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ADR’S FINALLY MOVING TO WHERE THEY SHOULD

Hotel ADRs are starting to crash.  That’s bad for margins, EBITDA, and earnings.  A dollar RevPAR decline due to ADR is obviously much more detrimental to margins and EBITDA than from occupancy.  Room rate declines drop right to the bottom line.  Street estimates need to come down for HOT, MAR, HST, and most of the rest of the sector.  The 2009 “trough year” thesis should be discarded, particularly after the recent 30%+ move in lodging stocks over the past month.  We believe 2010 will fall significantly short of 2009 in terms of sector EBITDA and earnings.  In contrast, the Street is still projecting generally flat EBITDA.

In a sort of perverse way, the downward move in rates could expedite the beginning of the trading cycle in the stocks.  Historically, lodging stocks do not sustain rallies until occupancy stabilizes. At that point in the cycle it ceases to be a numbers game.  Earnings still decline as rates continue to fall.  However, the inflection point indicates that the cycle is troughing, earnings, while lower, become more predictable and investors can see the light at the end of the tunnel.  As can be seen from the charts below, ADR change exceeds occupancy change at the bottom of the cycle.  That appears to be where we are heading.

ADR’S FINALLY MOVING TO WHERE THEY SHOULD - lodging metrics monthly

 

ADR’S FINALLY MOVING TO WHERE THEY SHOULD - lodging metrics weekly

 

Before the bulls get too excited, they need to realize that we are not there yet.  In this cycle, rates may fall farther, estimates need to come down, and the stocks probably need to approach valuation support at lower levels.


Patience Pays: SP500 Levels, Refreshed...

I have been seeing/hearing a lot of “technical” notes/noise today. What that generally means is that people are in trouble, looking for a lifeline. So, be patient … and you’ll get your price.

 

In this morning’s Early Look, I issued 2 levels of immediate term TRADE support (801 and 760). Since that dotted red line in the chart below was broken to the downside (801), I have done nothing but sell. I think you’re going to get paid to wait for the 755-763 range that I have outlined in green below. That’s my new buy/cover range in what is turning into a very trade-able range bound market.

 

The US Dollar is up again today – that’s bad for the US stock market. The USD runs into immediate term resistance at 86.46, and is bumping up against the 86 line here intraday. If I see a VIX over 47, the USD pushing up at 86.50, and the SP500 at 760, you can proactively predict what I’ll be doing – buying/covering.

 

This is a Bear Market, and it should be proactively managed accordingly.

KM

Keith R. McCullough
CEO & Chief Investment Officer

Patience Pays: SP500 Levels, Refreshed...  - SPX


BAD OR WORSE?

The reaction to today’s production data release by the Ministry of Trade was an exercise in the spin process as the glass-half-full crowd took heart from a modest month-over-month sequential improvement to -9.37%  coupled with a 4.2% decline in inventory levels –the thesis being that this was signaling a potential bottom.

We are unconvinced. Although declining inventories are clearly a positive signal for the drowning exporters, the data breakout showed little relief for the beleaguered automotive and consumer electronics sector as production declines in those spaces exceeded 50% on a year-over-year basis.

Our investment thesis in Japan remains unchanged: we still see Yen devaluation as the only potential driver for any near term recovery. Our short position in EWJ was initially caught flat footed as we put on the first leg in the face of the BOJ stimulus measures, which drove the Yen lower than we had anticipated. After selling a second leg into strength last week we are now close to flat on the position.

We continue to remain negative on Japan, and view it as a debt laden hostage to external demand. We will continue to adjust are portfolio opportunistically based on tactical factors, but our long term view remains decidedly glass-half-empty.

Andrew Barber
Director

 BAD OR WORSE? - Picture 5

BAD OR WORSE? - abche


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Where There’s Smoke… Notes for the Week Ending Friday, March 27, 2009

And The Winner Is…

Last week we asked readers to guess how soon the phrase “One Quadrillion Dollars” would appear in the mainstream media.  With governments Left, Right and Center tossing trillions about like panties at a fraternity party, it was clearly only a matter of time before the sums would spin out of control.

Not forty-eight hours elapsed, but the Wall Street Journal (Wednesday 25 March) OpEd page ran “Toxic Assets Were Hidden Assets,” by Hernando de Soto, in which the following appears:  “… aggressive financiers have manufactured what the Bank for International Settlements estimates to be $1 quadrillion worth of new derivatives….”

Honestly, folks, this is just getting too easy.

$*

Don’t buy trash with their cash.
- Stu Travis – “”The  Big man’s Ten Commandments”

Speaking of money, the media is now joking “A trillion here, a trillion there…” but unlike Senator Dirksen, we are no longer talking about real money.  Money is a contract based upon the consensus value of a basket of real items.  The Gold Standard, long since abandoned, merely designated the single most useless component of the basket as a proxy for coal, oil, timber, agriculture, and the other assorted hard resources that keep the world turning.  In today’s global Consensus of Confusion even the value of value is in question.

Since in God we no longer trust, the dollar’s stability is rooted in what accountants call Goodwill, and what the world knows as the Full Faith and Credit of the US Government.  Now that the Faith needle is hovering at zero, and with Credit literally gone negative, there is neither Intrinsic nor Premium Value to the dollar.

One reaction to this situation is China’s proposal of a new global currency.  When the Euro was first introduced, columnists at home and abroad wryly called it “Esperanto money”, and even a synthetic currency must seek its Full Faith and Credit legitimacy in some palpable measure: typically, the implicit backing of those nations who accept it in payment.  IMF Special Drawing Rights, another synthetic store of value, are based on a basket of the US dollar, Pound Sterling, Euro, and Japanese Yen.  Thus, the SDR looks like a set of hedged cross-trades of established currencies, rolled into a single contract.

Underlying China’s pronouncement is a heads-up call directed at the US.  Like an artificially enhanced athlete on its last legs, the Dollar has had a few strong seasons.  But now the fans know it is faltering, and its recent record has been marked with an asterisk.  The scary thing is, there is no coming star on the horizon to take up when the champion is finally carried off the field.

The global push to immolating our children’s future is a terrifying substitute for thoughtful and responsible leadership.  Governments are rushing to outdo one another in destroying their patrimony.  Everywhere we turn we see Potlatch Economics.  It is too late to say that it will end badly.  It is already very, very bad.

The Talmud tells of the sage Honi the Circle-Maker, watching an elderly man planting a carob tree.  “Old man,” asked Honi.  “Why do you plant that sapling now?  It will take seventy years for the carob to grow and bear fruit, and you will not be alive to enjoy it.”

“When I came into this world,” replied the man, “there were carob trees and I ate from them.  Just as others, who were no longer alive, had planted carob saplings so that I might eat of their fruit, so I am planting this carob tree before I leave this world, so that there will be fruit for future generations.”

The Talmudic ideal is that we are all part of a community that extends from the creation of the world, down through history, and to the End Of Days.  When President Obama speaks of The American People, he is reminding us that, unlike nations which derive their legitimacy from similarities of language, religion, skin color, eye shape, and common hatred for the people living in the next valley, America is a nation founded upon one basic ideal: that all people are equal, and that all have inalienable rights to Life, Liberty and the Pursuit of Happiness.

A society founded upon an ideal ignores that ideal at its peril.  As long as the Wall Street professional considered himself a Customer’s Man, he knew where his duty lay, and his efforts contributed to the society – even if only to a defined social stratum.  When he became a Financial Executive, the focus shifted from servicing the needs of the investment community, to building up his own Executive status.  Executive Suite.  Executive Perks.   Executive Privilege.

Underlying the global crisis is the true crisis: the Crisis of Trust.  A society that was not able to say No, that saw Gordon Gekko as a hero, is now shocked that “They” have let this happen to “Us”.  Where, the world asks, has America’s Full Faith and Credit gone?  It is a brave new world, to say the least, where America seeks to reassert its position of global dominance by doing everything it can to destroy its own credibility.  Vocal and articulate critics of this program, like Nobelist Krugman, are still not able to come up with anything to top the very real wisdom that rises from the gutter.  Not buying “trash with their cash” was one of Stu Travis’ golden rules.  If Stu were sitting today beside Timothy Geithner – instead of gracing the heavenly pantheon, somewhere between Jesse Livermore and Carlo Ponzi – he would be blowing cigar smoke in Geithner’s face and telling him “Mark it up!  Mark it up!” as Geithner & Co. lay the groundwork for the greatest principal trade in history.

Instead of providing for future generations, Potlatch Economics has put a Bizzarro twist on the Talmudic legend: “When I came into this world I inherited debt run up by those who had come before me.  I am now running up enough debt to ensure that our children will be paying it off from now until the Coming of Messiah.”

Slouching Towards Wall Street

“SEC Pledges To Strengthen Its Oversight” reads the Financial times headline (March 27).  Chairman Mary Schapiro has “… emphasized the importance of the SEC as the only government agency ‘responsible for both protecting investors and promoting capital formation.’”  And suddenly it occurred to us – wasn’t this what went wrong at the NASD/NASDAQ, the New York Stock Exchange, Congress and Fannie Mae, and the entire brokerage and investment banking business?

When you are funded by the fees paid by the issuers who list on your exchange, when your members are the banks who package the deals, and the brokers who sell them, does it make sense that you should also self-regulate that activity?

Not a new argument.  But timely.

The designation “Self-Regulatory Organization” (SRO) implies protection of the marketplace and the consumer.  These organizations, funded by the entities they are charged with protecting us against, enjoy the privileged status of a quasi-governmental agency.  They can limit, or suspend altogether, the ability of a company to raise capital.  They can restrict, or cancel, the ability of a banking firm, or an individual, to earn a living in the industry.  They charge membership dues and registration fees, and when they need to beef up their budgets, they levy fines.  The one financial area where they have a poor track record is in preventing investor losses, and in compensating investors who were cheated.

Suffice it to say that we have conflicted regulators to oversee a conflicted business.  The conflict-driven Wall Street business model will not change any time soon.  Now, with Secretary Geithner making a push to become the master Regulator, we are truly entering the Twilight Zone of market instability.

In a hyper-hyperbole worthy of the moment, Bill Gross, founder of fixed-income management giant Pimco, said of Secretary Geithner’s public-private partnership proposal, “This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically.”

Three “wins” sounds downright desperate to us.

What assurances can Treasury offer the private investors, in addition to asking the Private side of the Partnership to put up only five percent of the cost of the transaction, while taxpayer dollars to cover the risk on the rest?  Now, in case we are worried that market regulations may trip up our exit strategy, Mr. Geithner is taking control of the regulators as well.

Let it not be overlooked that, for the private investors to get out of these investments, they will ultimately have to sell them to someone.  Large private equity firms have announced their interest in floating toxic assets mutual funds, and are looking into partnership structures to permit them to package toxic assets into what will essentially become long-term hedge funds for sophisticated investors.  

We can just imagine how difficult these transactions might become if market regulators got involved, what with issues of disclosure and valuation.

Mr. Geithner is now out to arrogate to himself the control of the whole ball of wax.  Cloaked as the power to drag bankers into the woodshed if they don’t toe the line, Geithner is making a play to control all regulation.  The notion of creating one single global regulator – personally overseen by Mr. Geithner – is right out of the pages of Kurt Vonnegut.  It used to be the job of the free markets to decide which firms succeed and fail, and under what circumstances.  The freedom to make horrid mistakes and to be clobbered as a consequence is one of the great strengths underlying American Capitalism.  It’s that “Pursuit of Happiness” thing.  Capitalism is supposed to guarantee us only the Pursuit, not the Happiness.

To be sure, there is much to criticize in the current regulatory structure.  The SEC granted the banks loosened risk parameters – giving them the ability to leverage 33 to one.  In return, the SEC demanded – and after long and hard-fought negotiations, finally won – nothing more than permission to audit the firms it is charged with regulating.  Of such capitulations are market implosions made.

The rules that get in the way of the Private Partners stand to be done away with.  Hiding behind the highly orchestrated attack on mark to market accounting is the Trojan Horse of the Private Public Investment Partnership.  How are private equity partnerships going to convince their wealthy limited partners to invest in a new hedge fund, made up of the Government’s raw sewage, when their investment – like a used jalopy – will decline precipitously in value the moment it is driven off the lot?

The ability of the promoter of a partnership to, itself, determine the value of that partnership’s portfolio is key to attracting investor dollars.  The other key is the ability to dictate the exit strategy.

Mark To Market accounting is now being challenged on the notion that it forces institutions to mark portfolios down to distressed, or forced sale prices.  We recognize that disasters are not everyday occurrences.  But risk management tools fail if they do not protect against the outlier event.  It is precisely the fire sale scenario that no one ever predicted would come, that we are facing today, and that mark To Market accounting was designed, at least in part, to address.

As has been observed – by James Chanos, for example (Wall Street Journal OpEd page, 24 March, “We Need Honest Accounting”) the assets subject to possible material revaluation under MTM represent relatively small percentages of most institutions’ holdings.  But without a transactional market in the underlying assets, it is likely that 100% of the portfolios of the PPIP would be subject to MTM revaluation.

No one seems to have made this connection.  Mr. Geithner’s push to become the Commander In Chief of market regulation could put him in a position to tell the SEC “hands off” when the PPIP packages its assets for sale, and when it starts selling off its portfolios.

Of course, many things would have to transpire before that happens.  Not the least of which, the PPIP will have to find enough private sector interest to launch successfully.  And then there’s always that Messiah thing…

A Safe Bet

ETF investors can breathe easy.

We have raised our concerns and questions about the ETF marketplace on more than one occasion.  There appear to be several areas of potential regulatory concern, including the whipsaw effect that ETF creations and redemptions often have on underlying equities; the disparity between non-contemporaneous trading in the ETF and underlying commodity markets; the possibility of ETFs being hit with speculative restrictions under proposed new legislation, and the notion that, as ETF managers come to dominate sectors of the market, they will be seen as effectively dominating and controlling those sectors.

The good news is in: Goldman Sachs is said to be putting together a bid for Barclays’ iShares unit, one of the world’s leading creators of ETFs.  ETF market participants should get a confidence boost if the Goldman purchase goes through.  Goldman Sachs’ entanglement in the US government is perhaps the greatest concentration of influence and power coming from one organization since the Masons.

For those who need clarification, fifteen US presidents, 19 Vice Presidents have been masons.  By some counts, at various periods during the early and mid-1900’s, as many as 2/3 of the members of Congress have been Masons.

In a story that no one else seems to think is related, Goldman announced its intention to repay the $10 billion in TARP money it has taken in.  One of the foundation points of the TARP was getting all the banks to play by the same rules.  But Goldman has always made its own rules, and has the ongoing success to show for it.

The Financial Times reports (24 March, “Goldman Working on iShares Bid”) that the Barclays unit could fetch as much as $6.5 billion.  It goes on to say “The possible Goldman bid would be made by the bank, not its $20bn Principal Investment private equity fund, which manages money on behalf of third-party and employee investors.”

Goldman, the bank, which holds $10 billion in TARP money, will be subject to increased transparency requirements under Secretary Geithner’s upcoming “Stress Testing” program.  Now Goldman has announced its intention to repay that money, and it has control over a $20 billion private fund.  We would not be surprised to see a self-dealt bridge loan that would take Goldman out from under the microscope, giving it free rein to roam the markets while its competitors are being tied up in Secretary Geithner’s multicolored bureaucratic tape.

Say what you will about Goldman Sachs, they certainly understand power.  With control of everything from the US Treasury, to the State of New Jersey, to the Bank of Canada, and well beyond, Goldman continues to dominate the globe.  Hank Paulson showed himself a passed master of the Art of the Deal.  Cutting through the numbing detail, he told members of Congress there would be an abrupt economic meltdown resulting in martial law if they failed to pass the TARP.  That got their attention.  And as AIG’s recently disclosed payouts to counterparties makes clear, Lloyd Blankfein is calling the shots every bit as much as Secretary Geithner.  America was founded on Masonic principles.  Let us pray it will not be destroyed on the principles of Goldman Sachs.

J’Acc-Luluse!

But in spite of all temptations to belong to other nations –

He is an Englishman!
 - W.S. Gilbert, “HMS Pinafore”

We have observed in this space before that saying one is Sorry has become an empty ritual.  Gordon Brown has moved a few spaces ahead on the game board now, having his interlocutors say it for him, while he sits squirming in the European parliament.

The Prime Minister has not had a good week.  Fresh from being publicly dressed down by MP Dan Hannan – in a YouTube clip that has circled the globe – for having spent the British nation’s patrimony in an attempt to find the bottom of a bottomless pit, Mr. Brown may have thought he could save face by sharing the stage with another head of state.

Imagine Mr. Brown’s surprise when, seated alongside him, Brazilian President Luiz Inacio Lula da Silva said “This crisis was caused by the irrational behavior of white people with blue eyes, who before the crisis appeared to know everything, and now demonstrate that they know nothing.”

This is not a Che-T-shirt-wearing college radical, not upagainstthewall.org, not Reverend Al Sharpton.  This is the head of state of a nation boasting one of the world’s largest economies.  There is tremendous anger in the world, not all of it being expressed by groups as feckless as the US Congress.  We fear that we must now add this to the list of Things Which Will End Badly.

Moshe Silver

Chief Compliance Officer



More Capacity Comes Out of Home Furnishings Industry

I’ve always thought of dot.com as both a big risk and a big opportunity for the likes of Bed, Bath and Beyond. On one hand, virtually every item at a home goods store can be purchased online with little to no risk of getting the wrong size. In contrast, an apparel company can do dot.com to a lesser degree as there is some, but not massive, variability in sizing. At the extreme is footwear, where one SKU x 3 colors x 28 different sizes = massive complexity. This gives BBBY an edge vs. these other categories.

But within the home goods category the edge is less clear. Specifically, the barriers to entry are extremely low, as just about everything at a Bed Bath can otherwise be ordered at any of hundreds of sites, and shoppers can price shop using shopping bots. The key here for BBBY is to exploit its leverage and be sharp on price points while upselling the consumer on impulse-purchase items.

This is working to a degree, as Home Décor Products Inc, an on-line retailer and operator of nine sites that sell home furnishings, ceased operations. The company is one of the largest online home products retailers ranking number 143 in the Internet Retailer Top 500 Guide and generated sales just shy of $100mm. This is only a drop in the bucket to BBBY (BBBY’s revs are $7.2bn in a $110bn category), but it is still capacity removed from the industry. On the margin, a good thing for BBBY.

More Capacity Comes Out of Home Furnishings Industry - 3 30 2009 10 00 30 AM


Chart Of The Week: Queen Mary, Pray For Us!

This past December one of the Investment Themes that I outlined for the 2nd half of 2009 was “The Queen Mary Turning”…

My macro “call” for 2009 has had 2 parts – with two different durations:

1.       Re-flation = 1H09’ (vs. Q408 prices)
2.       Increasing Cost Capital = 2H09’ (on an absolute basis)

The first part of this call has to play out in order for the second part to – that’s why I made it a two part call. With the price of oil up for the last 6 weeks, consecutively, taking it +42% over that time period and +15% for 2009 YTD, we are already getting what we were looking for.

Obviously copper prices being +25% for 2009 to-date supports the same. As does the SP500 trading +8% so far for March to-date, reflating +5% from the November 20th low, and +18% from the March 9th low.

A lot of market pundits confuse the terms reflation and inflation – they are not the same thing. Reflation can occur on a day-over-day and/or a month-over-month basis. All reflation means is a sequential acceleration in the price of whatever you are measuring. I measure inflation on a year-over-year price change basis.

Issuing massive liquidity like the US Government has, in the end, will be inflationary. In between now and whenever we see inflation pick up on year-over-year basis (I think we could see that more obviously in Q1 of 2010), we’ll see 2-year yields on US Treasuries rise. They should effectively start discounting what it is that we are going to see on the inflation front, no matter how many Treasury bonds Bernanke says he’s going to buy.

At ZERO percent, rates in the USA are as low as they can go. The only place they can go from here (provided that we don’t turn this place into a Japan) is UP. Rates on 2-year Treasuries are already moving to higher intermediate term highs. An important line in the sand for 2-year yields is the intermediate TREND line at 0.88%. Trading above that line is where I’ll start to concede that reflation is running higher/faster. Trading below that line is where we should all be worried about deflation.

Queen Mary better turn higher, or deflation will have us all resorting to the unenviable investment position of having to pray. Reflation is the only way out of this mess.


Keith R. McCullough
CEO / Chief Investment Officer

Chart Of The Week: Queen Mary, Pray For Us! - queenmary

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