It’s been a glorious seven year run. Unfortunately, 2008 will prove to be the first year since 2001 when visitation to Hawaii turned negative. And it’s getting worse. Visitation fell over 10% in both June and July. August shouldn’t be much better. We’ve got more up to date hotel metric data and it is even uglier. While the hotels are trying to maintain rate, ADRs have ranged from 1% to -4% the last few weeks, occupancy is plunging. RevPAR has consistently been in the range of -6% to -16%. So what’s going on?

• It’s global this time! That’s not good.
• Stronger dollar. US no longer “on sale”.
• Aloha and ATA airlines shutting down has slammed the Hawaiian tourist economy. By far the primary manner of travel to Hawaii is via air. Hawaii has lost over 1m annual seats from east coast alone.
• The price of fuel is a dominant factor in the health of the Hawaiian tourism industry. Kelvin Bloom, President of ResortQuest Hawaii, states that Hawaii, as the most isolated land mass on the planet, is facing severe long term problems due to the current fuel crisis. “Airlines won’t fly flights that don’t yield. Las Vegas is an example of this”.
• July, traditionally one of the strongest months of the year, saw a 6.5% hit to occupancy and a decline in room rates. High-end markets such as Maui, which attracts affluent vacationers, took the steepest decline in July. Visitation from Japanese, corporate meeting groups, and honeymooners declined by 11.7%, 26.7%, and 24.2% respectively.

So who is exposed? HOT maintains 5% of its domestic hotel rooms in Hawaii. Worse, 30% of HOT’s timeshare revenue was derived in Hawaii. Timeshare is not an immaterial business for HOT, generating 25% of total company revenue. I’ve analyzed HOT’s 3 most important markets: NYC, London, and now Hawaii. Trends are getting worse in all of those markets with no signs of stability. Somehow, the sell side still believes EBITDA will grow next year. In my modest opinion, EBITDA estimates still need to come down 10-15% and EPS estimates reduced by 20-25%.

I hear crickets chirping
Hotel metrics are falling off the Hawaiian cliffs

US Market Performance: Week ended 9/19/08

Index performance:

Week Ended 9/19/08:
DowJones (0.3%), SP500 +0.3%, Nasdaq +0.6%, Russell2000 +4.6%

SEP08’ To Date:
DowJones (1.3%), SP500 (2.2%), Nasdaq (4.0%), Russell2000 +1.9%

2008 Year To Date:
DowJones (14.2%), SP500 (14.5%), Nasdaq (14.3%), Russell2000 (1.7%)


In an interview with Time, Prince Alwaleed bin Talal expressed that his hunger for US investments has abated. The focus of the interview was on financial investments but the implications were clear. The Prince’s investment portfolio is hurting, the drop in oil prices is not helping, and there are better opportunities at home in Saudi Arabia.

As you know, the Prince has been an active investor in hotel assets and companies. While not affiliated with Dubai World and other sovereign wealth funds, their fortunes are tied together to a large extent. For US investors hoping for a buyout, strategic investment, capital infusion, etc. of MGM, the hotel companies, or any other gaming/lodging company, this should be required reading.

With the dollar rising, the US is no longer “on sale”. No doubt the bad taste of their US investments is lingering in the mouths of the Sovereigns. Remember: in Feb Dubai World purchased 6.5m shares of MGM at $80 per share (the stock is now $30).

What does this equation add to: Bad investments + lower oil prices + stronger dollar. I’m pretty sure what it doesn’t equate to.

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

This is sad... I am going to 96% cash

I am sitting here at my desk here in New Haven, CT, listening to investment banker, Hank Paulson on TV, and its truly depressing.

Never mind that I am "making money". A monkey could if he was long the market like I am. This isn't about making money, it's about how everyone is making money here in the very short term. It’s about how this government is making decisions reactively rather than proactively.

In the intermediate term, the shortsighted and reactive decision that Hank Paulson and his cronies have made to ban short selling has delivered a serious blow to capitalism.

I am going to 96% cash. I do not trust these people, their process, or their solution.

This is a sad sad day for American Capitalism,


CKR continues to stress that it will not respond to today’s environment by offering “low priced margin-impairing products,” but rather it is focus on selling “innovative, premium priced products.” At the same time, the company understands consumers are under financial pressure and that there is a critical balancing act between discounting too much (at the expense of margins) and increasing prices too much (at the expense of traffic). Management made some telling comments about just how bad QSR’s promotional landscape has gotten:

“They can’t keep this up before franchisees start filing lawsuits.”
“People this quarter were literally giving food away.”
“they can’t maintain these prices much longer

CKR also explained that adding a slice of cheese to a burger currently adds about $0.30 of costs, which puts MCD’s Dollar Menu double cheeseburger and Wendy’s $0.99 Double Stack cheeseburger into perspective from a margin standpoint.

But the reality of the situation is different that then the rhetoric. See below!

Beware October 3rd, 2008

"There is no squabbling so violent as that between people who accepted an idea yesterday and those who will accept the same idea tomorrow."
- C. Morley

Take a big red marker and circle Friday, October 3rd, 2008 on your macro calendar. For those of you who proactively prepare for market risk, this has unfortunately moved straight up on my probability chart as a potential day for the US stock market to crash.

The old boy network of Wall Street investment bankers who didn’t see this US financial crisis coming are now politically scrambling the US government to make one reactive and emotional mistake after another in order to temporarily stop gap the inevitable, marking stocks, bonds, real estate, and commodities to market. Last night, SEC chief, Chris Cox, was cajoled by the Goldman Sachs and Morgan Stanley brain-trust to ban short selling in the US Financial stocks. Let me repeat that – the US Government IS PUTTING IN PRICE FLOORS across an entire sub sector of what used to be called a free market. These guys seriously don’t get it.

It’s one thing for John Mack and Lloyd Blankfein to cry wolf and call their own prime brokerage clients (short sellers) evil doers. It’s entirely another thing for individual self serving interests to have the ability to strike regulatory and legislative change in the way that this long standing free market operates. John Mack served as Chairman of hedge fund Pequot Capital in 2005. He knows better.

There is roughly $1.5 Trillion in assets in the hedge fund community – that’s a much larger number than what Long Term Capital Management ran, fyi. Under political fire, Cox’s unprecedented and short sighted decision to lead an SEC ban on short selling in the US Financial stocks until October 2nd has massive repercussions to this market. Ahead of this, if they warned their internal prop desks to cover their shorts yesterday, that would be really bad – I hope they didn’t. Regardless, I highly doubt that they consulted Citadel’s Ken Griffin or Renaissance Capital’s Jim Simmons on this rash move, but go ask those sober and reputable risk managers what this forced SEC decision means to the structure of their hedges. The US Government is effectively going to bludgeon the risk management mechanism that prudent leaders in the investment community have proactively implemented. This is like breaking Brett Favre’s legs.

On October 19th, 1987, the Dow Jones lost 22.3% of its value. US market losses from October 10th 2007 until 1:00PM EST yesterday were approaching -27%. For 11 months, by refusing to allow a free market to mark prices to market, the US Government has chosen to enter the game, and make mistakes, at every turn. Last night’s decision may be its worst yet. They have capitulated to said “leaders” who simply do not understand how this story ends, or do, and are attempting to socialize the downside associated with their risk management mistakes. On October 3rd, 2008, this reactive decision has the potential to create selling from both the long only and short selling community in orders of volume that we have never seen.

I am not trying to be an alarmist. I do not have a self serving agenda here either. The ‘Hedgeye Portfolio’ has the transparency that these said leaders of the investment banking community still refuse to give you. In the Hedgeye Portfolio you will see that I covered my short position in Goldman Sachs a few days ago. I am not short Morgan Stanley. In fact, I am not short one name in the US Financial sector. On market weakness, I moved from 84% to 76% cash this week. The futures charging higher this morning will do nothing but enhance by YTD performance. This is not about me. This is about proactively calling out massive tail risk.

Markets across the world are raging higher this morning. Hong Kong closed +9.6%. After being halted for a few days, Russia opened up +18%, and now they are halting it again because the government cannot bear this level of volatility on the bullish side. In London, stocks are +7%, and here in the US, the reality TV sponsors of the largest global stock market mania in world history are as emotionally amped up as I have seen them since October of 2007. These people didn’t understand it then, and they certainly don’t understand it right here and now. Financial historians of this great US system of free market capitalism will remind them all that this October, fully loaded with quarter end hedge fund redemptions that are inspired by this oncoming short squeeze, may very well see history repeat.

Be careful out there,

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.