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The hotel business is bad and getting worse. Estimates need to come down, again. I feel like a broken record. We’ve been very consistent in our negative view on lodging for the past 6 months. Our 12/10/08 post, “TIMESHARE TO CONTRIBUTE IN A DIFFERENT WAY” was the first non-negative lodging post we’ve had at Research Edge, ever.

Now for a second one. So why are we getting a little more positive? Answer: Cash flow. Certain lodging companies have the opportunity to curtail timeshare development and harvest the cash from this business. Timeshare is a hugely capital intensive business during the growth phase but highly cash generative as it winds down. Sure, timeshare has contributed to GAAP EPS growth over the past few years and that will wind down too, but book earnings have become almost meaningless. Even EBITDA multiples are becoming less important as a valuation technique here at the trough.

So why favor MAR over other timeshare/lodging operators such as HOT or WYN? There are a number of reasons. First, MAR hasn’t yet announced that it is reducing timeshare capex, so that catalyst is potentially ahead. We believe timeshare cash flow will turn positive in 2009. Second, MAR’s lodging business model is fee based and, thus, more defensive and not capital intensive. Cash flow is less sensitive to RevPAR changes than for a hotel owner. Third, MAR is the most diversified across lodging segments. Finally, MAR is the largest market cap company in lodging right now. Our macro/quant analyst (and our CEO), Keith McCullough, has identified market cap as a favorable factor right now.

MAR will report in late January and investors should be prepared for lower guidance. Thanks to some recent Johnny-come-lately downgrades, they probably already are. Cash is king here, not EPS.

Leading Indicators For Oil's Pending "Re-Flation": Russia & Saudi Arabia

Investors have to respect facts. What their timing is in coming to respect those facts differentiates returns.

It would be hard for anyone to convince me that the Russian Trading System and Saudi Tadawul Index didn’t proactively predict the oncoming tsunami in the price of oil. As “speculators” (or plain dummies) bought into the media’s manic “Fast Money” June/July highs, the local Ruskies and Saudis said “sold to you” (see chart).

Now, as the same “Fast Money” CNBC traders whine about “Deflation”, the Russian and Saudi stock markets continue to make higher lows. The RTSI is +18% from its freak-out lows, while Tadawul has “re-flated” by +13% in the last month.

We weren’t part of the mania that bought into oil prices at $145/barrel. We bought oil last week between $37-39/barrel. We are Research Edge.

Keith McCullough
Research Edge LLC

Eye on Capitalism: China's Real-Estate Stimulus Package...

China continued its capitalist policy trend, announcing over the weekend more details on its proposed real estate stimulus package, which will solve the housing problem for 7.5 million low-income urban families and 2.4 million households in "shantytowns" in the next 3 years. In summary, the government will be dramatically lowering taxes on sales and encouraging broader home ownership.

Specifically, the package outlined five points: (1.) Building more homes for low-income families, (2.) Encouraging home buying, (3.) Supporting property developers to deal with the changing market, (4.) Enhancing the role of local governments in stabilizing the real estate market, and (5.) Improving surveillance on the property market.

The plan will help incentivize new buyers. Under the new package home owners for at least 2+ years can sell their homes without having to pay taxes. This is a change from the previous 5+ year rule. And if owners sell their homes within 2 years, they will only pay tax on profits from the sale, not the actual sales prices.

Further, the Chinese government said it will work with commercial banks to extend credit to developers based on property demand. Already the government has encouraged people with “smaller-than-average” apartments to buy a second one.

Property prices in 70 major cities in China rose 0.2% in November Y/Y, the lowest numbers since the government began publishing the figure in July, 2005. A total of 2.7 Trillion Yuan (387.5 Billion USD) was injected into real estate development in the first 11 months of 2008, up 22.7% Y/Y. Yet total sales were down 18.3% Y/Y, with residential sales down 18.8% Y/Y during this same period.

We continue to be long China’s ETF FXI and applaud the government's proactive capitalist policy making.

Matthew Hedrick

Chinese Capitalists Marching Into The New Reality...

After the Shanghai stock exchange closed overnight, the Chinese government proactively cut interest rates by another 27 basis points to 5.31%. See the chart below; China is cutting rates now, primarily because they can (the world’s largest two economies, USA and Japan, can’t). This is the 5th rate cut in the last 3 months, and a signal to the world that the Chinese are very well aware that their economic growth has slowed, but, more importantly, that they are managing this fluid situation on their own terms.

Chinese stocks are up +20% from their lows because they are leading indicators – that’s what stock markets are. The -70% peak to trough crash in Chinese stocks proactively predicted this global economic tsunami. Now they are speaking to the global risk managers, softly, telling them to cover their China shorts.

There’s a new leader in global finance emerging in The New Reality. She has $2 trillion in reserves, and she’s wearing the pants. Alongside your Christmas cocktails, you should be thinking about the ramifications of as much. British merchants who didn’t see the USA coming in the early 1900’s will remind you that history has a tendency to rhyme.


Just as DRI’s same-store sales signaled a sequential improvement in November, the casual dining industry’s comparable sales were less bad in November and came in down 2.4% (down 6.0% in October). Traffic trends improved nearly 400 bps from October (150 bps better on a 2-year basis) to down 4.4%. For both DRI and the industry, November results were helped by a later Thanksgiving this year, but even excluding the benefit, trends looked better on a sequential basis. Even with the improved results in November, DRI management is still cautious on the remainder of the year. That being said, I don’t think November’s less than toxic numbers mean that the casual dining industry is out of the woods, but I do think that lower gas prices, a tick up in consumer confidence and Obama’s planned fiscal stimulus program will all work to provide some support to consumers going forward.

Chinese Reindeer?

“The key to successful leadership today is influence, not authority”
 ~ Kenneth Blanchard

I’ve been digging back into my old school leadership quotes as of late, because that’s where I think this country will ultimately go to find her moral compass. Some of you will remember Ken Blanchard’s “One Minute Manager” which sold over 13 million copies and was reproduced in 37 different languages. Leadership at its deepest simplicity bears no religion or language. It is principles based.

The ability to influence and empower change is not going to be found in the current strata of American economic “authority.” While the world’s financial community continues to evolve, countries are picking the “best of” American financial principles and intertwining them with their own. China has no bid for Chris Cox and the USA’s current form of the SEC, but they are looking to influence the world with their agreement that Greenspan can indeed go global.

I am at my house in Canada this morning. When I woke up to go through the daily data point grind, all was quiet - snowflakes were falling… and as I was going through my Asian economic news, all of a sudden I heard the jingle of free money reindeer bells – I thought, wow… this is weird… could I have the date wrong? Could Christmas come early? No silly hockey boy – have another cup of coffee… them reindeer bells are Chinese, and they are cutting interest rates again this morning! 

What’s most interesting to me about the Chinese proactively managing their economic system this way is the TIMING. Not only do they have the luxurious Santa sleigh seating associated with a velvet balance sheet, but unlike the Americans, they waited to use it. When I woke up this morning, the Chinese hadn’t cut interest rates yet – they waited until the manic media machine could flash it across their CNBC screens as “breaking news.” They also waited for a rare down day in the local stock market, and then cut rates, proactively, AFTER the close.

Say what you will about the Chinese making up their numbers – Madoff reminds us all that Americans make them up too. The Chinese are doing a masterful job here with doing what they can with what they have. Remember, “the key to successful leadership today is influence, not authority,” and the balance of power in global economic influence continues to shift. These Chinese open market exercises look far more capitalistic than they do communist.

Not only did the Chinese wait for their domestic market to put in a -1.5% down day in Shanghai, they waited for the Japanese to swallow their own export tongue. Japan reported a November export number that was… well… their worst monthly number EVER! Japanese exports took a negative -27% year over year swan dive – them aint Canadian or Chinese reindeers folks – them be Socialist Santas!

In Thailand, they also reported what is trailing economic reality – that the global economic Santa sleigh stopped, mid air, in October-November of 2008. Thailand’s exports for November weren’t as horrifying as Japan’s, but they proved that more than just Rudolph had a bloody red nose on the East side of the world. At -18.6% year over year, the Thai exporters reminded the world that their stock market was a leading indicator of future news, when it hit its bottom on November the 24th, 2008.

You see, now that the entire institutional investing community is afraid to say that the US stock market could be up a ton in Q1 of 2009, it’s probably the right time to be asking THE QUESTION as to why not? Thailand and Chinese stocks are no different than American ones. Prior to the revisionist historian news hitting the tape, the fall in the Thai stock exchange was -58%, and in China’s was over -70%. Asian equity markets crashed before America’s did, therefore it only makes sense for them to begin their respective recoveries first. Stock markets recover in anticipation of news improving tomorrow, not recapping yesterday.

Last week was the first up week in the SP500 in the last three. Small caps led the way, with the Russell 2000 having a +3.8% week, and I found that interesting as a proxy for where the bodies lie in this tape, particularly on the short side. Since its November 20th low, the SP500 has “re-flated” to the tune of +18%. Our macro portfolio has had a great run in the last 4 weeks, not as much for being long the USA, but by not being short it. Globally, the “Re-flation” we have seen from Hong Kong to Brazil have certainly helped.

So what is it that the shorts are missing? Maybe it’s asking THE aforementioned QUESTION. Maybe the “key to today’s leadership” is Chinese influence. Maybe Chinese Reindeer are flying overhead in Canada. After what we have seen “Made-Up” in 2008, maybe anything can happen… come Madoff, come Fuld, come Donner and Blitzen!

Have a great holiday week with your families,

Long ETFs

SPY-S&P 500 Depository Receipts –Front month CME contracts on the S&P 500 traded as high as 891.20 in trading before 7AM this morning before heading lower.  

USO - U.S. OIL FUND – Front month NYMEX light Sweet Crude traded as high as 43.44 this morning as Non-OPEC member nations Russia and Azerbaijan signaled that they will follow the organization’s lead and cut production starting January.

VYM – Vanguard High Dividend Yield- Proctor Gamble (4.28% VYM) placed $2 billion in bonds on Friday at a yield 100 basis points lower than notes issued in October.

DIA –DIAMONDS Trust Series – Front month CBOT contracts on the S&P 500 traded as high as 8,615 in trading before 7AM this morning before heading lower.  

EWZ – iShares Brazil— Brazilian inflation forecasted at 5.02% for 2009. Goldman Sachs cut 2009 and 2010 earnings forecast for Brazilian Banks. The economy is expected to expand 2.5% in 2009.

EWH –iShares Hong Kong – The Hang Seng closed down 3.34% this morning to 14,622.39. Hong Kong’s inflation accelerated for the first time in four months as the government resumed rental charges for public-housing residents. Consumer prices rose 3.1% in November from a year earlier, after gaining 1.8% in October.

FXI –iShares China – The CSI300 closed down 1.68% to 2017.55. The Yuan fell for a second day on speculation China is keeping appreciation in check to help exports. China’s currency fell 0.07% to 6.8510 per USD  as of the 5:30 p.m. from 6.8465 at the end of last week. This year’s 6.5% advance makes it the best performer among Asia’s 10 most-active currencies excluding the Yen.

Short ETFs

FXY – CurrencyShares Japanese Yen Trust – The Yen is trading down this morning to 89.92 USD.

Keith R. McCullough
CEO & Chief Investment Officer

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