howard Penney, reminded us all yesterday – timing your shorts was everything.
The YTD closing high for the SP500 is barely a week old. If you hate everything about this rally, you probably hate that you didn’t short the top too. Tops are processes, not points. So far, the SP500 has corrected -3.1% from its YTD high, and is +57.2% from its low.
In the intermediate term, I think that a strengthened US currency will be bullish. In the immediate term, it’s going to get your REFLATION longs more hammered than Cobain might be after a big show. Some of the ideologues like Larry Kudlow hate considering duration versus market price. Why? Because they want “King Dollar” back, but they perpetually want the stock market going up too. Sorry guys – that’s not the way the math works.
For the week to date, the US Dollar is up +1.1%. For the week to date, the SP500 is down -1.5%. Dollar up = stocks down, Larry. That’s the immediate term TRADE. Don’t hate me for it. Don’t love me for who I, or this dominant macro inverse correlation, are not.
I can give you as long a list as anyone as to why the Buck will continue to Burn from an intermediate term TREND and long term TAIL perspective. Those resistance levels for the US Dollar Index are now $77.79 (TREND) and $82.16 (TAIL), respectively. On those two durations, the Dollar remains broken.
However, in the immediate term, I can add to some of Penney’s thoughts on why we might have a Bombed Out Buck – this is, incidentally, one of our team’s three Q4 Macro Themes – what could put a short term bottom in the Burning Buck?
1.      Insider Trading – whether we cart these guys out in green sweater sets or orange jump suits, it is credibility bullish for the Dollar

2.      Too Big to Fail Legislation – the proposal to spread the hate to all banks with more than $10B in assets is less bad for the Fed’s Balance Sheet

3.      Rate Rotation – another one of our Q4 Macro Themes remains that the Fed has to move to where marked-to-market prices have, and raise rates

The biggest problem with these 3 points is the one some of the perma-bulls hate - duration. Remember, a lot of these people who have never seen a bull market that they didn’t like will tell you that they “can’t time markets” and that they “invest for the long run.” People whose money they lost hate that narrative fallacy too.
Hate is not cool, but the American public hates everything about this rally too. “Can’t time markets” means people don’t have a real-time process to manage risk. “Invest for the long run” gets the asset manager paid, not the client.
For most of this year, I’ve been annoying the hedgie girls with my hair blowing line of ‘Burning Buck means that the Debtors, Bankers, and Politicians get paid, and the Creditors/Consumers pay the bills.’ Don’t hate me for it – look at the recent data – America has voted:
1.       Last night’s NBC/Wall Street Journal poll has 64% of Americans saying that Dow 10,000 “doesn’t mean much”

2.       This morning’s ABC/Washington Post consumer confidence reading is at -51, down for the 3rd consecutive week

3.       Yesterday’s monthly consumer confidence reading for October came in at another lower-high, and down month to month

The New Reality isn’t that people hate the truth. It’s that Washington and Wall Street have to finally face it. Hating the US Financial System that we built is something that we have to all take a long hard look in the mirror at and think about.
For now, all I can do is tell you what I see in the US stock market. The SP500 has broken its immediate term TRADE line (1067) and the US Dollar is up again this morning, testing a breakout above its immediate term TRADE line ($76.20). For now, that’s bearish for mostly anything priced in US Dollars. For now, we need to stop hating the idea that the immediate term fix to this compromised US Financial System is going to cost us something.
This country’s Nirvana needs to find its love of American principles again. And that isn’t going to be found by empowering those who put us in this environment that we all hate to begin with.
My immediate term support/resistance lines for the SP500 now move to 1049 and 1084, respectively.
Best of luck out there today,


EWZ – iShares Brazil
President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt –leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country’s profile matches up well with our reflation call.

EWT – iShares Taiwan With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

XLU – SPDR Utilities We bought low beta Utilities on discount (down 1%) on 10/20. Bullish formation for XLU across durations.

FXC – CurrencyShares Canadian Dollar We bought the Canadian Dollar on a big pullback on 10/20. The currency ETF traded down -2%, but the TRADE and TREND lines are holding up next to Daryl Jones’ recent note on the Canadian economy.

EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

UUP – PowerShares US Dollar
We re-shorted the US Dollar on strength on 10/20. It remains broken across all 3 investment durations and there is no government plan to support it.

FXB – CurrencyShares British Pound Sterling
The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

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. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

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NKE: A Look At Insider Selling

A lot of people have asked me recently about insider selling at Nike. Here’s some history as to the one-two punch of insider selling vs. company stock repo. There are some key considerations this time around.



Phil Knight is such an icon in the footwear industry – not to mention the holder with majority voting interest. Mr. Knight has not been a ‘serial seller’ of his stock, and in fact hardly sold any in the open market in the first 30-years of his company’s existence. But since he began, he’s sold stock equating proceeds of about $2.5bn (yes – BILLION). Kind of mind-numbing, really, for a guy that started to sell shoes out of a van.  Here’s the part where I bring up that these sales are under a 10b5-1 plan, meaning that it is not Mr. Knight that pulls the trigger, but rather a financial advisor that handles Mr. Knight’s estate planning. Like it or not, the guy is good. His timing has been far better than plans we’ve seen for other executives in retail as well as other industries. But what does that mean? Regardless of who is pulling the trigger, these sales have been timed well in the past.


NKE: A Look At Insider Selling - Phil Knight solo


What’s interesting is that it’s been 17 months since he’s sold a single share. It has been a rarity to see a plan like this executed over time just before a meaningful near-term run up in the stock.


It’s interesting to stack this up against Nike’s own repurchase activity. The facts and numbers don’t lie on this one. In all but one traunch of Mr. Knight’s arms-length selling, Nike was in the market buying shares. Perhaps this is as simple as the company offensively using its bullet-proof balance sheet to mitigate volatility among investor concern about its Chairman selling stock. What we also know is that NKE has not repo’d any shares of substance since Oct 2008. We don’t know the current quarter’s numbers yet. But I’ll be concerned if we see the company not buying any stock, while insiders are selling, AND cash is sitting on its books collecting less than 1% interest.


NKE: A Look At Insider Selling - Phil Knight   NKE Repo Activity


Definitely something to consider.


Darius Dale

The Chinese Consumer – What is wrong with MCD and YUM?

I found it somewhat interesting that the CEOs of YUM and MCD both blamed poor same-store sales trends on the Chinese economy that grew 9% in 3Q09. 


Anecdotal evidence of the behavior of the Chinese consumer is very difficult to come by.  Today, I read an interesting survey on the Chinese consumer and it completely contradicts what the management teams of both YUM and MCD are saying about what is impacting their business.


First, YUM Brands CEO David Novak said on the company’s 3Q09 conference call that “I don't know when the China economy will improve, my guess is that it will strengthen before the rest of the world.”


More to the point, I specifically asked MCD’s management during its 3Q09 earnings call why it felt the need to pull back on China unit growth when GDP grew nearly 9% last quarter.  The answer was so flip I felt like I was dismissed as being uninformed about the Chinese economy. 


Here is MCD’s response to my question...  “GDP in China is very much driven by infrastructure investment.  So you've got to separate GDP from consumer spending.  Two different animals and then, worry is growing around the country.  So the Chinese consumer is a big saver when they're worried about what's going on, and so we've seen that.  We're not going to chase the traffic there from a significant price point of view.  And so, we see the consumer coming back there, so it's not any kind of long-term concern but the GDP numbers that you hear are the level of infrastructure investment that's being put in along with incentives for things like car buying, et cetera, which do not affect the consumer every day on the retail side.  And so, we modeled on the retail data and plan ourselves accordingly.”


MCD went so far as to cut back unit development in China and YUM did not.  I have thought that YUM should do this for six months now, but management suggests that I should not think like a typical US-centric restaurant analyst and I need to view China differently.  Time will tell.


Over the years I have found BIGresearch very helpful in detecting consumer trends here in the US.  BIGresearch just recently published a poll on the Chinese consumer that makes me question what both YUM and MCD are saying about the Chinese consumer.  Although both companies stated that they are seeing signs of improvement in China, both companies are expecting some softness to remain in the near-term as a result of the relatively weak consumer. 


According to the BIGresearch poll “The effects of a global recession continue to be felt around the world, except maybe China, where credit is flowing, and consumer confidence is rising and young Chinese consumers are planning to spend money.”


According to BIGresearch’s 17th China Quarterly, of which there were 12,641 18-34 year olds and 15,168 total respondents, 64.7% of Chinese Consumers 18-34 are confident/very confident in the chances for a strong economy versus 61.3% in Q2 2009, and up almost 40% from Q4 2008.  It would make sense that this sequential improvement in consumer sentiment would be reflected in MCD’s and YUM’s China results, but YUM’s same-store sales growth in China continued to decline in 3Q09 on a 2-year average basis and MCD’s comps are still running negative. 


According to the survey, “The improving trend likely reflects the success of the large stimulus package introduced by the government in early 2009.”  But there is no love for KFC or McDonald’s! 


The survey goes on to say “the young Chinese consumers have a higher propensity to buy a new vehicle or make a big dollar purchase than Americans the same age, which could be due to growing credit markets in China. For example, 24% of Chinese Consumers say they are planning to buy/lease a vehicle in the next six months, up 22.0% quarter-over-quarter, and a whopping 64.7% year-over-year. This compares to 13.4% of 18-34 year old Americans who say the same.  It appears that the young Chinese consumer economic outlook has started to improve.”


As compared to the US consumer, the Chinese confidence in the economy is increasing and their outlook regarding employment is better.  If we saw the same trends in the US, nobody would be making excuses for poor trends.  Instead, we all would be asking what is wrong with the concept.  Right now, both companies are getting a free pass on trends in China.

US Consumer: Lower-Highs...

On US Consumer spending slowing sequentially, Howard Penney has been as right as the rain feels today in New Haven. If some people don’t understand that the Dollar Down doesn’t get everyone paid at this point, some of those people probably wouldn’t know they are getting wet when rained on either.


The better balance of the rally in stocks since the summer’s highs had everything to do with a US Dollar debasement. We called this Burning the Buck. As the Buck Burns, Debtors and Bankers get paid – the Consumers and Creditors pay the bill.


While I have covered our short positions in both US Consumer ETFs in the last 2 days (XLP and XLY), that was simply because they were down. I will re-short them, at a price. This is not a V-shaped or squiggly shaped Cinderella US Economic recovery. It’s the same kind of recovery we have had in 11 out of the last 11 recessions – 1 to 2 quarters in length, then the US Consumer will call it from there. Stay tuned.


For now, Consumer Confidence continues to make a series of lower-highs (see charts below). Americans are not as stupid as Washington thinks they are.



Keith R. McCullough
Chief Executive Officer


US Consumer: Lower-Highs...  - a1

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