Not Decoupling: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU); Short Industrials (XLI)


Since Keith is out of the office performing some proprietary “field analysis” with his family at Disney World, I’ve been handed the pen on our quantitative risk management update. Fundamentally, we remain bearish on U.S. equities from a TREND-duration perspective and recent quantitative signals are confirming our non-consensus view.


This confirmation is highlighted by the U.S. equity market (as measured by the S&P 500 Index) failing to eclipse its immediate-term TRADE level of resistance (formerly support) at 1,395. Simple moving averages aside, that’s an explicitly negative PRICE/VOLUME/VOLATILITY signal. Across durations, our updated risk management levels are as follows: 

  1. SELL TRADE = 1395
  2. BUY TRADE = 1356
  3. BUY TREND = 1348 

Not Decoupling: SP500 Levels, Refreshed - SPX


Talk of the U.S. being a “safe haven” or its outright “decoupling” is what it is and we are not all surprised to see those kinds of phrases bandied about by consensus at yet another cyclical market top, insomuch as “raising cash” tends to dominate consensus recommendation at cyclical troughs. All told, we continue to view such process-starved analysis as constructive of asymmetric mean reversion opportunities on both the long and short side across various asset classes.


Not Decoupling: SP500 Levels, Refreshed - 1


Not Decoupling: SP500 Levels, Refreshed - 2


While it remains to be seen if 2012 will play out similar to 2011, one thing we are certain of is that this is definitely not the 90’s.


Darius Dale

Senior Analyst

UA: The Number No One Looks At, But Should

For those of you who would rather not join the herd in wigging out over the puts and takes that come along with UA's print tomorrow morning, here's something to consider in your longer-term modeling.


Much like analyzing the changes in lease payment schedules can help uncover trends as to how a retailer is using off-balance sheet tactics to obfuscate the P&L, we need to do the same for companies that operate in the Athletic space -- but with athlete endorsements. 


We've discussed this quite often in the past, and generally speaking, UA is tracking where Nike was it a similar point in its growth cycle. 


But there are two considerations positive and one not so positive.


On the plus side, 84% of the $169.5mm that UA is required to pay in MINIMUM obligations occurs over the next three years. This is a prudent and conservative strategy. In fact, that's a meaningful change from 69% just one year ago.


What does that mean? If UA wanted to be super aggressive, it could be locking in long-dated contracts with increasing minimums to athletes that might or might not be worth it. The company is definitely not doing this. That's the good news.


The bad news is that in this year alone, UA has about a $10mm step-up in endorsement expense. That's about $0.12 per share (7% of last year's earnings). 


Even worse is that over the next 2 years, there's a minimum increase of $36mm. That's about $0.45 per share over 2-years ('13 and '14).


In the end, all this means is that UA has committed to get the assets in place to a) build product around, and b) subsequently bring to market. If they're like Nike, then they'll succeed. If they're like Adidas or Reebok, then they'll fail.  We think it's more the former, but in fairness, UA is not yet proven in that regard.


Nonetheless, these are underlying numbers that people interested in the story should at least consider in their investment process. 



UA: The Number No One Looks At, But Should - uatable 

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I have re-purposed the following note from the Healthcare team headed up by Tom Tobin.  While the note is Healthcare-centric, the implications from a broader market perspective are obvious given what the country experienced last year when Washington ground to a halt under the weight of this topic.  It seems clear that the Debt Ceiling Debate is a topic that had a significant impact on businesses and consumers last year but has been off the radar screen for some time. Now it seems, it is coming back into focus.


Last weekend, Treasury Secretary Timothy Geithner said that the U.S. debt ceiling (now $16.4 trillion) will probably be reached by the end of 2012.  The analysis of the Hedgeye Healthcare team, copied below, suggests that the debate could resurface sooner than that, perhaps even before the presidential election in November. 


The following is the note from the Hedgeye Healthcare team:


CONCLUSION:  Under reasonable growth and spending assumptions for the balance of the year, we’ll be very close to hitting the debt ceiling by November.  A repeat of the 2011 debt ceiling spectacle would serve as an acute liability to Obama’s re-election bid, a headline risk to healthcare equities, and a prospective intermediate & longer-term negative for growth of the health economy.  Below we compared the latest budgetary projections against the current trajectory for federal revenues and outlays to assess the probability of another debt ceiling breach ahead the November election.




Last year’s debt ceiling debate, which began in 1Q11 and steadily escalated to full contentious crescendo into the signing of the Budget Control Act (BCA) on Aug. 2nd, had broad social & economic impacts.  Job Growth, Consumer confidence, & Obama’s Approval rating all declined as uncertainty accelerated in July & August.  Markets treaded water with a bias lower through that 2Q11 uncertainty before breaking to the downside in the wake of S&P’s downgrade of U.S. Credit on August 5th following Obama’s signing of the BCA. 


While the existent macroeconomic and Eurozone debt dynamics played a part in the movement of the metrics described above, at its peak, the debt ceiling captured the bulk of domestic headlines and certainly served as a lead catalyst driving populous sentiment and market price action.


Below we compared the latest budgetary projections against the current trajectory for federal revenues and outlays to see if a pre-election replay of the debt ceiling debate was either possible or probable. 


The accounting identity describing the monthly federal fiscal condition is a simple one for the Treasury Department:  Outlays – Receipts = Deficit This identity simply equates total deficit spending with the difference between Revenues (estimated but unknown) and Spending which predominately comes in the form of Entitlement Spending (estimated but unknown) and Budgeted Outlays (largely fixed).  With some minor exceptions, deficit spending finds its way to the Federal Balance sheet as a commensurate increase in total Public Debt.


Taking each equation constituent in turn – starting with inflows via Social Insurance and Individual & Corporate Income tax receipts.




As we highlighted in yesterday's HEALTHCASTER, revenue totals through March have been a strong predictor of total fiscal year revenue with an R^2 = 0.95 going back to 2000. Given total federal tax receipts through March of the current fiscal year, implied full year revenue will come in at  $2.391T, or ~$64B short of the CBO’s latest March Projection of $2.456T.




Looking at the temporal pattern in revenue run rate over the last few years tells a similar story.  For the years 2009 – 2011, on average, we have collected 45% of total fiscal year revenue thru March.  In 2012, we have only collected 43.3% of total CBO estimated revenues.   This means that either we will play catch-up via a  back half economic acceleration, or revenue estimates remain too high.  If current revenues through March, in fact, equal the recent historic average of 45% of total fiscal year revenue, implied full year 2012 revenue would be $2.357T, or some $99B below current estimates.


The conclusion that the U.S. is likely to realize a revenue shortfall also appears probable after analyzing of the growth & Inflation assumptions embedded in the CBO’s projections for the balance of fiscal 2012.


The CBO currently estimates nominal GDP growth will average 3.61% y/y through the balance of the fiscal year.  With quarterly inflation estimates averaging ~1.4%, this implies real y/y GDP growth of 2.3% for Fiscal 2012.   Given that real y/y GDP growth hasn’t eclipsed 1.6% in the last three quarters, and against our macro teams expectation for decelerating economic growth, these growth assumptions appear overly optimistic.  If, instead, real GDP growth averaged 1.1% for the balance of the fiscal year, the implied revenue shortfall would be ~$40B (still using the CBO’s estimate for Revenue as a % of GDP).


Lastly, Treasury data shows Total Withheld income and Employment taxes up 4.7% through March vs 2011.  While positive, growth in tax withholdings lags the forecasted 6.6% growth in tax derived federal revenues.  


Revenue Conclusion:  The current rate of tax collections and overly optimistic growth assumption for federal revenue both suggest full year tax receipts will come in below existing projections.  This is an obvious negative assuming that revenue gap is filled via larger debt funded deficit spending.   




We took a couple approaches in estimating where total deficit spending to could finish to close the year.


In a first scenario, we simply extrapolated the current treasury issuance run rate for the balance of the fiscal year.  For the fiscal YTD (thru March) there have been 123 working days in which we accumulated $779B in deficit spending - equating to $6.33B in debt funded deficit spending per day.  Extrapolating that same rate out over the rest of the fiscal year (127 working day) results in an additional $804B in deficit spending.  Admittedly, this doesn’t account for annual variance in the roll-over schedule due changing maturity profiles.  This scenario also implies total deficit spending of some  $1.583T for the year which would be a new record, exceeding 2009’s record total by ~$167B and exceeding the current 2012 estimate of 1.2T (current CBO estimate) by over $300B. 


Secondly, and similar to the analysis on revenues, we looked at the recent historical temporal pattern in debt issuance.  On average, over the past three years, 58.2% of total issuance has occurred thru March of the given year.   The $ 779B of deficit spending through March of this year would represent 66.5% of spending if the CBO’s estimate of 1.17T in total deficit spending for fiscal 2012 is indeed accurate. If, however, the current $779B in deficit spending were to equal the recent historical average of 58.2%, implied full year deficit spending would equal  $1.34T, $167B above current estimates.


Spending Conclusion:  As opposed to the revenue side of the equation, it’s more difficult to make a highly cogent case for a large delta in outlays vs existing estimates.  Consumption & Acuity of Medical care is stable but not showing significant upside which decreases the odds for an outlier move across the Medicare & Medicaid cost lines.


Uncertainty still exists around the costs associated with the payroll tax extension which includes the extension to unemployment benefits and another temporary Medicare doc fix.  CBO originally estimated the net cost at $100-150B and issued a final score with a net cost of ~$101B for FY 2012, which may ultimately prove conservative.


The Outlays scenario’s outlined above suggest spending estimates may be marginally too low, and with political shorterm-ism supporting spendthrift policy and CBO’s strong track record in underestimating outlays and deficit spending, we think the balance of evidence points towards spending that is flat to marginally higher than current projections.

Where Do We Stand Currently:


As of the end of march, total public debt stood at $15.539T against the legislated limit of $16.394T -  leaving $855B available before breaching the debt ceiling.  Taking the above dynamics into consideration, below we show the prospective timeline for the debt ceiling breach under 3 scenario’s of ranging aggressiveness. 






High Impact Event catalysts with the ability to influence election outcomes and subsequent policy initiatives are of obvious importance to industry stakeholders and market participants.  For healthcare, the current political and ideological differences between parties regarding the structure of the health economy and delivery of care are stark, with the potential for divergent trajectories for medical spending growth depending on who controls the White House post November.


Our view remains that the prospective coverage expansion,  increased public subsidization of medical care, and generally benign Entitlement reform expected under an Obama second term would auger positively for growth of the healthcare economy relative to the prospects under a GOP administration.  And while the health legislation & Entitlement proposals proffered by Ryan, and supported by Romney, may, in practice, have little negative impact to the current status quo over the intermediate term, the headline risk for healthcare equities is likely to be real and the longer-term growth prospects for the health economy comparably worse.


While it’s difficult to pin down a definitive timeline for a breach of the debt ceiling, especially given the fund shifting & other accounting maneuverability available to the treasury to extend the timeline, under reasonable growth and spending assumptions for the balance of the year we’ll be very close to hitting the ceiling  by November - certainly close enough for the GOP to hold the dialogue hostage to that point if they choose.


A repeat of the 2011 debt ceiling spectacle would serve as an acute liability to Obama’s reelection bid, particularly if employment growth remains lackluster and the profligate, deficit funded federal spending of the last few years continues to (arguably) fail in its attempt to drive a broad & meaningful economic recovery.




April is an important barometer month for revenues given the tax deadline, and the post April numbers offer a somewhat clearer picture of the revenue-spending balance as a full accounting of tax refunds can be netted against tax receipts.  The Treasury’s monthly budget statement is scheduled for release on May 10th.  


Below is a list from Reuters, compiled in 2011, of the temporary programs the treasury can engage in to extend the debt ceiling timeline.  As we saw in 2011, Geithner et al. are unabashed of using any & all available maneuvers to put off d-day.




The Treasury could cut issuance of longer-term government debt and rely more heavily on short-term cash management bills to gain more day-to-day control over debt outstanding. Cash management bills are typically issued for days instead of normal Treasury bill maturities of four weeks to one year. However, this is unlikely to buy much time and officials are wary of making any major shifts in the Treasury's debt issuance calendar, which could upset markets.




The Treasury could suspend sales of State and Local Government Series securities, known as "slugs," which are special low-interest-bearing Treasury securities offered to local governments and other tax-exempt entities for the investment

of municipal bond issue proceeds. Slugs, which count against the debt limit, were last halted in September 2007 to avoid hitting the ceiling then.




As it has in the past, the Treasury could suspend payments to the Civil Service Retirement and Disability Fund, a government employee pension fund. The government has recently been contributing an average of $5.8 billion to this fund per month. It would be required to replace any missed contributions and lost earnings.




The Treasury could dip into this seldom-used $50 billion fund earmarked to stabilize currency rates. Created during the Great Depression of the 1930s, the fund was last used as a backstop to guarantee money market mutual funds during the worst part of the financial crisis from September 2008 to September 2009.




To free up cash, the Treasury can halt reinvestment of another federal employee pension fund known as the G-Fund, which had net assets of about $125 billion at the end of 2010 invested in special short-term Treasury securities with maturities of one to four days. Normally, maturing assets in the G-Fund are reinvested daily. But the Treasury has statutory authority to retain a portion of the fund, as long as it provides proper notification and reimbursement for any lost earnings from the move. Such a move could temporarily claw back $122.3 billion in borrowing capacity.




The Federal Financing Bank can issue up to $15 billion in debt on behalf of other government agencies that is not subject to the debt limit. So the Treasury could exchange FFB debt for other debt to reduce the total amount subject to the limit.




The government could raise money by selling off chunks of companies it bailed out under its $700 billion Troubled Asset Relief Program. However, Geithner said this was not a viable option because taxpayers could end up suffering losses from a "fire sale" of financial assets. He also said selling U.S. gold could undermine confidence in the United States.



Thomas W. Tobin


Hesham Shaaban, CFA


Christian B. Drake














Initial jobless claims came in at 386k versus 370k expectations and 380k the week prior (revised from 388k). 


THE HBM: YUM, SBUX, CBRL - initial claims



Commentary from CEO Keith McCullough


Futures are up more in anticipation of the 1st“better than expected” US macro data pt in 2 wks (jobless claims), than on “Spain is fine”:

  1.  JAPAN – both Currency and Equities going down now at the same time (this is when it gets more real on the sov debt concern front – at least it has in every other major sov debt crisis – currency leads). Nikkei down -1.1% last night (down for 10 of last 12 days)
  2. SPAIN – evidently everyone’s a bearish expert again w/ Spain down -13% YTD; bear markets bounce obviously after -19% drawdowns (that’s where the IBEX was pre this bond auction, which came in at higher yields vs last – but being spun by whoever as “better” than “expected” – thank goodness broken sources routinely expect the wrong thing at the wrong time).
  3. COPPER – no bid this morning – 10yr yields remain below my key TREND line of 2.04% resistance too. Therefore, if you see the pop on the open, and we don’t see a close > 1394 (my immediate-term TRADE line of SP500 resistance), sell.

SP500 down for 8 of last 11 days, so yesterday I moved back to neutral (10 LONGS, 10 SHORTS), but will look forward to considering going back to net short today. Currently no position in SPY, but that’s the most obvious move to consider.





THE HBM: YUM, SBUX, CBRL - subsectors





YUM: Yum reported an EPS beat of $0.76 versus consensus $0.73.  The negative reaction to the print was largely due to China comps coming in slightly below expectations.  U.S. results were above consensus but how sustainable those will be going forward is difficult to say.


YUM: Yum was downgraded to “Outperform” from “Buy” at Credit Agricole.  The twelve-month price target is $80.  The stock is at $73 right now.


SBUX: Starbucks is continuing to accelerate its plans toward making China its second home market.  The company has announced a series of new initiatives aimed at further differentiating Starbucks as the employer of choice in the Chinese market.  Included in the initiatives is a new learnings and development concept, Starbucks China University, an institution aimed at elevating the existing learnings and development infrastructure of its employees.


SBUX: Starbucks will introduce the Verismo in China in 2013.




COSI: Cosi gained on accelerating volume but we are still concerned about the underperformance there.


PNRA: Panera declined on accelerating volume on the news of its COO leaving for Friendly’s.





CBRL: Sardar Biglari issued a letter to shareholders of CBRL calling for the removal of the Chairman and several other members of the board.  The letter does not express any confidence on the part of Biglari, who owns 17% of the company, in the company’s performance and ability to improve performance going forward.





Howard Penney

Managing Director


Rory Green




OK quarter but the outlook is strong


“Results were terrific in the first quarter of 2012. There is tremendous strength in global travel today; travelers are on the road, attending meetings, making sales calls and taking family vacations."


-Arne M. Sorenson, president and CEO of Marriott International




  • Hotel room supply is estimated to grow by less than 1% in 2012.  Room supply is expected to stay low for the next few years, especially for full service hotels.  Financing is challenging, personal guarantees are often expected and lots of equity.
  • Expect a modest pull back of supply growth in China.  However, they still expect China to be one of the fastest growing market. They have 15% share of rooms under construction in Asia.
  • Have a big pipeline in India as well
  • In Europe, supply growth is also projected to be under 1%.  Their focus in Europe is mostly on conversions
  • International arrivals to MAR's US hotels is up 7%.  Brazil visitors up 16% and Chinese visitation was up 32%
  • RevPAR rose 9% in London
  • 2012 special events:
    • London Olympics
    • Paris conventions
    • Euro Soccer Championships
  • Attendance at group meetings is ahead of expectations
  • Ritz Carlton - demand from consultants and transient business is strong and had allowed them to push rate.  Have 24 Ritz hotels under development with 50% in Asia.
  • Higher group attendance and stronger last minute business helped their results in the Q
  • Systemwide RevPAR would have increased 6.5% this Q internationally if you include March results
  • Japan continues to improve. 
  • RevPAR in the Middle East declined 6%.  Expect easier comps as the year continues
  • Property level margins were helped by improved productivity
  • Improved profitability in Eastern Europe, Asia strength, helped drive incentive business
  • Sale of their Execustay - expected to close at the end of April.  $100MM of revenues in 2011 from this business. The results though are immaterial.
  • Autograph continues to gain momentum 
  • Seeing some construction delays in ME and Asia as well as some conversion delays since renovations need to be completed in advance of conversions
  • Higher transient expectations reflect stronger transient and group bookings, especially at smaller hotels
  • Much stronger results at leased hotels in London, Tokyo, and Anaheim are driving full-year estimates higher.



  • Normal growth in benefits and wages - sees 100-200bps in margins given their RevPAR expectations
  • The 11% number is (for group business) for Marriott brands.  What they see underneath that is 16-17% growth for group bookings at the smaller hotels and high single digit growth at the larger box convention hotels.  What that means is that smaller groups that require less lead-time are doing better than the very large conventions.  Government groups are the one area where they are cautious, especially in the quake of the GSA scandal
  • 20% growth in incentive fees is probably a good number for the full year, but it will vary Q to Q
  • Most of the the 11% group bookings increase is volume - only 2% is rate
  • Why didn't the higher RevPAR translate into higher fees this Q aside from the $3MM fee reversal?
    • Lower re-licensing fees - thinks that's more timing
    • Ancillary fees - grew 5% but not as good as RevPAR
  • Their appetite for acquisitions hasn't changed over the last few years.  They remain committed to being a management company.  Although, they have some flexibility to hold real estate for recycling purpose for select opportunities like Edition.
  • Europe first quarter results were comforting- came in around budgeted levels.  Much of that was driven by global gateway markets like London and Paris that benefit more from stronger international travel trends. They feel a little better for the balance of the year for Europe but are still cautious on rural UK, weak Spain, etc. Watching Germany, have very little exposure to Greece - only one hotel there.  In Russia and the East they are still seeing strength.
  • In the year for the year bookings came in stronger.  Also meeting attendance was higher than expected. They also had lower group cancellations in the quarter.  Combined, that led to better results in the quarter.  Think that better attendance and lower cancellations may be a trend for the rest of the year
  • They are guardedly encouraged by Europe's results in the Q and wouldn't be surprised with 0% RevPAR in that region
  • Diluted quarter end share count was 332MM basic shares plus 11MM of dilution = 343MM shares at Q end 
  • Base management fee $3MM reversal color?
    • Relative to the restructuring and the capital going into the hotel, MAR agreed to temporarily adjust down their fees
  • Think that China will continue to grow very robustly. It's in some of the biggest and most established markets, that residential development is slowing. Often times, those residential developments include a hotel.  They are a bit more cautious about deal signings in cities like Shanghai and Beijing. 
  • Board is more included towards share buybacks vs. dividends
  • They would gladly partner with development partners to develop their brands faster.  The Fairfield investment in India is just that.
  • They have already started talking to buyers for their Edition hotels under construction.  But they won't count on selling the hotels before they are open. London would be the easiest to sell since it's furthest along while NY is in the earliest stages so that wouldn't sell for a little while until all construction costs are nailed down.
  • Tokyo is coming along very strong vs. last year's very easy comp
  • Residence Inn has been the weakest brand, but given the longer stay at those, it tends to lag.  They have seen a bit of a shift from the Eastern US strength to Western US.  NY is actually doing well as is Philadelphia, as is Chicago and Boston.  Would not say though that this recovery has just been driven by key gateway markets, it's been pretty broad. 
  • Anticipate that the return of capital will be through buybacks and dividends, but if unique opportunities presented themselves that could change
  • Think that the current conditions in DC are only partly related to the Election year, but also has to do with budget cuts in the government and the Congressional calendar. They do expect DC to continue to stay weak. Post election, things should improve. Group bookings in 2013 look stronger than 2012.  The biggest threat to DC is a reduction in government in general.
  • Chinese NY timing isn't a factor for their results this quarter
  • They are seeing very marginal improvements in labor productivity. They are are in the middle of DC labor negotiations.



  • "Worldwide pipeline of hotels under construction, awaiting conversion or approved for development increased to approximately 115,000 rooms, including over 51,000 rooms outside North America"
  • "The company expects to add 25,000 to 30,000 rooms and expects 7,000 to 8,000 rooms to exit the system in 2012."
  • "Over 3,200 rooms opened during the quarter, including nearly 950 rooms converted from competitor brands and nearly 1,200 rooms in international markets.. Ten properties (2,487 rooms) exited the system during the quarter."
  • "Marriott repurchased 4.2 million shares of the company’s common stock for $150 million during the quarter. Year-to-date through April 17, 2012, the company repurchased 6.7 million shares for $245 million"
  • "Comparable Marriott Hotels & Resorts properties in North America, room revenue from negotiated special corporate business rose over 9% in the first quarter. Group room revenue at comparable hotels increased approximately 6%"
  • "At quarter-end, group room revenue bookings for North American comparable Marriott Hotels & Resorts properties for the remainder of 2012 are over 11% higher than for such bookings at the end of the 2011 first quarter"
  • "29 percent of worldwide company-managed hotels earned incentive management fees compared to 25 percent in the year-ago quarter."
  • Guidance:
    • Comparable systemwide WW, NA, and International RevPAR: 6-8% for 2012 and 2Q12
      • Up 1% from last quarter's guidance
    • Fee revenue: 2Q12: $345-355MM; 2012: $1,425-1,465MM
      • Up 1% from last quarter's guidance or $15MM 
      • Street's at $350MM for 2Q and $1,430MM for 2012
    • Owned, leased, corporate housing and other, net: 2Q12: $35-40MM; 2012: $140-145MM
      • Increased by $5-10MM from prior Q's guidance
    • Adjusted EBITDA: $1,105 - 1,160MM 
      • Increased EBITDA guidance by $10-25MM
      • Street's at $1,108MM for 2012
    • EPS: 2Q12: $0.39-$0.43; 2012: $1.58 to $1.69 
      • Raised EPS guidance 5-6 cents from last Q's guidance
      • Street's at $0.42 for 2Q and $1.58 for 2012

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