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If You Do Macro You Won't Do These Stocks

We as a firm are concerned. We have the strongest macro call on the Street, in my opinion, but it's not positive. If you know anything about lodging you know that RevPAR is a function of supply and demand and demand is driven by Macro.
  • I'm not just worried about GDP. This time around the lodging beta could be significantly higher than the typical 1.0. Airline capacity is declining and airfares are going up. About time if you are an airline but clearly not good for the hotel industry. It might be time to invest in video conferencing finally, but probably not the time for lodging stocks. There is no RevPAR story, not here, not globally. As far as I can see the only growth story is global brand penetration driving new units. While certainly an investable story, it is a long term thesis. The near and intermediate story may be margins. We can argue about where the economy is heading but history shows us that margins have a long way to fall should we hit a downturn. As the chart displays, margins fell by a whopping 850 bps during the last downturn (2000 to 2002). Applying that margin degradation to the most recent revenues posted by the big four lodging companies results in an average EBITDA hit of 45%.
  • We don't want to be all gloom and doom. The demand for international branded hotel product appears insatiable. We see Marriott and Hilton as the primary beneficiaries although Starwood should capitalize as well. The supply situation is favorable domestically and more fee based business models could soften the economic blow. However, estimates look like they need to come down, potentially in a big way. In other words, as we like to say at Research Edge: Investors are not bearish enough.

SKX: Irony Can Be So Ironic

Here is a lawsuit that is up there with the guy that sued Starbucks because his beverage was too hot. Skechers, the king of knocking off other brands' IP, has filed a lawsuit against a company called Aetrex for - you guessed it - patent infringement. I can try to describe the irony here, but words cannot do a better job than the picture below.

While this development has little near term investment significance, it is very noteworthy for Skechers. Given how frequently SKX is sued for patent infringement, I wonder how much more juice its plaintiffs will have now that SKX has acknowledged the economic harm caused by such behavior.

I still think that this company is overearning by a good 3 points (see my 6/4 post).

LEH: Revisiting it's prior lows...

We have some good friends at Lehman and, for their sake, we do not like to see the marked to market effects of senior management's lack of judgement, but we would compromise our process if we didn't continue to call this one like it is.

Lehman was down another -5.8% today to $22.80, getting closer to my target, which i am going to move to $21.85...

KM

(chart courtesy of stockcharts.com)

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GM down another -6.4% on the day

From a quantitative perspective, GM has now lost almost 1/3 of its value since we shorted the Barron's "buy GM" call, and the stock is finally oversold. Cover for a "Trade" and re-short the bounce.

Levered companies are still allowed to go bankrupt.
KM

(chart courtesy of stockcharts.com)

Yellow Roadway (YRCW) Paving The Quants With Some Red

Last week, there was plenty of fanfare from the "Fast Money" crew about how well the truckers must be doing, given that YRCW didn't miss the quarter. Unfortunately for those momentum investors chasing green, today the red lights were flashing, taking this trucking stock down -6.4% on the day.

Interestingly, two big "Quant" shops are long this name, and given that the short interest is a whopping 41% of the float, that liquidity factor could very well be part of the reason why.

AQR Capital and LSV Asset Management are the 2 reputable quant firms on the top 10 holders list.

Quantitative Strategies do pose serious stock specific and market related risks when they correlate. The % moves in YRCW in the past few weeks highlights an example of as much.
KM

(chart courtesy of stockcharts.com)

Corn Update: From Our Argentine Correspondent

"CORN UNDER PRESSURE FROM MAN AND RAIN"

Weather is ravaging the corn crop in the United States, the largest corn producer in the world. In Argentina, the second largest producer of corn in the world, man is threatening to reduce the output of corn. Both weather and conflict are not good for corn supplies, and have pushed corn prices now to new highs.

The Central Government of Argentina is again fighting with its farm based producers on how exports should be taxed. This taxation issue has been around for a century as the government in Buenos Aires has tried to control the export of farm crops through export taxes. Historically, when the fight came to a climax, the result was a reduction of farm output over the following decade.

The populist government of the Kirchners is claiming that their taxation efforts are justified as they claim that agribusiness is now becoming more controlled by large moneyed groups. The farmers claim that the government is interfering with the free market and that higher profits are needed to meet the rising cost of farming.

The conflict is now threatening to cripple the Argentina as road closures are bringing fuel and food shortages in parts of the country. Neither side appears to be ready to concede its position. The sad fact is that Argentina is again on the midst of destroying its agribusiness, which is the only business segment where it is competitive in world markets.

It is said that God fixes at night what the Argentines break during the day. For the consumers sake worldwide, lets hope the Argentines help God this time.

Harry Scott
For Research Edge, LLC

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