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Election Day . . . Some Early Looks From The Ground

We’ve sourced some of our political contacts around the country and want to offer some early views of what we are hearing from the ground: 

  • Fond Du Lac, Wisconsin – “City of Fond du Lac Clerk Sue Strands said there’s been a steady stream of voters at the polls since they opened at 7 a.m. Strands had predicted a 63 percent turnout.” 
  • Cincinnati, Ohio – “An Enquirer analysis of early returns in Southwest Ohio shows that 43 percent of ballots mailed in were requested by Republicans, and 30 percent by Democrats. The rest were from independents or third party voters.” 
  • Portland and Bangor, Maine – “City officials in Portland and Bangor said the turnout as of midmorning was light. In Lewiston, an election official described the early turnout as steady.” 
  • St. Louis, Missouri – “It's a very heavy turnout," said Rich Chrismer, director of elections in St. Charles County, who predicted 65 to 70 percent of registered voters in the county will vote.” 
  • North Carolina – “State Board of Elections director Gary Bartlett says the two words he's been hearing from county officials so far are "steady" and "moderate." 

While it is difficult to read too much into these comments, it does appear broadly speaking that turnout will be more than the typical midterm election.  Interestingly, we have been watching the Intrade electoral markets this afternoon as well and would highlight a number of points there: 

  • The contract for the Democrats to control  the Senate has rallied well off its lows and is now registering 47.0, while the contract for the Republicans to hold 50 seats in the Senate is also rallying and is now at 38.0. 
  • The contract for Patty Murray (D) retaining her seat in Washington state is now at its highs of 69.2, which is likely leading to the increase in the Democrats chances of holding the Senate. 
  • The contract for the Republicans to gain a net 60 seats in the House is now 59.9, which is slightly off its highs of ~63, but still largely in positive territory for the Republicans.

More importantly: whatever your affiliation . . . get out there and vote! 

 

Daryl G. Jones
Managing Director


VERSIONS OF THE TRUTH

This note was originally published at 8am this morning, November 02, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"My way of joking is to tell the truth.  It's the funniest joke in the world".

-George Bernard Shaw

 

Both the Reserve Bank of Australia and the Reserve Bank of India certainly have their version of the truth today as both raised rates on inflation fears; for India’s central bank it’s the sixth such move this year. 

 

At home we have multiple storytellers giving their versions of the truth.  George Bernard Shaw was most commonly known as an Irish playwright skilled in many spheres of literature.  As you can probably tell from this morning’s quote, his work tended to fall into the satire or black comedy categories.  The black cloud that is the political theatre unfolding in the U.S. certainly would have provided Shaw with some material, were he alive today.

 

While Shaw held some controversial views that were anathema to many of those around him, his flair for music, literary criticism, journalism and drama was widely recognized.  Reconciling the vilification Shaw endured for his stances on the World Wars and other topics with the broad acclaim he received for his work (including a Nobel Prize for Literature and an Oscar) is difficult.  The bottom line is that most people love a good story line and can appreciate the person who can tell one.

 

In the run up to today mid-term elections, the Political Partisan Playwrights have been kicking into overdrive.  Political Prose has been weaved around every political theme imaginable; government spending, taxes, and immigration, to name but a few.  The resulting narratives have been recited ad nauseam and I can’t wait until it’s over.  Political commercials seem to get worse every election cycle.

 

We can argue which political versions of the truth are more tenuously linked to fact than others but the only certainty about every politician on the soap box is this: none is as allied to the truth as they are to their prospects of being elected.

 

At Hedgeye, we prefer to examine data than listen to political sound bites (however amusing).  As my colleague and Managing Director of Macro, Daryl Jones, wrote yesterday on the election, “The turnout measures for Republicans are very positive and should drive a big Republican win to the tune of a net gain of 9 seats in the Senate and more than 65 seats in the House”.   Daryl’s mathematical reckoning anchored on a selection of political polls that he has been following closely as part of this macro process.  While the likely Republican gains have already been priced into the markets, we will continue to be confronted with political versions of the truth for some time past today’s vote. 

 

Economic versions of the truth are just as commonplace in our manic media.  The interpretation of the ISM and personal income yesterday are perfect cases in point.  George Bernard Shaw died in 1950 but even if he were alive today, despite his talent for literary criticism, I think he would struggle to follow the convoluted economic plotlines being laid out by some present day commentators – and he was a co-founder of the London School of Economics! 

 

The main question I have for the storytellers is as follows: how does the economic reality we are faced with marry the expectations imbedded in Wall Street Groupthink?  Yesterday I posted a note on the ISM and personal income print titled, “Q4 2010 THEMES UPDATE – CONSUMER CANNONBALL”, that outlined the moving parts behind a major component of the U.S. economy.  The ISM print was less-than-comforting given that the upside was primarily driven by exports (a small part of the economy) while personal income and spending weakened (pertaining to the largest part of our economy). 

 

Government support is waning and taxes are going up.  We are in the midst of Jobless Stagflation and the data is continuing to confirm that.  If you ever had any doubt that political motivations can sway departments of government to take artistic license (especially a week before elections) with economic data, take a look at the chart below.

 

The story of the 3Q10 GDP number would be a masterful piece of black comedy – and a fitting ode to Bernard Shaw – if it were funny.  The consumer services sector is growing while consumer goods are decelerating but the evidence of government propping up the respective components of GDP is obvious.  Inventory accounted for 72% of 3Q10 GDP growth and exports declined even with the Almighty Buck burning at the stake.  Whatever version of the truth you choose to believe, the trends are unsustainable given our ever-increasing deficits. 

 

One version of the truth that is front of you today is that risk is clearly building in the market and most choose to ignore the facts.  Over the past six trading days the VIX is up 15.2% and the S&P 500 is UP +0.10%.  The inverse correlation of the VIX and the S&P 500 is 0.84.  The prospects of the FED saving the anemic economy are clearly priced in.   

 

Some may find it unappealing to consider that America’s economy can be as fragile as the data suggests.  As I wrote last week in my Early Look note titled, “BEING A LADY”, “America is a great nation and I’m proud to be an American”.  As a proud American, I would pay good money to see any political party come to grips with reality and face the cold hard truth.    

 

As Shaw himself would say, “All great truths begin as blasphemies”.

 

Function in disaster; finish in style,

 

Howard Penney

 

VERSIONS OF THE TRUTH - gbschart


HYATT YOUTUBE

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

 

 

YOUTUBE FROM Q2

  • “Strengthening group business is also important for us because it allows us to better manage yield relative to transient business as we see increased compression in hotels that have a mix of group and transient business.
  • “We also expect to see higher corporate rates coming out of negotiations this fall.”
  • “We are firm believers in the recycling of capital. This means that at any given time, we may be buying or selling hotels in order to put the capital that we have invested in hotel properties to work for us. For example, we’re currently exploring the sale of 11 properties consisting of approximately 4,500 rooms….We expect this to be a multi-month process, and we will announce completed transactions upon closing.”
  • Looking out a bit further, in the quarter bookings for all future periods were up approximately 35%, compared to the second quarter of 2009.”
  • “Visibility on group remains low as booking windows are short.”
  • “We have tightened the range on expected CapEx to 270 to 280 million. Most of that expenditure will take place in the third and fourth quarter as renovation spending at several of our larger owned hotels ramps up. These projects are currently tracking on time and on budget and will continue into next year as planned, particularly the large renovations at the Grand Hyatt properties in New York and San Francisco.”
  • “Our estimated depreciation and amortization expense remains the same at 285 to 295 million, and our interest expense range has been slightly lowered to 50 to $55 million.”
  • “With respect to growth in openings this year, we said during the last call that we expected to open more than 25 hotels, and I think that’s our current outlook. That was an increase from prior estimate that we had had, which was more than 20. Part of that has to do with some conversions, part of that has to do with some uncertainty about exactly when properties that are under construction will complete and, therefore, be able to open. So that remains our current expectation and outlook for this year.”
  • “Relative to our expense projection, we expect expenses to continue to increase, largely because we believe there will be wage inflation. We hadn’t taken merit increases last year. We restored bonuses from that perspective. So, I think you will see increase in expenses continue.”
  • [# of FTEs] “So we are going to keep that at current levels, at least in the short term.”
  • “In terms of hourly staff, that’s more of a variable expense, and we are beginning to see staffing increase for that group of colleagues, largely because the recovery so far has been demand driven. Now, the key question is going to be, relative to our profit flow-through, is how rates progress over the next six to 12 months.”
  • [Transaction environment]And with respect to the evolution of the opportunities over time, I do believe that there will be a further increase of activity and opportunities both in the latter half of this year and into 2011, and I think a lot of it has to do with people, owners and lenders alike, evaluating what their overall alternatives are. And, at least based on what we’re seeing to date, there has been more interest in trying to put a deal together to put an asset on to a different track, let’s say, or bring in a partner in order to help recapitalize. So, I think it’s very clear that, at least around our offices, we’ve got a lot more activity underway now than we did before.”
  • [Corporate negotiation rates for 2011] “Our best guess at this point is maybe somewhere in the high-single digits.  The only other thing on the corporate negotiation I’ll say, in terms of the sectors where we are negotiating-- the technology, the manufacturing and the financial segments are up; transportation is overall down.
  • [Group rates for 2011] “Tracking in the low double-digits; however, pace is still negative at this point of time, but again, that’s largely because the visibility and the lead times is fairly short at this point of time.”
  • [For 2H 2010, EBITDA impact from renovations] “From a RevPAR perspective, we think for our owned and leased segment, RevPAR is going to be impacted between 200 to 250 basis points. And, if I just take you back to what we had indicated in terms of the sensitivity on RevPAR, one point is anywhere between 10 and $15 million on an annualized basis. We think the EBITDA, in fact, is closer to $10 million or so in the second half of the year…. The renovations will continue until Q4 2011."
  • [International] So the booking curve, so to speak, or the outlook tends to be quite short.
  • “There are opportunities for capital deployment in Europe, mostly for management deals, less so for acquisitions, although we are also looking at and for acquisition opportunities in India on the JV basis and in Latin America also on a JV basis.”

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ASCA YOUTUBE

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

 

 

YOUTUBE FROM Q2

  • [St. Charles]Our market share there seems to have stabilized.”
  • [East Chicago] “We’ll see a $20-25 MM annualized negative impact from the bridge closure… A portion of those [road] improvements should be done later this year and the balance through the middle part of 2012.”
  • [Fixed charge coverage ratio] “We’ll see that improve starting in the third quarter now that the swaps have expired and we have substantially lower interest rates going forward.”
  • “Subsequent to the end of 2Q, we’ve retired an additional $16 million of debt. So through seven months, we’ve retired $80 million of debt. That’s created availability in our extending revolver of approximately $20 million over and above what’s required in the non-extending revolver that we have to retire in mid-November of this year. We obviously intend to continue to use free cash flow to retire debt through the balance of the year. For the rest of the quarter, we think we’ll probably end up at about 25 million in total in 3Q for debt reduction, which would be another 11 million from where we are today. And we anticipate having availability in the revolver in December of 45 to 50 million [after 1/2 of CIP] based on our current rate of debt reduction.”
  • “Our Q3 2010 estimate for non-cash stock based compensation expense: should be in the range of $3.4 to 3.9 million. And the blended federal-state tax rate should get back up to about 42.5%.”
  • “Capital spending for Q3 is expected to be between 15 and $20 million in the third quarter…. [For Q4], if we’re going to meet what we told you guys at the beginning of the year, we would have to spend a little more in the 4Q than we have so far on average this year…. Net interest expense in Q3 is expected to be near $28 million. Non-cash interest expense is expected to be between 2.5 and 3 million for Q3. Based on current LIBOR rates, we should see a reduction in the quarterly interest expense for approximately $13 million due to the expiration of the swaps in mid-July.”
  • “We currently expect to make a quarterly dividend of $0.105 per share in Q3.”
  • Pullback in Kansas City promotional spending going forward? “Yes.”
  • [Black Hawk market] “3Q should be the best quarter in that market.”

Risk Rising for PIIGS

Below we show graphically the heightening risk trade in Europe. Although the EU community, IMF, World Bank, and ECB continue to backstop or subsidize the debts of the region’s fiscally bloated countries, the threat of the rising cost of capital remains significant in a world of interconnected risk.

 

The proverbial ‘PIIGS’ have shown a clear negative divergence across capital markets over the last week, with sovereign CDS spreads blowing out after significant declines in September and most of October (see chart below). Importantly, as Ireland’s ability to meet its sovereign debt obligations this year and next are called into question, Ireland’s CDS rose to a new high of 499bps, as the yield on the country’s 10YR bond widened to 7.22% (or 477bps over German Bunds), the highest yield since the mid-90s. Equally, yields are blowing out in Greece, Portugal and Spain.

 

Risk Rising for PIIGS - mh1

 

Risk Rising for PIIGS - mh2

 

From a quantitative set-up, Spain’s equity index, the IBEX 35, broke its intermediate term TREND line of support at 10,726 today, while Greece’s ASE Index remains broken on both the TREND and immediate term TRADE durations, and is the worst performing index across all global equity indices year-to-date at -30.8%.

 

Risk Rising for PIIGS - mh3

 

As the risk premium expands for Europe’s fiscally weaker nations, we want to reiterate our cautious outlook on the region. While we continue to like Germany’s fiscal austerity and relative growth profile into year-end and in 2011, we expect the region’s growth to slow as austerity measures squeeze the consumer via higher VAT, job losses, and wage freezes. Below we chart data out today on the Manufacturing PMI. While the data shows that most countries gained in October versus September, we do not expect to see marked improvement in this data into year-end as Austerity’s Bite plays out.

 

We’re currently short Italy in the Hedgeye Portfolio via the etf EWI.

 

Matthew Hedrick

Analyst

 

Risk Rising for PIIGS - mh4


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