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Similar to almost every company we follow, HOT has done a great job cutting costs to partially offset brutal revenue declines, of which 75% are permanent, according to the company.  On the "less bad" thesis the stock, along with our universe, exploded off the March 9th lows.  Stabilization is a powerful catalyst when stocks fall 75%.  For HOT, two questions remain:  How stable is stable and are their more legs to the stabilization thesis.


I get the stabilization thesis, the reflation thesis, the "less bad" thesis.  Research Edge and my team were early on this call for consumer stocks.  After listening to the HOT call and reviewing the lodging data, I don't see a near-term recovery scenario, and even the veracity of the stabilization call can be challenged.  Consider the following comments by HOT's CEO from yesterday's call:


  • "We are seeing signs everywhere that there is some stabilization. Occupancies worldwide appear to be stabilizing.  However rate, which always lags, is still continuing to deteriorate. Transient trends feel firmer with more late-breaking business, while group business remains very soft....That said, all we are seeing is stabilization. There are no signs of any turnaround."


The comment starts out strong; "signs everywhere" but only of "some stability".  Of course, it ends with the wet blanket of no turnaround.


So what's left of the trade?  Valuation would say not much.  On our numbers, the enterprise value is trading at almost 10.5x 2010 EBITDA.  While sub 9% pricing on the bond deal could be a small catalyst, evidence of an actual recovery may be the only real catalyst.  Otherwise, 10.5x looks a touch pricey to us.


Our new 2009 numbers are $0.60 and $755 million in EPS and EBITDA, respectively, and $0.46 and $720 million for 2010.



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Volatility: KM Is Playing With The Street's (and my) Emotions

Position: Long VXX - this morning (at the market's highs), Keith added a tactical long on near-term equity volatility via the VXX ETF.  This relatively new product tracks a rolling position in the front two month CBOE VIX contracts.


Essentially, the CBOE VIX index is a measure of the volatility IMPLIED by the weighted average of the implied volatilities for a wide range of strikes in the 1st & 2nd expiration months for puts and calls options on the S&P.


The corresponding futures allow traders to take a directional view on broad market volatility at some point in the future.  The settlement price of the futures contract and the VIX become equal on the future contract's expiration date.  This leaves room for divergence between the index level and futures price (known as basis) as the futures markets reflect the anticipated level of options volatility at some point in the future while the index reflects the current price of near term options. 


Admittedly that is confusing, but what it means is the VIX represents the current level of near term volatility while the futures represent what investors think that VIX level will be at a point further out in time.


Volatility: KM Is Playing With The Street's (and my) Emotions  - ab1


During the 2008 mother-of-all volatility spikes, the traders in the futures pits held firm at levels that were much closer to historically normal levels (see above chart). The ones that held firm through what was a painful period to be short were rewarded when the VIX did come back to earth, eventually.


Volatility: KM Is Playing With The Street's (and my) Emotions  - ab2


We are using the VXX as a proxy for the VIX, which we actually track in our models. Since March, the futures have tracked the index closely, with a correlation of greater than .95 for the front month. As always, we will not use a product as a trading unless we are sure that it can provide the exposure that we are looking for (similar to our USO/OIL and FXI/CAF usage, which changes depending on the investment thesis). In this instance the VXX is getting us close enough to the index for comfort.


Feel free to hit me with any questions.


Andrew Barber

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Charting Depression: Claiming A Win For Sanity

Market prices don't lie; people do. The US stock market has been making higher highs now since we made our call that Employment was turning on 4/3/09 (if you'd like to see our work on the E (Employment)in the US Consumer "MEGA" squeeze call we've been making, please email ; our inflection point note was titled "This Is BIG: US Employment Is Turning")...


Given the amount of anger that my employment emails generated at the time, I knew that people were either too short and/or not allowed to agree with me. Now that the facts in this chart bear actuarial consideration, I guess the best thing to do now is cover shorts? That's not what I'm doing today. I'm selling on the proactively predictable news.


In the chart below you'll see that weekly jobless claims continue to make lower highs. Additionally, the 4 week moving average (the yellow line in the chart) continues to decline, and while it may indeed be a "head-fake", you can't make that call yet, and I'm thinking less and less Depressionistas are allowed to lever up their short positions this morning with this fact in hand.


Facts, at the end of the day, are stubborn little critters to deal with. Especially during Swine season.


Keith R. McCullough
Chief Executive Officer


Charting Depression: Claiming A Win For Sanity - employ1

Whiners and Winners

"To go beyond is as wrong as to fall short"
Suffice to say, there will be plenty of winners in The New Reality of proactive investing in 2009. Those who performed during the down move in February and then made the turn here in March/April have huge smiles on their faces this morning. As they should...
Wall Street loves asking "who made money"? And we're fired up to have some of this year's top performers as our clients. I'm already hearing of some fantastic performance starts to Q2 of 2009. As my Partner, Big Alberta Daryl Jones likes to say, "Crush, or be crushed!"
Yesterday was the eve of Obama's speech and month end - these were the two calendar catalysts that we warned the Depressionistas of, and no matter where you go this morning, there they are. We're about to lock in the best month for the SP500 since March of 2000. It will be very interesting to see how all of those Masters of The Quarterly Letter Writing Universe begin to revise their Q1 message to their clients.
Having spent the better part of my career on the buy side at various hedge funds, including my own, this is the way that the communication process works - realize your quarter end numbers in March - take a few weeks to make sure you have the numbers right - then write your accredited investors a revisionist letter that includes some form of an outlook that's based on new numbers (the current month) that you are staring at on your screens...
It's all rather silly really. Generally, there is nothing that's real-time about this quarterly letter writing process; particularly at firms that had a bad quarter. In some cases, disclosure is beyond selective. Selective Disclosure Depressionistas unfortunately cannot put losses on the short side into a "side pocket."
I will be fascinated to read the creativity writings of some hedge fund managers in explaining why they couldn't make money due to the "greatest challenges since the Great Depression" (a bipartisan message fully supported by Washington DC and every CEO in America who didn't do macro), but now can't make money on the long side either. I understand that some will say that "its just a macro short squeeze", but that's about as ridiculous a narrative fallacy as the Depressionista one.
The New Reality is that we are finally flushing out the overcapacity that we had built up in the hedge fund industry. This could be the toothpick industry, and any rational analyst would come to the same conclusion. Too much supply of a commodity ("smart money" with no Street smarts), ultimately results in capacity cuts.
Understanding that this has been a squeeze is one thing. Capitalizing on it is what people being paid 2 and 20 are hired to do. So to the men and women that Squeezy is
chomping on, no more whining and stressing ... or your investors will be giving you a "time out."
Who is winning out there this morning?
1.      Obama - the stock market is up +29.1% since March 9th.

2.      Obama - the stock market is up +25.3% since he called it a "bargain"

3.      Obamerica - the worldwide majority who approves of him leading the USA

That's not a political comment. This is called the political wind. And it's blowing hard Left. As it blows, so will the Arlen Specter's and Stress Testers (see our note titled "The Specter of Arlen" at www.researchedgellc.com). I have been of the mindset that the stock market can actually keep winning if Obama socializes this country to smithereens. That doesn't sound good though, Keith. Good is as bad does folks, so get used to it. As we Break The Buck, stocks will REFLATE.
I know, it's a perverse relationship. And at a bare minimum, it doesn't sound Patriotic - but you know what? Neither do any of these cats you have compromising the integrity of the US Financial System. At the end of the day, its American Idol season, and the world has voted on Timmy Geithner and Kenny Lewis - DOLLAR DOWN!
DOLLAR DOWN = everything else that's asset based UP.  Away from Obama lovers, who else is a winner as the Buck Breaks?
1.      Americans (value of their 401k and Home stops going down)

2.      Russians, Saudis, Canadians, etc... (yes, they like it when petrodollars reflate)

3.      US Debt Holders (53% of this world's leverage is denominated in Greenbacks!)

So, as I finish up another of my morning diatribes, please have CNBC remind me that this is nothing but a "short squeeze", and that the 4 months prior was nothing but a "Great Depression." I'll keep on banging out prose with my arthritic hockey knuckles on this key board, reminding you that not everyone in this game needs to play with crutches. Winners will keep winning, and the losers will keep whining.
My immediate term upside target for the SP500 is now 880. I'll be making sales into fire engine chasing strength on the open.
Best of luck out there in May,


EWC - iShares Canada- We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich Vancouver should provide a positive catalyst for investors to get long the country.   

SPY - SPDR S&P 500-In the face of manic media hysteria, we have once again held onto higher lows. Positive TRADE and TREND.

XLE - SPDR Energy- Energy is breaking out on a TREND and TRADE duration. We're long this sector and think it works higher if the Buck breaks down.   

CAF - Morgan Stanley China Fund- A close end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

EWG - iShares Germany-We bullish German fundamentals, especially as a hedge against financially levered and poorly managed Switzerland. While the automotive industry is ailing, the strength of Germany's labor unions will preserve jobs and maintain a slower rate of sequential acceleration in unemployment. Compared to most of Western Europe, Germany has a positive trade balance and will benefit from Chinese demand, especially if the Euro can stay below $1.32. The ZEW index of investor and analyst expectations for economic activity within six months rose to +13 in April from -3.5 in March, the highest reading since June 2007. We're bullish on Chancellor Merkel's proposed Bad bank plan to clear toxic bank assets and believe the country will benefit from a likely ECB rate cut next month.  

EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months.  With interest rates at 3.00% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.

TIP - iShares TIPS- The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%.  We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

USO - Oil Fund-We bought more oil on 4/20 after a 9% intraday downward move. We are positive on the commodity from a TREND perspective. With the uptick of volatility in the contango, we're buying the curve with USO rather than the front month contract. 

GLD - SPDR Gold-We bought more gold on 4/02. We believe gold will re-assert its bullish TREND as the yellow metal continues to be a hedge against future inflation expectations.

DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.

LQD  - iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.

SHY - iShares 1-3 Year Treasury Bonds- If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries.

EWL - iShares Switzerland - We shorted Switzerland on 4/07 and believe the country offers a good opportunity to get in on the short side of Western Europe, and in particular European financials.  Switzerland has nearly run out of room to cut its interest rate and due to the country's reliance on the financial sector is in a favorable trading range. Increasingly Swiss banks are being forced by governments to reveal their customers, thereby reducing the incentive of Switzerland as a tax-free haven.

UUP - U.S. Dollar Index -We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is up versus the USD at $1.3297. The USD is up versus the Yen at 97.8020 and down versus the Pound at $1.4846 as of 6am today.

XLP - SPDR Consumer Staples- Consumer Staples was overbought so we shorted more on 4/29.  This group is low beta and won't perform like Tech and Basic Materials do on market up days. There is a lot of currency and demand risk embedded in the P&L's of some of the large consumer staple multi-nationals; particularly in Latin America, Europe, and Japan.



Yesterday after the close, MGM announced an agreement with Dubai World and CityCenter's lenders to complete the funding of CityCenter.  MGM also announced another amendment to its credit facility.  Although neither of these agreements solves MGM's broader credit issues, they do put the CityCenter issue to bed.  We continue to view MGM equity as an option and to the extent they can extend the duration of that option, the stock will rise.


Terms of the revised CityCenter agreement:

  • Dubai World and MGM will fund their remaining equity contributions through letters of credit
  • CityCenter's lenders will immediately fund the full $1.8BN facility
  • Dubai World was relieved of all completion guarantees in return for paying $135MM of contribution made by MGM on its behalf and dropped its suit against MGM
  • MGM is now solely responsible for the completion guarantee of up to $1.2BN should the construction budget exceed $8.5BN and net condo proceeds fall below $243MM
  • Interest rate margin increased by 200bps, though payment are "PIK" (paid in kind) through 9/2010
  • Condo proceeds up to $250MM may be used towards construction costs; 30% of net proceeds in excess of $250MM will go towards debt reduction, while the remaining 70% will be distributable subject to certain performance criteria satisfaction
  • Certain financial covenants were also loosened
  • Facility matures June 30, 2012

Essentially MGM's only incremental cost for this amendment was the guarantee and $18MM in incremental annual interest ($36MM for the JV).  According to its 10K, MGM estimated it would need to fund $319MM of its $600MM guarantee, translating to $638MM without Dubai World's share.  However according to our math, MGM will likely not have to fund any of the guarantee.  MGM's estimated total construction budget was $8.7BN on its last conference call.  Management also believed that they could save an incremental $200MM of costs, bringing the total cost pre-condo sales to $8.5BN.  In addition, MGM had $1.6BN of contracted condo sales of which they estimated 75% would close, bringing the net cost comfortably below their completion guarantee trigger.


MGM also announced another amendment to its credit facility:

  • Additional 45 day waiver of its covenants through June 30, 2009
  • Allows MGM to make its remaining equity contributions to CityCenter through the issuance of a $224MM letter of credit
  • Permitted MGM to enter into revised CityCenter completion guarantees


In return for this amendment MGM:

  • Reduced borrowings and commitments under the facility by $100MM
  • Provided the banks additional collateral:  Gold Strike Tunica, MGM Grand Detroit, certain undeveloped land on the Las Vegas Strip, and to secure debt under the facility in an amount up to $300 million


Interestingly, this additional collateral does not count against MGM's ability to secure an additional $1.7BN from its $3BN basket.  The bank agreement permits granting security in assets that fall under a certain threshold (2% of net tangible assets) and MGM Detroit is also carved out in its credit agreement.


We believe the next steps for MGM will involve some combination of the following:

  • Exchange offer for the 6% Senior Notes due Oct 2009 ($820.9MM O/S as of 12/31/2008)
  • Exchange offer the 9.375% and 8.5% notes due in 2010 (Approx $1BN)
  • Sale of Beau Rivage and/or MGM Detroit
  • Equity raise ($500MMish...)
  • Secured note issuance
  • Pledge of additional collateral to banks in exchange for covenant relief and additional waivers


We expect the stock to open higher as MGM has extended the duration of its equity option. 

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