European Bank Swaps Mixed

Conclusion: Risk widens for Spanish banks and compresses for Greek Banks week-over-week.


Below we include a portion of a product offering from our Financials’ team, the Weekly Risk Monitor for Financials that tracks CDS across global banks. The table below covers major banks throughout Europe and the trend week-over-week was mixed, widening for 20 of the 39 reference entities and tightening for 19. Importantly, we highlight tightening in CDS for main Greek banks and widening in Spanish banks w/w.


Our attention remains acutely on the health of each of the PIIGS due to their volatility and contagion effect across the continent. As a point of reference, foreign exposures to Spanish banks are 4x higher than to Greek banks, or $989.8 Billion versus $252.1 Billion, according to the latest data from the Bank of International Settlements.


We closed out of our short position in Italy today with the Italian etf EWI immediate-term TRADE oversold.  We remain bearish on Italy's fiscal positioning for the intermediate-term TREND, and we'll look to re-short on strength.


We remain long Sweden (EWD) and short the Euro (FXE) in the Hedgeye Portfolio with the EUR-USD oversold in a trading range of $1.34-$1.36. The EUR-USD partially took a hit today on news that Germany’s West LB bank failed to reach an agreement on a restructuring model as Germany looks to sell the lender by year-end under conditions imposed by the European Commission.


Matthew Hedrick



European Bank Swaps Mixed - B1

European Bank Swaps Mixed - B2


In preparation for MAR’s Q4 earnings release this afternoon, we’ve put together the pertinent forward looking commentary from MAR’s Q3 earnings call and subsequent conferences.



Post Earnings Conference Commentary

  • [Autograph Collection] “We already have 12 hotels signed. We could have as many as 20 by the end of the year open, and we’re talking to 40 to 50 different developers and owners right now, owner-operators, about opportunities.”
  • [Cosmo] “Our newest edition to the Autograph Collection will be 2,000 rooms opening on December 15th, with another 1,000 rooms opening June, 2011; 150,000 square feet of meeting space right on the strip. We’re very excited about the hotel.”
  • “And the whole idea of buying hotels is to reposition those hotels, and then flip and sell those hotels, so at given time, we may own a dozen or a half dozen hotels. Right now out of our 3,400 hotels around the world that carry our brand we own six, so you could see it’s not a big investment from US.”
  • “We want to maintain about a 3 times debt to EBITDAR ratio as we continue to grow, so maintaining that rate keeps us at a solid BBB rating, which is important to us. And as a result of that, given the growth in our business, we will continue to borrow up about $1 billion to $2 billion worth of debt to maintain those ratios. We’re anticipating about $1 billion of that will be in the form of commercial paper. We’re a net borrower company.”
  • “So our adjusted earnings per share from continuing operations over that three year, well, depending on which growth assumption you make, 5, 7 or 9, our EPS could range between $1.90 and $2.75 or 20% to 36% compounded annual growth rate through the 2010 levels.”
  • “We’re right in the middle of doing all our budgets right now, but you would imagine based on, as you said, Europe is going to be a little lighter than the U.S., Asia, and the Middle East – Asia is going to be much higher. I mean, you can think about what’s going on around the world, and we think those trends will continue into ‘11”
  • [RevPar composition] “I think you’re going to see right now probably maybe 50-50 rate occupancy.”
  • “Current trends would tell you that ‘11 should be a better booking pace than ‘10 was, as you look at the booking pace as the economy continues to grow.”
  • Cancellations are way down, slippage is way down and attrition is way down.”
  • “Limited service hotels are likely to recover more slowly than full service hotels. In 2010, only 5% of our more than 450 company operated limited service hotels are expected to pay incentive fees.”
  • “So all-in-all, we expect international incentive fees to grow by 18% to 27% compounded. Putting it all together, incentive fees could increase 18% to 36% compounded, with growth coming from improving net house profit, hotels achieving owner priority and unit growth.”


Q3 Conference Call:

  • “We are forecasting global REVPAR to increase 6% to 8% in both the fourth quarter and full year 2011. We expect to see considerable in the year, for the year group bookings in 2011 with better pricing. We also expect next year’s special corporate rates to increase at a high single digit rate, reflecting the impact of both higher prices and the impact of mix. Growth in catering revenue is expected to recover more slowly. Fee revenue is projected to total $1.29 billion to $1.33 billion as we are likely to open another 25 to 30,000 rooms in 2011. Owned, leased, corporate housing and other revenue net of the related direct expenses could increase 5 to 15%, due to improving REVPAR and margin.  We assume Timeshare contract sales to be flattish to 2010 results and expect G&A expenses to increase 3 to 5%, reflecting increased spending for brand initiatives and compensation. All in all, both our 2011 cash flow and growing debt capacity provide substantial investment capacity next year. As we consider investments, our priority is to first, invest in our business and then return excess cash to our shareholders through dividends and share repurchases.
  • “The recovery is here and we’re doing things differently. First, we’re reducing discounting and improving our mix. And we’re raising room rates.”
  • [Corporate G&A] “There isn’t much more to cut but we continue to look for ways of doing things more efficiently.”
  • “We expect the Timeshare business to generate about $175 million in cash after all investing activities and to produce even more cash flow in 2011.”
  • [FY 2010] “Capex spending of about $500 million.”
  • [1% change in RevPar sensitivity] “I think you could use 15 million [for fees] for 2011. And then about 5 million for owned, leased and other.”
  • “I think, we don’t expect to see any deterioration in margins, in fact, we would expect that to expand as our margins expand, so our owned, leased properties would benefit from the REVPAR increase as well as the margin expansion.”
  • [2011 RevPar growth mix] "Mostly rate"
  • “I think healthcare costs will be up in the high single digits for us next year. Hopefully, that’s more in the 6 to 7% range than higher than that, we’re obviously not done with that. I think that rolling into cash compensation will make comp growth the largest driver of that 3 to 5% increased comp growth, meaning for our current group of associates around the world.”
  • [Nights on the books for 2011 compared to nights on the books for 2010 for same period] “Probably a little bit lower than where we were this time last year but one of the things we’re seeing is a lot of what you call in the year, for the year, in the quarter, for the quarter. And so when you look at ‘10, when we look the ‘10 compared to ‘09, we saw a real build-up as Arne mentioned in his comments where we started the year down like 5% and right now we’re up 1% for 2010 pace, a six point jump and you would expect ‘11 to be that way too with a lot of in the year for the year.”
  • “I think the revenue we’ve got on the books for next year for group business is all U.S. numbers, is down a little bit less than 2% from where it was at the same time last year for 2010.”
  • “We are seeing the lenders starting to get a little more active out there. Obviously, the leverage ratios are a lot lower than what they were, the time periods are probably a little shorter and you’re seeing a lot of personal guarantees by the developers, especially on our limited service side to enhance lines.  We will continue to invest in our business in the form of mezz loans or guarantees or even outright purchases.”
  • “We also have some gains in the fourth quarter that we put in, so we moved our guidance up a couple pennies for the full year because of the gains that you see in the fourth quarter.”
  • “We will see that the government contribution in REVPAR is actually negative because their approach to rate and compounded with the effect on government volume which will tend to get yielded out a little bit will make government a negative number in terms of the total REVPAR contribution. But both volume and rate on special corporate should more than offset that. And so it varies a little bit segment to segment. The discounted stuff may also be negative next year. So that’s packaged stuff, it’s stuff sold through the opaque channels online, some of those sorts of things and that too will get offset by the stronger performance in both group and in business travel.”

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As expected, revenues during Chinese New Year were outstanding. 



Despite the very slow start to the month, gross gaming receipts were HK$9.7 billion through 2/13.  If we include slots and assume more normalized wagering the rest of the month, our previous estimate of HK$17-18 billion looks good, probably skewed toward the higher end.  Market shares have been clearly impacted by hold percentages.  We remain most bullish on MPEL which will report Q4 earnings of February 22nd.  We think recent market share gains are sustainable, flow through should be better than people expect, estimates need to go higher, and CoD/Altira could procure new junkets in the coming months.



R3: AMZN, JCP, WMT, Groupon


February 14, 2010






  • Docker’s continues its efforts to elevate the “khaki” and bring some excitement to the middle market brand.  This time the company is collaborating with recently announced GQ menswear designer of the year, Alexander Wang, to create a limited edition capsule collection.  Recall that Docker’s has also partnered with Steven Alan.
  • While Wall St and most of the media is enthralled with the multi-billion dollar valuation hypothetically placed on Groupon, the hot social couponing site continues make missteps.  Just a few days after the company pulled it’s TV commercials that originally debuted during the Superbowl, the company is now offering refunds to consumers who purchased a deal for flowers at FTD.  It turns out a special Valentine bouquet would have actually cost MORE to those who bought the coupon rather than purchase the item directly from  Backlash ensued.
  • If you didn’t see the NY Times article this Sunday exposing JCP’s search engine optimization strategies it’s worth taking a look.  Incredible insight into the lengths the retailer  went to in an effort to reinvigorate growth in its .com platform.



Amazon’s Texas showdown - Inc. says it will close its Dallas area fulfillment center and reverse its plans to build additional centers in Texas, where the world’s leading web-only retailer was unable to reach an agreement with state officials to avoid collecting sales tax on purchases made by Texas residents. “Closing this fulfillment center is clearly not our preferred outcome,” Dave Clark, Amazon’s vice president of North American operations, said in a memo distributed this week to employees. “We were previously planning to build additional facilities and expand in Texas, bringing more than 1,000 new jobs and tens of millions of investment dollars to the state, and we regret the need to reverse course.” <InternetRetailer>

Hedgeye Retail’s Take:   Surprising move here by AMZN to actually pick up and leave the state.  Clearly the stakes on both sides of the Internet taxation debate have heated up.  Expect to see more talk on the topic as states look for all possible ways to close their budget gaps.


Wal-Mart’s Massmart Bid Clears First Antitrust Hurdle - Wal-Mart Stores Inc., the world’s largest retailer, received clearance from South Africa’s Competition Commission for its $2.3 billion bid for a 51 percent stake in Massmart Holdings Ltd. The commission referred the offer to the country’s Competition Tribunal and recommended its approval without conditions, according to an e-mailed statement today from an external public-relations agency for Johannesburg-based Massmart. The tribunal makes the final recommendation on antitrust matters in the country. <Bloomberg>

Hedgeye Retail’s Take: With the stock near multi year highs, the focus still remains the momentum of the domestic business.  Acquisitions like this one will not move the needle any time soon.


DVF Goes Exclusively to Bloomingdale's - “We’re playing it very big. When we get an exclusive, we make a big deal of it.” That’s Bloomingdale’s chairman and chief executive officer Michael Gould expressing what’s been standard procedure at the store for years — getting the jump on the competition with a high-profile label. On Friday, Gould whisked Diane von Furstenberg through Bloomingdale’s 59th Street store, which was decked out in DVF tabletop and bedding on the home floors, in the windows, along the escalator banks and with statements in ready-to-wear areas. It’s the designer’s first true crack at the category, though she’s dabbled in home decor before, and it’s comprehensive — about 500 stock-keeping units in tabletop and another 400 in bedding. <WWD>

Hedgeye Retail’s Take:  Big move on the merchandising front for both parties involved as the iconic designer known for her prints (and wrap dress) makes her way into the home.  This should be a hit.


Olsens Collaborate with Toms Shoes - First, it was the perfect T-shirt; then, the iconic sunglasses, and now, Mary-Kate and Ashley Olsen are delving into shoes. The two are continuing to build their designer label The Row, and for fall, they are collaborating with philanthropy-driven Toms Shoes. The partnership resulted in three groups of shoes that offer a new take on Toms’ espadrilles. Toms + The Row shoes will be available in plaid, wool-cashmere and herringbone, at a suggested retail price from $98 to $150. Blake Mycoskie founded Toms Shoes in 2006 after coming across an Argentine village on his travels that was so poor its children didn’t even have shoes.  <WWD>

Hedgeye Retail’s Take:  Tom’s has embraced the “collaboration” from the very beginning which has helped to keep the brand from becoming just another commodity product (even with the unique social premise of the brand).


Burton Cuts Ties with Dealers Suspected of Gray Marketing - Burton Snowboards said it recently terminated dealer agreements with several US shops suspected of re-selling products through unauthorized channels. This move reflects Burton's ongoing efforts to protect and support its global network of specialty retailers by aggressively combating gray marketing. "I've said it many times, and I'll say it again - I have absolutely no tolerance for gray marketing," said Jake Burton, founder and CEO of Burton Snowboards. "I don't get why a snowboard shop in one part of the world has a right to sh*t on a local shop in another part of the world for short-term gains. I often think of it in the context of a Japanese dealer shipping product back to Walmart in the US. We want to build a global network of specialty retailers that cares about the sport, the brand, the product and each other. So we're not afraid to end relationships with dealers that gray market anywhere in the world." A few months ago in mid-season, Burton took unprecedented action by canceling millions of dollars in US orders that were most likely intended for the gray market in Japan. For the sake of all its retail partners around the world, Burton's goal is to ultimately eliminate gray market activity, the company said. <SportsOneSource>
Hedgeye Retail’s Take:   While most illegal activities in retail and apparel usually surround counterfeiting, this issue also one to watch. For those brands that do not operate a critical mass of owned-stores, reliance on a dealer network is certainly not without risk.


Tanneries in Argentina are Outbid - The government of Argentina said it will take steps to offer help to the sheepskin industry in view of the raw material supply problem that the country has been facing.  Tanners in Argentina have complained of a lack of raw material after what they have called “an explosion in demand” for skins from rivals in China. Chinese tanners are reported to have been paying as much as $8 per raw skin, while local tanners pay only $5 and feel it would be impossible for them to pay more. <FashionNetAsia>

Hedgeye Retail’s Take: With slaughter figures in Argentina down 25% in 2010 and largely expected to experience another decline in 2011, short supply coupled with greater demand out of China is creating yet another inflationary dynamic in retail.

Chinese New Year Spending up 19 Percent - The Chinese didn’t just set off thousands of fireworks and feast on banquets of dumplings during the recent Lunar New Year holiday, which ran Feb. 2 through Feb. 8. They did plenty of shopping as well. According to the Ministry of Commerce, Chinese consumers spent 404.5 billion renminbi, or about $61 billion, over the seven-day holiday period, also known as Golden Week. That’s a 19 percent increase from the year before. Retail spending spiked even higher outside of first tier cities like Beijing and Shanghai. In Shanxi Province, for example, sales were up 23 percent while Sichuan Province saw a 21.5 percent gain and Tianjin, a city about an hour away from Beijing, had a 20 percent increase, according to the commerce ministry. <WWD>

Hedgeye Retail’s Take: Certainly a bullish indicator of Chinese consumer sentiment – 20%+ growth is worth noting. In addition, strength in second tier cities supports interest noted by several retailers (e.g. RL) that are looking to grow more aggressively beyond China’s first tier locations.


China Near Half of Luxury Market by 2020 - Fast-growing China is poised to account for 44 percent of the global luxury market by the year 2020, according to a new report from CLSA Asia-Pacific Markets. CLSA, which is a bookrunner on Prada SpA’s planned initial public offering in Hong Kong, forecasts the Chinese luxury market will grow at a rate of 25 percent a year for the next five years, and then at a rate of 22 percent a year afterward. This implies a market size of 74 billion euros, or $101.4 billion, by 2020. Consulting firm Bain & Co. estimates China’s domestic market in 2009 was 68 billion yuan, or $10.32 billion.<WWD>

Hedgeye Retail’s Take: We agree that China remains a sizeable opportunity for most categories in retail, but assuming that  a country that currently accounts for just shy of 20% of the world’s population will be accounting for nearly half of the luxury goods market in 10-years sounds like a stretch by most measures. It’s currently the world’s 3rd largest market for luxury goods and accelerated growth is more likely to come from further infrastructure development, but these figures look optimistic to say the least – perhaps not surprisingly given the firm has an IPO in the pipeline to sell.




Notable news items over the past few days and price action from Friday.

  • MCD may raise prices at its China outlets in the second half of the year, according to Tim Fenton, President for Asia, the Middle East and Africa.
  • MCD is being sued in the U.S. by a woman claiming that she was injured after chewing on a “large shard of glass” inside her spicy McChicken sandwich.
  • SBUX said on Sunday that it plans to announce a new product for the single serve market “in the near future.  I posted a note last night detailing my take on Starbucks’ direction.  My “coffee” strategy remains to be long SBUX and PEET and short GMCR.
  • I also posted a note last night titled, “THEY SEE INFLATION” on the news that SYY has raised prices as inflation takes hold.  The company's announcement cited produce shortages as being a major headwind.  This is acutely relevant for restaurant companies with high levels of exposure such as CMG.
  • PNRA outperformed the restaurant space, albeit on slowing volume, following the company’s 4Q earnings call during which they outlined guidance in excess of Street expectations.
  • COSI gained on accelerating volume, its share prices closed up 6.2%. 
  • CMG also saw its shares rise following 4Q earnings.  Despite management’s cautious outlook and the company’s vulnerable position from a commodity exposure perspective, the stock’s initial reaction was positive.
  • KONA and CPKI gained on strong earnings results.  Casual dining stocks generally gained on Friday, with the exception of MRT and CAKE. 
  • CAKE reported a low-quality earnings beat on Thursday after market close. 




Howard Penney

Managing Director

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