Simple: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU)


Einstein said that “everything should be made as simple as possible, but not simpler.”


Put simply, this is called a Short Squeeze from an immediate-term TRADE oversold low. You either recognized the Short Covering Opportunity when you should have or you didn’t. No matter where you go right here and now, this short squeeze isn’t over, yet…


Where could it end and what could end it? As a Chaos theorists, I’ll have to go with time and space.


In my model, space is usually simpler (but not simple) to solve for. How fast we travel across a price range is often determined by explicit or implicit markets catalysts. In terms of space to the most relevant line of immediate-term TRADE resistance, the SP500 is 13 points (or +1.1% away) from a very consequential TRADE line of resistance up at 1171.


In terms of time, the next big catalyst is the September US Employment report (830AM EST tomorrow morning). While I think the Sell-Side’s expectation for the payroll number is too high (+50,000 adds), I’m not going to have to make a call on that. Mr. Macro Market personally does not care about what I think.


So, I’m going to let the market tell me what to do. If it tests 1171 and fails: A) there’s plenty of space that opens up on the downside to 1099-1101 support and B) the reflexive nature of our minds will undoubtedly call that employment print out as to why.


Simple is as simple does.



Keith R. McCullough
Chief Executive Officer


Simple: SP500 Levels, Refreshed - SPX


Positive conference call, particularly the commentary of RevPAR relative to GDP. Confirms our belief that hotels are in better shape than consumer sectors in this environment.



"After reaching targeted debt levels in mid 2010, we have been investing in growth while also returning substantial cash to our shareholders.  In the last 12 months, we have opened 33,000 new rooms while returning $1.4 billion to our shareholders through share repurchases and dividends.  Third quarter share repurchases alone totaled $550 million. The spin-off of our timeshare business is on track and we expect to conclude the transaction in the 2011 fourth quarter. We are cautiously optimistic about 2012 and are well-positioned for continued growth.  We expect to add approximately 30,000 rooms in 2012, most of which are already under construction and included in our 105,000 room development pipeline.  While there is considerable economic uncertainty, assuming worldwide systemwide REVPAR growth of 3 to 7%, our earnings per share could total $1.48 to $1.68 per share and return on invested capital could increase substantially."


-J.W. Marriott, Jr. MAR chairman and CEO




  • WW REVPAR comparable systemwide properties increased 6.9% (+8.7% in actual dollars).  Ex ME and Japan markets, WW comparable systemwide REVPAR rose 7.4% (+9.0% increase in actual dollars).
  • International comparable systemwide REVPAR rose 6.9% (+15.8% increase in actual dollars), including a 4.9increase in average daily rate (+13.6% in actual dollars). Ex ME and Japan, international comparable systemwide constant dollar REVPAR increased 9.2% (+18.7% increase in actual dollars).
  • NA comparable systemwide REVPAR increased 6.9%
  • Adjusted EBITDA: $240MM; Adjusted EPS: $0.29
    • Adjusted results exclude $352 million pretax ($251 million after-tax and $0.73 per diluted share) of non-cash other charges.  Other charges include $324 million pretax of impairment charges, which Marriott previously disclosed, related to the timeshare segment.  Other charges also include an $18 million pretax impairment charge on an investment in equity securities due to a recent decline in the market price of these securities and a $10 million pretax write-off of both deferred contract acquisition costs and an accounts receivable balance related to one property whose owner filed for bankruptcy.  Adjusted results also exclude $32 million ($0.09 per diluted share) of tax expense recorded in conjunction with the write-off of international deferred tax assets related to the timeshare segment that Marriott determined were impaired, which the company also previously disclosed.
  • Marriott added 38 new properties (5,969 rooms), including the Ritz-Carlton Oman, the Boscolo Palace Roma, Autograph Collection, in Rome and the Courtyard Pune City Centre in India.  Five properties (1,234 rooms) exited the system. At quarter-end, the company's lodging group encompassed nearly 3,700 properties and timeshare resorts for a total of more than 638,000 rooms.
  • The company's worldwide pipeline: 650 properties with over 105,000 rooms at quarter-end.
  • NA profit margins increased 130 bps, primarily reflecting higher occupancy and rate increases.  House profit margins for comparable company-operated properties outside NA increased 40 bps, challenged by lower REVPAR in the Middle East and Japan.
  • Owned, leased, corporate housing and other revenue, net of direct expenses, increased from $7MM in the 2010 third quarter to $35MM, largely reflecting $13MM of higher credit card and residential branding fees, $8MM of higher termination fees and improved operating results at leased hotels.
  • Timeshare segment contract sales: $179MM; 43% of timeshare contract sales came from new customers compared to 37% in the year ago quarter.  Average contract price improved 45% YoY while volume per guest increased 10% in the third quarter.
  • Adjusted G&A: $170MM
    • Adjusted general, administrative and other expenses also increased due to higher costs associated with growth in international markets and incentive compensation increases.  The increase in adjusted expenses was partially offset by $6 million of lower legal expenses.  The quarter-over-quarter variance also reflected the unfavorable impact of the$4 million reversal in the 2010 third quarter of an accrual related to a tax settlement on a European asset.
  • Interest expense: $39MM
  • Debt: $3.103 BN, including $830MM of debt associated with securitized Timeshare mortgage notes, and cash balances totaled $220MM
  • Diluted Shares: 356.8MM 
  • Share repurchase: 18MM shares for $550MM
    •  Remaining share repurchase: 12.4MM shares.
  • Guidance:

MAR 3Q2011 CONF CALL NOTES - guidance

  • 2011 Capex: $500-600MM ($50-100MM maintenance)



  • Reportability issues impacted timeshare segment results by a penny but FX and better RevPAR more than offset that
  • Transient demand was very healthy
  • NA systemwide RevPAR was down 2% in DC this quarter. Better group bookings in an increase in ADRs should help DC in the 4Q
  • Courtyard will be fully renovated by YE 2013
  • Ritz had a great quarter - WW luxury incentive fees almost doubled in the quarter. Their pipeline is 6,000 rooms - largely international
  • Marriott brand group business and catering revenues were up 2%. Impacted by DC and slow return of association business.
    • Group bookings are running up 7% YoY
    • Group bookings made in the quarter are up 30% YoY
  • Group Business booked in the in first 3Q represented 900,000 rooms or 7% of all business booked in regions outside of their own regions. Other sales metrics also show improvement due to their new system.
  • Signed a distribution agreement with -allowing them to pay commissions to after the guest stay
  • Renegotiating their Expedia contract which is scheduled for renewal at end of year
  • Japan is recovering faster than expected
  • Incentive fees were strong in Barcelona, Amsterdam and HK
  • Stronger sales at a JV project helped contracted timeshare sales, however, there were Hurricane Irene costs, ADA compliance costs and lower reportability negatively impacting their numbers
  • G&A would have been $162MM excluding the cost of the spin off
  • Their international RevPAR growth will slow in the 4Q due to tough comps and comparability issues. RevPAR in London will remain strong but provinces are expected to be weaker.
  • Little evidence of slowdown in NA.  Group attendance is running a bit higher than expectations. Cancellations and attrition are at normal levels.
  • Lower segment timeshare guidance is due to timing of more banking options on the new points based program, lower interest income on a smaller mortgage book and more deferred revenue
  • Total cash transaction costs for the spin off: $40-50MM, already expensed $13MM of the costs. Not all the costs will be expensed in 2011 as some will be capitalized.  Spin off will occur prior to YE. S&P has rated MVW at BB-. The new warehouse facility has closed and funded.  There will be an Investor Day in late October. DB will lead a roadshow in November with expected spin off occurring in late November.
  • $325-350MM in cash tax benefits through 2015: $70-80MM cash tax benefits in 2011 and $120-130MM cash tax benefits in 2012.  Already realized $55MM of tax benefits YTD.
  • MAR should receive a $150MM cash distribution in the 4Q prior to the completion of the spin off
  • Timeshare net of the transaction costs will contribute $0.10-$0.11 to 2011 earnings. Once the spin off is complete, they will provide pro-forma financials.
  • Expect to slow their share repurchase pace in the 4Q
  • Outlook for 2012
    • Not seeing any weakening of their business but seeing the same headlines as the rest of us.
    • 3% RevPAR growth assumes 1% GDP growth and is likely too conservative while 7% assumes 3% GDP growth which is likely too aggressive
    • Even with no GDP growht they still expect some modest RevPAR growth in NA. Supply is only expected to grow .5% in 2012.  They think it's highly unlikely to see RevPAR decline.  There has never been a single month of RevPAR decline when supply growth is less than 1% since the 1980's.
  • Their pipeline is growing and it's largely international.
  • MAR's openings have represented 25% all new NA opening [this past quarter]
  • Autograph RevPAR rose 12%.  Expect to have 60-70 properties opened/signed by 2012.
  • Return to peak 2007 RevPAR is on the horizon and more importantly, a return to fee revenue is on the horizon. 
  • Expect to open 5,000 in the 4Q11 and 30,000 in 2011 and 2012
  • Expect to grow their system wide rooms with minimal capex
  • Expect another $500-$1BN for stock buyback or opportunistic investment. Expect some buyback activity for 2012 even under the 3% RevPAR growth scenario
  • Prior peak earnings - ex timeshare in 2007 would have been $1.51 - so they should exceed peak EPS in 2012 even if they see a weak RevPAR environment (ex timeshare spin costs)
  • Group revenue on the books is up 7% for 2012 and government per diem rates is up 4%


  • Group bookings color for 2012:
    • Group revenue on the books is up 7% for 2012.  August group bookings made for 2012 were up 14% despite market turmoil.  Even after August, group bookings in the works, aka "funnel", were up 17% YoY
    • Feel really good about their group bookings going forward - partly due to their sales transformation. 
  • Sales Force One
    • $100-150MM of business in 2011 from bookings pitched to one city made to another
    • Feel like they are continuing to make progress with Sales Force One
  • Expect that Sales Transformation will help them take further market share as it continues to develop and improve
  • In a growing economic environment, Transient will outpace Group
  • UK Provinces is the one meaningful region for them where they are feeling the impact of austerity measures. Only have one hotel in Greece so can't really comment.  Rest of Europe is still strong for them.  Their guidance for 2012 assumes more modest RevPAR in Europe than rest of world given a difficult comp schedule and the economies there
  • 90% of their rooms in the pipeline in China are under construction. They often sign hotel contracts for hotels already under construction in China.  Despite difficult Shanghai Expo comps, RevPAR in China is still very strong and showing no signs of slowdown.
  • 2012: Excess FCF of $500MM-$1BN. Assumes that investment activity in 2012 will be up YoY; likely moderately higher than 2011's $500-600MM. May acquire some hotels for repositioning but there is nothing in the works on that front today.
  • Does their guidance include some leverage increase?
    • They will maintain 3x leverage but with growing EBITDA, that gives them capacity for more debt. 
    • So yes, it includes more debt commensurate with maintaining 3x leverage
  • 2012 will also benefit from the share activity already done, which isn't really reflected in 2011.  So 2012 guidance really doesn't include a big benefit from buybacks. Any buybacks they do include assume a much higher stock price
  • International house profit margins would have been up 70bps excluding ME
  • Total fee performance for 2012 should be a little higher than 2007 levels but comprised of higher quality fees (i.e.less incentive fees) and the base and franchise fees will be more diversified across international geographies. 
  • Think that corporate rates will be up in 2012. September occupancies domestically were exactly in-line with 2007 levels. Record demand occupancy is one of the positive attributes to the upcoming negotiations.
  • Incentive fees from the select services brands are computed largely on a pooled basis vs. on an individual hotel basis. So it will take a little while longer for those to come back.  Refreshes should help RevPAR and incentive fees get back to being in the money.  Some of their largest Courtyard portfolios (50-100 hotels) aren't paying fees in 2011 and they don't assume that they will pay fees in 2012.
  • Their current valuation strikes them as highly compelling today. However, if they believed that there was a large risk of a meaningful RevPAR decline that would change their view on buybacks, but they just have good comfort that they are still in the early innings of what should be a long recovery. Therefore they think it's a good time to use the capacity they have to buy back stock.
  • They will increase the buyback authorization when they need to. 
  • Possibility of corporate rates being flat or negative?
    • Thinks it's unlikely given the occupancy rates today
  • Commission rate with Expedia?
    • Will not disclose. The contract expires at the end of this year. 3% of their total business comes from OTA's including Expedia. Expedia is about 1% of their system.  So negotiations will not have a significant impact on their business next year.
  • Corporate negotiated rate increase vary market by market for each large group
  • In September, they are not seeing any slowdown in their business and feedback from meeting planners is still that they will spend more in 2012 than 2011

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Retail: Mess in the Middle


September sales came in ahead of expectations, but the fact that top-line strength doesn’t simply translate to commensurate bottom-line growth is becoming increasingly evident this morning. As suggested in yesterday’s note, ‘Retail: Pre-announcement Time,’ we are beginning to see an increasing rate of downward revisions in the space from the likes of JCP, WSTLA, and CBK. Yeh, we know…not exactly the crème de la crème. But we’re seeing pressure elsewhere as well – particularly in the mid-consumer zone. The higher end consumer continues to defy gravity and logic, with healthy comps at SKS, JWN and M (good for RL). Other signs of mounting margin pressure include COST posting better than expected comps yet missing earnings and KSS reducing its earnings outlook in a similar fashion yet citing a change in lease accounting for the entire difference. We still think that there will be an increased bifurcation between upward and downward revisions in retail over the next quarter, and throughout 2012.


Keep in mind, product today is sourced from the period when cotton costs were at the peak. But also when order levels where off by 10% with pricing up commensurately. These results show that -- at least in the mid-tier -- prices are not sticking, but at the higher end (JWN, SKS, and to a lesser extent M) they are. This trend will hold at a minimum through Spring when costs improve on the margin.


But that's when 2 things happen...

  1. More units will flow through the pipe based on the increased order trends we’re seeing today. What do we mean? This industry is extremely fragmented, and the buyers rarely employ a Macro process in their buying/ordering behavior. So over the summer their thought process sounded something like “If I could sell though above plan at a 10% price hike, I’ll take up orders by 5-10% in the Spring/Summer of 12 at the same price or better and make even more money.” (kind of like a farmer's 'chase the market' planting strategy). Translation = this really doesn’t work.
  2. At that time we’ll have to deal with JCP rolling the dice with EDLP strategy without yet having the product (sans Liz) to back it up).  We’ll also have KSS’ competitive response. JCP accounts for around 8% of the industry’s sales – KSS is another 9%. KSS is also licking its chops over what should be the mother of all sloppy transitions from Ullman to Johnson. 

A few additional callouts in September:

  • High/Low-end performance bifurcation persists. Within department stores, JWN +10.7%, SKS +9.3%, M +4.9% outperformed while BONT -3.6%, SSI -0.7%, and JCP -0.6% all underperformed. KSS +4.1% and TJX +4% came out somewhere in the middle.
  • Online performance continues to be another important callout for department store retailers heading into the holidays. Macy’s DTC channels ( and accelerated up +43% while JCP’s online business continued to decline down -3.8%. This channel continues to be a key pillar of strength for retailers not named JCP and remains a critical structural disadvantage for the retailer near-term.
  • TGT was a notable positive callout with comps coming in better than expected (+5.3% vs. +3.8%) driven largely by its PFresh initiative as well as turn in its home category for the first time in 12 months leaving hardlines as the only negative category. Retailers with exposure to grocery continue to post strong sales (TGT up mid-teen and COST up double-digits), however, we need to be mindful not to simply extrapolate stronger top-line sales given a lower margin profile for consumables.
  • Lastly, while GPS was able to fend off posting its third straight sales day disappointment (barely), its International business came in down -13% compared to -9% in August. Isn’t a growth engine supposed to go the other way?

The bottom line is that you upretty much want to avoid anything that remotely touches the mid-tier of the US market.


Shorts: JCP, SHLD, UA, HBI

Longs: TGT, NKE, LIZ, RL


Retail: Mess in the Middle - Total SSS Oct 11


Retail: Mess in the Middle - 1 year comps Oct 2011


Retail: Mess in the Middle - 2 yr comps oct 2011


Retail: Mess in the Middle - TGT Sales Grid Oct 2011





BYI shines at G2E and dare we say, there is actually earnings visibility.


Our BYI thesis (formulated post FQ4 punt) was that improved systems visibility and growth would be the delta versus the industry beginning in Q3 FY2012 while significantly lower guidance set the bar low enough for meet and beats (see our note, "BYI 4Q POSTVIEW" 08/04/11).  Well, systems visibility remains fairly high and now it looks like BYI may actually beat the September quarter.  The Street is at $0.42 and we think $0.45 is the better number.



Meanwhile, our G2E takeaways were quite positive for BYI.  Management seemed more bullish on the outlook than we have seen in some time.  Their new games seem to be doing well in the field.  They may finally getting some traction with iVIEW DM which could meaningfully enhance their already strong recurring revenues.




Here are our notes from G2E:


Emerging technologies:

  • iDeck: gives you much more functionality on the games like Pirate Quest. iDeck is like iPad for new game mechanics
  • Alpha 2: 3D hardware tracks your head movements to give you a perfect visual perspective.  Biometrics will let you personalize the games to each player.
  • Total Blast: an example of a game that links the land base casino to social networking sites like Facebook. It has a skill-based bonus game that awards prizes.  The game aims to attract a younger demographic. 
  • BYI interactive:  BYI will integrate information from from online and land based play so casinos can have a complete view of their players activity. BYI is in the process of building online casino portal sites for their clients that will promote free play when casino patrons are not at the facility (similar to WMS) in the US and possibly for pay play internationally where internet gambing is legal.  In the next 12 months, BYI's plans to go live with an international site first.  When players make any changes online those changes will appear when they play at at the casino.  The online sites will also allow players to post stats on Facebook starting at the end of the fiscal year.
  • Generally they are much more methodical about player testing than they were in the past.


  • TableView:
    • Can recognize and count how much is being played. It  allows casinos to track players, average bets sizes, dealer productivity and allows pit managers to yield manage.  BYI's Tableview is not an RFID technology so casinos need not replace chips and tables. The new technology add on's are scheduled to be commercialized over the next 12 months.
  • Business Intelligence (all approved):  New product which helps create and measure the performance of various marketing campaigns by allowing casinos to create which segment players, offers, offer costs, and effective dates of the campaigns.  This will allow casinos to estimate the profitability and review actual vs estimated productivity of each marketing program.  Product will allow casinos to see which machines are played by the people that got offers and track back where the people came from as well. 
  • Quintile analysis: Will track popularity and profitability of slot machines. By changing the denomination, slot managers will be able to predict the profitability of machines and therefore better yield manage the floor.
  • Key Kiosk:  Replaces player cards without having to go to a live casino representative and allows the casino to market to customers on the spot.
  • STM (service tracking manager): messages tech support with any issues and service requests and directs them to the appropriate client/location. It also prioritizes customer service.
  • Elite Bonusing Suite:
    • Virtual Racing promotional event: goal is to drive more rated play and coin in.  Coin-in increased by 15-17% when the tournaments were run at the test site.  Any game can be converted into a tournament game regardless of manufacturer.
  • Cost of an iVIEW DM:
    • List price of $2K
    • 1x Standard license fee of $

    • Maintenance fee: 18-20% of the license fee

    • Elite bonusing suite software: $

  • iVIEW DM content available today:

    • Virtual racing
    • Tournaments
    • Uspin (cash, prizes, etc) different types of spinning wheels.
    • Information banner on screen bottom.
    • Almost ready: Watching fights/games/etc - little harder since it requires high speed streaming video which many casinos lack
  • iVIEW DM Units deployed ~1,600 currently but they are rolling out at several sites
    • Mohegan (has 6k slots in total)
    • BCLC (12,000 VLTs in total)
    • Caesars: Initially just at Horseshoe but potentially at many more properties
  • Other Canada contracts are 6 months behind

For sale Games

  • All for sale games: Alpha 2 Pro Series V32 and Pro Curve
    • Pro Curve: curved LCD with a touch screen over it.  This year, they have 10 new game mechanics on the Curve and 17 titles which will ready in 6 months
    • Some new game features include Stacked Wilds and Ratcheting Wilds
    • They can do more things video wise.   They also have a 3 reel Curve similar to BYI's 3 Reel mechanicals
  • New interactive games: Fishing for Loot and Total Blast
    • Fishing for Loot has a male and female version. Total Blast  has a video game like feature in the bonus round with a the appearance of skill based element.

Game operations

  • Wheel products are doing great.  In general, BYI is starting to stagger the content for game operations WAPs to minimize cannibalisation
  • BYI acquired 2 new brands: Michael Jackson and Grease
    • Michael Jackson is the first surround chair for BYI.  It also has a U-Spin feature.  Michael Jackson release targeted for calendar Q2 2012.  Grease is designed by Cash Wizard designer ( which already has an install base of 700-800).  Grease has 7 bonus rounds and will be customized at each casino.  Target release date for Grease is Calendar Q1 2012.
  • Over 2K cash spins out there (U-Spin/Cash Spin)
  • The concept is you can have skill in appearance but it still has to be random, at least where cash prizes are at stake.  Atari Pong was approved but didn't get traction since the machines were not ergonomically popular. iDeck helps solve some of the issues Pong had.
  • Their new boxes, even the top boxes, are 100% digital - making the replacement of titles much more seamless


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Initial Claims Give Back Some of the Gains

Initial claims rose 10k last week to 401k (+6k net of the upward revision to the prior week).  This is a partial retracement of the prior week's 32k decline.  Quarter-end generally involves significant seasonality, and the Department of Labor noted last week that technical factors related to seasonal adjustment fueled the decline.  


Challenger announced job cuts, out earlier this week, paint a very negative picture for initial claims going forward.  Job cuts rose to 115,730, up 211% YoY.  These job cuts will flow through initial claims over the coming months.  


Bigger picture, monetary stimulus has had a tight correlation to improving initial claims. The lack of further easing from the Fed means that this tailwind is now gone.  With further fiscal stimulus also off the table, we expect that initial claims will reflect growing weakness.  














2-10 Spread Remains a Headwind

The current rate environment remains very difficult for bank margins. The 2-10 spread tightened 11 bps in the last week to 162 bps.  






Subsector Performance

The table below shows the performance of financial subsectors over various durations.




Joshua Steiner, CFA


Allison Kaptur


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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 80.43%
  • SHORT SIGNALS 78.34%