TODAY’S S&P 500 SET-UP - November 2, 2011


72 handles and -5.6% lower in the SP500 from where we shorted them at 326PM EST on Thursday – now what?  As we look at today’s set up for the S&P 500, the range is 35 points or -0.43% downside to 1213 and 2.44% upside to 1248. 






THE HEDGEYE DAILY OUTLOOK - daily sector performance


THE HEDGEYE DAILY OUTLOOK - global performance





Bullish sentiment increases to 43.2% from 40.0% in the latest US Investor's Intelligence poll; Bearish sentiment down to 36.8% from 37.9%

  • ADVANCE/DECLINE LINE: -2153 (-245) 
  • VOLUME: NYSE 1329.21 (+16.29%)
  • VIX:  32.92 +16.05% YTD PERFORMANCE: +95.89%
  • SPX PUT/CALL RATIO: 2.29 from 3.02 (-23.99%)




TREASURIES: just ran the "but growth is good" camp right over as 10yr yields snap my TRADE line of 2.11% support

  • TED SPREAD: 43.68
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.01 from 2.17    
  • YIELD CURVE: 1.78 from 1.92


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage, prior 4.9%
  • 7:30pm: Challenger Job Cuts
  • 8:15am: ADP Employment, est. 100k, prior 91k
  • 10:30am: DoE inventories
  • 12:30pm: FOMC Rate Decision
  • 2:15pm: Bernanke speaks at Fed press conference


  • European leaders convene emergency talks today to tell Greece there is no alternative to budget cuts imposed in bailout plan
  • Greek PM Papandreou said referendum on Europe’s rescue package will confirm the nation’s membership of the euro
  • Bill Ackman said he isn’t pushing for sale of Canadian Pacific Railway



Gold continues to hold TREND line support - new range = 1; back to bullish bias in our model


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • MF Global Funds Are All Accounted For, Lawyer Tells Judge
  • Top Gold Forecasters See Rally to Record by March: Commodities
  • Paulson Clients to Pull Less Than 8% in Year-End Redemptions
  • MF Global Didn’t Segregate Client Collateral, CME Group Says
  • Greenlight’s Einhorn Bets Mining Companies Will Beat Gold
  • Oil Gains on European Debt Talks as U.S. Fuel Stockpiles Decline
  • U.K. Oil Service Stocks Cheap Vs Brent Price: Chart of the Day
  • Copper Gains for First Day in Three as LME Stockpiles Decrease
  • Gold Gains for Second Day as Debt Crisis Increases Haven Demand
  • Oil Falls a Fourth Day on Concern Greek Vote Raises Default Risk
  • Saudi Top-Oil Premiums Set to Drop With Naphtha: Energy Markets
  • China Copper Demand Growth to Slow Further, Antaike Says
  • Bell Financial Seeks to Transfer Positions With MF Global
  • Sumitomo Forecasts Copper Price Drop, Seeks Iron and Coal Assets
  • Soybeans Climb on Speculation 17% Slump May Attract Importers
  • Kinross Misses Gold Rally With October Plunge: Canada Credit
  • Copper Climbs in London Before U.S. ADP Jobs Report: LME Preview
  • Freeport Says Milling at Indonesia Mine Suspended Since Oct. 22
  • Oil Falls a Fourth Day on Concern Greek Vote Raises Default Risk




EURO – get the EUR/USD pair right and you’ll get mostly everything else right – that’s glaringly obvious right now in our correlation risk model. I covered the short EUR position at TRADE line support of 1.36 yest and will look to re-short 1.39-1.40 TAIL resistance after the ECB doesn’t cut as much as hoped tomorrow. Bernanke debauchery day for the USD side of the trade will be in full effect for today too.


THE HEDGEYE DAILY OUTLOOK - daily currency view





Inclusive of a generational squeeze, remember Germany's DAX and France's CAC are down -22% and -26%, respectively from their YTD highs


EUROPE: major breakdowns in the DAX and CAC not recovered this morn; after this last lift in the Euro; European stocks to resume crash


FRANCE – not only did the CAC40 fail at my TREND line of 3401 resistance in the last week, but now it has moved right back into a Bearish Formation (bearish TRADE, TREND, and TAIL) – given that French banks and their super sovereign rating all need to be downgraded further, this makes sense; don’t forget the CAC is still crashing (down -26% from its YTD high inclusive of the squeeze)


THE HEDGEYE DAILY OUTLOOK - euro performance




ASIA: stealth move continues in China with stocks up +1.4% on the A-shares and up 7 of the last 8 days; Japan not good.

Australia September building approvals (13.6%) m/m vs cons (4.5%).



THE HEDGEYE DAILY OUTLOOK - asia performance







The Hedgeye Macro Team

Howard Penney

Managing Director



Weekly Asia Risk Monitor: Dominant Trends Still Intact

Conclusion: The short term, beta-chasing melt-up we saw across global macro markets last month wasn’t enough to change our conviction on the dominant macro trends within this region.



Positions in Asia: Short the Aussie dollar (FXA); Short a basket of emerging-Asia currencies (AYT).



Not surprisingly, Asian equity markets are down across the board week-to-date, declining -1.8% on a median basis. The interconnected global melt-up we saw in October largely failed to register higher intermediate-term highs, as Asian equity markets remain down -2.5% and -11.3% on a 2mo and 3mo basis, respectively. The same sequence of price action can be applied to Asian currencies as well, falling -1.2% on a median basis in the week-to-date vs. the USD, and down -3.6% and -4.3% on a 2mo and 3mo basis, respectively.


Across the region’s sovereign debt markets, the Reserve Bank of Australia’s interest rate cut and nasty growth data out of Hong Kong are driving the largest deltas. Australian 2yr and 10yr yields have fallen -13bps and -14bps, respectively, in the week-to-date. Hong Kong’s 10yr yields have declined by -14bps as well in the week-to-date, collapsing the territory’s 10s/2s spread by the same amount. 5yr CDS have widened +16.8% on a median basis in the week-to-date and the dramatic tightening we saw in October (-23.3% on median basis) failed to make lower intermediate-term lows vs. the past two (+16.9%), three (+45.2%), and six (+49.7%) months.


Across Asian interest rate swaps markets, we continue to see our themes of Deflating the Inflation and Global Growth Slowing take market interest rate expectations lower. Notably, Chinese 1yr on-shore swaps have declined a full -85bps in the prior 2mo and are down another -16bps in the week-to-date as expectations for PBOC monetary easing grow seemingly larger by the day. Another callout here is that in spite of the broad-based optimism we saw across global equity markets in October, we didn’t see a pick-up in expectations for tighter monetary policy across Asia (1yr swaps advanced only +1bps on a median basis over the last month). What this tells us is that through the noise of the manic media-influenced equity market(s), the aforementioned Global Macro trends remain intact.



Rather than delineate these data points by country, given the varying size and importance of these economies, we thought we’d try something different by grouping them by theme. Ideally, this should make it easier to absorb and contextualize anything of significance. Lastly, the callouts below are from the prior seven days:


Growth Slowing:

  • China’s manufacturing PMI came in at a rather weak 50.4 in October (vs. 51.2 prior) – the lowest reading since February ’09! What’s worse, the forward-looking subcomponents (new orders, new export orders, and order backlog) all declined sequentially to near-50 or sub-50 levels.
  • Japanese export growth slowed in September to +2.4% YoY vs. +2.8% prior. Additionally, Japanese small business confidence edged down in October to 46.4 vs. 47.2 prior.
  • Hong Kong money supply growth (M3) went negative for the first time in years in September, falling -0.4% YoY. This happened in 2Q08 and was largely flat-to-down on a YoY basis until 1Q09. This is yet another stealth data point to consider when pondering where global growth might be headed over the next 3-6 months.
  • Taiwanese real GDP growth slowed in 3Q: +3.4% YoY vs. +5% prior – a two-year low. Manufacturing PMI ticked down in October to 43.7 vs. 44.5 prior.
  • South Korea’s manufacturing and non-manufacturing business surveys both ticked down in November to 82 (vs. 86 prior) and 84 (vs. 86 prior), respectively.
  • New Zealand’s NBNZ business confidence and outlook surveys both dropped in October to 13.2 (vs. 30.3 prior) and 26.1 (vs. 35.4 prior), respectively.

Deflating the Inflation:

  • Japanese CPI slowed in September to flat YoY vs. +0.2% prior.
  • Chinese input prices PMI sub-index ticked down in October to 46.2 vs. 56.6 prior – the first sub-50 (contraction) reading since March ’09!
  • South Korean CPI slowed in October to +3.9% YoY vs. +4.3% prior.
  • Indonesian CPI slowed in October to +4.4% YoY vs. +4.6% prior.
  • Australian CPI, core CPI, and PPI all slowed in 3Q to +3.5% YoY (vs. +3.6% prior), +2.3% YoY (vs. +2.6% prior), and +2.7% YoY (vs. +3.4% prior), respectively. An unofficial TD Securities gauge of inflation showed continued cooling of late: +2.6% YoY in October vs. +2.8% prior.
  • New Zealand’s CPI slowed in 3Q to +4.6% YoY vs. +5.3% prior.

Sticky Stagflation:

  • Chinese Premier Wen Jiabao reiterated that China will continue to maintain firm controls within the property market and that the country will ease policy at a “suitable time and [to an] appropriate degree”. We’ve been in print saying that we likely won’t see China loosen meaningfully without at least one quarter of sequentially contracting CPI alongside slowing YoY headline inflation trending down towards the State Council’s +4% target. The latest reported inflation data would suggest we’re at least 3-4 months away.
  • China’s banking regulatory body, the CBRC, granted approval to some banks to issue debt in order to fund incremental loan issuance to Chinese SMEs. Elevated inflation continues to keep the Chinese government from coming to the rescue of its ailing small businesses in a meaningful way.
  • Thai CPI accelerated in October to +4.2% YoY vs. +4% prior. The acceleration makes the Bank of Thailand’s monetary policy strategy that much harder, given that they just lowered their 2011 GDP forecast by -36.6% to +2.6%. Rapidly slowing economic growth is supportive of easing, but current CPI readings and an increase to their 2012 inflation forecast requires additional prudence per Assistant Governor Paiboon Kittisrikangwan.

King Dollar:

  • Japan intervened for the third time in the year-to-date to weaken the yen in the spot currency market. Finance Minister Jan Azumi pledged to continue taking “bold action against speculative moves in the market” as the “one-sided speculative moves that don’t reflect the economic fundamentals of [Japan’s] economy.” His lack of understanding on the relative nature of exchange rate determination continues to make Japanese bureaucrats flat-out wrong here, as our analysis shows the yen is being driven solely by “fundamentals”.
  • The Reserve Bank of India raised interest rates for the 13thtime since the start of 2010 (+350bps in the current tightening cycle) and signaled that if the “inflation trajectory conforms to [their] projections” over the next few months (our models suggest this is the most likely scenario), the RBI is likely done tightening monetary policy. India’s benchmark repo rate now stands at 8.5%.
  • Consistent with our outlook since 2Q, the Reserve Bank of Australia finally broke and lowered interest rates by -25bps (now at 4.5% on the overnight cash rate). In explaining the decision, RBA Governor Glenn Stevens cited all the things we’ve been hitting on for months: slowing Asian demand, a weakened domestic labor market, Europe’s Sovereign Debt Dichotomy, and retrenchment in the domestic consumer and corporate sectors. Interbank cash rate futures are currently pricing in a 74% chance the RBA lowers by another -25bps in December.

Eurocrat Bazooka:

  • Chinese Vice Finance Minister Zhu Guangyao confirmed our belief that China would not be a source of “dumb capital” for the EFSF, publically demanding more details about the “technicalities” of the fund. Additionally, China Investment Corporation (sovereign wealth fund) Chairman Jin Liqun said that “Europe is not really short of money” and publically challenged the European populace to “work harder”, “longer”, and “be more innovate”.


  • Japanese manufacturing PMI ticked up in October to 50.6 vs. 49.3 prior.
  • Indian manufacturing PMI ticked up in October to 52 vs. 50.4 prior.
  • South Korean manufacturing PMI ticked up in October to 48 vs. 47.5 prior.
  • Australian manufacturing PMI ticked up in October to 47.4 vs. 42.3 prior.


  • The epic flooding in Thailand (92 billion cubic meters of water) have forced closures of 10,000+ factories and caused structural damage to plants and farmlands currently estimated at $4.6 billion. The closures are noticeably impacting the supply chains of Japanese corporations like Toyota and Sony, helping drag Japanese industrial production down in September to -4% on both a YoY and MoM basis.


Darius Dale



Weekly Asia Risk Monitor: Dominant Trends Still Intact - 1


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 2


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 3


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 4


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 5


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 6


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 7

The Fall of the Arab Spring

Conclusion: The first chapter of the Arab Spring is complete.  In the short term, religious governments will likely take root in the region, which will have important foreign policy considerations for the West.  In the longer term, demographic trends suggest the Arab Spring will have legs.


In the last few months, the Arab Spring has been shifted to the back burner for the media with the acceleration of the European debt crisis.  Even without the daily focus of the Western media, events in the Middle East continue to unfold and are worthy of our consideration.


Stepping back for a second, the key catalyst for the Arab Spring was the Jasmine Revolution in Tunisia.  The protests in Tunisia began on December 17thwith the self-immolation of Mohammed Bouazizi (after police confiscated his unlicensed food stand).  In Tunisia, the initial protest ended with President Ben Ali fleeing the country on January 14th.  Subsequently, we highlighted in a note on January 27th, which was titled “No Longer in the Tail . . . Jasmine Revolution Being Exported”, that this civil unrest would spread broadly across the region, and it has.


The current output of the Tunisian-exported Jasmine Revolution is as follows: 

  • Revolutions in Egypt and Tunisia;
  • Civil war in Libya;
  • Civil uprisings in Syria, Bahrain and Yemen;
  • Two government leaders, in Iraq and Sudan, indicating they would step down;
  • Major protests in Iraq, Jordan, Algeria, Morocco  and Oman;
  • More minor protests in Western Sahara, Saudi Arabia, Sudan, and Kuwait, and Lebanon. 

Arguably, there is at least a symbolic tie-in to the Occupy Wall Street protests that have proliferated across North American.  Although, as of yet, the Occupy Wall Street group has yet to establish that they are truly representative of the majority, let alone the entire “99%”, like their Arab counterparts.


To be fair, part of the reason that media has shifted its focus from the Arab Spring is that major protests have become less plentiful.  Yet, the elixir of future civil unrest in MENA certainly remains.  First, the region is incredibly young, by some estimates 65% of the region is below 30 years of age with above average population growth rates.  Second, the region is grossly under-employed with an estimated 25% of the youngest working-age demographic unemployed.  Finally, the gap between the rich and poor, as measured by the Gini coefficient, is higher in MENA than in any other region in the world.


Even as the potential for future civil unrest remains in MENA based on basic demographic trends, the second derivative effect of the Arab Spring is beginning to manifest itself.  This is the transition from autocratic rule to democratic rule.  The unintended consequences of this shift are that the newly elected governments could be less friendly to the West and, over time, less stable.  This is especially true if political reform is rushed and occurs with little economic reform.


Due to a long nascent political culture in MENA, secular political parties will take time to build and then function effectively.  In the shorter term, religious-based parties will have an advantage given their history and organizational power through their religious leaders.  As a case in point, the Muslim Brotherhood has a history in Egypt that pre-dates the Mubarak government.


Currently, the three countries that have seen the most dramatic shifts in power, Egypt, Tunisia, and Libya, seem poised to become ruled by non-secular political parties.  In Tunisia, an Islamist party, Ennahda, was elected to power in the first election post-Ben Ali.  Next is Egypt, with general elections planned for this month, where the Muslin Brotherhood has been organizing for years, if not decades, for this moment and are poised for a strong showing.  Finally, in Libya, acting Prime Minister Abdurrahim el-Keib has indicated he would like to hold elections within a year, but one of his first acts was to “declare an Islamic state.”


From an investment perspective, we have highlighted in the attached chart the implications of perceived future turmoil.  The attached chart shows the price of WTI, Brent, Copper, and the CRB Index since roughly the beginning of the Arab Spring, just over a year ago.  In that time, Brent has vastly outperformed its commodities peers as competitive flow of sweet crude as been curtailed due to the Libyan civil war, giving Brent an underlying bid.


None of this is at all to suggest that Islamic states will be negative for the West, or negative for peace in the region.  Certainly, though, this shift is critical for us to flag and keep front and center on our risk monitors.  Longer term, even if there is a lull in civil unrest currently, the call of “ash-shab yurid isqat an-nizam”, or “the people want to bring down the regime”, is likely still in early days in MENA.


Daryl G. Jones

Director of Research


The Fall of the Arab Spring - DoR chart1

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DNKN did report a relatively strong quarter (with a few holes)  today, with the obvious exception being the implication from the secondary offering announcement that the equity sponsors want out ASAP.  This news was not very surprising to us given that the stock is the most expensive in the restaurant universe.


The line of questioning that the Street took with management is often insightful and on the DNKN call today, as with the EAT call last week, the dialogue was focused strongly on one area. For Dunkin, comparable store sales and K-Cups were the most touched upon topics.  We believe that the significance of comps and K-Cups is overemphasized by some; Dunkin’ Donuts is a franchise business model and the growth of its footprint is a far more meaningful driver of earnings.  With respect to unit growth, the quarter was a little disappointing.  To hit the mid-point of the target net unit opening range for the year of 220-230 new points of distribution, 107 net new openings are required in the fourth quarter.


Below are the top takeaways from the quarter:


  1. The company reiterated its goal to more-than-double Dunkin' Donuts' footprint in the USA to reach 15,000 locations over the next 20 years.  The company failed to disclose any details on its backlog of stores.
  2. In 3Q11, Dunkin' franchisees opened 57 net new locations; 70% of that development took place outside of the core markets.  But they are narrowing our projection of net new Dunkin' locations in the U.S. this year to 220 to 240 versus the previous wider forecast of 200 to 250. Its represents an acceleration from the net 206 restaurants in 2010, but a long way from reaching the 450 annual run rate needed to get the 15,000 target.
  3. On the call they said they have actively begun recruiting franchisees for markets in Texas, Colorado, New Mexico, Oklahoma and Nebraska, but do not expect new Dunkin' restaurants to open in any of these markets until early 2013.  On the call they said “we are focused on keeping our development pipeline build,” but fell short of revealing any numbers. 
  4. For the quarter, revenue growth of 13.3% far exceeded the system-wide sales growth of 8.3%.  According to the company they “offer our franchisees the opportunity to extend the term of their original franchisee agreement. And usually, when we do that, we can charge a fee associated with it.”
  5. It appears that the company booked a couple million in supply chain product designation/incentive fees this quarter, as well as $2M in refranchising gains, from where terminated stores are resold by DNKN at a profit.
  6. Dunkin International is not providing any real incremental growth to the overall organization.
  7. The management team does not really see SBUX’s move in to K-Cups as a competitive threat.


All in all, we do not see DNKN’s story as being compelling on the long side.  The equity sponsors are clearly not enthused and we contend that the Dunkin’ Donuts business model, as it currently operates in the US, is not viable west of the Mississippi and will not be for quite some time.  The hub-and-spoke model that the brand uses in existing markets would require a lot of capital to replicate in brand new markets.  For now, the donuts and other baked foods cooked at commissaries in existing markets will be flown into new markets frozen.  Whether or not that passes muster with consumers, the run-rate of new store openings needs to escalate rapidly in order for the guidance of a footprint of 15,000 domestic locations within 20 years is to be reached.  The lack of disclosure concerning the backlog is the biggest red flag from the quarter.






Howard Penney

Managing Director


Rory Green


Spear of the Souvlaki Stick; Covering FXE

Positions in Europe: Covered short position in EUR-USD (FXE) today


When I was in Greece in late September I remarked to my cabbie on the 35 minute ride from the airport to downtown Athens that there was astonishingly very little traffic as we approached the city center. His answer: Greeks can’t afford to fill up their tanks. At the time, gas prices were at €1.71/litre, some of the highest in Europe given the government’s added gas tax.


It’s clear that austerity is hitting the Greeks hard. And for an economy highly dependent on tourism, you can bet all the strikes, riots, and government indecision has chased away a number of tourists.


Austerity’s Bite alone however doesn’t justify PM George Papandreou’s decision late yesterday to call a confidence vote on his party and referendum on the newly-minted (though rough) framework for a second bailout of Greece.  Frankly, neither Papandreou nor the Greek Parliament have been calling the shots on the country’s go-forward policy over the last eighteen months, Eurocrats have—in particular the Germans from Chancellor Angela Merkel’s podium. However now Papandreou’s actions threaten to create further outsized market risks as he reaches out to the people, rather than Brussels, for direction. This is a reckless decision!


Below are the important developments in the past 48 hours and our take on the impact of Papandreou’s actions on the market and common currency: 



Papandreou’s Party is on the Brink: The confidence vote that Papandreou called is a very risky maneuver. It’s clear he wants to prove he has the people’s vote behind him on the go-forward, however his PASOK Party has a slim majority of 3 votes in Parliament (perhaps down to 2 on unsubstantiated reports today).  Debate is to commence tomorrow with a vote on his confidence expected on Thursday or Friday.  A crisis meeting between Papandreou with Germany and France was called early today for tomorrow afternoon, as Brussels was largely blindsided by Papandreou’s announcement, which led to an extreme plunge in European equities (down -3 to -7% today) and a hit to the common currency (EUR-USD is down 80bps to $1.375 intraday). Could Merkozy somehow force Papandreou to about-face and undo his action? It seems unlikely, but we can’t completely rule it out either.


Despite the diplomatic statement from European Council Herman Van Rompuy this morning…


“We take note of the intention of the Greek authorities to hold a referendum. We are

convinced that this agreement is the best for Greece. We fully trust that Greece will honour

the commitments undertaken in relation to the euro area and the international community.”


… realize Papandreou’s move is a slap in the face – after all, the EU, IMF, and ECB have worked to support Greece, most recently at the EU Summit ended 10/24. Here’s what Otto Fricke, the budget spokesman in parliament for Merkel’s Free Democratic Party coalition partner, said today:


“If the Greek people don’t see the necessity of backing Papandreou we have a whole different ballgame. If he doesn’t get a majority, then there’s no second aid package, no voluntary haircut. We’d have a potentially explosive situation, one that leaves us today baffled as to what we could possibly do next.”


That quote says a lot. Further, should Papandreou lose the confidence vote, expect even in an optimistic scenario that much indecision would surround reconciling existing bailout terms with a new government.  


According to the Kapa poll, The New Democracy party would win 22% of the vote if elections were held today, with Papandreou’s PASOK party receiving 14.7%, and neither getting enough to form a majority in parliament. More than 26% of voters said they were undecided on whom to back.



Debt Referendum Stretches the Window: Papandreou’s call for a referendum on the terms of the second bailout of Greece (€130 Billion), which is being call for the beginning of Dec. 2011 or Jan. 2012, heightens the already tenuous state of the Greek state.  It elevates the prospect of a Greek default/exit of the Eurozone, and could stretch concrete decisions on the expansion of the EFSF, recapitalization of European banks, and haircuts on Greek debt.  More concretely, the bailout tranches that Greece receives from its original bailout could be put on hold which could ground the country further to a halt or default. Any way you slice it, little good can come from the actions taken by Papandreou yesterday. 



Square in a full Calendar: On the theme of blindsiding Brussels, the timing of Papandreou’s announcement is complicated by the G20 beginning on Thursday in Cannes, at which the market is expecting more exact details on the rough framework outlined at the EU Summit, that is: how the EFSF will be reinforced; details on bank recapitalizations and the write down of Greek debts. Further, the ECB convenes on Thursday to announce its main interest rate policy. We expect no change (more below), yet the timing of the decision adds further market consternation.  This is all on the backdrop of slowing growth (Germany and France revised GDP for 2012 down to 1.00%, vs previous estimates of 1.80% and 1.75%, respectively), declining PMIs for Services and Manufacturing [most in contraction territory (sub-50) over the last months], and stubbornly high unemployment across the periphery. 



Common Currency Weakness: Today we covered our position in the EUR-USD via the etf FXE in the Hedgeye Virtual Portfolio. While the EUR-USD has once again broken its TREND ($1.42) and TAIL ($1.40) lines, it's holding our immediate-term TRADE line of support at $1.36. We’re covering this -4.2% drawdown over the last 72 hours as the pending confidence vote and referendum calls are being discounted for the trade.


We also don’t expect a rate cut on Thursday’s meeting, which may bring some support to the currency pair. Not only do we not see Mario Draghi making a big splash in his first week (his first day as ECB president was on Tuesday), but inflation still remains elevated at 3.0% (above the ECB’s mandate of 2.0%) over the past two months. We do think the ECB will cut over the intermediate term, perhaps as soon as next month, as slowing growth concerns elevate.  We’re looking to re-short any immediate term bounces in the EUR-USD.


Spear of the Souvlaki Stick; Covering FXE - 1. ME



Risk Signals: Markets are extremely volatile, running off the next headline or rumor, as the game changes with nearly every Eurocrat sound bite. As we mentioned in today’s Early Look, we’re keying off risk signals from Italy, namely the all-time wide in the spread between 10YR German Bunds over Italy 10YR yields, at 118 bps, as a signal that Europe is far from reaching any resolution on its sovereign and banking crisis.  Italy, with a public debt of 120% of GDP, poor leadership, lack of resolve on its austerity package, and considerable banking risk, remains a far larger shoe that could drop in this European soap opera and stoking the larger fear trade we continue to see play out.


And a stiff glass of ouzo is not going to cure these ails!


Spear of the Souvlaki Stick; Covering FXE - MH 11111


Matthew Hedrick
Senior Analyst


In preparation for HYATT's Q3 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • $1.5 billion senior unsecured revolving credit facility that matures in September 2016, which replaces its existing $1.13 billion facility which had been scheduled to mature in June 2012
  • New R/C pricing at current ratings is L+1.175% plus a 20bps facility fee
  • "We are extremely pleased to have secured this committed facility at more favorable terms, backed by a strong group of diversified banks"


  • Acquired 20 hotels for $660MM
    • "With one hotel acquisition to close during the fourth quarter of 2011.
  • "The acquisition also includes the management or franchise rights to an additional four hotels."
  • "Hyatt expects the acquisition to have a positive impact of approximately $10 million, exclusive of transaction costs, on Adjusted EBITDA for the remainder of 2011. In 2012, the purchase is expected to generate approximately $40 million of Adjusted EBITDA."


  •  $250MM principal amount of 3.875% senior notes due 2016
    • Priced at 99.571; grade: BBB
  •  $250MM principal amount of 5.375% senior notes due 2021.
    • Priced at 99.846; grade: BBB



  • “Rate growth was a result of continued shift in mix of business, as well as increased pricing power due to higher levels of occupancy.”
  • “We own 40% of the joint venture and have committed to invest over $30 million of equity, which together with Noble’s investment and with moderate levels of leverage, should allow the JV to build six to eight new select-service hotels over the next few years. The first of these hotels is already under development in the Atlanta area.”
  • “Group revenue pace for the year is still positive, with short-term bookings still limiting longer-term visibility....rates are getting firmer."
  • "No plans for future share repurchase"
  • “In 3Q, we expect the renovations to have a less than 100 basis point impact to RevPAR and a less than $5 million impact to adjusted EBITDA. Starting in the fourth quarter, and into 2012, we expect to see the positive impact of the renovations in our reported owned and leased segment results.”
  • [ROI on Lodgeworks] “If you begin in a framework that’s sort of mid to higher single-digit kind of cap rates, we would look to expand that into double-digits over time on a return on gross investment.”
  • [Transaction opportunities] “We’re seen more select-oriented opportunities both in the U.S. and outside the U.S., as well as full-service and some luxury deals….. I would say that the direct comparison for the deals that we just talked about are fewer and far between, but the overall level of activity in the market has been growing.”
  • “We expect to open 15 properties this year, excluding LodgeWorks acquisitions….I think we opened about seven so far, about eight balance of the year.”
  • “The mindset’s fairly cautious right now given the undertone on the macroeconomic factors, especially in North America.”
  • “Business that we have on our books or booked for 2012, the rates are about 8% higher than where we think we will end in terms of areas for the group business at the end of ’11….We also saw that our corporate and association business on the group side, which is about 70% of the Group side, was up in terms of revenue in the low double-digit combination of demand and rate."
  • “We’ve been very focused on employment and housing prices and general confidence levels in the economy.”
  • “The best way to model our tax rate is 35% on our U.S. income and 20% on our international income….If you adjust for the reversal in this quarter, tax rate varies anywhere from 35% to 40%. So, I think that would be a good indication of the tax rate that you can project.”
  • [Fee impact] “We still believe that a full year downside ... will be in the region of about approximately $5 million...that’s an even split between the Middle East and Japan."

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.