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Q4/2010 HOTEL TRANSACTIONS UPDATE

US hotel transaction market snowballed in 2010, gathering momentum for 2011

 

 

Market M&A Trends for Q4 and Year 2010

  • 2010 US transaction volume shot above $8BN.  Global transaction volume also soared this year, not far from 2008 levels.
  • Q4 saw as many portfolio deals as Q3.
  • In Q4, there were several luxury non-US property sales that surpassed $1MM in average price per key (APPK).      
  • REITS (existing and newly formed) have dominated the M&A market this year.
    • Chatham Lodging Trust and Chesapeake Lodging Trust were the two hotel REIT IPOs.
  • Financing still weak but lenders coming back
    • For Q4, LTV for first mortgage debt trended between 40-55%, lower than the median LTV of 60% in 3Q, according to STR.
      • Most of the loans have a 3-5 year maturity.
    • According to Fitch, CMBS hotel loans continue to default at a relatively high rate.  November delinquencies reached 14.27%. 
    • Lenders—BofA, Deutsche, GS, Wells Fargo, and JPM—are returning, albeit slowly, to the hotel lending market.

Luxury Segment

  • Average Price per Key
    • $998,687 (9 transactions in Q4)
    • $529,161 (42 transactions in 2010)
      • US average: $383,831

Upper Upscale Segment

  • Average Price per Key
    • $257,295 (11 transactions in Q4)
      • US average: $291,945
    • $229,265 (42 transactions in 2010)
      • US average: $264,971

Q4/2010 HOTEL TRANSACTIONS UPDATE - hotel2

 

Q4 Transactions (Summary)

 

Q4/2010 HOTEL TRANSACTIONS UPDATE - HOTEL TRANSACTION


Staring at The Sun

“It's best not to stare at the sun during an eclipse.” 

-Jeff Goldblum

 

As a younger man who came to America in the mid 1990’s wearing Canadian cutoff jean shorts, I enjoyed sunning myself. As I age, I try not to do that as much; especially during an eclipse.

 

Today the world will see the first partial eclipse of 2011. Africans and Europeans will witness it at sunrise. Russians and Chinese will get their eclipse at sunset.

 

No matter where you are in this world this morning, there it is – a new year, new investment opportunities, and new risks. If you are staring at a market price that’s already gone straight up in 2011, our best recommendation is to heed Jurrasic Park’s Jeff Goldblum’s risk management advice – don’t stare at it – it’s going to be a long race.

 

As market prices around the world race higher this morning, the sun is shining on the bulls. While I’m certainly not basking like Countrywide CEO Tan-gelo Mozilo did back in the day (my SPY short position is currently -3.80% against me), I’m as happy as the next clam who is long anything. Market prices that go lunar ahead of an eclipse are cool that way. Everybody gets paid.

 

In yesterday’s Early Look, I walked through our Hedgeye Asset Allocation Model. This morning I’ll focus on the Hedgeye Virtual Portfolio. They are 2 separate risk management products and I call them “virtual” because instead of running money, I run my mouth.

 

Currently the Hedgeye Portfolio is in what I consider a neutral position. We have 12 LONGS and 12 SHORTS.

 

As of last night’s close, our biggest un-realized winners and losers are:

  1. Top Winner: LONG Starbucks (SBUX) = +188.63%
  2. Top Loser: SHORT American Express (AXP) = -4.81%

Not unlike anyone who runs real money in this business, all of the positions I take in the Hedgeye Portfolio are marked-to-market every second of every day. Unlike most of the conflicted and compromised broker ratings and market pundits out there, we are accountable to every position we take.

 

Yesterday, I made the following risk management moves in the Hedgeye Portfolio:

  1. Shorted Tech (XLK) on the Facebook “news” as it was immediate-term TRADE overbought
  2. Shorted Industrials (XLI) after the sector closed up +25.5% in 2010 and was also immediate-term TRADE overbought
  3. Bought US Treasury Curve Flattener (FLAT) as the yield spread continues to make what we call lower-highs at 274bps wide
  4. Sold Suncor (SU) as the stock and commodity prices were hitting new highs (it too was immediate-term TRADE overbought)
  5. Shorted Bank of America (BAC) on the “settlement news” after our Financials Sector Head, Josh Steiner, made a call on it

Booking gains and/or searching for new absolute return ideas on the long and short side is what risk managers do. Some people buy-and-hold. Some people day-trade. The market doesn’t really care what your style is – like an eclipse, it’s going to do what it is going to do.

 

While you may need to be staring directly into the sun right now to be willfully blind to Global Inflation Accelerating, you don’t need an eclipse to generate inflation when market prices are inflating. Post daisy dukes ditching at Yale, I paid my own room and board to learn that’s what happens when prices go up.

 

On the topic of inflation, while it will be interesting to read the Fed’s Minutes later on this afternoon, the rest of the world has already agreed with us that a +10% monthly spike in the 19 component CRB Commodities Index since the beginning of December to new highs of 333 yesterday is indeed inflationary.

 

In fact, in the last 24 hours these are the 2 words that the Brazilians and South Koreans used to describe inflations:

  1. Brazil = “plague”
  2. South Korea = “war”

We think they are serious. So is staring at the sun.

 

In addition to being long German Equities (EWG), US Healthcare(XLV), Oil (OIL), Sugar (SGG), and Treasury Inflation Protection (TIP), I remain bullish on American and Chinese Cash (UUP and CYB). I’m bearish on US Treasury bonds (SHY) and bearish on Gold (GLD) – those are 2 of the 12 positions in the Hedgeye Portfolio that were working for us yesterday. There’s always risk to be managed somewhere.

 

My immediate term support and resistance levels for the SP500 are now 1259 and 1273, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Staring at The Sun - sun


PRESS RELEASE: Hedgeye Names Bob Brooke as Managing Director of Business Development


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 80.30%
  • SHORT SIGNALS 78.51%

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - January 4, 2011


As we look at today’s set up for the S&P 500, the range is 14 points or -1.01% downside to 1259 and 0.09% upside to 1273.   Economic data from around the world was bullish for equity markets as more evidence of continued improvements in the economy was seen. Equity futures are trading relatively in-line with fair value, despite gains in European and Asia.

 

MACRO DATA POINTS:

  • 7.45am, ICSC weekly retail sales
  • 10am, Factory Orders, Nov., est. -0.1%, prev. -0.9%
  • 11am, U.S. Fed to purchase $1-$2b TIPS
  • 11.30am, U.S. to sell 4-week bills
  • 2pm, Minutes of FOMC Meeting
  • 4.30pm, API Inventories
  • 5pm, ABC Consumer Confidence, Jan. 2, prev. -44

TODAY’S WHAT TO WATCH:

  • Motorola Mobility is spun off today, trades under MMI on NYSE 
  • President Obama will sign $1.4b food-safety bill today that marks the biggest change to oversight of the food industry since 1938 and sets up a funding fight with Republicans poised to take over the House.
  • Google is considering building a payment and advertising service that would let users buy milk and bread by tapping or waving their mobile phone against a register at checkout, two people familiar with the plans say. Service may debut this year
  • Airgas (ARG) bought Conley Gas and separately two other businesses 
  • Annaly Capital Management (NLY) plans an offering of 75m shrs
  • Belo (BLC) completes split of G.B. Dealey Retirement Pension Plan with A.H. Belo Corp; sees loss $19m-$23m on split, $5m-$7m tax benefit
  • Constellation Energy (CEG) completed acquisition of Boston Generating power plants for $1.1b
  • Corning (GLW) said Peter Volanakis retired as COO, President
  • Dick’s Sporting Goods (DKS) rated new buy at Janney  

PERFORMANCE: ALL 9 SECTORS BULLISH ON TRADE & TREND

  • One day: Dow +0.81%, S&P +1.13%, Nasdaq +1.46%, Russell +1.90%
  • Last Week: Dow +0.03%, S&P +0.07%, Nasdaq (-0.48%), Russell (-0.67%)
  • Month/Quarter/Year-to-date: Dow +0.81%, S&P +1.13%, Nasdaq +1.46%, Russell +1.90%
  • Sector Performance - BULLISH (All sectors were positive) - Financials +2.19%, Consumer Discretionary +1.18%, Tech +1.11%, Healthcare +0.91%, Materials +0.81%, Industrials +0.72%, Energy +0.72%, Utilities +0.49%, and Consumer Staples +0.14% 

 EQUITY SENTIMENT: BULLISH

  • ADVANCE/DECLINE LINE: 1469 (+1220)  
  • VOLUME: NYSE 1060.24 (+78.96%)
  • VIX:  17.61 -0.79% YTD PERFORMANCE: -0.79%
  • SPX PUT/CALL RATIO: 1.41 from 1.97 (-28.68%)  

CREDIT/ECONOMIC MARKET LOOK: BULLISH


Treasuries were weaker with the curve steepening slightly

  • TED SPREAD: 16.89 -1.624 (-8.865%)
  • 3-MONTH T-BILL YIELD: 0.15%   
  • YIELD CURVE: 2.75 from 2.72

COMMODITY/GROWTH EXPECTATION: BULLISH

  • CRB: 333.02 +0.07%
  • Oil: 91.55 +0.19% - trading +0.12% in the AM
  • Oil Trades Near 27-Month High as Economic Recovery May Boost Energy Demand  
  • COPPER: 445.75 +0.24% - trading -0.55% in the AM
  • Copper Rises to Record for Fourth Day in London on U.S. Growth Speculation
  • GOLD: 1,420.05 +0.09% - trading -0.89% in the AM
  • Wien Forecasts Gold Above $1,600, Grains Surge in `Ten Surprises' for 2011 - He went 0 for 10 last year!

OTHER COMMODITY NEWS:

  • Hedge Funds Increase Bullish Crude Bets to Four-Year High: Energy Markets
  • Flooding May Threaten More Cotton Crops in Queensland, Growers Group Says
  • Rubber Futures Advance to Record as U.S. Production Raises Demand Outlook
  • Gold Falls for Second Day as Reports May Show Recovering Economic Growth
  • Soybeans Advance on Concern Dry Weather in South America May Cut Supplies
  • Sugar Output in India's Top Producing State May Miss Forecast After Rains
  • Molycorp May Double Planned Rare-Earth Metals Output to Meet Global Demand
  • Vietnam Aims to Ship `About' 6 Million Tons of Rice, Deputy Minister Says
  • Australia Forecasts More Rain as Floods Isolate Thousands, Shut Down Mines
  • Alcoa Recommended as `Top Stock' by CNBC's Cramer; Shares May Gain to $22
  • Noble Stock Advances to Record as Acquisitions to Drive Growth in Earnings

CURRENCIES:

  • EURO: 1.3375 -0.07% - trading +0.20% in the AM
  • DOLLAR: 79.127 +0.13% - trading -0.07% in the AM

EUROPEAN MARKETS:

  • European Markets: FTSE 100: +2.12%; DAX +0.17%; CAC 40: +0.62%
  • Most European indices started the day slightly lower and are now trading in positive territory while the Footsie is up 2.12%, catching up with the rest of Europe following yesterday's strong session.
  • Notable divergence is Greece down 1.52%, Estonia up 2.90%
  • Energy shares are among today's best performers, helped by BP after the Daily mail reported Royal Dutch Shell thought about bidding for the company during oil-spill crisis.
  • France Dec Consumer Confidence (36) vs consensus (31) and prior revised to (33) from (32)
  • German Dec unemployment change, seasonally adjusted, +3K vs consensus (10K) and prior revised (8K)
  • UK Dec Manufacturing PMI 58.3 vs consensus 57 and prior 58
  • UK Nov mortgage approvals 48,019 vs consensus 47,000 and Oct 47,315

ASIAN MARKTES:

  • Asian Markets: Nikkei +1.7%; Hang Seng +1.0%; Shanghai Composite +1.6%
  • Most Asian markets rose today, except India -0.30% and Taiwan -0.31%
  • For several markets, this was the first trading day of the year.
  • Japan rose +1.65%, reflecting buoyant investor sentiment on gains throughout the world, with 32 of 33 sectors going up. Resource related stocks gained 3-5%. Exporters rose on strong ISM manufacturing data from the US. Megabanks followed their US peers up 2%, and consumer lenders Promise and Aiful soared 17% and 11%, respectively.
  • Property counters surged to lead China higher by 1.59%, with materials stocks providing strong support. China Shenhua Energy and Yanzhou Coal Mining rose 2% and 3%, respectively, on coal supply concerns arising from the flooding in Australia. Shippers rose 4% on optimism that export demand would be lifted.
  • South Korea found strength +0.73% from brokerages and shipbuilding stocks.
  • Property stocks led gains in Hong Kong +0.99% - Cathay Pacific rose 3% when its COO said the airline is reasonably confident about the year.
  • The floods in Queensland held Australia flat, as early gains were pared by falls for insurance companies. Insurance Australia Group, QBE Insurance, and Suncorp fell 2-3%.
  • The yen is trading at 82.07 to the US dollar

THE HEDGEYE DAILY OUTLOOK - setup

If Global Growth Slows, Could Commodities Still Charge Higher?

Conclusion: Supply constraints could drive many commodities higher, even if growth slows in 2011.


Positions: Long Oil via the etf OIL; Long Sugar via the etf SGG


We’ve been fairly vocal with our belief that global growth will slow sequentially in 2011, driven by the consumer slowing in the U.S., and emerging markets (China, Brazil, and the like) slowing due to monetary tightening as inflation rises.  Perversely (as some would suggest), we remain bullish and, in fact, long in the Virtual Portfolio certain commodities heading into 2011.  Normally, one would expect commodity prices to decline in line with slowing growth, but the key factor appears to be supply constraints for a number of key commodities.

 

Copper – According to the International Copper Study Group, world refined copper consumption exceeded supply by 436,000 tons between January and September this year.  In the same period last year, the world deficit was 56,000 tons.   In 2010, global consumption was the key factor, as it was up roughly 8%, while mine production was up a measly 0.8%.  The net results of this, as is highlighted in the chart below, is that LME copper inventories have seen a dramatic decline since the start of 2010.  So even if copper usage slows sequentially, low inventories combined with weak supply growth will likely continue to constrain the market and lead to higher copper prices heading into 2011.

 

If Global Growth Slows, Could Commodities Still Charge Higher? - 1

 

Oil – Oil is in a similar setup to copper heading into 2011: while the rate of demand growth should slow if global growth slows, oil appears to be supply constrained.  As our Energy Sector Head Lou Gagliardi notes:

 

“Turning to the Department of Energy, its energy agency (EIA) sees global crude oil demand growth outstripping supply in 2011: by roughly 630,000 b/d or supply falling short by ~0.7%. Although a slim margin, 2011’s forecast marks a sharp divergence from 2009 and 2010, when the EIA reported demand and supply in balance.  For 2011, the EIA, forecasts -0.5% supply/production decline from non-OPEC regions, unlike the 2.1% increase seen in 2010 from 2009.  Not surprising to us, the EIA sees declining supply in 2011 from 2010 worldwide across major crude basins; i.e. the U.S., U.K., Norway, Mexico, Russia, China, and Canada flat.”

 

The International Energy Administration echoes the point relating to non-OPEC production growth as they have cut in half from 2010 levels their 2011 production estimates, which will be primarily driven by declines form production in the Gulf of Mexico in the United States.  While the OPEC cartel still has spare capacity, to the extent they can keep their members in line, oil supply should be increasingly constrained in 2011.  The negative wild card for global supply could be if Russian production, which recently hit a new high, starts to slow.

 

Soft commodities – Soft commodities had one of their best years in recent memory in 2010 due to supply constraints and that looks poised to continue headed into 2010.  Some key soft commodity supply data points to focus on heading into 2011 include:

  • Sugar – Brazil, overwhelmingly the world’s largest producer at 23.7% of global production, saw its production estimate for 2010/11 revised down (-1.3M) metric tons to 39.4M due to dry weather;
  • Corn – The Argentine corn crop is developing slower than expected and Argentina is the world’s second largest exporter of corn;
  • Cotton – World cotton stocks are projected to decline in 2011 due to lower U.S. production;
  • Soybeans – Argentina’s soybean production is expected to fall as much as 17% to 43 million tons  in 2011 – 2012 due to the drought caused by La Nina;
  • Rice – Among other supply issues, an outbreak of cholera in Haiti’s rice fields will impact global supply heading into 2011.

Interestingly, despite our view of slowing growth into 2011, it seems that we are seeing evidence of supply constraints across the commodity complex that are poised to drive commodity prices higher in the face of a sequential slowdown in growth.  Higher commodity prices and slower growth mean one thing: stagflation.

 

Daryl G. Jones

Managing Director


America's Armpits

This note was originally published at 8am on January 03, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I know it's hard when you're up to your armpits in alligators to remember you came here to drain the swamp.”

-Ronald Reagan

 

Welcome back to a New Year. It’s Game Time.

 

While my New Year’s resolution is to remain as far away from professional politicians and academic charlatans as I possibly can, until this game changes I’ll have to remain focused on attempting to understand what Big Government Intervention can do to our markets.

 

President Obama seems keen on understanding more about what Ronald Reagan thought about the economy. Or at least that’s what the White House says he was reading about this past week. Lou Cannon’s President Reagan: The Role of a Lifetime is officially out of stock on Amazon due to a surge in speculative Democrat buying.

 

Ironically enough, I read The Reagan I Knew by Bill Buckley a few weeks ago. Don’t worry, I’m neither Republican or Democrat. I’m just a Canadian-American looking for historical perspectives, accepting that they are often decorated with hyperbole.

 

What will be most interesting to me with this new Obama/Reagonomics Revolution thing is whether or not the President justifies a bloated US budget deficit by reminding the Republicans that “Ronnie used one.” After all, as Danilo Petranovich reminds us in the Introduction of Buckley’s book, “Reagan, of course, had promised to cut the size of government, and yet the budget deficit nearly doubled during his tenure.”

 

American storytelling and political hypocrisies aside, the non-fiction version of the fiscal New Year is that America is up to its armpits in deficits and debts. It’s time we “drain the swamp”, and I think we can all save and make money while we do it.

 

In term of percentage allocations, here’s how I have the Hedgeye Asset Allocation Model positioned for what we’ll be introducing as a Q1 Macro Theme in the coming weeks – American Sacrifice (fiscal reform): 

  1. US Cash = 61% (long US Dollar, UUP)
  2. International FX = 18% (long Chinese Yuan, CYB)
  3. International Equities = 9% (long Germany, EWG)
  4. Commodities = 6% (long Oil, OIL; long Sugar, SGG)
  5. US Equities = 3% (long Healthcare, XLV)
  6. Fixed Income = 3% (long Treasury Inflation Protection, TIP) 

For those of you who follow my day-to-day risk management moves closely, you’ll recognize that I dropped my Cash position from 70% to 61% last week and re-allocated that Cash to Commodities and US Equities. This doesn’t mean I’m bullish on US Equities up here. It means I’m bullish on the Energy and Healthcare sectors at these prices.

 

There are obviously plenty of negative mean-reversion risks associated with buying anything US Equities after an +86% rally from the March 2009 lows. If you dare to chase equity oriented yields up here, we think you need to protect against 3 critical risk factors that are going to be perpetuated by Big Government Intervention

  1. Congress
  2. Fed Policy
  3. Inflation 

If we’re going to attempt to find the political spine to “drain the swamp”, these 3 factors will remain omnipresent. Congress will be getting paid to push their own book. Fed Policy rhetoric will trade like a NYC hedge fund. And yes, Inflation, will remain a policy.

 

Energy (XLE) and Healthcare (XLV) companies have leverage to inflation. Higher selling prices, in theory, help these companies expand margins. While the SP500 is running close to peak margins, these two sectors aren’t. There’s some mean-reversion opportunity there in equity prices for these sectors as a result.

 

In Energy, I’m not long the sector – I’m long the stocks. We remain bullish on China National Offshore (CEO), Suncor (SU) and Lukoil (LUKOY). In the immediate-term, the Energy sector ETF (XLE) is overbought with immediate-term TRADE support down at $66.29. In Healthcare, immediate-term TRADE lines of support and resistance for the XLV are $31.03 and $31.91, respectively.

 

From an asset allocation perspective (and I mean your money, not some theoretical Big Broker’s high net fee, commission, and compensation model), being bearish on Congress and bullish on its inflation policy is fairly straightforward to express. If I had to be in one or the other, I’d be in US Equities over US Treasury Bonds here. Fortunately, I don’t have to be in either.

 

What I am most bullish on is the hard earned Cash that my family and firm has earned over the course of the last 3 years. No, we weren’t the super duper top US Equity performer of the Year in 2010 (although I did win the Forbes stock picking contest!)… but we made money for the 3rd consecutive year, and there’s nothing that smells like America’s Armpits about that.

 

My immediate term support and resistance lines in the SP500 are now 1249 and 1263, respectively.

 

Best of luck out there this year,

KM

 

Keith R. McCullough
Chief Executive Officer

 

America's Armpits - 1


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