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MAR’s quarter and guidance shows why we are more cautious on hotels over the near-term but also why we like MAR’s business model.





MAR’s quarter was in-line but low quality in our opinion.  Guidance on recurring EPS was weaker than expected.  While management may or may not be a little conservative, there are real issues with the world economy and this is an economically sensitive business.  Moreover, our math suggests a sequential slowdown in YoY RevPAR growth in July without even considering a Macro slowdown.  These factors could weigh on the sector over the near-term and MAR which have both otherwise performed relatively well. 


The relative strength of MAR’s business model was and will be evident particularly if the economy worsens.  MAR bought back an astounding $400 million worth of stock in the quarter.  The company is a cash generating machine, especially since the spin of the capital intensive timeshare business.  The company’s cash flow is more insulated from softening demand trends due to the almost exclusive fee-based model.  While we are not recommending purchase of any lodging stocks right now, if you have to own one, MAR would be it.  Longer term, this is a great business with favorable supply/demand trends. 


We’re hoping for a significantly better entry point.





Marriott reported an in-line quarter that was low quality.  The $400MM buyback in the quarter was impressive though and exceeded our estimate.


Q2 would’ve been a miss if not for:

  • Higher termination fees and unusually high increases in branding and credit card fees
  • A $2MM receipt of business interruption insurance related to the Japanese Tsunami.    
  • The $400MM buyback in the quarter was impressive though and exceeded our estimate.

Somewhat offsetting the non-recurring positives above was higher SG&A that had $7MM of “one time charges” and $5MM of higher reserves. 


On the surface, it looks like MAR raised EPS guidance, but when you exclude the $40MM gain on the sale of the Courtyard JV guidance for 3Q12, EPS would have been about 8 cents lower and below consensus. Offsetting the gain on the Courtyard JV sale could be the loss of income from the sale of the corporate housing business which MAR has yet to quantify.


Some takeaways:

  • Room growth was disappointing in the quarter.  Excluding the sale of the Courtyard JV, rooms at the end of 2Q were still 5k lower than we estimated.  System-wide room growth was only 1.7%.  Gross room additions for the year were reduced by 5,000 at the midpoint due to opening delays.
  • On the positive side, absolute dollar ADRs were higher than we modeled
  • Fee income of $342MM came in $8MM below the midpoint of MAR’s guidance
    • Base fees only grew 4.4%.  Base fees as a % of estimated managed room revenues decreased to 4.7%, down 20bps YoY.  2Q was the 3rd consecutive quarter of declines.
    • Incentive fees increased 12%, below the 20% growth annual rate given on the last call.  NA fees grew 15% and International fees increased 10.4% - both slowed sequentially.  The % of hotels paying incentive fees increased by 1% QoQ.
    • Excluding fees on timeshare, which we estimate at $15MM in 2Q, franchisee fees grew 8.4% YoY.
  • For owned, leased, corporate housing and other gross margin came in $23MM above the midpoint of MAR’s guidance
    • Termination fees were up $12MM YoY
    • We believe that the $9MM jump in branding and credit card fees include some one-time items and do not expect to see this type of growth for 2H12
    • Benefit of $2MM of business interruption related to the Tsunami in Japan
    • Excluding branding and termination fees, we believe that gross margin would have been $22MM, which still represents a nice 5% increase in margin to 10% YoY.
    • Marriott mentioned that it sold its corporate housing business as one of the reasons for lowering guidance but made no further mention of the transaction in the release
  • SG&A would have increased 6% if not for some one-time charges and higher reserves for guarantees in the quarter.  MAR’s full year guidance for a 3.4% increase SG&A implies a YoY decrease in SG&A for the 2H12.


The Macau Metro Monitor, July 12, 2012




Singapore's Casino Regulatory Authority (CRA) probe against Resorts World Sentosa (RWS) is underway over alleged reimbursements of casino entry levies.  The investigation, which started almost a year ago, is understood to allegedly involve hundreds of incidences of these illegal reimbursements.  The probe is believed to have prompted RWS to take the decision to suspend several senior executives, including one Senior Vice-President. 


Breaches of the Act can result in the following disciplinary actions: Cancel or suspend the casino license, vary the terms of the license, issue a letter of censure, or impose a financial penalty up to S$1 million.  Multiple reimbursements can constitute just one breach.  


In May 2011, RWS was fined S$200,000 for illegal reimbursements of casino entry levies.  The penalty was for an incident in July 2010 when a senior management staff member paid for the entry levies of more than 10 reporters and photographers covering the launch of the casino's Ladies Club.



According to Melina Leong, a spokeswoman for Sands China, the company is in talks to get an extension of the April 2013 time limit the government set to develop Parcel 3.  The company said in a May SEC filing that it planned to seek the extension.  If the extension is not approved, the company could have to take a charge for some or all of its $96.7 million in capitalized construction costs and land premiums as of March 31, 2012.



The Taiwanese government awarded regulatory powers on casino gambling to the Ministry of Transportation and Communications.  

Euro Yank

This note was originally published at 8am on June 28, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Go ahead, yank.”

-Margaret Hastings


So, I’m bearish. And I really want to know why the bulls are still bullish. If the bull case at  the Q1 top was ‘growth is back, earnings are good, and stocks are cheap’, their entire thesis has to have changed.


Sadly, with Growth Slowing, earnings at risk (73 of the S&P’s 500 companies have already guided lower), and “cheap” getting cheaper, we all know what the bull case is now – bailouts. When centrally planned, those are bearish long-term, too.


If you are like me, publically admitting you are bearish on both the immediate and long-term durations, why wouldn’t you have a big Cash position here? Even for central planners in the post 49BC era, economic gravity has proven to be hard to stop.


Back to the Global Macro Grind


On the morning of the 19th European Bailout Summit, Global Equity and Commodity markets are red and the Euro is getting yanked right back to $1.24.


Imagine that, after 18 attempts these people think we are all dumb enough to believe that this is going to be resolved. *Long-term Risk Manager Note: piling more debt and leverage on top of this sick puppy is only going to prolong the pain.


That’s what she said.


Corporal Margaret Hastings is one of the American heroes in the book I am finishing this week, Lost in Shangri-La – “The True Story of Survival, Adventure, and The Most Incredible Rescue Mission of World War II.”


The aforementioned quote comes from the point in the story where she was down to weighing about 90lbs, badly burned, and dealing with life threatening gangrene. The paratrooper medic was babying her wounds and she promptly reminded him that “If I were back at Fee-Ask, the GI medic would yank the bandages off and then scrub my legs with a brush.”


God Bless America’s bravest.


The world can learn a lot from realists who aren’t trying to prolong the inevitable. If you can’t handle the idea of letting free-market prices clear, the market’s underlying wounds do not care. Eventually, they need to be addressed. At this point, doing more of the same to perpetuate debt mounting and Growth Slowing has reached the height of political cowardice.


Stock, Commodity, Currency, and Fixed Income markets get that. That’s why, when I take a step back and look at the context of these no-volume rallies like we had yesterday, I get more concerned, not less.


Looking at the internals of the SP500 yesterday, here are the key points:

  1. PRICE – both TRADE (1336) and TREND (1365) lines of resistance remained intact
  2. VOLATILITY – both TREND (18.22) and TAIL (14.26) lines of support remained intact
  3. VOLUME – yesterday’s volume was one of the worst (on up days) of the year

On that last point, I have been measuring average down day volume versus up day volume in Q2 as a proxy for both conviction and money flows. Yesterday’s volume was down a shocking -28% versus the average down day volume of the last 6 weeks.


The other obvious point about yesterday’s rally was that the nasty stuff was up the most. In other words, the worst performing Sector (Energy is down -7.4% YTD) led low-volume gainers, whereas one of the best performing Sectors (Consumer Discretionary is +10.5% YTD) led decliners.


This daily observation is very short-term, but it certainly rhymes with my basic long-term conclusion that bailouts will only structurally slow growth at an accelerating rate. Up Energy/Food price days slow real (inflation adjusted) economic growth.


Whether central planners targeting “asset price inflation” get that or not yet remains the most obvious question Romney should be asking Obama, repeatedly, during the Presidential Debate. If I were Romney, I’d label Bernanke as Obama (and Bush’s) guy. I’d also constantly pound on the point that the Europeans are now behaving like Hank Paulson and Bernanke did.


What happens when the Europeans eventually release their Paulson/Geithner “bazooka” anyway?

  1. The Euro could easily snap $1.22 and put “parity” back in play
  2. On that, the US Dollar is going to rip – say $84-85 on the US Dollar Index
  3. Commodity prices (and the equity markets priced off their top-line assumptions) will keep getting rocked

Maybe we get that at the 23rd Summit?


This folks is what Paulson/Geithner/Bush didn’t understand about free market prices in 2008, so don’t expect Geithner/Hollande/Obama to get it now. After the 2008 $800B Bazooka was deployed, that’s why Paulson yanked himself towards a garbage can for immediate-term relief.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1545-1593, $88.16-93.39, $82.23-82.91, $1.24-1.26, 6085-6259, and 1320-1336, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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TODAY’S S&P 500 SET-UP – July 12, 2012

As we look at today’s set up for the S&P 500, the range is 21 points or -0.63% downside to 1333 and 0.94% upside to 1354. 











    • Up versus the prior day’s trading of -955
  • VOLUME: on 07/11 NYSE 767.99
    • Increase versus prior day’s trading of 5.55%
  • VIX:  as of 07/11 was at 17.95
    • Decrease versus most recent day’s trading of -4.11%
    • Year-to-date decrease of -23.29%
  • SPX PUT/CALL RATIO: as of 07/11 closed at 1.10
    • Down from the day prior at 1.69 


10YR – fresh new #GrowthSlowing lows for the 10yr yield at 1.49% this morning and that’s really bad for the Financials, as the Yield Spread (10s/2s) also hits new lows at +123bps wide; not clear if Dimon’s fireside chat w/ the sell side’s finest tomorrow will change the economic gravity of the matter – the Yield Spread has never not gone back to flat in a big cycle (see 60yr chart from our deck yesterday). 

  • TED SPREAD: as of this morning 36
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.48%
    • Decrease from prior day’s trading at 1.52%
  • YIELD CURVE: as of this morning 1.23
    • Down from prior day’s trading at 1.26 

MACRO DATA POINTS (Bloomberg Estimates): 

  • 8:30am: Import Price Index M/m, June, est. -1.8% (prior -1%)
  • 8:30am: Initial Jobless Claims, July 7, est. 370k (prior 374k)
  • 9:45am: Bloomberg Consumer Comfort, July 8 (prior -37.5)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas change
  • 11am: Fed to sell $7b-$8b coupon securities in 7/15/2013 to 1/31/2014 range
  • 1pm: U.S. to sell $13b 30-yr bonds (reopening)
  • 2pm: Monthly Budget Stmt, June, est. $60b (prior $43.1b)
  • 2pm: NAHB midyear forecast
  • 3:40pm: Fed’s Williams speaks in Portland, Ore. 


    • House, Senate in session
    • Senate Energy meets to review progress on eliminating environmental hazards at abandoned National Petroleum Reserve oil wells in Alaska, 9:30am
    • House Energy panel holds hearing on proposed legislation to limit government programs backing alternative energy, 9:15am
    • House Science panel holds hearing on spurring economic growth through NASA-derived technologies, 10am
    • Dept. of Labor to announce settlement with BP regarding 2005 explosion at Texas City refinery, 11am


  • Yahoo! holds annual meeting today
  • Yahoo! expected to name Levinsohn CEO: LA Times
  • Blackstone teams up with investors for ING Asia insurance bid
  • Supervalu sinks on strategic review, dividend suspension
  • Peregrine customers’ claims priced at 25 cents on dollar
  • ECB says overnight deposits fall to lowest in 7 mos.
  • Maple, TMX Group obtain recognition orders from BCSC, ASC
  • Dentsu buys Aegis in $4.9b deal to create global media, marketing network
  • Peugeot shuts France plant, cuts extra 8,000 jobs; GM owns 7% of Peugeot
  • JPMorgan is No. 1 stock picker in buy-side survey
  • CFTC poised to adopt client-fund safeguards after MF Global
  • DirecTV, Viacom talks continue as channels stay dark 


    • Cogeco Cable (CCA CN) 6am, C$1.06
    • Cogeco (CGO CN) 6am, C$0.99
    • Corus Entertainment (CJR/B CN) 7am, C$0.49
    • Fastenal (FAST) 7am, $0.37
    • Astral Media (ACM/A CN) 7:55am, C$1.01
    • Progressive (PGR) 8:30am, $0.27
    • Commerce Bancshares (CBSH) 9am, $0.72
    • Novagold (NG CN) 9:15am, $(0.06)
    • Resources Connection (RECN) 4pm, $0.72
    • Bank of the Ozarks (OZRK) 6pm, $0.52 


  • Gold 22% Rally to Record Seen by Sprott Amid Debt: Commodities
  • Refineries Doubling Shutdowns Signals Oil Slide: Energy Markets
  • Oil Falls on Signs Faltering Economy Is Eroding Fuel Consumption
  • Cocoa Declines After Drop in European Cocoa Grind; Sugar Gains
  • Goldman Lifts Grain-Price Forecasts as Drought Withers Fields
  • Gold Retreats as Fed’s Minutes Lack Additional Stimulus Signal
  • South African Platinum Output Falls for 11th Month on Prices
  • Aid Welcomed by Drought-Stricken States as Losses Seen Worsening
  • China Crushers Buy More Local Soybeans as Cost of Imports Jumps
  • Cooking-Oil Imports by India Fall as Rupee Drop Deter Buyers
  • Palm Oil Drops for a Third Day on Concern Slowdown Curbs Demand
  • Sandfire Proves Cheapest Copper Target on First Profit: Real M&A
  • Russia’s Stavropol Region Is Seen Reaping 40% to 45% Less Grain
  • IEA Sees Global Oil Demand Growth Pickup in 2013 on Economy
  • Copper Seen Falling Amid Further Signs of Worldwide Slowdown
  • Corn Advances After USDA Cuts Outlook on U.S., World Harvests 










ITALY – Mario wasn’t kidding; it’s time to get out – the MIB Index -1.1% leads losers this morning and moves right back into crash mode (> 20% peak/trough decline YTD); Italy looks more suspect here than Spain – we went through why its size concerns us on our Q3 Macro Themes Call yesterday – email us if you missed the call and want the replay/slides.






KOSPI – continues to be one of our most stealth leading indicators for Global Growth (particularly for Industrials and Tech), and apparently the South Koreans agree w/ us – they cut rates for the 1st time in 3yrs last night – and, contrary to popular #BailoutBull beliefs, that was not good for Asian stocks; KOSPI down hard on that -2.3% (Bearish Formation).










The Hedgeye Macro Team

What's Your Edge?

“You are on your own and you must take ownership of your own destiny.”

-Hugh Hendry


No, that wasn’t the new marketing pitch from President Obama. That’s from one of Scotland’s finest – the one and only Hugh Hendry. He runs Eclectica Asset Management.


Eclectica isn’t a word that spell-checks on this word processor – that’s why you just have to love the name. This guy couldn’t give 2 deflated Canadian copper cents about what other people think about him and/or his Global Macro process.


For me, this has always meant being detached from the sell-side community. It is not a question of respect, it is just that I prefer not to engage in their perpetual dialogue of determining where the “flow” is. I cannot be reached by telephone… not one buddy, not one phone call, not one instant message. I am not seeking that kind of “edge”…” (Manager Commentary, April 2012)


Back to the Global Macro Grind


What’s our edge? Math.


Every single Global Macro thought, theme, and position we consider putting our name on is driven by what the market tells us. We don’t tell the market what to think. We aren’t that “smart.” The market tells us.


When I started in the hedge fund business in 1998, “smart” meant something that’s a lot different than what it means today. Smart is as performance does. It doesn’t mean coming up with a “value” idea, pitching it to all your favorite “smart” friends (after you bought it), getting them to buy it, and then promoting it on TV.


Modern Global Macro Risk Management (i.e. post 2007) uses computers. I hear a lot of whining about this – “it’s the machines”… I mean get real already. If it’s the machines, hire more super smart people to build better machines to front run the other machines.




Yep, I just wrote that. And I can because A) I don’t run a prop desk B) I don’t run a bank and C) I don’t run a broker-dealer. Front-running the machines is simply having a repeatable math-based decision making process that keeps you 1, 2, and hallelujah if it’s 3 steps ahead of the smartest guys/gals in the room.


In other words, understand what the other machines will act on, and act ahead of their most probable behaviors. If someone legitimately believes that the 50-day Moving Monkey is a risk management process, great. Let them – and more importantly, don’t interrupt them while they get whipped around by it.


Been there, done that.


I saw (I don’t hear, I use Twitter) more “flow” yesterday about the 50-day moving average being “intact” (it’s at 1335) than just about anything that was flowing into yesterday’s market close.


What, precisely, does that mean to people? Do they actually run other people’s money using a 1-factor simple moving average that my 4-year old son could replicate with his iPad and bang out conclusions on any ticker I give him?


That’s the biggest risk to our profession. The simple reality is that, since 2007, a lot of people have not changed what it is that they do. That’s sad and exciting. Sad because sad is as sad does; exciting because it provides for creative destruction – the guts of what we do.


What’s our edge?


Like I said, it’s math. And what I mean by that is that I am constantly re-modeling a baseline 3-factor model with dynamic price, volume, and volatility data across 3 core durations (TRADE, TREND, and TAIL).


Currently, looking at the SP500 for example, here’s what I see:

  1. Intermediate-term TREND resistance overhead (that’s bearish) at 1365
  2. Immediate-term TRADE support below last price (that’s bullish) at 1333
  3. An intermediate-term risk management range of 1

We’re Duration Agnostic. So you tell me what the duration of your risk is, and we’ll tell you what the risk of the range within your duration is. This gives us a very simplified edge that is our own. Our edge is making decisions at the highest probability points within our defined duration and range. It doesn’t mean we are always right; it means we don’t swing at outside pitches.


Our edge is by no means easy to derive. I have a team of 27 analysts constantly pumping me with quantitative inputs that I can add and/or subtract from our models. Constantly re-modeling; constantly changing – that is what I do. And I’m very humbled by the idea that I can attempt to explain our edge to you each and every day. Being held accountable to our process can only make us better.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $98.24-103.01, $82.61-83.96, $1.21-1.24, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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