No QG3: SP500 Levels, Refreshed...



La Bernank just back-pedaled on QG3, so the market sells Euros and buys US Dollars on that. The rest of what we call The Correlation Trade also loses its bid. Get the US Dollar right; and you’ll get a lot of other things right.


From a TRADE, TREND, and TAIL perspective, here’s the risk management range:

  1. TRADE: support = 1306; resistance 1332
  2. TREND: support = 1319, continues to be challenged based on what the USD does
  3. TAIL: support = 1241; resistance = 1377

So that’s it. Be a Risk Ranger (our Q3 Macro Theme that we’ll launch at 11AM EST) and proactively manage risk around the range of price volatility that the Chairman of the Fiat Fools confuses as “price stability.”



Keith R. McCullough
Chief Executive Officer


No QG3: SP500 Levels, Refreshed... - spx


Not horrible but can't afford to miss big expectations. 



“We continue to generate substantial cash flow and repurchase stock, returning over $700 million to shareholders through share repurchases and dividends year-to-date. Clearly, we have plenty of reason for optimism.”

- J.W. Marriott, Jr., Marriott International chairman and chief executive officer




  • REVPAR for worldwide comparable systemwide properties: 6.8% (7.7% actual dollars)
  • International comparable systemwide REVPAR: 7.3% (11.9% actual dollars)
    • "Excluding the Middle East and Japan markets, international comparable systemwide constant dollar REVPAR rose 12.4 percent (a 17.5 percent increase using actual dollars)."
  • "North America, comparable systemwide REVPAR increased 6.6 percent"
    • "While hotels in Washington, D.C. continued to reflect weaker demand associated with a shorter Congressional calendar and concerns regarding government budgets, most North American markets reflected both strong demand increases and modest supply growth. Excluding the Washington, D.C. market, North American comparable systemwide REVPAR rose 7.1 percent in the quarter."
  • "Marriott added 32 new properties (4,512 rooms) to its... portfolio in the 2011 second quarter. Ten properties (1,603 rooms) exited the system during the quarter"
  • "Pipeline of hotels under construction, awaiting conversion or approved for development increased to 635 properties with over 100,000 rooms at quarter-end."
  • "While incentive fees rose in most markets around the world, growth was constrained by lower incentive fees in the Middle East and slightly lower incentive fees in the Greater Washington, D.C. market."
    • 25% of company-managed hotels earned incentive management fees
  • NA comparable company-operated house profit margins: +100bps
  • International "house profit margins for comparable company-operated properties ....increased 10 basis points and
    were challenged by lower REVPAR in the Middle East and Japan. Excluding the Middle East and Japan markets, international house profit margins in the 2011 second quarter increased approximately 160 basis points."
  • $4MM of lower termination fees negatively impacted owned, leased, corporate housing and other revenue, net of direct expenses
  • "Contract sales to existing owners represented more than 61% of sales in the quarter compared to 48% in the year-ago quarter. While sales to existing customers were strong, with fewer sales to new customers year-over-year and a lower average contract price, second quarter timeshare contract sales were flat compared to the year-ago quarter. Fractional and residential contract sales declined by $4 million due to continued weak demand for luxury products."
  • "Timeshare sales and services revenue, net of expenses, declined...largely due to lower interest income on a smaller mortgage portfolio and, to a lesser extent, higher product costs....reflected greater than expected deferred revenue"
  • "The increase in [G&A] expenses reflected several non-routine items including $7 million of higher legal expenses, a $5 million payment related to the performance of one hotel, $3 million of transaction-related expenses associated with the spin-off of the timeshare business, as well as higher costs associated with growth in international markets and routine compensation increases."
  • "The company repurchased 10.6 million shares of common stock in the second quarter of 2011 at a cost of $375 million."
  • 3Q Guidance:
    • NA comp systemwide RevPAR: +5-7% "reflecting strong demand in most markets, but continued weak
      demand in Washington, D.C."
    • International comp systemwide RevPAR: +6-8% (constant dollars) excluding ME & Japan. ME & Japan could drag down RevPAR by 200bps
    • WW comp systemwide RevPAR: +6-8% (constant dollars) excluding ME & Japan or 100bps lower including ME & Japan
    • Timeshare:
      • Contract sales: $165-175MM
      • Sales and service revenue, net of direct expenses: $40-45MM
      • Segment results: $25-30MM
    • G&A: $165-170MM "reflecting higher year-over-year workout costs, as well as higher costs in
      international growth markets"
  • FY Guidance (excludes timeshare spin-off impact):
    • RevPAR guidance remained unchanged from last quarter
      • NA comp systemwide RevPAR: +6-8% (unchanged)
      • International comp systemwide RevPAR: +7-9% (constant dollars) excluding ME & Japan. ME & Japan could drag down RevPAR by 200bps
      • WW comp systemwide RevPAR: +6-8% (constant dollars) excluding ME & Japan or 50-75bps lower including ME & Japan
    • 35,000 room additions in 2011
    • Fees: $1,305-1,325MM (took down top end by $10MM)
    • Owned, leased, corporate housing and other revenue, net of direct expenses: $120-125MM (took up the bottom end)
    • Timeshare:
      • Contract sales: "slightly below 2010 levels"
      • Sales and service revenue, net of direct expenses: $205-215MM
        • "$10 million lower than prior guidance largely due to lower reportability and higher
          rental expenses"
      • Segment results: $140-150MM
    • G&A: $710-720MM "reflecting several non-routine items including higher workout costs and year-to-date
      transaction-related expenses associated with the planned spin-off of the timeshare business, as
      well as higher costs associated with growth in international markets"
      • $5MM higher than prior guidance
    • House profit margins in NA +100-125bps and 150bps internationally ex ME & Japan
    • EBITDA: $1,135 to $1,180MM (lowered by $20-35MM)
    • EPS: $1.35 to $1.43 (took down top end by 2 cents)



  • Remains very bullish about the long term prospects for the industry and Marriott in particular
  • Transient business is back in a big way - occupancy increased 3.5%, reaching peak levels this quarter
  • Later this year, they plan to introduce a new Courtyard prototype for China
  • Fee revenue was a penny shy of expectations due to weaker Greater DC market.  Deferred revenue in timeshare hurt them by 2 cents. This was offset by 1 penny benefit of share buyback, 2 cent benefit of lower G&A due to a reversal of a charge
  • Washington DC RevPAR only rose 1% - approx 5% of their systemwide rooms are located in this market.  In 2010 - 6% of their WW fee revenues and 13% of incentive fees came from this market
  • Group RevPAR at MAR brand increased 2%. Group bookings made in the Q for later in 2011 increased 18%.  Booked business for 2012 in the quarter was 19% higher than last year. 
  • Timeshare results were hurt by higher sales and marketing costs and higher deferred revenues
  • $5MM reversal of loan loss provision and lower expected workout costs benefited G&A in the quarter
  • RevPAR growth in Europe is expected to moderate in 2H11 and Shanghai Expo comps are difficult for China
  • With more leisure in the 3rd Q, they expect 3Q NA RevPAR to be weaker than 1H levels but 4Q to be better than 3Q
  • Expect that there could be material costs from the timeshare spin off in the 2H11 which aren't included in guidance
  • Expect to remain aggressive in their share repurchase activity
  • Timeshare spin-off details:
    • Think that there is still a lot of upside from the points program
    • Modest non-securitized debt
    • Near term cash needs are modest given their existing inventory. Expect to generate meaningful amounts of FCF in the future.
    • Plan on selling off some land as well - have lots of beach front property
    • Will seek out opportunities with 3rd parties


  • Cash tax benefit from the spin-off will be several hundred million - with half recognized immediately and the balance over the next few years
  • Back half guidance for NA implies a large ramp in the 4Q
    • Around 7%
    • Sounds like they will be at the low end of their 6-8% guidance
  • Have incurred $6-8MM of transaction related expenses so far - but some of those will be capitalized.
  • D.C. distribution for them is about 2x industry average. Expect that D.C. to bump along at flat RevPAR levels for the balance of the year. Expect that 2012 could be weak as well with the Presidential election and budget crisis
  • Japan is suffering from less inbound travel and less domestic activity... seeing some signs of comeback - like in the F&B business. Still expect 4Q to be down 20-30% YoY.
  • Middle East:
    • Egypt: believe that it will come back but driven by wholesale European business but it's unlikely that that business will come back until there is real stability - so it's likely a 12-18 month recovery story
    • Jordan is more stable than Egypt but not great
    • Their guidance assumes that ME remains weak
  • Bought back $25MM in stock after the quarter close -They were not in a blackout period last month.
  • When Arnie said that it would take longer to get back to peak profits - its was relative to RevPAR which is already back at peak... not signaling a change in their long term guidance that they presented at their analyst day.
  • Despite leisure travel being more price elastic than business, they have been pleased with leisure demand since their customer is relatively affluent.
  • Seeing a broad recovery - steady as she goes - with business transient being the most robust, seeing group bookings build steadily, and good leisure performance
  • Why was 2Q group business RevPAR - paid and stayed - only up 2%?
    • Because it's a lagging metric indicative of bookings 2 years ago.  However, business booked more recently is much better - it does take a while to build that book of business though
  • Impact of last terror event in Mumbai was not material on India's RevPAR results. Do not expect that yesterday's terror event to have a significant impact.
  • ME accounted for $30-35MM of fee income in 2010.
  • Special corporate negotiations are not underway yet for 2012. Special corporate rates are still down double digit from peak and expect to see healthy growth next year if economic recovery continues
  • Sales force one?
    • Still very early in the process to evaluate the success of that rollout
  • Group RevPAR growth for STR was 8% - why was their growth so much worse?
    • Think that their hotels are larger and do larger events which have longer lead times and that can explain why their numbers are weaker than those reported by STR. Some of that could also be geographic mix.
    • Not sure where this analyst got his numbers from but industry RevPAR for group was up 3-4% not 8%
  • What % of their group business is on the books for 4Q?
    • 90% or so. Think that their RevPAR is probably up low single digits.  Maybe revenue growth will be up close to mid-single digits
  • Deferred revenue in timeshare relates to financed sales.  They ran higher first day incentives and as a result some of their sales didn't meet the 10% recognition criteria to recognize the sales. So those sales will likely be deferred until early next year.
  • They are not losing share to their competitors according to their competitive set data. Their under performance due to the reported STR data for UUP data is due to their larger group business and geographic distribution.
    • Have more suburban hotels
    • Detroit, Atlanta and D.C are outsized for them vs. comp set
  • Timeshare sales in 2Q will likely be reported in 2H2011 - however, if the promotions continue 2011, sales are likely to spill into 2012. They have deliberately focused on their existing owners in the first year of the points program introduction. Over time they expect that the ratio of sales goes back to the historical averages of 50/50.
  • Why did they need to roll out the extra promotional activity in the Q?
    • In 2009/2010 they made a concerted effort to reduce their financing offers. Now financing is around 40%.  Instead of doing more discounting like they did in the last 2 years, they are raising prices but offering more financing and incentives.

Athletic Apparel/FW Notable Divergence


Last week, we saw the biggest diversion between weekly athletic apparel vs footwear sales in six weeks, as ASPs in apparel turned down sequentially by 7.4%, and both footwear units and apparel units and ASPs turned up. We’ll stick with the cliché that one week does not make a trend. But it’s definitely worth noting this especially given that the ICSC index turned positive as well, and the yy comparision for apparel is getting easier on the margin.



Weekly athletic apparel and footwear sales maintain positive underlying momentum following the conclusion of a strong June that was consistent with the rest of retail. While apparel sales reflect a sharp sequential deceleration in both sales and ASPs this week due to challenging one week compares, underlying two-year trends remain steady. Most noteworthy is the continued strength in ASP trends following a more promotional April/May period in footwear at a time when most of retail accelerates discounting ahead of back-to-school. This suggests that margins have likely improved at footwear and sporting goods retailers since May – good for DKS and HIBB, even more favorable for FL and FINL. Here are a few key callouts from the week:

  • Following a consistent stretch whereby athletic specialty retailers have outperformed the other channels, the discount/mass channel was the top performing last week. We expect strong yy sales growth in the athletic specialty channel to resume next week.
  • For reference, in order to keep underlying 2-year trends in apparel constant with results since May, yy sales growth would have to return to HSD – LDD and ASP to LSD growth levels. With compares getting even more favorable in July after this week, we could see an acceleration of sales into quarter end.
  • In apparel, Running (+35%) and All-Performance T-shirt (+24%) categories continue to substantially outperform Compression product (-3%) due in large part to Under Armour diversifying their apparel mix to include non-compression charged cotton product.
  • Interestingly, while regional performance data has been temporarily discontinued by SportScan as they integrate new participants into the apparel sample, retailers commonly mentioned particularly strong sales in the Northeast during June. This is in stark contrast to the underperformance in the NE as reported by SportScan in through May – a notable improvement particularly for DKS, which is over-indexed to the region.
  • Share gains at Nike in both footwear and apparel in recent weeks is the most notable brand callout. In apparel, these gains are coming largely at the expense of UA as sales of charged cotton moderate and Adidas. In footwear, Skechers, Puma, and New Balance continue to lose share to leading brands. As noted, sales growth of Under Armour apparel has decelerated to mid-to-high single-digits in each of the last three weeks following a run of double-digit growth over the past 3+ months since the introduction of its new charged cotton line.
  • As a reminder, monthly footwear data will be out in next week providing additional clarity into sales trends within the athletic specialty channel through the first two months of the 2Q at which time we’ll highlight any changes to our view of expectations.

Athletic Apparel/FW Notable Divergence  - FW App Agg Table 7 14 11


Athletic Apparel/FW Notable Divergence  - FW App ASPs 7 14 11


Athletic Apparel/FW Notable Divergence  - FW App ASPs T3W 7 14 11


Athletic Apparel/FW Notable Divergence  - FW App FW Table1 7 14 11


Athletic Apparel/FW Notable Divergence  - FW App FW Mkt Sh 7 14 11


Athletic Apparel/FW Notable Divergence  - FW App App Table 7 14 11


Athletic Apparel/FW Notable Divergence  - FW App App 1Yr 7 14 11


Athletic Apparel/FW Notable Divergence  - FW App App 2Yr 7 14 11


Casey Flavin





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20 Proprietary Risk Ranges

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Initial Claims Fall 13k - Minnesota Shutdown Adds 11.5k

Initial claims fell 13k last week (22k post the upward revision to last week's data).  Rolling claims fell 3k, but the prior week was revised upward, wiping out last week's 3k gain.  Net/net, rolling claims remain at the same level they were reported to be last week.  However, the decline in reported claims is a positive signal.  Furthermore, 11.5k of the reported claims number was attributable to the Minnesota government shutdown.


We also show the initial claims of newly discharged veterans.  Despite the current drawdown in troop levels, veterans' claims are roughly flat YoY and down from their recent peak.  Veterans' claims are reported on a one-week lag, and account for roughly 10% of total weekly claims.  















Yield Curve Tightens WoW

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 3Q is tracking 1 bp tighter than 2Q.  The current level of 254 bps is 13 bps tighter than last week.






Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 




Joshua Steiner, CFA


Allison Kaptur



Not awful but looks like a slight slowdown in RevPAR.



Relative to whisper expectations, Q2 RevPAR and Q3 RevPAR guidance is probably a little disappointing.  As many of you know, we’ve had been anticipating a June/July RevPAR slowdown based purely on the sequential math of absolute dollar RevPAR and historical seasonality.  Admittedly, we had expected a bigger slowdown which makes us a little more positive on the stocks actually, but only after the Street absorbs the lower expectations.  Assuming our macro view doesn’t get any worse, look for us to get more constructive on some lodging names as we move into late summer.



MAR 2Q11 Review

Revenue was $2MM lower than our estimate – with fees coming in $8MM light and somewhat offset by owned,  leased corporate housing and other and timeshare coming in $3MM and $4MM better, respectively.  Lower revenues were offset by lower SG&A, taxes, and share count, resulting in an in-line EPS number.

  • System-wide rooms came up short of our estimate because they included Cosmo rooms in the base
  • Fee revenues were $8MM lower than our estimate and $1MM below the low end of company guidance. The miss was across base, franchise and incentive fees – the company blamed lower incentive fees on weak ME and Greater D.C. areas.
  • Owned, leased, corporate housing and other revenue net of expenses ($29MM) was in-line with our estimate and at the higher end of company guidance.  Margins were negatively impacted by a $4MM YoY decline in termination fees.  Branding fees weren’t disclosed.  It appears that food, beverage and other revenues declined 16% YoY – not inconsistent with the 20% decline we saw last quarter – likely as a result of higher rate driven by more giveaways (free internet, free parking, complimentary breakfast, etc)
  • Timeshare sales and services revenue, net of direct expenses of $43MM missed the low end of company guidance by $7MM.  MAR attributes the miss to lower interest income on a smaller mortgage portfolio and higher productions costs as well as a higher percentage of deferred revenue.

Other stuff:

  • G&A of $159MM was $6MM below the low end of company guidance and would have been even lower if not for several ‘one-time’ items
    • $7MM of higher legal fees
    • $5MM payment to the performance of one hotel
    • $3MM of transaction related expenses associated with the spin-off transaction
  • Interest expense of $37MM was also lower than our estimate – MAR sited higher capitalized interest as part of the reason behind the decline


EBITDA guidance for the full year was lowered by $20-35MM – driven by

  • $10MM decrease in fees
  • $10MM decrease in net timeshare sales and service revenue (deferred revenue and lower interest on smaller mortgage portfolio)
  • $5MM increase in SG&A

Somewhat offset by

  • $5MM higher net owned, leased, corporate housing and other revenue
  • Lower share count (buyback)
  • Lower tax rate
  • Lower interest expense (higher capitalized interest)


Notable news items and price action pertaining to the restaurant space as well as our fundamental view on select names.




The performances of the QSR stock yesterday continue to suggest that business trends continue to remain strong ad that this should be a strong earnings season.  The food processors continue to struggle with high commodity prices.





Lower energy prices and a downshift in the domestic economy have taken the edge off U.S. import prices, as they fell 0.5% in June. Imported food and beverage prices fell 1.9% in June, larger than the 0.7% decline in May.


This morning, jobless claims were above 400k yet again, coming in at 405k.  While this was below consensus at 415k, and the week prior’s revised 427k, it shows that the employment scenario is still far, far away from improving meaningfully.  4-week rolling claims declined slightly week-over-week but remain elevated at 423k. 






  • YUM beat expectations on the back of outstanding +18% same-restaurant sales growth in China.  Margins in China were down, however, and the consolidated tax rate was lower-than-usual, providing a boon to earnings.  YRI comps were up +2% and the U.S. comps declined -4%.  The earnings call will take place at 9:15 am.
  • YUM’s KFC was mentioned, alongside KO, as two companies that sent representatives to North Korea earlier this month to discuss opening branches in Pyongyang.
  • SBUX has debuted a new kiosk concept at the JW Marriott Indianapolis.  According to a company release, the new kiosk will feature the full Starbucks menu.
  • MCD has prevented Russian authorities not to double its tax bill by persuading them that its outlets are supermarkets rather than restaurants.


  • RUTH, RT, BWLD, and BJRI all gained on accelerating volume.




Howard Penney

Managing Director


Rory Green


Early Look

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