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Covering France (EWQ): Trade Update

Position in Europe: Long German Bunds (BUNL)


Moments ago Keith covered France (EWQ) in the Hedgeye Virtual Portfolio. We’re taking this price opportunity to cover for a TRADE; our intermediate term negative view on France hasn’t changed. Below we provide our quantitative levels on for EWQ:

 

Covering France (EWQ): Trade Update - 11. ewq

 

This Sunday marks the first of two French presidential election votes. While the leading two candidates, the incumbent Nicolas Sarkozy and Socialist Francois Hollande, will advance to the second round vote on May 6th, recent polls suggest Hollande will beat Sarkozy 29% to 24% in Round 1 and 58% to 42% in Round 2, according to CSA.  

 

What’s broadly clear is that both candidates plan to increase taxes and impose fees on financial transactions.  Both have declared to reduce the country’s deficit to 0% (as a % of GDP), Hollande by 2017 and Sarkozy by 2016.  Both guide to reduce the deficit to 3% by 2013 versus 5.3% in 2011.

 

However, Hollande has signaled an even more socialist agenda, which we think should result in the inability of the state to meet its deficit and debt reduction targets. Hollande wants to increase spending by €20 MM over five years (by repealing €29 MM of tax breaks and generating revenue by separating retail and investment bank operations and raising the income tax on earners over €1 MM to 75%) and reduce the retirement age to 60 from 62.  With the country’s debt rising to the 90% level, we expect growth to be compressed, as proven by the work of Reinhart and Rogoff. Finally, Hollande has stated that if elected he will renegotiate the EU budget compact and that he will not accept austerity as rule for countries.

 

Taken together, we think these policy moves will disadvantage the broader economy versus its European peers.

 

Matthew Hedrick

Senior Analyst


MAR YOUTUBE

In preparation for MAR's FQ1 2012 earnings release tonight, we’ve put together the recent pertinent forward looking company commentary.

 

  • “As of year-end 2011, our group revenue pace for 2012 is up 9% and room rates continue to improve. For group revenue booked in 2011 for the following 12 months, room rates are up 3%. And for the transient business, approximately 80% of our special corporate rates are now negotiated with room rates running up at a mid single-digit pace.”
  • "Group revenue booked during the fourth quarter of 2011 for the next 12 months increased 16% year-over-year with 3% coming from rate while total group revenue on the books for 2012 is up 9%."
  • "As the bookings made in recession years in our large convention and resort hotels continue to burn off, we expect our group business will continue to strengthen."
    • “Our hotels in Japan have seen a remarkable recovery since the March 2011 tsunami. In December 2011, the Ritz-Carlton Hotel in Tokyo reported an 89% occupancy rate compared to just 28% last April. Demand from domestic Japanese travelers has led the recovery, but we expect growing numbers of international guests and easier comparisons in 2012. “
    • “The economy is Europe is concerning; government related travel has been weak in the UK provinces for some time largely due to government austerity programs. We estimate government related business represents 10% of lodging industry demand in continental Europe, so a broader adoption of such programs could have a negative impact on the industry.  Although the European economy is soft, 30% of our European lodging demand comes from outside Europe with about 20 points from North America and 7 points from Asia. We also benefit from a heavy concentration of hotels in international gateway markets. The Olympics in London this summer should also be a shot in the arm. Combined with a strong U.S. dollar, we hope for a strong tourist season this summer in Europe.”
  • "In the Middle East, local economies should be benefiting from higher oil prices but political unrest and the weak European economy continues to discourage travel, particularly to Egypt. While we can't predict future political unrest in the region, impact from the Arab Spring began in February 2011 so most of 2012 should at least benefit from easier comparisons. "
  • "San Francisco, Los Angeles, and Chicago were strong while some markets in the Eastern U.S. lagged a bit.  West Coast markets had both strong transient business and last minute group booking. New York RevPAR growth was moderated by new supply and competitor discounting. In Washington, our RevPAR increased modestly in the quarter but continued to be constrained by weak government business. Philadelphia had a very strong quarter following the completion of a public space renovation at the 1400 room Philadelphia Downtown Marriott."
  • "At year end, our pipeline increased to over 110,000 rooms worldwide with nearly half of the rooms in international markets.  Today, roughly 40% of our worldwide pipeline rooms are under construction and another 10% are pending conversion."
  • Guidance:
    • For 2012, we expect worldwide system wide RevPAR to increase 5% to 7%, reflecting strengthening group business. With roughly 30,000 group room additions – gross room additions, we expect adjusted fee revenue to increase 8% to 11% and incentive fees decline roughly 20%.
    • In 2012, we expect diluted earnings per share to increase 16% to 25% year-over-year to $1.52 to $1.64
    • For the first quarter, we expect diluted earnings per share to total $0.26 to $0.30 assuming a 5% to 6% worldwide system wide RevPAR increase. We expect fee revenue to increase 6% to 9% over 2011 first quarter adjusted levels.
    • We expect investment spending 2012 to total $550 million to $750 million including about $50 million to $100 million in maintenance spending.
    • We expect the [timeshare] transaction will generate approximately $400 million to $450 million of cash tax benefits over time, a bit better than our earlier expectations. We recognized about $80 million of these cash tax benefits in 2011 and expect to recognize about $115 million to $125 million in 2012.
    • Assuming incremental investment opportunities do not appear, we expect to return roughly $1 billion to shareholders through share repurchases and dividends in 2012.
  • "We're encouraged by our first period results. For January, system wide RevPAR at our North America hotels was up roughly 8%. For international hotels, RevPAR was up roughly 4% on a constant dollar basis in January, reflecting an earlier Chinese New Year in 2012. Given our 13 period fiscal year, our first quarter international RevPAR statistics will include only January and February so we won't see the easing comparisons in the Middle East and Japan until the second quarter."
  • Q: “So you generally expect the group rates to improve throughout the year as we look forward”
    • A: "That's absolutely right. Now it obviously varies significantly by hotel, but the group business on the books for 2012 at the beginning of the year is probably about 70% of the total group business that will actually stay and pay in 2012. So we'll get building rates on the business booked in the year for the year compared to the average, but they won't dramatically shift the total rate performance of the total group segment."
  • "There's a little bit of recycling in 2012, not around these EDITION hotels, but around some loans that will be paid off that we would anticipate happening. Total order of magnitude, $100 million."
  • Q: “Are you anticipating that debt will increase in 2012?”
    • A: “Sure, because we're anticipating the increase in EBITDA, or adjusted EBITDA from the rating agency standpoint. So based on that we have debt capacity and we'll use it.”
  • "We're sort of assuming that we have modestly positive RevPAR in Europe, plus two points or three points in comparable hotels. I think if you look at the risks in the model, probably the biggest single risk would be that we could do worse than that in Europe. Now, remember, we talked about 9% of our total fees are coming out of Europe, so you can do the math. If we lost 10%, really, of our RevPAR and therefore of our fees in Europe, that's only 1% of the total so it's not enormously crucial to us. But we don't have tremendous confidence that we have clear insight into the way Europe will perform in 2012."

THE HBM: MCD, PNRA

THE HEDGEYE BREAKFAST MONITOR

 

HEDGEYE VIRTUAL PORTFOLIO POSITIONS

 

LONGS: JACK, SBUX

 

SHORTS: MCD

 

MACRO NOTES

 

Commentary from CEO Keith McCullough

 

If only the global economy was Apple…

  1. SPAIN – do up your chinstraps because Spain is officially moving back into crash mode (down -19.4% from its YTD high in Feb where a lot in Global Macro stopped going up – gravity + #GrowthSlowing = nasty combo). Remember, the Germans are on the record saying Spain and Italy are potentially “Too Big To Save”… potentially…
  2. COPPER – the Doctor is out. No bounce this morning in either Gold or Copper as Bernanke’s Bubbles continue to pop. Neither of these Commodities look like Nat Gas yet (crashing to $1.94 this morn), but both are in what we call Bearish Formations (bearish across all 3 risk mgt durations – TRADE/ TREND/TAIL).
  3. US DOLLAR – hanging in here at its long-term TAIL of support ($76.13) like a champ. Despite all of the fiscal and monetary planning disasters in the US, that’s impressive – and that’s mainly because trading USD in the middle of a Global Currency War is relative (France could vote for a Socialist and Japan is on the fiscal brink).

 

SP500 no-volume rally yesterday didn’t close above my immediate-term TRADE line of 1394 resistance, despite APPL. KM

 

SUBSECTOR PERFORMANCE

 

THE HBM: MCD, PNRA - subsector

 

 

QUICK SERVICE

 

MCD: McDonald’s was raised to “Buy” from “Hold” at Edward Jones.

 

PNRA: Panera Chief Operating Officer John Maguire will step down effective May 31st to become CEO of Friendly’s Ice Cream LLC.  Charles Chapman III, currently serving as executive vice president of development and business development and licensing, will take over as Panera’s COO at the end of May.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

SBUX: Starbucks has declined for two consecutive days, closing down 1.7% yesterday on accelerating volume.

 

YUM: Yum traded higher on accelerating volume ahead of earnings. 

 

 

CASUAL DINING

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

BWLD: Buffalo Wild Wings declined on accelerating volume yesterday.  This stock remains one of our favorite names on the short side.

 

THE HBM: MCD, PNRA - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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RCL 1Q 2012 PREVIEW

In-line 1Q but will RCL change FY 2012 guidance?

 

 

We’re projecting an in-line 1Q at 14 cents.  Close-in bookings for Q1 were weak but it shouldn’t have much effect on results since there was very little unsold inventory left at the time of the last call.  1Q fuel expenses are estimated to be $8MM higher since its latest guidance update on Feb 29.  The big question is whether RCL will follow CCL and lower FY2012 guidance again.  As RCL mentioned on their last call, 2Q and 3Q is highly uncertain.  We’ve have lowered 2Q and 3Q estimates due to weak pricing across most itineraries as we mentioned in "2012 MARCH CRUISE PRICING MATRIX" (4/18/2012).  However, 4Q is looking healthy due to strength in the Caribbean business.  Our current FY 2012 estimate is $2.01, which is lower than the Street’s $2.16, but still within the $1.90-$2.30 set forth by RCL.

 

No change in guidance or only a small tweak lower would be a positive for the stock.  Since RCL lowered guidance on 02/02/12, the stock is down 3% while the S&P is up 5%.

 

RCL 1Q 2012 PREVIEW - rcl



End Game Success

“To succeed, you must study the end game before everything else.”

- José Raúl Capablanca (Chess Grandmaster)

 

José Raúl Capablanca was one of the world’s first great Chess champions.  In fact, statistical ranking systems rank him the fifth greatest player of all time.  He was a Cuban national and was world champion from 1921 – 1927.  His nickname was the “Human Chess Machine” which characterized the simple nature of his style combined with his total mastery over the board.  To him, understanding the end game was the preeminent focus for any player.

 

For those of you that aren’t Chess grandmasters, the end game is the point in the game when there are a relatively limited number of pieces on the board.   Many chess analysts disagree as to when exactly the end game begins, but they all agree that when the end game begins strategy is much different than the middle game.  In fact, over time the world’s best chess players have always excelled at the end game and utilized a consistent strategy.

 

Yesterday was one of those stock market days that certainly made a few investors wonder whether the global economic growth end game is actually here yet, or close.  The snap back in U.S. equities didn’t necessarily surprise us but obviously characterized the almost bi-polar sentiment that currently exists in global equities.  One day bad news matters, the next day good news matters more.  The global economic growth slowing end game is here, then it isn’t.

 

Meanwhile in Spain over night we did get more evidence of the debt end game.  The nation that will continue to be the pressure point in European sovereign debt issues this year, reported that non-performing bank loans accelerated from December and now total €143.82B, which is a 18-year high.  This compares to a 1% level before the correction of the real estate market that began in 2008.  As we’ve noted, the key risk is that this level of non-performing loans accelerates dramatically as property prices continue to revert to the mean.

 

The key issue with Spain accelerating to the downside from a debt perspective is that Germany is basically on record saying that Spain is too big to save.  And so is Italy.  Not being able to save either Italy or Spain is certainly a European sovereign debt end game that is increasingly concerning.   To be fair, though, Spanish 10-year yields have come in again over night and are now solidly below the 6% line at 5.78%, which is a positive, but the IBEX this morning is down -3.2%.  Tomorrow we get the longer term Spanish bond auctions and they, too, will likely be as successful as any artificially controlled market.

 

The major political catalyst this week in Europe is the French elections with the first round this weekend. Since a major candidate has to garner 50% to win, it is likely there is a second round given there are major candidates competing.  Currently, the most recent polls from CSA have Hollande leading Sarkozy 29% to 24% in Round 1.  This is an improvement from being tied a few days ago. The polls then show Hollande mercy crushing Sarkozy in Round 2, by a margin of 58% to 42%. 

 

The French election is critical because: A) Hollande is a Socialist, B) Hollande is a Socialist, and C) Hollande has stated that if elected he will renegotiate the EU budget compact and that he will not accept austerity as rule for countries.  Things are about to get a lot more challenging politically in the great monetary union that is the Eurozone.

 

In the U.S. we are fully in the midst of earnings season.  As part of earnings season, we our having our Sector Heads participate in our morning calls for clients ( ping sales@hedgeye.com if you don’t have access ) and also write a brief summary of their thoughts on earnings in their sectors.  Our Financials Sector Head wrote this yesterday as it related to financials:

 

“Roughly one third of financial companies have reported earnings so far. 7 of the 8 large or mid cap companies have beaten estimates on the bottom line. Revenue trends have been more mixed, with just over 1/3 beating estimates, 1/3 in-line and just under 1/3 missing.  However, this is a bit misleading because of Debt Value Adjustment. With DVA, the big banks’ revenue lines are adversely affected by an accounting convention that requires them to recognize negative revenues when their credit default swaps tighten.  First quarter saw sizeable CDS tightening, so the headwind was significant for all the large-cap capital markets sensitive names: C, JPM, BAC, GS, MS.”

 

The remainder of his note can be found at www.hedgeye.com in unlocked content and we will be updating these summaries over the course of the next week.  But if there was one take away from Josh, it is that so far his companies are beating estimates, which is a positive driver for stock prices in the financial sector in the short term.

 

Related to U.S. growth, we have a number of negative catalysts that will come more and more into focus in the coming months.  Namely, as of January 1st, 2013, the Bush tax cuts, the temporary payroll tax cut, and the long-term unemployment benefits all expire.  Then on January 15th, 2013 the automotive government spending cuts, driven by the failure of the Joint Select Committee on Deficit Reduction, go into effect.  Will it be check mate for U.S. economic growth? Probably not, but Q1 2013 is certainly an end game to start contemplating.

 

The immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), Euro/USD, and the SP500 are now $1, $117.69-120.93, $79.26-79.64, $79.96-82.30, $1.30-1.32, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

End Game Success - Chart of the Day

 

End Game Success - Virtual Portfolio


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