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Shorting Tail Risk: EWJ Trade Update

Current Virtual Portfolio Positioning: Short Japanese equities (EWJ).


Earlier today, Keith re-shorted Japanese equities via the iShares MSCI Japan Index Fund (EWJ) in our Virtual Portfolio. The Nikkei 225, which is up +2.6% week-to-date, is being propelled to the upside largely on the strength of FX translation relief (the yen is down -1.6% against the USD in the-week-to-date vs. a regional median of -0.3%).


To be clear, we think consensus risks going back to the well one-too-many times on this one, as the sequential ramp in sovereign debt maturities in MAR (¥57.1T or $725B or 5.8% of total marketable JGBs) provides a potential starting point for a Japanese sovereign debt issues. Broken from our long-term TAIL perspective (despite the YTD beta-rally across global equity markets), the Nikkei 225 index is signaling to us that there is at least some degree of tail risk that we must appropriately explore.


Shorting Tail Risk: EWJ Trade Update - 1


To be even clearer, we are not calling for a Japanese sovereign debt crisis in MAR. Rather, our analysis of the drivers within the JGB and JPY markets suggest that a number of key tailwinds have inflected/look to inflect in 2012. Coupled with an all-time high amount of JGB issuance that needs to come to market throughout this calendar year, we think the tea leaves suggest being appropriately hedged against what may be the next stop in our Sovereign Debt Dichotomy theme (originally published in 2Q10).


One of those tea leaves is the yen’s underperformance in the YTD (down -2.6% against the USD vs. a regional median of +2.5%). While much of the yen’s underperformance has been fueled by decreased risk aversion, which manifests itself via higher U.S. rate expectations on a relative basis (as measured by the spread between U.S. and Japanese 2yr OIS swaps), we don’t view a -500bps negative divergence as something to shrug off ahead of increased stress in the Japanese sovereign debt market. Should the risks we are flagging materialize, we ultimately think this trade plays out in the currency market via yen weakness vs. the USD.


Shorting Tail Risk: EWJ Trade Update - 2


Email us is you’d like to dialogue further on this growing topic.


Darius Dale

Senior Analyst

Weekly European Monitor: Molotov Cocktails and Extending the Runway

Positions in Europe:  No Active Positions


Asset Class Performance:

  • Equities:  European equity performance has been mixed over the last 5 days, with the balance towards the negative led by the periphery. This bucks the trend of strong performance from the PIIGS over the last month. Top performers:  Russia (RTSI) 2.9%; Denmark 2.5%; Norway 1.2%; Sweden 1.0%; and Switzerland 80bps. Bottom performers:  Greece -4.7%; Cyprus -4.7%; Spain -3.9%; Hungary -3.6%; Austria -3.3%.
  • FX:  The EUR/USD is down -0.4% week-to-date.  Divergences: HUF/EUR +1.3%, CZK/EUR +0.8%, PLN/EUR +0.5%
  • Fixed Income:  10YR sovereign yields were mixed week-to-date. Portugal led the move on the downside, falling -98bps to 11.99% followed by Germany (-14bps) to 1.83%. Greece increased the most, gaining +44bp to 33.35% followed by Italy (+26bps) to 5.78%.

Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. yields



In Review:

Deadlines for decision on the PSI and second Greek bailout came and went for another week as Molotov cocktails flew in the streets of Athens…. As Keith has noted in his Early Looks, Greece is but a tree in the forest, yet Greece isn’t going “away” anytime soon, which we stressed in our note “Greek PSI Is NOT Getting Done” (2/8)— we think Eurocrats will continue to suspend gravity around Greece to maintain the Eurozone project.  


As we show in the extended calendar below, there are many political zig-zags ahead, including the German Bundestag’s vote on Greece’s second bailout package on February 27th. The vote could be far from a resounding “Ja”, which increases the probability that we drift towards an 11thhour decision on a Greek bailout (and PSI) ahead of the country’s €14.5 Billion bond due March 20th. Finally, this week saw elevated “rhetorical” brewing between German Finance Minister Wolfgang Schaeuble and Greek officials, yet we are not of the camp that Schaeuble speaks for Merkel.


"But it's important to say that it cannot be a bottomless pit. That's why the Greeks have to finally close that pit. And then we can put something in there. At least people are now starting to realize it won't work with a bottomless pit."   -Schaeuble



Call Outs:

  • Eurozone Q4 GDP (Q/Q) contracts for the first time since Q2 2009 (see chart below).
  • Moody's cut its ratings on Italy, Spain (2 notches), Portugal, Slovakia, Slovenia, Malta, and placed the Aaa ratings of UK, France, and Austria on negative outlook yesterday evening. 
  • EU thinks Spain overstated its 2011 deficit figures to make this year’s deficit look better, and that it's also moving too slow in addressing a deterioration in public finances that is expected this year.
  • Spain’s regulator announced that it is lifting its ban on short selling of financial stocks effective February 16th. 

Key Regional Data This Week:

Positives (+)

Germany ZEW Current Situation 40.3 FEB (exp. 30.5) vs 28.4 JAN

Germany ZEW Economic Sentiment 5.4 FEB (exp. -11.8) vs -21.6 JAN

UK CPI 3.6% JAN Y/Y (exp. 3.6%) vs 4.2% DEC [slowed to the least in 14 months]


Negatives (-)

Eurozone Industrial Production -2.0% DEC Y/Y vs 0.1% NOV

Greece Q4 GDP -7.0% Y/Y vs -5.0% in Q3

EU 25 New Car Registrations -7.1% JAN Y/Y vs -6.4% DEC

Portugal Unemployment Rate 14% Q4 vs 12.4% in Q3




(2/16) Riksbank Repo Rate CUT 25bps to 1.50% (in-line with expectations)


CDS Risk Monitor:

On a week to date basis, CDS was largely up across European sovereigns (vs up last week), with Spain leading the charge at +63bps to 416bps, followed by Italy (+56bps) to 438bps (see charts below).   


Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. cds a


Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. cds b


Charts of the Week:

Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. gdp


Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. industvs retail


Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. cars


Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. greece maturity


Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. euribor



The European Week Ahead:

Monday:  Eurogroup Meeting; Feb. France Production Outlook and Business Confidence Indicator; Dec. Italy Industrial Sales and Orders


Tuesday:  Feb. Eurozone Consumer Confidence – Advance; Jan. UK Public Finances


Wednesday:  Feb. Eurozone PMI Composite, Services, and Manufacturing – Advance; Dec. Eurozone Industrial New Orders; Feb. Germany PMI Manufacturing and Services – Advance; UK BoE Minutes; Feb. France PMI Manufacturing and Services – Preliminary; Jan. France CPI; Jan. Italy CPI – Final


Thursday:  ECB Policy Meeting; Feb. Germany IFO Business Climate, Current Assessment, and Expectations; Feb. UK CBI Trends Total Orders and Selling Prices; Jan. UK BBA Loans for House Purchase; Feb. Italy Consumer Confidence


Friday:  Q4 Germany GDP – Preliminary, Domestic Demand, Exports, Imports, Capital Investments, Government Spending, Construction Investment, Private Consumption; Q4 UK GDP and Total Business Investment- Preliminary, Private Consumption, Government Spending, Capital Formation, Exports, Imports, Index of Services; Feb. France Consumer Confidence Indicator; Jan. France Jobseekers; Dec. Italy Retail Sales



Extended Calendar Call-Outs:

27 February:  The German Bundestag plans to vote on the issue of Greece’s second bailout, including the embedded terms of the PSI.


25-26 February:  G20 Finance Ministers Meeting in Mexico City. Decision on IMF loan of €500B is expected.


29 February:  2nd 36-Month LTRO Allotment.


29 February:  Eurogroup Meeting to sign the previously endorsed agreement between the 17 members on the Treaty for the European Stability Mechanism.


1-2 March:  Signing of the Fiscal Compact by 17 Eurozone leaders together with the non-euro area leaders of countries willing to join. Further, the group will reassess the adequacy of resources under the EFSF and ESM rescue funds.


20 March: Greece’s €14.5 billion Bond Redemption due.


April:  French Elections (Round 1) begins to conclude in May.


April:  Greek Presidential Elections.


30 June:  Deadline for EU Banks to meet €106 billion capital target/the 9% Tier 1 capital ratio.


1 July:  ESM to come into force.




Matthew Hedrick

Senior Analyst


RevPAR and Baccarat have been the focus areas of investors but high margin slot revenue has been quietly creeping up and growth looks sustainable.



Could slots be the next big thing?  We think slots will be the big delta for the Strip and relative to expectations and margins, that’s where the leverage is.  Consider this, the incremental margin on an increase in slot play per visitor is around 90%.  The incremental margin on an increase in slot play due to an additional visitation is nearly the same.  There is no other important revenue driver in Las Vegas that has this type of economics.


Without a doubt, slots are a profitable business.  Yet, they’ve been in a long time slump, until recently. Every other Las Vegas revenue driver has been in recovery mode for some time.  Slot volume growth was consistently negative from November 2007 until October 2010 (with the exception of a slight gain in February 2010).  Since then they've been inconsistent.  It’s only during the 2nd half of 2011 did we see more a trend of positivity.  We think 2012 will be the first meaningfully positive year for slot growth since 2006. 


The following chart shows the recent monthly performance of the Strip’s slot business and our projections for 2012.  We model sequential seasonality using a 3 month moving average, adjusted for historical seasonality and GDP.  We would caution that the monthly projections can be volatile but directionally, our model has been accurate.  For instance, we think it is unlikely that we will see a double digit growth month, but we do think March growth will accelerate.  Annually, our model is less volatile and is currently projecting 2012 growth of 4-5%. 


Most importantly, if the slot business recovers as we expect, the flow through should be a major tailwind for Strip earnings (MGM and the 2nd derivative, BYD) and the stocks with significant exposure to the Strip.  There is still a long way to go for slot volume.  In Q4 2011, slot volumes were 21% lower than levels achieved in Q4 2006.  If our projection for 2012 is met, slot volumes would still be 19% below 2007.  Now if only the Macro will behave.





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HBI’s stock not being down significantly is one thing, but GIL being UP? People aren’t contextualizing the real dynamics here. Both of these names look very risky (with minimal reward) to us.



Recall that HBI is blaming a $0.30 hit  to earnings on weakness in something that is only 8% of sales and profits. That same number is about 70-80% of sales for GIL.  We’re talking about $370mm for HBI, of which HBI noted that ¼ is what it refers to as ‘highly competitive’. That’s where it competes most heavily with GIL. This is $95mm that runs at a loss. Our sense is that for it to get to a point where HBI would let it go, it would need to be at about a -10% margin (this is usually a loss leader linked to other business).

GIL definitely has a more efficient cost structure, as well as the benefit of a zero percent tax rate. Let’s say that in a best case scenario, they stole this business from HBI and were somehow able to do so at a +10% margin. At best, we’re talking $0.04, or 3% on this year’s numbers, and less than 2% of the consensus 2013 estimate. But at a $25 stock and 12x P/E on next year’s estimates, the Street is already looking for 2013 earnings to nearly double for GIL.

This also assumes that HBI did not step up price discounting on the other 75% of its imagewear business. That’s far too safe an assumption.

It also assumes that HBI won’t get hit meaningfully due to the dominos set in place by Ron Johnson’s move to auction off space inside JC Penney stores.

Remember that HBI still has price integrity built into its 2H assumptions – which suggest margins right up there with the best names in the apparel industry (that don’t sell in basic categories like underwear).

The point here is that GIL’s stock is already above where it was when it collapsed last quarter, and yet the risk profile associated with one of its top competitor went up materially. HBI is more than 2x GIL’s size, and though I know people will argue with me that they don’t have perfect overlap with their businesses, I could care less. If HBI experiences pressure in its US branded wholesale business, it will find any area of weakness in its supply chain and competitive set to help fund any price or margin concessions.

Whether the first or second derivative of HBI impacts GIL, it won’t matter. Cash is cash.  In the meantime, if you want to bank on GIL putting up never before-seen earnings levels in 2013 (and pay 12x for it), be my guest.


An important note on TRADE here.

Keith added HBI to the short side of the ledger of the Hedgeye Virtual Portfolio this afternoon.

"TRADE support is 26.65 – should get smoked if/when it crosses that.”


His thoughts on GIL:

“Looks somewhat like HBI but needs a catalyst or will rip the shorts up to its TAIL at 28.19.” 


Let’s be careful on timing here. There’s no reason why the upcoming quarter can’t be the catalyst. 2H of CY12 looks bad. Did they give themselves cushion with their latest guide down? Everyone thought the same for HBI 13 weeks ago. Also, the market shrugged of GIL’s last guide down. If things change for HBI (which they should) then they will have likely changed for GIL as well.




HBI: Shorting

Keith adding HBI to the Hedgeye Virtual Portfolio. This has been one of our least favorite names fundamentally, and there’s a severe disconnect between fundamental and economic reality and the market’s reaction to the print. There’s enormous tail risk here.


As a follow up to yesterday's conference call, see our note "HBI: FAIL".


HBI: Shorting - HBI levels




“We are pleased to see sustained transient business travel around the world in the fourth quarter. Demand from this segment was the primary driver of our results in 2011. Though group demand in the U.S. was stronger in the fourth quarter of 2011 than in 2010, corporations remain cautious about making longer-term commitments and this continues to limit visibility into forward bookings.”


- Mark S. Hoplamazian, president and chief executive officer of Hyatt Hotels Corporation



  • Their major renovations have been on time and on budget and expect results from those hotels to increase over time as people see the improvements
  • Going forward, you are likely to see Hyatt use their capital to secure international growth - Europe and Latin America
  • Their contract base is 35% of their existing portfolio, up from 28% 2 years ago.  Most of them are full service and require little capital from Hyatt.
  • 10% of their total EBITDA comes from Continental Europe (France, Germany, Switzerland)
  • Their strategy is to control costs and keep balance sheet flexibility
  • Transient business revenues in the Q were up 13%. Corporate rate increases are up in the mid single digit range for 2012.
  • Corporate group demand was stronger than demand from association business and other group segments
  • Booking in the Q for 2012 were up 8% vs. this time next year.  70% of their business for 2012 was already contracted at rates that were 4% higher than 2011.
  • RevPAR was negatively impacted by Japan, North Africa and Shanghai - excluding these regions, RevPAR would have been up 7%.  IMF were actually negatively impacted by these regions.  Excluding these regions it would have been up 3%
  • Tax benefit: $13MM related to foreign tax credit and $11MM benefit from the settlement of a foreign tax issue
    • Further details will be available in the 10k which will be filed later today
  • 2012 tax rate: low 30's excluding discrete items.  Don't expect the impact from discrete items to be as material in 2012 as in 2011.
  • Spent $60MM less on capex - variance is due to timing on a land purchase and cash payments on construction
    • $65MM of their capex for 2012 is carryover from 2011
    • $35MM on new investment on properties developed by them


  • There is a lot of in the period production versus visibility into future bookings
  • Pace for 2012 is in the low to mid single digits.  70% of the bookings are already at 4% higher than last year.  40% of the business for 2013 is booked and 25% of the business for 2014 is on the books.
  • There has been a proclivity from meeting planners to book things closer to the date.  Hence there has been more in the quarter for the quarter bookings.
  • Select service - experienced occupancy impairment due to bathroom renovations - about 150bps of impact on RevPAR
  • Lodgeworks has not had any negative impact for their portfolio.  That portfolio is actually doing quite well.
  • Need more urban representation for their select service brands and that will start to change this year as more of their new stuff opens.  It's also an area of focus for them.
  • Lodgework's RevPAR isn't in the comparable RevPAR #
  • They are seeing some interesting opportunities on the select service side.  Deal activity in the 2H11 was low in the US - more outside of the US
  • 50% of their margins growth for last year were due to 1x credits.  
  • Cost per occupied room decreased 2% in the quarter
  • Atlanta still had some rooms out of service, but the Atlanta market had negative high single digit RevPAR so that didn't help
  • Was there still some renovation impact in the quarter?
    • Atlanta hurt them
    • Select segment bathroom renovations hurt them
    • These 2 items hurt RevPAR 200-250bps (2/3 Atlanta)
    • NY & San Fran had a great quarter YoY - "as expected" and close to what they underwrote
  • Their presence in Europe is just city center high end hotels.  They don't serve local markets. So they have seen demand for their hotels hold up. 
  • NA managed portfolio is 45-50% driven by group business
  • 2011 displaced EBITDA from renovations was $25MM for the first 3 quarters and a tiny bit in 4Q
    • They expect to get that back and then some over time. Underwrote returns in the high single to mid teens.
  • Their SG&A was up 7% for 2011.  4Q had some 1x bad debt recoveries that were one time.
  • Rio - they have been actively engaged to secure entitlements to proceed with that development.  They are in talks to get debt financing. Plan to complete that project well ahead of Olympics.
  • Lodgeworks conversion costs of $15-20MM. They also are converting the Woodfin hotels - also $15MM of cost. 
  • Expect to be active on the M&A side on both ends.
  • Expect to be an investment grade company - 3.5x leverage or better
  • Why so much cash on the balance sheet?
    • They have some forward commitments for $600MM (more disclosure in the 10K)
    • Their capex should be funded from cash from operations
    • Their intent is to use their cash to grow the business
    • Opportunities in lodging tend to come in large chunky sizes - so they like having the flexibility to act
  • Lodgeworks - paid 16.5x for that deal which was highly dilutive?
    • Their deals aren't trades and it will take time for them to make a return.  
    • They don't look at the multiple they paid but what it will do for the company over time.  The number of their managed corporate accounts have increased significantly over the last few years as a result of growing select service.
    • The property level multiple they paid was much lower - 16.5x includes SG&A and other fees paid
  • They are very bullish on NY long term
  • Group component of their owned portfolio is about 40%
  • They are modifying their format for the next quarter to be primarily Q&A.  All questions will need to be submitted by 8:30am with the name of the questionaire not disclosed.  There will be live Q&A afterwards.


  • Adjusted EBITDA of $143MM came in $3MM below consensus 
  • Adjusted EPS of $0.31 isn't comparable to anyone's estimates since it includes a $28MM tax benefit.  Our 'normalized' EPS calculation was $0.11, assuming a 35% tax rate and an addback of the $4MM of asset impairment charges in the quarter.
  • Comparable 4Q RevPAR stats:
    • Owned & leased: +6%
    • NA full service: +6.5%
    • NA select service: +5.5%
    • International: +2.9% (3% ex FX impact)
  • There were 7 property additions in the quarter
  • “In New York City, we have four new or recently renovated hotels that have opened within the last 24 months. The momentum continues with several hotels in development that will double our presence by 2014, giving us an extremely well-located, essentially new property portfolio representing almost all of our brands in New York City within two years.”
  • Owned & Leased:
    • "Excluding expenses related to benefit programs funded through Rabbi Trusts and non-comparable hotel expenses, expenses increased 2.4%"
    • "As part of the acquisition of assets from LodgeWorks, the 150-room Hyatt House Boston/Burlington was added to the portfolio. The property was previously managed by the Company."
    • "One hotel, Hyatt Regency Crown Center, was removed from the portfolio, as the lease agreement expired."
  • NA  Management & Franchising portfolio changes:
    • Hyatt Regency New Orleans (managed, 1,193 rooms)
    • Hyatt House Philadelphia/King of Prussia (managed, 147 rooms)
    • Hyatt Place Waikiki Beach (franchised, 191 rooms)
    • 2 hotels were removed (including Hyatt Regency Crown Center)
  • International Management & Franchising portfolio changes:
    • Park Hyatt Abu Dhabi Hotel and Villas (managed, 306 rooms)
    • Andaz Shanghai (managed, 307 rooms)
    • Hyatt Regency Danang Resort and Spa (managed, 295 rooms)
    • Hyatt Capital Gate, Abu Dhabi (managed, 189 rooms)
  • Pipeline of 170 hotels (or more than 38,000 rooms) with approximately 70% outside North America.
  • 4Q Capex: $115MM
    • Maintenance: $43MM
    • Enhancements: $68MM
    • Investments in new: $4MM
  • Debt: $1.2BN; Cash & equivalents: $530MM; Short term investments: $590MM
  • 2012 guidance:
    • Capex: $350MM
    • D&A: $350MM
    • Interest expense: $70-75MM
    • Hotel openings: 20

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