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Goldman upgraded Starwood to Buy after the close yesterday.  It doesn't look like a buy to me but that is fine.  At the same time, the firm upped its price target a whopping 145% to $27.  So fundamentals must be improving, right?  Cost of capital must be falling, no?  The hotel transaction market is opening?  Asset values increasing?  Try none of the above. 


Instead, the upgrade is predicated on minimal supply growth and easier 2H comps.  Yet, these "catalysts" were in place 2 ½ months ago when the stock was under $10.  Now that the stock is up 145%, the supply and easy comparison drivers are suddenly important?  This smells like a sentiment upgrade to me, i.e. stock is up big, momentum guys are buying, and I want to jump on board.  Getting in front of the time when RevPAR improves (given as the catalyst for stock appreciation) is dubious when:  a) we are a long way from that happening, b) stocks have already ripped.


Is this the kind of research institutional investors pay the sell side for?  The fact is that the stock has made a big move, along with everything else in my space, based in part on the "less bad" thesis.  The 2nd derivative thesis can be an effective one.  The problem for HOT and lodging in general is that business hasn't gotten less bad like other sectors we follow.  Occupancy is still declining, forget about rate.  There is very good reason to believe 2010 will be worse than 2009 due to the timing of 2010 corporate rate negotiations occurring this year (when the buyer has all the power), the long tail of the group and convention business, and the deep cost cuts already implemented in 2009.


Besides, a recovery thesis works better when stocks are on their back, which is clearly not the case here.  Price targets based on 11-12x EV/EBITDA look very aggressive, especially when based on 2011 EBITDA.  Can you say momentum justification?  As we've written about, historical EV/EBITDA multiples are less relevant when cost of capital is escalating.  Why is an 11.5x multiple appropriate when the cost of borrowing is 300-500bps higher than the 2004-2008 period and there is so much more risk?

Deaf And Willfully Blind

"The strength of a nation derives from the integrity of the home."
President Obama should take that quote and tape it to the back of his crackberry. America's currency is on the verge of a crisis, and now so is her Treasury market.
If you're in the "Jimmy Timmy" camp and think that Cramerica's solution to all that ails the integrity of the US Financial System runs through CNBC and Timmy Geithner, I'm sorry to hear that. Rasmussen's latest Main Street "Timmy" poll has over 70% of Americans thinking that the YouTubed Squirrel Hunter is removed from his seat as Secretary of the Treasury by the end of 2009. That's a bullish catalyst that can't come soon enough.
What's the point in having Secretaries of a Treasury market that they don't manage as a priority? Even tricky Dick Cheney went on national TV last night and finally admitted what we, who aren't willfully blind, have seen for the last year - Hank The Market Tank Paulson, like Timmy, serves Investment Banking Inc. bailouts first. So... Dear American underlings who aren't part of the Wall Street Club, take your currency and savings bonds and fall in line.
This is so pathetic and sad that I can only call it out for what it is. The New Reality isn't about being political, it's about the US Government being willfully blind and deaf. Obama's crackberry nation of reactive said leaders can hopefully get at least a feel for this if I keep hammering on it  - no need to see or hear boys, crackberries vibrate.
For those who haven't noticed, the US Treasury market has gone from shaking to crashing. Not unlike that US Dollar chart that I put up in a note yesterday to our Macro subscribers titled "The Chart That No One In Obamerica Is Allowed To Talk About...", the chart of 10-year US Treasury Bonds is equally as damning. If "the strength of a nation" really does "derive from the integrity of the home", don't look to the bonds associated with a long standing American handshake for shelter. The compromised and conflicted bankers of everything Robert Rubin groupthink are still running this joint.
Do I sound surly this morning? Yes, these days I'm in an average mood at best when my alarm goes off at 4:01AM. I was used to sleeping in until 4:03AM, until Geithner started making me allocate an extra 90 seconds of my research time every morning trying to follow his made-up rules to this game. Hockey players can change on the fly, but this guy's proposed rules, timelines, and selective disclosures for everything from his made-up tests to the PPIF (public private investment fund of funds or whatever he use to call it) can make a Sydney Crosby pass across the neutral zone look slow!
The New Reality remains. American supremacy as the world's safe haven for currency and fixed income investment is under assault. American Idol season of your local insider trader hedgie who is "smart" because he "makes money" are ending, abruptly. Madoff doesn't work. The world's financial markets have voted.
Yesterday I said that the US Equity market was setting up to lock in another lower high, and I gave you levels. All three of those levels (SP500 934, Nasdaq 1764, and Russell 511) were not breached, and right after the US Government issued another boat load of bonds at the 5-year auction, both the US bond and stock markets fell apart.
This morning, I'll give you 3 more levels on those same US indices, but this time these are levels I consider critical immediate-term TRADE support:
1.      SP500 = 885

2.      Nasdaq = 1702

3.      Russell 2000 = 485

My playbook from here is crystal clear. After selling down my invested exposures aggressively in the last few weeks, I am waiting to see the confirmation of US stock market support. If you believe that real-time market prices (across asset classes and geographies) are leading indicators like I do, you get the drill. Both the US currency and bond markets are already broken. Are they leading this Canadian hockey mule to water on US stocks or not? Only time will tell...
The US Dollar broke my long-term TREND line of support last week. Since literally the day that I rang the sirens on this critical global macro factor, the US stock market has been down in 5 of the last 6 days.
The US Dollar Index long-term TREND line of $81.54 is the one that has the hair standing up on my back - Washington ignoring the alarm bell just makes this worse. If Bush was willfully blind, Obama is apparently willfully deaf.
The strength of this nation depends on a red, white and blue vision that people can trust. President Obama, for the third time now in a public rant, I am going to ask you on behalf of the American people who are allowed to see, do you hear me now?
Best of luck out there today,


XLE - SPDR Energy- We bought Energy on 5/13 with the dollar up. We think it works higher if the Buck breaks down.  Bullish TRADE and TREND remain.

CAF - Morgan Stanley China Fund- A closed-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.

EWD - iShares Sweden-The country issued a large stimulus package to combat its economic downturn and the central bank has effectively used interest rate cuts to manage its economy. Sweden's sovereign debt holds a strong AAA rating despite Swedish banks being primary lenders to the Baltic states. We expect Sweden to benefit from export demand as global economies heat up.

XLV - SPDR Healthcare-Healthcare looks positive from a TRADE and TREND duration. We've been on the sidelines for the last few months, but bought XLV on a down day on 5/11 to get long the safety trade.

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.

GLD - SPDR GOLD -We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.

XLU - SPDR Utilities - Utilities had an ugly day on 5/27, breaking down through the TRADE line; we remain short. As long term bond yields breakout to the upside, Utility investments are the relative yield loser.

EWJ - iShares Japan -We re-shorted the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

EWW - iShares Mexico- We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.

WSM: Insider Selling Hardly Bothers Me Here

WSM: Management selling stock - again.


We've been warming up to this name meaningfully. Not because we love the business so darn much. Let's some facts -- it has issues. But we like the segment of the economy to which it is levered, as well as the potential upside to cash flow if business simply stops getting worse -- which appears within reach.  More importantly, the real intriguing part of this model is that the catalogue and dot.com fulfillment infrastructure is one of the best in retail.  As the bankruptcy cycle continues to play out and M&A takes on greater importance, we're convinced that WSM's assets will viewed ina  different light (and by a different audience).


Do management's stock sales deter me? Not exactly. This team is not afraid to sell at the bottom (see Nov sales in chart below).


WSM: Insider Selling Hardly Bothers Me Here - 5 27 2009 7 12 27 AM

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Major Macro Event Out of China for Retail

In another heavy earnings day in Retail, the Street, of course, looked right through what we consider to be a key overnight Macro event in China that has meaningful implications for Retail.  


China has made additional changes to its VAT (Value Added Tax) structure and has increased rebates on semi-finished leather to boost leather production and subsequent exports of handbags, leather shoes and accessories. This comes on the heels of similar actions geared towards athletic/casual footwear and apparel. What people do not realize is that these incentives are spurring the re-opening of factories every day (that closed in ‘07/’08).


With Asian capacity growth returning to the equation, do not underestimate the impact on earnings to the US retail supply chain! Key direct beneficiaries include PSS and UA. In this instance, Coach and to a lesser extent some other luxury goods brands should also benefit.


Indirect beneficiaries are those with the leverage in the supply chain to keep a disproportionate amount of the margin injection. Even though some companies have been talking about this for 3-4 weeks, it is not yet represented in estimates for some key names. People will be wishing they got these numbers right in another six months. Trust me...

US Housing: Looking For The Next Move....


We are well into 2Q09 and the news is clear: the housing market is testing a bottom.  Alongside our call on consumer confidence, the good news on housing is behind us.  The supply of new homes coming on the market and the bottleneck in lending capacity suggest we will begin to see the trends peak sequentially as we head into 3Q09. 


Today, the National Association of Realtors reported that existing home sales rose by 2.9% to a 4.68 million annual rate from 4.55 million in March.  This represents an improvement from the March figures in which sales fell by 3.0% to 4.57 million.


Increased affordability was the key driver to the better that expected performance; about 45% of the 4.68 million sales in April were foreclosures and short sales.  The pace of improvement would be even better if it were not for the tighter mortgage lending standards.


The real problem for housing now remains inventory.  Demand and underwriting constraints are keeping inventories of unsold homes at historically high levels. As reported today, inventories of previously owned homes jumped 8.8% at the end of April to 3.97 million.  Given the current pace of home sales this represents a 10.2-month supply, compared to 9.6 in March.


As we said yesterday, this thesis is also being played out in the Case-Shiller home-price index where there was a slight month-to-month acceleration in the decline of home prices. Unfortunately, that data point is somewhat stale (it's a March number).


At the beginning of this year we put in print our expectation that the rate of decline in home prices would decelerate in Q209. As we continue to search for a bottom it is important to remember that "less bad" is different from "good". The good news for the economy in this data does not represent good news for home sellers in the near future, not yet.


Howard Penney

Managing Director


US Housing: Looking For The Next Move.... - assoc

The Chart That No One In Obamerica Is Allowed To Talk About...


Or is Washington The New Reality Wall Street now? Who knows... Rhetorically, the politicization of the US Financial System is making this very hard to follow...


What is never hard to follow is the money. If you want to gain a clear understanding of where economic systems have a high probability of playing out, follow how people get paid.


In sharp contrast to the made-up rules to made-up "stress tests", the US Dollar trades on a marked-to-market basis. In global currency trading, there is no such thing as a newly implemented American Idol like "save." The chart below is the chart that matters. American Idol season is over, and the world has voted. The US currency continues to lose its credibility.


There are two TREND lines that matter in the chart below. The intermediate-term TREND line that broke in late April ($85.29) and the long-term TREND line that broke last week ($81.51). It's the latter TREND line that has the hair standing up on my back - Washington ignoring the alarm bell just makes thing worse. If Bush was willfully blind, Obama is apparently willfully deaf.


Is the brain-trust of Wall Street/Washington paid to be willfully blind and deaf? You tell me. The compensation structure of the current system will give you the bipartisan answer. Thankfully, as of yesterday's Opinion piece in the Financial Times by Stanford professor John Taylor, titled "Exploding debt threatens America", I'm not the Lone Survivor of sight and sound.


With regards to the groupthink associated with the Obama one liner of "we inherited this mess", Taylor poses an interesting question: "The debt was 41 per cent of GDP at the end of 1988, President Ronald Reagan's last year in office, the same as at the end of 2008, President George W. Bush's last year in office. If one thinks policies from Reagan to Bush were mistakes does it make any sense to double down on those mistakes, as with the 80 per cent debt-to-GDP level projected when Mr Obama leaves office?"


This chart isn't about being political. The American Financial system is becoming as political as politics get. The world is watching this real-time, and voting with their wallet.


Keith R. McCullough
Chief Executive Officer


The Chart That No One In Obamerica Is Allowed To Talk About...  - flames

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