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Global Slowdown Continues

As we head further into earnings season, it is becoming more and more apparent that our thesis on Growth Slowing and Earnings Slowing is correct. With companies like FedEx (FDX), Caterpillar (CAT) and Chevron (CVX) offering cautious or lower guidance, the market is looking more negative day after day. 

 

While we consider JP Morgan’s (JPM) Q3 earnings report on Friday to be the “true” kickoff of earnings season, yet another big company is offering guidance with caution. Rio Tinto (RIO) said the company would defer large capital programs due to cautious outlook on the next few quarters and a delay in Chinese stimulus spending - keep in mind China isn’t keen on seeing higher fuel and food prices anytime soon.The company is also expecting to materially reduce spending over the next few years.

 

 

Global Slowdown Continues  - Chart of the Day normal


HST 3Q12 REPORT CARD

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.

 

 

 HST 3Q12 REPORT CARD - 2

 

OVERALL

  • BETTER: HST raised FY RevPAR and EBITDA guidance.  Group bookings are improving and have given management confidence in a robust 2013.

 

GROUP BOOKINGS

  • LITTLE BETTER:  Group bookings were up 9% in 3Q while group bookings for 4Q are up 7.5% YoY.  2013 group activity is now 8% higher YoY.  Much of the improvement has involved HST's larger group's hotels.  
  • PREVIOUSLY:  "We continue to be encouraged by the positive trends in group business. Total bookings for the remainder of the year are now more than 7.5% ahead of last year's pace, and the overall rate for the third and fourth quarters has increased well over 2%, indicating revenue improvement of 10%. We're also seeing the positive booking activity extend into 2013 in both demand and rate, indicating that our group hotels are benefiting from increased business spending and should continue to perform well for the remainder of this year and next."

DISPOSITION UPDATE

  • SAME:  Still expect to sell $300-400MM of assets by the end of 2012 although some closings may slip into 2013.  HST expects to be an active seller in 2013 with the goal of improving the quality of their portfolio
  • PREVIOUSLY:  "While the sale market is difficult to predict, the guidance assumes we complete incremental sales in the $300 million to $400 million range by year-end. We do intend to be an active seller over the next two and three years. And as we are consistent with what we've described in the past, a number of these suburban assets, both in core and non-core markets and airport locations, leaving out the ones that are sort of directly attached to the airport, those are the hotels that would be high on our priority list in terms of hotels that should be sold."

UPDATE ON REDEVELOPED HOTELS

  • BETTER:  The recently renovated hotels have seen REVPAR increases of 38% in 3Q and YTD when compared to the pre-construction period in 2010.
  • PREVIOUSLY:  "It is worth noting that we are seeing great results at our three recently redeveloped hotels: the Chicago O'Hare Marriott, the Atlanta Perimeter Marriott and the Sheraton Indianapolis, where REVPAR is running better than 35% ahead of pre-renovation levels."  

PHILADELPHIA 3Q PERFORMANCE

  • SAME:  REVPAR grew 20.8% (occupancy: +11%, ADR: +3%) due to excellent growth in rooms and F&B revenues
  • PREVIOUSLY:  "We expect Philadelphia to be a top performing market in the third quarter due to strong group and transient demand, which should allow us to drive pricing."

CHICAGO 3Q PERFORMANCE

  • SAME:  REVPAR grew 3.5% (occupancy: slight improvement, ADR: +3%).  Poor city-wide and group demand led to underperformance in 3Q.  
  • PREVIOUSLY:  "We expect our Chicago hotels to underperform our portfolio in the third quarter due to lower levels of citywide and group demand when compared to the third quarter of 2011."

BOSTON 3Q PERFORMANCE

  • SAME:  REVPAR grew 15.4% (occupancy: +2%, ADR: +12%). Outperformance was driven by strong group demand, which allowed HST to benefit from rate compression for both group and transient business
  • PREVIOUSLY:  "We expect our Boston hotels to have a strong third quarter."

SAN FRANCISCO 3Q PERFORMANCE

  • SAME:  REVPAR 12.7% (occupany: +3%, ADR: +9).  Strong occupancy level allowed for better mix shift to higher-rated transient segments
  • PREVIOUSLY:  "We expect our San Francisco hotels to continue to perform very well in the third quarter as strong demand will allow us to continue to drive rate."

NEW YORK 3Q PERFORMANCE

  • WORSE:  REVPAR increased 4.6% (occupancy: +2%, ADR: +2.1%).  Results were affected by renovations at three hotels.  Driving ADR growth has been challenging.
  • PREVIOUSLY:  "REVPAR for our New York hotels increased 4.8% due to growth in ADR. Results were negatively impacted by the second and final stage of the rooms renovations at the New York Marriott Marquis and the Sheraton New York and a rooms renovation at the W Union Square....We expect our New York hotels to perform better in the third quarter."

MIAMI/FT LAUDERDALE 3Q PERFORMANCE

  • BETTER:  REVPAR improved 11% (occupancy: +2%, ADR: +9%) on the back of group and transient strength
  • PREVIOUSLY:  "Our Miami and Fort Lauderdale hotels struggled in the quarter as REVPAR declined 20 basis points....The weakness was due to less transient and group demand. We expect our Miami and Fort Lauderdale hotels to perform better in the third quarter due to better group bookings."

EUROPEAN REVPAR OUTLOOK

  • BETTER:  Excluding the Sheraton Roma under renovation, REVPAR (in constant euros) increased 4.1%. Inbound travel to the Eurozone from the U.S., UK, and Asia, and the Middle East continues to be strong and a major source of euro lodging demand.
  • PREVIOUSLY:  2H vs 1H Europe REVPAR:  "We generally would expect it to be in line with what we've seen in the first half of the year."

BRUSSELS PERFORMANCE

  • BETTER:  REVPAR was strong in 3Q
  • PREVIOUSLY:  "The one market that's underperformed year-to-date has really been Brussels. But we have a sense that that will do a little bit better in the second half of the year." 

ANCILLIARY REVENUE/ F&B FLOWTHROUGH

  • WORSE:  While F&B was good in 3Q, HST expects lower F&B revenues due to tough comps and an unfavorable calendar (e.g. election, Jewish holiday) in 4Q
  • PREVIOUSLY: 
    • We continue to see improvements in catering, meeting room rental and audio-visual revenues, as well as reductions in food and beverage cost as a percentage of revenue.  We expect the positive trends in group demand to continue which should help drive growth in banquet and audio-visual revenues and good F&B flow through.

RATE VS. OCCUPANCY CONTRIBUTION TO REVPAR

  • SAME:  In 3Q, most of the comparable REVPAR increase came from rate.  Rate increased 4.7% while occupancy increased 2.1%.  The improvements led to strong margin growth in the Q. Rate growth will be increasingly more important in 4Q.
  • PREVIOUSLY:  "Looking to the rest of 2012, we expect that comparable hotel REVPAR will be driven more by both occupancy and rate growth, but rate growth should be increasingly more important throughout the year. The additional rate growth should lead to solid rooms' flow through even with growth in wage and benefit cost.”

UNALLOCATED EXPENSE INCREASES

  • SLIGHTLY BETTER:  Increased 3.2% in 3Q.  HST expects unallocated costs to increase in line with inflation particularly for sales and marketing.
  • PREVIOUSLY:  "We expect unallocated cost to increase more than inflation,particularly for sales and marketing where higher revenues will increase cost.

UTILITY EXPENSE INCREASE

  • BETTER:  Utility costs declined 9.6% in 3Q. Expect utility costs to continue to be lower in 4Q but not as much as 3Q.  Property tax estimates remain unchanged at +6% for 2012.
  • PREVIOUSLY: “We also expect utilities to decline slightly for the full year."

CORPORATE RATE NEGOTIATIONS

  • SAME:  HST remains very confident that their managers will have success in negotiating higher special corporate rates this fall.
  • PREVIOUSLY:  "We will certainly be pushing for higher pricing next year to reflect the more competitive market conditions."

KORS: A Fashionable Setup

We’ve been a fan of Michael Kors (KORS)  for some time; the company has been able to consistently grow comps and retail/wholesale distribution. With yesterday’s pullback in the stock, we no longer consider KORS to be expensive. Our quantitative setup is in line with our fundamental view; thus we’ve added it to our Real-Time Positions. 

 

Our nine-factor fundamental model, outlined below, makes the case for KORS. With only two unfavorable setups on the cash flow side of the business, we believe KORS is a winner.

 

 

KORS: A Fashionable Setup  - KORS TTT 9Factor normal


Daily Trading Ranges

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Chinese Car Sales Flat

In terms of year-over-year performance, sales of passenger cars in China are flat at 1.32 million; aggregate 2012 year-to-date sales are only up +6.7% on a year-over-year basis. 

 

China’s automobile trade group, the Chinese Association of Automobile Manufacturers, is blaming the slowdown on the tensions with Japan. While that makes sense, if you compare car sales to Chinese GDP, you can see that there’s a correlation between sales and economic growth. Vehicle sales are now below economic growth, highlighting the weakness in the consumption economy. 

 

 

Chinese Car Sales Flat  - china cars


Golden Apple

GOLDEN APPLE

 

 

CLIENT TALKING POINTS

 

GOLDEN APPLE

For a long time, people thought you could just buy Apple (AAPL) and ride the train higher with little pullback in the stock. Things changed when people realized that the market is not Apple and Apple is not the market. The stock can drag the Nasdaq and tech down somewhat but it’s not the ultimate name in beta. Other factors drive market moves, like the US dollar. And if you remember our mantra, you know that if you get the US dollar right, you tend to get a lot of other things right.

 

 

THE TURNING POINT

If you think stocks are A-OK, yesterday’s sell off may have had you thinking twice. And there are plenty of other things to think about. Bernanke and Geithner still have their jobs, the US dollar continues to be devalued, equity volumes are lower than ever, global indices around the globe are down significantly from their 2012 highs, and regulation is being crammed down the industry’s throat. Positive catalysts are few and far between these days it seems and we’re reaching a turning point that will culminate in November’s election. After that, who knows what we’re in store for?

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                DOWN

 

U.S. Equities:   UP

 

Int'l Equities:   UP   

 

Commodities: Flat

 

Fixed Income:  DOWN

 

Int'l Currencies: Flat  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

BRINKER INTL (EAT)

Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

UNDER ARMOUR (UA)

This company’s on track to post $3Bn in revenues by ’14 – impressive given a $1.5Bn print in 2011. Perhaps more impressive is the breadth of growth drivers that will get it there – women’s, accessories, new underwear platform etc. in addition to footwear. UA is gaining share in both apparel and footwear quarter-to-date. While some may be concerned over the loss of UA’s SVP/Sourcing we’re 8% ahead of the Street in the upcoming quarter and buyers on weakness.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“Many of the 80 or so [Chinese] companies that produce wind turbines will probably have to close."bit.ly/Tf55O0” -@WindSector

 

 

QUOTE OF THE DAY

“Honesty pays, but it doesn't seem to pay enough to suit some people.” -Kin Hubbard

                       

 

STAT OF THE DAY

20% of Corporate America cooks their books according to a new study from finance professors at Duke and Emory University.

 

 

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 10, 2012


As we look at today’s set up for the S&P 500, the range is 30 points or -0.52% downside to 1434 and 1.56% upside to 1464. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 10/09 NYSE -1639
    • Decrease versus the prior day’s trading of -601
  • VOLUME: on 10/09 NYSE 612.52
    • Increase versus prior day’s trading of 31.94%
  • VIX:  as of 10/09 was at 16.37
    • Increase versus most recent day’s trading of 8.34%
    • Year-to-date decrease of -30.04%
  • SPX PUT/CALL RATIO: as of 10/09 closed at 2.35
    • Up from the day prior at 1.87

CREDIT/ECONOMIC MARKET LOOK:


TREASURIES – almost all of the time, bonds would rip w/ US stocks falling for 3 straight days – not this time; so respect the market move as it looks like oversold in stocks into JPM earnings Friday could be the tell here; not sure – need to see more data.

  • TED SPREAD: as of this morning 25.04
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.74%
    • Increase from prior day’s trading of 1.71%
  • YIELD CURVE: as of this morning 1.47
    • Up from prior day’s trading at 1.45

MACRO DATA POINTS (Bloomberg Estimates)

  • 7am: MBA Mortgage Applications (prior 16.6%)
  • 10am: JOLTS Job Openings (Aug.) est. 3735, prior 3664
  • 10am: Wholesale Inventories (Aug.) est 0.4%, prior 0.7%
  • 10:30am: EIA Weekly petroleum status report
  • 11am: U.S. Fed to sell notes
  • 11:30am: U.S. to sell $40b in 4-week bills
  • 2pm: Fed’s Beige Book
  • 2:45pm: Fed’s Kocherlakota speaks in Montana
  • 4:30pm: API Energy Inventories
  • 4:30pm: Fed’s Tarullo speaks in Philadelphia
  • 4:45pm: Fed’s Fisher speaks at Cato Conference in Washington

GOVERNMENT:

    • Commerce Dept. announces anti-dumping duties on Chinese solar-energy imports
    • G-7 finance ministers meet in Tokyo
    • Citigroup’s global head of commodities research, Edward Morse, speaks at DOE “Winter Fuels Outlook” conference. Other speakers include EIA Administrator Adam Sieminski, 8:30am
    • CFTC Chairman Gary Gensler, Futures Industry Association President Walter Lukken, SEC Senior Special Counsel Matthew Daigler discuss derivatives regulation under Dodd-Frank, 8:30am
    • Commerce Dept., National Telecommunications and Information Administration holds stakeholder meeting to develop consumer data privacy codes of conduct on mobile apps, 9:30am
    • Space Exploration Technologies Corp., led by billionaire Elon Musk, will attempt to attach its Dragon spacecraft to the International Space Station, 7:30am

WHAT TO WATCH:

  • FedEx to make public today details about goal to boost profit by $1.7b within three years, at meeting starting at 9am NY time
  • True Religion may announce plans to be sold as soon as today, private-equity firms, clothing cos. have expressed interest: WSJ
  • Toshiba will pay ~125b yen ($1.6b) to acquire Shaw Group’s 20% stake in co.’s nuclear power unit Westinghouse Electric
  • Alcoa cut forecast for global consumption of aluminum by 1 ppt on slowing Chinese demand
  • Chinese passenger-vehicle sales unexpectedly shrank for 1st time in 8 mos.
  • EADS, BAE Systems may determine fate of planned combination by 5pm in London today
  • Morgan Stanley, Mitsubishi UFJ CEOs may meet Oct. 13 in Tokyo to discuss deepening their partnerships
  • Microsoft cut fiscal 2012 bonus for CEO Steve Ballmer, citing slower-than-planned progress in online services division, failure to comply with pact with European regulators
  • Peter Muller’s PDT hedge fund said to raise more than $500m from Blackstone
  • RBS said to agree to sell two buildings in Frankfurt, Berlin to Axa Investment Managers, valued at $1b
  • Disney’s ABC network, Buena Vista Television units will ask federal appeals court to overturn $319m judgment won 2 years ago by U.K. creators of “Who Wants to Be a Millionaire”
  • Trades that caused disruptions in ~140 cos., ETFs canceled after review by firm that reported them
  • Lone Star Funds, Kennedy-Wilson Holdings said to be among remaining bidders for parts of ~EU2b of mainly Irish real estate loans Lloyds Banking is selling
  • H&R Block may drop designation as savings and loan holding co.
  • EBay, Amazon.com’s sales growth slowed in Sept.
  • BlackRock’s Laurence Fink said policy makers should plan global bank resolution system that would respond to deteriorations in capital sooner
  • Drought damage to corn, soybean fields in U.S. eroding supplies to below consumption Y/y for 1st time since 1974
  • U.S. cos. doing business in China less optimistic than 3 yrs ago, according to U.S.-China Business Council survey

EARNINGS:

    • Host Hotels & Resorts (HST) 6am, $0.21
    • Jean Coutu Group (PJC/A CN) 7am, C$0.22
    • Helen of Troy Group (HELE) 7:30am, $0.85
    • Progressive (PGR) 8:30am, $0.26
    • Ruby Tuesday (RT) 4:01pm, $0.07
    • Adtran (ADTN) After-mkt, $0.19

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Alcoa Cuts Global Aluminum Demand Forecast on China Slowdown
  • Greece Welcomes Gold Miners to Rank First in Europe: Commodities
  • Japan Easing Restrictions on U.S. Beef, Paving Way for Tyson
  • Oil Trades Near One-Week High as Mideast Risk Counters Slowdown
  • China’s Gold Imports From Hong Kong Slump as Price Deters Buyers
  • Palm Oil Stockpiles in Malaysia Surge to Record as Output Climbs
  • Soybeans Slide as Harvest Progress Eases Concern About Supply
  • Spot Gold Climbs 0.2% to $1,767.25/Oz, Erasing Earlier Decline
  • Cocoa Resumes Fall as Data May Signal Weak Demand; Coffee Rises
  • Gold Best of Biggest ETFs as Traders Seek Haven: Riskless Return
  • Romney’s Farm Policy Restates Republican Positions, Analysts Say
  • Drought Cuts U.S. Crops Below Demand First Time in 38 Years
  • China Piped Gas Imperils $100 Billion LNG Plans: Energy Markets
  • Rubber Declines on Europe Debt Crisis, Slowing China Car Sales

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


USD – don’t look now, but the most asymmetric trade in all of Global Macro is going our way; Romney mo + Euro slow + Japanese money printing pending = USD mo mo; USD now up for 3 of the last 4 wks but finally signaling immediate-term TRADE overbought here, which should but in a base of support for stocks, gold, oil, etc.

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


JAPAN – Nikkei gets crushed overnight, down another -2% (down -16.2% since #GrowthSlowing started, globally, in March), and the Chinese aren’t going to the IMF meetings because they are being hosted by Japan. FX War = On; short the Yen.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 

 

 

 

 


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