Newt May Lose, But.....

He Won’t Be Retiring In Florida


Conclusion: Romney is going to win Florida, but it is increasingly looking like Gingrich will battle Romney all the way to the Republican convention.  We believe this puts a Democrat sweep very much on the table.


In the second half of October and early November last year, the Republican nominating process looked like all but a coronation for former Massachusetts Governor Mitt Romney.  The contract on InTrade that calculated whether he would become the next nominee was trading at over a 70% probability after never trading above 40% prior to October 2011.  By mid-November both Rick Perry and Herman Cain, who for short period of times led national polls, had completely flamed out.  Then, of course, along came Newt Gingrich with his benefactor Sheldon Adelson.


The chart below from Real Clear Politics highlights the poll averages over the last year from the Republican field.  Specific to Gingrich, the chart shows that for much of the race he was a non-factor, running as far back as sixth place.  Slowly on the back of solid debate performances and the failures of Cain and Perry, Gingrich gained momentum as the right wing of the Republican Party coalesced around him.  On December 13, 2011, Gingrich had the most commanding lead of the race with 35.0% of those polled supporting him versus only 22.3% for Romney.  Since then, Gingrich’s polling has fluctuated dramatically.  In the course of six weeks since December 13th, Gingrich’s polls have been characterized by volatility, reaching as low as 16.2% on January 16th and as high as 31.3% on January 27th. 


Newt May Lose, But..... - chart1


Romney, on the other hand, has been the embodiment of controlled stability in the polls.  Although he peaked at 31.2% in early January, his poll numbers have largely ranged between 20% and 25% since late July.  It seems the Republican Party likes him, but not enough to enable him to land the knock-out blow and clinch the nomination, despite his superior organization and fundraising.  The fundraising point has been critical to Romney turning the tide in Florida.  As of Friday, Romney and his super PAC had spent $15.3 million in Florida buying media spots versus $3.4 million for Gingrich.


This spending, most of which has come in the last couple of weeks, has had a meaningful impact.  In the chart below, we show the last seven days of the InTrade contract on whether Romney will win Florida.  It has gone from ~40% to just under 95% in that period.  This is also reflected in Florida-specific polls, as Romney has won in the last 14 Florida polls going back to January 22nd and currently holds an 11.5 point lead over Gingrich on the Real Clear Politics poll aggregate.  Given the Florida primary is tomorrow, it is unlikely that anything will shake Romney’s sizeable lead.


Newt May Lose, But..... - chart2


Despite a likely loss by a wide margin in Florida, Gingrich has made one point very clear: he won’t be retiring his candidacy in Florida.  In fact he stated to Politico this weekend, “I will go all the way to the convention.  I expect to win the nomination.”


On some level, Gingrich appears to be adopting the Reagan strategy of 1976 when Reagan lost a number of early primaries, but won North Carolina, which shifted the momentum.  In the end, Reagan lost by a handful of votes at the convention to Gerald Ford despite limited cash and a lack of establishment support.  Following this tight loss, Reagan was lauded by conservatives for his efforts to push the Republican Party to the right.


The Gingrich camp is clearly trying to establish themselves as the conservative and right wing alternative to, as they call Romney, the “Massachusetts Moderate.”  On some level, this position is working as Gingrich has repeatedly associated himself with Reagan and has seen his standing in national polls increase as more conservative candidates, like Cain and Perry, have exited the race.  In fact, this weekend Gingrich actually received the tacit endorsement of conservative and Tea Party standard bearer Sarah Palin who said the following on Fox this weekend:


“We need somebody who is engaged in sudden and relentless reform and is not afraid to shake up the establishment.  So, if for no other reason, rage against the machine, vote for Newt, annoy a liberal, vote Newt, keep this vetting process going, keep the debate going.”


In South Carolina, the exit polls showed very clearly that Gingrich is attracting the more conservative vote in the Republican primaries.  In the ideology category of the South Carolina exit polls, Gingrich received 48% of the very conservative vote (which was 36% of the entire vote) versus 19% for Romney.  In the same category, Santorum received 23% of the vote.  Assuming that Santorum’s very conservative voters were split between Gingrich and Romney based on the 48% to 19% split it would have widened Gingrich’s victory by roughly 3.6%.


In the more broadly defined ideology breakdown of conservative versus liberal, which is represented by 68% and 32%, respectively, of those exit polled in Florida, Gingrich received 45% of the vote versus 23% for Romney and 19% for Santorum.  Doing the same math as above, assuming a Gingrich and Romney split of Santorum’s votes, equates to an additional 2.7% margin for Gingrich based on those that define themselves as conservative.


Clearly, the combination of support from the Tea Party right and the actually internals from recent exit polls support Gingrich staying in this race, even if he loses by a wide margin in Florida.  As well, a key strategic distinction that Gingrich has versus Reagan in 1976 may be money.  Or at least the money of casino mogul Sheldon Adelson, who has an estimated net worth north of $20 billion and has already donated $10 million to Gingrich’s Super Pac.  To the extent he wants to do so, Adelson certainly has the ability to keep Gingrich in the race.   


So, what does the likelihood of an extended and bloody battle for the Republican nomination for the Presidency mean for the Republicans?  Well, it seems to be conventional wisdom that it is not a good thing, and we tend to agree.  Assuming Gingrich stays in the race to the bitter end, this could be an epic battle between the right wing and the moderate wing of the Republican Party, with the two candidates both likely to suffer ongoing and negative attacks from the other.  This constant and negative barrage won’t be good for the candidates, or the Republican Party itself.


On the first point, President Obama has started to poll better compared to both Gingrich and Romney than he has in the last six months.  In the most recent Rasmussen poll, Obama is up on Romney by +6 points and up on Gingrich by an astounding +17 points.  Moreover, in the generic congressional polls, the Democrats for the first time in over a year are widening the gap from the Republicans, which we’ve highlighted in the chart below.  Currently, the Democrats have an advantage of 44.0 to 42.2 versus the Republicans, for an advantage of +1.8.  This is a stark contrast to their shellacking in the 2010 mid-terms.


The one election alternative that few pundits are considering currently is a Democratic sweep of the Presidency and both Houses of Congress.  In an extended war between Gingrich and Romney, this scenario could be squarely on the table.


 Newt May Lose, But..... - chart3



Daryl G. Jones


Director of Research


ECB’s SMP Takes a Dive

Positions in Europe: Short EUR-USD (FXE)


As a follow-on to our note today titled European Banking Monitor and EUR/USD Update, here we include that the ECB's secondary sovereign bond purchasing program (SMP) bought a mere €63 Million in the week ended 1/27 versus €2.243 Billion in the week ended 1/20 to take the total program to €219.0 Billion.  This light figure comes as a surprise, especially given the relatively strong bond auctions last week, particularly from the periphery.


ECB’s SMP Takes a Dive - 1. SMP


Matthew Hedrick

Senior Analyst


Q4 lukewarm but 2012 should be HOT.



HOT’s headline number should beat consensus when they report Q4 on Thursday.  The benefit from the sale of the Bal Harbour units will boost Q4 EBITDA as Starwood should have started booking in the quarter.  Excluding the Bal Harbour units, the ‘clean EBITDA’ number could be on the lower end of company guidance and a little below consensus of $279MM.  However, any slight miss would be due to USD strength, offset by stronger North American RevPAR trends. 

International exposure which has been a tailwind for Starwood these last 2 years turned into a headwind this last quarter.  Since HOT reported 3Q results on October 27th the Euro has depreciated by 7.4% vs. the dollar and the dollar index has strengthened 4.4%.  While HOT hedges roughly 50% of the Euro exposure, it still maintains plenty of exposure to other currencies.  Every 1% move in FX impacts EBITDA by $4MM.


Given the healthy trends in NA RevPAR, we’ve been positive on the lodging space since late August (see “IT’S NOT THE ECONOMY, STUPID” 08/25/2011).  However, given HOT’s heavy international and European exposure, we have preferred to express our positive thesis on lodging through MAR, which now derives almost all of its EBITDA from higher multiple fees.


Q4 Detail:


We estimate $285MM of EBITDA and EPS of $0.61, inclusive of Bal Harbour sales.


We model owned, leased and consolidated JV revenues of $440MM and margins of 19.2%

  • $281MM of room revenue, up 0.5% YoY
    • Room count should be down 8% YoY as a result of asset sales
    • We estimate non-same store RevPAR of $157.62
  • $159MM of F&B revenue, down 11%
  • CostPAR of $279.70 – up 2.2% YoY compared to up 8% in 3Q – benefiting from the strong dollar

$227MM of revenues from management & franchise fees, and other income

  • $85MM of base management fees, up 15% YoY
  • $56MM of incentive fees, up 3% YoY.  4Q10 is a tough comp as incentive fees were up 38.5% YoY
  • An 8% YoY increase in franchise fees to $35MM
  • $30MM of amortization of deferred gains and termination fees & other
  • $11MM of miscellaneous income

$175MM of VOI and residential sales and $44MM of operating profit, including Bal Harbour


Other stuff:

  • $90MM of SG&A
  • $78MM of D&A (including $11MM of unconsolidated JV)
  • $47MM of net interest expense plus $6MM pro-rata unconsolidated interest
  • 24% tax rate and 195MM shares

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.


Keith back into WMT, one of the few retailers that will remain unscathed through the upcoming JCP-fueled apparel retail mele, to the Hedgeye Virtual Portfolio.







We’re below the Street for Q4 but PNK has underperformed and light Louisiana numbers are well-known.



After making or beating expectations for two years, PNK could report 4Q11 results below expectations.  We are projecting net revenue of $274MM and adjusted EBITDA of $58.7MM, which is 4% below the Street.  PNK could underperform over the near-term as questionable ROI on new projects and soft revenues could continue to provide an overhang on the stock.  However, the relative weakness of the company’s Q4 report is probably well-known at this point.    



While the Q4 is always seasonally weaker than Q3, some properties underperformed this quarter.  L’Auberge gaming revenues were only up 4% YoY after an 11% rise in 3Q.  Margin estimates seem a bit aggressive to us.  Margin improvement of 320bps are difficult to fathom.  Last quarter, PNK’s margins only improved 1.4%.  Adding back the $1.7MM of ‘unusual’ expenses from last quarter, PNK’s margins would have been only 50bps better.  Going forward, margin comps are a lot more difficult than in the first half of 2011.


Other assumptions:

  • Corporate expense: $6.7MM
  • Stock comp: $1.7MM
  • D&A: $25.8MM
  • Net interest expense: $24.0MM
  • Same effective tax rate of 7.5% as for the first 9 months of the year 

European Banking Monitor and EUR/USD Update

Positions in Europe: Short EUR/USD (FXE)


Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor"


If you'd like to receive the work of the Financials team or request a trial please email .


Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 5 bps from last Monday to 77 bps today.


European Banking Monitor and EUR/USD Update - 1. ois


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis. 


European Banking Monitor and EUR/USD Update - 1. ecb


European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 34 of the 40 reference entities. The average tightening was 2.3% and the median tightening was 9.4%.


European Banking Monitor and EUR/USD Update - 1. banks


Security Market Program – The ECB has still yet to publish its secondary sovereign bond purchases for the week ended 1/27 (normally due out by 10am EST on Mondays).  It bought €2.243 Billion in the week ended 1/20 to take the total program to €219.0 Billion.  We’ll post on the 1/27 amount as soon as it’s released.    



A note on our short EUR/USD position and Europe’s Fiscal Compact illusions:

We remain short the EUR/USD via the etf FXE in the Hedgeye Virtual Portfolio.  This is a position that has worked against us since last week’s announcements from President Obama (State of the Union Address) and Federal Reserve Chief Bernanke (FOMC Press Conference), both of which fundamentally changed our previously bullish outlook on the USD.


However, there’s been no resolutions out of Greece on PSI and increasingly Portugal is looking like the next Greece, which suggests we may see a chess fight between the EUR/USD for the weaker link of the pair. Also to note is that Germany has called to establishing a budget overseer in Greece to have strict control and veto power over Greece’s fiscal policy decisions going forward in return for bailout funds. Greece’s Finance Minister Venizelos adamantly rejected this plan and warned that “anyone who puts a nation before the dilemma of economic assistance or national dignity ignores some key historical lessons,” which signals to us that the Fiscal Compact being pushed in Europe has little hope of success as countries refuse to give up their sovereignty to Brussels (or Berlin). In short, we expect cultural difference to trump, and the union of uneven countries to struggle to resolve deep seeded sovereign disparities. In this light, we see a higher probability of intermediate term weakness in the EUR/USD. 


Below is a heat map we use, courtesy of The Economist, which clearly shows the great difference in sovereign debt (as a % of GDP) across southern versus northern Europe. We expect this unevenness to have a long tail, and ultimately, and even if levels can be reduced through fiscal consolidation, to come at the expense of growth. 


European Banking Monitor and EUR/USD Update - 1. Heat Map


Matthew Hedrick

Senior Analyst

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.