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MAR 2Q 2013 CONFERENCE CALL NOTES

Weakest quarter/guidance of the bunch

 

 

"We were pleased with our second quarter results and believe they reflect the core strength of our business model.  Modest economic growth combined with historically low supply increases in the industry helped us post 5.2 percent systemwide REVPAR growth in North America.  Both business and leisure transient demand were strong in the quarter, more than offsetting weak short-term group business.  As occupancy rates reach 2007 peak levels for many brands, room rates are moving higher, improving hotel profitability and incentive fees.

 

- Arne M. Sorenson, president and chief executive officer of Marriott International

 

 

CONF CALL NOTES

  • Transient REVPAR: +6%, remains strong; rose 7% in March/April, 6% in May, 7% in June
  • Leisure business was hot
  • Group REVPAR: +17% in April, -1% in May, -5% June
  • Large convention hotels were particularly impacted by weak group demand
    • Bookings for rest of 2013: up 17%
  • Encouraged by long-term bookings
  • Corporations are cautious on discretionary spending
  • DC/Boston - group bookings very weak
  • Ex DC, NA REVPAR would have been +6.5%
  • Boston REVPAR 1%
  • Increases in meeting space supply
  • 2% group will come from DC
  • Don't believe group dynamics is a systemic issue
  • Adding resources to large meeting sales force
  • Encouraged by improvements in Europe; France/Russia led the way; 3Q comps in London will be difficult - but seeing signs of improvement in 4Q (also easier comps in 4Q)
  • Greater China - REVPAR +1% - gained 6% in market share
  • Middle East:  REVPAR +11% 
  • North America/Europe outlook:  steady as she goes
  • Tightened REVPAR forecast
  • Already have two 2 dozen AC hotels under discussion - look to sell assets when timing is right
  • 2Q - signed 16,000 new rooms
  • Beginning in June 2014, expect royalty fees for new and relicensed Fairfields to increase from 4.5%-5% of room revenue to 5.5%-6% of room revenue
  • Development environment for full-service remains challenging
  • Owned/leaser: 2 cents of higher than expected termination fees
  • JV impairment cost 1 cent
  • US incentive fees increased +35%
  • 100-150bps of margin improvement for 2013
  • Termination fees: $13MM vs $14MM
  • Shift in calendar will add $26MM in operating income; -$64MM in operating income impact in 4Q
  • 3Q 2012 -  $5MM positive litigation settlement
  • Group bookings flattish; 6% group bookings pace for 4Q 2013; 95% booked for 2013
  • Will have renovation disrutpions in leased hotels in 2H 2013
  • 4Q G&A guidance will decline significantly

Q & A

  • 2014 group pace:  revenues +2% 
  • Govt:  hopefully it's the worst; group and transient in decline; about 2% of business
  • No decisions made on bringing Moxy to US; 1Q 2014 brand launch
  • Spain getting worse and worse
  • 2013 guidance SG&A:  mostly due to noise in 2Q; 'steady state 5% SG&A increase'
  • Affordable Care Act delay - high single digit increases for healthcare costs for 2014. Double that rate in 2015
  • China:  tough 1H 2013 comps but comps will ease in 2H 2013; affected by austerity, some softening of economy, China/Korea/Japan island disputes; supply growth will be fairly high
    • Gained 6% in market share
  • Change in room opening guidance was due to pipeline timing
  • To get to 7% 2013 REVPAR guidance would require a spectuaclar 4Q
    • expect 5%ish REVPAR for rest of year
  • London asset:  open in 1st half of Sept - may sell it a year after opening
  • $1-1.5MM adverse FX effect in 2Q; FX more onerous in 4Q; 2013 FX headwind will be $6MM
  • 2013 incentive fees:  US 48%: 52% international
  • International incentive fees flat in 2Q
  • Diluted Share count at end of Q2:  310MM
  • Leisure/higher end have been doing well; occu and REVPAR at peak levels
  • 2014 Marriot brands booked 50%
  • AC hotel opportunity in US is 'substantial' - more urban feel; new additions are all mgmt contracts

 


INITIAL CLAIMS: PROFOUND

Takeaway: Following last week's deceleration hiccup, its back to full speed ahead for the labor market.

Keeping with our Forest vs. Tree theme of the last couple weeks (U.S. Growth - #TRENDing2Q13 GDP: Hurry Up & Wait, Separating the Forest from the Trees in EM) - from a broad, top down perspective, remember how this whole economic reflexivity thing works:   

 

Rising demand/spending drives income and employment higher which then drives consumption and confidence higher in a virtuous, self-reinforcing cycle.  Credit serves to amplify the cycle with credit expansion following pro-cyclically as loan demand and creditworthiness both increase alongside rising incomes and a re-flation in household net wealth.   

 

At present, the TREND slope of improvement across the Labor Market data (inclusive of today’s initial claims release), Confidence, Consumption & Credit are all positive.  We aren’t buyers of all things, pro-growth U.S. equities at every price, but we likely will continue to not be buyers of Bonds, Gold, or broader EM at any price in the immediate/intermediate term.  In fact, our 0% allocation to commodities turned 100 days old today. 

 

Below is the breakdown of this morning's claims data, along with some sector specific takeaways, from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact .

 

- Hedgeye Macro 

 

---------------------------------------------------------------------------------

 

Full Sails

Last week we flagged the deceleration in trendline improvement on a one week basis. It was notable in that it was a deviation vs the preceding 9 weeks of data. That inflection proved short-lived, however, as this week's print resumes the trend of accelerating improvement in the labor market that had been in place prior to last week.

 

This past week, rolling NSA initial claims were 8.9% lower than the prior year. This marks a modest acceleration in the rate of improvement vs the prior week, when rolling NSA claims were better by 8.7%, but remains down vs the two weeks ago rate of -10.6%. On a single week basis, NSA claims were 10.6% lower than the previous year, a sharp acceleration vs the prior 1-week print of -0.2%, and back in-line with the previous 9 prints of -9.9%, -13.3%, -9.4%, -9.2%, -7.7%, -11.7%, -9.4%, -7.6% and -8.0%. 

 

To reiterate what we've been saying for 9 of the last 10 weeks, this trend of accelerating improvement in the labor market is profound. We saw it across the board in 2Q earnings as credit metrics, namely new delinquency trends, came in better than expectations and bottom line beats were largely catalyzed by larger than expected reserve release predicated on this accelerating labor market dynamic. The data we've seen thus far in 3Q, now one month along, suggests a continuation of the trend we saw in 2Q, at least on the credit front.

 

The Data

Prior to revision, initial jobless claims fell 17k to 326k from 343k WoW, as the prior week's number was revised up by 2k to 345k.

 

The headline (unrevised) number shows claims were lower by 19k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.5k WoW to 341.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.9% lower YoY, which is a sequential improvement versus the previous week's YoY change of -8.7%

 

INITIAL CLAIMS: PROFOUND - JS 1

 

INITIAL CLAIMS: PROFOUND - JS 2

 

INITIAL CLAIMS: PROFOUND - JS 3

 

INITIAL CLAIMS: PROFOUND - JS 4

 

INITIAL CLAIMS: PROFOUND - JS 5

 

INITIAL CLAIMS: PROFOUND - JS 6

 

INITIAL CLAIMS: PROFOUND - JS 7

 

INITIAL CLAIMS: PROFOUND - JS 8

 

Yield Spreads

The 2-10 spread rose 4 basis points WoW to 227 bps. 3Q13TD, the 2-10 spread is averaging 223 bps, which is higher by 52 bps relative to 2Q13.

 

INITIAL CLAIMS: PROFOUND - JS 9

 

INITIAL CLAIMS: PROFOUND - JS 10 

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN

Takeaway: Credit was the biggest catalyst to 2Q earnings in FIG. The first month of 3Q is showing a comparable tailwind.

Full Sails

Last week we flagged the deceleration in trendline improvement on a one week basis. It was notable in that it was a deviation vs the preceding 9 weeks of data. That inflection proved short-lived, however, as this week's print resumes the trend of accelerating improvement in the labor market that had been in place prior to last week.

 

This past week, rolling NSA initial claims were 8.9% lower than the prior year. This marks a modest acceleration in the rate of improvement vs the prior week, when rolling NSA claims were better by 8.9%, but remains down vs the two weeks ago rate of -10.6%. On a single week basis, NSA claims were 10.6% lower than the previous year, a sharp acceleration vs the prior 1-week print of -0.2%, and back in-line with the previous 9 prints of -9.9%, -13.3%, -9.4%, -9.2%, -7.7%, -11.7%, -9.4%, -7.6% and -8.0%. 

 

To reiterate what we've been saying for 9 of the last 10 weeks, this trend of accelerating improvement in the labor market is profound. We saw it across the board in 2Q earnings as credit metrics, namely new delinquency trends, came in better than expectations and bottom line beats were largely catalyzed by larger than expected reserve release predicated on this accelerating labor market dynamic. The data we've seen thus far in 3Q, now one month along, suggests a continuation of the trend we saw in 2Q, at least on the credit front.

 

The Data

Prior to revision, initial jobless claims fell 17k to 326k from 343k WoW, as the prior week's number was revised up by 2k to 345k.

 

The headline (unrevised) number shows claims were lower by 19k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.5k WoW to 341.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.9% lower YoY, which is a sequential improvement versus the previous week's YoY change of -8.7%

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 1

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 2

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 3

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 4

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 5

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 6

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 7

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 8

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 9

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 10

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 11

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 12

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 13

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 19

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 14

 

Yield Spreads

The 2-10 spread rose 4 basis points WoW to 227 bps. 3Q13TD, the 2-10 spread is averaging 223 bps, which is higher by 52 bps relative to 2Q13.

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 15

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

Morning Reads on Our Radar Screen

Takeaway: Here's a glimpse at what some of our analysts are reading this morning

Morning Reads on Our Radar Screen  - Screen Shot 2013 08 01 at 8.47.35 AM

 

 

KEITH MCCULLOUGH: MACRO

Australia to Raise Tobacco Tax to Narrow Budget Shortfall (via Bloomberg)

 

 

 

TODD JORDAN: GAMING | LODGING | LEISURE

Boyd Gaming Corporation Announces Offering Of Common Stock (via Yahoo!Finance)

 

 

 

JONATHAN CASTELEYN: FINANCIALS

SAC Seen Avoiding $14 Billion Death Penalty From U.S. (via Bloomberg)

 

Eminent Domain Battle Pits Homeowner Against Hospital (via Bloomberg)

 

 

 

BRIAN MCGOUGH

WTO Report: Developing World Will Dominate Textile Exports (via Sourcing Journal)

 

J.C. Penney Says It Has CIT's Backing (via WSJ)

 

 

 

MATT HEDRICK: MACRO

Italy Banks Bad Loans Underline Southern Europe Malaise (via Bloomberg)

 

U.K. Factory Growth Quickens as Recovery Strengthens (via Bloomberg)

 

 


Capital Flow Beneficiaries...

Client Talking Points

JAPAN

Yen Down, Nikkei Up.  Welcome to the New Month, same as the Old Month.  Big +2.5% move to the upside for the Japanese stock market to kick off August.  The Yen failed at our TREND line of 97.41 resistance (vs USD) as the Nikkei held our TREND support level of 13,421.  From a quantitative perspective, holding TREND support is a key #Bullish signal for Japanese equities and, from a strategy perspective, we continue to like deep, liquid markets as capital recipients.    

U.K.

Ahhh, remember the good ole day’s of the late 19th century when the U.K. accounted ~10% of World GDP!  Don’t look now but the U.K. is starting to string together solid sequential economic data.  This morning’s 54.6 PMI print for July (vs 52.5 last mth) was the best global macro data point of the morning and the FTSE is looking increasingly better on the long side  – alongside the U.S. and Japan, the U.K. sits as our other favored, liquid market, capital flow beneficiary.

UST 10YR

Up, Down, Up.  Despite the daily oscillations, the trend remains higher as  yields continue to make higher-lows on pullbacks and probe higher-highs on the rips.  The current yield of 2.60% = +4bps w/w, +12bps m/m, +107bps y/y.  #RatesRising, particularly a first step function move higher towards interest rate normalcy, is not the enemy of growth or equity performance.  

Asset Allocation

CASH 36% US EQUITIES 25%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road

TWEET OF THE DAY

Government requests for Twitter users' data on the rise http://reut.rs/15dsuLw 

@KeithMcCullough

 

 

QUOTE OF THE DAY

Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible.”

- John Maynard Keynes

STAT OF THE DAY

The Eurozone PMI Manufacturing number for July increased to 50.3 (exp. 50.1) from 48.8 in June, this is the first expansionary reading since July 2011.

 


Bernanke's Blue Pills

This note was originally published at 8am on July 18, 2013 for Hedgeye subscribers.

“I only take Viagra when I am with more than one woman.”

-Jack Nicholson

 

Obviously Jack Nicholson doesn’t trade Oil or Gold futures. All you need to bid up the futures curve of inflation expectations are a few Washington whispers and some dovish Bernanke Blue Pills – and, oh baby, will some of the old boys in Chicago chase!

 

With time, trading losses, and substance abuse, I’ve seen some men in this business get dumber, faster. Yesterday, one of my Senior Analysts on the Hedgeye Macro Team, Christian Drake, reminded me why: “Keith, neuro-plasticity and de Novo brain cell creation are generally fixed by the time you enter adulthood… except for one notable exception:”

 

“The hormonal milieu present in pregnant women works to create new neural circuitry and further develop parts of the brain responsible for reasoning and problem solving. So, if you’re a female and need a cerebral kick-start, get pregnant.  If you’re gender deficient (i.e. male) you have to resort to more nuanced methods of warding off cognitive deflation.” 

 

Back to the Global Macro Grind

 

“Cognitive Deflation”. Bro, that’s what I’m talking about. I love that stuff!

On Twitter, I affectionately call some of the people I do not know, “bro.” If I’m really in a good mood, I might call one of these beauties something like “princess.” But that’s a special name that usually calls for very special circumstances.

 

When it comes to fading consensus, you need to pay attention to where the bros are at all times. If Bernanke understood how markets trade, he’d pick up on this pretty quickly.

 

Toning down the raging net long position of over +325,000 contracts in Oil futures and options contracts (and giving Americans a long awaited Tax Cut at the pump), would be easy. Just have Obama tell the bros that Bernanke is out of pills.

 

A version of that happened yesterday. Since the last thing Bernanke actually wants is for Gold Bond bulls to crash again, the shift in expectations was at first very subtle – then it happened all at once.

 

Viagra really should be sponsoring C-SPANs Congressional testimony coverage at this point. Here was the play-by-play:

  1. Bernanke’s testimony said nothing new (he wasn’t incrementally more dovish than when he spoke last time)
  2. The US Dollar Index immediately went from red to green
  3. And both Gold and Oil futures went from green to red

Both Gold and these bastardly looking Gold Miners (GDX) then started going really red – and my contra-stream of bros on Twitter were quick to say “buy the dip, he’s going to say something else.”

 

He didn’t.  Then there was more red, the bros turned into crickets, and the blue pill rally was over.

 

I know. It’s so anti-climactic at this point that it could make you cry. But why should it? Why do we need the entire world to wake-up every morning with the hope of a false dawn? Why has this game turned into purely front-running the Fed?

 

As Melvin Udall (Jack Nicholson in As Good As It Gets) said to his dog Verdell, “Don’t be like me. Don’t you be like me!” And since we aging men don’t have much upside left, we need to switch it up from time to time anyway.

 

The upside to the Hedgeye plan for Cognitive Deflation (i.e. getting it through the thick skulls of the bros that Bernanke is done and Oil could go to $65), would be the most exciting bull market catalyst for US stocks of the year – sustainable growth!

 

Think it through. Both Reagan and Clinton did:

  1. Average Price of Oil 1983-1989 = $22.16/barrel
  2. Average Price of Oil 1993-1999 = $18.63/barrel

Both Presidents signed off on massive #StrongDollar Tax Cuts that drove US Consumption growth through the roof:

  1. Average US GDP Growth 1983-1989 = +4.31%
  2. Average US GDP Growth 1993-1999 = +3.84%

So what say you to leader of the bros, President Obama?

 

I say it’s time to get rid of this un-elected academic. The bros can handle it. They are big boys who can always find something else to chase. Buying into any gold rally lasting for more than 4 hours requires medical attention anyway.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr yield 2.46.-2.75%

SPX 1663-1701

VIX 13.25-15.01

USD 81.96-83.59

Brent 106.99-108.95

Gold 1210-1294

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bernanke's Blue Pills - Blue Pills

 

Bernanke's Blue Pills - vp 7 18


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