HST 3Q09 beat consensus and Adjusted EBITDA came in line with our estimates. However, guidance for 4Q09 fell short of our expectations and we are now more confident that 2010 Street numbers need to come down.





The big conference call takeawy is that margins will down in 2010, contrary to current analyst projections, due to ADR declines and a slowing of cost cutting opportunities.



Q3 Results

  • Performance this quarter exceeded their financial expectations and they are seeing some signs of improvement
  • Lower banquet business, occupancy and more conservative spend per guest all negatively impacted their F&B business
  • Overall demand continues to be weak, translating into much softer room rates. They did see some positive signs
    • Demand in transient room rates did not fall this quarter
    • High end transient occupancy decline was offset by an increase in lower rate transient business
    • Transient room nights are actually running ahead in 4Q09 implying that corporate business is flattening out
  • Group room nights declined by 15% with high end being the weakest. Some positive signs
    • Bookings improved in the quarter
    • Booking cycle continues to be very short, and 4Q09 booking cycle is behind pace, but given the number of open rooms there is a possibility to catch up
  • Still expect the combination of lower occupancy and people's expectations for lower rates to impact RevPAR, expect that RevPAR will be negative in early 2010
  • Need to see a meaningful improvement in occupancy before they can raise pricing
  • Do not project any additional dispositions for the balance of 2009
  • Continue to monitor acquisition activities.  Expect that the $30BN of CMBS hotel debt coming due through 2014 will trigger many defaults and present attractive acquisition opportunities for them
  • Hotel construction costs have decreased 8-10% from the peak
  • Expect total capex for the year to total $340MM
  • Not comfortable giving 2010 guidance now given the uncertain environment. Will give color on 2010 on the 4Q09 call
  • Operating strategy over the next few months will evolve with the market
    • As various markets stabilize they will look to adjust prices
  • Believe the low supply environment over the next few years will benefit them in the future


Details on the Quarter

  • San Antonio & New Orleans were very strong in 3Q09 but San Antonio will underperform in 4Q
  • DC Metro region continued to outperform given to strength of government business
  • New England region rebounded in the 3Q09, had 2 hotels not been under renovation results would have been even better and expect this region to outperform in 4Q09
  • Seattle hotels outperformed by inducing demand with price promotions
  • Hawaiian RevPAR decreased over 20% but expect it to outperform in 4Q09 given easy comps, while Seattle and San Francisco are expected to underperform in 4Q09
  • Transient demand benefitted from international vistation
  • New York is expected to continue to struggle, while Philadelphia is expected to continue to outperform
  • Ft Lauderdale benefited by close in bookings induced by promotions
  • International hotels decreased 14% on a constant dollar basis
  • Marriott Marquis ground lease in NY negatively impacted profits
  • Wages and benefits decreased 11% and unallocated expenses decreased 13%. Utilities decreased 17% (lower usage/lower rates). Property taxes increased
  • 4Q09 comparable operating margins will decrease more than they have YTD due to harder comps and high levels of cancellation fees recieved in 4Q08 last year
  • Continue to evaluate the secured debt market and have seen costs come down
  • Have a continuous equity program that allows them to more efficiently tap the market
  • Accounting for dividends paid in common stock will increase their share count starting 2010 and will be retroactive to Jan 1, 2009



  • How much does occupancy need to improve to get pricing power, 300 or 500 bps? Will 1Q2010 occupancy be down?
    • Really a market by market issues. For NY, LA, DC they can fairly quickly raise rates since they are at higher occupancies.  But in lower occupancy markets it will take a lot longer.  NY has 90% occupancy now, while DC has 80%.  Others are down at 60%.  Expect slightly lower occupancy in the beginning of 2010, but the weakness comment was primarily related to rate
    • Their business is really dependent on a recovery in the economy and job growth. Think that 2H2010 is when they would see a recovery in ADR
    • Sense that 4Q09 will still be worse on an absolute basis than where they were in 1Q09, hence 1Q2010 should still be down
    • Thought there was some business that was canceled or postponed in 2009 that may come back in 2010... but its still on clear whether that will materialize
  • Spending in 2010 (capex) will be slightly less than 2009
    • Only going to be doing necessary improvements
  • Asset pricing.  When do they expect to start making acquisition?
    • Not really clear where pricing is, since there aren't many transactions. But starting to see cap rates decline as people become more comfortable that things have bottoms
    • Sold their assets at 8% cap rates, but when you include the capex investments that those assets need its more like 6%
    • Working hard on a number of transactions in Asia both full & select service - expect to announce something in in 2010
  • Aren't too many assets that they would consider buying with negative cash flow
    • Looking at 10 year IRRs that will yield a premium to their cost of capital (11-13% unleveraged IRR return)
    • Cap rates that you see depend on their recovery of scenarios for RevPAR
    • Haven't bought properties with existing debt, usually all cash or corporate debt. Relying on secured debt is tricky given how much unwriting assumptions have changed.
  • Expense growth in 2010?
    • While there are some opportunities to reduce some costs - like management fees if RevPAR is lower or utilities depending on where commodity prices are - most of the cost cutting is behind the company
    • 2003 margins are a good place to look to get a sense of what margins will look like in a moderately negative RevPAR environment 
    • 2002 dropped 200 bps on 5% RevPAR decline but as they got to 2003 and exhausted cost cuts, margin declines were worse
  • A lot of special servicers or lenders don't want to foreclose because they have no confidence that they can sell the asset or that things won't get worse. But depends on the situation and whether owners are willing to fund negative cash flow. Thinks that the shortfall to refinancing becomes more apparent and that more deals will come to market
  • Will also see some non-distressed deals come to market as people transition their businesses by getting rid of non-core assets
  • Their buyers had the cash on hand to complete the acquisitions and then would put debt on them down the road
  • Increase group bookings for the quarter in the quarter
    • Discount segment driven
  • Increase in corporate expense?
    • Higher stock comp
  • Dispositions? Are they done?
    • There are over the next 2-3 years but will not be that active in the next 12 months given where pricing is. 2010 disposition pace will be slower
  • Do they expect to grow their assets over the next few years?
    • Yes - expect to be a net buyer over the next few years
    • But also think they will sell more assets too, net net they will be bigger
    • Think that transactions will be more complex given all the layers of debt, and this is part of the reasons why its taking longer for distressed assets to come to market



It’s the right time and place for Chili’s to shake up casual dining!  How far will management go?


Brinker is scheduled to report fiscal first quarter 2010 earnings on Tuesday, October 20 before the market opens.  I don’t think it will be as bad as what we experienced following the day the company reported 4Q09 numbers when the stock traded down 17.5%, but I am not sure there is much near-term upside either.  Longer-term, the focus is on where the company is taking the Chili’s brand and how much it will cost to get there.


EAT is still down 16% since that day and down nearly 8% in the last 3 months relative to the casual dining group’s average +6% move.  The company has already taken a significant hit relative to the industry, but I don’t think Brinker will be let out of the penalty box until management unveils its plans for the Chili’s brand. 


To recall, we learned on the 4Q09 earnings call that management was pursuing a new long-term strategy for the Chili's brand that would include “a couple of things with looking at innovation around food, continued improvements with our core menu, our famous and favorite, how can we take the items that people come in and get at Chili’s each and every day and make them better. And couple that too with the environment that we're in to be able to provide our guest ongoing, compelling value, reasons to come into our restaurant. Add all that on the top of everyday focus on operational excellence and having a more consistent execution each and every day when people walk in.” 


Since then, we learned that Chili’s has revised its preparation methods for its ribs and burgers.  The ribs are now slow-smoked over pecan woodchips rather than mesquite as before, and the hamburger patties, which had been delivered to stores pre-formed, are now hand-shaped in the kitchens.  Additionally, the restaurants are now also offering premium-topping add-ons such as avocados, onion strings, bacon and different cheese types. 


These menu adjustments definitely show a renewed focus on its core products, which I think is necessary, but they alone, are not enough and don’t “go for the jugular” as I said the company needs to do (please refer to my 8/6/09 post titled “EAT – What is Management Going to Do?” for more details).  Although fresher products could bring in more customers, they will also raise the company’s cost of goods, which will put increased pressure on margins.  What management says about its plans for Chili’s will have a big impact on the stock’s performance as the current direction of the brand is in question.  To that end, the magnitude of investment behind these new initiatives is unknown and is a major question mark relative to the company’s Q1 and FY10 guidance. 


Following 4Q09, management provided Q1 EPS guidance of $0.12-$0.14, which was below street expectations.  The company attributed the low guidance to an extremely weak July, when Chili’s same-store sales growth was down low double digits for the first three weeks of the month.  Although same-store sales had recovered to a down low to mid-single digit range by the fourth week of the month, management said that July is seasonally the most significant month to profitability in the first quarter, making it hard to fully recover from a profit standpoint. 


July was a bad month for the overall casual dining industry with comparable sales growth -8.3%, as measured by Malcolm Knapp, but Chili’s down low double digit performance obviously pointed to a significant loss of share.  Based on the fact that EAT traded up prior to Malcolm Knapp’s release of August same-store sales for the industry and subsequently fell off, investors seemed to be expecting more of an improvement in trends than we got from the reported -5.4%.  Management attributed its under performance in July to the fact that its initial value initiative of 10 meals for under $7 did not resonate with customers, but stated that its newer 3 course meal for $20 promotion was responsible for the recovery in sales in late July. 


Based on the company’s commentary on its 4Q09 earnings call combined with what we are hearing from other restaurants operators, I am not expecting much from a sales perspective when EAT reports Q1 numbers.  I think management was fairly successful in setting the expectations bar low so I don’t think we will like what we see, but I also don’t think it should come as a surprise.  If August and September same-store sales at Chili’s returned to July levels despite the sequentially better numbers we got from Malcolm Knapp in August (we should receive the September numbers in the next week), then that would be bad (and worse than my expectations).  On the other hand, knowing what we know about July trends, if Chili’s same-store sales growth comes in better than -6% for the quarter that would be positive relative to my expectations because it would point to a significant sequential improvement in both August and September. 


We are looking for Chili’s to post same-store sales down 7%, which implies a 2% deceleration in the chain’s two-year average sales trends from last quarter.  For On the Border and Maggiano’s, we are looking for a 6% and 7% decline, respectively.  On a consolidated basis, this implies a nearly 7% decline in comparable sales growth.  EAT did not have a good quarter.


That being said, even with continued top-line weakness, I am having a hard time getting my EPS number down to management’s guided $0.12-$0.14 range.  For reference, the street does not appear to believe management’s Q1 and full year EPS growth guidance as the Q1 consensus estimate is at $0.15 and full-year estimates imply only a -8.5% decline relative to the company’s provided -10% to -20% outlook.  I think management is being extremely conservative with both its full-year EPS and same-store sales guidance (-2% to -4%). 


In the first quarter, cost of goods as a percent of sales will come under pressure as a result of the 3 for $20 promotion and labor expense as a percent of sales will be higher due to the abysmal sales results in July.  Even considering this, I think the company’s earnings will come in better than the street’s $0.15 per share estimate.  The company is still benefiting on YOY basis from cost savings initiatives implemented in the back half of 2009.  Again, I don’t know how much money the company is putting behind its new Chili’s initiatives.  So in sum, EAT should continue the trend of beating on the bottom line despite continued top-line weakness, but I don’t think the stock will move significantly higher until the company eliminates the question about the direction of Chili’s.





HST adjusted EBITDA beat consensus but was in-line with our projection.  However, implicit Q4 guidance was lower indicating that RevPAR is not recovering as quickly as we thought and significant cost reductions may be over.  This leads credence to our 2010 call that Street estimates are too high for HST and most of the lodging sector.




3Q09 Review


HST beat consensus but missed our revenue estimate by 4% or $32MM and missed our adjusted EBITDA estimate by $1MM


  • RevPAR was 1.8% worse than our estimate
    • Occupancy was 0.9% better while ADR was 3% lower
  • We also didn't account for the disposition of Hanover Marriott until 4Q09, hence our room count was also higher
    • HST sold Hanover Marriott for $27MM or 76k per key to HEI Hotels, which will invest $20MM to renovate the asset
  • Lower RevPAR and earlier closing on the disposition of Hanover Marriott accounted for $15MM lower revenues vs our estimate.  Lower F&B and other revenues accounted for the remaining variance


The revenue miss was offset by better cost management

  • Total operating expenses decreased 14% y-o-y vs our estimate of an 11% reduction.  This compares to a 17% decline in 2Q09 and an 11% decline in 1Q09 y-o-y operating expenses.
    • Cost per occupied room decreased by 3.7% and overall room costs were down 11.5% (vs our estimate of 11%)
    • Hotel departmental expenses decreased 16% (8.5% per occupied room) vs our estimate of a 10% y-o-y decline

Property EBITDA margins came in at 16.2%, 10 bps better than our estimate of 16.1%




HST increased the low end of its FY09 guidance

  • Increased the low end of FY09 RevPAR guidance to -22% from -23%
  • Low end of adjusted hotel operating profit margins raised by 10 bps to 640 bps
  • FFO guidance lowered to $0.46 to $0.51 from $0.68 to $0.71 (new guidance includes non-cash charges of $0.25)
  • Increased the low end of Adjusted EBITDA guidance by $60MM to $760MM




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Calm before the ?

Calm before the ?

October 14, 2009


As we approach earnings next week, the flow in retail is quiet.  That’s not a bad thing by any means… Here are some notables over the past 24 hrs.

  • I can’t ignore yesterday’s front page NY Times article highlighting Disney’s plans to re-enter the world of retailing.  After growing the original Disney Store chain to 600 stores, ultimately losing about $100 million per year, selling the chain to Children’s Place, and finally buying it back after contractual obligations were not met, Disney is looking to resurrect its own retail business.  The article goes on to suggest each store will require $1 million in capital investment in order to create a fresh, modern, and innovative “theme park” environment within the stores.   The influence of Steve Jobs is also noted, as he sits on Disney’s board and happens to run a company that operates highly successful retail stores.   I’m not convinced the Apple connection will make this attempt at retailing any more successful than in the past.
  • NPD released its annual holiday survey on consumers’ holiday spending intentions.  Notable callouts include a 4% increase in the amount of respondents who plan to spend less (30% of total) while those planning to spend about the same as last year dropped by the same amount (59% of total).  Electronics categories showed a sharp 20% increase in the 18 to 24 year old demographic saying electronics are “the gift to purchase”.   Value, special sales, and convenience are top factors in determining motivation behind purchasing decisions for Holiday ’09.
  • Just one day after Kanye West’s apparel line, Pastelle, was revealed online it appears that it will never actually make its way into production.  Perhaps the MTV music award debacle and subsequent cancellation of his upcoming tour were leading indicators for what was shaping up to be a challenging launch for his first apparel line.  Recall, Kanye interned with Gucci which was likely what gave him the confidence to to become a designer as well as a hip-hop artist.
  • A sad exchange  on CNBC this morning… Byron Wein (who his co-host Joe Kernen, in poor form, is referring to as Byron-asaurus), Guest Host on CNBC Squawk Box, with Ron Gettelfinger, President of the UAW:

Q: [Do you think we’ll get to a point where the US automakers start to regain share?]

A: [We have a lot of great product out there – all we need to do is get more people in the showroom and we’ll be ok.]


I understand the political nature of the ‘production guys’ blaming it on the ‘marketing guys’…but this is the same kind of behavior and mentality that got the US Auto industry into its current hole.





-Retailers Discovering Heavy Traffic From Facebook - Facebook quickly has become the top social site for retailers since the company revamped for business two years ago. Putting up a brand page that users can “fan” is free, and companies can interact with fans through a variety of means, including news feeds, widgets, targeted ads, giveaways and contests, event RSVPs and comments. Facebook estimates that, for every 10,000 fans a brand has, it will reach 1.5 million people. That’s because every Facebook user has an average of about 150 friends, and news, comments, games and other Facebook events are automatically distributed across groups of friends.  <>


-Brands Scan Consumers' Brains - Brain scanning is being used to help predict how shoppers will respond to products and shopping environments. And firms ranging from teen retailer Abercrombie & Fitch Co. to The Walt Disney Co. want to encourage the impulse to purchase, partly by stimulating the senses through smells, sound and light. The pressures of the recession and reduced consumer spending are spurring more companies to turn to techniques such as sensory marketing and neuromarketing, which measures the brain’s responses to common experiences, like touching a soft, new piece of clothing or shopping for a luxury handbag. The testing and use of neuromarketing has roughly doubled this year, compared with 2008, among the world’s 100 biggest brands, said consultant Martin Lindstrom, the author of “Buyology: Truth and Lies About Why We Buy” (Doubleday, 2008). <>


-CIT CEO Peek Leaving Firm - Amid rumblings that CIT Group Inc. is struggling to get bondholder support for its proposed debt swap, the lender said Tuesday that chairman and chief executive officer Jeffrey M. Peek will resign at yearend. News of the transition came Tuesday morning, not long after reports circulated that CIT, a major lender to small and midsize businesses, might have to consider a pre-negotiated bankruptcy as its proposed debt swap faced ongoing resistance.  <>


-Burberry Sees Profit Estimates Rising as Sales Gain - Burberry Group Plc, the largest U.K. luxury goods maker, expects analysts to raise full-year earnings estimates after reporting a 4.6% gain in second-quarter sales and saying licensing revenue will drop less than forecast. Chief Financial Officer Stacey Cartwright said pretax profit estimates are likely to rise to the “upper end” of a 160 million-pound ($255 million) to 190 million-pound range.  New outlets in the Asia and Americas region added to sales, which were also helped by sterling’s weakness against the dollar and euro. Burberry gets more than half its sales outside the U.K. <>


-Tarlazzi in Bankruptcy -  Angelo Tarlazzi is the latest fashion house here to file for the equivalent of Chapter 11 bankruptcy protection. Private equity fund Xaap Finance, which took a 67 percent stake in Tarlazzi last year with plans to accelerate growth, recently put the brakes on financing. Bruno Degeorges, chief executive officer at Tarlazzi, said the company is in talks with a potential new investor looking to inject 3 million to 5 million euros, or $4.4 million to $7.3 million at current exchange rates.  <>


-Unilever’s Polman Eyes M&A, Emerging Market Growth - Unilever, the world’s second-largest consumer-goods company, sees more opportunity for acquisitions as the pace of consolidation in the industry increases, Chief Executive Officer Paul Polman said. “Times are good right now” for acquirers, Polman, who became CEO in January, said on the sidelines of a conference in London today. “There are good brands out there. We’ll see even more consolidation than before,” he said, adding that Unilever is “always looking” at takeover opportunities. Polman last month broke Unilever’s nine-year streak of avoiding major acquisitions by offering to buy Sara Lee Corp.’s personal-care and European detergent unit for 1.28 billion euros ($1.9 billion) in cash. With Sara Lee, London- and Rotterdam- based Unilever has “sharpened its value equation” with a range of cheaper products, Polman said today.  <>


-Prada Workers in Temporary Lay off -  Prada SpA has signed an agreement with Italian union CGIL to put 250 employees in “Cassa Integrazione,” or on temporary work suspensions via special public funds. The affected workers, who will take a rotation leave of between four to six weeks, are employed in one of Prada’s largest production plants for accessories in Levanella a Montevarchi in Tuscany. Alessandro Mugnai, secretary of Filtea, the fashion arm of CGIL, one of Italy’s leading unions, explained the move is a way to make up for a cyclical and in-between-seasons decline in production, coupled with a general slump in consumer demand because of the recession. <>


-Benetton closes down sheep skin tannery which recently opened in Trelew - After investing some US$15 million in the southern Argentina town of Trelew to open a sheep skin tannery, the Italian Benetton Group slammed on the brakes and halted the project. The tannery had a capacity to process 60,000 sheep skins per month and an operating area of 15,000 square meters. It was fully equipped with new machinery imported from Italy but now there are only 10 operatives working there storing raw skins. <>


-Giorgio Armani Touted for Senate Post - Santo Versace, chairman of the Versace company and member of the Italian Parliament with Silvio Berlusconi's People of Freedom party, has sent a letter to the president of the Italian republic, Giorgio Napolitano, asking him to consider appointing Giorgio Armani as a senator for life. The Senate’s website said the distinction is granted “for outstanding merits” in social, scientific, artistic or literary fields. <>


-Hollister to Open on Fifth Avenue - The division of Abercrombie & Fitch Co. launched its first Manhattan store in July in SoHo. And now, Abercrombie & Fitch is preparing to open a second Hollister location at 668 Fifth Avenue, between 52nd and 53rd Streets in the former Hickey Freeman space. Crown Acquisitions Inc., which coowns the building, said the Hollister unit will be in a two-level, 15,500-square-foot space, which will open next year. In May, Abercrombie & Fitch said it would open a smaller Abercrombie children’s store in Hickey Freeman’s former location. <>


-Puma Supports Maasai Wilderness Conservation Trust - Puma announced their support of the Maasai Wilderness Conservation Trust (MWCT), a non-profit organization based in Kenya that supports the preservation of biodiversity within the Maasai tribal lands of East Africa by promoting conservation, education and health services within the Maasai community. As part of the partnership, PUMA will be one of the official sponsors of the Maasai Marathon, a group of thirty runners lead by three Maasai warriors, Parashi Ntanin, Samson Parashina and Martin Sunte, and actor/conservationist Edward Norton, who will run in the ING New York City Marathon on Sunday, November 1st for the MWCT. <>






  • Terry Lundgren, Chairman, President & CEO, exercised 300,000 options for net proceeds of $5.78mm.
  • Karen Hoguet, CFO, exercised 11,500 options for net proceeds of $225k.

SWY: Kenneth Shachmut, SVP, exercised 50,000 options for net proceeds of $1mm.


PERY: Joseph Lacher, Director, exercised 15,000 options for net proceeds of $255k.


WTSLA: Edmond Thomas, President & CEO, exercised 75,000 options for net proceeds of $276k.


KR: Mary Van Oflen, Vice President & Controller, exercised 4,500 options for net proceeds of $99k.



  • Timothy Greer, EVP-Director of Stores, exercised 6,000 options for net proceeds of $134k.
  • John Howe, EVP-CFO, exercised 2,5000 options for net proceeds of $55k.
  • Stuart Uselton, SVP-Tresury, Tax, & Credit, exercised 1,500 options for net proceeds of $34k.

NFLX: Neil Hunt, CPO, exercised 4,000 options for net proceeds of $188k.



The press release for period 9 sales trends at CKE Restaurants hit at 1am today.  I wonder why?  Here is one clue - Carl’s Jr. sales trends are troubling…….  


BAD NEWS AT CKE - CKE reported P9 sales trends of -3.3% on a consolidated basis.  This includes a decline of 5.5% at Carl’s Jr. and -0.6% at Hardee’s.  Carl’s Jr. saw a 0.4% decline in its 2-years average trends on a sequential basis from period 8.  The company did not make a lot of excuses in its press release other to say that California is struggling and it was sticking with its premium product strategy. 


CALIFORNIA STRUGGLES – The two most recent data points from CPKI and CKE suggest that sales trends in California are not getting any better.  On the margin this is negative for CAKE and PFCB.


TWEEKS IN BOSTON - SBUX said it is withdrawing its Clover Brewed premium coffee offering from seven of its Greater Boston stores as it looks to fine-tune a test program of the Clover system.  Plans call for the seven Clover systems that will be removed from some stores to be redeployed in other Greater Boston stores over the next few months.









Today we are waking up to another round in the “dollar credibility crisis.”  Pressuring the dollar overnight were comments from Federal Reserve Vice Chairman Donald Kohn, who said yesterday the U.S. economy would not snap back quickly from its deep recession, fueling expectations for continued low interest rates for an “extended period” of time.   Extended is, obviously, a duration with no defined end point, so no surprise that the dollar bears are licking their lips this morning


On Tuesday, the S&P 500 closed at 1,073, down 0.3% on the day.  The six day winning streak for the S&P 500 comes to an end on accelerating volume.  The streak came to an end due to (1) a more cautious view on the banks and brokers from Meredith Whitney, (2) the passage of healthcare reform and the pressure in managed care stocks and (3) disappointing earnings from JNJ, DPZ and JCI.


Yesterday’s portfolio activity included buying the Utilities (XLU).  Yesterday, we bought the low beta XLU with a reasonable dividend yield into lower prices associated with the morning's market correction.  We also covered our short in DRI.


The Technology (XLK) sector was the second best performing sector yesterday.  The XLK is the center of M&A activity as CSCO announced its second multi-billion dollar acquisition this month.  CSCO agreed to purchase STAR for $2.9B.  After the close last night INTC reported good numbers and is the primary driver of the early indication of a higher open for the S&P 500.  As Rebecca Runkle noted in her earnings review note last night, INTC has over $14BN in cash on its balance sheet.  Given the high cash levels on balance sheets of technology companies, we should expect sustained and accelerating M&A levels in the technology sector.


In addition to INTC, the other earning report of note is from J.P. Morgan, which printed a monster EPS number, at least versus expectations.  EPS came in at $0.82, which is up dramatically from the year ago quarter of $0.09, and well above consensus estimates of $0.51.  The top line was almost $3BN ahead of expectations as well, primarily driven by fixed income.  The bulls, of course, will probably look past the  fact this morning that J.P. Morgan added almost $2BN to consumer credit reserves, which brings the company wide total to $31.5BN, or 5.3% of total loans.  Loan reserves accelerating is not a good thing, even if irrelevant this morning.


Yesterday, the dollar index was down 0.2% on the day.  In early trading overseas, the dollar index is hitting a 14 month low; trading as low as 75.49.  The dollar fell after Federal Reserve Vice Chairman Donald Kohn said interest rates will remain low for an “extended period” of time. The VIX declined slightly on the day (0.1%) and is now down 10% over the past week. 

Five of the nine sectors in the S&P 500 were up on the day, despite the S&P 500 declining 0.3%.  The three best performing sectors were Materials (XLB), Technology (XLK) and Consumer Discretionary (XLY), while Utilities (XLU), Healthcare (XLV) and Financials (XLF) were the bottom three.  We are currently long the XLV. 


Today, the set up for the S&P 500 is: TRADE (1,053) and TREND is positive (994).   Day 3 of perfection - the Research Edge quantitative models have 9 of 9 sectors in the S&P500 positive on TREND and 9 of 9 sectors are positive from the TRADE duration.         


The Research Edge Quant models have 1.5% upside and 2% downside in the S&P 500.  At the time of writing the S&P 500 is trading +13.00 to fair value; the NASDAQ is trading +22.50 and the Dow Jones is trading +108.00 to fair value.  The futures have been accelerating post the J.P. Morgan earnings report.

Howard Penney
Managing Director


US Strategy – HAWKS VS DOVES - S P500


US Strategy – HAWKS VS DOVES - s pperf

US Strategy – HAWKS VS DOVES - s plevels


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