Suffocating Stagflation

“It’s nice and breezy here. In Cairo one suffocates.”

-Hosni Mubarak


Suffocating your citizenry with stagflation is apparently a problem; particularly when that citizenry is young, hungry, and unemployed. By definition this is the Egypt you are seeing on your flat panel TVs today.


Hosni Mubarak  became the 4th President of Egypt in 1981. While this may be a very old country (established in 3100 BC), this 21st Century Social Revolution is being driven by the very young. Almost two-thirds of Egyptians are under the age of 30 years old , and of the 79 million people who live in Egypt, approximately 40% of them live on less than $2 a day.


The Egyptian government has been telling its people that inflation is currently running around +12%. The people of Egypt obviously don’t believe that. They shouldn’t. However they do believe that the country is running double-digit unemployment. They don’t have jobs.


Captains of Keynesian Big Government Intervention don’t use the word ‘stagflation’ very much for a reason. The last time these bubble makers plugged the world with stagflation was in the mid-to-late 1970s. That’s when US Federal Reserve Chairman, Arthur Burns, was attempting to monetize America’s debt as President Jimmy Carter bet that it would not create any globally interconnected risk. Sound familiar?


At Hedgeye, we call it stagflation when real-world inflation readings are growing faster than economic growth. Even if we were lemmings enough to believe the Egyptian government on a +12% inflation number, that would be plenty enough to justify calling this situation for what it is. Egyptian GDP is only running +5% at this stage of what Groupthink Inc. in Davos, Switzerland would have you believe is an “emerging market boom.” It’s sad.


We’ve been berating this point for the last 6 weeks, because it’s time. It’s time to recognize what America’s debauchery of the US Dollar is doing to global inflation. If US monetary policy makers are still in the camp of the willfully blind and want to believe there’s no real-world inflation out there because The Ber-nank’s conflicted and compromised calculation of CPI says so, Godspeed having the world agree with them on that.


And for all of the Fiat Fool fans who are still out there cheering this on because it’s good for the inflation in our portfolios, here’s some global starvation math we can’t hide from – immediate-term inverse correlations between the US Dollar Index and 3 major global food prices:

  1. Corn = -0.91
  2. Rice = -0.90
  3. Wheat = -0.85

Those are extremely high (and alarming) correlations. So the next time someone tells you that the US Dollar and the policy that backs it doesn’t matter to the price of the #1 food staple for 3 BILLION of the world’s people (rice), forward them the math. Risk managers like me wouldn’t be perpetuating higher food prices by trading them with a bullish bias if we didn’t fully expect American policy makers to let its currency burn.


Burning Bone? Pull up the chart. The US Dollar Index is down for 4 out of the last 5 weeks and down almost 4% since the 1st week of January.  Chaos theorists don’t have to look very far to find that incremental grain of sand that tipped the Egyptian pyramid of risk into turmoil. This is what you get when you debauch the world’s reserve currency. Global Inflation is a policy – and it’s priced in US Dollars.


Inflation kills emerging markets. Inflation kills bond markets. These are historical facts and they are also reflected in last week’s bearish price action in emerging markets:

  1. Egypt = down -15.7%
  2. Chile = down -4.2%
  3. Turkey = down -4.1%
  4. Brazil = down -3.5%
  5. India = down -3.2%
  6. Thailand = down -2.5%

We’ve been writing about Chinese Growth Slowing As Inflation Accelerates for the last few months as well. Chinese Equities, at down -2% for the YTD, are now OUTPERFORMING 15 other country equity markets, including all of the ones on this list. Inflation’s contagion is broadening its base.


Stagflation doesn’t just stop when a politician tells it to. Stagflation is sticky. Since The Ber-nank opted for Quantitative Guessing (QG2) with his fear-mongering friends in Jackson Hole, WY, the 19 commodity component CRB Commodities Index has inflated by +27%.


While that may be up less than what US stock market volatility (VIX) is up in the last 2 weeks (+29%), that’s still up a lot – and we think that both globally interconnected markets and the people living in this world outside of Washington, DC have noticed.


Since the beginning of 2011, given our outlook of Global Growth Slowing as Global Inflation Accelerates, I have not been bullish on stocks or bonds in general. That’s why I have such a large asset allocation to Cash. Last week, I raised my Cash position to 67% versus 61% at the end of the week prior. I’ve sold all of our oil and German equity exposures (and there are no rules against buying them back).


The updated Hedgeye Asset Allocation Model is as follows:

  1. Cash 67%
  2. International Currencies 21%
  3. US Equities 6%
  4. Bonds 6%
  5. Commodities 0%
  6. International Equities 0%

Again, this isn’t an asset allocation model for a fund mandated to be fully invested. This is where I’d be positioned as an individual or family who has made positive absolute returns in all 3 of the last 3 years. We’ll have plenty of opportunities in the coming weeks and months to buy things on sale.


My immediate term support and resistance levels in the SP500 are now 1273 and 1288, respectively. On Friday, I covered my short position in the SPY and moved the Hedgeye Portfolio to 8 LONGS and 7 SHORTS. I’ll continue to trade US Equities with a bearish bias provided that we don’t see a close above 1288 in the immediate-term.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Suffocating Stagflation - EGY


The Macau Metro Monitor, January 31, 2011



Las Vegas Sands announced the District Labour Court in Tel Aviv has dismissed a claim from Moshe Hananel, a former LVS executive.  Hananel had claimed that he gave Adelson the idea to invest in Macau and an option for 12% of the company's business in Macau for helping Las Vegas Sands get a license in Macau.


Stanley Ho was taken to the Hong Kong Sanatorium & Hospital, local broadcaster Cable TV reported.  Over the weekend,  Brunswick Group, a PR firm acting on behalf of defendants Chan Un-chan, Ho's 3rd wife, and her five children, stated that Ho had dropped the lawsuit against his family.  However, Ho's lawyers denied such actions.


According to Pansy Ho, the Ho family met on Jan. 27 in Macau to discuss the family dispute but "the discussion did not lead to any conclusion nor consensus."



The provincial Development & Reform Commission originally required that the Guangzhou‐Zhuhai intercity rail to reach Gongbei in 1H11.  Guangzhou‐Zhuhai intercity rail is expected to run into downtown areas by July 1 and access Gongbei station by October at the latest.


Some of China's major banks have stopped extending credit in January as they have already reached the month’s lending quotas. As stated, lending in January should not exceed 12% of the 2011 full‐year target. New loans have exceeded 1.2 trillion yuan as of Jan 24th.


We expect HOT to report an in-line quarter when they report on Thursday and provide lower than consensus guidance for Q1.  Q2 remains our biggest concern.



At 14.5x EV/EBITDA, will a meet and lower really do it for the stock?  We don’t think so.  It is certainly possible that HOT beats on margin, but it is very unlikely management provides guidance in-line or above the Street for Q1.  Management is historically conservative with its forward guidance and RevPAR has been disappointing thus far in January.  While weather certainly played a role, the performance has been uninspiring.


Our bigger issue is Q2, where we think the Street is overly aggressive.  Our conclusion is based on the math from our recent post, “HOTELS: BLAME THE WEATHER” (01/26/11).  We are projecting Q2 RevPAR of only +2% and EBITDA and EPS of $233 million and $0.32, respectively, below the consensus of $258 million and $0.44.  Still, investors ought not wait until Q2 guidance to be concerned.




We are projecting Q4 revenues of $791MM, $240MM of EBITDA, and EPS of $0.39 this quarter which is in-line with Street numbers and a little ahead of HOT’s $230-$235MM EBITDA guidance.

  • $471MM of owned, leased and consolidated JV revenue with a 21% gross margin
    • Room count is down about 2.4% YoY
    • RevPAR : $151;  +12.5%  (this is not same store and therefore not comparable to HOT’s metrics). Guidance for SS owned RevPAR was 6.5-8.5%
    • 6.7% growth in CostPAR
  • $187MM of management & franchise fees and other income
    • 11% growth in base fees to $72MM (3.1% YoY growth in management system-wide rooms)
    • 5% growth in incentive management fees to $41MM
    • 13.4% growth in franchise fees to $40MM (4.2% YoY growth in franchised system-wide rooms)
    • Managed & franchise fee revenues of $153MM, or 10% YoY compared to guidance of 4-6%
    • $34MM of other revenues consisting of $20MM of amortization of gains, and termination and other revenues
  • $134MM of VOI and residential revenues at a 21.5% margin
    • 2% decline in originated sales revenue to $80MM
      • Flat YoY price per interval of $15k; 2% YoY in interval sales; 35% margins
    • $58MM of other sales and services revenue (down 16% YoY due to a $23MM gain on sale of timeshare notes in 4Q09)
    • $6MM of deferred revenues
    • $30MM of operating profit, up $10MM YoY which meets the upper end of guidance of a $5-$10MM increase
  • Other stuff:
    • Consolidated D&A of $73MM; total D&A of $81MM
    • Net interest expense of $61MM compared to guidance of $62MM
    • 20% tax rate – in-line with guidance

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 80.46%
  • SHORT SIGNALS 78.35%

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