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HOT: Q3 NOT THE STORY

Like every other release, Starwood beat consensus estimates and put forward lackluster guidance.  While the quality of the Q was just OK, 2012 RevPAR guidance shows the health of this business.

 

 

Core results in the quarter were softer than top line results imply.  While owned, leased and consolidated JV revenues were stronger than we estimated, flow through was weaker due to higher CostPAR.  The beat on fees was largely due to a boost from the conversion of 19 European hotels from franchise to more lucrative management contracts.  VOI and residential was below our estimate for both top and bottom line results.  Lower SG&A, interest expense and D&A all helped the bottom line and drove the beat in the quarter.

 

 

Detail:


Revenue of $783MM was 1% ahead of our estimate and adjusted EBITDA was 2% better than we estimated.  

 

Owned, leased and consolidated JV revenue of $441MM was 1% above our estimate but lower margins resulted in segment results that were $9MM below our estimate.

  • Given higher RevPAR, we were surprised that owned hotel revenue didn’t grow more than just 2.4% YoY
    • Room count was down 7.5% YoY but SS WW RevPAR was up almost 15%
    • We estimate that room revenues grew 11% YoY but that ancillary revenues including F&B were down 11% YoY.  We don’t think that this is surprising as many hotels that raise ADR’s are giving more away like free breakfast, local calling, free parking and internet which used to be a source of incremental revenue.
  • RevPOR increased 8.9% while CostPAR increased 8.2%, resulting in poor flow through consistent to what we saw in 2Q11

Management, franchise fees, and other income came in 5% better than we estimated – with most of the upside coming from management fees benefiting from the conversion of 19 European hotels from franchise to management contracts during the quarter.

  • Net of the conversion of the European hotels, room growth was 30bps better than we estimated
  • Management base fees were 6% higher than we estimated, while franchise fees were 6% lower - for reasons already mentioned
  • Incentive were $3MM better

VOI and residential revenue and segment results were 5% lower than we estimated

  • Originated sales revenue was $3MM lower than we estimated – likely due to lower pricing on sales mix
  • Other sales service revenue was $4MM lower than we estimated
  • Deferred revenue was in-line

Lower SG&A, interest expense and D&A all helped the bottom line and drove the beat in the quarter.

  • SG&A was down in the quarter vs. general guidance for a 3-5% increase
  • D&A was $3MM below guidance
  • Consolidated Interest expense was down $7MM sequentially and $8MM lower than our estimate

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET

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Initial Claims Close to Flat

The headline initial claims number fell 1k WoW to 402k (down 1k after a 1k upward revision to last week’s data).  Rolling claims actually increased week over week, rising 2k to 405k.  On a non-seasonally-adjusted basis, claims increased 17k to 374k. 

 

While flat week-over-week, initial claims remain high (over 400k), and are essentially flat year-to-date (405k rolling today vs. 410k at the start of this year). We've been arguing for the last several weeks that the largest divergence between the S&P and claims that we’ve seen in the last three years would likely result in mean reversion facilitated by a rise in jobless claims to the 450k+ level. Rather, thus far, the mean reversion has been driven by the market rising from 1100 to around 1 this morning. We remain skeptical that claims and economic activity will not be adversely affected by the profound loss of consumer confidence shown over the last few months. We continue to expect claims to rise, but are willing to strap on the accountability pants in the here and now and acknowledge that thus far we've been wrong.

 

It is interesting to note that in spite of a year's worth of record volatility, the market and claims are both essentially flat. These series are, in fact, co-integrated, as one would expect. In layman's terms that means that they tend to move together over time even if they are not especially correlated with one another in the short term. What that means is that you should pay special attention to periods in time when they materially diverge as they are likely to mean-revert going forward.  

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - Rolling

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - Raw

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - NSA chart

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - S P and Claims

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - Fed and Claims

 

2-10 Spread

The 2-10 spread widened 3 bps versus last week to 192 bps as of yesterday.  The ten-year bond yield increased 5 bps to 221 bps. This remains a very difficult environment for net interest margins.  

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - 2 10 Yield Spread

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - 2 10 Yield Spread QoQ

 

Financial Subsector Performance

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

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - Subsector Performance

 

 Joshua Steiner, CFA

 

Allison Kaptur

 

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THE HBM: PNRA, PFCB

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Initial jobless claims came in at 402k versus Bloomberg survey 401k.  The jobs picture remains poor and consumer confidence is reflecting that.  Later this morning the Bloomberg Consumer Comfort Index will be released and tomorrow morning the University of Michigan Confidence print will hit the tape.  It will be interesting to see if these two data points corroborate with the sharp drop in the Conference Board consumer confidence metric earlier this week.  There has been some debate as to why retail sales and confidence data has been diverging recently.  As our retail team pointed out during the week, at some point, the spread between these two trends is likely to come in.

 

THE HBM: PNRA, PFCB - initial claims 1027

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: PNRA, PFCB - subsector fbr

 

 

QUICK SERVICE

 

PNRA: Panera Bread was downgraded to Neutral from Buy at SunTrust.

 

PNRA: Panera Break was reiterated Equal Weight at Barclays.

 

PNRA: Panera Bread was downgraded to Hold from Buy at Miller Tabek.  The twelve-month price target is $133 per share.

 

 

CASUAL DINING

 

PFCB:  P.F. Chang’s reported earnings this morning.  EPS came in at $0.29 cents ($0.27 adjusted) versus expectations of $0.32.  Comps were -3.7% at the Bistro which was in line with expectations.  Pei Wei’s top-line trends were below expectations, coming in at -3.6% versus -2.2%.  Consolidated restaurant margins came in at 16% versus 16.4% consensus.  The call is going on and management has stated that the company is not for sale, despite rumors of PE interest.

 

THE HBM: PNRA, PFCB - bistro pod 1

 

THE HBM: PNRA, PFCB - pei wei pod 1

 

 

EAT:  Brinker International was downgraded to Underperform from Neutral at Stern Agee.

 

THE HBM: PNRA, PFCB - stocks 1027

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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 80.32%
  • SHORT SIGNALS 78.48%

THE M3: SJM, UNEMPLOYMENT SURVEY; TRANSFORMERS; S'PORE 2012 ECONOMIC FORECAST & INFLATION

The Macau Metro Monitor, October 27, 2011

 

 

SJM TO EVALUATE SALARIES Macau Business

SJM may soon raise worker salaries.  The move comes after Grand Lisboa’s cage cashiers held two demonstrations complaining that their wages only went up by MOP500 (US$62.5) since the property opened in February 2007, far below the increases enjoyed by their fellow croupiers.  Asked about the future ferry terminal, SJM CEO Ambrose So said, “Building one more terminal is necessary, but it should only be there to help divert the flow of visitors, and not replace the [peninsula] terminal.”  3Q earnings will be released Nov 7.

 

MACAU EMPLOYMENT SURVEY FOR JULY- SEPTEMBER 2011 DSEC

Unemployment rate for July-September 2011 held stable at 2.6%, same as the previous period (June-August 2011).  In comparison with July-September 2010, the unemployment rate dropped by 0.3% points.  Total labor force was 344,000 in July-September 2011 and the labor force participation rate stood at 72.5%, with the employed population increasing by about 300 over the previous period to 335,000.

 

TRANSFORMERS RIDE TO OPEN IN S'PORE ON DEC 3 AsiaOne News

On December 3, RWS's Universal Studios Singapore (USS) will launch the world's first theme park attraction based on Hasbro's iconic Transformers brand.

 

SINGAPORE INFLATION WILL REMAIN HIGH: MAS Channel News Asia

Inflation is likely to remain elevated until mid-2012 before easing as the economy slows, the Monetary Authority of Singapore (MAS) said.  The central bank said inflation will average above 5% for rest of this year.  It may fall to around 4% in the first half of 2012, before easing to close to 2% in the second half of next year. 

 

SINGAPORE'S ECONOMIC GROWTH TO STALL OVER NEXT FEW QUARTERS Strait Times

According to MAS, Singapore's economic growth will stall over the next few quarters before seeing a modest recovery late into 2012.  Continued uncertainty in economic activity as well as financial volatility will be a drag on growth, affecting both the domestic electronics sector and financial and tourism-related services, the central bank said in its twice-yearly macroeconomic review.

 

These factors have raised the possibility that Singapore could only grow below its potential growth rate of between 3% and 5% the MAS said.  It added: 'The Singapore economy is expected to grow at below potential in 2012, due in part to the near-term weakness of our key trading partners. However, the downturn is unlikely to match the severity of the global financial crisis (in 2009).'  The slowdown means that the labor market is expected to ease going forward, as demand for workers falls. This will also bring down wage growth from around 5 to 6% in 2011, to 2 to 4%, said the MAS.


Deceiving Themselves

This note was originally published at 8am on October 24, 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 should not deceive ourselves into thinking that when we die we shall be remembered intensively for more than a limited number of days.”

-Siegmund Warburg, 1974

 

Last week I started reading Niall Ferguson’s “High FinancierThe Lives and Time of Siegmund Warburg.” Interestingly, but not surprisingly, Ferguson chooses to preface the 19th century history of the Rothschild and Warburg families by giving you a hint about how it all ended for central bankers in the 1970s (it didn’t end well).

 

If you re-read the aforementioned quote and think about it within the context of what is going on in the world of banking today (either central banking or bailout banking, or both), this is the root of the problem. These people don’t appreciate the lessons of history. They live in the now and react to whatever fire they need to put out next. There is no such thing as being proactively prepared for the long-term.

 

In the long-run, Keynes excused himself (and the responsibility in the recommendation of his policies) by reminding politicians that “we are all dead.” That’s a sad and pathetic way to think about leadership and legacy. It’s also one that the Western World had enough of come 1978.

 

Back to the Global Macro Grind

 

Regardless of how I continue to think the biggest man-made money printing bazooka in world history is going to end (structurally impaired long-term growth), our risk management task this morning also needs to consider dealing with the right here and now.

 

In the last 3 weeks I have dropped my Cash position in the Hedgeye Asset Allocation Model from 73% to 58%, and here’s how I’m thinking of positioning into and out of what should be a disappointing European Summit “catalyst” on Wednesday:

 

  1. Cash = 58% (down from 61% last week)
  2. International Currency = 18% (US Dollar – UUP)
  3. Fixed Income = 18% (US Treasury Flattener, Long-term Treasuries, and Corporate Bonds – FLAT, TLT, and LQD)
  4. US Equities = 6% (Consumer Discretionary – XLY)
  5. International Equities = 0%
  6. Commodities = 0%

 

Looking at these positions in the order that they appear:

 

1.   US Dollar – the US Dollar Index was down -0.3% last week, closing down for the 2nd consecutive week, but remains up +4.7% since Ben Bernanke’s beginning of the end of QE2. Despite Obama and his politicized Fed whispering everything they can about stimulus and housing bailouts last week, I think the political inertia remains at the US Dollar’s back.

 

2.   Fixed Income – the Growth Slowing TREND we’ve been calling for throughout all of 2011 has manifested in the US Treasury Curve flattening. While the market is telling me that growth is slowing at a slower pace (bullish for the immediate-term TRADE in stocks and bearish for bonds), the intermediate-term TREND levels for both the Flattener and long-term Bonds remain bullish.

 

3.   US Equities – my two favorite S&P Sectors (Utilities and Consumer Discretionary) are now up +11.3% and +5.1% for 2011 YTD, respectively. With Utilities finally achieving immediate-term TRADE overbought last week, I sold our XLU and stayed with the Strong Dollar = Strong America trade (US Consumption). Most of the domestic consumption stocks we like fit this same theme (MAR, TGT, etc…).

 

4.   International Equities – not being long most things Asian Equities last week was a good call. Asian equity markets closed down another -1.2% wk/wk. Losses were led by China (-4.7%) and Thailand (-4.1%), as both struggled with heightening domestic risks associated with Growth Slowing. I’m not touching anything European Equities at these lower-highs with a 1,000 foot Keynesian pole.

 

5.   Commodities – not here, not now. The US Dollar’s 2 weeks of weakness does not a TREND make. Inclusive of this morning’s +3.2% mean reversion bounce in the price of Copper, the Doctor remains in what we call a Bearish Formation (bearish TRADE, TREND, and TAIL). The CRB Commodities Index and Gold were both down another -1.9% and -2.8% last week. That’s good for consumers, not commodity long positions – which just saw their long “bets” (CFTC options contracts) rise +12% last week with hedge funds chasing.

 

On weakness (earlier in the week), I covered our short positions in US Housing (ITB), Oil (OIL), and the Financials (MS and C), so we actually had a pretty good week. No one ever went to the poor-house booking gains on the short side.

 

Where could I be wrong from here?

 

That answer obviously resides where it has for all of 2011 – led by the direction of the US Dollar Index versus the Euro.

 

Get the US Dollar right and you’ll get a lot of other things right. This is something our political and academic elite should think long and hard about as they try to fix their long-term policy mistakes with more short-term policies.

 

Sadly, in the short-term, I have no reason to believe that these people won’t continue to Deceive Themselves into thinking whatever it is that they think as the rest of us commoners are thinking about meeting payrolls.

 

In the short and long-run, I am fairly certain that if I do not succeed, both my family and firm will remember my mistakes intensively for plenty more than “a limited number of days.”

 

My immediate-term support and resistance ranges for Gold, Oil, the German DAX, and the SP500 are now $1622-1659, $86.34-88.98, 5761-6116, and 1220-1239, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Deceiving Themselves - Chart of the Day

 

Deceiving Themselves - Virtual Portfolio



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