Learning Fast

“The ability to learn faster than your competitors may be only sustainable competitive advantage.”
-Arie de Geus


De Geus was a global macro man, of sorts. Born in Holland, he worked for Royal Dutch/Shell for his entire career (1) and was head of Shell Oil’s Strategic Planning Group. “The ability to learn faster than your competition” is a great way to think about what a global risk manager is tasked with every day.


Last week, I learned a lot about what one of our Top 3 Macro Themes for Q1 of 2010, Rate Run-up, might mean for global market risk. While my short US Treasuries (IEF), long US Dollar (UUP), position had another solid week, I ended up being way too light on my US Equity exposure.


Currently, I have only a 3% position in our Asset Allocation Model to US Equities. In a week where the SP500 was up +3.2%, and I was short the SPY (SP500 ETF) for -1.25% of that move, that made me wrong in that position.


While I was never in the camp that a Buck Breakout or a Rate Run-up were going to make the stock market crash, I was most definitely getting out of the way of what I thought would remain a credible, short term, marked-to-market fear. For now, the US stock market’s fears about the Fed raising the Discount Rate have proven to be fleeting.


The US Treasury market continues to see this differently - government bonds continue to sell off this morning. With 2-year yields trading up at 0.91%, the short end of the curve is breaking out from an intermediate term TREND perspective. Meanwhile, the long end of the yield curve continues to make a series of higher-lows and higher-highs. Intermediate term TREND line support for 10-year yields is down at 3.59%, so this morning’s yield of 3.79% is comfortably higher than that.


At +288 basis points wide, the spread between 10 and 2-year yields is within 2 basis points of its widest spread ever this morning. Ever, as we macro people like to say, is a very long time. Yes, even longer than 50 years, which is what Team USA ended last night with their respectable Olympic win against my homeland on the ice.


Our Hedgeyes affectionately refer to this 10’s to 2’s spread as the Piggy Banker Spread. That spread is the best way to measure the US Government’s choice to capitalize the profits of bankers rather than incomes for Americans with US Savings accounts. How long Washington can politicize and compromise the rate of return on your hard earned nest egg is up to the politicians, I guess. It may be sad, but it’s great for those preferred borrowers while they can get it.


This is obviously great for bankers looking to finance large M&A transactions with debt. Great, that is, until it isn’t. The ghost of the 2007 levered-loan market is back, and it will be interesting to watch corporate junk spreads trade in the coming weeks as volumes come back to the marketplace.


We’ve already seen 16 corporate bond deals and 15 IPOs pulled in the last month as interest rates have backed up. So the piggies who have been eating at the trough of a government sponsored spread are at least wavering. That said, if Bernanke panders in Washington this week (he testifies in front of Congress), there is no telling how hog wild the reflation trade can go again.


In the meantime, you don’t have to learn fast to understand this: $80/oil and $3.34/copper prices this morning are inflationary. Year-over-year US inflation growth is currently running up +3-5%, not including last week’s commodity price spike (CRB Commodities Index was +3.7% week-over-week).


Markets look forward, and maybe that’s exactly what the US stock market did after taking a good hard and long look at the SP500 futures trading down 10 handles on Thursday night. Maybe, just maybe, Mr. Macro Market is getting quite good at proactively predicting a Fed that panders to Japanese style political winds.


Markets don’t lie; people do. And I for one am not going to wake-up on this Monday morning pretending I don’t need to take up my long position in both individual US stocks and my US Equity asset allocation; particularly if we go back to a daily macro grind of politicians pretending there is no inflation in America. There remains a Bubble in US Politics that we have to manage risk around.


My intermediate term TREND line of resistance for the SP500 was eclipsed to the upside late last week. At 1099, now that’s a very important line of support. I have immediate term TRADE resistance up at 1119. Keep learning fast and manage the risks embedded in this improving stock market range.


Best of luck out there today,




XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.


UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.



EWU – iShares United KingdomThe TREND of higher y/y inflation and stagnant growth = stagflation. For a country with the UK's balance sheet and leadership problems, that’s not good.


SPY – SPDR S&P 500We re-shorted the SP500 at an attractive re-entry point on 2/16/10. We are bearish on US Equities for the immediate term from this price. Shorting green.


XLE – SPDR EnergyWe remain bearish on Oil for the intermediate term TREND and bullish on the US Dollar on the same duration. Everything has a time and a price.


GLD – SPDR Gold We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result.


RSX – Market Vectors RussiaWe shorted Russia on 2/9/10 and maintain our intermediate term TREND bearish view on the price of oil.


XLP – SPDR Consumer StaplesThe Consumer Staples sector finally broke both our TRADE and TREND lines on 2/8/10. Given how many investors own these stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.


EWJ – iShares JapanWe re-shorted Japan on 2/2/10 after the Nikkei’s up move of +1.6%. Japan's sovereign debt problems make Greece's look benign.


IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.

US STRATEGY - By the Charts

US STRATEGY - By the Charts - sp1


US STRATEGY - By the Charts - usd2


US STRATEGY - By the Charts - vix3


US STRATEGY - By the Charts - oil4


US STRATEGY - By the Charts - gold5


US STRATEGY - By the Charts - copper6

UA: Playing the Olympics Like a Champ

The Winter Olympics is traditionally a big blown-out non-event in the world of sports marketing. Yes, brands make noise about their innovations and new product. But let’s face some facts, most people don’t walk the Streets wearing those luge unitards.


Under Armour is the exception as it relates to brand impact, however. Why? Three of the many holes in its portfolio it has yet to fill are 1) International, 2) Higher-end cold weather outerwear, and 3) Women.  This event gave a lay-up opportunity to show the world that it’s not just a US football brand, and UA soared over a few defenders’ heads and jammed it.


Under Armour is taking full advantage of the 2010 Vancouver Winter Olympics through its official, unofficial, and individual sponsorships.  The ground work was laid in 2002 when UA joined the U.S. Ski Team as a supplier and has blossomed into high profile coverage through official sponsorships of the U.S. Freestyle Ski Team (aerials, moguls, and ski cross), U.S. Bobsled Team, U.S. Skeleton Team, and the Canadian Curling Teams (as an FYI, Curling in Canada is second only to Hockey as a National pastime). 


UA’s unofficial sponsorship can be seen underneath the outerwear with its performance base layers that are worn by most of the US athletes on the slopes.  If you’re watching the games, chances are that you noticed.  I’d argue that this trumps individual sponsorships in this instance. But Under Armour has also invested around cross-over athletes like Lindsey Vonn.  UA compared Vonn’s potential at the Winter Olympics of winning 5 gold medals to Michael Phelps amazing accomplishments of 8 gold medals at the 2008 Summer Games. That’s a bit of a stretch, but heck, UA endorsed Phelps last week last week, so even if they are wrong that still have the Big Man.  


Why Vonn and Phelps?  In the end, the athletes need to either win, but really, they need to capture the hearts and minds of viewers around the world. One of the more powerful ways to do this is by partnering with athletes with broad crossover appeal. By ‘crossover appeal’ I mean Vonn making it into the swimsuit issue of Sports Illustrated (see below), and Phelps endorsing UA’s product for purposes nothing having to do with water – but simply the training apparel/footwear to help him build form. This is also akin to someone like Maria Sharapova for Nike (who has been on the cover of SI and Vogue in the same month), where no one can justify the investment on tennis sales alone, but across a much broader product set.


Under Armour downplayed the impact of the Winter Olympics on their 4Q call and only mentioned it as a small opportunity to be seen as a global player. Our sense is that they fully baked this in to their SG&A guidance, but lowballed revenue opportunity as well as the longer-term brand implications.


See stats below for the market opportunity for UA in the Ski/Snowboard outerwear market. Its current share is sitting between 1-2%. Yes, that’s almost as small as its footwear market share. Big opportunity.


On a related note…Under Armour won the seventh Doc DesRoches Award (other winners include Rossignol, Spyder, and SmartWool) for recognition as an SIA member and U.S. Ski Team supplier for its promotion of the Team's brand and athletes. Under Armour was acknowledged for the national print and TV campaign around World Champion Lindsey Vonn. Check out the commercial:


Zach Brown


Hedgeye Retail 


UA: Playing the Olympics Like a Champ - Endorsements image 1


UA: Playing the Olympics Like a Champ - Endorsements image 2


UA: Playing the Olympics Like a Champ - Lindsey Vonn


UA: Playing the Olympics Like a Champ - Snow Market Size


UA: Playing the Olympics Like a Champ - US Winter Olympics UA Team


UA: Playing the Olympics Like a Champ - US Ski Team Website honoring UA


UA: Playing the Olympics Like a Champ - UA Webstie Image Shot


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Hoping for more disclosure.  Here is our preview.



Hyatt is scheduled to have its first earnings release as a public company this Thursday.  Results should look similar to HST’s, although Hyatt has a little less exposure to the convention business.  While we expect Hyatt to talk about the opportunity to grow its management and franchise business, especially in select service and international, most of its earnings still come from owned hotels.  Every other hotel company already told us that EBITDA for owned hotels will be down in 2010.  Hyatt should sing the same song.


We thought that the disclosure in the S1 filing was fairly poor, so hopefully there will be more detail this quarter and in the 10K filing.  We have no idea on how to model their substantial JV EBITDA.  To get to Hyatt’s “Adjusted EBITDA” we have to make some odd adjustments to calculated and historically reported segment EBITDA.


Anyway – below is our best guess of what results will look like this quarter, as well as our projections for 2010.


4Q09 Thoughts:

  • We project Hyatt to report $482MM of revenues (excluding pass-through revenues from managed properties) and $53MM of “Reported Consolidated Adjusted EBITDA”
  • Our EBITDA calculation excluding JV’s is $37MM (down 54% y-o-y).
  • We expect Owned & Leased Revenues of $438MM and  EBITDA of $31MM, driven by the assumptions below:
    • Full Service RevPAR down 9.5% and Select Service RevPAR down 12.5%, with 100% of the decrease driven by ADR
    • CostPAR (cost per occupied room) -6% (this compares to a decline of 6.7% decline in 3Q09 and a 2.1% decline in 1H09)
    • EBITDA margins down 630 bps for a margin of 12%, compared to a margin decline of 820 bps in 3Q09 and a 910 bps decline in 1H09
  • Management and Franchisee fees of $31MM and associated EBITDA of $25MM
  • A deduction of $25MM for corporate and other to get to “Consolidated Adjusted EBITDA”
  • Other assumptions:
    • Timeshare and other revenues of $13MM
    • Other direct costs of $6MM
    • SG&A of $53MM
    • D&A of $69MM
    • Interest expense of $8MM


2010 Outlook

  • We’re projecting EBITDA of $333MM for next year (on an as Reported Basis) compared to consensus of $352MM.  Consensus projections assume flat y-o-y EBITDA despite guidance from other lodging companies of another year of EBITDA declines in 2010 due to contracting margins.
  • We expect a similar outlook to HST, although Hyatt probably has a little convention exposure so RevPAR may be a little better in 1H09.
  • The company is likely to steer investor focus on growth opportunities given their:
    • underleveraged balance sheet and “coming” of distressed properties on the market … despite not seeing a lot of bargains “yet”
    •  “under-penetration”  of their brands especially on the select service side
      •  It’s hard to understand why companies equate under-penetration of their brands with demand> supply…that makes sense for huge networks where travelers accumulate significant loyalty points through work travel that they utilize for personal travel… but that “loyalty” traveler is a very small % of the total travelers for a company like Hyatt… and it’s hard to argue that the there is excess demand for hotels now.  Limited service is also going to be a tough sector to grow due the lack of credit available for construction
  • Since Hyatt has a smaller base of management and franchise business, given the law of small numbers, they may experience bigger growth in this segment of their business than other lodging peers but it still may not move the needle over the near term

The Week Ahead

The Economic Data calendar for the week of the 22nd of February through the 26th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2


Russia Ailing

Position: Short Russia via the etf RSX; Long US Dollar via UUP


Using a 2-factor macro model, commodity prices and Chinese demand continue to weigh on Russia. Additionally, on the domestic front, today we received two incremental data points: unemployment rose a full percentage point to 9.2% in January from the previous month and Bank Rossii cut the refinancing rate 25bps to 8.5%.


From this year’s high of 1580 on the Russian Trading System (RTSI) on 1/19/10, the Russian stock market is down 9.8% and broken from an intermediate TREND perspective (Note: the RSX is down 9.3% over this same period).


For the commodity-levered economy, the pullback in commodities and the underperformance of the Russian market rhyme with our Buck Breakout theme for Q1, a bullish call on the US Dollar (despite its immediate term overbought level today), which we’re long via the etf UUP in our model portfolio.  We also attribute this downward pressure from the recent economic tightening of China, Russia’s critical trade partner. (For more on our thesis on China, see our post “1Q10 THEME: Chinese Ox in a Box” from 1/13/10.)


Russia Ailing  - RUSS1


The move by the central bank today to lower the refinancing rate signals an effort to improve liquidity and lift the market; and the RTSI reacted favorably to the cut, closing up 1.2% after opening down this morning. Bank Rossii said there are no inflationary pressures, citing that inflation has come in every month since August ’09 to its current level of +8% (in English, we still call that inflation).


Yet with unemployment popping, we’d expect further crimping in domestic consumption to accompany Russia’s already bleak economic performance (GDP fell 7.9% in Q4 Y/Y). And if we’re right on our intermediate term TREND (3 months or more) bearish view of commodities, analysts’ predictions for 3% GDP expansion in Russia this year could fall short. 


Matthew Hedrick



Russia Ailing  - russ2


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%