SP500 Risk Management Levels, Refreshed

Now that the initial round of this Goldman grilling is over with (5 hours and 15 minutes), it’s a good time to look at some legitimate risk management levels. What I heard from these young guns about risk management reinforced a lot about why I think global markets reached the heights that they did in 2007. The alleged smartest guys in the room truly didn’t know what they didn’t know. Birnbaum is really the poster child of this.


At least for the immediate term TRADE, an important top in the SP500 may have been reached on Friday at 1217. Today, we finally broke down through an important immediate term momentum line of support at 1205. Watch for that line to confirm into the close. If it does, the next line of support is the dotted green line in the chart below down at 1188.


Given the negative sentiment that the market has today with this pending Blankfein grilling, and that the line of support at 1188 is meaningful, I have covered our short position again in the SP500. What was support at 1205 is now resistance, which we could easily rally toward in the coming days. The VIX has also broke out above both my immediate and intermediate lines of resistance at 16.81 and 19.12, respectively. We haven’t seen that since late January.



Keith R. McCullough
Chief Executive Officer


SP500 Risk Management Levels, Refreshed - S P





  • “The second quarter is seasonally the weakest quarter for gaming operations. However, revenues from the gaming operations for the quarter increased by $2.2 million over last year to $68.6 million, despite the frigid weather in many parts of the United States during December, which negatively impacted our results.”
  •  “Even with our older range of product, our current product performance is strong and our new product pipeline is very exciting. We are especially pleased with our showing at G2E last November and now at IGE. A best-of-show suite of products has generated significant customer interest, which we believe will begin to translate into revenue from both games sales and gaming operations starting in the June quarter.”
    • They are referring to the rollout of Alpha 2. We would not be surprised if BYI’s shipshare slipped in the March quarter as some operators may be holding out for the release of Alpha 2 to place BYI orders.
  • "In our premium product range at Digital Tower Series of products and our Jumbo Cabinet continue to perform well. Our Fireball Digital Tower game is our fastest growing premium game ever. New demands for installations of it and Jackpot 7s remained strong…. We are very excited about our new spinning wheel games and the Dual Vision community games, both of which will launch in the March quarter for gaming operations. Hot Shot Cash Wheel will be released in about two weeks. Our current order backlog for these newer premium products continues to improve.”
  • "Cash Spin Touch Wheel product won Best in Show at G2E and will be released in March. Our new Pro Series cabinets and our new ALPHA 2 platform will allow us to compete more effectively against the latest offerings of our competitors and will be released beginning in the June quarter. And we plan to release almost twice as many game titles this year as compared to last.”
    • We expect BYI to provide an update on interest in their Cash Spin Touch Wheel Product on their next call.
  • "63% of our shipments this quarter were video products. So our normal target is sort of… 40% to 60%. And so we continue to get better and better video with the release of the Pro Series cabinet, which is the dual-screen cabinet that really acts as one screen or two screens, if you choose, will clearly enhance video; as well the ALPHA 2 platform, where we'll have enhanced sonographic capabilities”
    • This is an important statistic since video has always been BYI’s Achilles heel.
  • "ASP was still flat or even down a little bit, probably due to a fairly large international sale of a sort of a stripped down cabinet with basic functionality, good margin, but not a very high price point. So as we look to ALPHA 2, we do expect the higher price for that cabinet due to the increased power that ALPHA 2 will have in that cabinet, and look for that to ramp over a 12-month period or so. So if we begin the launch of Pro Series and ALPHA 2 this summer, you will get a really robust set of titles. It builds up steadily over a 12-month period from the release date this summer.”
  • “We do not see capital as clear as you would like it or we would like it. We see, even if somebody has capital allocation, they always have the ability to modify that based on how the next month goes or the next quarter goes. Not in every case, but we see more variability in what we would've expected years ago in capital allocations these last 18 to 24 months where it still can move around quite a bit.”


  • "We expect the margin on our games sales will be north of 50% in the next few quarters. As we roll out our new product lines in the coming quarters with their increased functionalities, we believe there will be opportunities for further margin enhancement.”
  • “We now expect an effective tax rate for the year of between 34% and 36% due to higher income and lower tax international jurisdictions.”
  • “We continue to build international infrastructure and expect these revenues to grow from 19% to as much as 30% of total revenues within the next several years.”
  • “We have the potential to increase our operating margin from 25% this quarter to 28% to 30% over the next couple of years.”
  • “We expect an improving replacement market”
  • “We also reaffirmed our previous guidance of diluted earnings per share for fiscal 2010 of $2.30 to $2.55 per share with our fourth quarter expected to be stronger than Q3.”
    • We have F3Q2010 at $0.62 and F4Q2010 at $0.64 

Food Costs . . . Up and to the Right!

Our inboxes routinely get inundated with emails from subscribers who agree with us or disagree with us.  It is human nature to react to either support your thesis, or to counteract a point that is contrary to your thesis.  Inflation is probably the most debated topic at the moment.


Is it just easy comps?


CPI and PPI are still low on a relative basis, no?


Commodities are signaling serious inflation.


What about low wages, they are indicating deflation?


Both the inflation bulls and the inflation bears can point to great arguments on both sides of the argument; we try our best to point to facts.  As the facts change, so shall we.


But, as the chart below highlights, in many important categories, we are seeing real inflation.  Food input prices are up meaningfully year-to-date, and are in inflationary mode.


Remember, food and gasoline combine to almost 20% of the average consumer’s annual spending.  Even if the government tells you differently, when those prices go up, it is inflationary.


As it relates to specific equities, though, as our Restaurant Guru Howard Penney recently said to me, “Energy and food costs are accelerating and restaurant valuations are at near all time highs . . .something is not sustainable.”  Indeed.



Daryl G. Jones

Managing Director


Food Costs . . . Up and to the Right! - pork


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GIL: KM Covering

GIL: KM Covering


Keeping a trade a trade. We have longer-term concerns about this business, but the company has 2 more good quarters ahead of it before that matters. But Keith shorted as it was overbought with high expectations and cotton heading higher. Now it is holding TRADE line support of $28.61. We'll revisit at a different time/price.  


GIL: KM Covering - GIL




"While the domestic RevPAR and franchise sales environment remained challenging during the first quarter, the company's overall franchise sales results and recent RevPAR trends indicate some stabilization in this environment"

- Stephen P. Joyce, president and chief executive officer



  • Their 1Q RevPAR includes December.  Are encouraged that the pace of decline has moderated
  • March and first few weeks of April - occupancies have turned positive and ADR declines have moderated.  RevPAR is down mid-single digits. 
    • So expect a decline of -2% in 2Q09
  • Domestic franchise development has been negatively impacted by reductions in property level profits and limited availability of financing has hampered their growth
  • Hearing that property transactions are picking up from the brokerage community
  • Have 2-3 Cambria units opening later this year
  • Near term prospects are better for Ascend as a conversion brand than that for Cambria
  • Surpassed the 10MM mark for members in CHH privilege - members accounted for 26% of revenues - up 500 bps y-o-y
  • Applications received declined by 29% for new franchises y-o-y. Have seen some encouraging signs of stabilization in development recently.
  • 18 relicensing transactions - down 49% volume wise - due to lack of transactions
  • Optimistic that conversion opportunities will increase in the near term


  • MAR's guidance has more transient and urban customers and they have easier comps - so it's not exactly comparable
  • For the last decade, 4-9% of their fees are from initial franchise and relicensing fees- average of the last 10 years is 6%. Assume it gets better from current levels but unclear when it will return to average rates.
    • Need to get back to a normalized transaction environment which will really help the conversion market
  • Looks like removals have been pretty high the last few quarters and sequentially no room growth, why?
    • New construction pipeline is drying up as more hotels open - only 80 new hotels projected to open in 2010
    • Conversions are holding up better but still depressed. Conversion hotels open 3-9 months from signing- so you don't see it in the pipeline
    • More terminations from their portfolio - because they are enforcing brand standards, and franchisees are having credit difficulties
    • Expect to get back to net 2% room growth in the next few years
  • Relicensing only happens when a sale of a unit occurs
  • They historically have a 90% retention rate with franchisees
    • saying that they initiate most of the terminations
  • They have converted a lot of properties in their system to lesser brands--however, when properties leave their system, they either go to Wyndham brands or just become independents
  • Share repurchase program? Why did it trail off?
    • Price is a factor. Their approach is opportunistic. Cost of capital and liquidity are also factors.
  • While there have been a growing number of foreclosures, those assets aren't hitting the market as much as they thought.
    • Banks are extending more.
    • Given the upswing in RevPAR, owners are holding on more and funding negative FCF in hopes of an upturn
  • Initial franchise and relicensing fees- timing?
    • There is usually a 6 month lag between transaction pickups and growth there.
  • Is CHH interested in acquiring an UUP brand?
    • Yes... they are interested in an Upper Upscale full service. Ascend is partly helping them there - although it's a more "boutiquey" brand
  • April has been running relatively comparable to March. Occupancy is up slightly - but overall, fairly similar. They have less volatility than full service brands, and they are more leisure oriented.
  • Very little visibility into the summer season - their booking window is 7-10 days on average.
  • Marketing and reservation receivables?  When will they start billing their franchisees without getting the money back from their franchisees?
    • They do bill marketing and reservation fees and collect them every month--it's just that in certain periods they spend more then they receive. During the last lodging downturn they saw the same cycle of the receivable growing and then decreasing once things recovered. They are also investing in their international systems.
    • Expect modest growth in that receivable over the next few years and then a gradual decrease
    • Think it's critical to have that marketing spend during the downturn
  • Is their typical franchisees still making money given the declines in RevPAR? What is the health of their system?
    • Average operating margin is 40-50%. So it's probably half of that now and their cash flow is really dependent on how much leverage is on the property.
    • They have seen some modest deterioration in the health of their franchisee systems - but no different from last year.
    • Have not seen a material uptick in foreclosures in their system.
    • Think that they are making money - just less of it
    • Their franchisees have exposure to multiple brands typically - and they believe that their brands are fairing better than others so that should help them in the future
  • Expect that RevPAR is flat in 3Q and positive in 4Q.  Driven by occupancy growth
  • Central reservation system makes up 1/3 of their revenues- which is consistent over the last few years. OTAs are only 6% of their distribution, and they are relatively flat


Slot replacements should easily exceed 50k this year.



With IGT and WMS already reporting and per discussion with some industry contacts, we think slot replacements should exceed 13,000 for Q1. Last year, replacements were roughly 8,500; so big y-o-y growth.  We suspect Q2 could be even better. PNK just said on their conference call that they were increasing maintenance capex this year in part to more slot purchases. For all of 2010, we think replacements will exceed 50k, up from our previous estimate of 47k.


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