TODAY’S S&P 500 SET-UP - October 13, 2011


After a serious short squeeze (and 2011 has had many), we’re back to the Global Macro fundamentals this morn, and they are not good looking at China, Copper and the Euro.  Today, JPM earnings are what matters most.   If Jamie Dimon tells the truth about his interconnected exposures from FX, to NIM, and counterparty risk in Europe, yesterday’s selloff into the close will make sense. If he says everything is fine, SP500 can suspend disbelief to 1229.


As we look at today’s set up for the S&P 500, the range is 58 points or -3.25% downside to 1168 and 1.55% upside to 1226











  • ADVANCE/DECLINE LINE: 1791 (+1448) 
  • VOLUME: NYSE 1066.01 (+20.83%)
  • VIX:  31.26 -4.87% YTD PERFORMANCE: +76.11%
  • SPX PUT/CALL RATIO: 1.70 from 1.90 (-10.54%)




  • TED SPREAD: 38.56
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.24 from 2.18     
  • YIELD CURVE: 1.95 from 1.86


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Trade balance, est. (-$45.8b)
  • 8:30 a.m.: Jobless claims, est. 405k
  • 9:45 a.m.: Bloomberg consumer comfort, prior (-50.2)
  • 10:00 a.m: Freddie Mac mortgage
  • 10:30 a.m: EIA natural gas: est. 102
  • 11:00 a.m: DoE inventories
  • 1:00 p.m.: U.S. to sell $13b 30-year bonds (reopening)
  • 2:30 p.m.: Fed’s Kocherlakota speaks in Sidney, Montana


  • Treasury Secretary Geithner will tell European counterparts at G-20 finance ministers meeting to act forceful
  • Slovakia may approve Europe’s enhanced bailout fund today or tomorrow, finishing ratification process
  • DuPont is seeking buyers for a polyester-film joint entire and a business that makes powder-based paint.
  • RIMM said customers in Canada and U.S. still face delays to its Blackberry network.
  • Galleon’s Raj Rajaratnam will be sentenced today for masterminding the biggest hedge-fund insider trading scheme in U.S. history.


COMMODITY/GROWTH EXPECTATION                                                                    


COPPER – The Hedgeye  TRADE/TREND/TAIL lines are all overhead with immediate-term TRADE resistance closest at 3.59/lb and no legitimate support until 3.01/lb; this recent gap up on no volume looks like a very dangerous air-pocket (like most thing equities and commodities do)





  • Congress Approves Biggest U.S. Free-Trade Agreement Since 1994
  • Australians Fret About Crash With Fortescue Metals Growth Stock
  • Thai Flooding Threatens Bangkok, May Cut Deeper Into Growth
  • Coal to Drop in Asia After 2011 ‘Perfect Storm’: Energy Markets
  • Zinc Bear Market Seen Ending as China Absorbs Glut: Commodities
  • Oil Falls a Second Day on Speculation U.S., China Demand to Slow
  • Clive Fund Said to Erase Year’s Loss With 11.4% September Gain
  • Best Mining Deal Seen With Sundance China-Africa Ties: Real M&A
  • China Copper Imports Gain to 16-Month High as Price Tumbles
  • China Copper Stocks at Record 1.9 Million Tons at End-2010
  • Codelco Plans Anglo American Option After $6.75 Billion Loan
  • Rice Farmers in Japan Set Tougher Radiation Limits for Crops
  • Gold Falls in London Trading as Dollar’s Rebound May Curb Demand
  • China’s September Foreign Trade by Commodity (Table)
  • Copper Declines After Rally to Two-Week High Seen as Excessive
  • Copper Falls in London After China’s Exports Cool: LME Preview
  • COMMODITIES DAYBOOK: Oil Slides on Demand Concern; Copper Drops
  • Gold Eclipses Cocaine as Rebels Tap Colombian Mining Wealth




EURO – understanding that this is one of the largest short positions left in the hedge fund community, yesterday’s attempts to scare the shorts really only did one thing - open the gap on the downside to 1.30 now – in other words, it should be considered probable that that could happen over the span of 1-3 days.  Yes, that would be bad






SLOVAKIA: Slovak parties reached an agreement to approve Europe’s enhanced bailout fund, paving the way for a second vote this week that will complete its ratification process across the 17 euro countries.  A second vote will be held on the European Financial Stability Facility tomorrow or on Oct. 14 after lawmakers failed to approve the legislation yesterday, Robert Fico, head of the largest opposition party Smer, said today. Party leaders agreed on elections to be held on March 10, he said.






CHINA – reported a bomb of an export report for the mth of SEP this morning showing a drawdown to +9.8% exports to Europe vs +22% in August; this is why the Chinese and HK stock markets (or any market in Asia for that matter other than Indonesia who cut rates this wk) remain in Bearish Formations; it tells you most of what you need to know on why Copper is still in crash mode too (down -1.3% this morn)


Add Singapore to the list of Asian economies that have introduced or implemented policy focused specifically on boosting domestic demand in recent months. This is a trend we’re seeing across developing Asia (China, Singapore, Indonesia, Thailand, Philippines, Malaysia thus far) and will eventually be bullish for their equity markets – especially given that they have the fiscal space to implement such policies (whereas the U.S./E.U./Japan remain largely constrained by large deficits and debt burdens).








Howard Penney

Managing Director

Checking In With China

Conclusion: We recommend both caution and patience to those using [potential] Chinese stimulus as their bullish catalyst for equities or commodities at the current juncture. Moreover, we think that, if eventually signed into law, Chuck Schumer and Sherrod Brown’s trade legislation is likely to leave the U.S. economy worse off.


China Won’t Bail Consensus Out At These Prices

A lot of speculation is bouncing around the halls of consensus about Chinese stimulus potentially providing a positive force for the global economy. We’d be cautious to fade that – for now. Yes, China relaxing monetary and fiscal policy would indeed be very bullish for the Chinese economy and very supportive for the global demand curve, but getting from point A to point B could wind up being quite painful.


We’ve been calling for China to eventually shift to a stance of marginal dovishness in the latter half of this year and eventually cut rates as inflation slows closer to the government’s 4% target – which, according to our models, could be sometime in 1Q12. This outlook is supported by our continued conviction in our Deflating the Inflation thesis – an explicit call to short/sell commodities – as well as conviction in our soon-to-be released King Dollar thesis, which extends that call into 4Q11.


Checking In With China - 1


As we've pointed out in our recent research on China, there are a number of things China has introduced or implemented on the fiscal and financial policy fronts that will be supportive to Chinese consumption growth in 4Q and beyond (email us for the most recent analysis). These are, however, not nearly as supportive as rate cuts would be to ease the credit crunch many Chinese corporations are facing. Monetary easing would also go a long way towards easing the liquidity headwinds currently squeezing Chinese property developers; at ~48%, fixed asset investment is nearly half of Chinese GDP, so it’s rather important for global growth and commodity prices. And given the credit quality headwinds facing China’s banking system, we think it is unlikely they pursue a large-scale fiscal stimulus/credit extension program like the CNY4 trillion package introduced in November ’08 – a full four months before the S&P 500 bottomed!


All things considered, it could be a while before China pulls the trigger on the monetary easing front. Merely using 2008 as a semi-comparable reference, we saw that China waited a full six months for confirmation of flat-to-down sequential CPI growth and a -380bps reduction in YoY CPI before cutting interest rates in early September of that year. We’re not quite there yet and we don’t reckon we’ll get there absent seeing the deflationary forces we’ve been calling for continue to exert downward pressure on the commodity complex over the intermediate term. And as the math continues to tell us, that outcome is likely not positive for equities in the short term (the trailing 3yr positive correlation between the S&P 500 and the CRB Index has an r² of 0.86). Eventually, deflated commodity prices will be a bullish catalyst – particularly for global consumer stocks. Eventually.


Checking In With China - 2


Needless to say, we recommend both caution and patience to those using [potential] Chinese stimulus as their bullish catalyst for equities or commodities at the current juncture.


Chuck Schumer Doesn’t Get It

Much to-do is being made about the passage of S-1619, the [slightly] bi-partisan bill recently introduced by Senators Chuck Schumer (D-NY) and Sherrod Brown (D-OH). The bill, which now moves on to the Republican-controlled House Ways and Means Committee, is anticipated by some to fizzle out in the House; this is crucial because all U.S. trade legislation is controlled within this chamber. The intra-party debate between Dave Camp (R-MI), who voted for similar legislation last year, and the duo of House Speaker John Boehner (R-OH) and House Majority Leader Eric Cantor (R-VA) should indeed create a spirited internal battle over the legislation.


As it stands now, the bill, if signed into law, would allow U.S. companies to seek duties on imported goods after the Treasury Department identifies whether a particular currency is undervalued. Such non-compliant regimes (i.e. "China", as argued by the bills supporters) would face dumping duties and/or a ban on federal procurement within the U.S.


Critics of the bill – including the Peterson Institute, the U.S. Chamber of Commerce, the National Retail Federation, the Financial Services Roundtable, and over 50 other business groups – claim that even if passed, it won’t have a “substantive effect” on U.S. companies due to the long lag time between filing complaints, government action, and economic results. In addition, they mock it for its “pro-U.S. jobs” claim, saying retaliatory action by China is perhaps a greater price to pay than what is currently perceived as being paid for doing business with the Chinese.


We think this bill reeks of the recent spate of misguided dogma that D.C. continues to force upon the domestic and global economy. As the title implies, Schumer doesn’t get it. Passage and implementation of this legislation would likely be very detrimental to U.S. corporations and consumers in the form of import price inflation and a closing of the Chinese domestic market to U.S. exporters – a key growth market for U.S. multinational corporations like YUM, MCD, and WMT. Remember, China can always turn to the Germans for products in the event the U.S. forces itself out of this important market. Recently, the PBOC issued on their website a stern rebuke supporting our view:


“Passage of the legislation may lead to a trade war that we don’t want to see… The [legislation] won’t solve U.S. problems of insufficient savings, a trade deficit, and an elevated jobless rate.”


Moreover, expedited yuan revaluation is especially punitive in the short-to-intermediate term as production capacity isn’t easily moved. For example in 1Q11, COH said that it would take four years to shift production from China to Vietnam. In the meantime, companies will have to incur both rising CapEx expenses resulting from expanding capacity into other low-cost countries and higher import costs in the interim from any resultant yuan appreciation.


Checking In With China - 3


As a courtesy "newsflash" to Chuck Schumer, it’s worth reminding him that U.S. labor costs are too exorbitant to economically manufacture footwear, apparel, and other consumables on a large scale. As such, we’re not sure how they come up with their "2.8 million U.S. jobs stolen by China” estimate. Moreover, the resultant capacity constraint on the global supply of low-cost, working-age labor could be very inflationary/really bad for margins for corporations all over the world. It’s worth noting that China has a larger working-age population than the next two largest non-U.S. countries combined (India and Indonesia).


Checking In With China - 4


Net-net, we think that, if eventually signed into law, Chuck Schumer and Sherrod Brown’s legislation is likely to leave the U.S. economy worse off over the short, medium, and long terms.


Darius Dale



Commodities rebounded over the last week, with a few exceptions, as the dollar declined. 




Corn prices gained over the last week but are again falling today as news emerged from the government that stockpiles of the grain before the 2012 harvest will total $866 million bushels, up from 672 million forecast in September.  While the dollar decline last week helped drive grain prices higher over the same period, the supply and demand metrics for corn are pointing to continuing declines.  Our macro team’s view is also dollar-bullish (for now). The decline in corn/wheat prices is a positive for food processors such as TSN and SAFM in particular, particularly as beef prices continue higher.  Rising beef prices are a concern for WEN, TXRH and many others in the restaurant industry.


Coffee prices have continued to slide, making it less likely that additional price raises from coffee retailers such as SBUX, DNKN, PEET, GMCR, CBOU and THI are imminent.  We would expect high retail prices to persist for some time as inventory bought at elevated prices is worked through.


Chicken wing prices declined on the week, which is a positive for BWLD.  However, wing prices have been trending higher for much of the last month and if the upward momentum recommences, BWLD could see some shift in sentiment.  BWLD is a favorite of ours on the short side.









Grains shooting higher last week on the declining dollar and “improving economic prospects” impacted food processor stocks like TSN and SAFM. Today, following an upward revision of inventory estimates, corn is declining and the Food Processing name are outperforming.


As we have been writing of late, declining commodity costs are generally a positive for restaurants but it is worth noting that much of the softness in commodity demand is related to softening economic conditions and this implicitly means a drop in demand for consumer goods and services.  We believe the dollar impacted trends over the last week but, as with corn, much of the incremental supply and demand data hitting the tape is bearish for prices.




Gasoline prices continue to toe the 2008 line but the weaker dollar supported price over the last week.









Corn has been trending lower but popped up almost 10% last week.  The declining dollar most likely had an impact (see correlation table).   It seems that the data points emerging today regarding stockpile estimates in the U.S. could be triggering a resumption of the downward trajectory in corn prices.  If this is the case, this is a positive for protein producers that can enjoy much needed relief as feed prices decline.  Supply and demand concerns (rising inventories and slowing economic growth) seem to be attracting investor attention in today’s trading.





Below is a selection of comments from management teams pertaining to grain prices from recent earnings calls.


PNRA (7/27/11): “Just to note on the cost of wheat, in 2011 overall, the per-bushel cost will be about the same as 2010 due to our laddering purchasing strategy.”


“We are going to take price in the fourth quarter. This price will offset dollar for dollar the per-bushel inflation of wheat of approximately $3 a quarter that we're going to see in the fourth quarter of this year and then across next year”


“We do continue to expect significant inflationary pressures in 2012, 4% to 5% food inflation, $10 million of unfavorability on wheat costs, which means that we don't expect operating margin much better than flat to full-year 2011 in 2012.”


HEDGEYE:  This past week aside, weak global demand and a stronger dollar are currently trumping the adverse impact on supply due to weather and fires in the U.S.  In fact, corn and wheat stockpile estimates have risen globally, which is leading grain prices lower today.  While this is a positive in terms of costs, slowing demand may also mean lower sales for PNRA, so it remains to be seen if margins improve from this effect, even if high wheat costs come down.



DPZ (7/26/11): “We're fairly locked in on our chicken, locked in on our wheat into – partway into next year.”


PZZA (8/4/11): “We're actually covered through Q1 from a contract standpoint. So from a supply chain disruption or even significant price impact we don't anticipate anything between now and the end of the year.”





Cheese prices declined -1.2% on the week.  Prices have been extremely volatile this year but, for companies that have exposure to cheese prices (like DPZ, PZZA, TXRH, YUM and others), the recent leg down in dairy prices is encouraging.




Below is a selection of comments from management teams pertaining to cheese prices from recent earnings calls.



DPZ (7.26.11): “Given higher than originally anticipated cheese prices, we currently expect our overall market basket for 2011 will increase by 4.5% to 6% over 2010 levels. This was up from our previously communicated range of 3% to 5%.”


HEDGEYE: We recently highlighted the fact that DPZ’s last earnings call took place during a trough in cheese prices and we expected a change in tone from the commentary in early May.  It remains to be seen if cheese prices will remain above 2010 levels for the remainder of the year but CAKE’s guidance for inflation in 2011 recently became much more realistic, although not a sure thing.


TXHR (5.2.11): “We've also got a lot of flow in the dairy markets, in cheese, so there's other things beyond produce that do move around throughout the year.”


HEDGEYE: In 1Q09, TXRH called out favorable beef and cheese prices as being primary drivers of cost of sales being down 126 bps in the quarter.  Cheese was a contributor to a cost of sales increase in 2Q11, as we predicted.  For the remainder of the year, barring another (possible) spike in prices, TXRH could see some margin relief from lower dairy costs.



CMG (4.20.11): “As we move into 2011, we're expanding our use of cheese and sour cream made with milk from cows that are raised on open pastures rather than spending much of their time in confinement, as most dairy cattle do.”


HEDGEYE:  For CMG, the lower levels of dairy costs, if they persist, will offer some food costs relief on the company’s P&L.





Coffee prices declined over the last week even as the dollar weakened.  Despite the recent drop, coffee prices remain up 26% on a year-over-year basis.  Coffee is trading higher today as optimism grows that Europe will control the region’s debt crisis, boosting the outlook for commodity demand.




Below is a selection of comments from management teams pertaining to coffee prices from recent earnings calls.


PEET (8/2/11): “As we indicated, in our first quarter call, we had to buy a small amount of our calendar 2011 coffee beans at significantly higher prices and this coffee will roll into our P&L during the third and fourth quarter.”


“Higher priced coffee resulted in gross margins this quarter being 290 basis points below prior year. In our first quarter conference call, we indicated that in addition to the overall higher price coffee market, we had to buy a small amount of coffee this year at significantly higher prices. And as a result, we expected our coffee cost to be 40% higher in fiscal 2011.”


HEDGEYE:  Peet’s is a company with a very competent management team that manages coffee costs extremely well.  Its higher-end, loyal customer base makes the price elasticity of demand more inelastic than for other coffee concepts’ products.



SBUX (7/28/11):  “As I mentioned earlier, are absolutely a headwind for us in the full business and that's most acutely impactful on margins in CPG as it's a much more coffee intensive cost structure, as you know. I can tell you that the decline as I spoke about it earlier from about 30% operating margin in CPG this year down to the target 25% next year is really all explained by commodities. Absent commodity inflation we'd be at or improving our margin in the coming year.”


“As we had anticipated, in recent weeks, coffee prices have retreated significantly from a high of more than $3 per pound just a couple of months ago to levels now near $2.40 per pound. As prices have been falling we continue locking up our needs for fiscal '12 and now have virtually the full year price protected.”


HEDGEYE: Starbucks is aligning itself with the right partners to gain more control of its coffee costs to provide investors with more certainty going forward and to protect its margins as global coffee demand continues to rise.



GMCR (7/27/2011): “However, what we've said is that should coffee prices or other material costs spike, we will certainly consider price increases as necessary. We certainly hope that we do not have to cover one again next year. But our objective long-term is attempting to maintain our gross margin as we would see input costs come along.”


HEDGEYE:  GMCR hedges out 6-9 months in advance.  Strength in the dollar has helped bring coffee prices lower but whether or not dollar strength will continue or not will be a significant factor in future price action in coffee.  Growing demand, globally, is bullish for coffee prices over the long term.


Howard Penney

Managing Director


Rory Green



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

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



Early Look

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