In preparation for HOT's Q3 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from HOT’s Q2 earnings release/call and subsequent conferences.



  • “We are in the middle of a very sharp recovery from what is being described as the worst downturn in our industry since the Great Depression.”
  • “We are in the end primarily a business-to-business enterprise. 75% of our business comes from corporations. As long as the expectations for corporate profits is good, we expect that corporate travel will stay good.”
  • “If you look at where occupancies are today, they’re approaching where they were at peak levels. I think in the second quarter, for example, the occupancies in our owned hotels were within 150 basis points of absolute peak levels.”
  • “We now expect rate to be the driver of RevPAR as we go forward, that’s not atypical in the cycle. This year will be 70, 80% of our RevPAR growth coming from occupancy as we get into next year. That may shift more towards rate.”





  • “For the first time in two years, total group business on the books is in positive territory.”
  • “New leads were up 20% and rates for 2010 bookings were up 16%.”
  • “North American properties saw occupancy above 71% in the quarter, with midweek levels in June for New York, Boston and Chicago over 90%. So it’s not a surprise that ADRs [average daily rates] are up roughly 5% in North America for June and July. And in London, June midweek occupancies were 98%, with Paris and Rome at 92%.”
  • “Asia continued its sharp recovery track…China once again led the charge with growth of 46%. Rate was up 7% and occupancy was up 10 points. RevPAR growth was around 14% in India, Australia and the rest of Asia, more than offsetting weakness in Thailand,  which was down 6% due to the political crisis. Even Japan, which has been sluggish to date, was up in the double digits driven by occupancy gains. This recovery trend continues into July but comparisons get a lot tougher. Between Q2 and Q3 2009, RevPAR at company-operated hotels in Asia improved by 800 basis points, and by another 1200 basis points between Q3 and Q4. So despite the strong demand trends, on a year-over-year basis the rate of growth will slow down.”
  • “RevPAR growth accelerated during the quarter from 12.6% in April to 14.6% in June as rate turned positive in May and was up 5% in June.”
  • “The tone of business remains strong in North America as we enter Q3. Short-term booking trends as well as conversations with customers about future plans remain positive. In the year, net group production is running at three times last year’s depressed levels.”

 Guidance/Forward looking commentary

  • “Over time, the real driver of cost is head count, which is flat in the quarter and will remain flat through 2011.”
  • “While Q3 business demand is strong, it is important to point out again that comparisons get a lot tougher. In 2009, RevPAR at company-operated hotels improved 700 basis points between Q2 and Q3, and by over a thousand basis points between Q3 and Q4. As such, year-over-year RevPAR revenue growth will be lower in Q3 and Q4 than it was in Q2, even as absolute levels of RevPAR continue to rise.”
  • “The trajectory of recovery is slower in Europe than in the U.S., and the weaker euro adds an additional headwind to reported numbers. As we enter Q3, we expect some benefit from the weaker euro at our owned hotels in Italy. However, the timing of Ramadan will hurt business originating from the Middle East. The euro was at 142 in Q3 last year, versus 125 to 130 today, further impacting numbers as reported in dollars.”
  • “As we enter Q3 conditions will remain challenged in the Gulf, stronger in Egypt and the rest of Africa, but Ramadan will affect August.”
  • “In Latin America, strong growth in the south and Mexico – Mexican H1N1 impact last year resulted in RevPAR up 30%. Argentina grew 44% and Brazil 32%. In Mexico business travel is recovering, but results have been hit by drug-related crime concerns. These trends remain intact as we enter Q3. This quarter we will lack the significant impact from H1N1 we saw in South America last year.”
  • “We expect the margin improvement trend to continue into the back half, with operating margins increasing 100 to 150 basis points worldwide.”
  • “SG&A will be up again in the 10 to 12% range. We made deep and what we believe are sustainable cuts in SG&A last year, and we remain determined to maintain them.”
  • “In our vacation ownership business, which is our most consumer-dependent enterprise, the tone of business is best described as sluggish. Customer propensity to tour is lower, close rates are stable, and pricing is lower due to our reductions as well as mix…With consumer confidence declining, we do not expect these trends to improve in the second half.
  • “We expect 8 to 10% local currency RevPAR growth in Q3 at company-operated hotels. Exchange rates will be a headwind, reducing dollar-reported RevPAR growth to 5 to 7%. The FX impact will remain a headwind in Q4 too. For the full year, we are raising constant-dollar RevPAR growth to 7 to 9%, 200 basis points above our prior expectations, and 6 to 8% as reported in dollars. Our full-year EBITDA expectations have also increased to a range of 815 to 845 million.”
  • “We are working on the securitization of vacation ownership receivables, market conditions are favorable, and assuming they stay that way, we should get a deal done in Q3.”
  • Q: “If I look at your guidance for the second half of the year it seems to imply RevPAR growth up in the 7% range for the fourth quarter, but EBITDA growth of kind of up 1 to 3 or 4%. Am I missing something on that?”
    • A: “There’s some comparison issues relative to last year, as you said, asset sale differences. Second, it doesn’t underestimate the impact of a significant move in FX YoY, compared to last year. We also have the SG&A incentive comp deltas from last year that we’ve talked to you about. So you put those together and it does explain a big chunk of that.”


In preparation for what looks to be a strong Q3 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from PNK’s Q2 earnings release/call. 




  • “We’ve seen margin improvement this last quarter, but I’ll tell you it’s just the beginning of our ability to thoughtfully look through each one of our operations and for us to improve our margins.”
  • “There is much activity in this company to improve things even beyond margins as we rationalize our delivery system, if you will, for our product, our entertainment casino product, as we look at hotel optimization, as we look at our floors, as we examine assets and discard those that are unnecessary or drag on our system, and as we consolidate offices to be a better management team here in Las Vegas.”
  • “But in the quarter, in particular at River City, we did overstaff on a payroll basis. We did have a couple of unlucky workers comp items in the quarter at that property. We also had some base stock amortization, which will normalize after six months, and so those numbers are higher. We expected some higher numbers in that category, but that’s not the run rate. We’ll get that in-line in the next quarter or two.”
  • “And so our expectation is that, while the economy as a whole is not great and the recovery is slower than anybody will like, we feel fairly optimistic about our prospects going forward, and where we sit competitively in the markets we’re in.”
  • “We don’t have a CRM system today. And we have done a good job driving revenues with really a lack of tools.”
  • “I’m going to guess out loud it’s [effective tax rate] 10% or perhaps south on an annual basis.
  • [Corporate expense in 3Q] “8 million. I think it’s in-line with that."


TODAY’S S&P 500 SET-UP - October 27, 2010

As we look at today’s set up for the S&P 500, the range is 25 points or -1.66% downside to 1166 and 0.45% upside to 1191.  Equity futures are trading below fair value having finished narrowly in positive territory on Tuesday after indices pared earlier losses. A stronger dollar has dampened risk appetite across Asia and Europe as investors curtail expectations for QE and look to cover naked short dollar positions ahead of next week's FOMC meeting. Earnings will again take center stage, while Sep Durable Goods and New Home Sales are the primary economic releases.

  • Aflac (AFL) 3Q rev., EPS beat ests.
  • Broadcom (BRCM) 3Q rev. beat est., said it is to acquire Percello for ~$86. Offers $600m senior notes
  • Buffalo Wild Wings (BWLD) sees net earnings growth next year below est. 3Q adj. EPS beat est.
  • C.H. Robinson Worldwide (CHRW) 3Q rev. missed est.
  • Delphi Financial Group (DFG) 3Q operating EPS, rev. beat est.
  • DeVry (DV) 1Q EPS, rev. beat est.
  • DreamWorks Animation SKG (DWA) 3Q EPS beat est.
  • Equinix (EQIX) sees 2011 rev. above est.
  • F5 Networks (FFIV) announces buy back of up to $200m shares and 4Q adj. EPS beat est.
  • Fiserv (FISV) 3Q EPS beat est., affirmed 2010 EPS forecast
  • Illumina (ILMN) 3Q EPS, rev. beat ests.
  • JDA Software (JDAS) 3Q adj. EPS beat ests, said it sees achieving higher end of 2010 software rev. forecast range
  • McKesson (MCK) reaffirmed its 2011 fiscal earnings forecast of $4.72 to $4.92 a share. Earnings showed positive impact of non-cash, pre-tax asset impairment charge of $72m in Technology Solutions
  • Molex (MOLX) forecast 2Q EPS below est.
  • Netgear (NTGR) 3Q adj. EPS beat est., forecast 4Q rev. above est.
  • Novellus Systems (NVLS) 3Q adj. EPS beat est. 
  • Panera Bread (PNRA) sees 2011 EPS above est. 
  • Western Union Co. (WU) 3Q EPS beat est, raised its outlook for the year


  • One day: Dow +0.05%, S&P 0.00%, Nasdaq +0.26%, Russell 2000 (0.14%)
  • Month/Quarter-to-date: Dow +3.54%, S&P +3.89%, Nasdaq +5.43%, Russell +4.55%
  • Year-to-date: Dow +7.11%, S&P +6.33%, Nasdaq +10.05%, Russell +13.04%
  • Sector Performance: Consumer Disc +0.4%, Energy +0.3%, Tech +0.1%, Financials +0.1%, Telecom +0.1%, Utilities (0.2%), Materials (0.2%), Industrials (0.3%), Healthcare (0.3%), Consumer Spls (0.4%)


  • ADVANCE/DECLINE LINE: -239 (-832)  
  • VOLUME: NYSE - 966.37 (-4.02%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Coach +11.92%, Natl Oilwell +8.46% and Carnival +6.37%/Lexmark -20.98%, Tellabs-13.15% and Regions Financial -7.82%.
  • VIX: - 20.22 +1.86% - YTD PERFORMANCE - (-6.73%)
  • SPX PUT/CALL RATIO: - 1.97 from 1.91 +3.22%


  • TED SPREAD - 16.06 -0.609 (-3.651%)
  • 3-MONTH T-BILL YIELD 0.14%    
  • YIELD CURVE - 2.27 from 2.22


  • CRB: 301.29 +0.33%
  • Oil: 82.55 +0.04% - BULLISH
  • COPPER: 386.90 +0.16% - OVERBOUGHT
  • GOLD: 1,339.05 +0.27% - BULLISH


  • EURO: 1.3864 -0.69% - BULLISH
  • DOLLAR: 77.708 +0.78%  - BEARISH



European markets:

  • FTSE 100: (0.49%); DAX: 0.5%; CAC 40: 0.15%
  • European markets opened lower as investors reviewed a mixed set of European earning releases and a stronger US dollar weighed on commodity prices sending the sectors lower.
  • Results from SAP and Heineken saw their shares decline whilst Deutsche Bank bucked the trend post its Q3.

Asian markets:

  • Asian Markets: Nikkei +0.1%; Hang Seng (1.9%); Shanghai Composite (1.46%)
  • Asian markets were mostly down today.
  • A stronger US dollar led to sell-offs in materials and commodities stocks.
  • Japan finished flat after a rollercoaster day.
  • South Korea fell as investors waited for earnings reports later this week; sentiment was dampened when Q3 GDP growth slowed sequentially. 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%

Isolated Curiosities

“Clouds are not spheres, mountains are not cones, coastlines are not circles, and bark is not smooth, nor does lightning travel in a straight line.”

-Benoît Mandelbrot


To say Benoît Mandelbrot lived a great life would be an understatement.  The recently deceased Sterling Professor of Mathematial Sciences at Yale University had the opportunity to follow and study his passion his entire life and, as a result, his contributions to the field of mathematics were vast.


Most interesting to our Hedgeyes was Mandelbrot’s work on fractals, which underscore many of our own market models.   In fact, Mandelbrot actually coined the term fractal in his consummate work, The Fracatal Geometry of Nature.  He also did what many academics actually have a hard time doing, he extended his academic studies into the more practical areas. According to our friends at Wikipedia:


“Although Mandelbrot coined the term fractal, some of the mathematical objects he presented in The Fractal Geometry of Nature had been described by other mathematicians. Before Mandelbrot, they had been regarded as isolated curiosities with unnatural and non-intuitive properties. Mandelbrot brought these objects together for the first time and turned them into essential tools for the long-stalled effort to extend the scope of science to non-smooth objects in the real world. He highlighted their common properties, such as self-similarity (linear, non-linear, or statistical), scale invariance, and a (usually) non-integer Hausdorff dimension.”


Mandelobrot passed away at the age of 84 years after more than 60 years of pursuing his passion.  He was one of the most celebrated mathematicians of the last 50 years and won innumerable awards for his work, including:  the Wolf Prize for Physics in 1993, the Lewis Fry Richardson Prize of the European Geophysical Society in 2000, the Japan Prize in 2003, and the Einstein Lectureship of the American Mathematical Society in 2006.  Most interestingly of his awards was perhaps that fact that he has an asteroid named after him:  27,500 Mandelbrot.


As it relates to financial markets, his primary contribution was determining that price changes in “financial markets did not follow a Gaussian distribution, but rather Lévy stable distributions having theoretically infinite variance.”  In addition to his study of financial markets, he also had an idiosyncratic character that was near and dear to our hearts. So much so in fact, that he actually gave himself his own middle initial, “B”, which actually did not stand for anything.


So in memory of Professor Mandelbrot and chaos theorists everywhere (especially our Harvard friend at a well known money management firm in Canada), we are going to focus on only 3 important global macro events this morning as it relates to managing risk, which are as follows:


1.  The Election – As many of our subscribers know elections are near and dear to our hearts and the upcoming midterm election is one we’ve been very focused on. (If you would like to trial our research and to see some of proprietary election analysis, please email  In fact, we are on record saying that we are more bullish for Republican chances than our friend Karl Rove.   For us, though, it is not about politics, but is simply math.  As the math stands now, and excluding races that are “too close to call”, the Republicans will win 233 seats in the house (a majority) and will win 45 seats in the Senate.  We believe that turnout could be the wildcard and slide many of the “too close to calls” to the Republicans as many poll internals show a highly motivated Republican base.  The primary implication of this is that the Republicans will likely implement immediate budget cuts, which, according to reports this morning, could be as much as $100BN as soon as January.  While in the short term a decline in government spending may hurt GDP, in the longer term deficit reductions will put the U.S. economy on a more stable path of growth.


2.  Greek Deficits – If you don’t think that government numbers can be wrong or revised lower, well now you know.  Greek deficits this morning were revised higher to 15% of GDP as, shockingly, tax revenues were worse than expected.  As we’ve been saying for months, sovereign debt issues in Europe will rear their ugly heads again and obviously Greece is at the forefront of that again this morning.  We’ve highlighted this point of Interconnected Global Risk in the Chart of the Day below, which highlights that credit default swaps in Europe are making higher lows. As these CDS spreads increase, we are likely to see equity markets act inversely to those spreads widening.


3.  U.S. Dollar – The U.S. dollar is appreciating this morning (not a sentence we have been used to typing over the last few months) on the back of Wall Street Journal reports that while Quantitative Guessing will likely be implemented on some level, it won’t be the “shock and awe” type that many proponents of Krugman Kryptonite were hoping would be implemented.  It seems Chairman Bernanke may actually be listening to some of his colleagues at the Fed like Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, who said Monday that more expansive monetary policy was a "bargain with the devil."  Indeed.  The most immediate term impact of a stronger dollar is likely a correction in those commodities that are priced in dollars.


Just like Mandelbrot, many of the fine folks at Hedgeye have left higher paying jobs to pursue their passion. This passion is the art and process of producing objective and real-time investment research, which we believe is Hedgeye’s core competency.  We aren’t always right and we aren’t always popular, but we passionately believe in what we do and we thank you for your support. 


Yours in risk management,


Daryl G. Jones

Managing Director


Isolated Curiosities - brots


Airport traffic was down 2% which should contribute to a lousy September on the Strip. Shrewd timing by MGM and its equity deal.



August was a blockbuster month on the Las Vegas Strip and MGM took advantage by pricing its equity deal the week after the numbers were released.  Nice timing.  At least they released their full quarter numbers so we could back into the September performance.  It didn’t look good then, at least in the Baccarat segment, (“STRIP BACCARAT TOOK A BIG BREATHER IN SEPTEMBER, 10/13/10) and it doesn’t look good now.  With airport traffic down 2% and facing difficult hold comparisons, the other gaming segments will likely come in disappointing as well, particularly slot win.


When MGM pre-released earnings, our conclusion then was “a 50% move in the stock for this?”  Indeed, the stock is down 19% in an up market and up sector since the day before they announced the equity deal.  In addition to the dilution, the anticipation of a September slowdown probably contributed to the stock pressure so the actual revenue release may not be a huge surprise.  However, it is clear that Las Vegas is not making the V-shaped recovery implied by the August numbers.  One month does not make a trend.


Here are our projections for September and the McCarran numbers:






The Macau Metro Monitor, October 27th 2010



The unemployment rate for July-September 2010 remained unchanged from the previous period (June-August 2010) at 2.9%.  The employed population increased by about 2,700 over the previous period to 320,200, in which employment of the Gaming Sector and Wholesale & Retail Trade both saw an increase.  Total labor force was 329,600 in July-September 2010 and the labour force participation rate stood at 71.8%, up by 0.4% point from the previous period.  Number of the unemployed held stable at 9,400, with 19.0% being fresh labour force entrants searching for their first job, up by 1.8% points over the previous period.  




Early Look

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