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Q1 HOTEL TRANSACTIONS UPDATE

Big jump on transaction volume in Q1

 

 

Market M&A Trends for Q4 and Year 2010

  • Q1 US transaction volume soared close to $5BN, more than half of total volume for 2010
  • Biggest deal: Ashford Hospitality’s acquisition of 28 Highland Hospitality hotels for $1.28BN in a foreclosure deal
  • Consistent with 2010, REITS (existing and newly formed) dominated the M&A market in Q1
  • Hotel delinquencies have stabilized. The latest data from Fitch showed hotel delinquencies in February hit 14.3%, a rate similar to Q4 2010

Luxury Segment

  • Average Price per Key
    • Q1 2011 Global average: $279,697
      • US average: $289,733 (4 transactions)
    • Q4 2010 Global average: $998,687.  In Q4, there were several sales in Europe (London, France, Dubai) that surpassed $1MM in average price per key.
      • No US transactions

Upper Upscale Segment

  • Average Price per Key 
    • Q1 2011 Global average: $250,532 
      • US average: $261,559 (20 transactions)
    • Q4 2010 Global average: $257,295
      • US average: $291,945 (7 transactions)

Q1 HOTEL TRANSACTIONS UPDATE - hotel trans


TALES OF THE TAPE: MCD, JACK, WEN, DIN, YUM, KKD, RT

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

  • MCD CEO, Jim Skinner, received a total of $9.7 million in compensation in 2010, including his roughly $42,000 annual salary increase as well as a 38% rise in his annual performance bonus.
  • JACK was cut to “Underperform” from “Neutral” at Credit Suisse.
  • WEN is challenging its biggest rival, McDonald’s, by putting its marketing dollars behind gaining more French fry market share.  A “national taste test” carried out by Wendy’s claims that 56% of consumers preferred Wendy’s fries to McDonald’s, with 39% taking the opposite view and 4% having no preference.  Wendy’s fry unit sales were up 16% during the national media in December versus the base period.
  • DIN is carrying out an internal investigation after a toddler at a Madison Heights, Michigan, Applebee’s location was served alcoholic margarita mix.  Police are looking into the incident and Applebee’s has pledged to cooperate and conduct its own investigation.
  • YUM gained on strong volume on Friday. 
  • KKD gained on strong volume on Friday, also.  The stock has declined sharply since 3/31, when the company announced disappointing earnings.
  • RT declined once more, on accelerating volume, as confidence in the company’s ability to meet the Street’s expectations waned. 

TALES OF THE TAPE: MCD, JACK, WEN, DIN, YUM, KKD, RT - stocks 411

 

 

Howard Penney

Managing Director


WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK

This week's notable callouts include swaps tightening across the board, particularly the European banks and European sovereigns (except Greece).  The only negative on the short-term duration was a significant decline in the Baltic Dry Index, which fell 144 points WoW.


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 6 of 11 improved / 1 out of 11 worsened / 4 of 11 unchanged
  • Intermediate-term (MoM): Positive / 5 of 11 improved / 1 of 11 worsened / 5 of 11 unchanged
  • Long-term (150 DMA): Neutral / 4 of 11 improved / 4 of 11 worsened / 3 of 11 unchanged

 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - summary

 

1. US Financials CDS Monitor – Swaps were mostly tighter across domestic financials, tightening for 22 of the 28 reference entities and widening for 6. 

Tightened the most vs last week: XL, AIG, HIG

Widened the most vs last week: PMI, RDN, GNW

Tightened the most vs last month: MET, XL, C

Widened the most vs last month: PMI, RDN, MBI

 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were tighter, tightening for 35 of the 39 reference entities and widening for 3, with one unchanged.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - euro cds

 

3. European Sovereign CDS – Sovereign CDS fell sharply across Europe, particularly in Ireland and Portugal.  Greek CDS rose slightly on the news that Greece may require another extension of the terms of repayment or another cut in the bailout rate. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates fell slightly last week, ending at 7.82, 3 bps lower than the previous week.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose last week to end the week at 1620.   

 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - lev loan

 

6. TED Spread Monitor – The TED spread rose last week, hitting a new high mid-week and ending the week at 24.0 versus 23.6 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index rose to end the week at 37.4, 4.5 points higher than the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 11 bps.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Last week spreads fell to 122. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - mcdx

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Early in the year, Australian floods and oversupply pressured the Index, driving it down 30%. Since then it has bounced off the lows.  Last week it fell once again, dropping 144 points to 1376. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - Baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread widened out to 277 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  1.6% upside to TRADE resistance, 0.4% downside to TRADE support.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - xlf

 

 

Joshua Steiner, CFA

 

Allison Kaptur


Early Look

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THE M3: LRT LAWSUIT DROPPED; LAND AUCTION POSTPONED

The Macau Metro Monitor, April 11, 2011

 

 

BOMBARDIER DROPS LAWSUIT OVER LRT TENDER: REPORT macaubusiness.com

The consortium between Bombardier Transportation and China Road and Bridge Corporation has dropped a lawsuit related to the Macau Light Rail Transit public tender.

 

GOVT POSTPONES LAND AUCTIONS macaubusiness.com

Macau CEO Chui said the auction of two land parcels will be postponed.  He reaffirmed the building of 19,000 public housing units by next year and new measures to fight inflation if average 12-mth CPI reaches 5%.


CHART OF THE DAY: Paving Serfdom's Road in Getting More Expensive by the Day

 

 

CHART OF THE DAY: Paving Serfdom's Road in Getting More Expensive by the Day -  Chart


Serfdom's Road

“It is seldom that liberty of any kind is lost all at once.”

-David Hume

 

I shifted reading gears this weekend from Lincoln (“Team of Rivals”) and Bastiat (“The Law”) to Jefferson (“Undaunted Courage”) and Hayek (“The Road To Serfdom”). From a research perspective, I think it’s important to draw on history’s lessons in order to contextualize where we might be going next. While socialist leanings have impregnated our economic policies, liberty has not yet been lost.

 

Inasmuch as it was critical for investors to consider alternatives to Big Government Intervention strategies of the 1970s, it most certainly is now. If you didn’t know that Debauching Dollars perpetuates The Inflation, now you know.

 

Before I start digging into some of F.A. Hayek’s thoughts in “The Road To Serfdom”, let’s take our noses out of our text-books and consider some real-time market prices – here are some of the major week-over-week moves in Global Macro from last week:

 

Currencies

  1. US Dollar Index = DOWN -1.3% to $74.86, closing on its YTD lows and down for 11 of the last 15 weeks.
  2. Euro = UP +1.4% to $1.44 versus the USD, closing at its YTD high after having its best quarter ever against the USD in Q12011.
  3. Canadian Dollar = UP +1.1% at $0.95 versus the USD, closing at its YTD high and remains a good way to be long Global Inflation.

Commodities

  1. CRB Commodities Index (19 commodities) = UP +2.2% at 368, registering fresh weekly closing highs for the YTD (+11%)
  2. Crude Oil = UP +4.5% to $112.79/barrel, setting a new 32 month high and a new YTD high of +23.4% in 2011!
  3. Gold = UP +3.2% to $1474/oz, locking in a new all-time high – and, as we like to say at Hedgeye, all-time is a long time!

Countries (Equities)

  1. USA = DOWN -0.3% with the SP500 closing -1.1% off its February 18th, 2011 YTD closing high of 1343.
  2. China = UP +2.1% with the Shanghai Composite locking in a higher-high for 2011 YTD of +7.9%.
  3. Russia = UP +0.7% with the Russian Trading System (RTSI) moving into the #1 spot in Global Equities YTD at +19.9%.

There were obviously many other moves across global asset classes (i.e. global bond yields rising alongside inflation expectations) that mattered as well, but as a Chaos Theorist my job is to deliver you the deep simplicity of the point.

 

The point is correlation risk to the price of the US Dollar. That’s why I started with Currencies - because that’s where policy lives. The Inflation is an American policy. Whether The Bernank and Timmy Geithner want to be willfully blind to this or not, their monetary and fiscal policies are driving inflation through a US Dollar devaluation.

 

Not everyone agrees with this assessment. Not everyone likes being held accountable either. But if Americans want to tell the world with a straight face that Serfdom’s Road is the best path to prosperity – the rest of the world is just going to keep walking further and further away.

 

F.A. Hayek was not a fan of socialism or centrally planned economies. Neither am I. He wrote this many moons ago (1944) about “free markets”, but I think it’s worth re-reading, slowly – “the freedom of our economic activity which, with the right of choice, inevitably also carries the risk and the responsibility of that right.”

 

Never mind the privilege associated with giving one currency (USD) the “reserve currency” right. Never mind one man (The Bernank) abusing that right. There are risks and responsibilities associated with all that is a “free market” to begin with. Without accepting these risks and responsibilities at face value, President Obama, you are starting to blur the lines between political and economic freedom.

 

The good news here is that Americans are going to have this debate about Big Government Intervention, debts, and deficits out loud for the entire world to see. If you listen to Harry Reid or John Boehner long enough, you might say that’s really bad news too – but transparency is progress – if only it reveals how ridiculously politicized our economic policies and planning have become.

 

Hayek’s spite for central planning was born out of watching the Germans debauch and devalue their way to hyperinflation (1920s) and new left-leaning ideas coming out of Britain in the 1930s (Keynes).

 

“Hayek cited the new enthusiasm for socialist planning in Britain as an example of such misguided ideas. The economists who had paved the way for these errors were members of the German Historical School, advisors to Bismarck in the last decades of the 19th century.” (Hayek, “The Road To Serfdom, page 4)

 

I’m not a Keynesian. I’m not an Austrian. I am Canadian American. And I am looking forward to engaging in this generational economic debate. Is America going to entrench herself in a Hamiltonian posture of federal controls? Or is America going to revive her individual freedoms embedded in a Jeffersonian resolve?

 

I don’t know the answers to these questions. But I do know the risk management that will be required in taking either of these paths. The path to the dollar devaluation of the Keynesian Kingdom leads to Serfdom’s Road. And while I doubt I’ll feel that personally, the 44 million Americans on food stamps who are out there fighting The Inflation policy every day, sadly, will…

 

My immediate-term support and resistance lines for the SP500 are now 1320 and 1339, respectively. On a week-over-week basis I drew down the Cash position in the Hedgeye Asset Allocation Model last week to 40% versus 43% in the week prior. My allocation to US Equities is now 6%.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Serfdom's Road - Chart of the Day

 

Serfdom's Road - Virtual Portfolio


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