MAR was the first chink in the lodging armor but HST might be the biggest. We remain worried about Q2 RevPAR.



HST’s Q1 results may disappoint the sell side bulls, some of whom have EBITDA estimates in excess of $180MM.  The company will report the quarter on April 28th.  We’re projecting $147MM of Adjusted EBITDA, 14% below consensus of $171MM and FFO of $0.11 cents, 1 cent below the Street.


Looking forward, we’re also 9% below the Street’s 2011 EBITDA estimate, which happens to be above the high end of company’s guidance of $1.035BN.  Expectations, both formal and informal, may have gotten too aggressive.  Q2 and Q3 remain our chief concerns.  We don’t believe the Street is reflecting the truly difficult comps from the May through July period of 2010.  As we’ve written about, absolute dollar RevPAR may have been boosted by pent up demand and it appears statistically that dollar RevPAR has slowed sequentially since then on a seasonally adjusted basis.  We’re about 12% below the Street for Q2 and Q3 EBITDA.


1Q2011 Detail:

We estimate that HST will report 1Q2011 revenue of $929MM and $168MM of Property level EBITDAR (margin expansion of 150bps YoY)

  • Property level revenue of $867MM
    • Total RevPAR growth of 9.2% to $119
    • Room revenue of $535MM, +10.5% YoY
    • F&B revenue of $272MM, +8% YoY
    • Other revenue of $60MM, +5% YoY
  • $664MM of property level expenses
    • CostPAR increase of 3%, producing estimated room expenses of $149MM
    • F&B expenses of $199MM
    • An 8% increase in hotel departmental expenses to $240MM
    • Other property level expenses of $75MM, a 3% YoY increase or a CostPAR decrease of 1.5%

Other items:

  • Corporate expense of $26MM
  • D&A of $139MM
  • Net interest expense of $86MM


Notable news items and price action from the past twenty-four hours, as well as our fundamental view on select names.

  • EAT price target raised to $28 by JPM, based on low valuation relative to peers and an upwardly revised 2012 EPS target.
  • EAT was downgraded to “Negative” from “Neutral” at Susquehanna.  The twelve-month price target is $20 per share.
  • EAT declined 2.7% on accelerating volume yesterday.
  • MCD market share gains are likely to continue, according to Janney Montgomery.  The note cites a report by Technomic, a foodservice industry consultant, on annual market share figures for 2010. 
  • RRGB overhauled its menu, implementing a 1.5% price increase and resurrecting several dishes that had been removed from the menu.
  • AFCE’s Popeye’s Louisiana Kitchen announced that the Popeyes restaurant system achieved supply chain cost savings of approximately $16 million in 2010.
  • SBUX launched its tenth annual Global Responsibility Report, which outlines fiscal 2010 performance in ethical sourcing, environmental stewardship, and community development. 
  • PZZA was cut to “Hold” at Stifel Nicolaus.
  • KONA gained 1.7% on accelerating volume.



Howard Penney

Managing Director


TODAY’S S&P 500 SET-UP - April 15, 2011


As we look at today’s set up for the S&P 500, the range is 9 points or -0.32% downside to 1301 and 0.37% upside to 1310.




We now have 5 of 9 sectors positive on TRADE and 8 of 9 sectors positive on TREND.    


THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: -1182 (-1105)  
  • VOLUME: NYSE 1042.27 (+0.20%)
  • VIX:  16.96 +10.70% YTD PERFORMANCE: -4.45%
  • SPX PUT/CALL RATIO: 1.80 from 2.11 (-14.69%)


  • TED SPREAD: 22.305
  • 3-MONTH T-BILL YIELD: 0.07%
  • 10-Year: 3.40 from 3.43
  • YIELD CURVE: 2.71 from 2.72


  • 8:30 a.m.: Building Permits, est. 540k, prior 517k
  • 8:30 a.m.: Housing Starts, est. 520k, 479k
  • 11:00 a.m.: EU’s Barnier speaks at Banker’s conference in Brussels
  • 04:30 p.m.: API U.S. Crude Oil Inventories, est. 1187k 


  • Economic: March housing starts, building permits
  • Other: 11am Energy Department, Office of Fossil Energy meeting of Ultra-Deepwater advisory committee
  • Default Swaps Drop as Plant Cools, S&P Warns U.S.: Japan Credit
  • Greece Sells Bills as Two-Year Yield Tops 20%: Euro Credit



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • China Crops in Shortest Supply as Vanishing Farms Spur Rising Food Futures
  • Oil Falls for a Second Day as Economic Outlook Prompts Fuel Demand Concern
  • Copper Rises, Rebounding From Losing Streak, on Robust China Manufacturing
  • Wheat Advances for a Third Day on Deteriorating Crop Conditions in U.S.
  • Gold, Near $1,500 an Ounce, Trades Little Changed in London; Silver Slips
  • Coffee Climbs on Speculation of Winter Crop Damage in Brazil; Cocoa Falls
  • Zinc Production in Japan Drops as Imports Set to Increase to 10-Year High
  • Sugar, Rice Output to Gain as India Predicts Normal Rain for Second Year
  • Gold May Reach Record $1,520, Sarin of Barclays Says: Technical Analysis
  • Steel Demand in Japan to Slow as Carmakers Cut Operations, Federation Says
  • Oil Bets at $80 Soar After Prices Approach Three-Year High: Energy Markets
  • Alumina Says Some Customers Are Balking at Change to Short-Term Cash Price
  • China Helps Domestic Seed Makers With Tax Breaks to Ensure Grain Security
  • U.S. Feedlots Purchase More Cattle Because of Drought, According to Survey




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • European Stocks Rebound From Biggest Decline in a Month; LVMH, SKF Advance
  • Vedanta Said to Buy 11% of Cairn India From Petronas in $2.1 Billion Deal
  • European Services, Manufacturing Growth Unexpectedly Accelerates in April
  • J&J-Synthes Merger Obscures Product Recalls in Instant Makeover: Real M&A
  • Greek Default Drive Risks Reviving Euro-Region Contagion as Bonds Plunge
  • Wellink Calls ECB Rate Increase a Signal to Anchor Inflation Expectations
  • Novartis Rises as Profit, Sales Beat Estimates on Generic Lovenox, Gleevec
  • Tesco Full-Year Profit Rises Less Than Estimated as Quarterly Sales Drop
  • Frankfurt Cargo Suggests German Export Growth Will Slow: Chart of the Day
  • Bahrain Sukuk Beaten This Year by Emerging Debt on Unrest: Islamic Finance
  • Italy Shelving Nuclear Means Fiat to Keep Paying Most for Power in Europe
  • Kengeter Plan Thwarted at UBS Spurs Gruebel Cuts to Buoy Return on Equity







  • Asia Stocks Fall For Third Day as U.S. Credit Outlook Cut; Cnooc Retreats
  • Euro Advances Versus Dollar, Yen as Data Points to Higher Interest Rates
  • Seagate to Buy Samsung’s Hard-Disk Unit for $1.38 Billion, Build Alliance
  • Apple Claims Samsung Copies IPhone, IPad in Galaxy Phone, Tablet Products
  • Bank Risk Rises Most Since January on Fitch Bad-Debt Warning: China Credit
  • Foreign Direct Investment in China Surges 33% as Zhou Sees Excess Reserves
  • Nuclear Power Bond Tests Confidence in World's Biggest Plant: India Credit
  • Google, Itochu, Sumitomo Buy Stake in $2 Billion Wind-Power Farm in Oregon
  • BRIC Stocks' Longest Rally Since 1997 Seen Doomed as Interest Rates Rise
  • Chinese Developers Soar In Hong Kong as Sales Defy Curbs: Chart of the Day
  • Asahi Bicycle Sales Double as Commuters Haunted by Quake Seek Alternative
  • China Crops in Shortest Supply as Vanishing Farms Spur Rising Food Futures













Howard Penney

Managing Director


CHART OF THE DAY: Underestimating Leadership?


CHART OF THE DAY: Underestimating Leadership? - Chart of the Day

Underestimating Leadership?

“I suppose leadership at one time meant muscles; but today it means getting along with people.”
-Mohandas K. Gandhi


Yesterday, the ratings agency Standard & Poor’s downgraded their view of U.S. government debt from “AAA” stable to “AAA” negative for the first time since the attack on Pearl Harbor.  The implication of this new rating is that there is now a 33% chance that the S&P downgrades U.S. government debt in the next two years.  To be clear, our view of ratings agencies hasn’t changed—they are lagging indicators at best. 


In this instance, though, Standard & Poor’s did provide insight on the current political debate in Washington.  The basis of their call is that they believe it unlikely that the politicians in Washington will come to an agreement on a budget plan that will narrow the deficit over the long term.   This is the point we made in our Q2 Theme call last Friday, so of course we agree.


On the Republican side of the debate is the budget proposed by Congressman Paul Ryan from Wisconsin whose key tenets are to cut taxes, cap the size of Medicare and Medicaid, and to dramatically slash discretionary spending.  Conversely, the budget plan presented by President Obama raises taxes on the rich, cuts discretionary spending somewhat, and takes a hatchet to defense spending.  These are meaningfully substantive and philosophical differences with very little common ground as a starting point for negotiation.    


The reaction from the Obama Administration to the rating change from Standard & Poor’s was interesting.  The White House effectively dismissed the action, while the Treasury Department doubled down on the politicians in Washington.  In fact, according to Assistant Treasury Secretary Mary Miller, Standard & Poor’s revised outlook “underestimates” the nation’s leadership.  I’m not sure exactly what Ms. Miller thinks is being underestimated about the politicians in Washington, but fair enough.


I used the quote above from Ghandi to underscore the core of leadership, which is getting things done in conjunction with your perceived adversaries.  Unfortunately, many of our perceived leaders have failed the nation on this front in the last week.  President Obama failed us by turning a prime time speech about his deficit reduction plan into a campaign speech that alienated Republicans, including Congressman Paul Ryan who was stoically watching the speech live.  While Tea Party leader, and Presidential hopeful, Congressperson Michelle Bachman, failed us by once again bringing up the tired old questions about President Obama’s place of birth last weekend, rather than focusing on the critical deficit issues facing the nation.


If Standard & Poor’s action yesterday did anything, it brought the lack of political leadership to solve the deficit issue completely into the mainstream.  Not surprisingly, stock market operators cast their votes appropriately.  While the SP500 closed above our TREND line of 1,302, it did so barely at 1,305 and it is still trading below the TRADE line of 1,319.  Volume also confirmed this vote as it accelerated 28.8% on the NYSE week-over-week.  Volatility did the same with the VIX up 11%.


From a sector study perspective, financials became the first of the primary SP500 sectors to break down with yesterday’s market action.  On some level, this is likely the early anticipation of the ending of quantitative easing, which removes the politicization of the short end of the yield curve and hurts the lucrative business of borrowing short and lending long.  As we’ve posted below in The Chart of the Day, the spread between 2s and 10s is at a near all-time high in spread.  (As a way to play this reversion to the mean, we are long the etf FLAT in the Hedgeye Virtual Portfolio, which is a Treasury curve flattener position.)


Our Financials Sector Head Josh Steiner also provided some color as a rationale for yesterday’s quantitative breakdown in the sector:


“Mortgage-related costs are on the rise and managements are being more open about the accelerating deterioration of fundamentals in that business. Bank of America stated on their call that multiple charges taken in the quarter were tied to ongoing home price deterioration. MSR write-downs at other banks are an additional indication of ongoing deterioration in that business, as JPMorgan highlighted with their $1.1 billion write-down.


While most companies are beating on the bottom line it is largely being driven by credit-related improvement, but this is illusory. Most of that credit improvement comes from reserve release, specifically in the credit card business. For instance, JPMorgan’s card services provision was $226 million in 1Q11 as compared with $1.6 billion in 3Q10. One might assume that credit losses had fallen to $226 million, but in reality net charge-offs were $2.2billion in 1Q11. In other words, the company released $2 billion in reserves (defined as the difference between losses and provisions).


This reserve releasing has been substantially propping up earnings for the last several quarters, but will be coming to an end in the next few quarters as delinquencies in that business are nearing their trough.


The catch? The banks have been using reserve release from their card operations to offset growing pressure and recurring “one-time” charges in their mortgage business. Reserve release in cards will end in the next few quarters but mortgage-related weakness will persist for much longer.


Bigger picture, the industry continues to face an environment of little to no loan growth, rising margin pressure, falling non-interest income and, in 2Q11, significantly rising FDIC deposit insurance premiums for most of the large banks. From a macro standpoint, the start of the Consumer Financial Protection Bureau on July 1, 2011 will coincide with the end of QE2 on June 30, 2011, both of which are likely to be incremental headwinds for the sector.”


Needless to say, Josh isn’t overestimating the future stock performance leadership of the financial sector. 

Broadly, we will see this week which bell weather companies will lead, follow, or get out of the way as earnings seasons kicks off in full force.  Today, Goldman (this morning), Intel, IBM, and Yahoo all report earnings.


One last leadership quote today from the venerable Nobel Laureate Paul Krugman, who said this about the Standard & Poor’s ratings change:


“That said, it’s worth remembering that S&P downgraded Japan in 2002… Japanese bonds became known as the “trade of death”, because people kept betting on an interest rate rise, and it kept not happening. So, no big deal.”


So according to Dr. Krugman, emulating Japanese fiscal and monetary policy is no “big deal”.  I’m no Nobel laureate and my PH.D is from the School of Hard Knocks, but even I know that becoming Japanese economically IS a big deal. 


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


Underestimating Leadership? - Chart of the Day


Underestimating Leadership? - Virtual Portfolio

Tipping Point

This note was originally published at 8am on April 14, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“There’s an invisible tipping point – when we get there, it’s far too late.”

-Seth Klarman


Seth Klarman founded the Baupost Group in 1982 and runs north of $22B.  He’s done a better job than most managing risk out there over the course of the last 30 years – one of the hallmarks of his risk management strategy is doing nothing.


“I’m convinced, and have done this over the years, to invest in cash when there is nothing else out there that excites me. Cash is risky too, but less risky than making an overpriced investment.”


I pulled these two quotes from a Klarman transcript that was making the rounds in recent weeks. One of our sharpest clients sent it to me after a dinner I hosted in NYC where we had a lively Portfolio Manager debate about the only question that matters to the institutional investment community right now – when does the Fed’s music stop?


Whether it was in a New York restaurant or the meetings I’ll be doing in Boston today, I’ll be having the same discussion. Sophisticated investors get that this won’t end well for America – the only thing between now and “when we get there” is daily performance.


That only thing is a pretty big thing. The institutionalization of our industry has put short-term performance chasing in the hot-box of misunderstood market tail risks that remain. It’s omnipresent. It’s invisible – but it’s there. And after the next market crisis, you’ll be able to see it very clearly.


Presidents Bush and Obama don’t get how globally interconnected markets work. Neither do the Treasury Secretaries and Fed Heads that have advised them. When the entire game is all about gaming the game, sometimes the government guys who are being gamed forget that…


Now some people who think Hank Paulson and Timmy Geithner are “smart” will take issue with that – and that’s fine. Most of these people have never traded a market in their life – and if they did, they’d know that being smart doesn’t give you a birthright to being right.


This is where I think both the President of the United States and whoever is left in terms of his economic advisors have made some grave mistakes in the last few weeks. Market risk is all about expectations. They have set up both the catalysts and the fundamentals for a US Dollar crash.


Crash? Yes, Mr. President, get all the “smart” central planners of your economic universe to unite in Washington – and ask them what happens to a market and an economy when that country’s currency crashes. Oh, wait – the rest of the world is already trading ahead of you on this. As the US Dollar was crashing in Q2 of 2008, the petro priced in dollars went to $150/barrel. Then US Consumption crashed. Then Paulson puked.


Is the US Dollar going to retest those lows? Does the President want to experiment with that? Does the bubble in Big Government Intervention need a US currency crisis to get out?


Here are the market’s expectations and calendar catalysts:

  1. May 16 – thanks to the market expectation genius of Geithner, that’s the date he gave the world on US debt default
  2. June – last night President Obama outlined “June” as his “deficit deadline”
  3. July 1 – The Bernank is out of bullets (end of Quantitative Guessing II)

Nice. Since all of these professional politicians want to go grandma and children on me now every time they talk about America’s spending future, who in the high-schools of central planning decided to put all of our moms and kids on the trolley tracks for both the biggest monetary and fiscal policy showdowns in US financial history in the same 6 weeks?


You can say what you want about the politics of it all. You can say to yourself that The Inflation born out of burning our currency at the stake isn’t there. You can say whatever you damn well please. But the market price says all you need to know right now – it doesn’t lie like our politicians do.


Fed fans, don’t worry. These guys are on it. One of the cheerleaders of Big Government Intervention and easy money, St Louis Fed Head James Bullard, had this to say last night on the risk management matter of the June date that he helped impose as a market expectation:


“This is very much a live debate within the Federal Reserve. There is a lot of uncertainty about the optimal way to proceed as we haven’t been in that situation.”


Awesome. We’ve never done this before so we have no idea how it ends – so we’re talking about that “live” now because it’s almost May.


Sleep tight everyone.


My immediate-term support and resistance lines for the SP500 are now 1310 and 1327, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Tipping Point - Chart of the Day


Tipping Point - Virtual Portfolio

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