"We continued to see tangible signs of stabilization in our business in the fourth quarter. Attrition and cancellation levels continue to normalize. The 10.6 percent same-store attrition we experienced in the fourth quarter is a significant improvement over 14.1 percent in the fourth quarter of 2008. Our average group room rate booked in 2009 for 2010 has been slightly better than the average room rate actualized in 2009, a sign that travel and convention budgets are potentially beginning to return to historical levels. Additionally, our holiday programs drove incremental business in the fourth quarter and demonstrated that leisure consumer demand is stabilizing."

- Colin V. Reed, chairman and chief executive officer of Gaylord Entertainment


2010 Guidance

  • "As we look towards 2010, we have been encouraged by signs of market stabilization including lower attrition and cancellation rates and solid advance bookings. That said, it is difficult to have total visibility into what remains an unpredictable political and economic environment. We have closely examined our business and the factors that could impact it moving forward and continue to believe that top line demand will likely be flat in 2010, though there is potential during the year for RevPAR growth to enter positive territory. We do expect to see labor and benefit cost increases in 2010, as well as the full impact of our completed union contract at Gaylord National. All of these cost increases will combine to impact profitability. As always, we will remain prudent in how we manage our business including capital expenditures."
  • FY2010:
    • RevPAR -2.0% to 1.0%.
    • Total RevPAR: -1.0% to 2.0%
    • CCF guidance: $210-$226MM
    • Opry and Attractions CCF: $10-$12MM
    • Corporate and Other CCF: Loss of $44-$41MM
    • Total CCF: $176-$197MM

Highlights from the Release

  • "Gross advance group bookings in the fourth quarter of 2009 for all future years was 736,736 room nights, an increase of 18.7 percent when compared to the same period last year. Net of attrition and cancellations, advance bookings in the fourth quarter for all future periods were 453,093 room nights, an increase of 8.7 percent when compared to the same period last year."
  • "Same-store attrition that occurred for groups that traveled in the fourth quarter of 2009 was 10.6 percent of the agreed upon room block compared to 14.1 percent for the same period in 2008 and 9.9 percent in the third quarter of 2009. Same-store in-the-year, for-the-year cancellations in the fourth quarter totaled approximately 6,278 room nights compared to 15,332 in the same period of 2008 and 14,375 in the third quarter of 2009. Same-store in-the-year, for-the-year cancellations for the full year 2009 totaled approximately 116,735 compared to 74,673 in the prior year."
  • "The Gaylord National continued to gain momentum this quarter despite a challenging economy and at times, challenging weather conditions that made travel in and around Washington, D.C. very difficult. We continue to grow our revenue base and improve our operations, which we believe will translate into additional growth in 2010."
  • "Gaylord Entertainment's planned resort and convention hotel in Mesa, Arizona remains in the very early stages of planning, and specific details of the property and budget have not yet been determined. The Company anticipates that any expenditure associated with the project will not have a material financial impact in the near-term."


  • Looking back at 2009, its clear that their business model "worked"
    • Clearly their model was more defensive and predictable than their lodging peers.  Didn't need to keep modifying their guidance throughout the year
  • Contracts that they locked in in prior years, they cancellation fees offset some of the fundamental weakness
  • Deployed $45MM of cost cuts throughout the year
  • Average group room rate booked in 2010 has been slightly better than 2009
  • Given the fragility of the US and broader market, think that it is prudent to assume a conservative and slow market recovery.  Higher health care costs and compensation will also impact margins on a flat revenue base.
  • Not going to move on any "distressed" asset or otherwise, simply because they have liquidity.  Will only consider such opportunities to the extent they enhance their core brand and create shareholder value
  • Some of the 2009 cost reductions where volume related and will come back when occupancies do.  However, other changes like centralized call/reservation center, centralized sourcing, etc are sustainable.  They are continuing to look for more cost savings in their business
  • Heading into 2009 they re-focused their sales people to focus on short term bookings when large group weren't booking.  As they look to 2010, they are encouraged by the improved pace of business. Groups are picking up more banquet and outside of just "room" events. Rate booked in 2009 for 2010 is slightly better than the rate realized in 09. 
  • For 2011 have 36 points of occupancy on the books and almost 29% occupancy for 2012
  • New website launch is targeting to capture a larger portion of direct bookings
  • Produced a 21% increase in ICE admissions from Thanksgiving to NY day.
  • Weather continues to be a factor impacting the National
  • Think that the top line in 2010 will remain flat to slightly up, but costs will be up a little (HC/labor costs). Anticipate that 2010 will be another challenging year.
  • $290.2MM of availability under the R/C
  • Other than maintenance capex they have no significant capex to deploy in 2010, therefore, if they meet their performance expectations they should product significant cash flow


  • For apples to apples need to add back proxy & severance expense to 2009 to compare to 2010 guidance
  • Headcount levels flat for 2010, increases in health care (double digits for everyone), increases in labor costs (merit increase for example), impact from a full year of ratified union agreement at the National
    • So adjusted Corporate and other guidance compares to $38MM 
  • What sub segments of their business are they expecting the most improvement?
    • Seeing more corporate and association group business (although the association business was already on the books). Did $269MM of group revenues in 2009 and have $248.5MM of group already on the books for 2010
    • Seeing more activity on the corporate side
    • Assuming flat spending per delegate though
    • Transient delivery systems are better than what they had 2 years ago, so they are reasonable more optimistic that they will see more traffic
    • Seeing less attrition
    • Pickup for smaller in the year for the year bookings
  • Did the sequential increase from 3Q to 4Q continue into 1Q2010.  Had a strong Oct, decent Nov and a very strong December.  That worries them if they pulled forward from January. However, that didn't happen as they saw a substantial increase in y-o-y net bookings in January
  • Las Vegas? Would like to be in the West Coast at some point in time since their customers want to go to the West Coast.  Getting a study back from meeting planners that will help them decide how much interest there is.  Time is their friend in Vegas.  Consumer appetite for spending isn't getting any better over the next 12 months, and thinks that things will still get worse in Vegas before they get better.
  • National? Future thoughts on where they can get to from a profitability standpoint over the next 4-6 quarters
    • Hotel has a few things going in its favor (customer satisfaction) and if you believe that the federal government will continue to spend more money and that people will continue to visit the nation's capital, the property should continue to experience growth
    • National Harbor destination is also getting better: Condos that were for sale are selling and more retail is opening.
      • National Harbor - really early on in capitalizing of what that destination can mean for them as a destination. Leisure wise they do a lot of entertainment to drive transient opportunities. So Opryland runs at 75% occupancy during the holiday season while the National was in the 30's ... so as ICE ramps this is a big opportunity for them. Same thing for 4th of July - so if they can produce the right events they can do a better job filling in times when Group is weak
    • "Optimistic about the future of this hotel"
    • Maybe in the 4th-5th innings of maturation of this hotel
  • Thoughts on presence in Vegas?  Think that their delivery system is very valuable. They aren't going to stretch their companies balance sheet to full fill short term goals. Won't speculate on how they can do something or who they can do something without stretching the balance sheet
  • Capex in 2010: $50-60MM (mostly maintenance) and includes planning a resort pool at Cactus property
  • Transient vs. Group in 2009: $64.5MM in 2009 for transient expect transient to be 20% or so of the business in 2010
  • Rates for 2011? Are seeing more rate integrity for 2011 & beyond then what they saw in the early stages of the financial crisis
  • All of their hotels increased market share - they are #1 in all their markets
  • Any pressure in Orlando from additional competition?
    • Its generally a competitive market because there are lot of hotels that look like theirs. Had a big supply shock last year and this year have the Peabody, but nothing really after that.  Holding back inventory for future years because they expect things to eventually improve
  • Cancellation and attrition rates for 2010? Budgeting returning to levels consistent with 2008 (so still a little elevated over historical levels but down from peak 2009 levels)
  • Sweet spot for acquisitions size wise?
    • Will let you know when we have one. Any asset that they intend to plug in will fit with their strategy and will be financed in a way that doesn't stretch their balance sheet


MCD reported January same-store sales that came in a little light in the U.S. relative to expectations but outperformed in Europe and APMEA.  MCD’s U.S. comparable store sales declined 0.7%, implying a 60 bp sequential decline in 2-year average trends from December, on a reported basis.  A calendar shift/trading day adjustment by area of the world, ranging from approximately -0.4% to 1.0%.  Even excluding this negative calendar shift impact, 2-year trends slowed somewhat from December. 


Management stated on its 4Q09 earnings call that underlying trends were looking better in January, but that weather had a big negative impact on trends in January.  Specifically, management said, “We don't normally like to talk about weather, but we can't avoid it when you look at the first 14 or 15 days of the month. And the severity of the weather, I think it was impacting us at probably around 3% a day in the sales because whenever we had a weather that was normalized, we saw much better results. And so if anything, I would say that the trends are a little bit better than they were in December.”


Regardless of the weather impact in January, top-line trends continue to slow in the U.S., with the company reporting negative comps for three out of the last four months.  For reference, MCD had not reported consecutive monthly declines since early 2003.  MCD launched the Dollar Menu at breakfast nationally in January and the company is facing an easier comparison in February of +2.8% (relative to +5.4% from January 2009), but as management also pointed out on its last earnings call, it does not expect to see a big improvement in trends until we see a recovery in jobs.  “When you look at trends in the industry and you look at the spending of our consumers and the consumer confidence, even though it's edged up over the last couple of months, with the unemployment where it is, until we start to see job creation and we start to see people get comfortable with the fact that they have a place to go to work and have a steady income, we're not going to see, in my opinion, enormous pickups or a big change relative to the trends in consumer spending.”


MCD reported a 4.3% increase in same-store sales in both Europe and APMEA, which signals an improvement in sequential 2-year average trends in both segments.  In Europe, 2-year average trends improved by 45 bps while APMEA’s number got better by nearly 400 bps from December on a reported basis.  Despite these sequentially better results, MCD still highlighted weakness in Germany and a tough comparison in China.  It will be important to see whether the better trends in January, particularly in APMEA, continue as we trend through 2010.










Howard Penney

Managing Director






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."


  • 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


  • 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)

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R3: PSS: Content Upgrade Underway


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.





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




  • 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.  <>

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, 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. <>

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. <>

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. <>

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. <>

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,






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.


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.


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.




  • 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



  • 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



  • 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.





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.”



  • “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.


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