The Romney Rally: S&P 500 Levels, Refreshed



I leaned longer again on the open, covering CAT and buying some of our favorite long ideas. The signal is the signal. I think I’ve been as flexible adhering to leaning long or short in the last 3 weeks as I have all year.


Across risk management durations, here are the lines that matter to me most:


1.       Immediate-term TRADE resistance = 1463

2.       Immediate-term TRADE support = 1448

3.       Intermediate-term TREND support = 1419


In other words, what was resistance yesterday (1448) is now support. That changed, so I did. And there are no rules against selling some at 1463 ahead of tomorrow’s employment report either. That’s the market we are in. Romney just changed the probabilities of Obama winning too.


#EarningsSlowing is bearish. Potential for political change (was with Obama in 2009 too) is bullish.


Keep managing the risk of this 1419-1474 (Bernanke Top) range.


Keith McCullough



The Romney Rally: S&P 500 Levels, Refreshed - kmchart1


Takeaway: Despite the beat, lodging demand is softening.

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.






  • WORSE:  MAR’s outlook, while still bullish,  is "modestly" weaker, particularly on North America, relative to a few months ago. 





  • BETTER:  G&A came in $23MM below guidance.  There was a ~$4-5MM benefit from better cost controls, $5MM net benefit from a litigation settlement less higher legal expenses, and about a $12-15MM benefit from lower than anticipated workout costs.
  • PREVIOUSLY: “We expect general and administrative expenses will total roughly $155 million in the third quarter, largely related to normal inflation and costs associated with some property workout.”


  • LITTLE WORSE:  Incentive had their best Q of 2012 in 3Q, up 24% YoY.  YTD they are up 17%. Marriott did not revise full year guidance but did say that they expect less growth in YoY results for 4Q.  This implies that results will come in a little below 20% for the full year.
  • PREVIOUSLY: “I think we still expect in full-year 2012 that our incentive fees will be growing about 20%.”


  • SLIGHTLY WORSE:  Including the acquisition of Gaylord, which will add 8,100 rooms to the system in 4Q, MAR expects to open 28,000 rooms in 2012—basically just below the low end of prior guidance.
  • PREVIOUSLY: “We've also reduced our room opening expectations a bit for 2012. In the first quarter, we noted slippage in opening dates from 2012 to 2013 for some new hotels in Asia and the Middle East. In the second quarter, the slippage continued in these markets as well as with a few projects in Mexico. We continue to see a lot of conversion opportunities around the world but they too are taking a bit longer as some projects require more extensive renovation before flagging. As a result, today we expect to open 20,000 to 25,000 rooms in 2012. Since this reduction is largely timing”


  • LITTLE BETTER:  Marriott recognized $7MM of deferred fee base revenue vs. guidance of $5MM
  • PREVIOUSLY:  “With this transaction, Marriot expects to recognize about $5 million in fee revenue for deferred base fees”


  • SAME:  No change in their leverage targets
  • PREVIOUSLY: “We will continue to manage our leverage to 3 to 3.25 times debt-to-EBITDA. So that's what we are targeting for.”





  • SAME:  Group revenue rose 8% in 3Q for comparable properties
  • PREVIOUSLY: “In North America, year-to-date the Marriott brand's special corporate revenue has been strong, up over 8%; group revenue rose 7% year-to-date and group bookings for the second half are even stronger.”


  • SAME:  While government per diems will stay flat in 2013, Marriott expects to substitute much of this business with better mix.  MAR expects DC REVPAR to grow at a mid-single digit rate in 2013.
  • PREVIOUSLY: “Here there is good news; interest in the upcoming election is starting to drive political business to the city. Group revenue bookings in DC for the Marriott brand are up 10% for the second half of 2012 and 16% for 2013. 2013 should be a good year overall in this market but we'll have to see how government demand shakes out. Next year's government per diems will be set this August and we will be watching this carefully.”


  • SLIGHTLY WORSE:  Group revenues on the books for 2013 for the Marriott brand in North America are up over 7% with rates up nearly 4%.  Marriott also said bookings in 3Q for the next twelve months were down 5% but up 10% for business two years out since they are running out of capacity.  Marriott reiterated that they are particularly bullish on North America and expect NA systemwide RevPAR of 5-7% in 2013.  Special corporate rate negotiations are still on pace for high-single digit increases. 
  • PREVIOUSLY: “Looking ahead for the second half of the year, group booking pace is up 10%, and 2013 booking pace is up 8%.  We are very bullish about pricing in North America in 2013. For group business on the books for next year, room rates are running up 4%. On the transient side, we are targeting price increases for special corporate business at a high single-digit rate on average.”





  • SAME: Middle East RevPAR was strong in 3Q on the back of easy comps and good results at their Red Sea resorts.  4Q is expected to be healthy at mid-to-high single digit increases but moderate from 3Q levels.
  • PREVIOUSLY: Occupancies at our hotels in the Middle East improved compared to last year's Arab spring results. However, travel wholesalers still aren't jumping back into the market. So, we are likely to continue to see volatility here for a while longer… Middle East ought to be performing reasonably well as the year goes along.”


  • BETTER: European RevPAR increased 3.8% in 3Q and is expected to increase in the low single-digit range in 4Q
  • PREVIOUSLY: “We would think Europe will continue to tick along around of that 3% sort of number. Q3 maybe a bit better because of the Olympics and Q4 maybe a bit worse because we don't have anything like the Olympics, which is likely to help Q4, but still kind of the same rates that we've seen.”


  • SAME:  China has been relatively stable since last quarter’s guidance
    • “Growth in China moderated in the second quarter but continued to deliver outstanding performance, with constant dollar REVPAR up 8%.”
    • “China, we've been… 10 or above year-to-date, I suspect the right set of expectations would be as high single-digit as opposed to a double-digit growth rate for the balance of the year reflecting – probably a somewhat more modest growth rate there.”

Round Won

Takeaway: Solid win for Romney last night with Big Bird the key loser. Poll sampling questions suggest this race is very tight.

Admittedly, we borrowed the title for this note from the current headline on the Drudge Report.  The title is a pretty succinct summary of last night’s debate.  In effect, Romney won, but it was only the first debate.  Nonetheless, this was a critical debate for Romney and he delivered.


The most immediate assessment of Romney’s debate performance was on Intrade, the electronic predictive market.  The contract in which people can bet on the probability that Romney will win the Presidency increased more than 10 points in the last 24 hours and is currently trading at just over 34%.  Based on our analysis this was the most significant one day move on Intrade this election cycle.  The caveat being that the odds that Obama is re-elected are still 2:1 in Obama’s favor.


Round Won - A


The most noted response on the debate was probably from Chris Mathews (not necessarily a Hedgeye fan boy) who all but blamed Obama’s performance on the fact that the President doesn’t watch enough MSNBC.  We are not sure we would agree with that assessment, but we did want to highlight one exchange that characterized much of the debate, which is the following:


“But don't forget, you put $90 billion, like 50 years' worth of breaks, into — into solar and wind, to Solyndra and Fisker and Tester and Ener1. I mean, I had a friend who said you don't just pick the winners and losers, you pick the losers, all right? So this — this is not — this is not the kind of policy you want to have if you want to get America’s energy secure.


The second topic, which is you said you get a deduction for taking a plant overseas. Look, I've been in business for 25 years. I have no idea what you're talking about. I maybe need to get a new accountant.”


To us this was the point when Romney pushed Obama very hard and Obama had a very feeble come back and looked more annoyed than anything.  The unstated message was that Obama really doesn’t know what he is doing.  The question of course is whether this characterization will stick and provide Romney a sustained bounce.


As of yet, none of the polls will have the impact of last night’s debate, but if we look across a number of electoral factors, Romney remains solidly in the hole.  First, on the national poll aggregate Obama is still up +3.1.  This is narrower than the +5.9 spread that Obama had four years ago over McCain but it is still a meaningful edge.  Second, in terms of the Electoral College math, based on state level polls, the President appears to have 269 Electoral College votes locked up.  Finally, based on our Hedgeye Election Indicator, Obama has a 62.4% probability of getting re-elected.  Net-net, the race is tight, but Obama has the pervasive advantage.


Thus, while the debate last night was a clear victory for Romney, it is not clear that one debate will be enough given Obama’s advantage on many factors.  To the extent that Obama’s strategy is to play good enough defense so as to not lose the lead, he probably accomplished that last night.  The question from here for the Obama team is whether a respectable defense is enough through the duration of the campaign.  Based on the current polls, it just might be, but the key remaining wild card is that polls are inaccurate and that this race is potentially much closer than many suggest.


We’ve touched on just this point a number of times and Karl Rove reemphasized it this morning in an op-ed for the Wall Street Journal.  Rove compared the current election to the race between Reagan and Carter in 1980 when he was the director of the Texas Victory Committee for Reagan-Bush.  Specifically, on Oct. 13th Gallup put the race nationally at Carter 44% and Reagan 40%.  Two weeks later, this gap widened to Carter 47% and Reagan 39%.  Ultimately, Reagan won by more than 10%.  The lesson being that while polls are instructive, they are far from scientific and have at times been very misleading.


In 2012 a key issue with polls appears to be sampling.  Many polls model turnout levels that compare to 2008, a record year for Democrat participation.  In reality, many measures of voter enthusiasm and voter ID suggest that the turnout between the parties could be much more comparable to 2004 than 2008.  As Dick Morris put it:


“People need to understand that the polling this year is the worst it has ever been.”


The most recent example of poll skew came from a series of Quinnipiac polls.  The most prominent was a poll they did for CBS / New York Times on Florida.  The poll showed Obama up by 9% in Florida.  Coincidentally, or not, the poll also had 9% more Democrats than Republicans represented in the poll.


We are not ready to throw out all polls. Realistically, there are a number of polls that do appear to be oversampling Democrats based more on a 2008 turnout profile.  There is a website that attempts to unskew national polls.  For your edification, we’ve included their most recent analysis in a table below.  For what it’s worth, they believe Romney is actually up +2.6.  Ironically, that may not be news the Romney camp wants right now as the Governor has upped his game considerably as the underdog.


Round Won - B



Daryl G. Jones

Director of Research



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Keith added WMS to our Real-Time Positions at $15.81.  WMS's TRADE range is $15.71-16.94 with a TREND resistance of $17.46.



WMS surprised on the upside in terms of content at G2E this year.  WMS will appeal to investors looking for a turnaround on a beaten down stock and there was certainly a buzz in the investment community out at the show.  The excitement probably means WMS works for a long trade.  However, we would caution that the appearance of good content doesn’t always translate into high revenue generating games.  Even if the content performs, it will be at least a couple of quarters before the revenue impact is meaningful.  WMS’s near-term earnings visibility is cloudy.  Nevertheless, the stock could run over the next week or two.




HedgeyeRetail: SSS = Shrinking Sales Sample

Takeaway: Notable weakness across the Department Store complex.


The biggest callout of this morning’s Retail Sales day is the simple fact that this is a legacy process and one that isn’t likely to be in practice a year from now. TGT announced that January will be its last monthly sales report just two months after SKS went dark. We’re now down to 16 companies compared to 21 this time last year. More notable is the size of the parties departing the practice (TGT, JCP, DDS, SKS, HOTT) which accounted for 34% of the SSS sample this time last year. This monthly exercise is clearly losing its relevance.


Back to the results, which were weaker compared to last month as largely expected with 9 companies coming in ahead of expectations compared to 8 misses – a notable deceleration from the favorable 15:1 August mix. Here are a few callouts worth noting:

  • What catches our eye is the distribution of results within retail. Apparel retailers came in mixed with a positive skew, Broadlines (COST/TGT) came in clean ahead of expectations, while Department/Dollar stores fell short across the board with the sole exception of SSI.
  • The off-pricers (ROST/TJX) continue to outperform and were the only companies to raise their outlook (though TJX had keep prior guidance in check due to an unexpected pension charge).
  • KSS’s bet on taking on inventory to drivetraffic clearly hit a snag in execution.
    • The fact that Q3 expectations weren’t tempered as a result sets un unrealistic bar in our view. Sept comps were the toughest of the quarter, but Oct is not much different implying a substantial acceleration in 2yr trends to hit guidance of +0%-2% - not likely.
    • Moreover, with higher inventory levels we think SG&A is the lever that can get KSS to their EPS for the quarter not gross margin upside – not dissimilar to last quarter. The trend in earnings quality of late is concerning.
    • Lastly, the fact that KSS’ top competitor is hemorrhaging over $3Bn in share and it’s comping down is just embarrassing.
    • To that end, the slight miss at Macy’s despite a more favorable setup is less than impressive while GPS is reminiscent of the kid in the corner at a holiday party stuffing chocolates in their mouth.
      • Aside from the off-pricers, GPS has arguably been the greatest benefactor of the JCP retailer stimulus which it has propped up its US Gap and Old Navy business. Our estimates suggest that GPS may have realized as much as a 3pt lift to total comp of in 1H, which would account for the majority of 1H growth. This is another quarter or two away from being fully realized.
      • Comps rolled across all concepts with only Old Navy improving on a 2yr basis (Mr. Johnson your fruit basket is in the mail). This matters with Old Navy accounting for 33% of sales, but that tailwind is decelerating.


HedgeyeRetail: SSS = Shrinking Sales Sample - SSS Chart




Takeaway: RevPAR may be moderating faster than expected

Management surprisingly bullish but we would fade that


"Pricing power continued to improve in the quarter as hotel occupancy levels approached prior peaks. Looking ahead, we expect 2013 worldwide constant dollar REVPAR to increase at a mid single-digit rate despite moderate economic growth in many markets around the world. We are particularly bullish about our prospects in North America"

- Arne M. Sorenson, president and chief executive officer of Marriott International




  • Our 3Q was terrific. EPS was 4 cents higher than mid-point expectations. 
    • Favorable residential branding fees and termination fees contributed an extra penny.  
    • G&A line was benefited by 2 cents from better cost control and net litigation settlement. Lower than expected work out costs added another 3 cents.
    • Offsetting the above benefits, higher taxes and lower gains due to an asset impairment hurt them by 2 cents
  • Transient RevPAR was up 6%, largely driven by rate.  In particular, MAR saw stronger demand from technology and professional services companies.
  • Meeting planners spent more on F&B and have more last minute upgrades
  • Saw a double-digit RevPAR growth in: Boston, Philadelphia, New Orleans, Orlando and Los Angeles. 
  • Manhattan RevPAR rose 5% despite more supply
  • DC saw a 5% increase in RevPAR largely due to strong leisure and group demand
  • RevPAR in the ME benefited from easy comps and strong results at their Red Sea results
  • Asia Pacific saw much stronger business in Hong Kong, Tokyo, Indonesia, and Thailand
  • Incentive fees in NA more than doubled.  16 properties that didn't earn fees last year contributed $2MM of fees this quarter.
  • G&A: Lower energy costs and continued efficiency improvements
  • Continued to build market share in the US as measured by rooms.  According to STR, they have 10% of open rooms in the US and 20% of the construction pipeline.
  • 4Q outlook/guidance commentary: 
    • Quarter will have more of a benefit from business travel
    • Group booking pace is up almost 9%.  However, the election and a mid-week Halloween will likely negatively impact close-in bookings.
    • Europe:  expect a low single-digit increase in RevPAR, reflect economic weakness and absence of special events
    • Caribbean:  Low single-digit RevPAR growth; seasonally slow with only modest leisure demand
    • M&E:  Group business was surprisingly good last year and the comps are more difficult. Forecasting mid-to-high single digit RevPAR growth
    • Asia Pacific:  Forecasting mid-to-high single digit RevPAR growth
    • Fee revenue guidance assume lower re-licensing fees
  • Issued bonds given the low yields.  Increase their interest expense by $4MM in 4Q.
  • 2013 outlook: 
    • Assume that there will be some solution to the fiscal cliff
    • Government announced flat per diems.  Luckily, their business is strong enough that they can replace most of this business with higher rated business.  They still expect DC RevPAR to grow mid-single digit next year.
    • Low supply and peak occupancy level positions them well to drive higher rates
    • Meeting planners and transient guests are booking earlier and in some cases for multiple years
    • Expect NA to be steady as she goes, representing 75% of their fee revenue
    • Europe represents 9% of their fee revenue:  difficult event comps, supply is increasing faster than the US in some cities where they have distributions.  Expect flattish constant dollar performance in 2013.
    • Asia:  2013 RevPAR should reflect higher supply growth in some cities and lower inbound travel from Europe. RevPAR to increase in a mid-high single digit range.  In 2012, this region accounted for 9% of fee revenue.
    • Caribbean & LA: mid-single fee growth in 2013.  Region represents 5% of their fees.
    • ME: Assuming mid-single digit constant dollar RevPAR growth in 2013.  Region represents 2% of fees.
  • Expect hotel industry operating margins won't return to peak levels until at least 2014-2015
  • Transactions for properties are increasing.  Good opportunity for conversions.  Expect conversions to account for 50% of room openings.
  • Most of the 13,000 rooms they signed this Q will open between 2014-2016 and about 50% are outside the US
  • Welcoming the Essex House back to Marriott. They owned the property until 1994. It entered the system in September and is currently under renovation.  


  • Both Salesforce One ("SFO") and Group exposure is helping the Marriott brand in NA outperform.  They are 5 quarters post roll-out of SFO.  They are seeing great results from their efforts.
    • Hedgeye has gotten a lot of negative feedback on SFO from franchisees
  • GET's challenge is getting economies of scale around reservation systems.  Those will be the easiest places to get savings.  Fee potential of those hotels is very strong.
  • Why is the outlook for 2013 below their 3 year outlook of 6-8% given a few months ago?
    • 6-8% is a relevant range for their "model" 
    • As they get closer to 2013, they are on balance a bit more cautious then they were this summer in Beijing.  Particularly on GDP growth. Thinking 2%-ish GDP growth is in their forecast now
    • What they are seeing in the US is still very encouraging related to demand and corporate business, ability to push rate
  • China openings are about stable to where they thought they would be.  About 5 hotels opened this Q. They do see some opening slippage in Thailand and India, although it's unclear that those are related to the economy or hotel specific.  None of them are cancelled projects though.
  • Essex House guarantees:  Imply that they believe that they can get back to peak levels.  40% of visitors since being added to their systems were MAR Rewards members. Their relationships with meeting planners and databases should drive significantly more business to that property. 
  • Incentive fee growth:  Talked about a 22-28% CAGR a few months ago.  No guidance on incentive fees for 2013.  Expect that 4Q incentive fee growth will be lower than what they saw in 3Q given lower international RevPAR expectations. 
  • Booking window expansion?  Bookings in Q3 in the US for 1-year forward periods were down about 5% but bookings for 2 years out were up 10%.  Nothing to get alarmed about, it means that they are getting more capacity constrained and customers are booking further out. They are about 3% behind on RevPAR from 3Q07 and most of that is rate driven.
  • Seeing a modest increase in demand from their special corporate customers but they are obviously very early in the negotiating process
  • Forward group bookings and feedback on corporate negotiated rates give them confidence on achieving 5-7% RevPAR growth.  Better mix also goes into that calculation.
  • Group is about 40% for the MAR brand, so that mix impacts overall RevPAR for the brand.  Some markets that are more transient dominated like NY are influenced by strengthening dollar and increased supply.  Demand for Transient still looks good for next year.
  • The 7% increase in group bookings is really like 7.5% so it's really close to the +8% they saw last Q
  • The management business is more Group reliant and more concentrated in urban markets.  That's why their results are a little stronger than the franchised portfolio.  
  • Lower G&A in the quarter and read through for 2013:
    • They saved a penny through cost discipline
    • Saved 3 cents on the work-out (a one-time item) - they didn't anticipate this outcome. 
    • Expect a 3% increase in G&A YoY 
    • In the 4Q11, they had a $5MM one-time item that's helping the comp.
  • They wrote down an investment in a partnership by $7MM because values dropped
  • Group nights on the books are about the same as this time last year.  About 2/3rds of business should be on the books for 2013 at the end of the year.  Suspects that they may be 1-2% above when the year ends. 
  • Special Corporate is about 12-15% of their US Marriott brand business. 
  • They are still, on balance, pleasantly surprised about the numbers coming out of Europe. It's possibly that they keep chugging along at this pace for next year, but the loss of Olympics and other special events will cost them about 2%. 
  • How do they think about leverage?  Same: 3-3.25x.  They like repurchases over dividends because it gives them the ability to adjust capital returns based on the environment. Even though expectations are modestly reduced for 2013, they don't see a major shift that would make MAR change their leverage targets.  They are "modestly" a little less bullish.
  • NYC:  They think that NYC will perform in-line with other top US markets.  On the negative side, supply growth is on the high side. They do think that they should be able to absorb the new supply coming online.
  • What to expect about hotels leaving the system?  They think that 1.5% of the system is the right kind of deletion number going forward. There are different reasons for hotels leaving the system. They are comfortable having hotels on the low end leave the system.  Last Q they took out 4 hotels in Thailand. They took out 200 rooms from a hotel in Beijing because the owner wanted to convert some of the rooms to residential. This Q, Doral Miami left the system because they were going through a bankruptcy and they received a substantial termination payment. 





  • In 3Q12, MAR completed the sale of its equity interest in the Courtyard joint venture resulting in cash proceeds of $96MM and a $41MM pre-tax gain
  • At the end 3Q, MAR's "worldwide pipeline of hotels under construction, awaiting conversion or approved for development totaled over 120,000 rooms, not including the 8,100 rooms from the acquisition of the Gaylord brand and hotel management business"
  • In 3Q, Marriott added 35 new properties (4,874 rooms included 1,400 conversions & 1,600 international rooms) and MAR signed nearly 13,000 rooms.  Thirteen properties (3,103 rooms) exited the system during the quarter." 
  • Repurchased 9.6MM shares for $35MM during the quarter. 
  • "For comparable Marriott Hotels & Resorts properties in North America, group room revenue increased 8% in 3Q" with ADR up 3%.
  • "Transient REVPAR rose 6% with strong last-minute retail demand and reduced discounting."
  • "We expect 2013...North American systemwide REVPAR to increase 5 to 7 percent in 2013"
  • "Negotiations for special corporate business are already underway and we are targeting room rates to increase at a high single-digit rate."
  • "Group revenue on the books for 2013 for the Marriott brand in North America is up over 7% with rates up nearly 4%"
  • "We expect to add 28,000 rooms in 2012, 30,000 to 35,000 rooms in 2013 and 90,000 to 105,000 for the three-year period from 2012 to 2014. Our market share of hotels continues to grow around the world.”
  • "Base management and franchise fees rose 9%... reflecting higher REVPAR at existing hotels and fees from new hotels, as well as $7MM of deferred base management fees recognized in the quarter related to the sale of the Courtyard joint venture."
  • "In the third quarter, 28% of worldwide company-managed hotels earned incentive management fees compared
    to 24% in the year-ago quarter."
  • "Owned, leased, corporate housing and other revenue, net of direct expenses, totaled $26MM....The $9 million decline reflected a $7MM decline in termination fees and a $2MM decrease in residential branding fees."
  • SG&A & other declined 8% to $132MM, reflecting a favorable litigation settlement, partially offset by higher legal expenses, netting a $5MM favorable impact. 
  • The $41MM gain on the Courtyard JV sale was partly offset by a $7MM impairment charge on investment
  • Capitalized interested totaled $7MM compared to $5MM last year.

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