Some rumors can be downright dumb!


RUBO – Yesterday, Rubio's received an unsolicited takeover offer from a group consisting of Alex Meruelo and his affiliates and Levine Leichtman Capital Partners IV, L.P. outlining a proposal to acquire all of the company's outstanding common stock for $8.00 per share.


RUMOR MILL 1 - GMCR – According to StreetAccount, GMCR is trading higher in reaction to the circulation of a rumor that GMCR could replace Affiliated Computer (ACS), which is being purchased by Xerox (XRX), in the S&P 500. 


RUMOR MILL 2 - GMCR traded higher last week in reaction to the circulation of a rumor that McDonalds (MCD) could buy it.  This is about the most stupid rumor I have heard in a long time.  If you think there is any truth to this rumor, MCD is headed a lot lower.


EAT – I published an EAT preview yesterday - EPS beat/revenue miss type of quarter.


SBUX - Starbucks Coffee Japan raised its full-year profit forecast by 50% as cost cutting and higher sales of locally developed drinks helped it boost margins even in the face of slumping sales. 





Lodging analysts.  They don’t learn their history.  Hotel margins go down in the 2nd year of a downturn.  So why are analysts projecting flat 2010 margins and down RevPAR?



“Those who don’t know history are destined to repeat it” – Edmund Burke



Germany invaded Russia in 1941 while at war with England and failed.  Deciding to spread troops over such a huge land mass in order to fight a war on two fronts was a questionable move.  Considering that Napoleon tried the same thing in 1812 (and failed) made Germany’s decision downright idiotic.  We’re not sure if the current crop of sell-side analysts have any dictatorial traits, but they don’t seem to very good students of history, or math for that matter.


This isn't the first time we've dinged the sell side for the margin work.  Way back in June of last year we wrote "IF YOU DO MACRO YOU WON'T DO THESE STOCKS" and followed that up with a number of margin related posts.  The issue now is that many analysts are projecting flat-to-slightly down RevPAR in 2010, yet they are keeping margins flat.  Hotel history has shown us a few things:

  1. Occupancy recovers first – we haven’t seen either recover yet but it’s probably a safe bet occupancy will begin to improve year-over-year at some point in 2010.  I’m not so sure about rate.
  2. Rate flow-through is pretty close to 100% while occupancy flow through is probably in the 65-70% range.  Since the sell side is projecting down ADR in 2010, they should also be projecting down margins.
  3. Cost cutting is nearing its end – the good news is that the hotel companies were aggressive and early in their cost cutting.  The bad news is that we are pretty much through that phase.  Hoteliers have been aggressively reducing their cost structures since Q2/Q3 2008.
  4. Margins continue to decline meaningfully in the second year of the downturn for reasons 1-3 above


Host Hotels reported its Q3 earnings yesterday and pretty clearly corroborated our thesis with its comments on the conference call:

  • HST indicated that in regards to 2010 margin expectations, a look at 2003 would be instructive.  So if you look at 2003 - it’s not a perfect comp but that’s where they pointed us to - RevPAR declined 2.7%, occupancy down 1.8% while rate was down 0.9%.   Hotel revenue declined 2.5% while total expenses increased 1.8%.  Property level margins declined 280 bps.  In theory, 2010 should be even worse since rate will be down considerably more than occupancy.  The consensus HST estimate has margins declining only 70 bps next year.




  • With regards to cost cutting, HST indicated that the heavy lifting has been done.  By way of illustration, they indicated that margin degradation accelerated in Q3 despite a positive second derivative on year-over-year RevPAR change.  The YoY property EBITDA margin declined from 560 bps in Q2 to 720 bps in Q3 at the same time the YoY RevPAR decline improved from -24.9% to -21.3%.





Looking at another lodging stock, Starwood Resorts, the analysts appear to have it wrong here as well.  As seen in the following table, the consensus 2010 EBITDA margin is flat with 2009.  We estimate the average analyst has RevPAR down low single digits.  Given our prior discussion, how is this possible?


The following table provides a simplified calculation of the margin impact to HOT from a decline in RevPAR.  If we start with 2009 Street projections and assume RevPAR declines 3%, comprised of a 1% occupancy increase and a 4% ADR decline, EBITDA margin should fall 3.1%.  This analyst assumes almost full profit flow through on the ADR change and 70% on the occupancy change (it costs money to clean a room).  We are projecting only a 2.5% decrease in margin next year due to some more cost cuts, but flat margins seem like a pipe dream.  Interestingly, this quick analysis would project a $70 million EBITDA divergence from the Street consensus which is almost exactly the amount our estimates differ.




US Strategy - Golden, or Goldman, Expectations?

On Wednesday, the S&P 500 closed at 1,092, up 1.8% on the day.  Yesterday was a melt up day for the S&P 500 on a big sequential acceleration in volume.  This is bullish as trade and TRADE and TREND are positive.  Of all the positive dynamics at work yesterday the earnings calendar seemed to take center stage, with JPM, INTC, ALTR and CSX leading the way with better than expected results.


The MACRO calendar also offered a positive tone to the market as retail sales fell 1.5% month-to-month in September vs consensus expectations for a 2.1% decline. The sequential decline is a function of the expiration of the cash-for-clunkers program, as sales at auto dealerships fell 10.4% month-to-month.  Excluding autos, sales were up 0.5% vs consensus expectations for a 0.2% increases, while core retail sales - which excludes autos, gasoline and building materials - rose 0.5% last month following a 0.7% increase in August.


Yesterday’s portfolio activity included shorting CCL.  Todd Jordan and Keith have been waiting, patiently, on price to re-short this levered name of over-capacity as we head into 2010's consumer spending headwinds.  We also shorted NKE; Brian McGough and Keith will take the other side of today's bulled up GS call. For the immediate term TRADE, NKE is a short at this price.


Bell weather investment bank Goldman Sachs’ reported earnings this morning and metrics across the board were broadly better than expected.  The stock in the pre-market is down just over three percent, which implies that the “whisper” expectations were higher than consensus estimates.  This was to be expected give the massive move Goldman’s stock price in the year to date, and specifically over the last few months.  Expectations, as always, are the root of all heartache as the futures and Goldman are now reflecting.


The momentum behind the “currency creditability crisis” continued to weigh on the dollar index, which fell for a third straight session, finishing down 0.7%.   The VIX declined for the eighth straight day (0.6%) and is now down 43% year-to-date, which a more rational and tighter ranged market.


It’s being reported today by RealtyTrac that U.S. properties subject to foreclosure filings totaled nearly 938,000 in 3Q09, up 23% year-over-year and up 5% sequentially.  Yesterday the FED released the details of the September meeting and the notes "expressed considerable uncertainty about the likely strength of the upturn in the economy once those stimulus supports were withdrawn or their effects waned."  In particular, the housing “needs to get back on stronger footing for the national economy to return to full health.”  The housing market has firmed up, helped by low mortgage rates and an $8,000 tax credit for first-time home buyers.  The remaining question is the fate of the tax credit that is scheduled to expire at the end of November.


Yesterday, only three sectors outperformed the S&P 500.  The three best performing sectors were Financials (XLF), Industrials and Materials (XLB), while Utilities (XLU), Consumer Staples (XLP) and Technology (XLK) were the bottom three.  


Today, the set up for the S&P 500 is: TRADE (1,061) and TREND is positive (996).   Day 4 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% upside and 3% downside in the S&P 500.  At the time of writing the major market futures in the U.S. were trading down small on the back of Goldman Sachs’ earnings. 


The Research Edge MACRO team.


US Strategy - Golden, or Goldman, Expectations? - S P500


US Strategy - Golden, or Goldman, Expectations? - s pperf

US Strategy - Golden, or Goldman, Expectations? - s plevels


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 80.46%
  • SHORT SIGNALS 78.35%

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

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