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Sausage: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU), Short Consumer Staples (XLP)


Making the multi-factor, multi-duration, risk management sausage isn’t easy. If it was, Nomura would be sending you a note today about sausage.


I’ve been writing this since the SP500 got back above its immediate-term TRADE line of support (1169), and it’s the point to be made once again. The SP500 is bullish TRADE and bearish TREND/TAIL with the following lines that matter: 

  1. TRADE = 1169
  2. TREND = 1229
  3. TAIL = 1266 

Broken TREND/TAILS are not good. This, anyone managing risk over the course of the last 5 months knows. What they may not know is that when an immediate-term TRADE breakout expedites itself on a low-volume squeeze, you create a big air-pocket.


Air-pockets, within bearish TREND/TAILS, are not good either. As prices move higher within then, the probabilities of a crash (from those higher prices) increases.


If this market fails at 1229 and dives below the TRADE line again – and it could all happen very abruptly – I’d call a 1-3 day short-term peak-to-decline move towards 1086 probable.


People like to talk about “risk management” on a revisionist basis. The real-time risk management occurs when someone flags the probability of something crashing going up as the market is going up.


That’s not me making up mathematical stories. That’s just how I make the sausage.



Keith R. McCullough
Chief Executive Officer


Sausage: SP500 Levels, Refreshed - SPX


Bullish commentary, all things considered. Q4 RevPAR expected to accelerate over Q2/Q3.  We still like lodging.




  • "Comparable hotel RevPAR increased 6.4% for the third quarter, as a result of the improvement of average room rate of 3.7%, combined with an increase in occupancy of 1.9 percentage points to 75.8%... Comparable hotel adjusted operating profit margins increased 110 basis points and 80 basis points for the third quarter and year-to-date 2011, respectively." 
  • Euro JV completed the acquisition of 396 room Pullman Bercy in Paris for Euro 96MM on September 30th and will fund Euro 9MM of renovations at the property. Accor will continue to operate the hotel.
  • On 8/30 HST purchased the remaining 51% interest in Tiburon Golf Ventures which owns the golf club surrounding the Ritz Naples Golf Resort for $11MM
  • Capex in the Q: $32MM in ROI projects (NY Marriott Marquis was completed) and $63MM of renewal and replacement capex
  • Used proceeds from the issuance of $500MM 5 7/8% Series W Sr. notes to repurchase $105MM face of 2 5/8% 2007 Debentures for $106MM which were puttable to HST in April 2012 and likely to get put back based on HST's stock price
  • Guidance was lowered due to a delay in the anticipated closing of the Grand Hyatt Washington DC acquisition which they company assumed would close in September and is now forecasted to close on December 14th. Previously issued guidance included $9MM of EBITDA in 4Q11 from the Grand Hyatt DC.  Should the acquisiton not close, HST will forfeit its $15MM deposit, negatively impacting FFO by $0.01, Adjusted EBITDA by $15MM and net income by $8MM.
  • FY2011 Outlook:
    • Comp RevPAR: 6.25-6.75% vs. 6-8% previously
    • Operating profit margins: +170-190bps vs. 210-260bps previously
    • Comp hotel adjusted operating margins: +80-90bps vs. 100-140bps previously
    • FFO: $0.86-$0.88 vs. $0.88 - $0.93
    • Adjusted EBITDA of $1,015-1,025MM vs. ($5-25MM lower than previous guidance)
    • FY Capex: $220-240MM for ROI projects and $300-320MM in renewal and replacement projects



  • Current RevPAR levels are just slightly shy of (1.3%) of peak 2007 level.  Irene caused a 60bps hit to the quarter as their downtown NYC hotel was evacuated and Washington conferences were cancelled.
  • Business mix trends were favorable this quarter. Transient demand and rate were the primary drivers of growth.  Retail rooms were down slightly but special corporate was up 5.3%. Transient revenues grew more than 7%.
  • 15% increase in demand in higher rated corporate business as discount business declined 6% - resulting in a 4% increase in group business in the quarter
  • Outlook for 4Q remains quite positive.  4Q booking pace is up 2% and revenues up 5%. Transient up 6% so far. Do expect that 4Q RevPAR growth will be in-line or slightly better than the last 2 quarters.
  • Fundamentals for their business continue to be attractive:
    • 0.5% supply growth in 2012.  Occupancy should continue to grow even if GDP is very modest at higher rates
    • Recently issued government per diem rates increased 5% on average
    • Special corporate rates should also be higher
    • They should continue to benefit from mix-shift and rate increases
  • RevPAR in Paris has increased 18% YTD and expect it to perform well going forward
  • Determined that extended the closing date of the Grand Hyatt DC made sense in light of the continued global turmoil.  Still believe that the hotel is a good asset in a great location. Unlikely that any other acquisitions would close before year end.  They are marketing a few assets for sale but those are likely to close in 1Q12.
  • They were very pleased with operating results in the quarter despite global turmoil.  They feel like only risk is reflected in the group's stock movement.  Their equity price suggests a price per key of just $200k- or just 50% of replacement costs
  • Phoenix - 24.4% RevPAR growth.  Strong group demand - occupancy improvement of 20%. ADR growth of 8%. Expect outstanding 4Q.
  • Miami/Ft Lauderdale: 20.6%, Occupancy increased 12% & ADR increased 2%. Renovations helped.  Expect great 4Q.
  • Florida region was impacted by significant renovations elsewhere
  • 17% RevPAR growth in San Fran - ADR improved due to better mix. Expected to perform well in 4Q.
  • Houston: +12.6%, Occupancy over 6% and ADR growth over 2%. Expect strong 4Q.
  • Hawaii: +6.8% Occupancy +5.8%. Expect to outperform in 4Q.  More air capacity helping.
  • Chicago: +6.7%, ADR +2%.  Good 4Q due to strong group bookings.
  • NY: +6.7%, ADR+8% - would have been better ex Irene -expect excellent 4Q
  • DC: +2%.  Expect DC to perform better next quarter.
  • Boston: -4% affected by lack of group demand.  Group demand expected to be weak in 4Q.
  • New Orleans: -10% RevPAR due to difficult comps - occupancy declined 12%; ADR increased 6%.  Expect rough 4Q due to new opening of Hyatt and difficult comps from last year's oil spill clean up effort
  • Euro JV: +5.2% REVPAR.. 3 hotels were impacted by meeting space renovations. Excluding Sheraton Roma - REVPAR would have been up 8%
  • Unallocated costs increased 3% - due to variables expense growth. Utility increased 3.6%, insuirance grew significantly as property insurance poilicies were renewed.
  • Expect 4Q margin performance similar to YTD but better F&B flowthrough, and higher rate contribution but expect higher property taxes (refunds received last year) and higher unallocated costs
  • Prior guidance included $9MM of total EBITDA from the Grand Hyatt acquisition - however, if the deal doesn't close, then EBITDA would be $15MM lower in 2011.  Reason for the mismatch is due to transfer tax payment of $7MM which didn't get paid this quarter.



  • Group rates for 2012 so far is up about 1%
  • Deal market? They are trying to assess that right now. Sellers have yet to drop their prices. Cost of financing has increased a bit so buyers are probably looking to pay a little less. Seeing a little less purchase activity from other REITs given where equity prices are. Expect pace in 2H11 will fall short of expectations.  However, there is still an active market out there.
  • 4Q bookings are up 2% - same as commentary from last quarter
    • Net net bookings for 4Q are better than where they were earlier this year. As they have worked their way through the year they have seen continued improvement for 4Q. Last 60 days they booked more business for 4Q than they booked around the same time last year.
  • Lost some group activities on the East Coast due to Irene. Big group in Philly cancelled. Had to shut down in NY for the entire weekend.  Expected DC strong bookings for the opening of the MLK memorial.  
  • Property level forecasts are stronger than the guidance they are giving for 4Q
  • Why was corporate expense so low?
    • Significant part of their comp is tied to restricted comp - so they will earn less of that stock comp and with the stock comp being a lot lower so is the comp amount
  • Need 7% RevPAR growth (SS) to hit their FY 11' guidance
  • Generally would view a stock buyback as an attractive use of capital here. However, they like to use proceeds from asset sales to repurchase stock
  • 2012 group booking trends?
    • Room nights were up 4% and rate so far is up 1%
  • Acquisition RevPAR was up 14% - so they would have had 7.1% RevPAR for those assets. Excluding Irene they would be up 7.7%.
  • Why aren't they more aggressive today buying back stock if they are so confident?
    • If everything plays out things will be good next year but there are some real risks (macro) that things can get a lot worse. Thinks its prudent to be conservative for now.
    • Don't want to lever up today.  There are a lot of advantages to a lower cost of capital for them.
  • Not comfortable issuing stock at current prices therefore, they walked away from the St. Regis deal
  • Think that in the long run its better to be overweighted to Group since over the long term Group is more resilient than transient. However, in this year transient is clearly better than group.  The opportunity for 2012 is really on the group side for them.  For group - they are still 9% below peak levels.
  • Thinks that the opportunity on the transient side is more on the rate side for 2012 vs. occupancy - as occupancy is already very strong
  • Think that it's still fairly early to know how negotiated rate will play out.  Clearly, occupancy levels are higher and there is a higher level of group activity on the books.  So it puts them in a better negotiating position.
  • If event risk doesn't occur, they feel like they could accomplish the rate range that MAR layed out
  • In the event of the economy heading south, how much cost cutting is left?
    • If it's in the form of reduced demand - they can reduce costs (i.e. variable costs) but at current occupancy levels, it's a lot harder - they already made those cuts
    • Occupancy went from 66% to 72% - so they have had to add head count in line with that increase but they are still well below prior peak levels
  • Lower ADR growth this quarter is likely due to a stronger leisure mix in the summer quarter vs. inability to push rate - so less of a mix shift benefit as they have seen in other quarters
  • Not sure that across the board cap rates have really moved up that much in top gateway cities - however, it's possible that they have increased about 50bps in some markets related to higher cost of funding and therefore needing a lower purchase price to meet hurdle ROI rates
  • They are at 55% of their total room nights for 2012 (on the books) however that isn't too far off of where they would normally be - for group nights. By end of year, they would expect 70% of their group nights to be booked for '12
  • EBITDA impact from Irene - $4.5-5,0MM






Small-business confidence


Yesterday, recession fears continue to weigh on U.S. small-business confidence, as the NFIB Index moved slightly higher in September, rising from 88.1 to 88.9.


The gain snaps a streak of six consecutive monthly declines. Despite the improvement, the index remains depressed, having been below 90 for three consecutive months. There was no noticeable improvement in the details; it is clear small businesses are in no rush to expand.




Corn and wheat prices have driven higher over the past week.  News emerging today from the government states that the U.S. corn crop, the world’s largest, will be 0.5% smaller than forecast last month after unusually hot weather in July and freezing temperatures in September reduced yields.







Food processor stocks have slowed as corn prices reversed the downward slide that had been helping the outlook of TSN, SAFM, and the rest of the industry.


THE HBM: TSN, SAFM, CMG, EAT, DRI, CAKE, PFCB - subsector fbr





CMG: An article in Fortune, published yesterday, is highly critical of Chipotle’s new concept, ShopHouse Southeast Asian Kitchen.





EAT: GS resumed coverage of Brinker at Neutral with a price target of $21. 


EAT: Chili’s Grill and Bar opened its first restaurant in Sao Paulo, Brazil.


DRI:  Coverage of Darden was resumed at Goldman Sachs at Buy


CAKE: Coverage of The Cheesecake Factory was resumed at Goldman Sachs at Sell


PFCB:  PFCB was resumed Neutral at GS, price target is $29.





Howard Penney

Managing Director


Rory Green



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Stupid Easy

This note was originally published at 8am on October 07, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It’s not supposed to be easy. Anyone who finds it easy is stupid.”

-Charlie Munger


That’s one of the quotes Howard Marks uses to introduce his thought about what he calls “Second-Level Thinking” in his book that I just finished reviewing – “The Most Important Thing.”


People on Old Wall Street really don’t like being called stupid. They don’t like being called monkeys either. Both on the ice and in this Globally Interconnected Arena of risk management, I’ve been called plenty of names. It’s what gets me up in the morning.


Name calling isn’t nice. Neither is lying to people or blowing up their money. In some conflicted and compromised research report, this game looks gentlemanly. On the front lines though, this game is far from polite. It isn’t easy either.


Managing risk isn’t about getting a guy to call you with a whisper about this morning’s unemployment report. Neither is it about assuming we all know what we don’t know. It’s about embracing uncertainty, then considering scenario analyses, probabilities, and ranges. You don’t have to be a contrarian all of the time – but, some of the time, you need to play this game to win.


“Of course, it’s not that easy and clear cut … if your behavior is conventional, you are likely to get conventional results… Only if your behavior is unconventional is your performance likely to be unconventional.” (Howard Marks, The Most Important Thing)


Back to the Global Macro Grind


This morning’s setup across Global Macro is much more concerning to me than the one we were staring down the barrel of on Tuesday morning. Given that most of Asia and Europe was crashing and the S&P futures were trading at 1078 in the pre-market, that probably sounds like an unconventional thing to say.


Unconventional is as unconventional does. Covering shorts and buying that opportunity was too.


Today, after 3 consecutive days of The Pain Trade (short covering), all of Asia, Europe, and the US have rallied between +5-10% “off the lows.” The S&P futures are +5.9% from the YTD closing low (Monday, October 3rd 2011 = 1099), and if I had a Canadian Loonie for every email and tweet I’ve had that this US unemployment report is going to be “better than expected”, I’d pay myself for once.


I know. It’s unconventional for generals in this industry to eat last. It’s unconventional to be yourself instead of who you are supposed to be. It’s also been unconventional to have said Growth Slowing would be the 2011 call that needed to be made. If my behavior has sounded too “confident” or whatever it is that mediocrity calls success in this country these days, so be it.


Looking across my Global Macro factors this morning, here’s why I say start selling again today:

  1. Japan’s Nikkei’s 3-day rally failed at TRADE line resistance of 8777 and remains in crash mode
  2. Hong Kong’s rally failed at TRADE line resistance of 18,918 (Hang Sang) and remains in crash mode
  3. South Korea’s squeeze failed at TRADE line resistance of 1797 and remains in crash mode
  4. British banks are breaking down again and the FTSE remains in a Bearish Formation (bearish TRADE, TREND, TAIL)
  5. Belgium and Switzerland have taken over Europe’s negative divergences for this morning (big bank exposures for both)
  6. Russia’s Trading System Index rallied to another lower-high and is down -39% since April when US stocks peaked
  7. Oil prices remain in a Bearish Formation despite another bounce to lower-highs
  8. Copper prices remains in Bearish Formation despite a big short squeeze from a very newsy September oversold low
  9. Gold is now bearish TRADE and TREND for the 1sttime in forever with TREND line resistance up at $1673
  10. SP500’s TRADE, TREND, and TAIL lines of resistance (Bearish Formation) = 1182, 1237, and 1266, respectively

So that’s just the Top 10 unconventional calls you could have been making for the last 3-6 months. If you back this up to when we bought the Growth Slowing Trade (Long the US Treasury Flattener (FLAT) in February) you’ll see a lot of Global Equity prices put in their 2-year cycle peaks in February of 2011, not April.


And while its conventional to call out the SP500 as having “staved off a bear market” this week (because it didn’t violate the -20% crash signal; it was down -19.4% on Monday’s close), its unconventional to remind the bulls that Financials (XLF), Industrials (XLI) and Small Caps (Russell2000), have all crashed already in 2011 anyway.


Can the market rally on hope? For sure. It just did. But what do you do right now? If this unemployment number is better or worse than expected, my Stupid Easy hockey head answer will remain the unconventional one for 2011 – sell.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1602-1673, $75.92-85.11, and 1101-1172, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stupid Easy - bearish formation


Stupid Easy - virt. port

Buying Things Well

“Investment success doesn’t come from buying good things, but rather from buying things well.”

-Howard Marks


In Chapter 4 of Howard Marks’ “The Most Important Thing” he discusses a very hot topic at our Yale campus headquarters these days – the relationship between price and value.


American shoppers tend to get this concept much more readily than some American Institutional Investors do. Why? Probably because Americans shop using their own money as opposed to other people’s money. A subtle difference that focuses the mind.


Rather than opining on why I’ve been bearish on the “buy stocks because they are cheap” thesis since the February-April 2011 highs, I’ll submit one more concise thought from Marks that summarizes the crux of the matter:


An accurate opinion on valuation, loosely held, will be of limited help. An incorrect opinion on valuation, strongly held, is far worse.” (The Most Important Thing, page 23)


Back to the Global Macro Grind


Today, I’ll probably “sound” as bearish as I sounded bullish covering shorts last Tuesday. Plenty of people can’t reconcile how someone can be that way. They didn’t teach us how to be Duration Agnostic on a Keynesian campus, thankfully.


Plenty of people like to label people in this business too. That’s usually easier than taking the time to understand what it is that they do. We get it. This is Old Wall Street, until it isn’t.


On Wall Street 2.0, there will be Time Stamps.


To review, Hedgeye has made 3 “Short Covering Opportunity” calls in the last 2.5 months:

  1. August 8th
  2. September 12th
  3. October 4th

These were accurate immediate-term TRADE opinions about the relationship between price and value. On October 3rd, the Hedgeye Asset Allocation Model held a 73% position in Cash. On October 11th (before yesterday’s open), my Cash position was 61%.


On Old Wall Street 1.0, there are no Time Stamps. That’s dying on Opacity’s Vine.


Fully Occupied Transparency comes next.


Why be bullish, on the margin, before an +8.7% short squeeze, and be bearish, on the margin, after it? Price/Value matters – and everything about managing risk in a Globally Interconnected Macro market happens on the margin.


I wrote about being multi-factor and multi-duration as a matter of process yesterday. Nothing has changed on that front today. Across my Top 6 Global Macro Factors (and across durations), here’s what I see this morning:

  1. SP500 = bullish TRADE (1167); bearish TREND (1228) and TAIL (1266)
  2. VIX = bearish TRADE; bullish TREND and TAIL
  3. German DAX = bullish TRADE; bearish TREND and TAIL
  4. EUR/USD = bullish TRADE; bearish TREND and TAIL
  5. Copper = bearish TRADE, TREND, and TAIL
  6. 30-year US Bond Yields = bearish TRADE, TREND, and TAIL

So if those who are paid to think in a marketing vacuum want to call me Rosie or Roubini, they can whisper amongst themselves and have at it. No Duration Differentiation. No Real-Time Risk Management.


If you are reading this today, you’re paying for my rants … and on behalf of my research team, I sincerely thank you for having an open mind. We couldn’t Occupy Hedgeye without you.


Having been bearish in 2011 doesn’t mean we can’t help you buy “good things” well. We bought Starbucks in April of 2009 when no one wanted to touch it – that’s an American brand that means something, and will continue to for a long time.


In the last few months we’ve also bought Utilities (XLU), Target (TGT), and Marriott (MAR) well. These are 3 of the 10 LONG positions we have in the Hedgeye Portfolio that do stand the chance of actually being held for the “long-term.” Good balance sheets, dividends, and, most importantly, bought at good prices.


We get Graham and Dodd. It’s not that complicated, really. Buy low. But we also get Buffett and Munger’s #1 rule of investing that supersedes all of the vaunted “value” investing rules – DON’T LOSE MONEY.


Oh, and their second rule of investing is don’t forget rule #1.


My immediate-term support and resistance ranges for Gold, Oil, German DAX, and the SP500 are now $1, $84.42-89.71, 5, and 1167-1212, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Buying Things Well - Chart of the Day


Buying Things Well - Virtual Portfolio

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