In preparation for IHG’s Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from IHG’s Q4 earnings call.



  • “Although our visibility remains limited ... our demand trends do look very good and our momentum is strong.”
  • “In terms of system size, we expect growth to remain modest this year as the last tranche of exits related to the Holiday Inn re-launch directly are managed out of the system. In future years, the level of removals should revert to historic norms. And that should allow us to produce annual net system size growth of between 3% and 5% over the medium term.”
  • “For 2011, we expect the effective tax rate to be in the high 20%s. And going forward, the rate will move toward the low to mid 30%s.”
  • “Based on our expectations of the net system size movement in the Americas franchise business due to these exits, we expect a decrease in royalty fees in the region of $15 million in 2011.”
  • “Looking at 2011, our continued focus on costs and efficiencies mean that, based on the current trading outlook and at constant currency, our expectation for regional and central costs is between $250 million and $260 million as planned incentive payments return to a more normal level.”
  • “In 2011, we are starting a number of technology enhancements, which means that we do expect maintenance capital expenditures to go back above depreciation and to be in the region of $150 million.”
  • “We now have... an 18% share of the global industry pipeline. That compares to a 3% share of the total open hotel system and an 8% share of the total open branded system. And within that pipeline we have the top three brands, Holiday Inn, Holiday Inn Express and Crowne Plaza.”
  • “On Barclay, we’ve obviously been working on preparing for the sale for a little while. So we’re clearly looking to sell, just to be clear, keeping flag and management on the hotel. We’re also going to be selling it with a requirement to refurbish the property as well. So we actually have a refurbishment plan. We’re talking in the order of $100 million refurbishment plan to really bring the hotel back to where it needs to be and to compete effectively or complement effectively the new InterContinental we’ve got in Times Square….So we’ll probably be looking second half of the year.”
  • “I think we’re seeing finally some thawing in the lending markets in Northern Europe where they’ve been very difficult for a period.”
  • “And if you look at the January numbers, we’re up again. And North America trends are looking very good in that area.”
  • “So at the moment we’re thinking maybe inflation up to mid-single digits is where we’re going to finish, although we’re only three-quarters of the way through that process.”
  • [1% REVPAR sensitivity on EBITDA] “Yes. 1%, $13 million still holds. That’s a full-year number. Obviously it slightly depends where the RevPAR growth comes through, but we think that holds for 2011. So we haven’t changed that.”
  • “HPT. We continue to have discussions with them. The guarantee will burn out this quarter one and we’re into deposit. So good-natured discussions, but ultimately we’re earning no income from that portfolio and we need to earn some income from it. So we’ll see where we get to, but we’re continuing to talk to them.”
  • "We’re seeing no slowdown in deal pace in China at the moment.”
  • “I think what we’re that the Holiday Inn Express, and the Holiday Inn core brand are now starting to hit their stride, the markets stabilizing around price points... One of the interesting features, though, is how well Holiday Inn is doing. It’s getting very competitive now. For a time, the differential between Holiday Inn Express and Holiday Inn was actually in the opposite direction that you might have expected, and Holiday Inn Express was quite often outperforming Holiday Inn. We’re beginning to see that now move in a different direction as the Holiday Inn with food and beverage product starts to – the quality of that estate now starts to come through.”
  • “I think the long-term intention is to move the Holiday Inn brand premium up. We’re already about 10 points better than the segment’s average on average. And we would like to start to close some of the gap on the upscale brands that are above it, and we see no reason now with the quality of the estate, and the brand imagery that we’ve got out there that over time, and as people get used to the new product, we can’t actually start to close the gap on some of its more upscale competitors.”
  • “We have 25 hotels in Shanghai at the moment; that will be going up to 40, 42... Even though we are well-dispersed through the secondary and tertiary markets, we still have leading positions in the major cities in China. There is quite a large discrepancy between the highest RevPARs based on Holiday Inn or a Crowne Plaza, and the lowest, it’s probably about 50% at the low end for the regions. We anticipate that will change over time and will start to close down, bu it’ll be quite some time yet before that happens.”
  • “We have a broader distribution across America than perhaps some of our competitors, given the heartland states of our midscale estate. But at the moment, we are still seeing the big driver of our business in the States coming out of the big centers. But I’d have to investigate it a bit further to see if we’re actually getting anything in that’s happening in the Midwest, particularly that’s changing the results. But as you say, we are definitely seeing the engine pick up speed, and our January numbers were stronger again than Q4, which was stronger again than the overall for the year. So, we’re definitely picking up pace.”


Notable news items and price action from the past twenty-fours along with our fundamental view on select names.

  • MCD Global sales results were released this morning.  Global comps came in at +6%.  U.S. comps gained 4% while Europe and APMEA both produced comps of +6.5%.  The results were impacted by a calendar shift that impacted results by between 0.9% and 1.0%, depending on the area of the world.
  • MCD Japan sales results revealed that April comps came in +3.6% year-over-year.  24 of the 264 doors closed due to the March earthquake/tsunami disaster.
  • DPZ gained 3.7% on accelerating volume. GMCR, THI, and DIN were other gainers that traded with high volume Friday.
  • BAGL, KONA, and PFCB all declined on accelerating volume Friday.




Howard Penney

Managing Director


TODAY’S S&P 500 SET-UP - May 9, 2011


Plenty of talk this morning about what’s not new news to European bond/equity/FX market prices: (1) Greek Bond yields have been pricing in restructuring/default for 6 weeks (10s at 15.65% this morn) and (2) Greek Stocks (ATG Index) have been crashing since FEB (down -0.87% this morn; down -20.8% since February 18th).  As we look at today’s set up for the S&P 500, the range is 18 points or -0.54% downside to 1333 and 0.81% upside to 1351.




The Hedgeye models now have 6 of 9 S&P Sectors bullish TRADE and 7 of 9 bearish TREND.  The XLE and XLF are broken on both durations.




THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: +993 (+1731)  
  • VOLUME: NYSE 1026.81 (-7.78%)
  • VIX:  18.20 +6.56% YTD PERFORMANCE: +2.54%
  • SPX PUT/CALL RATIO: 1.85 from 1.94 (-4.41%)



  • TED SPREAD: 26.19
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 3.19 from 3.18
  • YIELD CURVE: 2.62 from 2.60 



  • 11:30 a.m.: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 4 p.m.: Crop progress (winter wheat, cotton, corn, soybean)


  • Hertz makes hostile cash & stock bid for Dollar Thrifty, offering $72-shr; $57.60 in cash, 0.8546-shr equal to $14.40. Offer is 3.3% premium over DTG’s Friday close $69.69.
  • Greece wants reduced interest rate on the aid it received from the IMF and the EU -- Reuters
  • Marriott increases quarterly dividend by 14.3% to $0.10 from $0.0875; increases stock repurchase program by 25M shares



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Commodities Rebound From Worst Week Since 2008 as Crude Oil, Silver Climb
  • Crude in New York Rebounds to $100 After Biggest Weekly Decline Since 2008
  • Copper Climbs on Speculation Biggest Weekly Drop Since March Was Overdone
  • Wheat, Soybeans Gain Second Day as Commodities Slump, Weather Lure Buyers
  • Silver Futures Rally From Worst Weekly Loss Since 1975 as Investors Return
  • Sugar Rises as Brazil Production May Miss Estimates; Coffee Prices Climb
  • Palm Oil Climbs First Time in Four Days as Commodities Rebound from Slump
  • Coal Prices Rise for Sixth Week to Two-Year High in China as Demand Surges
  • Mississippi to Crest Tomorrow in Memphis as Floods Expected to Move South





THE HEDGEYE DAILY OUTLOOK - daily currency view




  • Eurozone May Sentix Index 10.9 vs consensus 12.0
  • UK Halifax Apr House price index (3.7%) y/y vs consensus (2.9%)
  • The periphery is dragging down the region on newspaper reports that Greece wants reduced interest rate on the aid it received from the IMF/EU







  • Most Asian markets rose today on the back of positive US employment data.












Howard Penney

Managing Director

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Fiat Laws

“Man is free if he needs to obey no person but solely the laws.”

-Immanuel Kant


Kant was an 18th century German philosopher who over-weighted the value of real-life experience versus academic theory. Hayek used Kant’s aforementioned quote in “The Road To Serfdom” to support his point that unchecked government planning and the Rule of Law run counter to each other’s objectives.


“By giving the government unlimited powers, the most arbitrary rule can be made legal; and in this way a democracy may set up the most complete despotism imaginable.” (F.A. Hayek, “The Road To Serfdom”, 1944, page 119).


Since professional politicians gave Hank Paulson the TARP “bazooka” and started begging The Bernank for both “shock & awe” rate cuts to zero (2008), then The Quantitative Guessing (2009-2010), we’ve been waking up every morning trying to manage risk around Fiat Laws.


This morning’s speculation as to what the European Union is going to do with Greece’s $110,000,000,000 lifeline of bailout Euros is no different than the perpetual risk management exercise of Gaming Policy that we engage with here in the US. It’s a sad state of the “free” market union.


The good news is that we can measure the Global Macro risks embedded in the next Big Government Intervention mathematically. If the intermediate-term TREND of US Dollar Debauchery is going to change, the currency market is going to signal that to us in real-time.


Last week’s short squeeze in the US Dollar did exactly what we thought it would do if and when it stopped crashing – it started making everything else start to crash. The Bernank calls this “The Price Stability.”


With the US Dollar closing up +2.6% week-over-week (only it’s 5th up week in the last 19 weeks), here’s what The Correlation Risk looked like:

  1. Euro = DOWN -3.4%
  2. CRB Commodities Index = DOWN -8.9%
  3. WTI Crude Oil = DOWN -14.7%
  4. Gold = DOWN -4.2%
  5. Copper = DOWN -4.8%
  6. Volatility (VIX) = UP +24.7%

No, that’s not a typo on the marked-to-market pricing of The Price Volatility associated with The Bernank pandering to the political winds and keeping “hope” for a 3rd round of rule making (QE3) alive.


Now, for myself, The Price Volatility is cool because I’m trying to prove that Big Government Intervention in our markets does nothing but A) shorten economic cycles and B) amplify market volatility.


For our profession and the economy that we live in, it’s not so cool. Last week’s US jobless claims (474,000 – breaking out to the upside) reflect this. So does the weekly Bloomberg consumer confidence survey coming in at minus -46.1. Volatility crushes confidence.


While there is a lot of partisan fanfare about a “bull market in stocks”, I don’t think I have ever seen so much storytelling go alongside a +6.6% YTD return for the SP500 since I started in this business 13 years ago.


Globally, as of Friday’s closing prices, the big “bull market” in equities isn’t especially bullish looking either. Take a look at the Top 3 Global Equity market performers for 2011 YTD:

  1. Venezuela = +17.6%
  2. Hungary = +11.2%
  3. Romania = +10.0%

Go Chavez and the Keynesian Kingdom?


Notwithstanding The Price Volatility that it’s taken us to get to another lower-long-term high in US Equities (down -14.4% versus it’s October 2007 peak), isn’t it interesting that there are only 3 stock markets in the world with double digit returns for the YTD?


Markets aren’t “free” – at least not like they used to be. And being reminded of that last week is why I took up the Cash position in the Hedgeye Asset Allocation Model on the Bin Laden news. Here are my current asset allocations and positions:

  1. Cash = 43% (versus 34% last Monday)
  2. International Currencies = 24% (Chinese Yuan and British Pounds – CYB and FXB)
  3. Commodities = 12% (Gold and Oil – GLD and OIL)
  4. Fixed Income = 9% ( US Treasury Flattener – FLAT)
  5. International Equities = 6% (China – CAF)
  6. US Equities = 6% (Technology – XLK)

As a reminder, the way I think about asset allocation is the way I think about my own net worth. I’m not saying that’s a perfect methodology for everyone else – I’m just saying it’s the only one I can hold myself accountable to. So after a +98.2% two-year rally in US stocks (where we got bullish in 2009), it shouldn’t be a surprise to see me wait and watch for my spots to get invested again.


We made a call in April of 2010 called “May Showers” that saw The Price Volatility index (VIX) shoot up to 45 by June. Looking ahead at the US political calendar of deficit and debt ceiling debates this June, I’m not especially hurried to be levering myself up alongside my least favorite Fiat Fools either. I’d rather obey my own risk management laws.


My immediate-term support and resistance line for Gold are $1485 and $1521, respectively. Immediate-term support and resistance for oil are $98.63 and $109.11, and my immediate-term support and resistance lines for the SP500 are now 1333 and 1351, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


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Correlation Risk

This note was originally published at 8am on May 04, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We are willing to accept almost any explanation of the present crisis of our civilization except one.”

-F.A. Hayek


That’s an important quote from page 65 of a chapter that Hayek wrote in “The Road To Serfdom” titled, “The Abandoned Road.” As I take a step back and think about what a tremendous opportunity our profession has had to learn about real-time risk management and the interconnectedness of Global Macro markets in the last 3 years, it’s somewhat sad to realize that consensus hasn’t been paid to learn much.


What we get paid to do is chase short-term returns. The Bernank perpetuates this performance pressure by marking the short-term “risk free” rate to model (or the ZERO bound) and, as a result, this gargantuan experiment of starving savers of returns imputes 3D Risk (3 D’s) into markets:

  1. The Dare – zero percent rates dare you to chase yield across asset classes where you can justify it
  2. The Delay – zero percent short-term financing for banks delays the financial restructurings that free market prices would impose
  3. The Disguise – zero percent expectations disguise the interconnected risks associated with carry trading, correlation risk, etc

The Disguise is the one that can really nip a perma-bull in the butt. That’s the one that, allegedly, “no one can see coming.” That’s the one that is being revealed real-time. In terms of making excuses for being willfully blind to it, this time is different because we have a modern day technological innovation in financial market transparency – it’s called Twitter.


Going back to Hayek’s aforementioned point, I think that’s the one thing our professional politicians do not get paid to understand. That would be called accountability. The Disguise in financial markets is The Correlation Risk – and while his original text was addressing a different kind of socialism and Big Government Intervention in 1944, I still think what Hayek goes on to say about explaining our perpetual financial “crisis” is very appropriate:


“… that the present state of the world may be the result of genuine error on our own part… and that the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected.”


With another 78 Billion Bailout Euros being extended to the government of Portugal this morning, Spain seeing unemployment spike to 21.3% (new all-time highs), and Americans staring down $5/gas at the pump with jobless claims re-accelerating, wasn’t that some advice our “independent central bankers” and fiscal spenders should have considered?


Independent research? Should we just never mind silly old school things like the American Constitution or what John Locke wrote On Liberty 80 years before Hayek penned his original counter-points to Keynes? Just buy-the-damn-dips, chase yield, and believe that it’s going to end well this time?


Back to The Correlation Risk and playing the game that’s in front of you…


Given that the US Dollar is the #1 factor we are talking about when we say Global Macro Correlation Risk (say it central planners -“who –ho-wns de Campaigner-in-Chief?”), let’s  get a real-time price check on how that looks on our intermediate-term TREND duration (3 months or more):

  1. Crude Oil = -0.92
  2. Gold = 0.94
  3. Silver = -0.94
  4. Coffee = -0.84
  5. Pork Bellies = -0.92
  6. CRB Commodities Index = -0.87

I know, I know – The Bernank calls this commodity stuff that you put in your cars, stomachs, and teeth “transitory”…


How about the intermediate-term TREND inverse-correlations between the US Dollar Index and relatively larger matters like countries?

  1. USA (SP500) = -0.82
  2. Brazil = -0.88
  3. Mexico = -0.82
  4. Germany = -0.93
  5. Spain = 0.94
  6. Russia = -0.85
  7. China -0.85
  8. South Korea = -0.90
  9. Australia = -0.91

How about the obvious, the intermediate-term TREND inverse correlations between the USD spot price and the world’s currencies?

  1. Euro = -0.99 (not a typo)
  2. Swiss Franc = -0.96
  3. British Pounds = -0.95
  4. Chinese Yuan = -0.92
  5. Japanese Yen = -0.87
  6. Singapore Dollar = -0.96
  7. Aussi Dollar = -0.94
  8. Brazil’s Real = -0.92
  9. Canadian Dollar = -0.85

Really? Yes, President Obama – really. This Correlation Risk math checks out from Hawaii to Havana. We get it. Anyone gaming Geithner and The Bernank get it. The Chinese get it.


In the Peoples Bank of China’s Q1 Monetary Policy Statement last night (published on China’s website – not to be politically pandered to on 60 Minutes this Sunday or at a US Federal Reserve Presser), this is what the Chinese had to say about all of the aforementioned real-time prices:


“Stabilizing prices and managing inflation expectations are critical… given the loose monetary policies of major economies and gradual recovery of the global economy, commodity prices and global inflation expectations are rising significantly.”


“Significantly” versus “transitory.” Academic dogma versus independent analysis. Government storytelling versus Correlation Risk. It’s all out there folks. It always has been – and, sadly, when it comes to US policy, so has Hayek’s “Abandoned Road.”


My immediate-term support and resistance lines for Gold are now 1525 and 1565, respectively. For oil I’m at $109.39 and $114.21 – and for the SP500, my immediate-term support and resistance lines are now 1349 and 1373, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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