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MGAM F1Q2010 CONF CALL

MGAM F1Q2010 CONF CALL

 

While we don't closely follow MGAM, we thought the call may be of interest for other suppliers.  MGAM primarily operates in Class II / VLT markets and derives most of its earnings from leasing games to operators in Oklahoma, New York, Alabama, Washington, California and Mexico.

 

Highlights from the Release

  • "In addition to the impact from continued year-over-year reductions in consumer discretionary spending, the gaming operations revenue decline is primarily attributable to: 1) an approximate $1.4 million reduction related to the sale to Oklahoma customers of approximately 551 games subsequent to the fiscal 2009 first quarter; 2) the previously disclosed temporary removal of units at WinStar World Casino for a portion of the fiscal 2010 first quarter to allow for the redevelopment of older areas of the facility; and, 3) lower win per unit and blended revenue share from placements at WinStar World Casino resulting from the facility’s significant slot floor expansion completed subsequent to the fiscal 2009 first quarter."
  • Update on Alabama Charity Bingo Market:
    • "Three of the four facilities in Alabama which have installed charitable bingo units provided by Multimedia Games, as well as other game manufacturers, have recently voluntarily ceased operations for a yet to be determined amount of time, following an unsuccessful attempt by the Governor’s Task Force on Illegal Gambling to raid certain of those facilities."
    • "On January 29, 2010, the Governor’s Task Force attempted a raid on two of the facilities in Alabama where Multimedia Games has charitable bingo units installed. The operator of one of the facilities obtained a temporary restraining order that stopped the raid on its facility. The Governor’s Task Force promptly filed an emergency motion with the Alabama Supreme Court seeking to vacate the temporary restraining order."
    • "On February 4, 2010, the Alabama Supreme Court issued a ruling that vacated the temporary restraining order. The Alabama State Legislature is currently reviewing proposed legislation in the form of both a general bill and a constitutional amendment that are aimed at resolving the need for judicial intervention. The legislative or judicial outcomes are uncertain. If this legislation is not timely passed, the facilities of Multimedia Games’ Alabama customers could remain closed for an undetermined period of time."

CONF CALL

  • Mississippi license granted in December.  Expect to make placements in the 3rd Q of the year
  • Currently having application reviewed in LA and hope to get approval there shortly
  • Seeing an increased interest in Washington State, shipped Class III there
  • Alabama - cannot determine the ultimate financial impact of the facility closures. If the facilities remain closed they will suffer a loss of cash flow from those facilities and may need to take a write down of their net exposure to that market
    • IGT will likely have similar impact - except they have a lot more exposure there
  • Oklahoma market (70% of the 4Q09 results) because of dilution of net win per unit per day due to lower participation rates and some units at Winstar being temporarily taken off the floor
  • NY lottery business continues to grow modestly. They are preparing for the Acqueduct expansion

Q&A

  • For October approximately 400 games where out of commission at Winstar (due to renovation) and in March about 200 will be out of commission.  The games are Class II games and some of their better performing game. At the end of the quarter all 2.4k games at Winstar were operational
    • Have a higher revenue share of the floor in the older facility (Winstar), and as the facility gets renovated play spreads to some of the newer areas, so that impacts them to some extent. Although new entertainment options being opened should expand visitation and benefit everyone
  • Games operations install base: 5403 in Mexico, 2400 games in Alabama, most of the rest are in Oklahoma
    • Had 1100 units at Victoryland that were removed so have about 1300 left in Alabama
  • Will likely need to reduce their R/C capacity in return for covenant relief if they get close to the covenant levels due to the closure of certain facilities in Alabama ($60MM Min TTM EBITDA Covenant)
  • Timing of New York? Operating leverage in that market for them
    • Don't know about the timing, its 6 months after MOU signage- but who knows
    • NY is profitable for them, and 90% of the new revenues from Acqueduct would flow to the bottom line
    • Capex is $2.5MM for equipment plus labor
  • Washington was a market where MGAM used to have a great presence but then took their eye off of that market and lost share.  However, now they are gaining share again.
  • Lost 530 units at River Spirit in Tulsa facility (net of the games they lost from ops because they were purchased)

R3: PSS: Content Upgrade Underway

R3: REQUIRED RETAIL READING

February 9, 2009

 

If we take a step back and look at yesterday’s licensing agreement between Collective Brands and Lucasfilms (Star Wars), we see that this marks the latest in a series of announcements that are likely to be key drivers of improved content at PSS – a key tenet of our thesis. PSS remains one of our top long ideas.

 

 

TODAY’S CALL OUT

 

If we take a step back and look at yesterday’s licensing agreement between Collective Brands and Lucasfilms (Star Wars), we see that this marks the latest in a series of announcements that are likely to be key drivers of improved content at PSS – a key tenet of our thesis. While any brand and/or merchandising upgrade won’t necessarily translate into an immediate sales benefit, we do believe that enhanced content will 1) differentiate Payless and further separate it from the low priced commodity footwear business, 2) help to minimize promotional activity, as recognizable brands tend to command higher like for like pricing, and 3) allow Payless to become a destination for key exclusive brands, which over time should drive traffic. As the largest seller of footwear in the U.S. (by pairage), the opportunity to develop, own, and license exclusive content should continue to be a key driver of the Payless story for years to come.

 

Aside from the Lucafilms tie-in,  Payless announced in January the addition of Above the Rim (Reebok’s dormant basketball line) to the Collective Licensing portfolio. We suspect this gives PSS multiple distribution angles for the brand. Is it possible that we see the Above the Rim brand at Payless stateside and as a licensed brand in basketball-frenzied China?  Why not?  Then, a few weeks ago came the soft launch of the new Champion Fitness line (think knock-offs of Shape-Ups, EasyTones, and FitFlops). At roughly 1/3 of the price of the leading branded competitors and with EasyTones currently out of stock until March/April,  this offering is poised for a strong start. Impressively, management already tested the shoes back in Spring ’09, further validating the prospects for the category.  Yes, they actually test product and really work to understand the their customer. Importantly, the fitness line ranges in price from $24.99-$39.99, well above PSS’s average $17-$18 ASP.

 

Shifting to the revitalization of Keds, we note a series of high profile collaborations. First, Keds teamed up with ultra fashionable retailer/wholesaler Opening Ceremony to create a limited offering of faux animal fur shoes (Zebra & Leopard). Just yesterday, Keds announced a collaboration with women’s sportswear line Alice & Olivia (Payless already collaborates here as well) to produce a limited offering of sequin covered slip-ons for Spring ‘10.  And finally, rumor has it that Keds and The Gap are teaming up to offer a line designed by Patrick Robinson for the Summer. We now wonder if 2010 will finally be the year of the Keds, especially now that Mischa Barton has faded away?

 

Another interesting aspect of the Lucasfilms/PSS partnership is the announcement that PSS is planning to distribute the Star Wars footwear through both the Payless and Stride Rite channels.  Pricing is expected to be $15-$20 for the Payless offering and $35-$55 via Stride Rite.  This plays right in-line with management’s stated goal at Stride Rite to both expand beyond infants to youth as well as drive profit improvement, which has proven to be a challenge. Content is king, especially in children’s footwear, and we believe this is a major upgrade for both distribution channels.

 

While we don’t want to get ahead of ourselves by all of a sudden making product calls, we do believe it’s worth noting that traffic compares ease substantially over the next 3-quarters.  Any boost in average ticket against easing traffic, could ultimately drive upside to our current above-consensus estimates.  We are currently looking for a  4.8% increase in topline, based on a 4% increase in same store sales and ~9% growth in wholesale and EPS of $2.10 in FY10 – 30% above consensus. With shares trading at $19, PSS remains one of our top long ideas.

 

R3: PSS: Content Upgrade Underway - PSS CompTrends 2 10

 

R3: PSS: Content Upgrade Underway - PSSChmpFit Shoes Campaign 2 10

 

R3: PSS: Content Upgrade Underway - PSSChmpFit Shoes 2 10

 

Casey Flavin & Eric Levine

 

 

LEVINE’S LOW DOWN 

  • Burberry continues to push the technological envelope, this time with an announcement that it will be streaming its Autumn/Winter runway show in London live in 3D. The 3D broadcast will screened in real time at local screening venues in Tokyo, Paris, Dubai, and New York. Unfortunately the average Burberry fan will only see the show in two dimensions, although it will be streamed live and revealed to the entire world at the same time.
  • In another take on technology and luxury, LVMH has been developing prototype handbags that incorporate HERM (heart rate and emotion monitors) in the form of jewelry. These electronic devices can then be attached to a consumer’s handbag which in turn transmit location and “heartbeat” via Bluetooth/WiFi to a smartphone. The owner is then able to track movement and “journey’s” taken with the bag, which then become the backbone of a broader Louis Vuitton social network.
  • As the quest to revitalize the Keds brand continues, a series of high profile collaborations have been announced. First, Keds teamed up with ultra fashionable retailer/wholesaler Opening Ceremony to create a limited offering of faux animal fur shoes (zebra & leopard). Now Keds announced a collaboration with women’s sportswear line Alice & Olivia (Payless already collaborates here as well) to produce a limited offering of sequin covered slip-ons. And finally, rumor has it that Keds and The Gap are teaming up to offer a line designed by Patrick Robinson for the Summer. We now wonder if 2010 will finally be the year of the Ked now that Mischa Barton has faded away?
  • Just 6 days after highlighting that it will aggressively grow its store count in 2010, Joe’s Jeans announced they will increasingly take control of its distribution by opening 9 outlet stores in Simon Premium Outlet Centers across the country. The move will give the company a total store count of 15, with more full-priced stores likely before year-end. On the recent earnings call, CEO Marc Crossman noted that comps at its existing retail locations were up 40%! While the sustainability of this performance is clearly unachievable, on the surface it appears to be the right move to accelerate both top-line and margin expansion for the CA-based brand.

 

MORNING NEWS  (and Hedgeye Retail’s 2 Cents)

 

American Eagle Weighs M+O Future - American Eagle Outfitters Inc. may be preparing to close its Martin + Osa stores, which the teen retailer began operating three years ago to broaden its appeal to adults. The decision may come as soon as next month, when American Eagle posts fourth-quarter results, a spokeswoman said on Monday. Martin + Osa is depressing American Eagle's bottom line as the concept stores, meant to appeal to 28- to 40-year-olds, lost its president late last year and American Eagle Chief Executive Jim O'Donnell was a bit non-committal about the stores' future at a recent industry gathering.  <wsj.com>

Hedgeye’s 2 Cents: This move can’t come soon enough.  Not news though. Nor is it new to AE. Remember many moons ago when it closed its Canadian ops after years of pain? Stick to the core, guys…

 

Rue La La appoints an industry veteran to head up its travel division - Members-only web retailer Rue La La has appointed travel industry veteran and entrepreneur Marka Jenkins Waechter general manager of its experiences division. She will be responsible for expanding Rue La La's partnerships with luxury travel providers. Most recently, Jenkins Waechter provided business management and strategic planning consulting services to companies and non-profits. She was brought in last year by Rue La La to help shape its travel and experiences strategy. Before that, Jenkins Waechter was CEO of Seattle-based Metropolitan Travel, which provided corporate travel services to companies including Amazon.com, Nordstrom and Starbucks. Metropolitan Travel was acquired by travel booking web site Expedia in 2002. While at Metropolitan, Jenkins Waechter was also co-founder and CEO of Highwire, an online corporate travel software company. Highwire was sold to Cendant Corp., now Travelport, in 2001. <internetretailer.com>

Hedgeye’s 2 Cents: Rue La La needs to invest in these non-apparel parts of its business – simply because the tightly allocated invite-only apparel sales model is simply not scalable.

 

Gaiam to Make Reebok Fitness DVDs and Kits - Reebok inked a multi-year licensing agreement with Gaiam, Inc. to launch a new line of Reebok DVDs, fitness accessories, and workout kits.  The Reebok branded fitness DVDs are scheduled to launch in March 2010, with accessories following in summer and fall of 2010. Gaiam and Reebok will produce a series of Reebok branded DVDs to be released throughout the duration of the multi-year agreement. Two new programs, Cardio Tone and Boot Camp, will launch in March 2010, and will be available wherever fitness DVDs are sold. The fitness content of the DVDs was developed by Reebok and Reebok Global Instructors Sara Haley and Tanja Djevelic. <sportsonesource.com>

Hedgeye’s 2 Cents: After all the ups and downs (and downs, and downs) for Reebok over the years, it always ends up coming back to fitness (remember that it got its start in the US after the NYC subway strike in 1980 when women wore Reebok’s instead of heels to walk to work). Anything centered around fitness is probably not a bad idea even for the current day Reebok – especially given that it can’t do anything else right.

 

Ariat Expands Into Apparel - Ariat International is expanding its repertoire with a collection of denim wear for spring ’10. The Union City, N.J.-based company, known for its equestrian and Western footwear, will debut Ariat Denim, focusing on performance riding jeans for men and women designed with such features as waistbands that don’t gap. They are also made to transition to all-around city wear. Included in the offering are three styles each for women and men, with the women’s retailing at $65 and $70, and men’s at $55 and $60. The jeans are set to hit Western specialty stores this month. <wwd.com>

Hedgeye’s 2 Cents: Watch out Ralph! Well, not really… But interesting nonetheless. I’ll keep an eye on this one, as it has a strong name in a defendable part of the footwear market.

 

New Tariffs Cutting Into Domestic Industry - It’s been more than a month since Congress let legislation expire that suspended duties on millions of dollars worth of certain textiles, apparel components and footwear, and the industry is feeling the pain. Yarn spinners, fabric firms, footwear brands and retailers have had to fork over tens of thousands of dollars in duties since Jan. 1, which could potentially lead to price increases or the unavailability of some styles. There has been no signal yet from the House or Senate that it will act on renewing the temporary duty breaks, or if the tariffs will be reimbursed retroactively, which has many executives nervous about the fallout from rising production costs. Lobbyists have said lawmakers could potentially act on a bill by the end of March. The House introduced a miscellaneous tariff bill in late December that would renew the expiring tariff suspension for three years on more than 600 imported products, but the Senate has not yet introduced a bill. David Trumbull, vice president of international trade at the National Textile Association, said the majority of his 100 members are being affected by the duty increases. <wwd.com>

Hedgeye’s 2 Cents: This is more political noise than anything else. Don’t sweat it.


Faith And Fear

“Fear has its use but cowardice has none.”

-Mahatma Ghandi

 

I sold into yesterday’s intraday US market strength again, primarily because my macro models told me to, but also because the Faith and Fear model of the old boy network in this country is really starting to worry me again. Never forget that these guys created the crisis that they claim to be saving us from.

 

There is absolutely no risk management process associated with having faith at the market’s highs and fear on the lows. The sad truth is that Washington has been fear-mongered into believing that a Fed hike will be the end of us all. As a result, our fine nation’s monetary policy becomes more and more like Japan’s with each passing market downtick.

 

When it comes to the economy, the mantra of both the Bush and Obama administrations has been to use fear as the governing principle behind keeping American savings account rates of return at zero percent. At the same time, there is some kind of backward looking faith that what happened during the most expedited 9-month stock market rally in a generation should be underwritten by a pandering Federal Reserve policy.

 

This isn’t just a Washington thing. This is very much a Wall Street thing. On December 29th, 2009, after the SP500 had rallied +66.7% from its Great Depressionista freak-out lows, I called out two of the most predictable perma bulls who, sadly, have influence over our manic financial media:

 

1.       Bill Miller said “there is a lot of upside left”

2.       Larry Kudlow was calling for a “mini-boom”

 

I titled that morning missive “Frightening Faith”, and that’s really all that was. As I have said many times in the last few years of penning my thoughts, hope is not an investment process. Neither is maintaining zero percent returns on our fixed incomes for an “extended and exceptional” period of time.

 

The good news is that there is one brave American soul who stood up at the last Fed meeting and agreed with me. Kansas City Federal Reserve President, Thomas Hoenig, dissented with He Who Sees No Real-Time Data (Bernanke) saying, “I dissented on the language.”

 

The bad news is that one independent voice isn’t yet strong enough to overcome the conflicted and compromised group-think that puppeteers this nation’s financial system. Sure, there are some fiscal conservatives who understand what a balance sheet is and respect that the cost of capital shouldn’t be zero – but at the whiff of a stock market down move, most of them run for the exits saying that “now is not the time” to tighten the Piggy Banker Spread.

 

The immediate and intermediate term bubbles that we said should pop (Gold, China, etc.) have already popped. The mother of all bubbles that remains isn’t where all of the lemmings are looking this morning. It’s the one that these political cowards live in – the Bubble in US Politics.

 

The best way to measure this bubble is via that Piggy Banker Spread and the bankers at UBS chowed down on it, big time, this morning. They reported almost $1 Billion in profits. The Spread (10-year minus 2-year yields) is +281 basis points wide. That’s only 0.005% away from its widest spread ever!

 

Thankfully, wealthy investors aren’t stupid. They get this. UBS may have made themselves a “B”, but the clients ran for the exits. The UBS Wealth Management division saw quarterly redemptions of $42 Billion, almost doubling from the total client money leaving the building in the quarter prior.

 

President Obama may be having a hard time executing on the Transparency, Accountability, and Trust model of his Presidential campaign, but Americans are obviously voting with their wallets. They have no faith in the current financial system. They fear those who are running it.

 

The SP500, Asian and European Equities, Commodities, and most Foreign Currencies have all recently broken both their immediate and intermediate term TRADE and TREND lines. The market doesn’t lie. It never believed in the US Dollar devaluation trade being a long term fix to begin with. From here on in, we will be held hostage by the Faith and Fear model that these politicians perpetuate.

 

Here are some critical intermediate term lines of resistance to consider, across asset classes, globally, as you manage the volatility and risk politicians around the world are underwriting:

 

1.       SP500 = 1099

2.       Nasdaq = 2193

3.       Shanghai Composite = 3158

4.       Hang Seng Index = 21,709

5.       London’s FTSE = 5360

6.       Germany’s DAX = 5751

7.       WTIC Oil = $77.28/barrel

8.       Gold = $1110/oz

9.       Euro/USD = $1.46

 

Every morning, we have our feet on the floor very early in order to manage the risk these political cowards impose upon our children’s futures. The reason why they don’t give you any transparency on what they see coming is simply that they don’t know.

 

They have never known. Maybe that’s their faith. A faith in the fear of their own incompetence.

 

I raised my cash position to 58% in the Asset Allocation Model yesterday. I sold my SPY (SP500) position and I cut my equity position in Brazil (EWZ) in half. I maintain a zero percent asset allocation to Commodities, and my immediate term support/resistance lines for the SP500 are now 1045 and 1081, respectively.

 

Best of luck out there today,

KM

 

 

LONG ETFS

 

XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.

 

UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

 

EWG - iShares Germany — We added to our position in Germany on 2/4/10 on the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.  


EWZ - iShares Brazil — The long term TAIL of support for Brazil's Bovespa remains intact. We added to our position and bought EWZ on 2/4/10 on a -6.1% drop in the ETF, because the math is telling us to.

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.
 
SHORT ETFS

 

XLP – SPDR Consumer StaplesThe Consumer Staples sector finally broke both our TRADE and TREND lines on 2/8/10. Given how many investors own these stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.

 

EWW – iShares Mexico We do not want to be net long Latin America (Brazil) anymore. Mexico short is a solid compliment to our short position on oil and our concerns about sovereign debt risks.

 

EWJ – iShares Japan We shorted Japan on 2/2/10 after the Nikkei’s up move of +1.6%. Japan's sovereign debt problems make Greece's look benign.

 

UNG – United States Natural Gas Fund Macro DJ (Daryl Jones) and I remain bearish on Commodities. Natural Gas had a healthy price pop on 2/1/10, prompting us to short it. 

 

IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.

 

EWJ - iShares JapanWhile 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.


Daily Trading Ranges

20 Proprietary Risk Ranges

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

MAR Q4 PREVIEW AND “YOUTUBE”

Should be an in-line quarter although we are below the Street for 2010.

 

 

We’re at $0.25 cents of normalized EPS for 4Q09 and $244MM of Adj. EBITDA, which is in line with street for EPS and 2% above on EBITDA.  We are also ahead of mgmt guidance of $0.20-$0.23.  Note that our $0.25 excludes gains on timeshare note sales which should amount to $0.05.

 

However, for 1Q2010 we’re projecting EPS of $0.15 and adjusted EBITDA of $166 million (excluding gains), lower than the Street at $0.18 and $181 million, respectively.  For 2010, our EPS and EBITDA estimates of $0.83 and $841 million compare to Consensus of $0.88 and $856 million, respectively.

 

Below are our assumptions.

 

 

4Q2009:

  • Worldwide (WW) RevPAR down -14% (vs. -13 to -16% guidance)
  • Owned, Leased, Corporate Housing & Other revenues down 9% and margins at 5.1% (inclusive of termination fees) - in –line with guidance
  • Fee revenues down 20% (above mgmt guidance of $310-320MM)
    • Base fees down 12% and incentive fees down 45%
    • Franchise fees down 8.7%
    • Timeshare segment results of $14MM vs. $15MM guidance
    • Net interest income of $28MM

 

1Q2010:

  • WW RevPAR down -8.3%
  • Owned, Leased, Corporate Housing & Other revenues flat and margins at 2% (inclusive of termination fees)
  • Fee revenues down 8.3%
    • Base fees down 8.7% and incentive fees down 20%
    • Franchise fees down 2%
    • Timeshare segment results of $3MM

 

2010:

  • WW RevPAR down -2%
  • Owned, Leased, Corporate Housing & Other revenues flat and margins at 4.3% (inclusive of termination fees)
  • Fee revenues flat
    • Base fees down 1% and incentive fees down 5.4%
    • Franchise fees up 4%
    • Timeshare segment results of $56MM

 

Other stuff:

  • Fx will be less of tailwind than previously expected. At current rate, the Euro is 6% stronger in 1Q2009 (benefiting WW RevPAR by about 1.5 -2%) and only 60bps stronger than in 2Q2009.  In 2H2010 the fx tailwind reverts back into a modest headwind again since the current dollar/ Euro exchange rate of $1.37 is now below the 2H09 average of $1.45.

 

 

“YOUTUBE FROM Q3 RELEASE/CONF CALL

 

Current trends & Outlook: 

  • “We are encouraged by signs of economic recovery in our business.”
  • “We nevertheless expect REVPAR to continue to decline in 2010, albeit modestly, while occupancy levels will likely increase, negotiated room rates for special corporate and group business, not to mention per diem rates for government business, will likely constrain price improvement.”
  • “Pricing will continue to be pressured by a significant amount of price-sensitive, leisure, transient business.”
  • “While supply additions are slowing dramatically, the increase in new hotel supply expected in 2010 will still provide headwinds to near-term improvement in business fundamentals, especially in the upscale segment.”
  • “REVPAR may turn positive sometime during 2010, but probably not early enough or strong enough to report higher REVPAR numbers for the full year.”
  • “The first quarter of 2010 is likely to continue to show meaningful REVPAR declines as any gains in occupancy continue to be more than offset by softness in rates.”
  • “We expect to open 25,000 to 30,000 new rooms in 2010.”
  • “We continue to work with those owners most impacted by the economy, deferring FF&E reserves, relaxing brand standards, and delaying brand initiatives. Our hotels are paying fees and expenses on time and we are not cutting our fees.”
  • “We expect conversions to accelerate in 2010 as lending opens up a bit more and lenders begin to recognize and deal with problem loans.”
  • “Travel departments are quite aggressive and today everyone wants a deal. We have renegotiated from special corporate rates during 2009, lowered other corporate rates, we are selling fewer premium rooms.”
  • “Cancellations and attritions were less of a problem than in the first half of 2009. The last minute in the quarter/for the quarter bookings were relatively few.”
  • “We are beginning to see stabilization as contract sales for one-week intervals modestly exceeded expected levels in the third quarter.”
  • “We would need REVPAR to be positive modestly before we could keep margins in percentage terms, flat.”
  • “I think the optimistic side here is that we will cross over the zero line on occupancy sometime in, hopefully, the first half of 2010, though who knows. And once we've crossed over that line, we will start to have inevitably a little less threat around pricing.”
  • “I think one of the things we're seeing in groups is the cancellations and attrition is less of a problem than it was in the first half of the year. The booking windows are still pretty short, though. The fourth quarter booking pace is down 19% and 2010 is down 12%.”
  • “We have with, at least the Euro and the pound, some hedges that will remain in place through the end of the year and they insulate us. Ultimately, we'll still look forward to FX adjusted REVPAR but the fees in effect are coming in on a constant dollar basis through our P&L. At least with respect to those currencies.”

 

Guidance

  • “While we aren't giving formal guidance for 2010, our fee outlook assumes 2010 worldwide, system-wide REVPAR will be flat to down 5% compared to 2009 levels. Even assuming the bottom of our REVPAR range, our 2010 base and franchise fees should at least stabilize as unit growth offsets the REVPAR decline.”
  • “We are working under the assumption that contract sales in 2010 will be at roughly 2009 levels, which would imply roughly flat timeshare development profits.”
  • “We do expect to target our timeshare business drive at least $75.0 million in net cash flow in 2009 and that least double that in 2010.”
  • We anticipate that Marriott's general and administrative expenses will decline about 20% in 2009 on an adjusted basis but will likely rise a bit in 2010 as we resume investing in our business and our people for the future.

US STRATEGY - NOT GOING AWAY

The news flow on the MACRO front is quiet this week and so is the market.  The S&P 500 finished lower by 0.89% on very light volume.  The sovereign debt concerns are not going away as the issue continues to put pressure on the RISK trade.  The VIX closed up another 1.5% yesterday (22% Year-to-date) and is bullish on TRADE and TREND.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (23.98) and Sell Trade (27.66). 

 

Contagion fears are taking a toll on the Financials (XLF), which was the worst performing sector yesterday closing down 2.0%.  Yesterday our Financials analyst, Josh Steiner pointed out that Banking News reported that Deutsche Bank and Unicredit Group have denied requests from 3 to 4 Greek banks for loans on the repo market.    First it was the CDS market signaling trouble and now the repo market is breaking down.   

 

According to Bloomberg news, ECB Chairman Jean-Claude Trichet has decided to leave a symposium of policy makers in Sydney a day earlier than planned to attend a special EU summit on Thursday to discuss the growing debt problems among EU states. Trouble is brewing!

 

The Financials are also being hit with the Democrats talking regulatory reform with or without Republican cooperation.   The large-cap banks like WFC, BAC, C and JPM were among the notable underperformers.  In contrast, the bulk of the regional banks outperformed, while credit-card names were also under pressure. 

 

While the Materials (XLB) was the second worst performing sector yesterday, not all pockets of the RISK/RECOVERY trade underperformed.  Technology and Consumer Discretionary outperformed the S&P 500 yesterday.   

 

The Technology (XLK) sector outperformed the S&P 500 by 50bps yesterday.  The destruction in the SOX was halted for a day with the index down in line with the market.  Outside of the semis, there were a couple of bright spots in the communications equipment and PC related names.  Yesterday, we shorted AAPL.  We've spent the last week working on an Apple model and we think the Street's assumptions on margins in the upcoming two quarters are too hopeful. Hope is not an investment process. 

 

Yesterday, both the Consumer Staples (XLP) and Consumer Discretionary (XLY) sectors outperformed the S&P 500.  We are now short the Consumer Staples (XLP).   The XLP has finally broken both our TRADE and TREND lines. Given how many investors own these stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.

 

Along with the rally in the homebuilders, the XLY benefited from an earnings beat from HAS +12.7% and better relative performance from the retail group.  The S&P Retail Index declined 0.15%, only declining late in the day.  Within the XLP, CVS and TSN were higher following earnings. 

 

The Dollar index took a breather yesterday declining 0.17%; the Hedgeye Risk Management models have levels for DXY at – buy Trade (79.48) and sell Trade (80.64). 

 

As we look at today’s set up the range for the S&P 500 is 36 points or 1.0% (1,045) downside and 2.4% (1,081) upside.  Equity futures are currently trading above fair value after the markets broke down late in the day yesterday. 

 

Copper rose for a second day in London on speculation that demand may swell on increased imports into China. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.79) and Sell Trade (3.01).

 

In early trading gold is trading higher on the back of a weaker dollar.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,048) and Sell Trade (1,086).

 

Crude oil is trading near $72 in New York before the government data due tomorrow that may show U.S. inventories of diesel and heating oil declined last week. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (70.01) and Sell Trade (73.90).

 

Howard Penney

Managing Director

 

US STRATEGY - NOT GOING AWAY - sp1

 

US STRATEGY - NOT GOING AWAY - usd2

 

US STRATEGY - NOT GOING AWAY - vix3

 

US STRATEGY - NOT GOING AWAY - oil4

 

US STRATEGY - NOT GOING AWAY - gold5

 

US STRATEGY - NOT GOING AWAY - copper6

 


Risk Management Time: SP500 Levels, Refreshed...

On strength this morning, I sold the long position I took in the SP500 on Friday’s weakness. Anytime I can book a gain on the long side of a market that remains in an bearish intermediate term position, I will.

 

In addition to the SP500 having broken my intermediate term TREND line of 1099 (thick red line in the chart below), here are some important risk management factors to consider intraday:

  1. Volatility: VIX remains in a bullish TRADE and TREND position, with newly established intermediate term TREND line support = 22.32
  2. Financials: XLF is the worst performing sector in our SP500 Sector Model today, and remains broken on both TRADE and TREND durations
  3. US Dollar: UUP continues to be in a bullish TRADE and TREND position, showing no signs of backing off after closing up for 3 straight weeks

At 2PM EST the SP500 is trading right in the middle of a new range that I think we will trade in for now (1052-1082). After 4 consecutive weeks of the SP500 closing down on a week-over-week basis, there is plenty of revisionist bearishness to support buy-to-cover rallies back up to what is becoming significant resistance.

 

This is definitely turning into a risk manager’s tape. Be patient, and pick your spots. If the SP500 starts churning here, a lot of weak hands will get frustrated and flushed out.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Risk Management Time: SP500 Levels, Refreshed...  - spkm

 


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