Minsky Meltup

“It is what people actually did in the stock market that counted – not what they said they were going to do.”
-Jesse Livermore
Jesse Livermore knew a thing or two about managing real-time market risk, sometimes. He was an American, born in 1877 in Acton, Massachusetts. He was famous for both making and losing a lot of money. He was one of the first well known Stock Market Operators to explain what he was thinking.
When I think about shorting stocks, I think about my process. That always starts with what not to do. While Livermore profitably called both the 1907 and 1929 US stock market crashes, he also called for crashes that never came. Being early on the short side is called being wrong. Global Market Operators need to manage the risk associated with bad timing, acutely.
Early last week, I knew exactly when and why I was about to be wrong. After all, we did author the Burning Buck. So I covered my short position in the Dow, and started taking up my invested position again. I express this both in terms of drawing down the position I have in US Cash in our Asset Allocation Model and by expanding the breadth of the long/short ratio of positions in our Virtual Portfolio.
I thought that there was a heightening probability that the US Federal Reserve would signal an end to the narrative fallacy of perpetual deflation and the “Great Depression.” I thought they would create a squeeze in the now consensus position of short the US Dollar. I thought this was setting up for a series of higher-lows in the US Dollar and the associated series of lower-highs in the prices of everything priced in Burning Bucks.
Mucker, think Again.
Yesterday, you saw the unthinkable. Fed Head, Donald Kohn, inspired lower-lows in the Burning Buck and forced anyone short anything priced in those Bucks to run for the exits. “It is what people actually did in the stock market that counted.”
This morning, the Buck continues to Burn. America’s Compromised Currency is trading down another -0.37% at a new YTD low of $75.27 and, other than her all-time low set during the 2008 US stock market crash, there is no line of support for her now. It’s sad, but true…
In stark contrast to the Heli-Ben Bernanke Doctrine of US Dollar Devaluation, this is what the world’s most impressive central banker, Glen Stevens, had to say this morning from his pulpit at the Reserve Bank of Australia:
“If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias in our monetary policy framework” …

No, Global Market Operators on the East side of this world didn’t run for the exits on that. They actually took both the Australian and Hong Kong stock markets to fresh YTD highs at +33% and +53%, respectively.

It isn’t just a bald dude in Australia who is reaping the economic harvest associated with a credible rate of return for his Creditors. For the last few weeks, Brazil has been explicitly signaling that easy money is over and that they are setting up for a rate hike. At +36% YTD, the Brazilians Real is the best performing currency in the world for good reason. Brazil’s stock market tacked on another +2.4% yesterday, taking the Bovespa to New YTD Heights of 66,201. That’s up +73% YTD!
All the while, countries like Brazil and China are issuing IPOs with legitimate organic top line growth while America’s originators of levered long debt piles are tee’ing up the likes of Steve Schwarzman and Henry Kravis for liquidity events in IPOs like Dollar General. It’s sad, but true…

Some people think that I think that the US Federal Reserve is stupid. On the contrary, I think they know exactly what they are doing here. Being willfully blind to prices accelerating around the world like this is no different than Bernanke telling you that $150/barrel oil wasn’t inflationary. The US government has changed the complexion of reported inflation 9 times since 1996 for a reason folks. This fictional exercise in storytelling needs book ends.

No matter where we go this morning, here we are. Right back where this mess started – in a meltup of levered up US asset prices that is making Hyman Minsky rollover in his grave.

The Minsky Model wasn’t so popular for the levered long crowd under Bush and it wont be under Obama either. Their Burning Buck policies stand in stark contrast to those of Reagan and Clinton. This isn’t a Republican/Democrat thing. This is a very politicized thing. This is what happens when debtors have no other way out.

Minsky warned that capitalist economies create debts. Crises are then born out of debt financed speculation on asset prices (private equity, levered loans, etc…). Eventually, asset prices pop – then those prices collapse – then conflicted governments, devalue, re-lever, and set them up for the next fall…

Maybe that’s not Minsky to a tee… call it the Mucker Minsky Model if you want. And remember, as we watch these asset prices meltup to higher and higher-highs, stay on the watch for “what people actually do in this market, not what they say they are going to do.”

My immediate term TRADE lines of support and resistance moves to higher-lows and higher-highs this morning. Those lines are 1061 and 1099, respectively.

Best of luck out there today,

XLU – SPDR Utilities
We bought low beta Utilities with a reasonable dividend yield on 10/13.

EWT – iShares Taiwan
With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

EWG – iShares Germany
Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XHB – SPDR Homebuilders We were the bulls on a Q2 housing turn but, as the facts change so do we: now we are getting cautious on 1H 2010 US Housing. Rates up as access to capital tightens is not good for new home builders as we enter into a new year and series of potential catalysts for renewed pressure in the secondary market, including the expiration of the $8,000 tax credit.

WTIC Oil traded just north of our overbought line on 10/12. With the US Dollar hitting another higher-low, we shorted more of oil’s curve.

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.



Concerns over visitation caused Macau casino stocks to trade down sharply in Hong Kong today.  A report was released by The Mao Ping newspaper suggesting that, since October 1, authorities in Guangdong have tightened visa restrictions for its residents traveling to the gaming hub.  The change in policy reverses the recent easing of travel restrictions that has been a key factor in Macau’s recent revival in the wake of the financial crisis.  Visitation from Guangdong, according to the report, has been scaled back to one visit every two months from one visit per month.




Accor Asia-Pacific chairman Michael Issenberg said that the company expects revenue per available room on the mainland to drop by 20-to-30% this year.  A large amount of new supply is the most important factor behind this decline.  The company is expecting a strong improvement in the performance of its hotels in China in 2010.  Issenberg said that in 2009, while there was growth in demand, you had more supply coming in.





Meltup: SP500 Levels, Refreshed...

Apparently, on our Q4 Macro Strategy conference call, I surprised some people with the height of my immediate term SP500 upside targets. With the Buck Burning to lower-lows, this shouldn’t be a surprise at all. This Credibility Crisis in the World’s Reserves Currency is great, in the immediate term, for anything priced in that currency…


The two levels I gave on the 1PM call were 1096 (dotted red line in the chart below) and 1113. Those are immediate term TRADE lines. These have nothing to do with the long term implications of a debased currency. They have everything to do with real-time Risk Management.


I now have a higher-low of support for the SP500 at 1061 (dotted green line). Don’t fight this yet. This is a Meltup.



Keith R. McCullough
Chief Executive Officer


Meltup: SP500 Levels, Refreshed...  - a1

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 80.52%
  • SHORT SIGNALS 78.67%

Sports Apparel Retail: A Big But

Sports apparel POS data suggests another sizable sequential improvement to up 13% y/y vs. last week’s reading of up 7% y/y. What’s interesting, however, is that this came at the expense of price point – which posted its first y/y decline since December 2008. This is just flat-out weird. I want to wait 2 more weeks before I start to make any conclusions (1 week is not a trend – 3 is), but if these numbers continue it will be inconsistent with the trends on inventory that the companies have been chirping to the Street on recent conference calls and ‘super duper secret 1-on 1s’.


Sports Apparel Retail: A Big But - 1


Sports Apparel Retail: A Big But - 2


Sports Apparel Retail: A Big But - 3


Sports Apparel Retail: A Big But - 4


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.



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