“I feel dirty making money on the long side in this market”
-A Hedgeye Client that has been successfully making money on the long side
This quote comes from a client of hedgeye, who just happens to work for one of the largest “long only” money managers on the planet. Why does he feel dirty? He’s probably shares many of the same views that David Einhorn has had as he’s been covering his shorts. The music is playing and the kids are Dirty Dancing. The Chuck Prince of 2007 would approve. The grownups, however, do not.
David Einhorn had this to say, in the Greenlight capital Q1 Shareholder Letter: “The broad market, which shrugged off the continued escalation of commodity prices, unrest in the Middle East, a catastrophe in Japan, tightening monetary policy outside the United States and a deceleration of domestic economic growth...this quarter we were repeatedly confuzzled when we read company news announcements that we expected to cause falling stock prices, only to see them rise instead – and sometimes sharply at that. Nonetheless, we believe that this environment is cyclical, and that it will continue this way... until it doesn’t.”
Einhorn likens the market today to Charlie Sheen, believing that “all publicity is good publicity”. Einhorn’s past record and thorough thought process that comes through in his writing are both impressive. He is no Bud Fox; he understands the danger of investor psychology and groupthink. Nevertheless, he is not confident that his firm can call the turn so he has been covering.
Both Einhorn and the Hedgeye Client quoted at the beginning of this Early Look are thoughtful market operators that have generated alpha in different market cycles across sectors and geographies. Clearly by the sentiments they are expressing, they are alerting us to a real problem that exists in money management at this point in equity markets. Capital has been pumped into the system through two rounds of quantitative easing and PM’s that want to get paid will chase yield with that capital. The stock market rally has been self-sustaining in that regard; a rising stock market does improve consumer confidence among higher income brackets. However, the reception of all news as good news is disturbing to say the least. As the multitude of interconnected global macro factors continue to change in real-time, the government is handcuffed with sky-high debt, zero percent interest rates, and slowing economic growth.
The pension fund community, too, has been dragged into this game of pass-the-grenade. “Assumed” rates of return are to be hit lest the funds face a significant shortfall on their obligations. Given the fear of inflation that has rightly taken hold, pension funds cannot look to bonds for the required 7-8% returns with interest rates at 0%. Rather, pension fund managers are chasing yield right at the top of the cycle. In fact, I would argue – although Keith may not agree (so this is not the official Hedgeye view) – that the cycle has already topped.
Jobless claims have given back all of the progress that was made from January 2010 onward. GDP slowed sequentially and sell-side expectations for GDP growth are coming back down to earth. What’s more, Fed-sponsored inflation and price instability is the ultimate kryptonite for the economy as we head into 2H11.
Osama bin Laden’s death is a great victory for the U.S. Military and the American people, but it is important to keep that in context from a market perspective. Many market pendants are trying to spin this as a positive for the consumer and thus the overall market. While it may have been yesterday, for a time, consider the day-to-day realities facing Americans. Sky high gas prices, food costs, clothing costs, healthcare costs and declining purchasing power are a constant reminder to consumers of the fragility of the economy.
Even if Bin Laden’s death is to have a long-lasting impact on markets, it may be a negative one if any retaliation or escalation of extremist terrorist activity causes an increase in the global risk premium and the cost of oil. In fact, a CNBC.com poll conducted yesterday indicated that, of just under 10,000 respondents, 72% of people responded “No” when asked if they felt safer now that U.S. forces have killed Bin Laden.
The Dirty Dancers out there are counting their blessings that the market, perched on a precipice, is still on two feet thanks to the maintenance of the status quo. Quantitative Easing sponsors bubbles and I believe that while earnings have been strong of late, many markets are taking on more and more of the characteristics of a bubble. Dr. Rich Peterson uses three main parameters to describe a bubble. First, it’s a great story. Secondly, it has unlimited upside and finally, it is confirmed by higher prices. An asset class that is exhibiting these characteristics is difficult to resist. Pension fund managers and hedge fund managers alike are following market momentum as their performance targets require them to.
All the while, great stories are being told as to why the market should keep going up. Inflation is “transitory”. Japan’s catastrophe is not a big deal. Oil prices are still not high enough to impact the consumer, according to some. At the end of the day, all of these stories are supportive of higher equity prices.
How will it end? This debate begins on the topic of debt and deficits. Hedgeye believes that a country’s currency is a prescient indicator of its underlying economic health and we view the USD crashing as a bearish indicator, just as it was in 2008. Warren Buffett’s recent quote on the impossibility of a U.S. debt crisis of any kind “as long as we keep issuing our notes in our own currency” is based on several obvious assumptions that neither Mr. Buffett nor anyone in the investment or bureaucratic community can be certain of. The unexpected is unexpected for a reason. That the political make-up of Washington D.C. will allow the federal government to continue on this road or to involve itself with the States’ debt issues remains to be seen.
Part of the timeline of the USD Currency Crash call we’ve been making has been this literal moving target on the debt ceiling limit. It was only three weeks ago that Secretary Geithner was doing some Dirty Dancing of his own, drawing a firm line in the sand that May 16th was the debt ceiling debate’s date with destiny. Now, after 1Q11 GDP growth sequentially slowed and the dollar maintained its downward trajectory, Geithner has decided to join the festivities by pushing out the deadline to July 8th as of a few weeks back and now to August 2nd as of yesterday. “Extend and pretend” is a phrase that comes to mind.
In my view, the bottom line is this; there are some terrific story-tellers out there. Whether it’s today on Osama bin Laden’s death being bullish for confidence but not for oil, that the global currency market will tolerate this crashing of the global reserve currency, or Secretary Geithner procrastinating in the hope that the market will give the dollar a bid, story-tellers abound.
Lastly, this weekend I went shopping with my daughter for her prom dress. After trying on at least thirty different dresses, the first twenty-nine were not good enough, she found the right one. She has assured me that there will be no Dirty Dancing at the prom.
Function in Disaster; finish in style,
In preparation for the LVS Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from LVS’s Q4 earnings release/call and subsequent conferences.
Post Earnings Commentary
- “We’ve got a dominant position on the mass side and in the slots, and we’re experimenting with ETGs and it’s building up.”
- “We’re bringing a couple of junket reps in that one of our competitors have, and we’re building special rooms for them in the Plaza. And that’s part of the Four Seasons casino. And it takes time to build the rooms, so I guess we’re partially done. It’ll take a maximum of six months to do it.”
- “Now in the construction in 5 and 6, we’ll get about 4,500 workers on site, and we’re close – we’ve got plenty of foreign workers, but it’s tough to get the Macanese workers. But we’re ramping up slowly on that, and we’ll have enough workers to meet our schedule. So we’re going to open like a portion of Phase 1 in December, and we’ll open another – two portions in March and May. So we’re not experiencing a severe impact of the shortage of construction.”
- [Singaporean/non-Singaporean mix] “I just looked at yesterday’s Singaporean versus non-Singaporeans, the foreigners, and we were about 30% of the days. We’d like to keep it down to 30%. The government would
like us to keep it at 30%."
- “There is some discussion going on with the government about allowing us to put in some more ETGs.”
- “We’re short of VIP rooms, on the weekends. We're short of tables and slots.”
- “FIT is recovering, not as fast as we’d like to see it recover. And we used to have an ADR of $250 weekend, mid-week. Just this past weekend, we had about $260 ADR with 100% – 98% to 100% occupancy.”
- “We’ll probably, in 2012, have a record MICE year in terms of room occupancy and the percentage of total room nights that we occupy with groups.”
- “I understand the Cosmopolitan is maintaining high rates. But I’m told, although I have no idea, that they have less than half their rooms open.”
- “We have some extra land. We had bought steel to tear down the Sands Expo Center and move it a half a block away and connect it with a pedestrian bridge and build 5,000 more units where the Sands Expo is. We’ve scrapped that. And I think in the foreseeable future, I don’t think we’ll ever develop.”
NEW DEVELOPMENT OPPORTUNITIES IN EUROPE
- “Now we’re not going to go into any project that we can’t make a 20% ROI.”
- “We probably won’t have to put any money beside minor development money over the next couple years. But it’ll start in a couple of years, and then we’ll do it in four pieces at a time for a total of 12 pieces and see what happens after that.”
- “I’m very leery about overbuilding in the United States. So we are more inclined to do things internationally.”
Q4 Conference Call:
- [LV] “We continue to see an increase in MICE bookings through 2011 and into 2012.”
- "We experienced over 90,000 room nights for the month of January which was significantly ahead of last year, and we’re still booking."
- “Closer to home, we are following the process in Florida, Texas, and Massachusetts, and if the economics there provide a successful development opportunity, we will surely consider it.”
- [LV] “For 2012, we’re forecasting about 781,000 room nights, which is more than what we have today for leverage. And a forecasted ADR is close to $200 for next year, versus this year’s forecasted ADR of $180.”
- “During the first quarter of 2011, most of the major remaining elements of Marina Bay Sands will be launched, including the ArtScience Museum and light and water show On the Bay, as well as the opening of The Lion King. These events will all drive additional visitation and produce increased earnings at the property.”
- “I mean there’s a few days now right before Chinese New Year that it dropped down a little bit, but now it’s picking right up. Our occupancy numbers are getting close to the 90% target. Our MICE business in the first couple of months of this year is good. We still need to do some work there. We are really getting close to the occupancy potential now and the rate structure is very good. We’ve got a good rate going. Our restaurant business is up considerably from where it’s been and I think we’re probably 80% to 85% for the potential on the property for this moment in its lifestyle; so there’s somewhat to go but we’re really pretty well ramped up this point. Some more retailers are a little bit slower than we’d like. We’re open about 260 stores now, we got about 40 stores to go.”
- “It’s about in the mid-80s EBITDA on the mall coming in on the mall revenue today…. But we’re still in the early stages, but the long-term future of the mall in our business plan is to eventually dispose of the mall. And if you put a cap rate on that of 4% or 5% and you can see that we can do $170 to $200 million of EBITDA out of there by 2013 or so, that’s a lot of money in the bank for us going forward, so that’s what we’re watching.”
- “We’ll add 300 [slot] games by the end of Q1…. it’s ‘11 or it’s late in ‘11, you’re going to see $1.5 billion of cumulative revenue at a 65, 66, 67 point margin.”
- “We should get some more improvement in the EBITDA margin.”
- “We’re still waiting for the final situation with the government on the apartments. I feel very confident we’ll get something in this quarter.”
- “We think it’s a huge upside for us on the junket side, and not the premium side.”
- “In any event, where our relationship with the junket reps is improving, we’ve just brought on a top guy from one of our top competitors whose relationships with the junket reps is what we brought him on for. He’s a specialist in that, and we expect that to improve.”
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There is no question the United States has achieved a moral victory by finding and killing Al Qaeda leader Osama bin Laden. More practically, the implications relating to geopolitical risk are much less certain. While some would argue that killing the head of al-Qaeda is a positive development, there is also a credible case to be made that this action could potentially accelerate terrorist activity if bin Laden is perceived as a martyr by his brethren.
In assessing the impact of the death of bin Laden, it is important to note that he has been on the run from U.S. Special Forces for almost a decade. While figuratively bin Laden remained the head of al-Qaeda, there is no doubt that being on the run reduced his effectiveness from a operational leadership perspective. Practically, with the entire CIA looking for him and a massive award on his head, bin Laden realistically didn’t have the capability to micro manage al-Qaeda operations. Therefore it is unlikely that the killing of bin Laden will dramatically reduce the threat from al-Qaeda in the short term.
Stepping back for a moment, it is also important to note that the very nature and organization of al-Qaeda remains very much in question. There are some analysts that question whether al-Qaeda is as organized as is often portrayed by the press. In fact, as Marc Sagemen, a former CIA agent based in Islamabad, and author of Leaderless Jihad: Terror Networks in the Twenty-First Century, wrote:
“There is no umbrella organization. We like to create a mythical entity called al-Qaeda in our minds, but that is not the reality we are dealing with.”
This is a controversial position and is widely disputed, but the reality is that al-Qaeda is most certainly not organized akin to a Western criminal organization with specific command and control functions.
To this point, as of 2004 it was estimated that almost two-thirds of the senior leadership of al-Qaeda had either been captured or killed. If this were a typical American crime family, it would be safe to assume the family would be out of business. This has not been the case for al-Qeada. In fact, the July 2005 London bombings purportedly occurred without specific leadership from abroad. Conversely, the 2009 plot by three Londoners to detonate seven bombs on airliners bound for North America was tied directly to al-Qaeda. These actions suggest that al-Qaeda is alive and well despite this loss of “leadership.”
While al-Qaeda, as led by bin Laden, may have at a point in history provided funding or training for some of these groups, currently many them, as characterized by the 2005 London bombings, likely work largely independently. In fact, while bin Laden had at one time bankrolled al-Qaeda, his ability over the past decade to do so was limited by the fact that he was cut off from the family fortune; and even if he still had some independent wealth, moving those funds would have likely given U.S. operatives information as to his whereabouts.
Conceptually, Bin Laden’s key role over the past decade seemed to have been to fan the flames of discord against the United States, and the Western world generally. In this effort, he was certainly successful and the al-Qaeda network will likely need to fill this vacuum.
Ultimately, the real legacy of Bin Laden is the hundreds of thousands of operatives that have been trained in al-Qaeda terrorist camps. In fact, Gary Bernsten, a former senior ranking CIA official, and author of Jawbreaker, has estimated this number to be as high as 800,000. Despite the death of bin Laden, this large group of like-minded Islamic terrorists continues to exist.
It is also important to note that, based on the evidence, al-Qaeda activities are typically planned years in advance of when they are actually intended to occur. Therefore even if bin Laden were more directly involved in orchestrating broader terrorist activities of the al-Qaeda network then we believe he was, it is still not likely that any potential attacks currently in the pipeline would necessarily be thrown off course. The primary example of this process is the September 11th attacks in the United States. According to reports, the idea for these attacks was germinated in 1996 and planning began in 1998, which was a full three years before they occurred.
Not surprisingly, equity markets, as a proxy of investors’ propensity to accept more risk, have completely shaken off any potential positive impact of bin Laden’s death. This is partially because of the points outlined above, which suggest that killing bin Laden likely won’t halt terrorist activity in the intermediate term, but also because there is real potential that bin Laden’s death accelerates terrorist activity on the basis of avenging bin Laden. In fact, Hamas earlier today started stirring such emotions by stating the following in a press release:
“We condemn the assassination and the killing of an Arab holy warrior. We ask God to offer him mercy with the true believers and the martyrs."
We certainly won’t suggest that the world is not a better place with the death of bin Laden, but it is not quite clear that is a safer place, or that geopolitical risk premiums should be reset lower as a result. While the head of the serpent has been cut off, the snake is still very much alive and remains poised to strike.
Daryl G. Jones
In preparation for HYATT’s Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from HYATT’s Q4 earnings call.
- “During the quarter, we saw continuation of the operating trends we began to see earlier in the year, as business continued to strengthen across the system. Almost 70% of our full service hotels worldwide showed improvements in average daily rate.”
- “In terms of future asset sales, relative to the exploration that we started last year on a group of 11 assets, we may sell one more asset, which would conclude that process”
- [In 4Q owned hotels] “RevPAR results were negatively impacted by approximately 400 basis points due to renovation at five owned properties.”
- “Operating margins at comparable owned and leased hotels increased by 210 basis points in the fourth quarter. Approximately half of the reported margin improvement was a result of improved operating performance. The other half was due to items such as property tax refunds at a few hotel and other non-recurring items.”
- “The group revenue pace for 2011 is positive. Group revenue booked during the fourth quarter of 2010 for 2011 was up over 20% as compared to group revenue booked during the fourth quarter of 2009 for 2010.”
- “As for transient revenue, slightly higher rates resulted in higher revenues compared to the fourth quarter of 2009.”
- “Corporate negotiated business segments represents approximately 10% of our business in North America. With the majority of the negotiations complete, we expect a mid-to-high single-digit increase in corporate rates in 2011.”
- “Approximately 30% of full-service hotels in North America paid incentive fees in 2010… The number of international hotels paying incentive fees in 2010 was about the same as that in 2009, at about 80%.”
- 2011 Guidance:
- Capex: $380-400MM
- “Our maintenance CapEx that we’re looking at is between 5% and 6% of owned hotel revenue”
- “While we do not anticipate these renovations to significantly disrupt revenues, given that we’re scheduling most of the work to be done during the slower months, the capital expenditures for these renovations are above and beyond what we would consider a normal maintenance plan.”
- D&A: $280-290MM
- Interest expense: $50MM
- “This year we plan to open about 15 hotels”
- [SG&A]: “As we think about ‘11, we believe we will have inflation in terms of merit increases. We believe that we will be adding some incremental resources relative to supporting the development activities, largely in the areas of real estate, finance and legal. And we look at our head count on a very thoughtful basis. And the head count that we add incrementally is truly driven by growth in other related activities.”
- Capex: $380-400MM
- “We estimate that during the first three quarters of 2011, the cumulative negative impact of the renovations at our five owned hotels will be approximately 300 to 350 basis points to owned and leased RevPAR, and approximately $20 million to $25 million of EBITDA. This impact will be front-loaded, with the biggest impact in the first quarter... So if you’re going to split it between quarter one, quarter two, quarter three, I would say the mix will be more like 40% in quarter one, 30% in quarter two, and 30% in quarter three. The fact of the matter is, the number of rooms that we are taking out of inventory for renovation purposes, relative – in quarter one for example, relative to quarter four is up by about 20%.”
- “The hotels that we sold during the fourth quarter, the 2010 full year pro forma EBITDA would have been approximately $7 million. Second, we had some one-time factors in 2010 such as a timeshare settlement, which increased EBITDA in the first quarter, and non-recurring items, which helped margin growth during the fourth quarter”
- Q: “Business momentum …. in January and early February”
- A: “Like the others, the weather has hurt us. We’ve also had renovation. And I said earlier, the impact of renovation in the first quarter is going to be a little higher relative to the rest of the year just because we are taking advantage of, A, the momentum on renovation and, B, the slower top line growth. Internationally, the trends that we are seeing in the quarter continue. And overall, relative to our performance, North America looks slightly hurt relative to the weather, but international continues to chug along.”
- [Group business] “The business that is in our books as we step into 2011 is a little over 70%. And that’s in line with our expectations. That we have now – if you look forward, traditionally the business in 2012 and 2013, it’s a little difficult to predict because the visibility continues to be lower. The windows haven’t lengthened from that perspective. But traditionally at this time of the year, one would see about 40% of the business for 2012 booked and about 25% of the business for 2013.”
- “If you define peak as ‘07, we had 59% of the hotels in North America paying incentive fees at that point of time...So international peak, again, defined as ‘07 is a little north of 90%.”
In preparation for BYD’s Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from BYD’s Q4 earnings call.
- “While we expect to return to year-over-year growth in the second quarter, we also expect that the first quarter of the year may reflect a slight decline versus last year. This is due in large part to tough comparisons, not a fundamental shift in our business. Recall that the first quarter of 2010 was one of the strongest quarters in the Las Vegas Locals region we had experienced in several years as the economy appeared to be picking up steam, consumers were spending, and it appeared a full recovery was underway. Unfortunately, the recovery slowed dramatically in the second quarter, most notably due to the flash crash in May of 2010.”
- “Our first quarter has been impacted by severe weather in the Midwest and South regions. Nevertheless, we do expect to see strong sequential growth in revenue and EBITDA between the fourth quarter of 2010 and the first quarter of this year.”
- [re: convention business pickup] “During the first two quarters of 2011, we have also seen evidence of this at our own properties. We are projecting that our group business at our Las Vegas properties will be up 15% year-over-year.”
- “We’re also encouraged by early signs of a broader recovery in the Las Vegas market. For example, taxable sales were up nearly 3% in southern Nevada in December. This was the third straight month of improvement with five of the last six months showing year-over-year growth, signaling that consumers are starting to spend a little bit more.”
- “A $5 increase in spend per visit would result in growth of $20 million to $25 million annually in EBITDA in the Las Vegas Locals region alone.”
- “We’re increasingly encouraged by the outlook for the locals market. Although we should note that the promotional environment continues to be highly competitive. In fact, our largest locals competitor unveiled an unusually aggressive advertising and promotional campaign in February… they have not had an effect on our Las Vegas Locals operations. Despite this promotional activity, our coin-in and customer traffic have grown since they launched their campaign.”
- “Higher expenses at our Hawaiian charter operation impacted regional results in the fourth quarter. Fuel costs have been rising sharply in recent months, so we expect higher charter expenses to remain a factor in upcoming quarters. Despite this, we are encouraged by strength in our business volumes. Rated play from our Hawaiian customer segment rose in the fourth quarter and it was up again in January and February.”
- “We project that winter weather has cost the MSR [Midwest and South] nearly $3 million in EBITDA during the first 60 days of the year, though when weather’s not a factor, business levels are meeting our expectations throughout the region.”
- “We’re still going to see significant growth between Q4 and Q1 as we did last year. It’s just we will probably fall short of last year’s Q1 for those reasons. Part of it was weather once again, and part of it is just a strong Q1 last year.”
- “And despite horrible weather, Borgata maintained slot win at prior year levels in January and captured a record 21% share of the Atlantic City slot market. This marked the second straight month we set a new record in slot share.”
- “Corporate expense is projected for 2011 to be approximately $40 million to $42 million, and that amount should be spread relatively evenly throughout the year.”
- “For 2011 we expect consolidated depreciation expense to be approximately $195 million to $200 million, about $130 million to $135 million attributable to Boyd and the remaining to Borgata.”
- “We expect share-based comp to be approximately $12 million for 2011.”
- “Assuming three-month LIBOR stays in the 50 to 75 basis points range throughout this year, we expect Boyd’s interest expense to range from $145 million to $150 million in 2011, Borgata’s interest expense to be approximately $85 million to $87 million. Therefore consolidated interest expense should be reported between $230 million and $237 million for 2011.”
- “We expect the tax rate to be approximately 35% for 2011.”
- “Most of the upward trajectory on the revenue line is related to the frequency number as opposed to the spend per visit at this point.”
- “Borgata’s maintenance capital run rate is about $15 million and then they had the $50 million room remodel project of which about half of that will be spent in 2011. So for Borgata, it’s the $15 million maintenance plus the approximate $25 million room remodel to get to about $40 million for Borgata for 2011 and probably a similar amount in 2012. For Boyd, our maintenance capital run rate right now is about $50 million.”
- “Cash rooms in the Las Vegas market overall accounts for roughly, let’s call it 25% to 30% of our overall business mix and that would exclude things like wholesalers and other things, more FIT and convention business, more I’ll call them oriented customers. As far as the trending is concerned, the trends are actually continuing to strengthen in the second quarter.”
- “ On flat net revenues, you will have a positive impact on the EBITDA line.”