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The Hunt for Europe’s new Central Banker

As we hit on in a note yesterday titled “Who is Germany’s New Bundesbank President?”, the departure of Axel Weber throws a kink in the race to replace ECB president Jean-Claude Trichet in October, not only due to his experience and gravitas, but also his firm hawkish stance on monetary and fiscal policy.


Below we lay out the main candidates in the running for Trichet’s seat. Sifting through the candidates, it’s clear that each one has a fault of some sort, be it their nationality, past work experience or affiliations. If Weber was the heavily favored candidate before his departure late last week, now Italy’s CB governor Mario Draghi is the favorite, however in our opinion he seems like the best of the rest and we’re critical of his dovish, “Trichet-puppet” posture. 


Given that Europe continues to be in the thick of a sovereign debt crisis, which we believe has a 3-5 year tail, especially considering that European leaders appear unwilling to let member states default on their debt, the stakes for ECB succession are even further elevated. We’re of the camp that a more hawkish stance from the next ECB president would benefit the region given rising inflationary pressures and the need to impose fiscal restraint (including penalties for abuses) on countries that overstep debt and deficit limits.


So without further ado, here are the profiles of the main candidates:



Mario Draghi (Italy)


Position 1: Bank of Italy Governor since 2006, Draghi, 63, appears to be the front runner to replace Trichet.   As chairman of the Financial Stability Board, Draghi has been at the core of international efforts to rewrite the rules of global finance following the credit crisis, experience that should win him the favor of Trichet, who is chair of Europe’s new risk watchdog.  Draghi is viewed as a dovish candidate in the spirit of Trichet.



  • 1976: Economics doctorate from the MIT.
  • 1: Executive Director of the World Bank.
  • 1: Official in the Italian Treasury. He worked on Group of Seven meetings and led the privatization of $105 billion worth of Italian companies.
  • 2002-05: Employed by Goldman Sachs, in which he arranged currency swaps that helped Greece hide the extent of its budget deficit.   


  • Draghi has the backing of Italian Prime Minister Silvio Berlusconi, which should count against him given Berlusconi’s numerous political and sexual scandals over the last years, included a pending trial; the severe debt leverage on Italian balance sheets should serve as a further detractor, symbolic of southern Europe’s fiscal irresponsibility.
  • Draghi’s 3-year stint as a vice chairman of Goldman Sachs reflects poorly against a European populous that blames investment bankers for the region’s credit crisis.   
  • His selection would leave two southern Europeans atop the ECB, with Portugal’s Vitor Constancio as ECB vice president. A third, Jose Barroso of Portugal, runs the European Commission.


Yves Mersch (Luxembourg)


Position 2: Luxembourg Central Bank Governor Mersch, 61, ranks as a German-style inflation hawk, with the ability to speak German, French, and English. A lawyer by training who helped negotiate the 1991 Maastricht Treaty that created the euro, Mersch has sat on the ECB’s council since its inception.




1: Director of the Treasury

Since 1998: Govern of Luxembourg Central Bank

-Previous posts include: IMF and World Bank alternate Governor; European Bank for Reconstruction and Development (EBRD) alternative Governor; European Investment Bank (EIB) board member; and Development Bank of the Council of Europe board member.


Hang-ups: The appointment of Mersch might force Luxembourg Prime Minister Jean-Claude Juncker, Europe’s longest-serving government head, to give up his role as the chairman of the monthly meetings of euro-area finance ministers.



Erkki Liikanen (Finland)


Position 3: Liikanen, 60, has run Finland’s central bank since 2004. As Finland’s finance minister in the late 1980s, he oversaw the boom of the Nordic economy before growth slumped.  After negotiating Finland’s 1995 accession to the EU, he served as European budget and business-promotion commissioner. Liikanen is viewed as a more acceptable candidate than Draghi by Germany, although not known as an inflation hawk, and as a positive sale to Merkel as a northern European.


Hang-ups: Fellow countryman Olli Rehn is now EU commissioner for Economic and Monetary Affairs. As is so often the case, European leaders do not want to be seen favoring one country for top leadership positions, and all things being equal Finland represents a small percentage of the Eurozone GDP to have two high profile leaders. 



Klaus Regling (Germany)


Position 4: Klaus Regling is currently head of the European Financial Stability Facility (EFSF).



  • Critics suggest he’s at a disadvantage because of his lack of monetary policy experience, despite the years he spent working in the International Monetary Fund (IMF), the German Finance Ministry, and private industry.
  • Regling has different plans for the future and has already indicated to German government representatives that he would like to be president of the new European Stability Mechanism (ESM), which will replace the current bailout fund starting in 2013. The European Commission envisions the new facility, which is designed to permanently combat crises in the euro zone, becoming a powerful institution almost as important as the ECB.
  • Given Merkel’s appoint of Jens Weidmann as the new Bundesbank President this week, it is unlikely, due to timing, that Merkel could push through another high-profile countryman. 




Juergen Stark (Germany)


Position 5: Juergen Stark, the ECB's German chief economist, could have been a candidate, but he would not be able to complete a full eight-year term because he has already served on the ECB council for more than four years.



Athanasios Orphanides (Cyprus)


Position 6: A long-shot contender, and the youngest, Orphanides, 48, who heads Cyprus’s central bank and has worked 17 years as a Federal Reserve economist.  He was the first ECB official to argue in favor of 0% interest rates amid the global downturn. He was born in communist-ruled Czechoslovakia and studied at MIT.



The next weeks will be telling to see if Draghi loses his top pole position. While the top candidates come with impressive credentials, there’s a fierce battle brewing over nationality, namely northern versus southern representation. The Germans have largely voted against Draghi in favor of a northern candidate, and the initial read-though would suggest that Draghi is more dovish leaning than Mersch or Liikanen. Clearly the French under Trichet will also have considerable pull, and Trichet looks to be signaling his vote for Draghi. 


There’s speculation that the ECB would like to firm up a decision on the next ECB president by March, perhaps to coincide with the European Summit that takes place on March 24-25, the catalyst for the release of the framework for the new European Stability Mechanism.   


Tick tock,


Matthew Hedrick

FL: Adding an All-Star

It’s not often that we comment on personnel changes, but the addition of Allen Questrom to Foot Locker’s board is worth noting.  For most who have been following the retail sector for more than a few years, you’re probably familiar with Questrom’s successful and widely praised turnaround of JC Penney (’00-’04).  If you go back even further the list includes Neiman Marcus, Federated, and Barney’s.  For those less familiar, Questrom is pretty much a legend of retail turnarounds, known as “The Master of the Turnaround” and “Mr. Fix It”. 


While Questrom has had his fair share of success over the course of his 40+ years in retailing, his strength is deeply rooted in cultural change.  He thrives in extracting talent from people within organizations whose culture may not have allowed or afforded them the opportunity to excel.  Additionally, he has no problem looking for talent outside of an organization, even if this means hiring an “enemy” who may be THE best person for the job.  This sounds silly for sure, especially if you’re solely focused on the quantitative aspects of the FL opportunity.   However,  Foot Locker up until just one year ago was managed by essentially the same team with the same processes for a decade.  The cultural shift from defense to offense for the world’s largest athletic footwear retailer is necessary for this multi-year process to continue. 


There’s still plenty of work to be done, but the reunion of Allen Questrom with Ken Hicks is noteworthy and one that should only add to the merchandising, marketing, and brand segmentation strategies already underway.



Eric Levine


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Another in-line Q for another lodger; renovations to impact 1Q


“In the fourth quarter, we saw solid growth in demand and RevPAR, especially in our international and select-service properties. Continued focus on flow through led to significant operating margin improvement at our owned hotels.”

“In 2010 we achieved improvements in key drivers of brand value -- namely associate engagement, customer satisfaction, and our Gold Passport program, which demonstrates our loyalty to our best customers. We also expanded our ability to serve more of our guests when they travel as we opened over 30 hotels across all brands and expanded the number of executed contracts for future hotels. Looking ahead, we continue to focus on our key strategies and goals, reinvest in our hotels, and pursue many opportunities for expansion with existing and new owners. We are focused on creating value over the long-term and are excited about our prospects around the world.”


-Mark S. Hoplamazian, president and chief executive officer of Hyatt Hotels Corporation






  • Owned and Leased:
    • RevPar +4.1% vs consensus +5.5%
      • Constant currency: +4.4%
      • Due to the renovations at 5 properties, RevPAR for comparable owned and leased hotels was estimated to have been negatively impacted by approximately 400 bps.
    • Revenues: $470MM vs. consensus of $479.6MM
    • Sold three Chicago-area properties (Hyatt Lisle, Hyatt Deerfield, and Hyatt Rosemont) for $51 million and entered into a franchise agreement for each property.
    • Sold Grand Hyatt Tampa Bay for $59 million. The Company continues to manage the property.
  • NA Management and Franchising:
    • Full service RevPAR: +3.9% vs. 7.3% consensus
      • Constant currency: +3.8%
    • Select service RevPAR: +9.5% vs. 6.7% consensus
    • Added to portfolio:
      • Hyatt Place Des Moines/Downtown (franchised, 95 rooms)
      • Hyatt Place Pittsburgh-North Shore (franchised, 178 rooms)
      • Hyatt Place Houston/Sugar Land (managed, 214 rooms)
      • Hyatt Escala Lodge at Park City (managed, 153 rooms)
  • International Management and Franchising:
    • RevPAR: +11.7% vs. 13.5% consensus
      • Constant currency: 9.2%
    • Added to portfolio:
      • Hyatt Regency Dusseldorf, Germany (managed, 303 rooms)
      • Hyatt Regency Pune, India (managed, 219 rooms)
  • Total Management and franchising revenues: $73MM vs. 70.6MM consensus
  • Adjusted EBITDA was $118MM (in-line with consensus)
    • Owned and leased $87M
    • NA management and franchising $36M
    • International management and franchising $27M
  • 140 executed contracts (32k rooms) for future expansion; 70% are international
  • Debt of $771MM, cash: $1.1BN; ST investments: $524MM; undrawn RC: $1.1BN.

2011 Guidance

  • Capex: $380-400MM; expects renovations will adversely impact owned/leased segment through 3Q 2011: 300-350bps on owned/leased Revpar and 20-25MM of EBITDA (front-loaded in 1Q)--40/30/30 split among 3 quarters
  • D&A: $280-290MM
  • Interest expense: $50MM


  • Focused on "long-term value", not quarter to quarter volatility
  • "Good growth"- expansion into undeveloped markets
  • Positive customer feedback on recent hotel renovations
  • Margin improvement impressive given most of RevPAR gains were related to occupancy
  • Market share gains in select-service hotels
  • Gold Passport program increased 15% in enrollment
  • New York: 3 more hotels to open in next few years (currently 3 hotels)
  • Increased number of high brands represented from New York from just one to four
  • Andaz: 12 under development (incl. one in Shanghai)
  • Park Hyatt: 40 under development
  • Sold 6 properties for $240MM in 2010
  • Signed contracts:
    • Increase of over 15% in terms of hotel and over 18% in terms of rooms
    • 8 new markets
    • 3/4 of projects require no or little firm capital
  • 70% of hotels worldwide showed improvements in ADR
  • Sold 4 hotels for $110MM
    • Blended cap rate of 5%
  • Owned and Leased segment:
    • Q4 Margins were negatively impacted by 150bps due to renovations
  • NA mgmt & franc segment:
    • 70% growth driven by ADR
    • Stronger corporate/hospitality business
    • 70% of group business on books - in-line with expectations
    • Group rev of 2011, up 20% (Q4 2011 compared with Q4 2010); 50%/50% - occ/ADR driven
    • Transient - slightly higher rate resulted in higher revenues compared to the 4Q 2009
    • Corporate negotiated rate business: represent 10% of NA
      • Mid-to-high rates for 2011, in-line with previous forecast
    • 40% of NA full-service hotels paid incentive fees; peak in 2007 was 59%
  • Int. mgmt & franchise segment:
    • Asia region continues to ramp up; China RevPar up 30% (World Expo); S'pore, Korea, and Indonesia also strong
    • F&B and other rev represent 50% of international revs
    • 80% of international hotels paid incentive fees (similar to 2009); peak in 2007 was " a little north of 90%"
  • 2 special items:
    • $37MM - impairment on timeshare inventory and 2 JVs
    • $20MM gain as a result of the sale of three assets during the quarter.
  • 2011 Capex: not normal run-rate due to renovations
  • Expect to open 15 hotels in 2011--most are new
  • Lock-up shares: 12.8MM registration request with SEC; further details in 10K


  • 2011 SG&A forecast:
    • Inflation will impact costs
    • Adding Real Estate/Finance/Legal headcount
  • 2011 renovation:
    • 5-6% of owned revs
  • 2011 Capex: 20% are for maintenance
    • Traditionally, maintenance capex (80-100MM)
    • Expect normalized levels after 2011
  • Current business conditions: NA slightly hit by weather; international continues to push higher
  • Select service portfolio: as source of capital; will not be owned forever
  •  Business booked:
    • Traditionally, 40% and 25% in 2012 and 2013, respectively
  • 4Q international business:
    • Segment margin: 64-65% 
    • For 2011, should be smoother margins
    • Pipeline:
      • Higher in full-service project
      • India/China: 50% of selling contracts
  • 2011 Owned Property level cost comments: "increase slightly"; healthcare costs up in NA; instituting solar programs - Hyatt Regency in Scottdale; increase in F&B costs due to high commodity prices
  • Mid-week business transient and weekend family business strong 

Higher-And-Lower Highs: SP500 Levels, Refreshed

POSITION: no position in SPY


Intermediate-term tops are processes, not points. This one has been perfectly confusing to time – that’s why we currently don’t have a position in the SPY.


That said, I’ve been talking and writing about this 1340 line as my 3 standard deviation overbought line (using my intermediate-term TREND duration model) for the past month and I still think that, given VIX 15 has held again, it’s as good as any reference lines I can find in my probability analysis.


From a long term TAIL perspective, yesterday’s higher-intermediate-term-high was simply another lower-long-term-high. How’s that for a mouthful! That’s about as loaded a sentence as this US stock market is with intermediate-term mean reversion risk (see the drawdown risk line of -7.2% in the chart below).


My immediate term support and resistance lines for the immediate-term TRADE are 1327 and 1338, respectively. Until 1327 breaks I’ll continue to trade risk around my long and short positions with a bullish bias. Given the drawdown risk, that doesn’t make me feel comfortable. That’s just the game I see in front of me.




Keith R. McCullough
Chief Executive Officer


Higher-And-Lower Highs: SP500 Levels, Refreshed - SPP


Initial Claims Climb Back Above 400

The headline initial claims number rose 27k WoW to 410k (25k after a 2k upward revision to last week’s data).  Rolling claims rose 1.75k to 417.75k. On a non-seasonally-adjusted basis, reported claims fell 17k WoW.  NSA claims in 2011 to date has been less volatile than typical. 


We have been looking for claims to hit the 375-400k range and remain there or lower before unemployment begins to improve. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9%, it's 11%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11% actual rate as opposed to the 9% reported rate.








One of our astute clients pointed out the relationship between the S&P and initial claims shown below.  We show the two series in the following chart, with initial claims inverted on the left axis.




In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.




Joshua Steiner, CFA


Allison Kaptur

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