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Hotel giant Marriott International on Thursday said it was seeing no sign of an upturn in business travel demand that would signal an improving economy.
The company, whose brands include Marriott, Ritz-Carlton, Renaissance and Courtyard, reported a 56% drop in second-quarter operating earnings, to $84 million, or 23 cents a share. Revenue sank 19% to $2.57 billion.
"In North American lodging we continue to see signs of stabilization in occupancy levels. Unfortunately, we aren’t yet seeing more corporate travelers and business meetings returning to our hotels," said Arne Sorenson, Marriott’s president, in a conference call with analysts and investors. "Instead, our mix of business remains skewed toward price-sensitive leisure travelers."
 In other words, Marriott is at the mercy of people looking for bargains.
"With occupancy levels stabilizing in the low- to mid-60s [percentage level], pricing has become a greater challenge," Sorenson said. "Everyone is price-sensitive today, not just vacationers."
For the Marriott brand, room nights sold to corporate travelers plunged 18% in the quarter from a year earlier, while room nights for leisure travelers were up 12%, the company said.
Carl Berquist, Marriott's chief financial officer, said meeting planners and bookers were "sitting on the sidelines waiting to see if they can get a better deal."
That's a natural reaction in a bad economy, but it's the kind of deflation mentality that ought to give the Federal Reserve the willies.
Marriott also threw cold water on the idea that business might be holding up better overall in emerging markets overseas. (NOTE: The company's results were announced before the bombings Friday at Marriott hotels in Indonesia.)
In China, "Their economy obviously is better-performing and forecasted to be better-performing than much of the rest of the world," Sorenson said. "But you’ve got still a tough travel environment, which is compounded by meaningfully higher supply growth in China than we’ve seen probably anywhere else.
"And so you look at the RevPAR numbers [revenue per available room] actually for that market, and they are not meaningfully better, and in fact in many respects are worse in many months than we’ve seen in the United States."
Travel also has been hit hard in some foreign markets by the H1N1 flu outbreak.
Marriott said it was hard-pressed to come up with an earnings forecast for 2009 because of economic uncertainty, but it offered a range of 76 to 86 cents a share in operating results -- down from the range of 88 cents to $1.02 it had forecast in April.
The company’s stock sank $1.36, or 6.2%, to $20.44. It fell as low as $12.58 in March.
-- Tom Petruno
Photo credit: JB Reed / Bloomberg News
Bad day to be a bear.
Stocks surged, in the broadest advance since late March, as market bulls were heartened by a flurry of encouraging reports from major U.S. companies.
American Express Co. helped to juice today's rally after the charge-card giant said it may not suffer the level of credit write-offs it had previously forecast for the second half of the year.
Although Intel Corp.’s better-than-expected second-quarter sales announced late Tuesday drove an advance in technology shares today, financial issues were almost as strong. The financial-stock sub-index of the Standard & Poor’s 500 surged 4.1% while the tech-stock sub-index rose 4.2%.
From Bloomberg News:
Costs tied to uncollectible debt fell in June to 9.9% of managed U.S. card loans, compared with 10% for May, American Express said today in a federal filing. Loans at least 30 days overdue -- an indicator of future charge-offs -- fell to 4.4% from 4.7% in May.
 "Assuming delinquency and bankruptcy trends continue to be below previously expected levels, the company believes that it is highly likely" that write-offs for the third and fourth quarters on U.S. cards "will be better than previously forecasted," the filing said.
The report added to signs that record defaults by consumers on credit cards may be near a peak. JPMorgan Chase & Co. and Discover Financial Services also reported fewer soured loans today.
AmEx shares rocketed $2.76, or 11.3%, to $27.22.
This was a broad rally, by any measure. The number of rising stocks on the New York Stock Exchange came to 2,767, the most for any session since March 23. That will further stoke the bulls’ hopes.
The S&P 500 was up 26.84 points, or 3%, to 932.68 -- its highest close since the spring peak of 946.21 reached June 12. The recent pullback failed to reach the 10% threshold of a standard market "correction." At the S&P's low on Friday it was off 7.1% from the June 12 high.
The fast rebound this week is an obvious sign that too many people came into the third quarter expecting stocks to head south, particularly after the dismal June employment report on July 2. The market is doing what it does best: disappoint the crowd.
Now, with the S&P 500 up 6.1% since Friday, "short sellers" are getting squeezed and may be buying to cover some of their bearish bets.
All that the bulls wanted was a little encouragement from major companies’ second-quarter earnings reports, and they’ve been getting it -- from Intel, Goldman Sachs, Johnson & Johnson, railroad CSX and others.
Intel shot up $1.22, or 7.2%, to $18.05 today, its highest since Oct. 1.
Goldman Sachs rose $5.60, or 3.7%, to $155.26, the highest close since Sept. 11 -- just before Lehman Bros.’ collapse and the beginning of the fall market meltdown.
-- Tom Petruno
Photo credit: Karen Bleier / AFP/Getty Images
Wall Street opens this week less confident that a turning point for the economy is on the near horizon, after last Thursday's report that the U.S. lost a net 467,000 jobs in June.
But as I noted in my weekend column in The Times, many stock market bulls are sticking with the view that the employment situation isn't a good indicator of where stocks are headed. Investors, the bulls point out, know that the job market always is the last thing to recover, and so are more likely to take their cues from other economic signposts in deciding whether stocks deserve higher prices.
Pimco CEO Mohamed El-Erian, however, takes issue with the idea that unemployment is a lagging indicator in the current recession.
He writes on Pimco's website:
"The unemployment rate is traditionally characterized as a lagging indicator and, as such, is viewed as having limited forward-looking information. After all, unemployment is a reflection of decisions taken earlier in the cycle so the rate always lags behind the realities on the ground – or so says conventional wisdom.
"This conventional wisdom is valid most, but not all of the time. There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviors and outlooks.
"Today’s broader interpretation is warranted by two factors: the speed and extent of the recent rise in the unemployment rate; and, the likelihood that it will persist at high levels for a prolonged period of time. As a result, the unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system."
Pimco, of course, is mainly a bond investor, so stock bulls will accuse El-Erian of talking his book. Bill Gross, El-Erian's co-chief investment officer at Pimco, also has been arguing for some time that the economy's structural challenges (too much debt, too little savings, etc.) will mean very slow growth, at best, in any recovery -- an environment that could favor many fixed-income investments over stocks.
But then, almost nobody expects a strong rebound for the U.S. economy this time around. The question is whether, despite high unemployment, many companies will be able to get their earnings back on a growth track with even a very modest increase in demand (which might well come from places outside the U.S.). Reviving earnings, after all, is what all the corporate cost-cutting of the last nine months has been about. And it's the expectation of rising earnings that draws investors back to stocks.
The market's spring rally was built on the assumption that the economy was no longer in a free fall, and that some kind of recovery was on the way -- a reason to hope.
After the dismal June employment report, two big tests now loom for Wall Street: Will other data this month support the optimists' view that the worst has passed for the economy overall, if not for jobs? And will companies in their second-quarter earnings reports provide guidance for the rest of the year that offers enough incentive to investors to stick around for better times?
-- Tom Petruno
Even counting last Thursday's slump, the U.S. stock market as a whole hasn't given much ground since the big rally began on March 10 -- frustrating sidelined investors who've been hoping for a pullback.
But under the surface there has been plenty of bloodletting among industry sectors and individual stocks over the last month or more. If buyers are still interested (a big if, it seems), they can already find a lot of issues marked down from their spring highs.
Though the Standard & Poor's 500 index was off just 5.3% through Thursday from its spring closing peak of 946.21 reached on June 12, four of the 10 main industry sectors in the index already are in "correction" mode, meaning they're down at least 10% from their highs.
 The biggest loser among the 10 sectors: financial stocks, which had led the rebound from the market's winter low. The S&P 500 finance sub-index was down 12.7% through Thursday from its spring peak reached May 8.
More surprising, perhaps, is how much energy stocks have been hit since topping out in mid-June. The S&P energy sub-index was off 12.5% through Thursday from its June 11 high. Crude oil futures, which also peaked June 11, were down 8.2% through Thursday, to $66.73 a barrel.
The other two S&P sectors down more than 10% from their spring highs: materials, off 11.5%, and industrials, off 10.2%. The softness in those stocks suggests doubts about how soon the recession will end. In the industrial group, General Electric, at $11.46 on Thursday, was down 21% from its May 8 high of $14.53. (GE, of course, also has a huge financial business.) Farm machinery giant Deere & Co. has fallen 18% since May 6, to $38.53.
At the other end of the spectrum, the S&P sectors that have held up the best so far are consumer staples, off just 2.9% through Thursday from their spring high reached June 2; health care, off 3% since peaking on June 29; and technology, also off 3% from its high set on June 11.
Consumer staples (toiletries, packaged foods, etc.) and health care are considered classic "defensive" sectors, meaning places to hide in a lousy economy. Technology's relative strength, by contrast, signals that investors are counting on tech firms to lead the way if the economy is on the verge of reviving -- a view that will be tested soon by second-quarter earnings reports.
-- Tom Petruno
Photo: The statue of George Washington near the New York Stock Exchange. Credit: Andrew Harrer / Bloomberg News
Pacific Capital Bancorp of Santa Barbara said it has stopped paying dividends on the capital infusion it received under the Treasury’s bank-bailout program.
The bank is one of at least three small lenders that have suspended dividends owed under the Troubled Asset Relief Program, the Wall Street Journal reported. The other two identified by the Journal: Seacoast Banking Corp. of Stuart, Fla., and Midwest Banc Holdings Inc., of Melrose Park, Ill.
The banks’ dividend troubles point up the continuing financial woes of many small lenders, even as regulators have pronounced some of the nation’s biggest banks healthy enough to operate without government capital.
Last week, 10 large banks, including JPMorgan Chase & Co. and U.S. Bancorp, announced that they had paid back $68 billion in TARP capital.
 Pacific Capital, which owns Santa Barbara Bank & Trust, First Bank of San Luis Obispo and three other central California lenders, said in a statement that it was opting to conserve funds "during these difficult economic times."
The company said it had suspended interest payments on its junior subordinated notes, and that as a result of the terms governing those notes it also was suspending dividend payments on all preferred and common stock issues.
A spokeswoman confirmed that the suspensions covered preferred stock the company had sold to the Treasury under the TARP program. She said TARP rules allowed banks to defer dividends owed for up to six quarters without penalty. Banks generally are paying a 5% annual dividend to Treasury under TARP. . . .
Read on »
Today wasn't a total loss for Bank of America Corp. CEO Ken Lewis. He got pummeled on Capitol Hill, but his stock enjoyed its biggest rally in nearly a month thanks to some bullish words from Wall Street.
BofA shares jumped 99 cents, or 8.3%, to $12.97 after research firm Keefe Bruyette & Woods raised its rating on the stock to outperform, or buy, from hold.
 That followed a move by Morgan Stanley analysts on Wednesday to boost their 2009 and 2010 earnings estimates for BofA. Morgan also rates BofA a buy.
Congress was looking backward today at the mess that ensued after Lewis’ decision to buy Merrill Lynch & Co. last fall. As Merrill’s losses mounted, Lewis threatened to pull out of the deal unless the government ponied up a big wad of money; the feds, in turn, threatened to boot BofA management if Lewis walked away from Merrill.
New revelations about the bitter negotiations made for great theater at a House hearing. But the stock market isn’t much interested in the past. What matters now is how BofA comes through the recession and what it might be able to earn on the other side.
Keefe Bruyette said it lifted its rating on the stock after BofA successfully raised $33 billion in fresh capital, nearly satisfying the $33.9 billion in additional capital the Federal Reserve wants the bank to have on hand by November.
"The completion of these capital-raising actions takes away a level of uncertainty that kept us from being positive on the shares," Keefe said.
 It believes BofA is capable of posting annual earnings of around $3 a share when things get back to normal -- sometime after 2010, Keefe figures, as loan losses ebb. Compared with other big banks, "BofA’s stock trades among the cheapest to normalized earnings per share," the firm said. It raised its target price for the shares to $16.50 from $12.
Morgan Stanley boosted its 2009 earnings estimate for BofA to 52 cents a share from 43 cents and its 2010 estimate to $2.64 from $2.54 -- mostly because of expectations of higher fee income from investment banking and wealth management (i.e., the businesses BofA beefed up by buying Merrill).
BofA is Morgan's favorite stock pick among the major banks: The brokerage has a price target of $32 for the shares, which would be a gain of about 150% from the current price.
But both Keefe and Morgan could be all wet if BofA’s losses on consumer loans and commercial real estate loans are far worse than expected. The main rationale for avoiding most bank stocks now, particularly after their rally of the last three months, is that Wall Street -- and bank regulators -- still don’t have a realistic grip on how much bad credit is on lenders’ books.
-- Tom Petruno
Photo: Ken Lewis on Capitol Hill today. Credit: Michael Reynolds / EPA
DreamWorks Animation's strong first-quarter earnings report is getting rave reviews on Wall Street today: The company’s shares have soared 25%, and brokerage Goldman Sachs moved the stock back to its "buy" list.
DreamWorks late Tuesday said earnings last quarter more than doubled, to $62.3 million, or 71 cents a share, far exceeding analysts’ mean estimate of 45 cents.
As my colleague Richard Verrier notes in this story, the Glendale studio benefited from strong box-office and DVD sales from its "Madagascar: Escape 2 Africa" sequel -- exactly as CEO Jeffrey Katzenberg had predicted in late February, when the company otherwise disappointed Wall Street by reporting a 45% drop in fourth-quarter earnings.
 Today, the stock was up $4.78 to $23.85 at about 10:40 a.m. PDT, in heavy trading. That's still well off the 52-week high of $32.57, reached in August.
Goldman upgraded the stock to "buy" from "neutral" today and lifted its price target to $27.
Although Dreamworks isn’t likely to generate much big news in the next few months, Goldman said, it expects the stock to gain ahead of "positive catalysts" in the fourth quarter and in 2010, including revenue from airings of "at least two new TV specials" in the fourth quarter, anticipation of three films in 2010 (including "Shrek Goes Fourth") and the potential for a "Penguins of Madagascar" TV series DVD for sale later this year or early in 2010.
Goldman expects the company to earn $1.50 a share this year and $2.18 in 2010. Based on the current share price, the stock’s price-to-earnings multiple on the 2010 estimate is about 11, which Goldman figures is an "attractive" valuation.
The brokerage also trotted out the perennial idea that DreamWorks could be a takeover candidate for a bigger studio.
-- Tom Petruno
Image: Some of the "Madagascar" team. Credit: DreamWorks
Lucky 7 eluded Wall Street's blue-chip indexes today.
Despite a strong rally led by economy-sensitive stocks, the Dow Jones industrials and the Standard & Poor’s 500 closed shy of what was needed to extend their winning streak to seven weeks.
The Dow rose 119.23 points, or 1.5%, to 8,076.29, but was down 0.7% for the week. The S&P gained 1.7% to 866.23 but was off 0.4% for the week.
The BKX bank stock index slid 7.1% for the week, although it was up 2.9% today after the Federal Reserve’s initial report on big-bank "stress tests" didn’t drop any bombs.
 While financial stocks lost ground for the week, many market sectors did make it seven in a row, including the industrial, materials and technology sectors within the S&P 500. Those are bets that the economy will be getting better in the second half of the year -- the basic sentiment that has been a key force behind the spring rally.
Market bears say Wall Street is delusional (again), but investors remain inclined to look on the bright side of economic reports. Today, for example, the government reported a 0.8% drop in orders for big-ticket manufactured goods in March, but the decline was smaller than expected. Ditto for the 0.6% drop in new-home sales last month.
"The market continues to treat good news well and shrugs off bad news," says Brent Luce, a portfolio manager at CapitalWorks in Cleveland.
And the problem for the bears is that they’re leaving a lot of money on the table by being unwilling to buy into the market even for a short-term trade. Case in point: Builder KB Home surged 99 cents, or 5.7%, to a six-month high of $18.38 today, bringing its year-to-date gain to 35%.
In the technology sector, Microsoft jumped $1.99 to $20.91 and Amazon.com rose $3.85 to $84.46 after their earnings reports late Thursday. Over the last two weeks, a number of major tech and e-commerce companies have reported first-quarter earnings that either matched expectations or beat them.
The Nasdaq composite index ended today at its highest level since Nov. 4, up 42.08 points, or 2.6%, to 1,694.29. The index rose 1.3% for the week and is up almost 34% since March 9.
Given the steep gains in stocks over the last seven weeks, many sidelined investors no doubt are waiting for a sharp pullback before getting in.
They had their chance on Monday, when the S&P 500 tumbled 4.3%. But "if you blinked, you may have missed it," analysts at Bespoke Investment Group noted in a report today. Buyers returned to the market on Tuesday, and again on Thursday and today.
Whatever it’s going to take to significantly curb investors’ renewed appetite for risk-taking, we haven’t seen it yet.
-- Tom Petruno
Photo: On the NYSE floor today. Credit: Richard Drew / Associated Press
Some Americans' answer to the recession blues: Eat more cheesecake -- or at least, don't eat a lot less.
Shares of Cheesecake Factory Inc. have rocketed 19% today after the Calabasas Hills-based restaurant chain late Thursday reported better-than-expected first-quarter sales and earnings.
Same-store sales were down 3.4% compared with a year ago, but that was far better than the 6% decline that analysts, on average, had expected.
The first-quarter drop also was about half the fourth-quarter’s pace -- another sign that many consumers have opened their wallets a bit wider in recent months. The company said it saw improvement in its suburban stores, which had suffered worse than its urban locations in last year’s sales slump.
 And although customers continue to reduce alcoholic beverage orders, dessert orders are up compared with a year ago, Cheesecake said.
Net income last quarter was $10 million, or 17 cents a share, down 30% from a year earlier. But analysts had expected earnings of just 10 cents a share. Total sales were $393 million, basically flat with a year earlier.
The company raised its earnings projection for 2009 to a range of 67 cents to 75 cents a share, from the 57-cents-to-67-cents range it gave in February.
The stock was up $2.84 to $17.76 about 12:10 p.m. PDT, the highest since June. The shares fell as low as $5.32 in late November, when it looked to some investors as if economic Armageddon was imminent.
Ironically for a restaurant chain known for its huge portions, Cheesecake got a boost last quarter from its new "Small Plates & Snacks" menu. CEO David Overton said on a conference call with analysts on Thursday that guests are using the small-plates menu "as an add-on when they might not have otherwise ordered an appetizer, and also for shared dining."
Overall, customers who ordered from the small-plates menu had higher check averages than customers who didn’t, Overton said.
That impressed Jeff Farmer, an analyst at Jefferies & Co. But with the stock already up 76% this year, and trading for 24 times the high end of the company’s 2009 per-share earnings forecast, Farmer maintained his "hold" rating on the shares.
-- Tom Petruno
Photo: Samplings of Cheesecake Factory's "Small Plates & Snacks" menu. Credit: BusinessWire
Wall Street has felt better this year about Morgan Stanley's long-term future. Perversely, that helped contribute to the brokerage’s poor first-quarter results.
The company today surprised investors with a larger-than-expected quarterly loss that was driven partly by accounting rules related to the valuation of the firm’s debt.
But more fundamental factors also worked against Morgan -- including $1 billion in real-estate-related losses.
The brokerage’s net loss for the quarter was $177 million, or 57 cents a share, much worse than the 8-cents-a-share loss that analysts had predicted. The company had earned $1.4 billion, or $1.26 a share, in the year-earlier quarter.
Morgan also slashed its quarterly dividend to 5 cents a share from 27 cents, a move the company said would save it $1 billion a year.
After falling more than 9% at the opening bell, Morgan’s shares were down $1.38, or nearly 6%, to $23.27 about 11:10 a.m. PDT. The stock still is up about 45% year to date.
The company’s red ink in the quarter stemmed partly from accounting rules that dictate how firms record changes in the value of their own debt. In Morgan’s case, interest-rate "spreads" on the company’s own bonds have narrowed this year, a seemingly positive development that shows investors feel less worried about the company’s long-term financial viability.
But that narrowing forced a $1.5-billion writedown -- the logic being that Morgan now would have to pay higher prices in the open market if it were to buy back its own debt.
Still, analysts focused more on continuing real-estate-related write-offs. At a time when financial giants such as Goldman Sachs Group and Wells Fargo & Co. have buoyed investors with better-than-expected first-quarter results, Morgan’s disappointing performance showed how toxic assets -- particularly in commercial real estate -- continue to weigh on banks.
"On balance, Morgan Stanley is an underperformer relative to peer reports, particularly Goldman [Sachs]," analyst David Trone at Fox-Pitt Kelton Cochran Caronia Waller wrote in a report to clients.
-- Walter Hamilton
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Tom Petruno
Tom Petruno has been chronicling financial markets' highs and lows since 1979, and has been the Times' financial columnist since 1990. He writes on markets, corporate finance and the economy, and how it all ties in to individual investors' portfolios.
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