Street Showdown: UBS, Nasdaq and Facebook


Hedgeye Director of Research Daryl Jones appeared on CNBC’s Closing Bell this afternoon along with Sadis & Goldberg Partner Ron Gefner to discuss the problems associated with the Facebook (FB) IPO.


Nasdaq’s systems had problems throughout the morning of the IPO and when trading in Facebook finally began, the exchange encountered all sorts of errors. As a result, multiple trading firms such as UBS, Knight and Citadel have brought forth lawsuits as a result of losses stemming from the IPO. UBS alone lost $355 million and is now seeking to recoup the entire amount from Nasdaq.


As Jones noted, Nasdaq has only put aside $62 million in a legal fund related to the botched Facebook IPO. The exchange must find out who is owed money and specifically, how much cash is owed to each firm.


“The stock should have been halted,” said Jones. Nasdaq knew of the issues associated with their IPO system and should have pushed the Facebook debut back a day in order to make sure everything was working correctly. “UBS had to keep putting orders in trying to get confirmation for their clients…it’s their job,” added Jones.

Face Off: The Market’s Battle Against Oil

As the inflation trade prepares to make a big move this week courtesy of the Federal Open Market Committee (FOMC) meeting, the energy sector is at the center of everyone’s attention. The Oil Services Sector Index (OSX) has outperformed the broader market (the S&P 500) more than 8% over the last 30 days. The high beta nature of the sector can be attributed to the performance, but there are three underlying themes that highlight why this is happening:


1. Better-than-expected earnings reports from BHI, HAL, SLB, NOV, CAM and others.  It is worth noting that the “beats” came off very low expectations and numbers that had been significantly revised lower over the prior six months. This is a very important point to keep in mind.

2. Inflation trade – Brent crude is up 8.3% MTD. This is subject to change if the US dollar roars back into action and heads higher; oil in turn will fall significantly should this occur considering we have an abundance of crude currently available.

3. Mean reversion move.  The OSX still trails the S&P500 by 27% over the last 12 months even with the recent gains.


Face Off: The Market’s Battle Against Oil - OFS SPXchart



As the chart above shows, the OSX tends to fluctuate between +15% and -15% versus the S&P 500 with a tendency to auto-correlate.  Hedgeye Energy Analyst Kevin Kaiser expects some profit taking to occur over the next three weeks (our TRADE duration), but the FOMC decision this week and performance of the dollar will weigh heavily on the OSX performance going forward. After all, if oil continues to climb higher, OFS names like the ones listed above will be able to put up better numbers in the third quarter.

INDUSTRIALS: Planes Feeling the Pains

Airlines aren’t exactly the most profitable industry as it is known. Many aren’t able to turn a profit after expenses save for a few select names like Southwest (LUV) and AirTran. Our Managing Director of Industrials Jay Van Sciver recently took an in-depth look at the industry and highlighted three main underlying issues:


  1. Airlines get screwed by competitors that are emerging from bankruptcy and, as a result, have lower costs.
  2. Some investors are mistaking the benefits of a weak competitor in AMR and “optimistic accounting” for industry improvement // this one should definitely be changed because I don’t think airlines have been squeezed by inflation
  3. Consolidation is unlikely to meaningfully improve performance for legacy carriers.


INDUSTRIALS: Planes Feeling the Pains - AIRLINES slide2


Regarding bankruptcies, the name in the headlines is American Airlines (AMR). It was the last legacy airline to go into bankruptcy and thus, had the opportunity to eliminate numerous expensive and restrictive collective bargaining agreements and other sources of higher costs relative to competitors. Companies like Delta and United/Continental will have a tough time ahead competing with American going forward. Van Sciver outlines some of the cost reductions AMR may effect in bankruptcy below: //benefits will piss people off since they are firing people and screwing the industry


Key Collective Bargaining Agreements Inclusions for AMR

  • Restrictions on domestic codesharing: This is a substantial disadvantage since it curtails the breadth of route offerings and the value of loyalty systems
  • Limitation on operating more than 47 regional jets with >70 seats, force AMR to use less efficient/less flexible 37/44/50 seat regional jets.  These jets make up just ~8% of AMRs fleet vs. 32% for US Airways and 36% for Delta.
  • Limitations on the performance maintenance work on weekends and maintenance outsourcing
  • Restrictions on the sale of the first class seat next to the relief pilot rest seat on long haul flights
  • Requirement for flight attendant rest area on 777s in the main cabin
  • Other legacy carriers are not winning, they are just beating AMR


All of that was in addition to the highest labor costs in the industry by far.


Writes Van Sciver:

AMR was the highest cost large competitor prior to its bankruptcy, leaving it unable to compete effectively on price.  Now that AMR’s costs are coming down through bankruptcy, it will become more competitive.  Historically, that has pressured industry margins and driven airline equity underperformance. “


In the short run, changes in fuel prices can impact profitability.  In the long run, all competitors are price takers for fuel and other commodity inputs.  The advantage of lower fuel prices tend to be competed away.  Sustained increases in fuel prices can competitively favor airlines with younger, more efficient fleets.  Legacy carriers like UAL, LCC and DAL have older fleets than low cost carriers like Southwest and JetBlue (JBLU).


Lastly, consolidation may at first seem like a viable option for some airlines. Look at what United and Continental did and follow their lead, right? In this case, it’s not the best idea. Canada’s airline industry has tried playing the consolidation game before and it did not benefit customers or airlines.  Worse, United Continental appears to have higher costs than when the two airlines operated independently and the attempted integration has been enormously disruptive.  The failure of the United Continental integration over the past two years should give the AMR creditors committee pause in considering a tie-up with US Airways.



INDUSTRIALS: Planes Feeling the Pains - AIRLINES slide3



In our view, consolidation will not matter for US legacy carriers because they are high cost.  In an industry with low barriers to entry, growing low cost competition and price based competition, a high cost position is a losing position.  We would avoid the equity of LCC, DAL and UAL.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%

Big Trouble In Little China







Tuesday’s Rumor of the Day is brought to you in part by China. We have said again and again that China cannot afford another round of rate cuts right now. Food and fuel prices are already too high and the country just can’t send ‘em any higher. Well despite common sense, word on the Street is that President Hu will increase fiscal and monetary support to the economy in the second half of 2012.


This comes from Xinhua, the official press agency of the People’s Republic of China. We’d still take it with a grain of cautionary salt.



The Bailout Bulls are back in action begging for more QE. We remain on the sidelines to see what Fed Chairman Ben Bernanke will do exactly, but should the bulls get their wish, gold will rip to the upside. Currently, we have $1606 as our TRADE line of support, which was formerly our line of resistance. This thing could run all the way up to $1679, so keep an eye out and be careful out there. People have a tendency to gravitate toward bright and shiny objects.



As the Olympics continue to sneer in the face of viewers, retailers aren’t faring much better. Sales and growth that were expected from London hosting the games this year are tepid and just aren’t meeting retailers’ expectations. Throw in the time delays associated with the various networks showing the Olympics and you’ve got a mess on your hands of epic proportions. It’ll take a hell of a climax and break through from an underdog athlete or something of the like to revitalize both sales and viewership.




Cash:  Down              U.S. Equities: Flat


Int'l Equities: Flat     Commodities: Flat


Fixed Income: Up         Int'l Currencies: Flat





This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.




TAIL: LONG            



The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.







We continue to expect outpatient utilization to pick up in 2H12 alongside stabilization in acuity with ortho and cardiac/ICD volumes supporting both pricing and inpatient admissions growth. Births should serve as a tailwind into year-end, recent and prospective acquisitions offer some upside to 2012/13 numbers and the in place repo offers some earnings flexibility. With European and Asian growth slowing, we like targeted domestic revenue exposure as well.








Tweet of the Day: "Bernstein u/g $FB to hold, lowers TP to $23. "Display advertising worth $19/share, $4/share to upside from social advertising & new biz"” -@BergenCapital


Quote of the Day: “The end of the human race will be that it will eventually die of civilization.” –Ralph Waldo Emerson


Stat of the Day: The EFSF sold 1.48 billion euros of three-year bonds at an average yield of 0.54%. The cover ratio--a gauge of demand--was 3.7.



In preparation for HYATT's 2Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary




  • "In North America, full service hotels where group business represents about 45% or 50% of our room revenue, our group pace for 2012 is currently up in the mid single-digit range with one-third of that increase due to increase in rate."
  • "Industry supply growth in North America is in and around the 1% level, which is a real plus for us as we move forward and given our owned asset base."
  • "We expect to open more than 20 hotels this year, including our first select service hotels outside of the US."
  • "The former LodgeWorks Hotels are doing very well, on track to exceed our original forecast and showing strong RevPAR and market share performance."
    • "LodgeWorks, we expected that we would generate roughly $40 million of EBITDA this year; we're on track to do that."
  • "From a hospitality perspective, upper tier hotels in Mexico City continue to perform well. The market RevPAR progression expected this year is about 10% and our hotel [Hyatt Regency Mexico City] is up over 20% RevPAR was year-over-year through April."
    • "With respect to Mexico City, we expect this year to earn somewhere between $8 million and $10 million in EBITDA from the property."
    • "We expect to improve operations in this hotel both from our branding of it, but also we're committing to spend about $40 million to complete a rooms renovation that is largely completed, but we're also adding meeting space and doing some repositioning of the food and beverage operations in the hotel. That will be spent over the next few years. So we expect the expansion of meeting space to allow us to shift some mix into group business and with a more proactive and integrated revenue management process, we expect to be able to significantly improve operations. So our outlook for earnings for this hotel is more than $25 million of annualized EBITDA upon stabilization."
    • "Most importantly, it's really consistent with our strategy of how we intend to use our balance sheet, which is to
      really secure opportunities in gateway cities, and eventually this hotel will – we will look to recycle it, and sell it,
      but retain the long-term management contract. But we really believe the repositioning of the hotel, the branding
      of it and some other work that we are going to do will have a positive impact."
  • "We have signed contracts for more than 170 hotels representing over 38,000 rooms. On a hotel basis it's about 37% of our hotel base. On a rooms basis it's about 30% of our room base. Over a third of those properties are under construction and about 80% of the contracts for these hotels and the pipeline require little or no capital from us. About 70% of them are outside of North America and about 50% of the total are in China and in India."
  • "We expect the increase in second quarter adjusted SG&A to be similar to the increase we saw in the first quarter, excluding the special items. For the full-year, we expect total adjusted SG&A to increase in the low teen's percentage range versus 2011."
    • "I would say that over time we expect by virtue of increasing fee base for the increase in SG&A as a proportion of the revenue base to actually flatten out over time, because the base of openings will increase our revenue base. So it's really difficult to peg it to a percentage of revenue."
  • [Park Hyatt New York] "It's under construction right now. It is on 57th Street opposite Carnegie Hall. That hotel, we have a fixed price purchase contract for that property. We're anticipating returns – cash-on-cash returns in the high single digit percentage range unlevered."
  • "HYATT House is a brand that we just re-launched; many of the LodgeWorks hotels that we acquired have been converted to HYATT House. So we have a lot of momentum on that side. Same thing with Hyatt Place; we have a lot of conversion activity, more urban penetration of Hyatt Place. So that's helping those brands, and then frankly, on the full-service side, given some of the mix issues I talked about, both the concentration of group business and Hyatt Regency being a big part of our full-service representation in North America, as group business continues to pick up, you should see increased market share growth there."
  • "Hotels in North America tend to be higher base fees relatively speaking, lower incentive fee contributions with higher hurdles; internationally, generally slightly lower in base fees, relatively speaking, with lower hurdles on the incentive fees and higher incentive fee potential. So I would say, roughly speaking, those generally have not changed even despite the fact that there's more competition in the space. The margins tend to still be quite good and it's a good business for us to be in."
  • [Renovation cycle] "We're at the very tail end of that cycle with regards to those large-scale renovations. We have one project, the Grand Hyatt in San Francisco, where we're finishing up the meeting space and some of the food and beverage space in the hotel and the lobby."



  • [Hyatt Regency Mexico City] "The hotel currently has roughly a 15% group mix, and we expect that to expand over time, both because of our revenue management, and our group base of business, but also because we're doing some reprogramming within the hotel."
    • It's clearly below peak [cycle]. But the comparability of that to the operation of the hotel under our management is really difficult to establish, especially in view of the fact that we do expect to change the mix of business in the hotel. We clearly expect that there will be a lift from the branding as well as the renovation, which we expect to execute over the next two-and a- half to three years."
  • "We completed the acquisition of a site in Rio and we continue to refine the design plans and the construction estimates for the project. So, at this point it's predevelopment costs that we are incurring to move the project along, which we will continue to do. We are looking forward in time to the Olympics in 2016, and ensuring that we put ourselves on a path to have the hotel open and ready for that prior to that. And, we will over time engage with potential partners and look to establish a partnership or JV of some kind in taking that project forward."
  • "In terms of the sectors, as I mentioned, is really consulting, technology and IT being strong. In terms of least strong, less strong, is really the pharma and the financial sector."
  • "I would say as I think about the bookings, for 2013 and 2014 continue to grow. 2013, I think we probably have about 45% of the business on our books. And 2014, we probably have 30% of the business on our books. And, rates are picking up, I mean, rates are up 2%, when you compare this for the bookings this time last year. So I think overall trends are looking decent."
  • [Andaz] "We have about half a dozen in the pipeline at this point, mostly outside of the U.S. and in some really attractive and important cities, both for the Andaz customer base but also for Hyatt overall. We are less than five years into the rollout of the brand post launch. I think the traction has been very good.  There's been a positive impact to the rest of the portfolio, as Gold Passport members are discovering Andaz. And so, it remains a significant brand in the dialog with developers that we are already doing business with, in China and India, and in other markets."
  • "I think New York has been good. I think the market's seeing mid-to-high single digit increases for us. We've got a newer product, whether it's the Andaz which are new or the recently renovated Grand Hyatt Hotel. So, we're seeing increases higher than that on our overall market basis."
  • "I wouldn't say that there's a fundamental shift at this point in terms of actual transaction volume increasing. We'll see how this evolves over the course of the year, the debt markets are not backing up for sure. But neither are they really expanding significantly or at a fast pace. We have seen some improvement in securing financing for some specific projects, but those projects have tended to be in great locations in key cities with great sponsorship. And I think that the – with those factors, financing seems to be more accessible now than it has been in the past.
    But again, I don't consider that a sea shift."
  • [Park Hyatt opening] "It looks like they are on track to complete late next year or early 2014 and we will establish an opening date a little later."
  • "The contracts that we have in some of the major cities, Chicago, San Francisco, Los Angeles, and Waikiki for example, expired in late 2009 and in one case early 2010. We've been in negotiations and dialog with the local unions in those cities since then. We have not been able to bring those negotiations to closure. There was a recent round of negotiations in both New York and in Washington. And those have progressed relatively more quickly. And the terms of the arrangements there are being finalized at this point. we have about 25% or 30% of our workforce in North America is unionized. So we remain highly focused on this."

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