Takeaway: We think Q1 is shaping up better for the lodging sector than guidance

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




  • IN-LINE - Quarter was in-line and guidance was roughly in-line although the midpoint was a little below Q1 and 2013 consensus, respectively.  However, we think management is being conservative and our research shows stronger Q1 RevPAR.





  • SAME:  4Q REVPAR in North America came in at 5.9%, in-line with its 5-7% guidance range.
  • PREVIOUSLY: "We expect REVPAR to remain strong in North America even as we shift from a leisure-heavy quarter to one more driven by business travel. Our fourth quarter guidance reflects 5% to 7% growth in system-wide REVPAR in North America. While our group booking pace is up nearly 9%, the fourth quarter includes a U.S. Presidential Election Week and a midweek Halloween, both of which will likely temper last-minute business-related demand in the quarter."


  • SAME:  Government has been much more cautious on travel and F&B spending.  If sequestration goes through, cuts will be more severe.
  • PREVIOUSLY: "Better understood as the continued government pressure to cut cost by focusing on travel, the GSA recently announced flat government per diems for 2013. Fortunately, at many full-service hotels in the United States, business is strong enough that we will probably replace this government business with other customers paying higher rates." 


  • WORSE:  Inauguration impact on January REVPAR was less than one point of REVPAR.
  • PREVIOUSLY: "In Washington, we expect occupancy rates to increase in 2013 as the politicians and lobbyists get back to the city. We estimate that the inauguration alone should increase annual REVPAR growth in the Downtown D.C. market by 150 to 200 basis points. With this strong Downtown performance, we expect REVPAR for Greater D.C. to grow at a mid single-digit rate in 2013. You may recall that roughly 5% of our North American room distribution is in the D.C. area."


  • WORSE:  2013 Group bookings in North America are up 6% with room rates up 4%.   70% of 2013 group nights have been booked (unchanged YoY) for the MAR brand.
  • PREVIOUSLY: "Our group booking pace for the North American company-operated Marriott brand for 2013 is up over 7%, with nearly 4% improvement in room rates over a strong 2012. Meeting planners and transient guests are booking earlier, and some customers are requesting multiple-year contracts. Given this climate, we are targeting corporate negotiated rates to increase at a high single-digit rate in 2013. In short, we expect North America to be steady as she goes. North America represents about 75% of our annual fee revenue."


  • SAME: Expects flattish REVPAR in Europe in 1Q 2013 and for 2013.
  • PREVIOUSLY: "In Europe, the big 2013 story will likely continue to be the economy as many countries struggle with sovereign debt burdens, austerity programs, and modest economic growth. We will also face tough comparisons to many 2012 special events including the Olympics, the Euro Cup Championship, and a record-breaking 2012 fair schedule in Germany. Given all this, we are expecting flattish constant dollar REVPAR performance in our European hotels in 2013."


  • SAME:  Expects 1Q REVPAR to increase at a mid-single digit growth, which will strengthen a few points as the year progresses.  New supply will continue to pressure REVPAR growth.
  • PREVIOUSLY: "In Asia, in addition to more moderate GDP growth, 2013 REVPAR should reflect significant supply growth in a few markets and slower inbound traffic from Europe. Overall... we expect REVPAR in the Asia Pacific region will increase at a mid to high single-digit rate on a constant dollar basis in 2013."


  • BETTER: Expects 1Q REVPAR to increase at a mid-single-digit rate, improving to high single-digit rate for FY 2013
  • PREVIOUSLY: "In 2013, the Caribbean and Latin American market should benefit from economic growth throughout the region, stronger leisure business in the Caribbean, and a newly renovated hotel for us in São Paulo. Here, we are targeting constant dollar REVPAR growth in the region will increase at a mid single-digit rate."


  • BETTER:  Worldwide incentive fees were up 22%.  North America incentive fees rose 32% largely due to strong results from Boston and New York.  Full-service fees are particularly robust.  
  • PREVIOUSLY: "When you look at fourth quarter, I suspect we'll see incentive fee growth at lower rates than we've experienced in Q3, and that's fundamentally can be driven by that 3%-ish REVPAR expectation for international hotels in Q4."


  • SLIGHTLY BETTER:  MAR repurchased 31.2 million shares of the company's common stock for $1.2 billion plus dividends 
  • PREVIOUSLY: "We expect to return roughly $1.1 billion in share repurchases and dividends in 2012."

Reviewing Nassim Taleb's "Antifragile"

Takeaway: Buy the book. A must read as we continue to narrow the gap between Chaos Theory and Behavioral Finance.

I’ve had many of you ask me for my thoughts on Nassim Taleb’s latest risk management book, Antifragile. So, in the spirit of the main criticism I’d give the book (it’s repetitive), here are some brief notes (< 1000 words = Top 50 highlights):


Summary Thoughts


  1. He doesn’t like academic/unaccountable government policy. Neither do I.
  2. He likes the recent work of Dan Kahnemann (Thinking, Fast and Slow). So do I.
  3. He’s transitioning from market practitioner to philosopher. I wouldn’t do that.


Content Highlights


  1. “I’d rather be dumb and antifragile than extremely smart and fragile” (pg 4) Wall St “smart” is changing
  2. “anything that has more upside than downside from random events is antifragile; the reverse is fragile (pg 5)
  3. “This is the tragedy of modernity… those trying to help are often hurting us the most (pg 5) #agreed
  4. I.A.N.D (International Association of Name Droppers)” (pg 6) #funny
  5. “academics with too much power and no real downside and/or accountability” (pg 6) #yep
  6. “Less is more and usually more effective”, cites Steve Jobs  (pg 11); good advice, #practice it
  7. “only practitioners (or people who do things) tend to spontaneously get to the point” (pg 13)
  8. “Table 1: The Central Triad (3 Types of Exposures” (pgs 24-27) very #thoughtful/concise on Behavioral Econ
  9. “We are all… similarly handicapped, unable to recognize the same idea…” (pg 39) good pt on #context #bias
  10. “Abundance is harder for us to handle than scarcity” (pg 42) 
  11. Equilibrium, Not Again” (pg 60) solid complexity theory (Stuart Kaufman) reference vs #Keynesians
  12. “Leopards… are not instructed by personal trainers on the “proper form” to lift a deer up a tree” (pg 73) #true
  13. “you learn from the errors of others…” (pg 73),  #important lessons, especially on Wall St
  14. National Entrepreneur Day” (pg 79) #Obama, please read
  15. “what is made to fly will not do well on the ground… volatility comes from volare, “to fly” in Latin” (pg 81)
  16. “Nature loves small errors… humans don’t.” (pg 85) #evolve
  17. “those experiencing a brand of variations called chaos can be stabilized by adding randomness to them” (pg 103)
  18. “For a theory is a very dangerous thing to have… Theories are superfragile.” (pg 116) #awesome quotes
  19. “Men feel good less intensely than bad.” (pg 155) good quote by Livy in the context of #Seneca’s thoughts
  20. Seneca’s Barbell” (pg 161) #important pg to read related to your #Cash position and #Drawdown risk
  21. “An agent does not move except out of intention for an end.” (pg 169) #quote from St Thomas Aquinas
  22. Convex Tinkering” (pg 182) makes an #excellent risk mgt pt on asymmetry with a picture
  23. “Life is long Gamma” (pg 184) would love to hear the anti-free market #answer to that
  24. “Risk taking ain’t gambling, and optionality ain’t lottery tickets” (pg 185) this ain’t Kansas, and I ain’t Toto
  25. “Few want to jeopardize their jobs and reputation for the sake of change” (pg 192) #truth
  26. “Evolution does not rely on narratives, humans do” (pg 207) #money quote
  27. Table 4: “The difference between teleological and optionality” (pg 214) good thinkers framework
  28. Chapter 15 = “History Written by the Losers” #rant
  29. “The difference between humans and animals lies in the ability to collaborate” (pg 233), bingo #collaboration
  30. “Nokia … began as a paper mill” (pg 235), #re-learn, find a way to win 
  31. “Trial and error is freedom.” (pg 246) #RiskMgt101
  32. “You are taking the joy of ignorance out of out of the things we don’t understand” (pg 253) Fat Tony to Socrates
  33. “What is not intelligible to me is not necessarily unintelligent” (pg 256) #Nietzsche
  34. “It would be like prostitutes listening to technical commentary by nuns” (pg 264) Bernanke, comments?
  35. “Smile! A better way to understand convexity and concavity” (pg 272) #pics summarize hundreds of pages
  36. “Squeezes are exacerbated by size” (pg 279) think #HedgeFundBubble, Short Interest, etc.
  37. “If you have favorable asymmetries, or positive convexity… in the long run you will do reasonably well” (pg 300)
  38. “Innovation is saying no to 1,000 things.” (pg 305) quotes Steve #Jobs again
  39. “we are moving into the far more uneven distribution of 99/1 across many things that used to be 80/20” (pg 306)
  40. “absence of literary culture is actually a marker of future blindness” (pg 314) on some #techies vs the classics 
  41. Medicine, Convexity, and Opacity” (pg 337), you can skip this chapter unless you like to rip on doctors
  42. “mention of the fragilista journalists Friedman or Krugman can lead to explosive bouts of anger” (pg 362) #lol
  43. Chapter 23 = “Skin In The Game” (pg 375) 1st three pages and Table 7 of this chapter #excellent
  44. “a person is only as respectable … as the downside he is willing to face for the sake of others” (pg 376) #skin
  45. “you can’t feel insulted by a dog” (pg 380) #woof
  46. “in traditional societies even those who fail have a higher status than those who are not exposed” (pg 383)
  47. “Isn’t this unethical?” (pg 413) crushes Princeton’s Alan #Blinder for his conflicts of interest as an academic
  48. “Everything gains or losses from volatility. Fragility is what loses from volatility and uncertainty” (pg 421) #conclusion
  49. “Prometheus is long disorder; Epimetheus is short disorder” (pg 422) #conclusion
  50. “living things are long volatility. The best way to verify that you are alive is by checking if you like variations” (pg 423)


Buy the book. A must read as we continue to narrow the gap between Chaos Theory and Behavioral Finance.



Keith R. McCullough
Chief Executive Officer

Against The Tide

Client Talking Points

If You Fight It...

If you fight the market, you’ll get crushed. If you use common sense and more practical methods to move with the market, then you might stand a chance. We have two things happening right now: bullish and bearish formations. For instance: the US stock market is in bullish formation and is set to continue heading higher; that doesn’t mean we don’t ever have a down day, mind you. Gold, however, is in bearish formation and continues to get crushed. Anyone who bought the metal at $1750/oz has to be hurting. And while the S&P 500 is signaling overbought on the TRADE duration at 1533, that doesn’t mean were’ dropping back down to 1400. It means we’re due for a bit of a correction and today, we may very well get it.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


“Housing Starts missing is bullish for pricing” -@KeithMcCullough


“It is difficult to get a man to understand something when his job depends on not understanding it.” -Upton Sinclair 



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Conflicting headlines on ISS’s recommendation regarding their Proxy recommendation made us scratch our heads.  



IGT’s press release headline reads: “PROXY ADVISORY FIRM ISS RECOMMENDS THAT IGT SHAREHOLDERS REJECT TWO OUT OF THREE OF THE ADER / MATHEWSON GROUP'S NOMINEES, INCLUDING CHARLES MATHEWSON” and states "Institutional Shareholder Services (ISS) recommends that IGT shareholders  vote to elect seven of IGT's eight director nominees.” 


Ader Group’s press release headline reads:  “Group announces that ISS recommends International Game Technology holders vote gold proxy card.”


We got our hands on the report and IGT’s press release is definitely misleading, if not entirely inaccurate.  The ISS reports recommends that shareholders “DO NOT VOTE” on the management ballot which seeks to re-elect all 8 nominees.  The report recommends that shareholders “VOTE” for Dan Silvers and 5 of the existing IGT Board members, including Janice Chaffin, Greg Creed, Patti S. Hart, Robert J. Miller and Philip Satre.  ISS explicitly withheld its vote for Raymond J. Brooks and Charles N. Mathewson.  


The report also outlines the dissident case for discontent and their plan if elected to the Board along with IGT’s response.  The report then goes on to analyze the merit of the dissident case, asking the question if the ADER has made a compelling case for change and concludes that YES they have.


In the company’s continuing difficulties in redressing the weakness of its core business segments, the uncertainty about the potential of the online diversification efforts, and the sustained shareholder doubt reflected in IGT’s persistent stock underperformance, the dissidents have demonstrated a compelling case for a greater shareholder perspective on the board.”

  • Stock performance:  IGT has underperformed their peer benchmarks over a 1, 3, and 5 year period ended January 7, 2013 (the date where the dissidents filed their intentions to get on IGT’s Board).  ISS also found it troubling that IGT had not shared in the peer group's recovery over the past year where the comp set increased 18% vs. the S&P’s 17% while IGT declined 12% over the same period.   IGT has underperformed all of its peers with the exception of SHFL in 2012.
  • Core operations:  Expressed concerns surrounding the decline in IGT’s gaming operations business
  • Interactive opportunity:  Double Down’s results have been promising so far, but it's too early to tell whether IGT’s efforts to diversify through the interactive channel will “pan-out”.  ISS also states that wisdom of IGT’s online strategy will hinge on their ability to maintain healthy margins in this business while the online industry evolves.
  • Governance:  ISS concludes that IGT implemented a lot of improvements surrounding pay for performance in 2012 after dealing with widespread investor discontent, but wonders why it took them so long in the first place.

The ISS report then goes on to opine which Board nominees are likely to effect change.

  • Support for Dan Silvers:  ISS supports Dan Silvers given his representation of the dissident shareholder group, his experience as an analyst and investor in the gaming industry and his financial background.
  • Withholding support for Brooks:  Brook’s background is primarily in restructuring and IGT doesn’t need radical change so his background isn’t the best fit
  • Witholding support for Mathewson:  IGT opposes Mathewson since he is viewed as the most controversial candidate from IGT’s standpoint

REPLAY: "A Counterpoint To Herbalife as a Pyramid Scheme"

CLICK HERE to access the replay of our 2/14 call: “A Counterpoint To Herbalife as a Pyramid Scheme", featuring Professor Anne Coughlan.



  • Historical context and understanding of multi-level marketing (MLM) and how direct selling looks different than traditional retail
  • Areas in which Ackman and others misrepresent or misunderstand the MLM model
  • Assessment of HLF moving forward




Professor Coughlan is the John L. & Helen Kellogg Professor at the Kellogg School of Management. She joined the faculty in 1985. Coughlan's areas of expertise are distribution channels, direct marketing, international marketing, sales force management and compensation, and pricing. She is the lead author of Marketing Channels (a textbook originally published in 1996 and now in its seventh edition from Prentice Hall). She teaches classes on distribution channel strategies at the MBA level, and quantitative models in marketing at the doctoral level.  


Coughlan was invited by Herbalife to explain multilevel marketing plans at the company's January 10, 2013 Analysts Day. In July 2012 she published a paper titled "Assessing an MLM Business: Herbalife as a Legitimate MLM".


Coughlan was the recipient of the school's Executive Master's Program Teacher of the Year Award for the best elective course in 1996 and again in 2003, as well as receiving the Sidney J. Levy Teaching Award in 2000-01.  She received her Ph.D. in Economics at Stanford University. Prior to her appointment at Kellogg, she was a professor at the business school of the University of Rochester.




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

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