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Who Has Your Hedge Fund's Back?

Rather than regulating themselves, "Investment Banking Inc" has decided to pull out all the stops and have their colleagues who run the US Government regulate their clients!

This is embarrassing, on many levels. The clients are going to have to the underwrite the new rules of illiquidity and volatility that the government and bulge bracket investment banks are creating.

Below is a prospectus for what that once vaunted "bulge bracket" could look like come 2009. At a minimum we'll need a new bracket that still puts clients above their own compromised P&L.

Keith McCullough & Andrew Barber
Research Edge LLC

IN THESE TIMES ALOHA MEANS GOODBYE

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%)

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 PRINCE AS A PROXY

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.

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,
KM

QSR SIGNS OF THE TIMES

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!

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