Cautious on domestic REVPAR


  • REVPAR growth may have peaked in June 2012.  Based on our model, which projects sequential REVPAR growth on a seasonally-adjusted dollar basis, the 2nd half of 2012 will show a sequential slowdown in YoY REVPAR growth.
  • This model does not take into account macroeconomic issues and with the typical lodging lag, our estimates could prove aggressive
  • Obviously, REITs have the most leverage but among the hotel brand companies, the more cyclically-sensitive lodgers (more hotel ownership) like Starwood and Hyatt are more exposed than a Marriott



HedgeyeRetail Visual: JCP Shops Ready to Go?

We are the first to admit that ‘Research by Anecdotes’ is a low-ROI way to invest, and that visiting a single store is hardly representative of the other 699 locations receiving JCP’s August Denim Shop update. But let’s face facts, this launch is under a microscope. The rumblings we’ve been hearing about initial hiccups were true at least in the store we visited earlier today. There are bound to be delays with such a large-scale initiative. But if 10% of other stores experience a hiccup, our numbers (which have been well below a dollar since the Street was at $2.77 in June of last year) will likely prove too optimistic.  


Although anecdotal, the 1 JCP location we checked out this afternoon in preparation for the expected shop introduction tomorrow will not be ready to debut its Arizona stores on schedule due to wallpaper arriving late.


Here are a few things we noticed this afternoon:

  • The women’s Levi shop is already open although there we no i-pads in sight. This could simply be a store that did not receive the full blown Levi “store” however notable given the “denim bar” innovation.
  • The Arizona shops (both men’s and women’s) will not be opening on time despite having been scheduled to open with the Levi shop due to wallpaper arriving late. The images below show a view into the women’s shop which has no décor as well as the men’s shop which is just to the right of the store’s entrance; neither is complete.
  • The overall atmosphere of the store has a warehouse feel despite the areas under construction being concealed. Interestingly, with 2-4% of the location’s selling square footage remaining under construction over the next 2 years, there were concealed areas with no work complete inside. Our sense is this area is sectioned off for the September shops but we found this interesting nonetheless given the amount of the store already under construction.

HedgeyeRetail Visual: JCP Shops Ready to Go? - JCP 1

HedgeyeRetail Visual: JCP Shops Ready to Go? - JCP 1A

HedgeyeRetail Visual: JCP Shops Ready to Go? - JCP 2

HedgeyeRetail Visual: JCP Shops Ready to Go? - JCP 3

HedgeyeRetail Visual: JCP Shops Ready to Go? - JCP 4

HedgeyeRetail Visual: JCP Shops Ready to Go? - JCP 5

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.

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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.


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.


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