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Idea Alert: Shorting FXE

Takeaway: Fundamentals and the challenges inherent in the Union of uneven states suggest our $1.31 EUR/USD resistance level will hold.

Positions in Europe: Short EUR/USD (FXE); Long German Bonds (BUNL)


Keith added FXE to our Real-Time Positions at $129.13. FXE’s TRADE range is $127 – 129 with a TAIL resistance of $131.


With regard to the trade Keith said: “Europe didn't cut rates today. But they will, again, eventually. This is the Currency War. Immediate-term TRADE overbought within a bearish long-term TAIL.”


Idea Alert: Shorting FXE - bb. eur


We’ve written a number of notes on Europe this week. Certainly at any moment the EUR/USD can be influenced by numerous factors, however below are the larger forces we think are acting on the cross:



There is great political uncertainty in Europe right now, which lends support that the EUR/USD will not cross our quantitative long term TAIL line of resistance at $1.31. The market consternation centers around:

  • If and when Spain will seek a sovereign bailout
  • The extent to which the ESM can directly recapitalize troubled banks, and
  • The terms around setting up a fiscal and banking union

On a banking union we’ve already seen push back from stronger nations like Germany to “blindly” accept this risk (ie without conditions to benefit itself and/or limit reduction in its credit rating) and coordination to set up the logistics of a fiscal union inducing a protracted drag in this decision. 


To the point on timing, ECB Executive Board member Joerg Asmussen said on Monday that the ECB will not rush through “half-baked” plans for a new pan-European supervisor.


Also, remember that German Chancellor Merkel and Bundesbank President Jens Weidmann continue to butt heads on many fiscal issues. Eurobonds is one topic that Weidmann remains vehemently against while Merkel has not ruled out their use. However, if the Eurozone is to move to a fiscal union, Eurobonds are simply a natural extension of a fiscally united union. This is one hot topic to monitor as we move through the calendar year.



Interestingly, this week, Jin Liqun, chairman of the supervisory board of the China Investment Corporation (China’s $480B sovereign wealth fund), said that CIC will not buy bonds issued by debt-ridden Eurozone countries until their fundamental problems are solved. This point is of note because some over the last 12 months have suggested there’s a reduction in “risk” across Europe given the willingness of the Chinese to step in and support the region. Further, Jin said:


“The mass demonstrations in Greece and in Spain against fiscal tightening do not bode well for attracting investment into their debt… It's not realistic to expect any Chinese investor, CIC included, to buy the bonds, which are not safe…If the euro zone would issue a Eurobond backed by all of the countries - it is more attractive to international investors. Backed by all of the countries means backed by the core members."



European Manufacturing and Services PMIs for September (released on Monday and Wednesday, respectively) have shown little to no improvement over the last 7-8 straight months, stuck below the 50 line indicating contraction (see chart below).


Idea Alert: Shorting FXE - bb. pmis


The next immediate political catalyst for the cross is the Eurogroup being held next week in Luxembourg on October 8-9, however we do not expect any definitive action to be agreed upon. Taken together, we are fully aware of the powers of Central Bankers to drive the EUR/USD. That said, the fundamental data from Europe keeps us grounded in our opinion that despite best efforts from Eurocrats to craft rescue programs, we think slowing growth, rising inflation, and the structural flaws inherent in creating a Eurozone will continue to present challenges that should prevent appreciation of the EUR/USD above our TAIL line of resistance at $1.31.  


Matthew Hedrick

Senior Analyst

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.”

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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




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



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