The Client: Chinese Momentum


CAAM June sales data released today show that total motor vehicle sales exceeded 1 million for the 4th consecutive month registering a year-over-year increase of 36.48% (see chart below). Critically, this marks 2Q of 2009 as the first quarter ever with reported sales in excess of 3 million units and, at 3.4 million in total, the CAAM target of 11 million for the year seems achievable. Passenger car sales as a category of the total experienced a 48% increase in June as tax rebates and improving vehicle quality selection continue to draw consumers to showrooms.

 (continued below chart)

The Client: Chinese Momentum  - a1

The latest NBSC production estimates, for May, show that total vehicle production increased by 28% for that month. Although NBS data production is notoriously sketchy, there is a very clear trend emerging. Domestic Chinese passenger automotive sales are outpacing commercial sales, and sales in total are outpacing production growth by a significant measure.  Add in anecdotal reports on engine component imports and individual reporting by foreign JV partners and we have a clear vision that retail Chinese automotive consumer strength is outperforming all but the most bullish expectations -and that it is driving rapid capacity growth by producers.

We have been consistently bullish on The Client's internal demand dynamics, and the consumer discretionary categories that should logically be feeling the biggest impact of the stimulus programs at this stage of the development cycle  -big ticket durable goods, appear to be  proving out our thesis.  As Chinese consumers continue to enter the car market for the first time or to trade up from inferior vehicles, we expect that they are also eyeing government sponsored incentives for household appliances, consumer electronics and small farm agricultural equipment.

Take note: as strategic investors we are China bulls, but as tactical investors we are pragmatic risk managers and will actively seek to trade in an out of a market that has experienced an intense short  term rally capable of correction with unchanged fundamentals.  With a process that employs overlapping durations we have the luxury of picking intermediate entry and exit points while remaining focused on the horizon -if you are married to a single duration by choice or circumstance you should be prepared for volatility as the complex recovery story continues to unfold in China.

As always we are here to answer any questions and welcome the opportunity to share ideas.

Andrew Barber



HOT has done a great job cutting costs in a deteriorating demand environment.  This time they may have run out of dry powder.  This may be the first quarter without a substantial beat.  We believe forward numbers once again need to come down, despite favorable currency movements.  The Street continues to project flat 2010 RevPAR versus our projection of -5% and our EBITDA estimate is 11% below the Street at $790 million.  Here are the details ahead of the earnings release on 7/23.


-For 2Q09 we're in line with HOT's guidance but below street:

  • We're at 190MM of EBITDA (3.5% below street & guidance of 180-195MM) and $0.15 EPS (16% below street & guidance of $0.14-$0.20 EPS


-For full year 2009 we're still below consensus as we are less positive regarding HOT's ability to further cut costs.  Last quarter HOT stopped giving explicit guidance on EBITDA & EPS for full year 2009 due to the "uncertain environment":

  • $750MM of EBITDA (5.5% below street) and EPS of $0.65 (17% below consensus)
  • We assume owned RevPAR decreases 25% in 3Q09 and 15% in 4Q09and owned EBITDA margins decline 8.5% & 7.5% respectively
  • We assume world-wide RevPAR decreases 20% in 3Q09 and 8% in 4Q09, for a 2009 20% RevPAR decline (in line with management guidance)
  • 4Q09 improving RevPAR comparisons are driven by occupancy
  • Our owned EBITDA margin for 2009 is down almost 900 bps driven by difficult cost cut comparisons in the back half - we believe this is where we differ from consensus
  • Given the opaque nature of timeshare, we're in-line / slightly better than management's guidance
  • Total reported fee income down -16.5% (probably worse than street expectations)
  • We assume that HOT can reduce SG&A by $100MM (better than the $70MM guidance)


-2010 - We're still 11% below the street EBITDA estimate of $790m which is flat with 2009 due to approximately 5% lower RevPAR estimates.


-RevPAR 2Q09 Assumptions:

  • Branded Same-Store Owned Hotels in North America: we're in-line with an estimate of -30% vs. HOT guidance of -30% to 32%
  • We estimate that total revenue (not SS) will decrease 24.5%, which compares somewhat to HOT's guidance of SS worldwide company operated hotels of -24% to -26% (-18% to -20% in constant dollars).


-Foreign Currency:

  • Since HOT reported 1Q09 results, the dollar has depreciated against almost all of the currencies that HOT has exposure to
  • We estimate that vs. guidance given on April 30th the dollar depreciated about 3.5% against most of HOT's portfolio of owned hotel and 6% vs current spot
  • Euro: 1.32 on April 30th vs an average rate of 1.36 in 2Q09 and spot of 1.40
  • A weak dollar will have a positive impact on reported RevPAR relative to expectations on April 30th when Starwood gave guidance


We've been pretty negative on LVS over the last month so some may be surprised to see us pull a u-turn.  The issues haven't changed but price and duration have.  Q2 margins in Macau will look better than people think as the company readies itself for an IPO and pushes itself to limbo underneath the covenant bar.

LVS has fired and laid off many employees in Macau, including a number of senior level management folks.  Look for a decent size number in the one-time expense bucket for Q2 and Q3.  The layoffs and charge-offs should have the effect of pumping margins.  Sustainability is certainly a question mark but given the high short interest and volatility, investors likely won't scrutinize that aspect over the near-term.

Better Macau margins will also partially alleviate covenant concerns.  Moreover, LVS can exclude one-time charges from the leverage covenant calculation - even more incentive to fill the 1x bucket.  A Q3 covenant bust has been all the talk from the sell side.  However, Sheldon is right.  LVS will not bust a covenant.  Even though a Macau IPO will not likely float until Q4, the promise of one will allow the banks to be much more flexible with a covenant waiver or amendment.  LVS still has the debt buyback lever per the 4/15 amendment that allows them to repurchase up to $800 million of its term loan debt (trading at a discount).  Investors should worry about borrowing costs going up, but not a covenant bust or imminent bankruptcy.  We will have a more detailed, numbers-oriented post on the covenant issue coming soon.

The stock looks like it is going a lot higher over the near-term, at least through the Q2 earnings release in early August.  We still harbor concerns with MASSive amount of table supply entering the Macau market, particularly Oceanus next to Sands.  The Singapore ramp is also a worry especially considering the uncertainty of the junket situation - can they get licensed and can they offer credit?  However, keep a trade a trade as they say.

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US Employment Bears, Waky Waky...

I think we we're the only Macro Team who read the June unemployment report as bullish, on the margin. That was not born out of a self perpetuating Wall Street narrative fallacy; it was born out of the math.

On the margin is where things matter in our Macro Model. Here are the two most recent data point that matter on US Employment:

1.       The US unemployment rate flashed a double top in the rate of month/month acceleration in February and May (+50bps m/m)

2.       The US jobless claims data (weekly, and less of a lagging indicator as unemployment is), continues to improve, sequentially (see chart)

Please send the chart below to the qualitative journalist who doesn't do calculus (derivatives). This is very straightforward.

At 565,000 claims, the first week of July broke the 600,000 line for the first time since the second half of January and represented a  52,000 improvement (8%) over the prior month. US jobless claims were also 41,000 below the 4-week moving average.

It's time for the one-factor model bears (200-day moving averages) to wake-up here.


Keith R. McCullough
Chief Executive Officer

US Employment Bears, Waky Waky...  - unempl45

SSS: Quick Initial Read

While the smaller companies that are less representative of the overall environment are out of the box first with sales results, here's our initial read. Overall net positive thus far.


  • June sales coming in largely in line with weather-reduced expectations. Overall, it appears that underlying consumer demand is status quo here, if you incorporate last year's stimulus benefits and this year's record rain. So far, it appears that the haves and have-nots remain unchanged, as those companies such as HOTT and BEBE continue to struggle while others like TJX and GYMB continue to outperform.


  • In general, the absence of earnings revisions either way for most companies suggests to me a net positive. With nine weeks in the bag, the this would surely be an opportunity for retailers to lower EPS if they had to. Expectations were low enough heading into today, which in theory would have provided a decent backdrop to massage earnings lower. However, we are not seeing wholesale earnings revisions to the downside. Clearly, tight inventory controls, careful planning against LY, and a fairly rational promotional environment are the keys to current earnings visibility.


  • Finally, June confirms once again that the consumables driven retailers continue to drive traffic and grow share at the expense of the traditional grocers. Despite the weather, retailers including COST, FDO, BJ, etc continue to benefit from aggressive pricing, supplier discounts, and their overall value-driven strategies.

Eric Levine

Game On

"You have to learn the rules of the game. And then you have to play better than anyone else."
-Albert Einstein
As I wake up today I'm seeing that most European and Asian markets are trading higher after being weaker for the past week. This is what markets that correct do. Yesterday's news from Alcoa may calm fears over the upcoming earnings season, yet with Alcoa losing less money than thought, does that really mean "less bad" is still "good"?   Maybe, but I don't get paid to believe it!
One of our Q3 MACRO themes is "Range Rover", a call that the S&P 500 will trade in a tight trading range of 9% in the intermediate term. We have branded this duration as  "TREND".  Despite the low volume and downward momentum in the market over the last two trading days, the S&P 500 has held our critical 871 support line.  We aren't fading right on the goal line - that's what people with no process do. We're sticking to our game plan.
This upcoming earnings season is going to be critical look into what we can expect for the second half of 2009.  Alcoa's loss of $454 million was better than consensus as the company was able to cut costs by putting people out of work.  Good for profitability, bad for the economy!  Looking at demand, the company intimated that some aluminum markets showed signs of improvement, but the fact is that worldwide aluminum consumption will decline by 7% in 2009.  This is a pattern we are seeing in every US sector:  demand remains soft and companies are cutting costs to improve profitability.  
We all know this is not a sustainable trend, but for now it does not seem to matter. What matters in our macro model happens on the margin. Six months ago, don't forget that every reactive CEO in America was firing people under the narrative fallacy of a Great Depression. While things are bad (in recessions that's generally the case), on the margin, they are better than those prior fear mongering expectations.
The reality is that the economy is bottoming, but it's not really getting much better.  Last night the Group of Eight leaders said the economic recovery was too fragile for them to consider reversing efforts to pump money into the economy.  Free money live on! This morning you are seeing 3-monht LIBOR trade down to new lows at 0.51%. By any historical measure, that means money is cheap.
This is also being confirmed by Oil trading above $61, after declining -17% over the past week.  The news flow suggests that a rise in U.S. gasoline inventories means demand remains weak.  Increased concerns are also being reflected in the VIX, which was up 1.5% yesterday and has been up for four straight days.  Lastly, the risk aversion trade is working with the Dollar index up 0.07% yesterday, now up for five straight days. Don't forget our Breaking/Burning The Buck call - Dollar up = everything down.
I could wait till 7am Eastern to see what the Bank of England announcement will be on their rate policy, but there is probably no hurry to remove its free money policy. This situation has been completely politicized, and that is what it is. While Ben Bernanke might be fighting for his job, rates are going to stay low everywhere until it's absolutely certain that economic recovery is self-perpetuation via REFLATION.
Right now the evidence from corporate America suggests that demand remains soft.  Cost cutting is a "one time event" and is not a long-term investable theme.  The earnings season is upon us - GAME ON!
Our intermediate term TREND line of support for the SP500 remains 871, and longer term TAIL resistance is 954. Trade the range.
Function in disaster, finish in style.
Howard Penney
Managing Director


USO - Oil Fund-We bought USO on 7/6 and 7/8 on a pullback in oil. With the USD breaking down, oil should get a bid.  

EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.

QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 and added to the position on 7/7 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.

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 think Energy works higher if the Buck breaks down.  XLE is working against us as one of the worst sectors in the market right now. TRADE and TREND are negative.

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.

XLV- SPDR Healthcare - We re-initiated our long position in healthcare on 6/29.  Our healthcare sector head, Tom Tobin, wants to fade the public plan, and he's been right on this one all year.

GLD - SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.


XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   Added to the position on 7/1, as our stance on the consumer is no longer bullish like it was in Q2, when gas prices and mortgage rates were dramatically lower.

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.

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