In preparation for HOT's Q4 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.



Starwood Says Hotel Conversion Opportunities in North America Expected to Rise in 2012 with Uptick in Portfolio Transactions (1/24/2012)

  • “We ended 2011 with a renewed sense of momentum in the North American deal environment and, as we enter 2012, we’ve got a close eye on several transactions which may lead to an increase in conversion opportunities”
  • “Announced today that it opened 27 hotels in North America in 2011, more than it had predicted”
  • “Looking ahead to 2012, Starwood is slated to open 20 new properties in North America, not including late breaking in-the-year conversions which are expected to result in additional new hotels this year.”
  • “Conversions continue be the primary driver of new hotel growth in developed markets. In 2011, 75% of Starwood’s openings and 63% of its new deal signings in North America were conversions.”

St. Regis Hotels & Resorts Continues Remarkable Global Growth with the Debut of The St. Regis Bal Harbour Resort & Residences (1/20/2012)

  • “The St. Regis Bal Harbour Resort offers guests a new dimension of bespoke luxury with 243 guest rooms and suites and 245 private residences, all offering expansive private balconies with ocean views, in three glass towers rising 27 stories above a sprawling stretch of beach.”



  • We see the balance of this year in-line with what we said on our Q2 call.”
    • Full year EBITDA: $980 to $990MM
    • EPS will come in at around $1.75 to $1.79
    • Full year RevPAR remains at 7% to 9%
    • Owned EBITDA margins: 150 to 200bps
    • SG&A: +3% to 4%
    • “SVO will be at the high end of expectations.”
    • “Year-to-date we have opened 53 hotels and remain on track to open approximately 80 hotels in 2011.”
  • “Our Q4 EBITDA range of $270 million or $280 million was negatively impacted by $4 million to $5 million since we last spoke, due to the strengthening of the dollar.  Owned EBITDA in Q4 will be negatively impacted by approximately $8 million versus last year due to renovations and pre-opening costs at our new St. Regis Bal Harbour. In the fourth quarter, we will recognize income from Bal Harbour residential unit closings in addition to ur core EBITDA.”
  • “Overall for 2012, group pace is up mid single digits. Corporate rate negotiations are only just beginning but unlike last year, our customers expect higher rates as they see occupancy and virtually no new supply in key cities.”
  • 2012 guidance:
    • "Our worldwide RevPAR range of 4% to 8% reflects a sustained recovery at the high end and a more anemic one at the low end”
    • "6% to 8% RevPAR growth and the upper half of our EBITDA range would be in-line with this Q4 momentum being sustained through 2012.
    • “If we actually have 4% RevPAR growth, the bottom of our range, owned EBITDA growth becomes hard to realize, despite our cost containment initiatives. SVO is relatively flat in all scenarios, in synch with our strategy for this business. So whatever growth we get at a 4% RevPAR scenario will have to come from our fee business.”
    • EBITDA: $1.03 to $1.12BN
    • EPS: $1.96 to $2.25
    • “RevPAR implies a continued growth in market share of at least 100 basis points and it implies rigorous cost control. You'll note that between 2010 and 2012, we expect SG&A to be up only about 2% to 3% per year.”
    • “An estimated impact of about $20 million from completed asset sales this year, planned renovations, and foreign exchange.”
  • “We expect to have ample cash from these investments, generated by operations, Bal Harbour, and timeshare.”
    • “In North America… group pace heading into Q4 is good, with more than 90% of group business already on the books. Secondary indicators like leads and cancellations also remain positive. Transient booking momentum remains strong and at this point we're not seeing any changes in trend. As such, we are projecting that Q4 RevPAR growth in North America will remain generally in-line with what we saw in Q3. We are closely watching Canada, which is showing some signs of softness, partially due to the strong Canadian dollar.”
      • Europe: “We have seen some softening in booking trends as we entered September. As such, we are projecting that Q4 RevPAR growth in Europe will be in the 3% to 4% range. At this point it is too early to tell if this is a generalized trend or some local soft spots.”
      • North Africa and ME: “Year-over-year fee growth comparisons will suffer in Q4 since we do not expect to earn any incentive fees in North Africa, which are generally recorded in the fourth quarter. In total, our 2011 fees in North Africa will be down $10 million, which is in-line with what we had estimated early this year.”
      • “As we enter Q4, booking pace remains on trend, leads are up, and cancellations are down. India is weak and Thailand is severely disrupted by the floods. As such, we expect a small sequential slowdown in Asia RevPAR growth in Q4.”
      • “We do not expect this [3Q] level of growth to continue into Q4 based on current booking trends, nevertheless Latin America will grow in the double digits.”
      • “At SVO, tours are up as are close rates versus last year. The business remains stable and predictable. We hope to complete a securitization in the fourth quarter if terms are attractive. Default trends continue to improve and are now at 2006 levels. Assuming we complete the securitization, SVO will generate over $200 million in cash in 2011.”
      • “We will have some significant capital projects underway next year including the shutdown of the Gritti Palace in Venice and the Maria Cristina in Spain. Major renovations will also be on at the Westin Maui, the Westin Peachtree, and the Sheraton Rio. We are also shutting down two other hotels in the U.S. to convert them to Alofts.”“In terms of exchange rate impacts, as we have done for the past several years, we have hedged about half our euro profit exposure in 2012 at $1.44 to mitigate the euro risk as best we can.”
      • “Not included in our 2012 outlook range is income from residential unit closings at Bal Harbour. TCOs are coming in as planned and we anticipate starting closings in mid November. We have been in contact with buyers and expect that we will have several closings before the end of the year. The bulk of the closings of contacts previously signed will be in 2011. There will be significant revenue, income and cash from Bal Harbour in 2012. We will separately identify Bal Harbour numbers so you can clearly track performance of our core hotel business. As Bal Harbour flows through our income statement, it will affect our reported tax rate and our interest expense, as capitalized interest is expensed.”
      • For 2011 we're estimating approximately $10 million in earnings, $0.03 in EPS and $30 million in cash. The numbers for 2012 will be substantially higher. We continue to expect that we will generate almost $1 billion in revenue from selling all 307 condos at the St. Regis Bal Harbour. By the end of this year, we expect that 70% of this value will be under contract. Average price per square foot on units under contract exceeds $1,300. Sales have been robust year-to-date in 2011, well above our initial expectations. And since we're close to completion, we've asked for and received almost 50% in cash deposits on 2011 contracts.”
      • “Our priorities for cash use remain reinvesting in our business to drive growth in our pipeline and our owned hotels, paying down maturing debt, and returning cash to shareholders. We will shortly announce our 2011 dividend and will execute stock buybacks as we have in the past, if our criteria are met.”
      • [2012 FCF] “We would estimate free cash flow at least in the $250 million to $300 million range after payment of dividends, so maybe a little higher than that once you consider dividends. So let's say $350 million to $400 million in free cash flow.”
      • [Group Bookings] “Our pace going into the fourth quarter is up roughly 6%, with the majority of that being rate-driven. We continue to look for higher rate of business so we're pushing for rate. And occupancies and year-over-year gain in room nights is roughly flat
      • “There isn't a lot of downside [to 2012 RevPAR guidance] if RevPAR is flatlined in Continental Europe, because that would be factored into the ranges that we've given.”
      • “In terms of extra F&B spend, we're seeing some strength there. We've also worked, by the way, on continuously improving our margins from our food and beverage and our catering operations. And so even if we weren't to see a complete recovery on the spend there, we're absolutely seeing better flow-through from what we have.”
      • “A solid BBB, the way the rating agencies calculate it, which is very different than a simple net debt to EBITDA calculation, would be somewhere in the two and a half to three times debt to EBITDA range. And we should be in those ranges based on current trends by the latter part of next year.”


      TODAY’S S&P 500 SET-UP – February 1, 2012

      As we look at today’s set up for the S&P 500, the range is 15 points or -0.34% downside to 1308 and 0.81% upside to 1323. 












      • ADVANCE/DECLINE LINE: 517 (-1314) 
      • VOLUME: NYSE 1034.20 (39.07%)
      • VIX:  19.44 0.21% YTD PERFORMANCE: -16.92%
      • SPX PUT/CALL RATIO: 1.56 from 1.97 (-20.81%)


      TREASURIES – kaboom! U.S. Growth expectations are getting hammered into the hole now with 10yr yields hitting YTD lows this morning at 1.81%. A lot of people will convince themselves that U.S.  stock futures up is whatever they want it to be, but we see that simply as inflation expectations rising which, in turn, slow growth even further. The Yield Spread hitting its lowest YTD at 161bps wide – should put a lid on the Financials at $XLF 14.24.

      • TED SPREAD: 49.15
      • 3-MONTH T-BILL YIELD: 0.05%
      • 10-Year: 1.82 from 1.80
      • YIELD CURVE: 1.61 from 1.58

      MACRO DATA POINTS (Bloomberg Estimates):

      • 7am: MBA Mortgage Apps, week of Jan. 27 (prior -5.0%)
      • 8am: NAPM Milwaukee, est. 57.5 (prior 57.8)
      • 8:15am: ADP Employment, Jan., est. 182k (prior 325k)
      • 8:30am: Fed’s Plosser speaks on economy in Gladwyne, Pa.
      • 10am: Construction Spending (M/m), Dec., est. 0.5% (prior 1.2%)
      • 10am: ISM Man., Jan., est. 54.5 (prior, revised 53.1)
      • 10:30am: DoE inventories


      • Obama speaks on economy in Falls Church, Va., talk about ways to revive housing market, 11am
      • Mitt Romney, Newt Gingrich attend campaign events in Nevada, site of Republican presidential caucuses on Feb. 4
      • Democrats retain House seat in special House election
      • Treasury issues Quarterly Refunding statement, 10am
      • FCC holds forum on distributed antenna systems, 9:30am
      • House, Senate in session:
        • House Oversight and Government Reform Committee holds hearing on President Barack Obama’s recess appointments, 9:30am
        • House-Senate Conference Committee meets on H.R.3630, the Temporary Payroll Tax Cut Continuation Act, 10am
        • House Budget Committee holds hearing on CBO outlook, 10am
        • Senate Budget committee holds hearing on Eurozone outlook, 10am
        • Senate Small Business and Entrepreneurship Committee holds hearing on entrepreneurship, with start-up executives, 10am
        • House Small Business Committee holds hearing on small business job creation, with Gallup Chief Economist Dennis Jacobe, 1pm
        • House Rules Committee meets to formulate rule on H.R.3578, the Baseline Reform Act of 2011; and H.R.3582, the Pro- Growth Budgeting Act of 2011, 3pm
        • SEC holds meeting on regulations affecting small, emerging companies under federal securities laws, 10am


      • Facebook said to pick Morgan Stanley to lead planned IPO, file plans with regulators today to raise ~$5b or more
      • EU regulators vetoed Deutsche Boerse, NYSE Euronext plan to create the world’s biggest exchange after concluding deal would hurt competition
      • Greek bondholders said set to get GDP sweetener in debt swap
      • Jan. manufacturing may rise to 54.5, highest since June, economists est.
      • Mitt Romney won Florida’s Republican primary, Newt Gingrich second by 14 points
      • Sony named Kazuo Hirai as CEO, replacing Howard Stringer, who will become chairman
      • United Steelworkers union, Royal Dutch Shell reach tentative 3-yr contract, averting potential strike that would have idled as many as 69 refineries
      • U.S. automakers report Jan. sales
      • AMR poised to start labor talks with 10k job cuts possible
      • MF Global lowered European risk in Aug., risk officer says
      • Ex-Credit Suisse workers said to face charges over CDO pricing
      • U.S. regulators weigh Volcker exemption for sovereign debt
      • Chinese purchasing managers index increased to 50.5 in Jan. from 50.3 in Dec., beating est.


        • Aetna (AET) 6am, $0.97
        • Enterprise Products Partners (EPD) 6am, $0.55
        • Thermo Fisher Scientific (TMO) 6am, $1.15
        • Whirlpool (WHR) 6am, $2.09
        • Navistar International (NAV) 6am, $0.27
        • NiSource (NI) 6:30am, $0.37
        • CGI Group (GIB/A CN) 6:30am, C$0.40
        • AOL (AOL) 7am, $0.32
        • Energizer Holdings (ENR) 7am, $1.93
        • Hershey (HSY) 7am, $0.70
        • NASDAQ OMX Group (NDAQ) 7am, $0.61
        • Tupperware Brands (TUP) 7am, $1.53
        • Northrop Grumman (NOC) 7:01am, $1.67
        • Marathon Petroleum (MPC) 7:05am, $(0.05)
        • IAC/InterActive (IACI) 7:30am, $0.54
        • Corinthian Colleges (COCO) 7:45am, $0.01
        • Arrow Electronics (ARW) 8am, $1.30
        • Franklin Resources (BEN) 8:29am, $2.09
        • Marathon Oil (MRO) 8:31am, $0.83
        • Chipotle Mexican Grill (CMG) 4pm, $1.83
        • Green Mountain Coffee Roasters (GMCR) 4pm, $0.36
        • Hain Celestial Group (HAIN) 4pm, $0.49
        • Las Vegas Sands (LVS) 4pm, $0.57
        • Qualcomm (QCOM) 4pm, $0.90
        • Canadian Oil Sands Ltd (COS CN) 4pm, $0.45
        • Ameriprise Financial (AMP) 4:01pm, $1.40
        • AvalonBay Communities (AVB) 4:01pm, $1.22
        • Electronic Arts (EA) 4:01pm, $0.93
        • Tractor Supply Co (TSCO) 4:01pm, $0.93
        • Fortune Brands Home & Security (FBHS) 4:04pm, $0.15
        • JDS Uniphase (JDSU) 4:04pm, $0.10
        • Allstate (ALL) 4:05pm, $0.96
        • BMC Software (BMC) 4:05pm, $0.82
        • CACI International (CACI) 4:05pm, $1.30
        • Assurant (AIZ) 4:15pm, $1.37
        • Equity Residential (EQR) 4:15pm, $0.65
        • Crown Holdings (CCK) 5:01pm, $0.47
        • Tesoro (TSO) 5:30pm, $(0.66)


      • Steel Slows With Europe Setting Back ArcelorMittal: Commodities
      • Wheat Rises in Chicago, Paris as Russia May Start to Tax Exports
      • Oil Rises First Time in Four Days on Signs of Growth in China
      • Copper Rises as Stronger Manufacturing Bolsters Demand Prospects
      • Gold Climbs to Eight-Week High as Debt Concern Spurs Investment
      • Cocoa Rises as Bean Sales May Leave Prices Unhurt; Coffee Drops
      • Indian Exchange to Start Platinum Trading as Demand to Gain
      • Rice May Extend Decline as Supply Increases, FAO Forecasts
      • Rubber Gains for Second Day as Thai Purchase Plan Cuts Supplies
      • Smithfield Goes Whole Hog to Trim Borrowing: Corporate Finance
      • Louis-Dreyfus Widow Chairman Ousts Men Running Commodities Giant
      • Record Bunker Fuel Charges Sink Shipping Profits: Energy Markets
      • Noble Said to Approach Banks for About $2 Billion Loan Facility
      • Crude Advances on China Manufacturing Data
      • Indonesian Commodity Exchange Starts Physical Tin Contract
      • Rubber Output From Major Growers May Rise at Slower Pace
      • Aluminum Surplus May Plunge to Lowest in 5 Years, Sumitomo Says









      GERMANY – just absolutely ripping this morning on a big breakout above my long-term TAIL line for the DAX of 6503. Germany’s stock market is now up +11.7% YTD! (vs SPX +4.3%) as the old Bundesbankers prove out that there is an economic model that resides right of left-center (Keynes).




      CHINA – immediate-term growth expectations are coming down in a hurry now that commodity inflation expectations are rising – last night’s PMI print of 50.5 was not only a miss vs uninformed whispers (sad), but was a sequential deceleration in the slope of improvement (hard to beat the DEC v-bottom vs NOV). Chinese stocks closed down -1.1% on the news, and they should have.









      The Hedgeye Macro Team






      The Bernank Tax

      This note was originally published at 8am on January 27, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

      “This book is chiefly addressed to my fellow economists.”

      -John Maynard Keynes


      This morning’s Early Look is chiefly addressed to anyone looking for an alternative to the Keynesian Economic Dogma that’s failing us. The aforementioned quote is the opening sentence of Keynes’ “General Theory” on economic Storytelling of 1936.


      After blowing up his personal accounts by levering himself up on the long side of commodities (rubber, corn, etc.) in the late 1920s, Keynes lost the confidence of not only The People, but of the politicians. The latter constituency is not easy to lose!


      The “General Theory” ended up being an alternative for academic economists to opine on versus Marxism. It wasn’t a Global Macro market practitioner’s framework or anything that resembled real-world (or what we call Prices Rule) economics.


      That’s why it’s so critical for Ben Bernanke to fear-monger politicians today with threats of the “alternative” scenario. That’s also why he, like Keynes, is losing The People. We can only watch people getting paid at The Great Davos Depression for so long until we figure out we’re the ones paying for the champagne.


      Speaking of popping out of bed feeling a little bubbly, this morning I am going to formally start calling Ben Bernanke’s Japanese 2.0 policy The Bernank Tax.


      Why am I calling it a tax? Because that’s exactly what it is – whether it’s a tax on the hard earned savings accounts (interest income) of Americans and/or a food/gas tax that a family in India is going to have to incur as a result of debauching the world’s reserve currency – it’s a tax on Global Consumption. Period.


      Back to the Global Macro Grind


      The Bernank Tax was also a tax on YTD stock market returns yesterday. As the US Dollar fell, the Old Wall did exactly what Bernanke is daring them to do – bid up Inflation Expectations (Gold, Oil, TIPs, etc.). Stocks opened strong in the morning, then went red by the afternoon as Growth Expectations started to fall.


      Get the slope of Growth and Inflation Expectations right, and you’ll get a lot of other things right.


      What’s going to make this really interesting is that The Bernank Tax is going to become a hot potato for President Obama now in the General Election. Provided that Romney figures out the marketing message, what is Obama going to say if/when the US stock market starts going down on US Dollar down days?


      That’s not part of the Keynesian playbook, fyi. But it’s measurable – in real-time. And maybe that’s why Obama is making the best decision I have ever seen him make from an economic leadership perspective – getting rid of his fiscal Dollar Debaucherer in Chief, Timmy Geithner.


      Now I know that you know that my Storytelling on this matter is getting pretty tasty. This is my counterpunch to one of my investment mentors, Warren Buffett, and his “my poor Secretary should pay lower Taxes” thing. Where’s the fair-share in him only paying her $60k, by the way?


      As is the case with all non-fiction Storytelling, here are the inverse correlations, across durations, between what the US Stock Market (SP500) has done versus the US Dollar Index (USD) in the last 3 years: 

      1. 3-year = -0.68%
      2. 1-year = -0.22%
      3. 4-month = +0.44% 



      That sneaky little Mucker got them didn’t he!


      Huh? What the math is telling you here (and yes we get these are correlations, but we also get that the longer-term causality of cheap money only amplifies my point) is that for the last 3 years, the Fed’s go-to move of debasing the US Dollar worked (dollar down = stocks up).


      But a funny little thing started happening on the way to the Hedgeye forum in the last 4 months… Since the thralls of September 2011, as the US Dollar started to stabilize/strengthen (from a 40-year low), so did the US Employment, Confidence, and Consumption picture (also from 40 year-lows).




      If you haven’t heard this story from a Paul Samuelson and/or any of the Keynesians who are still brave enough to parade their charlatan textbooks around an Ivy League campus yet, I can give you 50 million copies (textbook revenues) of reasons why.


      Never mind the rest of the debate – this point about The Bernank Tax on the citizenry is very simple to understand. If you want to tighten your duration inside of the last 4 months on this, have at it. Here are more inverse correlations between SP500 and USD: 

      1. 30-day = +0.04
      2. 60-day = +0.31
      3. 90-day = +0.23 

      Yep. Instead of US stocks going up on dollar down days, they’re starting to go up on dollar up days. Makes sense. While, in the long-run, we may all be dead - in between now and then, we all have to pay for things with real dollars to live.


      The Bernank Tax doesn’t yet cap what Charles Ketterring called the one thing no one has ever been able to tax, “thinking.”


      My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, and the SP500 are now $1677-1727, $110.57-112.41, $1.29-1.32, $78.91-80.26, and 1310-1333, respectively.


      Best of luck out there today,



      Keith R. McCullough
      Chief Executive Officer


      The Bernank Tax - Chart of the Day


      The Bernank Tax - Virtual Portfolio

      Early Look

      daily macro intelligence

      Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


      In preparation for RCL's Q4 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




      • “We already have a good level of booking [for 2012], and we're particularly pleased that those bookings are at a higher load factor and at a higher price than they were a year ago.”
      • “As you may recall, we had [fuel] options for 2012 at a strike price of $100, and for 2013 at a strike price of $90. After the quarter close, we sold the 2012 options, and we will be realizing a small gain in the fourth quarter. The 2013 options had been prepaid and have a book value on September 30 of approximately $11 million.”
      • “Switching to the demand environment, our load factors and APDs are ahead of the same time last year for both the fourth quarter and 2012. In the fourth quarter, we expect to finish with double-digit yield improvements in the Caribbean, but lower yields than last year in the Eastern Mediterranean and Asia. Fortunately, the Caribbean accounts for 47% of our capacity in the fourth quarter, while the Eastern Med and Asia represent only 13% and 2%, respectively.”
      • “We saw very strong close-in demand for the third quarter, but we are hesitant to forecast a continuation of this strength in the traditionally weaker fourth quarter, particularly given all the uncertainty in the market today.”
      • “The percentage of our inventory that has been sold for 2012 is higher than the same time last year and this has consistently been the case since April.”
      • “Looking forward, 2012 will be the first year of no capacity growth for the Royal Caribbean International brand since 1994.”
      • “We will continue our Royal Advantage revitalization program with equally substantial makeovers of Grandeur of the Seas and Rhapsody of the Seas in early 2012.”
      • “Overall, we anticipate modest improvement in onboard and other revenue spend per guest per night. The primary reasons this revenue stream is growing more slowly than ticket yield are decreased gaming spend and the changed composition of our guest mix. Within the guest mix, onboard spend per guest per night will increase this year for U.S. customers.”
      • “Looking ahead, the Caribbean product, where we will have over 60% of our capacity this fall and winter, is shaping up nicely. We will have all four of our Solstice-class ships sailing in this market and will be debuting the Celebrity Silhouette next week to our Northeast trade partners before we begin a series of 12-night Eastern and Southern Caribbean itineraries from Cape Liberty from November to April.
      • The Caribbean is performing well, and we are on pace to finish ahead of where we finished in Q4 2010 and Q1 2011. Our non-Caribbean products, which represent 40% of our capacity, are also performing well.”
      • “Our ambitious Solsticeizing program continues with Celebrity Infinity in just a couple of weeks and will be followed by the Celebrity Summit and Celebrity Millennium in January and April.”
      • “October was fairly solid to-date in terms of the close-in bookings. I think just as we get more into the winter months, we tend to take a little bit more conservative view. We have taken, as I'm sure you've calculated by now, a little bit of a haircut into the fourth quarter. We saw a little bit more weakness in the Eastern Med. The Caribbean seems to be holding up fairly strong.”
      • “We have reduced our capacity in the Eastern Med by 17%. So, the way we look at Eastern Med is that, that's something that makes its way over to Greece or down into the Holy Land.”
      • “What I was referring to there was the fall and winter of this year and into the beginning of 2012. So, 60% of Celebrity's capacity will be in the Caribbean in that time period...outside of the Caribbean, it will be predominantly South America and Australia and New Zealand during that time. Around the rest of the year, it's Europe in the summertime when we're outside of the United States...and Bermuda.”
      • “I'll just add that at the corporate level about 29% of our inventory next year will be within Europe. And if you look at the Eastern Med and Holy Lands, that represents about 9% of our capacity for the full year.”
      • [2012 capacity filled] “We said that we were slightly less than 25% sold out, and by year-end, we generally were about half sold out.”
      • “Some of the shifting was marketing expense from third quarter fourth quarter, as we intend to have a fairly intense period of marketing coming up soon for our brand and a variety of other general and administrative costs."
      • “I will point out one currency that we don't normally talk about that we're more sensitive to this time of the year is the Brazilian real, but we did see a little bit of haircut in fourth quarter on a constant-currency basis mainly due to the Eastern Caribbean. There were some other small adjustments outside the Caribbean, but in totality, it was less than a full percentage point."

      Black Gold

      "In my humble opinion, we should now have reached peak oil. So it is high time to close this critical chapter in the history of international oil industry and bid the mighty peak farewell."  

      - Ali Samsam Bakhtiari, Vice President of the National Iranian Oil Company 


      To say that oil makes the world go ’round is an understatement.   Every day we consume almost 85 million barrels of oil.  At $112 per barrel, the current price of Brent oil, this is $9.3 billion of oil consumed every day, or $3.4 trillion per year. Global GDP is estimated at just over $65 trillion, so the cost of oil itself, setting aside additional refining, distribution, and marketing costs for oil and oil products, is more than 5.2% of global GDP.


      A meaningful move in the price of oil has a clear and definite impact, all things equal, on GDP.  While it is not a zero-sum game, as global consumers spend more on oil and energy products, they clearly spend less in other areas. 


      The value of the U.S. dollar is a key driver of the direction of oil.  In fact, the correlation of Brent to the U.S. dollar on a three year duration is -0.67.  Globally, oil is priced in U.S. dollars, so dollar down equates to oil up, and vice versa. 


      As we’ve reiterated many times, dovish U.S. monetary policy is a key driver of the price of the U.S. dollar.  In turn, as noted above, the U.S. dollar inversely drives the price of global commodities priced in U.S. dollars.   Keith has started calling this The Bernanke Tax.   By keeping interest rates and monetary policy at levels not seen even in the Great Depression, Chairman Bernanke is explicitly adopting a weak dollar policy.  As oil and other commodities prices inflate, they take global GDP share.  Unfortunately, what’s good for the oil company, is negative for the consumer.


      In the United States, The Bernanke Tax is seen most directly on purchases of gasoline for motor vehicles.  According to a recent report in Scientific American, Americans spent more than $490 billion on gasoline in 2011.  This was an increase of more than $100 billion over 2010, despite the number of miles being driven in the United States remaining relatively flat.  In aggregate, U.S. consumption of oil as a percentage of GDP very closely parallels the global numbers at just over 5%.


      The other key factor, setting aside geopolitical concerns for the time being, in analyzing oil is global supply, specifically the idea of peak oil.  U.S. geologist M. King Hubbert is widely considered the father of peak oil theory.  Hubbert first created peak oil models in 1956 to accurately predict that United States oil production would peak between 1965 and 1970.   Models have since been used to predict, with reasonable accuracy, the peak of various fields and regions around the global.


      Tomorrow, at 11am EST we will be hosting a conference call with geologist and renowned peak oil theorist, Jeffrey Brown, in a presentation call titled, “Peak Oil: Fact or Fiction?”.  (If you don’t subscribe to our energy vertical and would like details on the call, please email .  Obviously our research isn’t pro bono, but our Head of Sales Jen Kane will work with you.) Jeffrey has prepared a detailed presentation that outlines the case and support for peak oil, and much higher oil prices. 


      Despite the rapidly accelerating price of oil over the last decade, the concept that global oil production is peaking is far from mainstream.  In fact, investors polled at a Credit Suisse energy conference revealed that 94% of investors believe that peak oil is at least twenty years or more away or will never occur.  As well, energy company earnings only make up 12% of SP500 earnings versus 30% in 1980.


      Peak oil advocates point to a multitude of supporting evidence to defend their case.  The historical evidence revolves around looking at the production of a number of the world’s largest oil producing areas, most notably the North Sea and the continental United States.  An analysis of the peaking of these oil producing areas follow very similar patterns of decline, which are supporting evidence of M. King Hubbert’s models.  In effect, oil is a finite resource, which on a global basis has very predictable decline patterns.


      The other, and more obvious, support for peak oil is simply the price of oil. Over the course of the last decade, the price of Brent oil is up 454%.  In a typical commodity market without supply constraints, or really any type of market for that matter, production should increase to create greater supply to offset dramatic price hikes.  In the last decade global oil producers have seemingly been able to grow production at a level that offset accelerating prices.  The domestic natural gas market is the contra example of this as accelerating prices routinely lead to more production and a natural correction in price. 


      The counter case for peak oil is that there is more oil out there, we simply have to explore to find it and invest to get it out of the ground.  In fact, our friend the ever thoughtful Peter Orszag, recent penned an article for Bloomberg flagging the impact that development of fracking technology in the United States has had on oil production by increasing access to so called “tight oil”.  As Orszag writes:


      “In 2010, oil companies produced 5.5 million barrels per day of domestic crude [in the U.S.].  The Energy Information Administration estimates that figure will rise to 6.7 million barrels per day by 2020, mostly because of the continued development of tight oil, in combination with the development of offshore resources in the Gulf of Mexico.” 


      Assuming that EIA’s forecasts prove correct, U.S. oil production is on a path to grow 22% over the next decade and reach aggregate daily production levels not seen since 1994.  If this occurs, the idea of peak oil becomes seriously questionable.


      So, is peak oil fact, or fiction? We will dig into this debate tomorrow morning at 11 am EST with peak oil expert Jeffrey Brown.  While these types of discussions are rarely conclusive, this conference call will outline the key theory behind peak oil, which will enable us to evaluate its validity as data points reveal themselves in the coming years.


      Regardless of the side you are on in the peak oil debate, J. Paul Getty left us with one truism about oil:


      “Formula for success: rise early, work hard, strike oil.”


      I’d actually add to that slightly:


      “Formula for success: rise early, work hard, strike oil, AND subscribe to Hedgeye.”

      Keep your head up and stick on the ice,


      Daryl G. Jones

      Director of Research


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