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When we started doing the analysis on this last week our opening line was going to be, "We agree that Starwood looks cheap on a Net Asset Value basis".  Given the run in the stock and the SHO default on Monday (see our 06/09/09 post, "A PROACTIVE DEFAULT"), that statement is probably no longer accurate.  It appears the market is placing a $100-125k per key valuation on HOT's owned and joint venture portfolio.  Other analysts are making the claim that the rooms are worth $150k or more, based on pre-2009 transactions, I guess.  Either way, our point is that NAV is somewhat of a meaningless valuation metric, especially in this environment.


For HOT, most people conveniently ignore the fact that of the 69 hotels in this bucket, not all are wholly owned.  The company says the "majority" of the 22,800 rooms are owned.  We know that they also have $90MM of lease associated expenses in 2009.  In any case, without knowing the details on what's actually owned vs leased and joint venture, any per key valuation we come up with will look artificially too low. 


There are other issues with using NAV.  Since the collapse of the financing markets last fall, there have been very few transactions for assets that are comparable to HOT's "owned" portfolio. Most of the transactions that have occurred are limited service, small, single assets under $10MM in size.  Many of the traditional "NAV" buyers (REITs, PE funds like Blackstone & Colony) are notably absent from the market.  The new buyers that have emerged are distressed investors, and guess what?  These guys only care about cash flow, not a theoretical per key valuation. NAV was a relevant valuation metric in 2006 & 2007 because there were a lot of transactions.  A liquid market doesn't exist right now, especially for large assets, let alone a $2-3BN portfolio and therefore NAV is simply not relevant.


As our survey works stands now, only 10% of the stores surveyed said that sales have not improved sequentially in April and May. Surprisingly, 50% of the stores surveyed are reporting positive sales trends. As of today we are only 1/3 of the way done with the survey.

We are also asking the following question - "In your opinion, is management taking the company in the right direction and what particular decisions is the management taking that has an impact/effect on your store's sales?" Increased employee training, customer satisfaction and sampling are helping to improve current trends.

All of the following comments come directly from the survey work.

"Their decision to keep the prices of Ice Coffee's low has been effective. They have also introduced new meal coupons which have had a positive impact on the sales."

"Their focus is on product promotion and making sure that the customers get a sense of the products that we are targeting. For example, currently we are targeting ice-coffee, seasonal coffee, ice-cappuccino and we make sure that they are displayed near the cash counter with various attractive pairing options. This has led to a positive impact on the sales."

"They are pushing us towards suggestive selling which helps us to achieve our targets. Providing samples is another aspect the management is focusing on."

"We are now doing sampling. We prepare a product and hand it over the sales desk for them to offer these to our customers as samples, and it is working well."

"They are ensuring that the customers are familiar with our new products. They are doing up-selling by offering pastries with other products, which is a good practice. The management communicates effectively to ensure everyone is on the same page. They are posting products on the display board so that all the partners read them and work on the required action items."

"They are aggressively marketing and sampling products such as pastries, drinks, etc. which has impacted the store sales in a positive way."

"Their focus on reducing costs has been successful. They offer programs to perform a particular task in an efficient manner such as organizing the pastry case, etc. This helps us to save time and thus we can spend more time helping customers. They keep a track of the sales of various products and encourage us to sell more."

"Their focus has been on pairing and sampling of meals which has lead to an increase in the store sales."

"Lately, they have been more amplified on the training they give us. They ensure that all the store supervisors are well-trained and equipped in order to further explain and relay information to the customers. They are giving trainings around new and different ways to make drinks, etc. I think they are trying to build our more knowledge base rather than just focusing on sales."

"The decisions with reference to the menu and pastries have a direct impact on our sales and our success. They share the recepies with us about how a particular pastry is actually made, which we can share with our customers. This generally attracts more customers as they are interested in that piece of information."

"Their lean initiatives are doing really well. Focusing on the right products and maximizing on the core beverages has led to an increase in the store sales."

"Considering the current economic condition, their focus is on customer's satisfaction, taking care of partners, paying attention towards cost and minimizing waste. They are pushing us to offer our customers combos and to up-sell."

"The management is taking the company in the right direction by shutting down stores that were not doing well."


Eye on Weak Sports Apparel Figures

Another lackluster week for sports apparel. Is it 'less bad' than the horrific performance two weeks ago? Yes. But I don't like the composition of the numbers. Specifically, we're seeing a 12-20% gap in dollars vs. units in each of the past three weeks. In other words, prices are holding up, but without traffic and units coming through in the end, both prices and units will fall. That's a bad bad margin event. The weakness appears to be disproportionately in the family/mass segment, and weakness in the athletic specialty channel is driven more by urban specialty stores than full line sporting goods.


These numbers come from SportscanINFO.  Did anyone notice that FINL and FL meaningfully underperformed this week?  There's no doubt in my mind that someone had these numbers early.  How's that for integrity and transparency?


I do not usually put much stock in weekly numbers, but I'm very interested to see the NPD footwear data that comes out later today in order to gauge the bigger picture.


Eye on Weak Sports Apparel Figures - table


Eye on Weak Sports Apparel Figures - 3wkchrt



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 80.48%
  • SHORT SIGNALS 78.35%

Burning The Buck

"Fear keeps you from making as much money as you ought to."
-Jesse Livermore, Reminiscence of a Stock Operator
At 3:25PM yesterday, I sent the following note to our Macro subscribers: "A close above 944 in the SP500 looks imminent and higher-highs are bullish. Away from being long REFLATION, being long short interest may be your next best bet. Squeezy is hungry."
"Squeezy" is the name of one of the Research Edge mascots - he's a shark, and he bites holes in the behinds of bears when they aren't expecting it. I have been bearish, and I have been bullish, but the Golden Rule that I discussed yesterday implies that I should never be wed to being either. I get paid to be right, not rigid.
This morning's #1 Headline on the Bloomberg box (in terms of how many people have already clicked on it) is "Stocks, U.S. Futures, Commodities Gain; Dollar, Treasuries Fall"... and that is what it is folks - it's called the #1 factor that has affected the macro side of your portfolios in the last 3.5 months - the REFLATION trade.
The US Government either A) doesn't particularly care about this US Dollar crisis or B) doesn't understand it. Having done a call with the CBO's (Congressional Budget Office) representative on US Dollar forecasting last week, we'll take B).
Obama may very well trust that the CBO's Director, Peter Orszag, does math, but someone needs to rattle his cage and wake this office up to the basic principle that forecasting the US Dollar requires a global macro investment process. If you think I am being political about this, think again. Call the office for yourself and it will take you about 3 minutes to get my point.
From the authors of Breaking The Buck, we now have the sequel - Burning It! In the short run, this is going to stoke REFLATION's fire. In the long run, the US Dollar's status as the world's reserve currency will be dead.
No, I don't mean dead as in its going away. I mean dead in terms of how the world considers the US Dollar's credibility. Three weeks ago, when I first started annoying you with this point, all I had was the world's new economic juggernaut, China, supporting my view. Today, alongside China, Russia, Germany, and even Australia, I also have the President of the World Bank, Robert Zoellick, talking about China diversifying and Lipsky at the IMF stating plainly that a "new reserve currency is possible"!
We're not being alarmist - this is a live and ticking situation that America has never had to deal with before. In decades past, we'd have a independent Federal Reserve stand up for itself (Volcker), and support America's currency with objective monetary policy (raising rates). Today, we have as highly a politicized process of monetary and fiscal policy as this country has ever seen.
So away from the "emergency" level free money policy that we have (which was prefaced by a conflicted narrative fallacy - The Great Depression, remember!), we now have a credibility crisis of generational proportions that is Burning The Buck.
If you're long commodities (or anything priced in Dollars), this is great! Again, that's in the short term. Yesterday, on the heels of Timmy Geithner being YouTubed again (bailing out his boys in De Banking Club), the Buck started to burn again intraday. As it burned lower, commodities melted higher. The CRB Commodities Index was up a sharp +2.7% on the day, and despite our British Philosopher friend's attempt to be "short of" crude oil on Monday's higher-low, the West Texas kind (priced in Dollars) has spiked another +6% in less than 48 hours.
Crude and Copper continue to make higher-highs, alongside Chinese demand. Last night, the Chinese reported a very impressive industrial production growth rate of +8.9%, rising sequentially from +7.3% last month, and putting the Panda bears to bed with a Squeezy session of their own. The Shanghai Stock Exchange was up another +1% overnight, making a higher-year-to-date-high at +54.7%. Stocks in Hong Kong closed up a full +4% on the day, taking their YTD gains to +30.6% on the Hang Sang Index. Great Depression "emergency" level of ZERO percent interest rates what??
All the while, REFLATION markets from Russia to the United Arab Emirates continue to power forward this morning, trading up another +2% and +3%, respectively. As the balance of economic power in the world shifts, make no mistake - in the end, REFLATING the almighty Petro-Dollar will have unintended consequences. Putin's Russia announced they are selling US Treasuries this morning - geopolitical risk is going to be back, in a big way.
Burning The Buck pays the Bankers, the Politicians, and the Debtors. Burning The Buck pays Putin, Ahmadinejad, and Chavez. We get it - that's why we re-invested 16% of the Assets in our Asset Allocation Model in the last few days. That's why I am back up to 22 long positions in our Virtual Portfolio. Do the said leaders of America's Financials system get it? You tell me...
My immediate term upside target for the SP500 is now 960. If you want to trade the last part of the REFLATION move (like I do), do so surgically, all the while respecting that "Fear keeps you from making as much money as you ought to."
Congratulations to our Pittsburgh subscribers and Sydney Crosby's Penguins on last night's win,


EWA - iShares Australia- EWA has a nice dividend yield of about 5% on the trailing 12-months.  With RBA rate cuts showing signs of working and a commodity based economy with proximity to China's reacceleration, there are a lot of ways to win being long Australia.

FXA -CurrencyShares Australian Dollar Trust-Thanks to recovering Chinese demand for commodities, the sure handed management of RBA Governor Glenn Stevens and comparatively modest consumer debt levels -Australia's GDP continued to expand in Q1 while other industrialized economies saw double digit declines.  As with Canada, we like the Australian economy as an offset to the toxic US balance sheet.  

XLV - SPDR Healthcare -Healthcare looks positive from a TRADE and TREND duration. We bought XLV on 6/08 to get long the safety trade.

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 British Columbia should provide a positive catalyst for investors to get long the country.   

XLE - SPDR Energy - We bought Energy on 6/05. 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.

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.


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. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the imm.ediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.

XLU - SPDR Utilities - As long term bond yields breakout to the upside, Utility investments are the relative yield loser.

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.

Squeezy Is Back! SP500 Levels, Refreshed...


As we move along through the trading day, one thing has happened that really matters - the US Dollar has trended lower, and everything priced in Dollars has REFLATED.


XLB (Basic Materials) and XLE (Energy) are the top 2 performing sectors out of the 9 we monitor in our Sector Views risk management system. A close above 944 in the SP500 looks imminent and higher-highs are bullish. Away from being long REFLATION, being long short interest may be your next best bet. Squeezy is hungry.


My immediate term TRADE resistance line for the SP500 is now 960.



Keith R. McCullough
Chief Executive Officer


Squeezy Is Back! SP500 Levels, Refreshed...  - vorsicht