Position: We are bearish on housing as we get closer to 2Q10 and short TOL. 


Stories like the one in the WSJ yesterday are scary and a reminder that most home builders don’t have a macro process and seemly ignore reality.


From the WSJ - “Spec houses rise as builders bet on buyers before tax credit ends - home builders are ramping up speculative construction to attract last-minute home buyers who want to tap a soon-to-expire tax credit.”


From a MACRO perspective the housing market is going to face headwinds for years, despite the fact that supply of homes have come down during the recession.  We don’t need more new homes and the ones being built should not be done on speculation. 


The MACRO headwinds include:


(1)    Slowing household formation - slowest level in 15 years




(2)    Rising interest rates - Conventional mortgage rates are at 5% right now - right around their all-time low. If rates were to back-up to 6%, a 100 bp move, this would lead to a 10.5% decline in affordability for borrowers, which equates to a comparable drop in home prices.




(3)    The potential number of foreclosed homes is high and rising -




I understand that if you are in the business of selling homes you can’t make money if you are not selling any.  Taking increased risk in this environment only seems to be a losing strategy.  Some of the small builders seem to suggest that “builders lost sales because they didn't have enough houses to satisfy a flurry of demand from buyers looking to take advantage of a federal tax credit for first-time buyers before they expired on Nov. 30.”


The seasonal pattern of home sales suggests that those buying homes will wait until the last few months of the new program in March and April.  The current credit, which offers first-time buyers up to $8,000 and repeat purchasers up to $6,500, applies only to deals signed by April 30 and closed by June 30, 2010.


Fortunately, Pulte Homes Inc and KB Home have a different view of building spec homes in the current environment.  Not surprisingly, the biggest builders got caught with a lot of inventory just as the current downturn started. 

Our bearish stance on housing is expressed by being short TOL.




Howard Penney

Managing Director



Debasing Greenspan Groupthink

Over the course of the last year, Glenn Stevens at the Reserve Bank of Australia has thrown down the gauntlet against Greenspan Groupthink. Rather than choosing to live in fear of his government’s conflicted politics, he has proactively raised interest rates alongside a real-time market recovery.


Many US centric equity market investors live in fear of rate hikes, primarily because there is a cowardice that comes from the top. The Australian citizenry is seeing the rewards born out of confident leadership to put a real rate of return into their hard earned savings accounts.


Rather than wait for a lagging economic indicator like the unemployment rate to rollover (Bernanke), a confident Stevens has raised interest rates 3 times, taking benchmark rate in Australia to 3.75%. In the face of those rate hikes, we saw the January unemployment rate in Australia ROLL OVER!


This morning’s payroll adds in Australia were 3-times higher than consensus expected, and the unemployment rate dropped from 5.5% to 5.3% on a month-over-month basis.


Washington/Greenspan Groupthink is being taught a lesson from China and Australia. I humbly suggest America starts learning. Evolution of thought processes is a critical aspect to long term success, particularly when working within the spheres of a social science like economics.


Well done Sir Stevens. Well done.



Keith R. McCullough
Chief Executive Officer


Debasing Greenspan Groupthink  - aussiu




"In the fourth quarter, leisure travelers responded to aggressive marketing campaigns and special offers and, even adjusting
for easier year-over-year comparisons, business travel showed signs of improvement, particularly in international markets. With
solid cost controls, we translated the stronger-than-expected occupancy to better-than-expected incentive fee revenue.
Demand for timeshare intervals improved modestly from third quarter levels which, combined with a successful note sale and
reductions in investment spending, allowed the timeshare business to generate over $150 million of cash flow after investing
activities for full year 2009.

- J.W. Marriott, Jr., chairman and chief executive officer of Marriott International


Highlights from the Release

  • "We're thrilled to have two new exciting brands, EDITION and the Autograph Collection, opening their first hotels in 2010 with more expected to come. Our global development pipeline totals nearly 100,000 rooms."
  • "Nearly 35 percent of these development pipeline rooms are Marriott, Ritz-Carlton, Renaissance, EDITION or Autograph rooms, of which nearly 75 percent are located outside North America."
    • So 26% of the development pipeline is international full service and new brand brands


  • Corporate demand is picking up
  • December group bookings were ahead of last year
  • January occupancies were improving
  • Group room nights on the books for 2010 are 2% below where they were last year with rates down 3%
  • Expect in the year bookings to improve from this levels
  • Special corporate business could help mix and rates as corporate becomes a higher % of total business
  • Base and franchise fees will improve with RevPAR and unit growth
  • Incentive fees: only 51% was earned from NA properties in 2009. 25% of their portfolio earned fees in 2009, but in NA only 11% of hotels earned incentive fees
  • With relatively few NA hotels earning incentive fees - 40% can from DC and 20% came from NY - 3 other markets plus NY & DC accounted for 80% of NA revenues.  Even if profits increase by 20% in NA, only a few more would generate incentive fees
  • International incentive fees: 30% from EMEA, 30% Asia. ME & Asia incentive fees don't have an owner's priority.
  • Have 130 international hotels in the pipeline and 90 of those are already under construction
  • Focused on conversion opportunities. Up until now they haven't seen a large pick up in conversions. With nearly $40BN of mortgages on hotels coming due in the next 2 years they expect more conversion opportunities.  In 2009 they converted 19 hotels, and their 100,000 room pipeline includes 30% from conversions.
  • Timeshare attributed to 6 cents of better EPS plus 3 cents came from better demand
  • G&A and taxes were 3 cents worse than expected related to guarantee hotel payments
  • Adjusting for comparable periods (adjusted for calendar shifts) RevPAR would have been 1% better
  • Corporate business: comparable room nights were flat in the 4Q and rose in period 13
  • International occupancy increased 4% in December
  • In 1Q2010 expect London and Paris occupancies to increase double digit in the first quarter
  • Group revenues on the books in China are up y-o-y in 1Q2010
  • Korea had positive RevPAR growth due to positive Japanese demand in 4Q09
  • Mexico continues to suffer from lingering H1N1 and crime
  • Costs are likely to rise in 2010 and margins are likely to be under pressure from lower ADRs in 2010, looking for more cost cuts
  • Maintenance fees from unsold units and better securitization market helped them perform better than expected in 4Q09
  • New timeshare inventory spending to be lower than 2009 spending and 100MM lower than cost of goods sold, and therefore net cash flow from timeshare to be $175-200MM in 2010
  • Excluding impact from deferred comp G&A decreased 20% in the Q
  • Actual room openings exceeded estimates due to favorable construction timing
  • 50% of the rooms in their pipeline are under construction and 6% are awaiting conversion
  • Cut overhead dramatically at timeshare
  • Over 50% of their customers pay for their 1 week product in cash, so securitization program will be smaller
  • Assumed $15MM of performance related charges (guarantees) in 2010
  • 378MM shares in 2010
  • Don't expect any net timeshare development spending since they have plenty of inventory
  • New accounting rules would have increased timeshare EBITDA by $75MM
  • Expect debt to decrease by $400-500MM 



  • FX impact in 4Q09 was less than $1MM and don't expect it to be material in 1Q2010. 60-70% hedged for Euro and Pound in 2010
  • Where does occupancy needs to be to see rates rise?
    • Some of what they are seeing is just due to very easy comps from Dec & Jan last year (which were so bad) since no one was traveling
    • In the first stage of ADR improvements - it will be all about mix shift vs. rate increases.  There was a lot of very promotional deals in 2009.  So it will likely take a few quarters of positive occupancy to see the benefits of mix shift on rate.  But real rate increases may not come until 2011
  • Incentive fees?
    • With -2 to 2% RevPAR in 2010, house margins will be under pressure (even at +2%).  So that will put more pressure on incentive fees, offset by international increase in units and higher % mix (without owner's priority). On balance expect incentive fees to be modestly lower than those seen in 2009
  • Want to continue maintaining their investment grade ratings by reducing debt. No assumption of stock buybacks
  • Expect that new opening pace for hotels to continue to decline in 2010 & 2011, too soon to know about 2012 & 2013. Expect transactions on existing hotels to pick up and thereby drive more conversion activity in 2011 & 2012, and perhaps that can offset the decline in new build in NA. Internationally there is still a lot of opportunity to grow. Ballpark # of room openings should remain in this same level
  • Autograph hotels will contribute at the same level as franchise full service
  • Seeing a significant increase in volumes in Jan - occupancy growth is very strong at the high end hotels, because people are no longer "paralyzed" in regards to travel
  • Mix in 2009: Corporate & Special Corporate where 28-29% usually runs higher in normal times, and they are seeing it begin to increase
  • Period 13 (month of Dec): saw that the increase in travel was due to more corporate travel
  • When will MAR start enforcing brand standards?
    • Sometime in 2010, but varies by situation
  • Will see modest hourly wage growth, health care, management wages.  No more reductions for headcount reductions. Plus they will need to start paying bonuses. So they will see more margin pressure in the 2010
  • Capital expenditures: $150-200MM is identified capex,  balance is unidentified - so they can opportunistic btw Mezz/equity/JV, but will probably be back half weighted
  • What is the price difference between highest and lowest paying guests? 2x differential - premium could be 2x better than promotional leisure.  Negotiated corporate is about 50-60% better than most promotional rate.  
    • Obviously these are very skewed numbers that probably don't adjust for seasonality
  • Should sensitivity to RevPAR growth increase as things recover? (yes bc of maintenance were at 22MM per point of RevPAR and when things recover they will have even more sensitivity to 1 point of RevPAR given the increased room base)
  • NY is going to see some supply growth in 2010, but also seeing a return of the business traveler.  Have seen pretty strong occupancy growth already - think that the market will really outperform in 2010.
  • Group usually runs at 40% at MAR full service and is running at 37% now.  Special Corporate & Corporate is running at 28%, in 2007 it was 30%.
  • Timeshare as a % of profits in the future? Unlikely that it will ever get close to % of contribution that is was at the peak

HD: Keep a Trade a Trade

There’s not a boatload of companies anymore in retail that have the kind of setup into the quarter that we see in HD, which can’t be ignored on top of a bullish formation. There’s a trade to be had – but be careful about timing, and ‘Keep a Trade a Trade!’


HD is a name that Keith’s models flag as looking solid on his short-term TRADE duration. Specific levels are as follows…


TRADE = 28.36

TREND = 27.49

TAIL = $25.19


Looking at the financials, let’s keep this simple. HD is going up against a -17% comp, and an 800bp erosion in operating margin last year. Underlying trends have been improving on the margin (looking at 2 and 3-year numbers), and yet the consensus is modeling a flat quarter. Upside is likely.


The SIGMA chart below (as always, call if you need a hand interpreting -- someday I'll figure out a way to simplify it) also shows the disconnect that we saw in 4Q of last year with working capital as it relates to sales. Simply put, the delta between sales and inventories was the worst we saw last year since well before the recession began. Combine that with one of the worst margin quarters in HD history, and it led to the mother of all squeezes on cash flow. We don’t need to bank on better snowblower and rock salt sales to do better than that this go around.


But as noted, Keep a Trade a Trade! After 1Q, you’re gonna need to bank on a housing recovery. If you’re in that camp, then we wish you the best of luck – you’ll need it. Actually, to the extent your process supports a housing recovery, give our Macro team a call. They’ve got plenty of research that should help balance any such view.


Brian McGough


HD: Keep a Trade a Trade - hd1


After going the wrong way for 3 weeks, initial unemployment claims dropped to 440k last week, down 43k from 483k the week prior (revised up 3k). This brings the 4-week rolling average down 1.5k to 468.3k from 469.8k last week. This is an important print as it reverses the negative trend of the last three weeks, and keeps the trajectory in-line with the data trends since March 2009.


As a reminder, our channel shows claims hitting 375-400k between late-February - mid-May, at which point we expect unemployment to begin to move steadily lower. The drop in unemployment from 10.0% to 9.7% this past month suggests we may already be at that point. We consider the rolling claims data the best leading indicator for consumer credit, and this week's data bodes well for consumer finance companies.


Joshua Steiner, CFA






LVS should have a pretty good quarter and we expect them to be fairly bullish about the opening of Marina Bay Sands, the hot streak in Macau, and stabilizing trends in Vegas.



The question is, will it be good enough?  We’re above the Street on most Q4 metrics but LVS may need to beat our numbers and convince the Street to raise 2010 estimates for the stock to go higher.  Whisper expectations are pretty high, and justifiably so. Macau is booming, particularly the VIP side.  January was huge and with the calendar shift of the Chinese New Year into February from January last year, expectations are that February could be an even bigger month.


We generally share that view although we do have some concerns.  First, the tightening by the Chinese government should eventually work its way to the VIP business, which is heavily reliant on liquidity and credit.  While any impact on February will likely be masked by the Chinese New Year impact, March could see a big slowdown. In our 1/26/10 post, “MACAU VIP AND THE MACRO VARIABLES”, we showed that China economic indicators had a material impact on driving VIP business.  Our second concern is with the 20% increase in Mass table supply after Wynn Encore opens later this quarter.  Finally, our sources have indicated that SJM plans to get very aggressive on stealing VIP market share, even at the expense of margins, this year.  This could pressure Macau margins.





We expect LVS to report $320MM of EBITDA on $1.3BN of revenues in 4Q09 compared to consensus of $282MM of EBITDA on $1.235BN of revenues. 


Las Vegas

  • Revenue of $295MM and EBITDA of $98MM
  • Slot handle down 11% y-o-y  with 7% slot win (company implied it would be higher though), table drop up 2.4% y-o-y and 19.5% hold
  • Venetian RevPAR of $163 (down 13%) and Palazzo RevPAR of $169 (down 19%)
  • Operating expenses of $197MM, down 17% y-o-y


  • Sands:  $295MM of net revenue and $77MM of EBITDAR
    • VIP:  RC drop of $6.7BN (11% direct play) and $211MM of win, so an estimated hold % of 3.16%
    • Mass win of $117MM and slot win of $22MM
    • Variable expenses (taxes, gaming premium, commission in excess of contra-revenue cash back already captured in net revenue) of $174MM
    • Fixed expenses and cost of non-gaming revenues of $43MM (flat with 3Q09)
  • Venetian:  $559MM of net revenue and $172MM of EBITDAR
    • VIP: RC drop of $10.2BN (20% direct play) and $313MM of win, so an estimated hold % of 3.07%
    • Mass win of $202MM and slot win of $48MM
    • Variable expenses (taxes, gaming premium, commission in excess of contra-revenue cash back already captured in net revenue) of $284MM
    • Fixed expenses and cost of non-gaming revenues of $103MM
  • Four Seasons:  $83MM of net revenue and $12.4MM of EBITDAR
    • VIP: RC drop of $3.65BN (25% direct play, could be higher though last Q was 50%) and $76MM of win, so an estimated hold % of 2.09%
    • Mass win of $18MM and slot win of $5MM
    • Variable expenses (taxes, gaming premium, commission in excess of contra-revenue cash back already captured in net revenue) of $51.4MM
    • Fixed expenses and cost of non-gaming revenues of $19.5MM

Sands Bethlehem

  • Revenues of $58MM and EBITDA of $9MM
  • Reported gaming revenues of $54MM and total revenues of $58MM
  • Reported state taxes of $29.5MM and $20MM of other operating expenses




Below are January numbers for LVS's Macau & PA properties from our proprietary database



  • Sands:
    • $2.1BN of RC volume, high hold of 3.36% assuming 12% direct play for a VIP revenues of $71MM
    • Mass win of $47MM and slot win of $8MM
  • Venetian:
    • $3.3BN of RC volume, high hold of 3.5% assuming 20% direct play for a VIP revenues of $116MM
    • Mass win of $74MM and slot win of $18MM
  • Four Seasons:
    • $1.16BN of RC volume, high hold of 3.06% assuming 27% direct play for a VIP revenues of $37MM
    • Mass win of $10MM and slot win of $2MM


Sands Bethlehem

  • They added 250 slots in December and reported state gaming revenues were $21.3MM. Slot win per day increased to over $211

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