Low quality beat and lower guidance for 4Q09




  • Despite the most challenging lodging environment they have been able to grow their footprint
  • The operating environment for hotels continues to be challenging.  CHH RevPAR performance was 50 bps better than their chain segment comps
  • Pace of RevPAR decline in the 3Q was comparable to what they saw in the 2Q but things are starting to stabilize. Occupancy, rate and RevPAR declines on the weekends have been noticeably less severe than week nights (so high single digit for weekends vs high teens during week days)
  • December results will be in the their 1Q2010
  • Expect pace of RevPAR declines to continue to ease into 4Q09, Guidance of -12% in 4Q
  • Focusing on brand awareness - loyalty programs are seeing very nice member growth - will have over 9MM members and account for more than 24% of their revenues (vs 22% in '08)
  • Continuing their commitment to returning FCF to shareholders through dividends and share repurchase
  • Offset some percentage of their RevPAR declines with royalty rate increases and room growth.  Royalty fees are expected to grow 5 bps next year
  • Executed 79 new domestic franchise contracts in the quarter and applications for conversions were flat y-o-y. New construction franchise sales declined by 82% in the quarter.  22 re-licensing transactions.
  • Adjusted SG&A declined 8% y-o-y and expect to manage to a high single digit decline for the full year
  • Leverage = 1.8x Adjusted 2009E EBITDA
  • Goal is to generate the highest ROI for franchisees
  • They remain committed to returning FCF to shareholders




  • Looks like unit growth guidance has increase from July.
    • Gross openings are inline, but there have been less terminations than they anticipated
  • Conversion trends?
    • Holding up better than everything else.  New build market has become extraordinarily difficult. They have no seen that big uptick in conversions that they usually occurs when lots of hotels trade hands.  Bid and ask for hotels is starting to sync. Think that all the action in hotels will be all about conversions and that should benefit them as they are the "premier conversion company in the space"
    • Seeing some owners want to upgrade brands
  • Out of the 550 companies in the pipeline, what is under construction?
    • Low-to-mid teens area. Conversions have traditionally been (2/3rds?) of gross openings which aren't in the pipeline for very long. A lot of their pipeline will not start given the lack of construction.  The first financing that does come back will be in smaller hotels so they will benefit first
  • Cambria suites, no new contracts this quarter?
    • Victim of current financing environment.  Loans above $10MM simply aren't available. So until the financing market recovers that brand will grow very slowly
  • Potential acquisitions?
    • Some brands are in play, like Extended Stay, but haven't really seen a lot of others
    • Looking at everything and scanning the environment for opportunitites and hoping that brands will trade at better prices than in the past
  • Any change in other brands providing incentives on new build?
    • Have seen aggressive incentives but doesn't really move the needle in an environment with no financing
    • They have not changed their incentives... there aren't really many other companies that do any kind real conversion volume - they are really new builds
  • November 2008 was the first really bad month for them so comps get 600 bps easier over Sept/Oct last year
  • They have pretty good visibility into their guidance since more than two thirds of the "quarter" is over for them
  • Continue to think they are getting the benefit from trade downs although they would call it share gain from their value proposition
  • Are they getting more corporate contract business?
    • Yes - up 30+%
  • OTA's are not a big part of their business, EXPE is their largest OTA channel at 3% of their bookings.  Thinks that OTA's are an expensive channel, but anywhere you can get revenues today is worth dealing with
  • Why is the EBITDA coming down so much since they shouldn't be as sensitive to RevPAR?
    • Slight reduction on the royalty revenues
    • Lower initial and re-licensing fees
    • Re-licensing fees are really driven my turnover in asset base - they really can't stimulate that
  • Have a very high retention rate of properties in their system.  Haven't seen any real benefit from discounting franchising fees aside from the normal "ramp in fees" that they get (i.e. initial discount)
  • Primary priority for FCF is returning cash to shareholders, whenever they think their stock is cheap they will opportunistically buyback stock.  They are one of the only companies that increased their dividend this past year.  Lastly they are exploring ways to grow their business (brands, acquisitions, etc) - but returns need to be very high on those opportunities
  • 50% of conversions is from repeat business (when current franchisees buy new hotels)
  • Not seeing strength in leisure translating into more week night travel
  • The fact that RevPAR is starting to look better is just easier comps not from any fundamental improvement
  • Typical cost for a travel agent is 10%
  • Were the lower terminations just deferrals?
    • Some were but some were not.  The franchisee actually made the improvements they needed to make to keep the flag
  • Assume no gain or loss on investment on retirement funds in the 4Q.  If the market is up in 4Q than there could be a gain and vice-versa but there is an offset to higher SG&A on a portion of any gain or loss

US STRATEGY – For Your Eyes Only

Continuing with Keith’s theme from the Early Look, we’ve titled the U.S. Sector Strategy piece this morning after the 12th film in the James Bond Series.  In total, there were 22 films in the James Bond Series, with the 22nd having been released in the U.K. on Halloween of this year.  


On an inflation adjusted basis, the James Bond film series brought in $11.7BN in revenue versus costs of production of $1.1BN. Now that is a margin you can take to the bank. (Maybe even a government subsidized bank!)  Although, as we have seen recently in the U.S., government subsidized financial institutions actually do quite well.   This morning AIG continued that trend with it second quarter of positive earnings, though with the stock up 6x since March, it is trading down in the pre-market on earnings.


The S&P 500 has been up for four days in a row, rising 1.9% yesterday.  Yesterday’s rally was on the back of upbeat earnings and guidance in the Technology sector and favorable MACRO data points.  In addition, retailers saw the biggest increase in same-store sales since July 2008, but the rate of growth is still anemic.  Also helping was the passage of stimulus legislation, including and extension (and expansion) of homebuyer tax credit and unemployment benefits.  The homebuyer tax credit as extended to April 30th for signed contracts.


In addition, the VIX fell 8.3% yesterday, now falling for the fourth straight session after spiking nearly 38% last week.


On the MACRO calendar productivity was the mantra of the day, as Q3 nonfarm productivity jumped 9.5%, well ahead of the 6.5% consensus and the biggest quarterly increase in six years. With output up and unit labor costs declining the numbers highlight the attractive corporate profitability trends.  In addition, initial jobless claims fell to 512,000 (from 532,000) in the week-ended October 31st.  The four-week-moving average fell to 524,000 from 527,000, the ninth consecutive weekly decline. Continuing claims fell for a sixth straight week.  This morning the focus is the government’s monthly employment report.


All the sectors with leverage to the global RECOVERY theme outperformed the S&P 500 across the board yesterday. The move came despite some strength in the dollar and pullback in the CRB; the CRB declined 1% yesterday.  The three best performing sectors were Consumer Discretionary (XLY), Industrials (XLI) and Financials (XLF), while the safety trade – Utilities (XLU), Healthcare (XLV) and Consumer Staples (XLP) - were relative underperformers.  All nine sectors were positive on the day. 


The two stocks causing the underperformance of the Consumer Staples (XLP) yesterday were CVS down 20% and WFMI down 15%.  CVS announced the loss of $3.7B in PBM contracts and disclosed that antitrust regulators were probing some business practices.  Also, the margin guidance for the PBM business in 2010 appeared to be disappointing.  WFMI was taken out behind the wood shed issuing below-consensus 2010 EPS guidance. 


Today, the set up for the S&P 500 is: TRADE (1,064) and TREND is positive (1,029).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 6 of 9 sectors are positive from the TRADE duration.  Consumer Staples is the only sector positive on both durations and the Financials broke TREND. 


The Research Edge Quant models have 1% upside and 3% downside in the S&P 500.  At the time of writing the major market futures are poised to open down. 


The Research Edge MACRO Team.


US STRATEGY – For Your Eyes Only - S P500

US STRATEGY – For Your Eyes Only - s pperf





November 6, 2009


Some interesting call-outs from Sales Day, but some notables in the athlete endorsement world probably slipped through the cracks for most people. Good for UA all around. Adidas slight positive.





Two interesting call-outs yesterday that had nothing whatsoever to do with Same Store Sales – but with athlete endorsements.


  • Adidas dropped its University of Central Florida sponsorship after Marcus Jordan wore his Dad’s brand of choice (i.e. Nike’s Brand Jordan) on the floor of a recent game. The deal guarantees all student-athletes will wear Adidas unless the athlete can't wear that specific shoe because of medical reasons and a custom shoe can't be made. UCF Officials claim that they had obtained an exemption for Jordan due to his lineage, but Adidas claims that they never agreed to such a request.  This really smells more to me like Adidas wanted to get out of this deal, and found a good reason to walk. Adidas ’10 hinges on more cost cuts – and they need every penny they can get.


Even though Marcus is only a shadow of his father as it relates to raw ability, they share brand loyalty. Remember when Michael draped an American flag over him to avoid being seen in a Reebok logo on the podium of the 1992 Olympics?




  • Under Armour endorsed Georges St-Pierre, and subsequently broadened its reach into the world of Mixed Martial Arts (MMA). The irony is that while MMA athletes don’t wear shoes and typically sport little more than Speedo-like shorts, the company is looking to St-Pierre to serve as the face of Under Armour’s Underwear as well as it’s Recharge suit. Why do I like this? It definitely reinforces UA’s hard-core image by stepping into the fastest growing spectator sport in the US. Nike won’t touch this area, because they can’t enhance the athlete’s performance and have better ROI opportunity elsewhere. But this works for UA. Also, I like the dollars. The math of endorsing a top MMA athlete vs. football, baseball, or even a below-average hoopster is pretty much a no-brainer.







  • K-Swiss is looking to grow its recently acquired Palladium brand and early results are positive. Interestingly, management looks to Converse (specifically All-Stars) as a model for which to emulate. The Palladium boot/shoe is actually a very simple product, with its iconic styling defined by its chunky rubber sole. Given that the sole essentially defines the brand (like the Converse All-Star), the main difference between all styles is the color, material, and height of the upper. As a result of this simplicity, management believes over time Palladium should be one of the more profitable products in the company’s portfolio.


  • In an effort to boost PR and generate traffic, Bebe formed a partnership with the Kardashian sisters to develop and design an apparel line. The reality TV stars will produce one line per season, comprising about 12-15 styles. The first merchandise produced under the collaboration will arrive in the Spring 2010. We just hope the “star power” lasts long enough for the first line to hit the floor!


  • After a strong start to October, aided by easing comparisons and a favorable weather backdrop, most retailers cited softening trends as the month progressed. Weeks four and five were consistently called out as having more challenging results. Despite the slowing trend, the tight inventories and early strength in seasonal merchandise sales still managed to drive earnings higher for a handful of companies.





-Congress Passes Tax Aid Bill - Congress sent a bill to President Obama’s desk on Thursday that would provide millions of dollars in tax refunds to retailers and manufacturers, as well as additional aid to millions of unemployed workers. The House passed the bill 403 to 12 after the Senate passed the measure on a vote of 98 to 0 Wednesday night. Obama is expected to quickly sign the legislation. Retail trade associations pressed for an expansion of the so-called net operating loss carryback, which allows large companies to carry their losses back two years and apply for refunds on taxable profits. The new bill will now allow businesses that had operating losses in 2008 or 2009 to seek refunds for taxes paid on profits over the past five years. Under the economic stimulus bill enacted earlier this year, the net operating loss carryback was extended from two to five years for small businesses with gross receipts of $15 million or less, from 2008. Under the new bill, small businesses that already elected to carry back in 2008 can also elect to carry back losses from 2009. <>


-M&A Companies Hunt for Beauty Targets - As the beauty sector begins to shrug off the effects of the recession, it is emerging flush with dealmaking activity. While merger-and-acquisition activity percolates, strategic buyers are coming to the fore. Beauty brands strong in alternative channels, such as television shopping or specialty retailing, are considered to be among prime candidates for takeover, as are natural or eco-friendly brands, experts agree. What’s more, fragrance licenses are being signed and changing hands at an ever-faster rate. <>


-China’s nonwovens and technical textile industry bounces back - Industry adjustments, government action and product innovation kept China’s textile industry solvent in -the first half of 2009, in spite of a decline in exports due to the global economic crisis. While the outlook for China’s textile industry for all of 2009 is not a cause for wholesale optimism, China Nonwovens & Industrial Textiles Association (CNITA) has identified four types of textile enterprises that have fared well, providing a measure of hope during an uncertain economy. Entering 2009, China’s macroeconomy showed some improvement, including an expansion in the scale of loans and an increase in the purchasing managers’ index (PMI). The Chinese government increased the ratio of tax refunds on exported textiles and apparel by three times and introduced a series of structural adjustments and revitalization plans for textile industries. These policies have stimulated China’s textile economy, which at midyear appeared to be bouncing back. <>


-FUBU Returning to U.S. - FUBU, an original player in hip-hop streetwear, is aiming for a comeback. Starting in fall 2010, founder Daymond John will reintroduce the brand, which exited the U.S. market about five years ago amid increased competition and a decline in popularity. John is hoping the convergence of surf-skate and urban fashion trends will result in a renewal of the label for a larger audience. FUBU will seek to appeal to a younger, more diverse crowd than the original line with what John described as a “Carhartt-meets-Abercrombie & Fitch style,” and average price points of $65. It will be targeted to specialty stores such as City Blue, Trends, Jimmy Jazz and S&D. The bulk of the first collection will be men’s wear with a smattering of women’s and some swimwear.  <>


-Consumers will spend 18% less online in Q4 than a year ago, study predicts - Shoppers will spend an average of $281 the fourth quarter this year, a 18% decrease compared to the same period last year and a 24% increase compared to Q3, a new report finds. The report, conducted by research and consulting firm Javelin Strategy & Research and commissioned by eBillme, a payments service that allows consumers to pay with funds in the bank, polled 1,200 consumers to predict online spending for the quarter.  <>


-Kimberley Process Passes on Action Against Zimbabwe - The future of the Kimberley Process and the global image of the diamond industry hung in the balance after the organization’s annual meeting ended Thursday in the Namibian capital of Windhoek without any decisive action against Zimbabwe for alleged gross human rights abuses of diamond panners and for using the profits from diamond sales to prop up Robert Mugabe’s oppressive regime. The southern African nation, bordered by South Africa, Zambia and Mozambique, was high on the agenda of the Kimberley Process, the international regulatory body formed in 2002 as an initiative between governments, industry and civilian groups to stem the flow of conflict diamonds. <>


-Vanguard Trade Show Readies Debut -The MRket trade show will launch a sibling called Vanguard next season that focuses on the contemporary market. It will be staged adjacent to MRket at the Jacob K. Javits Convention Center in Manhattan from Jan. 18 to 20. Vanguard will bring a new dimension to MRket, which caters mostly to tailored clothing and traditional men’s wear brands. “MRket has grown quickly and retailers and vendors have been asking us to add a section for contemporary and luxury brands,” said Charles Garone, director of sales for the Vanguard show. “The new show will have a completely different look and feel from MRket. There will be partitions between the shows, but traffic will be able to move freely between the two.”  <>


-Juicy Couture to Open Airport Shops - The contemporary brand, which did $600 million in sales last year, plans to target customers when they travel, opening four stores at airports worldwide beginning in December. The first will launch in Miami International Airport’s American Airlines terminal, followed by the British Airways terminal at New York’s John F. Kennedy International Airport in January. In February, a Juicy store will open in the Taiwan TaoYuan International Airport’s Terminal II through Juicy’s Asian distribution partner, Lane Crawford.  <>


-Home Depot builds a new interactive gift card strategy - By letting shoppers personalize gift cards online, including with their own uploaded photos, Home Depot expects to increase the rate of card redemption and drive more incremental sales both online and in stores, says Michael Homiak, director of gift card and incentive programs. “When people use our gift cards, they tend to spend more,” he says. Home Depot recently launched a new online gift card program with CashStar, which provides hosted web technology that lets gift card buyers choose from several card images or design their own card with uploaded images and text. <>


-Izod to Become IndyCar's Title Sposor - The IndyCar Series, whose drivers include Danica Patrick and reigning champion Dario Franchitti, said today that the apparel brand Izod agreed to become the series' title sponsor in hopes of widening the sport's popularity. Izod, a division of clothing maker Phillips-Van Heusen Corp., said it signed a "multimillion-dollar" deal covering at least six years with plans to increase the media and Internet promotional efforts of the newly named Izod IndyCar Series. <>





BBY: Bradbury Anderson, Vice Chairman, sold 31,000 shares after exercising options to buy 31,000 shares for a net gain of $248k.


RL: Hubert Joly, Director, purchased 2,000 shares for a total of $152k.


VFC: George Fellows, Director, sold 4,800 shares after exercising options to buy 4,800 shares for a net gain of $218k.


NFLX: Reed Hastings, CEO, sold 10,000 shares for a total of $525k.


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The Macau Metro Monitor. November 6th, 2009.




The numbers released as part of LVS’ draft IPO prospectus filed with the Hong Kong stock exchange show that Sands China Ltd is in “great shape”.  DM gives a few good points from the prospectus.

  • Macau’s gaming market is the biggest and is getting bigger every day
    • Venetian Macau Limited and Sands China Limited dominate the market in terms of earnings
  • LVS is the most diversified of Macau’s concessionaires, therefore it is well-placed for growth
    • There is room for improvement in many areas of the company’s business – MICE, for instance – and in some cases the improvement seems to be underway.  DM asks, “if the company can do US$228 million a quarter with only one piston firing, imagine what it can do when the rest join in
  • Its non-core assets are “incredible”.  Disposing of these could change everything


In terms of the small print, DM flags the following:

  • The line items in the prospectus on risk should be taken very seriously, especially the section about lawsuits against the company.  Some of the cases are more trivial than others but cases regarding the suspension of Lots 5&6 and the CotaiJets concession could meaningfully impact the company
  • Sands China Limited is operating within the domain of the Macau government and a regulatory environment different from anywhere else in the world.
    • The company has invested US$1.7 billion and still has not secured a land concession
    • Regarding the sub-concession agreement signed with Galaxy, the situation could swiftly change for the worse if the Chief Executive were to grant further sub-concessions.





Under the leadership of the president of MGM Grand Paradise Ltd, Grant Bowie, MGM Grand Macau has markedly improved its performance over the summer.  EBITDA has gone up sharply, from around US$25 million in Q2 to US$75 million in Q3.  Jim Murren’s comments on the conference call reflect his satisfaction with how the business is developing and, in particular, his satisfaction with Grant Bowie’s impact on operations. 





Gaming revenues for October came in at MOP12.7 billion, +42% y-o-y and +18% m-o-m.  However, Macau gaming stocks are still below where they were in September.  A strong month was always imminent after the surge of Golden Week.  SJM was surely helped by the celebrations bringing in mainlanders, who love the Lisboa, and the opening of L’Arc in September.  Its marketshare went up from 26% in September to nearly 31% in October, resulting in MOP3.89 billion in revenues.  LVS gained from 20% to 24%, with revenues at MOP3.05 billion.  November shouldn’t be as strong, according to DM, but the traffic in the casinos does not indicate a bad month, either. 





The Statistics and Census Service indicated yesterday that commercial flight movements at the Macau International Airport for the first nine months of the year fell by 23% y-o-y to 27,813.  Helicopter flights between Macau and Hong Kong also fell by 9% y-o-y to 11, 679 in the same period, whereas those between Macau and the mainland increased by 20% to 2,454.  In the nine months through September, passenger transport by sea between Macau and Hong Kong rose by 29% y-o-y to 82,341 ferry trips and totaled 15,928 between Macau and Mainland China, up by 2% compared with the first nine months of 2008.





Hengqin island, at three times the size of Macau, could add significantly to the tourist attractions in the region, according to the Asia Times.  LVS expressed interest in investing in a resort complex on the island as early as three years ago; the development potential of the island has long been recognized.  The most recent development proposal envisages a family-orientated leisure and resort center for the southern part of the island, and the new University of Macau campus in the east.


Official projections show Hengqin’s current population of 4,000 growing to 200,000 by 2020 and per capita GDP growing to US$29,000 at that time from US$1,200 today.  Chinese officials have lent their support to the project.  The ambitious plan amounts to a new model designed to bring out the best in Guangdong, Macau, and Hong Kong.  


With economic integration comes geographical integration – talks of allowing visa-free access to Hengqin for visitors from Macau and Hong Kong (and for foreigners) shows the direction of thought officials are assuming in their plans for Hengqin.  Through infrastructure (HK-Macau-Zhuhai bridge) and economic integration, there is no shortage of imagination on how to make full use of the “one country, two systems” policy.


“You have a nasty habit of surviving.”
-Kamal Kahn
As far as we know, ex-Galleon employee, Roomy Kahn is not related to the wealthy Afghan prince from Octopussy. That said, there seems to be plenty of metaphors that apply to James Bond spy films in the latest hedge fund round of arrests. The man with the smoking Galleon gun called himself Octopussy.
Ok. So. We know some of these hedgies are really smart, but…
1.      No Man makes up his own nickname

2.      Octopussy is a woman

I couldn’t make this up if I tried. The way by which certain people in this business sought out inside information is both pathetic and sad altogether. We need these people to just strap on a Raj-green sweater vest and some cuffs and go on their merry way to the Big House. It’s time for these Goldfingers to fully admit what it is that they do, leave the US Financial System, and hand over the assets to those fiduciaries who have a legitimate investment process.
Whether it be Madoff, or Stanford, or now Octopussy… for the Burning Buck, it’s all the same. Not only is American Finance land locked with the most politicized monetary policy we have ever seen, the Asset Management side of the business is facing a Credibility Crisis of generational proportions. In the age of YouTube and real-time data feeds, what do you think the Chinese think when they watch these almost fictional missions of espionage and deceit?
As the Credibility Crisis mounts, the Buck continues to Burn. Here are the three main drivers of the US Dollar hitting 2-week lows this morning:
1.      Fed Balance Sheet – after dropping last week, it went straight back up this week to $2.17T (T, as in TRILLION)

2.      G20 Meetings – they’ll play a little golf in Scotland this weekend; Monday’s news-flow will be anti-US Dollar

3.      Octopussy – re-reruns of the 1983 flick will be playing on a cable channel near you this weekend; starring General Orlov Hedgie

As Octopussy fans will remember, the Soviet renegade (Steven Berkoff) was the bag man for Kamal Khan. Russian style geo-political power is making a comeback these days. If you didn’t know that – now you know. It’s one of those unintended consequences of our Fed Heads not getting out of Washington much. The Russians get paid in inflated petrodollars, fyi…
Now that Russia’s stock market is leading the majors of the world for the YTD at +115% (including another +0.44% gain this morning in early European trading), Putin Power is looking to raise some debt. This is big. Understand that the Russians haven’t issued government debt since Pierce Brosnan played Bond in “Tomorrow Never Dies”, circa 97-98’. Remember Russia’s default? The guys at LTCM do. These Russian financial instruments “have a nasty habit of surviving!”
Whether it be Middle Eastern “Sukuk” oriented bond deals or the American LBO train finding her rails on Burlington Northern associated deal speculation again, it’s all born out of one and the same. Government’s have a Greenspan mandate to issue moneys from the heavens. This debtor addiction has indeed gone global.
Octopussy (when Bond was in traction): “I wish you weren’t in such a weakened condition.”
As long as the self perceived heroes of our governments can release themselves from the traction associated with massive debts and passionately kiss Octopussy, what does it matter folks? This is out of our control at this point. This movie is for real.
For those who are telling you that the US Dollar has stabilized, please get them a movie clip of the Slow Moving Train Wreck that has become our currency chart since Nixon abandoned the Gold Standard in 1971. The US Dollar is trading down for the 4th week out of the last five. Since March, its down -16%. That’s a crash.
I know it’s becoming consensus, but so is Bond getting the girl. “I trust that you can handle this contraption” of a dollar DOWN = everything priced in dollars UP correlation. It won’t last forever, but for now you are still getting paid by this “From Russia, With Love.”
Ahead of the employment report, I have done a lot of nothing.  My immediate term support/resistance lines for the SP500 are now 1029 and 1076, respectively.
Have a great weekend. 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 on 10/20. TRADE and TREND bullish.

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.   

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.



XLI – SPDR Industrials Industrials shot up +1.1% on 11/3 because of a monster Berkshire bid. That’s now in the price of XLI. We’ll short expectations for V-shaped recovery. TRADE bullish, TREND bullish.

EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. TRADE and TREND bullish.  

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.

UUP – PowerShares US Dollar We re-shorted the US Dollar on strength on 10/20. There continues to be 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.

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.


Beneath the messy results, the quarter was better than we expected. 2010 guidance looks reasonable.



IGT reported $515MM of revenues and normalized adjusted EPS of $0.19, beating the Street and our expectations.  Beneath the mess of deffered revenue and one-time charges, we think that the quarter was actually pretty good.  Furthermore, visibility on 2010 has improved.  While near term growth is still not in the cards, we like the long-term outlook for the sector.  The opening of new gaming jurisdictions, normalized replacements, and the leaner meaner IGT, could all combine to double EPS for IGT in 3-4 years.


Despite not being able to recognize revenues on 2,000 units shipped to North America, IGT reported much better than expected product revenues.

  • Replacement sales were surprisingly strong, since the September quarter is usually a seasonally slower quarter.  It doesn't appear that sequential replacements were down very much at all.  IGT's share of replacements also increased materially, hitting or exceeding 40% for the first time in over a year.
  • 2,300 new and expansion shipments also implies that IGT got over 60% ship share.
    • We estimate that most of the CityCenter units that were shipped in the quarter were IGT's (~800)
  • ASP's were materially higher than our estimate due to the higher mix of MLD's

International product sales were mostly in line with our expectations.  The FX headwind should reverse itself in FY2010, and therefore ASP's should appear higher.


Gaming operations revenues were a little below our expectations while margins were better due to lower D&A charges given that a higher percentage of IGT's install base is fully depreciated



Other thoughts:

  • The Walker Digital charge off should come as no surprise since the pre-paid poker play at Station's was basically a complete failure
  • We continue to be impressed with Patty and her assurance of focusing on running a lean and ROI focused organization.  For those of you who have followed this space as long as we have, you know that IGT has never been know for being "lean",  "efficient", or "ROI-focused"
  • If IGT can really move to a single platform, that could mean huge capital expenditure savings and higher ROI for it's gaming operations business. In that past they have replaced 20k participation units per year without recycling or redeploying those units given the numerous platforms at IGT


Going forward:

  • Deferred product sales should provide a nice cushion of roughly $4MM for just NA new unit sales and provide a very nice bump in the $20MM range for 1Q2010 international box sales
  • We think management guidance of $0.77-$0.87 is reasonable.  Our revised estimate is $0.83 after factoring in the $0.06 non-cash hit to the P&L from the accounting change related to the convertible note.

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