All the data points we monitor on the health of the consumer continue to flash RED.


HOUSING CONCERS CONTINUE - Today, the Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased 8.2% to 608.3 from 562.3 last week; this was the first increase in a month on the back of lower mortgage rates.   The refinancing gauge jumped 15%, while the index of purchases fell for the fourth consecutive week.   The purchase Index includes all mortgages applications for the purchase of a single-family home.  It covers the entire market, both conventional and government loans.  The trends in the purchase index does not bode well for the next data point existing home sales.


CONSUMER SPENDING PATTERNS - The Research Edge Retail team pointed out  that the current results out of MasterCard’s results does not support a rebound in underlying consumer discretionary spending patterns. 


From our Retail post today – “While showing continued progress on a number of fronts this quarter, MasterCard’s US credit card volume continues to show no meaningful signs of turning around. In fact, credit card volumes for the last three quarters now, on a year over year basis, have been: -16.9%, -18.9% and -17.9%; not the kinds of numbers that signal a recovery. Granted, the volumes have stabilized and importantly they have arrested the decline that was in place from 2Q08 through 1Q09, but since then we have yet to see them move decisively back towards the positive column, which is what we’d expect to see amid the backdrop of a real (vs. perceived) recovery.   For reference, credit card volumes are a better proxy than debit cards for the discretionary side of the US consumer’s wallet, as consumers tend to revolve discretionary items, whereas they put staples on debit cards which are paid in full at the time of purchase.”


TEAM CONSUMER DATA CHECK - 11 4 2009 8 12 45 AM


A DECLINE IN NON-ESSENTIAL CONSUMER SPENDING – The following is from a post that the Gaming, Lodging and Leisure team did on the subject of consumer spending.



GDP = C + I + G + (EX – IM).  While the G may be expanding, C probably won’t.  Discretionary sectors are likely to see a smaller and smaller proportion of the consumer’s “wallet” over the next year or so.  As shown in the table below, our macro forecasts and healthcare cost projections indicate that 2010 will bring an accelerating drop in non-essential consumer spending, culminating in a $124 billion year over year decline (-11.4%) in Q3 of 2010.  Q3 2009 is looking more and more like an anomaly which makes it a very difficult comparison.  Due to leisure spending, both lodging companies and the cruise lines reported better than expected Q3 revenues.  For all of 2010 Research Edge projects a 5.2% decline. 




Despite GDP growth and the market rally since March, unemployment continues to increase.  As we have written about at length recently, gas prices are also going to negatively impact consumers’ spending power for the remainder of 2009 and into 2010.  For consumer spending on casino gambling and hotels, in particular, our post, “WHAT GOES UP…” (09/10/2009), shows that gaming is in a mean reversion period in terms of a percentage of personal consumption expenditure.  Gaming was strongly levered to the fifteen-year rip in housing-fueled PCE that ended in 2008.  A one-two punch of a smaller allocation of a more frugal consumer’s wallet could meaningfully impact the gaming industry’s top line next year.


We remain short the XLY (Consumer Discretionary ETF) in the Virtual Portfolio.


The Institute for Supply Management’s index of non-manufacturing businesses fell to 50.6 from 50.9 in September.  A Bloomberg survey suggested an expansion to 51.5; clearly the result is a sign that joblessness is likely to restrain consumer spending.  To date, the improvements in economic conditions in the US have been based on government assistance, which over the longer term is unsustainable.  The implication here is that the recovery will likely lose momentum as stimulus fades. 


Howard Penney

Managing Director





OEH meets consensus expectations for the first time in while, which seems good enough... for now




Quarterly Review & Outlook

  • No big surprises in the 3rd quarter as trends set in the 2nd quarter continued
  • Grand Hotel Europe was down $3MM in EBITDA, $1.4MM was due to currency
  • Mexico was down $0.75MM (continued H1N1)
  • Occupancy grew 2% in Italy
  • Trains and cruises, cost basis in Euros impacted results by over a $1MM, despite some revenue recovery in certain products
  • Goal of reducing fixed cost base has been achieved and now they need to hold costs down
  • Goal of deleveraging:
    • First step is selling non-core assets, should have proceeds of "over" $100MM by year end
    • $55-65MM in cash proceeds expected from sale of villas in St Martin
    • Worked at Keswick hall to sell some plots for residential development
    • Net result should reduce debt by $140MM
  • Business outlook
    • Italy RevPAR grew 3%, Russia grew 9% in local currency in October
    • However, October still saw revenues drop 19%
    • Trends over the last 5 weeks have been consistent
    • Nov & Dec are trending 18% behind in bookings, but should end up better
    • 1Q2010 is running 50% in bookings from where they were a year ago
    • Bookings are very last minute still
  • Restricted cash was $18MM
  • 9.0x TTM debt/EBITDA
  • $116MM of loans drawn of R/C loans outstanding
  • $51MM of debt due in 2010 is related to Cupacoy which should be repaid from villa sales
  • Some of the capex this quarter was covered by insurance proceeds
  • Tax charge of $12-14MM for FY2009
  • Discussing debt maturities with their banks
    • One of the strategies is rebalancing debt maturities, for example Grand Hotel Europe, which they beleive is worth over $200MM only have $20ishMM of debt want to add some leverage there
  • Are seeing some interesting opportunities arise in the luxury space, will look at more management related opportunitites



  • Don't expect the booking window to further shorten but at the same time don't expect it to lengthen
  • Some of the group business they have is also booked within a month of the event
  • Any corporate bookings they have are last minute
  • 2010 should be like 2009 booking wise
  • "Last year all the bookings were last minute, now they are last second"
  • Domestic business around the world has increased to offset the considerable decrease in UK travelers, while US traveler has somewhat stabilized
  • Rate of expense growth next year?
    • Think they can really keep a very tight lid on costs for one more year
    • 50% target on variable costs (on flow through), the real challenge is for that not to grow when things recover
    • There are some properties that will likely see additional declines next year - like Mexico
    • Hope to keep fixed cost growth at or below local inflation levels
  • American guest (ex - domestic properties) is just above 30% (consistent across most of Italy, ex Ravello which is in mid 20's)
  • Debt refinancings?  Trying to achieve 85% on renewal (loan to value).
  • Balance of doing it now vs keeping the current low pricing?
    • They can do a forward start agreement to balance some of that out
    • Debt would be marked around mid 200's spread - would be happy there (sounds very low to me)
    • Would like to have something done by filing of 3Q2010 10Q, otherwise they have a current debt issue
  • Color on market pricing
    • Have traditionally bought assets around a 10x multiple (on what they think is a stabilized number).  Their special sauce is buying slightly run down assets.  Developing countries would have a slightly lower multiple though higher cost of debt
  • Performance in Asia is bouncing back nicely
  • Any change on dual class structure?
    • Hearing in Bermuda 6 weeks ago, and the court has ordered a further hearing on a pure question on law on whether having the dual structure is legal as well as OEH's desire to move to dismiss the charges.  No date set - sometime in 2010
  • El Canto
    • Dealing with some interested parties putting together JV
    • Would only do the project with a JV partner
    • Have $52MM sunk there
  • No more payments due on NY library until 2010, taking the total to $30MM
  • Brought recurring capex down from over $100MM to $35-40MM including the completion of Cataratas for 2010.
  • Any acquisition they would pursue in the intermediate term would likely pursue it through a JV that is asset lite from their end.  Hopefully see some opportunities come through in next 6-8 months

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For the first time in recent memory OEH's results were in line with consensus estimates.  However, outlook hasn't really changed and the story remains centered on asset value.


I suppose when the Street keeps lowering their numbers, companies will eventually meet them.  Street revenues and EBITDA numbers came down 14% and 30% for 3Q09, respectively since last quarter.  We still think the Street is too high for 2010, but again this story is all about asset value.  OEH's outlook basically tells us nothing new:

"While the ongoing decline in demand that has characterized the last two quarters has slowed, I believe it is still too early to predict a return to growth... We will therefore continue with our prudent approach to cash management, including the tight control of costs and capital expenditure, and continue to expedite the sale of non-core assets and developed real estate. Our aim is to significantly deleverage the Company by the end of 2011, with a targeted ratio of debt to EBITDA on a stabilized basis, in the four to five times range."





Owned Hotels:

  • Owned revenues of $116.5MM came in $4MM better than our estimate while EBITDA was $1.4MM lower
  • Disappointing results in North America were somewhat offset by better results in Europe
  • Rest of the world was mostly in line with our expectations. Asia results were the least bad, followed by South Africa.

Everything else:

  • Adjusted for Charleston Place, hotel management and JV interest income came in at a $100k loss versus our estimate of $1.3MM
  • Restaurant revenues and EBITDA were $0.4MM and $0.2MM below our estimates, respectively
  • EBITDA from trains was in line with our estimate at $7.7MM
  • Central costs actually increased y-o-y which was a surprise to us

Other things of interest from the release:

  • LOI signed in October for sale of a 3rd non-core asset, with estimated proceeds in the $15-20MM range
    • Our guess is that it's Bora Bora which has been accepting bids since August 2009. For more assets that could be "for sale" see our note "OEH: TRUE VALUE", published 8/12/09
  • Sold 2 villas in Koh Samui for $1.7MM

US STRATEGY – Buffett Rolls The Bones


The S&P 500 is up for two days in a row, rising 0.2% yesterday.  Yesterday, M&A activity ruled the news flow with the high-profile Berkshire Hathaway $44BN deal to buy Burlington Northern.  Without the improvement in the XLI the market would have been down yesterday.


The Industrials sector was led higher by the Transports, up 5.3% yesterday.  The move was underpinned by the Buffett deal as the S&P Railroads Index increased 12% yesterday.  Additionally, SWK agreed to acquire BDK, which rose 31% on the day.  The other key acquisition was in the coffee sector with Peet’s buying Diedrich Coffee.


Yesterday, the Materials were the third best performing sector outperforming the S&P 500 by 0.8%.  The precious metals stocks outperformed with the rally in gold and silver.  The rally in gold was fueled after the Reserve Bank of India purchased 200 metric tons of gold from the IMF for $6.7B.


On the day the VIX declined 3.3%, declining for the second day in a row.  The dollar index finished slightly higher on the day.


The three best performing sectors were Industrials (XLI), Energy (XLE) and Materials (XLB), while Technology (XLK), Consumer Staples (XLY) and Utilities (XLU) were the bottom three. 


Tech was one of the worst performers yesterday, closing down 0.4%.  Weighing on Technology stocks was the decline in the semi space, with the SOX down 1.3%.  Both Morgan Stanley and UBS downgraded the semi and semi-cap equipment groups today.


Today, the set up for the S&P 500 is: TRADE (1,065) and TREND is positive (1,025).   The Research Edge quantitative models have 7 of 9 sectors in the S&P 500 positive on TREND and 1 of 9 sectors are positive from the TRADE duration.  Consumer Staples is the only sector positive on both durations. 


The Research Edge Quant models have 2% upside and 2% downside in the S&P 500.  At the time of writing the major market futures are poised to open up to the upside. 


The Research Edge MACRO Team.


US STRATEGY – Buffett Rolls The Bones - S P500


US STRATEGY – Buffett Rolls The Bones - s pperf




The key call out in Consumer over the past 24 hours is one that probably slipped right by most Consumer analysts. Diving into the composition of MasterCard’s results, it certainly does not support those who are banking on a rebound in underlying consumer patterns.



While showing continued progress on a number of fronts this quarter, MasterCard’s US credit card volume continues to show no meaningful signs of turning around. In fact, credit card volumes for the last three quarters now, on a year over year basis, have been: -16.9%, -18.9% and -17.9%; not the kinds of numbers that signal a recovery. Granted, the volumes have stabilized and importantly they have arrested the decline that was in place from 2Q08 through 1Q09, but since then we have yet to see them move decisively back towards the positive column, which is what we’d expect to see amid the backdrop of a real (vs. perceived) recovery.   For reference, credit card volumes are a better proxy than debit cards for the discretionary side of the US consumer’s wallet, as consumers tend to revolve discretionary items, whereas they put staples on debit cards which are paid in full at the time of purchase.


Expect to hear more from us in coming weeks about the consumer finance angle as it relates to driving spending. It matters big time...






Some Notable Call Outs


  • Steve Madden management offered one of the more articulate looks into the M&A environment than I’ve heard in a while. The company is actively looking at making an acquisition, and is currently looking at deals in the $30-$40 million range. Additionally, the company actually has a Letter of Intent out on a deal that they expect to close by year end. Finally, the company is very focused on acquiring an athletic or athletic inspired brand. Now I guess we just sit back and wait for the press release...


  • According to Tweetbrands, a website that tracks the most commonly referenced brands on Twitter in real-time, Nike and Ikea are the only two retail or apparel names to crack the top 50. The relevance of such a tracking service is very low on a standalone, “snapshot in time” basis but we expect companies to watch closely both the frequency and context of real-time dialogue concerning their brands’ on Twitter and across other social networks.


  • While upfront orders still remain under some pressure, Ralph Lauren’s upside to its topline forecast was driven by strong acceptance of new products, a double-digit increase in replenishment, and the ability to accelerate shipments into the quarter to meet improving demand. Despite these positive sales drivers, management cautioned that wholesale customers still remain cautious in their ordering commitments through Spring and Summer ’10. As a result, it appears that “at once” orders and “read and react” will remain a key driver of near-term results should the demand environment remain better than forward orders would otherwise indicate.






China's Canton Fair Export Orders Rise on Christmas Demand - The Canton Fair, China’s biggest trade show, received 16 percent more export orders than six months ago as overseas demand for electronic gadgets and clothes picked up ahead of the Christmas shopping season. Contracts rose to $30.5 billion at the end of the 15-day expo in southern China’s Guangzhou, led by orders for machines, electronics and appliances, said the fair’s spokesman Chen Chaoren. European Union and U.S. buyers thronged the show, a barometer of foreign demand for local products, from Oct. 15, boosting visitor numbers by 14 percent, he said. <>


Wal-Mart Settlement OK'd By Nevada Judge; Cuts Prices on Turkey, Televisions - Judge Philip Pro’s ruling in U.S. District Court in Las Vegas closed the book on 39 actions against the world’s largest retailer. The suits, filed in federal courts in 30 states, accused the company of cheating workers out of hourly wages by forcing them to work through breaks and other means. Wal-Mart said it would pay between $352 million and $640 million to settle the cases, but that the agreements would need individual court approval. In other news, Wal-Mart Stores Inc., the world’s largest retailer, cut prices on turkeys and plans reductions on flat-panel televisions to win holiday sales from rivals. U.S. stores are selling whole, 12-pound (5.4-kilogram) turkeys for 40 cents a pound starting today, Wal-Mart said in a statement. That’s a third of last Thanksgiving’s average price in a survey by the American Farm Bureau Federation in Washington. A a 42-inch Sharp Corp. flat-panel TV for $498, down $270 from its regular price, and a 46-inch model, which usually sells for $1,158, for $698, according to Wal-Mart. <> <>


Disney Wins Approval for Park in China’s Richest City - Walt Disney Co. won government approval to build a theme park in Shanghai, giving the world’s largest media company access to consumers in mainland China’s richest city. The agreement with China to construct Disney’s fourth park outside the U.S. “marks a very significant milestone,” Chief Executive Officer Robert A. Iger said in a statement. Disney and its Shanghai partners are now allowed to move toward a construction and operation agreement, the statement said. Disney’s foothold in mainland China comes after a decade of negotiations and will cost 24.5 billion yuan ($3.6 billion), according to Hong Kong newspaper Wen Wei Po. <>


October Shows Signs of Life for Retailers - On Thursday, when individual chains report their October sales, the industry is expected to post its strongest sales figures yet in this recession. Contrary to predictions made only a few weeks ago, the nation’s stores could be poised for a merrier Christmas this year than last. The latest sales figures come from his organization, which estimates sales for all forms of payment, including cash, checks and credit cards. They show, for example, that sales of women’s apparel increased 0.6 percent in October, the first positive figure since August 2008. However, women’s apparel sales are still 12.2 percent lower than in the heyday of consumer spending, in October 2007. That theme — up compared with last year, but still down compared with the height of the boom — played out across several retailing categories, including jewelry and luxury goods. <>


Industry Sees Positive Signs in California - Retailers and manufacturers in the nation’s most populous state said the battered economy seems to have bottomed out despite persistent high unemployment and state budget shortfalls. Signs of improvement are emerging as businesses stabilize after slashing costs and staff and revising their expectations and strategies. Retail buyers are placing new orders, as well as reorders, in a flurry of pent-up spending. And there are indications that some shoppers are beginning to crack open their wallets. Kohl’s opened 30 California stores in September — all in former Mervyns locations — and hired 4,200 employees in the Golden State. American Rag Cie, the specialty retail chain that has three locations in Los Angeles, San Francisco and Newport Beach, Calif., plans to expand its jeans section, World Denim Bar, as a stand-alone store with seven new units in California over the next two years. <>


American Eagle's Times Square Screening - American Eagle’s four-floor, 25,000-square-foot flagship opening Nov. 19 in Times Square here is an entirely different animal for the retailer –— double the size of the next largest unit in the chain. In addition, the flagship, at 1551 Broadway at 46th Street, will have a 25-story interactive LED sign — that’s 15,000 square feet of outdoor electronic signage. All the wattage will be used to capture consumers’ attention. “They kind of know we’re here,” said Jim O’Donnell, chief executive officer of American Eagle Outfitters Inc. “Now they’ll really know we’re here.”As for the signage, the company plans to go big and bold and be “part of the Times Square landscape,” O’Donnell said. “We priced the signage and if we sold every inch of that screen out to third parties, we would offset the entire rent of the building. At some point we might do some cobranding with some companies.” <>


Retailers Bet on Warm and Fuzzy Holiday Themes - Nostalgia and other emotions — visions of sugar plums, softly falling snow, reindeer and Santa — will be plentiful in holiday marketing campaigns but may not be enough to shake most American consumers out of their sleepy spending ways. Shoppers with tighter budgets and lower sights set on gift giving are struggling with worries about job security and high unemployment, depressed home values, flat personal income and tougher consumer credit terms. <>


'Shoptimism' Book Tracks the American Consumer - Lee Eisenberg is totally consumed — with consumer culture. The author of “Shoptimism: Why the American Consumer Will Keep on Buying No Matter What” (Free Press) aims to find out why enough is never enough in the land of the shopper. He left no cash wrap uncovered, interviewing market researchers, demographers, behavioral economists and neuroeconomists, who use brain scans to determine what sets consumers’ hearts aflutter. In the course of his research, Eisenberg got a job at Target and donned the red shirt so that he could explore the dynamics of buying and selling from the point of view of the sales associate. <>


New Balance Names Licensing Partner - New Balance announced on Tuesday that the firm has tapped Boston-based Klone Lab LLC, as the new U.S. licensing partner for all sandals and slides. The agreement is effective January 2010. Klone Lab has worked with various other footwear brands including Speedo, Reef, Timberland and Converse. The company will launch a collection of New Balance slides and sandals for the spring ’10 season, followed by kids’ and wellness footwear for spring ’11. <>






  • Thomas Szkutak, SVP & CFO, sold 70,000 shares for a gain of $8.3mm.
  • Jeffrey Wilke, SVP, sold 20,000 shares after exercising options to buy 20,000 shares for a net gain of $2.2mm.
  • Andrew Jassy, SVP, sold 15,000 shares after exercising options to buy 15,000 shares for a net gain of $1.7mm.


DECK: John Gibbons, Director, sold 2,1000 shares for a gain of $195k.

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