Even the bears aren't bearish enough on Spain's coming sovereign debt problem


While deferred capex must certainly be accounted for when accounting for NAV’s, the math shows it’s not that material for the public hotel owners.



By the end of 2010, hotel owners in aggregate will have under spent for two consecutive years in terms of maintenance capital expenditures.  The following chart shows the trend as a percentage of revenues for the public hotel owners:




The following chart shows maintenance CapEx per hotel room.  Under spending is clearly evident in this chart as well.  However, even if you assume that 2008 peak spending is the right number, the maximum amount of under spending would total only $9,500 ($4,750 multiplied by 2 years of under spending).  At best, deferred CapEx looks to be only $4,500 ($2,250 multiplied by two years) if we assume reversion to the trend line.




While the public companies have certainly cut back spending, they have not fallen that far behind.  The situation for the private owners is quite different.  Most of the major transactions we've seen involve significant amounts of deferred CapEx.


In this note we've provided some forward looking commentary from Hyatt's Q4 earnings release and conference call in preparation for their Q1 earnings release on Thursday.




  • "At present, there are mixed economic signals in the U.S. As to international operations, we are seeing some relative improvements in selected markets, especially in emerging markets such as China where economic stimulus from the government has created support for commercial activity. In general, occupancies on the transient side have shown some signs of improvement over the last  few months, but rates are still under pressure."
  • "On a year-over-year comparative basis, cancellations in group business have slowed and we saw a sequential reduction in the rate of decline in group bookings during the final months of 2009. These trends continued into 2010."
  • "Since any recovery in our industry is widely expected to be occupancy driven at first, and because we do expect to see some cost increases in 2010, including increased wages, we expect that margins will be under pressure in 2010 even as we focus on additional productivity gains."
  • "More recently the rate of decline in RevPAR for select-service properties has narrowed significantly compared to prior periods."
  • "We expect compensation expense to increase as we face some wage inflation in 2010."
  • "We plan to spend 270 to 290 million on CapEx in 2010, which is about 30% more than last year. This includes, roughly, four to 5% of owned hotel revenues on maintenance CapEx. We are starting major renovations projects at the Grand Hyatt New York and the Grand Hyatt San Francisco. Both of these projects will begin over the summer and continue into the third quarter of 2011. We anticipate that there will be disruption to business and estimate we’ll have about 400 rooms, on average, out of service per day in the second half of the year. We’ve got three other hotels, in essence largely the Park hotel in Chicago, the Hyatt Regency in Atlanta, and the Hyatt Regency in San Antonio, where we’re undertaking projects in 2010."
  • "We expect the tax rate on our U.S. income to be approximately 38% and the blended tax rate on our international income to be approximately 20%. In addition, we have certain fixed tax charges each year which we believe will approximate 2,911."
  • "One point of global RevPAR change equates to between 10 to 20 million of adjusted EBITDA for the company."
  • Potential acquisitions: "business transient hotels or hotels that principally serve business transients guests."
  • "The transaction volume for what I would say typical whole asset sales has not really been significant and not been growing significantly."
  • "While overall group revenue on the books for 2010 is below 2009, the decline has been lessening since about October of 2009. In the last four months we have booked something in the range of a third more group revenue for 2010 than the same period in the prior year."

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German PMI and the Weight of Gravity

Position: Long Germany (EWG); Short Spain (EWP), Short Euro (FXE)


As a leading indicator, the Purchase Managers Index (PMI) is one critical data point we use in our fundamental analysis. While our bullish call on Germany remains (see our portal for recent analysis), we’re acutely aware that ‘gravity’ could prevent this number from improving over the coming months. 


Below we’ve pulled back a chart of German PMI over the last eight years and overlaid the DAX. There are two major call-outs:


(1.)  We’re now above the 60 level, a critical threshold for the Manufacturing PMI (the most current reading in April is 61.5 versus 60.2 in March).

(2.)  The change in the second derivative from March PMI to April slowed compared to previous months, an early sign that may suggest the expedited move since early 2009 could turn.

(3.)  If history is any gauge, and if April was the peak in PMI, we’re likely to see the DAX pull back.


As some of our subscribers have pointed out, the bailout of Greece and potentially other Euro member states could create downward contagion in Germany (the top loan sponsor), therefore threatening a long Germany position. While we wouldn’t disagree that contagion is a risk, over the intermediate term we see a weaker Euro as a bullish catalyst for the country’s export base and continue to believe that Germany’s fiscal health will help drive its equity market over its debt-laden peers.   To play this divergence, which is one of our Q2 2010 themes (Sovereign Debt Dichotomy), we’re long Germany, short Spain. Currently there is a 16.2% spread between the DAX and the Spain’s IBEX 35 year-to-date.


While we expect to see further slowing (and mild contraction) in PMI in the coming months from gravity as risks surrounding contagion from the sovereign debt bubble play out, we believe the data still supports our bullish call on Germany.  


Matthew Hedrick



German PMI and the Weight of Gravity - pmii



Last week some of us attended a function for Tom Foley, a gubernatorial candidate for Connecticut that was being hosted by some friends of the firm.  While Hedgeye does not have a political affiliation, a fact about Mr. Foley that interested us is that he has never before run for office.  He has, however, enjoyed considerable success in the private sector and served in overseeing some of Iraq’s state-owned businesses in 2003 and 2004.  His platform includes a focus on jobs, balancing the budget through controlling spending, reducing taxes, reducing healthcare costs, and other issues.  Through reining in spending alone, Mr. Foley claims to have identified $1 billion of savings – with a $3 billion deficit currently projected in 2012. 


Outside Connecticut, many more “non career-politicians” could be making forays into the political sphere over the coming months and years.  Allen Alley (candidate for Governor of Oregon), Keith Lepor (candidate for U.S. Congress in the 9th Congressional District of Massachusetts), and Jeff Greene (candidate for U.S. Senate from Florida)  are but three other candidates running for public office with extensive experience in the private sector and similar views on the inability of those currently in office to resolve the major issues, particularly those related to deficit reduction.  Having actually managed a P&L or budget will likely be a real advantage to these folks if they are elected.


While virtually all politicians, incumbent or not, are pledging to address unemployment and public deficits, it is clear that public opinion is swaying against those currently in power.  Public opinion towards those in Washington, in particular, is interesting to consider.  Since the market-bottom on March 9th, 2009, Congressional approval ratings have made a series of lower highs.  The idea of candidates with proven problem-solving experience in the private sector and clear ideas on how to address the burgeoning debt loads on the public is appealing in light of the seeming inability of many currently in office to do so.  For candidates running for office, a lack of political experience may become an attribute in the eyes of the voting public.


We called the Bubble in U.S. Politics out earlier this year.  The most noteworthy trait of the implosion of this bubble could be the declining acceptance of career politicians' inability to represent voters and create effective solutions.  While anti-Washington or anti-politician sentiment is nothing new, the generational lows in acceptance and approval of these politicians certainly are.  As this Bubble in U.S. Politics bursts and the career politicians find new careers, perhaps then people will begin to trust the process again, which will be a good thing for America.


Daryl G. Jones

Managing Director


Rory Green




WINDS OF POLITICAL CHANGE? - congress vs sp50




Inflation's V-Bottom

There are so many price charts like this now that it’s laughable to hear Ben Bernanke say there are no inflation expectations being priced into the economic system.  Assuming the depression historian has access to live quotes, we’ll assume he isn’t looking at the expectations being priced into TIPs, Oil, or Manufacturing Prices Paid.


In the chart below we highlight the V-Bottom in just that – the Prices Paid component of this morning’s ISM Manufacturing report. The month of April saw another sequential rise on a monthly basis (78 versus 75 reported for March) and another higher-high for this stage of the economic cycle.


Now some doves argue that prices are only inflating because they’d deflated so much on a y/y basis. To that point what we have to say is we agree. It’s math. But we’d also add that the 2008 prices from which we deflated were from are all time highs.


Is Bernanke daring you to speculate on reverting back to 2008 price levels? Maybe. With unemployment this high, that will take the low-end of this society right back to the poor house (they are actually there already). For that, I can’t imagine Bernanke’s conscience sleeps well at night. It’s his choice to pander and maintain an inflation policy.


At least Warren Buffett joined our camp this weekend in acknowledging that he is now “concerned about inflation.” Look for some consensus climbers to start following him to where the math has already gone.



Keith R. McCullough
Chief Executive Officer


Inflation's V-Bottom - 1

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