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This quarter wasn’t expected to be a huge catalyst but after the HST disappointment, MAR looks relatively good.



As many of you know, MAR has been our favorite stock for the last few months and we see nothing in last night’s release to change our positive view.  The quarter was messy and confusing – as we expected – and not necessarily comparable to estimates.  However, guidance was solid which may move the stock in a positive direction today.  Following the HST disappointment, expectations were ratcheted down.  Going forward, we expect solid RevPAR growth for the industry and MAR.  While we are not totally sold on this recovery from a Macro perspective, MAR’s almost pure fee business provides a level of protection from economic volatility.  While the valuation has improved, we don’t believe the multiple yet reflects the strength of MAR’s cash rich, fee-based business model.


The conference call starts at 10am EST but here are some takeaways in the meantime:

  • Managed and franchised room growth was a little better than we expected
    • Managed rooms were 1,185 higher than we estimated (0.4%)
    • Franchised rooms were 839 (0.3%) higher than we estimated
  • Absolute RevPAR was about 1% higher than we estimated but the numbers aren’t exactly comparable
  • Reported WW System wide RevPAR was at the midpoint of company guidance (5-7%)
  • Fee revenue of $416MM missed – mostly on the incentive fee line
    • Guidance: $420-$430MM
    • Consensus: $426MM
    • HE estimate: $429MM
    • $9MM of the shortfall in fee revenue (vs. HE & Street) was from incentive fees
    • The street wasn’t adjusting for the shift in timeshare fee accounting from Management to Franchise fees so their numbers aren’t really comparable.  Versus our numbers, the rest of the shortfall came from lower base management fees ($4MM)
  • Results from owned, leased, corporate housing and other were better than expected due to a combination of stronger owned/leased results and higher branding fees
    • MAR reported $56MM of segment results vs.
      • Guidance: $50MM
      • Consensus: $59MM
      • HE estimate: $52MM
    • They did not provide a breakout of branding fees so it’s hard to comment on margins on the own/leased portfolio
  • Not much to say on Timeshare other than:
    • Street numbers aren’t comparable since MAR reported a partial quarter and didn’t provide the typical historical disclosure
    • The partial revenues that they did report were lower than our numbers as were the partial segment results.  $17MM of the miss vs. our EBITDA estimate for the quarter was attributed to timeshare segment results
  • SG&A was $25MM higher than we estimated.  We thought that the SG&A attributed to timeshare was $25MM (based on prior disclosure) and that the clean 4Q10 number, including timeshare, was $240MM (excluding charges).  We assumed only a partial removal of SG&A for the quarter.  The clean number of $219MM looks lower than what we would have projected.  This obviously accounted for a large part of the discrepancy in numbers for us and probably consensus too.
  • Guidance thoughts
    • 1Q12 and full year RevPAR outlook looks fine – in-line
    • Fee guidance is in the range of consensus ($1,438MM) and in-line with our $1,428MM estimate
    • Owned, leased, corporate housing and other guidance is below consensus of $158MM and below our estimate of $154MM
    • EPS guidance is better than our estimate of $1.49 and in-line with street estimates of $1.59

Trailer Homes

“We don’t want a society where when you lose your job you live in a trailer home, like in the U.S.”

-Nicholas Sarkozy


Over the course of my 13 years in this business, I’ve seen bubbles in Tech, Housing, and Keynesian Economics. Now the bubble in dumb politicians has gone global.


I know some people don’t like being called names. That’s why I call those ones in particular names. Sometimes, if you want to creatively destruct dogmas, you just have to pick a fight. That’s pretty easy to do with the left leaning leader of France.


Ironically enough, American politicians are now competing with the Japanese and Europeans on who can lean the most left in market interventions. When I left Canada in 1994, I never would have thunk I would see the day. It’s sad to watch.


Back to the Global Macro Grind


I didn’t short the SP500 yesterday at 11:58AM (1355) because I wanted to pick a fight – it’s because my process had it immediate-term TRADE overbought. The process obviously isn’t perfect, but it is repeatable – and when I get something right, I know why.


Yesterday I wrote about being wrong and how I deal with my own issues. If you couldn’t tell, I have a lot of issues. My goal in life is to improve upon them. In addition to President Sarkozy, politicians who understand Keynesian Policies To Inflate are having some issues of their own this morning:

  1. JAPAN – the Yen continues to go down in a straight line this week, down another -0.54% this morning to $78.80 vs USD
  2. SPAIN – the Spaniards are having a tough time selling pig paper at lower yields (2.3B EUR in 2015 bonds priced at higher yields)
  3. VENEZUELA –the Latin American FX debaucherer, Hugo Chavez, has fallen behind his Presidential challenger, big time



Yeah, I know you probably wanted someone to write to you about Greece or whatever a 12-month late Ratings Agency is thinking about what they should have warned you about 12 months ago…


Instead, consider the following about the Hugo Trailer Homes model (see chart):

  1. Collapse the currency
  2. Inflate the stock market
  3. Lose the Election

Last year, when almost 90% of country stock markets closed down for the YTD (sorry to remind everyone), Venezuela was up +79.1%. That was the best performing stock market in the world by a Madoff mile.


Instead of made for TV “rallies” on no volume (or inflows from The People), what does a Policy To Inflate get you in Venezuela, Wisconsin, or Milan?


Angry (and hungry) people.


We’ve never seen a $100 handle on the price of oil (pick your vintage – Brent, WTI, etc.) not Slow Global Growth. Now maybe the Sell-Side Strategists who told you to buy everything Global Equities on green last February are telling you it’s “Different This Time”, but I’m on the other side of that trade.


I can see exactly where perma-bulls are coming from – their risk management models have not changed. And that’s actually sad too. One of the many globally interconnected reasons I shorted SPY at 1355 instead of chasing it yesterday was that US Industrial Production Growth for January was reported at 0.00%.


Nice round number – and while The Bernank might like the ring of the zero percent thing, stock and commodity markets did not:

  1. US Industrials (XLI) were the worst performing S&P Sector of the day at -1.3%
  2. Dr Copper snapped its immediate-term TRADE line of $3.88/lb and is down another -1.1% this morning
  3. SP500 closed down for the 3rdday in the last 4

These are simply the facts. And I get paid to report them to you in the order that they are received.


Last week, I wrote a note telling you what I thought you should focus on instead of Greece:

  1. Japan’s Sovereign Debt Maturity Spike in March
  2. China’s Growth Slowing Sequentially (China’s Foreign Direct Investment reported overnight was down y/y!)
  3. The almost hyper global inflation/deflation relationship driven by policies driving the US Dollar

The bad news is that most of this is becoming new news to consensus. The Good news is where this all started is beginning to end – the US Dollar stabilizing in the last 48 hours is the most bullish fundamental factor I have in my notebook this morning.


While that may not be good for the guy who bought the Basic Materials ETF (XLB) or Freeport McMoran (FCX) at last week’s top, Deflating The Inflation is great for all my friends who grew up in Trailer Homes.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Spain’s IBEX, Shanghai Composite, and the SP500 are now $1, $116.79-119.79, $1.30-1.31, $79.01-79.73, 8, 2, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Trailer Homes - Chart of the Day


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TODAY’S S&P 500 SET-UP – February 16, 2012


As we look at today’s set up for the S&P 500, the range is 15 points or -0.31% downside to 1339 and 0.80% upside to 1354. 












  • ADVANCE/DECLINE LINE: -468 (347) 
  • VOLUME: NYSE 806.39 (8.45%)
  • VIX:  21.14 8.19% YTD PERFORMANCE: -9.66%
  • SPX PUT/CALL RATIO: 2.40 from 1.53 (56.86%)


  • TED SPREAD: 38.83
  • 3-MONTH T-BILL YIELD: 0.11%
  • 10-Year: 1.91 from 1.93
  • YIELD CURVE: 1.65 from 1.67 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: PPI, M/m, Jan., est. 0.4% (from -0.1%)
  • 8:30am: Jobless Claims, wk of Feb. 11, est. 365k (prior 358k)
  • 8:30am: Housing Starts, Jan., est. 675k (prior 657k)
  • 8:30am, Building Permits, Jan., est. 680k, (prior 671k revised)
  • 9:00am: Bernanke speaks on community banking in Arlington, Va.
  • 9:45am: Bloomberg Consumer Comfort, week Feb. 12, est. -42.0 (prior -41.7)
  • 10am: Philadelphia Fed., Feb., est. 9.0 (prior 7.3)
  • 10am: 30-yr mortgage rates, Freddie Mac
  • 10:30am: EIA natural gas storage
  • 1pm: U.S. to sell $9b 30-yr TIPS
  • U.S. Treasury to announce 2-, 5-, 7-yr auction sizes 


  • President Obama attends campaign events in California
  • Chinese Vice President Xi Jinping visits Iowa
  • House, Senate in session:
    • House Energy and Commerce Committee hears from FCC Chairman Julius Genachowski on its budget. 9am
    • Senate Energy Committee hears from Energy Secretary Steven Chu on the Energy Department’s 2013 budget request. 9:30am
    • Senate Budget Committee hears from Treasury Secretary Timothy Geithner on the president’s 2013 budget request. 10am
    • House Homeland Security Committee holds hearing on monitoring of social networking and media. 10am
    • House Appropriations subcommittee hears from Defense Secretary Leon Panetta and Joint Chiefs Chairman Martin Dempsey on the 2013 defense budget request. 10am
    • House Appropriations Committee hears from Interior Secretary Ken Salazar on his department’s budget request. 1:30pm
    • House Budget Committee hears from Treasury Secretary Timothy Geithner on the president’s budget request. 2pm
    • Senate Homeland Security Committee hears from Homeland Security Secretary Janet Napolitano on Cybersecurity Act. 2:30pm  


  • Europe is set to make “all the necessary decisions” on Greece rescue on Feb. 20: Luxembourg prime minister
  • Morgan Stanley, UBS may be cut up to three levels by Moody’s
  • U.S. officials said to have intensified their focus on banks, Taiwan in insider-trading probe
  • Summers, Clinton said to be lead contenders for World Bank president
  • IAG says taking AMR stake in bankruptcy is “not on table”
  • Florida foreclosures climb 14% as lenders resume home seizures: RealtyTrac
  • House-Senate negotiators announce payroll deal completed
  • ABB falls as 4Q results show margin pressure
  • Cap Gemini reaches 6-month high on higher margin forecast 


  • Huntsman (HUN) 6am, $0.28
  • Nexen (NXY CN) 6am, C$0.44
  • SPX (SPW) 6am, $1.75
  • DENTSPLY International (XRAY) 6am, $0.52
  • Penn West Petroleum Ltd (PWT CN) 6:30am, C$0.15
  • Barrick Gold (ABX CN) 7am, $1.26
  • Discovery Communications (DISCA) 7am, $0.69
  • DTE Energy (DTE) 7am, $0.80
  • Duke Energy (DUK) 7am, $0.22
  • Frontier Communications (FTR) 7am, $0.05
  • OGE Energy (OGE) 7am, $0.35
  • JM Smucker  (SJM) 7am, $1.41
  • TRW Automotive Holdings (TRW) 7am, $1.55
  • VF (VFC) 7am, $2.31
  • DirecTV (DTV) 7:30am, $0.92
  • General Motors (GM) 7:30am, $0.41
  • Hyatt Hotels (H) 7:30am, $0.13
  • Health Care REIT (HCN) 7:30am, $0.90
  • Progress Energy (PGN) 7:30am, $0.53
  • Molson Coors Brewing (TAP) 7:30am, $0.70
  • Waste Management (WM) 7:30am, $0.60
  • Apache (APA) 8am, $2.87
  • Reliance Steel & Aluminum (RS) 8:50am, C$0.78
  • Finning International (FTT CN) 8:56am, $0.34
  • PG&E (PCG) 9:04am, $0.85
  • CI Financial (CIX CN) 11:17am, C$0.31
  • Advance Auto Parts (AAP) Pre-Mkt, $0.75
  • Nordstrom (JWN) 4pm, $1.10
  • Allscripts Healthcare (MDRX) 4pm, $0.25
  • DaVita (DVA) 4:01pm, $1.49
  • Aruba Networks (ARUN) 4:03pm, $0.15
  • Applied Materials (AMAT) 4:04pm, $0.12
  • SunPower (SPWR) 4:05pm, $(0.06)
  • Baidu (BIDU) 4:30pm, $5.69
  • EOG Resources (EOG) 4:35pm, $0.87
  • Fairfax Financial Holdings Ltd (FFH CN) 5:01pm, $(2.60) 



COPPER – breaking our mo mo line of 3.88/lb support was one of the many Growth Slowing signals that had us short SPY at 1355 yesterday. This morning, copper = down -1.1% and 10yr UST yields are straight down to 1.91% as well. 

  • Biggest Mining Deals No Promise of Xstrata Bonanza: Commodities
  • Oil Declines From Five-Week High After Greek Bailout Delayed
  • China May Become World’s Biggest Gold User, Beating India
  • Commodities Drop From Six-Month High on Greek Default Concern
  • Gold Drops as Greece Bailout Concerns Boost Demand for Dollar
  • Soybeans Drop as Debt-Crisis Concerns Eclipse China’s Purchases
  • Robusta Coffee Swings Between Gains, Losses; Cocoa Retreats
  • U.K. Natural Gas Contracts Decline on Lower Demand; Power Falls
  • U.S. Says Iran’s Nuclear Breakthrough Is ‘Hype;’ Oil Pares Gain
  • Spain’s Cepsa Secures Crude From U.A.E. in Case of Iran Loss
  • Barrick Gold Earnings Trail Estimates as Mining Costs Increase
  • Rising Pump Prices in China to Cut Refining Loss: Energy Markets
  • Impala Calls for Help to Restart World-Biggest Platinum Mine
  • China Seen Topping India This Year on Gold
  • Gold Demand Fell 2.1% in Fourth Quarter on Jewelry, WGC Says
  • NYSE Liffe Wants to Start Delivery Limits on London Commodities
  • Malaysian Palm-Oil Exports Seen Rising 10%, Paring Reserves 











SPAIN – the Spaniards are selling as much pig paper as they can (34% of their YTD needs) before someone figures out that Growth Slowing is what is going to crush their citizenry next. This morning’s debt auction finally came in at a higher yield (2015 bonds at 3.33% vs 2.86% last) and the IBEX is the 1st major European market to snap my immediate-term TRADE line of 8653 (down -2.1% leading decliners in Europe).






CHINA – after seeing its 1st y/y decline in Export growth in 2yrs (JAN -0.5%), this morning the Chinese reported a y/y decline in Foreign Direct Investment of -0.3% y/y. Chinese government guys called it “grim” (see Bloomberg article) – volumes on the NYSE aren’t the only thing in the world that have slowed to a halt.











The Hedgeye Macro Team





The Macau Metro Monitor, February 16, 2012



The Ministry of Trade and Industry said S'pore GDP in Q4 2011 contracted 2.5% QoQ in seasonally adjusted, annualized terms, smaller than the 4.9% contraction estimated last month.  The government maintained its previous forecast that the economy will grow 1%-3% in 2012, and highlighted uncertainty surrounding the global economy, namely political and economic problems in the euro zone and geopolitical risks arising from the Middle East.



Conclusion: There is such a wide disconnect between economic reality and what HBI presented after the close. We’ve been so negative on it, but even if this stock is down 20%, we’d sell every share we owned. HBI said it should get to ‘True Earnings Power in 2H’. That’s what concerns us most. I can make a better case for a Zero than $25.



Is it me, or was this quarter simply surreal? Seriously. For those of you short it, congratulations. It’s going to be a good day for you. But today we’ll see downgrades and capitulation, and now we have to focus on what’s next. But after going the model (several times over) we’re coming up with '12 earnings about $0.90 (37%) below the mid-point of guidance.  


We can bicker about pricing vs cost inflation all we want. But we’re beginning to get concerned about a much bigger tail risk – liquidity. That’s when the logic of looking at this name on a trough multiple on trough earnings is simply flawed.


That’s perhaps the ultimate value trap. An 8x pe on the bottom of management’s guidance suggests a $18-19 stock. But what the market will likely do if our model is right is model this on EBITDA (as it should for such a highly levered company). Assets in this space have historically traded between 3-5x EBITDA. On our 2012 numbers, 5x EBITDA gets you $3.50 per share. At 4x, you’re looking at a donut and the bondholders will be sweating it out.


Let’s look at the Majors…

1)      HBI’s credibility is blown. It was just 13 weeks ago that the company said that it mis-judged the extent to which retailers would tighten inventories. So it reset earnings expectations. Mgmt said that cotton costs are not a profit issue but more of a timing issue, and that pricing was holding and elasticity was not a problem. Then it revealed that WMT cut massive Just My Size program in favor of private label. This happened after price increases went into effect.  How is that not a problem with price elasticity?

2)      This quarter, HBI takes down 1H guidance by $0.30 due to severe price competition in the wholesale distributor channel for its Imagewear (ie screenprinting) segment.

  1. No problem with pricing/elasticity? C’mon…in gauging elasticity, you need to look at the entire portfolio. A PM can’t look at his book of 50 stocks, and say that he outperformed the market if he excludes the 15 that underperformed.
  2. This category is about 40% of Outerwear, but only 8% of total company sales. How does that add up to a $0.30 EPS hit?
  3. HBI noted that ¼ of its Imagewear sales are what it refers to as ‘highly competitive.’ That’s only $95mm. At a 20% incremental margin (which is probably too high if they are right about it being so competitive), then we get to a $0.15 earnings hit if all of it completely goes away. The only way we can get to $0.30 is if half of this business (again, at a generous 20% margin) goes away entirely. I guess that’s possible, but it’s not what they indicated.

3)      Management noted that ‘Aside from the Imagewear business, they are doing quite well.’ Huh? Excluding Imagewear they’re guiding to flat sales for the next 2 quarters. They’re ‘pleased’ with flat? Flat stinks.

4)      ‘Solidified’ 2012 pricing is baked into guidance. Wasn’t Innerwear price baked into guidance six months ago, and Imagewear competition/prices baked into guidance three months ago? Why should we believe it now?

5)      Still plan for international to reach $1bn by mid decade and for Consumer Direct to be a growth driver. In the quarter, they were +0.6% and -1.6, respectively. They don’t sound like growth engines to me.

6)      I have no way to get anywhere close to the company’s $400-500mm in free cash flow guidance in 2012.

7)      HBI gave the political answer about changes at JCP – that it’s excited about the change. They might lose a little hosiery business there, but that’s all that’s in their plan. That’s a binary outcome, imho. JCP is about a 5%-6% customer for HBI. Family dept stores = 15%. Mass channel = 50%+. Ron Johnson at JCP is going to competitively bid out each section in the stores to see which brand wants it more. JCP might get the revenue, but it will be at a lower margin. PLUS, any special product workup is going to upset Kohl’s, Target, WalMart, Sears, Macy’s, Dollar Stores, etc… This will be a domino effect with or without HBI. Also, be sure to remember that price competition at retaisl in higher end categories is often funded by discounts in more commodity categories (ie discounts on Polo at Macy’s will be paid for by Jones Apparel Group, PVH’s Dress Shirt biz, and underwear vendors like HBI).

8)      Perhaps the biggest positive is that Even the company finally used cash to retire $200mm in debt. But what’s notable here is that – if we’re right on the model – it will be better served to have more cash on hand to meet debt service to the extent that cash flow gets tight.


In the end, as noted above, we can’t  think of a single reason to own this stock as the risk reward does not start to look remotely interesting until it’s a single digit name.


Brian McGough

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