Unemployment has been a statistically more significant variable in driving RevPAR than GDP over the last 10 and particularly 5 years. The implications are a potentially slower RevPAR recovery than in past recessions.



GDP has been the universally accepted hotel demand driver.  GDP is important, no doubt, but our regressions using more recent data show that unemployment is a statistically more significant driver of revenue per available room.  While not as meaningful as unemployment or GDP, the housing price index has also been an important variable. 


Here are the T-Stats and R Square from our regression of RevPAR to GDP, unemployment, and housing.  As can be seen, the significance of the unemployment variable in driving RevPAR is higher than GDP in the last two 5-year periods.  Moreover, the relative significance of unemployment increased in the last 5-year period.




Joel Ross wrote an interesting (at least for us geeks) article in Hotel News Now entitled “Industry Uses Wrong Metrics to Project RevPAR” that provides some insight on why GDP may not be as important.  “The increases in unemployment, home foreclosures, bank balance sheet strength, lending to small business, consumer balance sheets and the entire capital markets environment are different this time” wrote Mr. Ross in explaining why there may not be a V-shaped RevPAR recovery as was experienced in past downturns.  Mr. Ross goes on to say that essentially the historic relationship of GDP to RevPAR may lessen since increases in government spending are inflating GDP.


Insightful commentary, no doubt, and we would like to add a few bullets:

  • Housing prices have moved more independently from GDP over the last 10 years and may continue to do so as housing remains under pressure
  • Consumer leverage is still high by historical levels
  • Unemployment may take longer to revert to historical norms and the wild swings over the last few years causes uncertainty and potentially a higher savings rate
  • Companies don’t seem as quick to open the purse strings as in previous recoveries which means less hiring and less travel
  • More government uncertainty – taxes look like they are going higher at the federal, state, and local levels to combat ballooning deficits
  • Historically low interest rates may not be sustainable
  • Potential for inflation

None of these factors will be good for RevPAR even if GDP continues to bounce back.


The Macau Metro Monitor, March 22th, 2010



A decision to fill in a 13-hectare lake, which is bounded by Lotus Avenue and Estrada do Istmo (Isthmus Road), near the Macau Dome stadium, to build a public hospital highlights the Macau government's dire shortage of land after years of land hoarding by speculators. Citing population growth and lack of medical services, CEO Chiu listed the building of a hospital on the Cotai Strip as a high priority and reassured legislators that the government will deal with undeveloped land in accordance with the laws, as filling a lake while there are large undeveloped sites nearby has sparked criticism of the government's inability to seize land from speculators. Large sites totaling at least 50 hectares sit idle near the lake.


Legislator Au Kam-san, a veteran watchdog of Macau's land policies, said it was absurd not to use an existing site.

Au said at least three undeveloped sites could be used to build the hospital. A 10.6-hectare plot to the east of Macau Dome was sold to a company controlled by Chui Sai-cheong, an elder brother of the CEO, for 231 million patacas, or 2,179 patacas per square meter, in January 2006, according to the Government Gazette. According to the gazetted land deal, a hotel had to be built on the site by January 2009. This means the government now has the right to seize the undeveloped site under Macau law. Another plot of over 10 hectares to the west of Macau Dome is also vacant. It is unclear who owns that site as the government has not made the information public. A third plot of more than 10 hectares to the south of the Grand Waldo casino hotel belongs to Galaxy Entertainment and is not being developed.


Macau's Land Law requires government land sales to be carried out through public bidding, with exceptions allowed only with the chief executive's permission. Yet since the 1999 handover, only a handful of more than 400 sites sold by the government have gone through the public bidding process. In a rare open land auction in January 2008, two plots in the Macau Peninsula's northern Fai Chi Kei area totaling 4,700 square meters fetched HK$1.4 billion, or HK$297,872 a square meter. The prices for many land deals in the past few years were less than 10% of the open bid price.



CPI for February 2010 rose by 2.57% YoY; the increment was attributable to the price increase of the Food & Non-Alcoholic Beverages. Price indices of Recreation & Culture; Transport; Clothing & Footwear; Miscellaneous Goods & Services; and Food & Non-Alcoholic Beverages rose by 8.64%, 7.87%, 7.84%, 7.33% and 4.82% respectively, on account of soaring charges for outbound package tours, meal brought away from home and hairdressing services, rising prices of gasoline, gold jewelery, clothing, vegetables, fresh fish and seafood during the Lunar New Year period.


The CPI-A (103.0) and CPI-B (103.28) for February 2010 increased by 1.99% and 2.62% YoY respectively. The CPI-A relates to about 50% of the households, which have an average monthly expenditure of MOP6,000 to MOP18,999. The CPI-B relates to about 30% of the households, which have an average monthly expenditure of MOP19,000 to MOP34,999.



The Financial Services Bureau says direct gaming tax receipts for the first two months of 2010 rose 54% to MOP9.26 billion. These receipts accounted for 86.55% of total government revenue, which reached MOP10.7 billion, a YoY increase of 45.8%.



The Monetary Authority of Macao released data that showed M2 grew 1.5% MoM to MOP 215.4 billion in January. Resident deposits grew 1.5% from the previous month to MOP 210.4 billion. Non-resident deposits dropped by 16.9% MoM to MOP 69.1 billion and public sector deposits with the banking sector decreased 6.5% to MOP 15.2 billion. As a result, total deposits with the banking sector declined 3.9% from the previous month to MOP 294.8 billion. Domestic loans to the private sector expanded 1.8% MoM during January to MOP 102.7 billion. As domestic loans to the private sector rose at a faster pace than resident deposits, the loan-to-deposit ratio for the resident sector grew 0.4% this month to 45.5% at the end of January 2010.


Each nation feels superior to other nations. That breeds patriotism - and wars.
  - Dale Carnegie


On the MACRO front, continued concerns over sovereign credit in Europe seemed to be the driving theme behind Friday’s decline. The Greek PM suggested that Greece might have trouble accessing the market in order to refinance its debt later in the spring.  According to street account, “In a speech mostly for domestic consumption in front of one of the Greece’s unions Papandreou raised the stakes in a competitive game of political posturing.”


The Germans aren’t buying it.  According to Bloomberg, “German Chancellor Angela Merkel told investors they shouldn’t expect this week’s European Union summit to agree on assistance for Greece, resisting calls for the specifics of a rescue plan and helping send Greek bonds to their lowest in more than three weeks.”


The S&P 500 declined by 0.5% on Friday, but was up 0.8% for the week.  While the S&P traded within a relatively narrow range, the breadth continues to decline as small caps underperformed large caps on the day.  Every sector declined on Friday and only two sectors outperformed the S&P 500.    


Also on the MACRO front, India raised its repurchase rate on Friday, which was a surprise and a concern for US equities. Further, India central bank Governor Duvvuri Subbarao also alluded that he’ll likely raise rates again next month.


Although down slightly on Friday, Healthcare (XLV) was the best performing sector, along with Consumer Discretionary (XLY) and Consumer Staples (XLP) on Friday.  Many cited reduced uncertainty regarding healthcare reform as providing support for the sector. Managed health preformed well; the HMO index was up 2.7% on the day. 


The Dollar index was up 0.62% on the day and 1.1% on the week.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.34) and sell Trade (80.92).  The strength in the dollar knocked down the REFLATION trade and related sectors.  On Friday the three worst performing sectors were Energy (XLE), Materials (XLB) and Utilities (XLU).   


The strength of the dollar and Crude's big drop (1.8%) on Friday provided significant pressure on the XLE and the XLB.  In early trading, Oil is trading down below $80 a barrel.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (79.85) and Sell Trade (83.63). 


Last week Technology (XLK) was also a notable underperformer.  Last week the XLK underperformed the S&P 500 by 70bps.  On Friday, PALM reported disappointing earnings and provided guidance significantly below expectations; smart-phone sell-through was well below expectations.  The SOX declined 1.7% on the day. 


The VIX gained +2.1%, although off its highs at the close and closed down 3.5% for the week.  The VIX continues to be broken on all three durations - TRADE, TREND and TAIL.  The Hedgeye Risk Management models have levels for the volatility Index (VIX) at:  buy Trade (16.39) and sell Trade (18.79). 


In early trading, equity futures are trading below fair value after the House of Representatives approved a bill overhauling the health-care system in a 219-212 vote and India’s interest rate increase.  The US MACRO calendar is void of any significant events. 


In early trading, copper in Shanghai fell by the most in a week as supplies expanded significantly.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.31) and Sell Trade (3.43).


In early trading Gold is trading lower as the Dollar is trading near a three week high.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,096) and Sell Trade (1,120).


Restless Howard Penney

Managing Director















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Levers Of Interest And Fear

“There are two levers for moving men: interest and fear.”

-Napoleon Bonaparte


I wake-up each morning not really knowing what I am going to write. We are, after all, data-dependent here at Hedgeye – and contrary to Washington revisionist economist beliefs, the data does in fact change, real-time. On the heels of another politically-packed weekend in the bubble that we call US Politics, I feel like quoting the little French man who lived in his own political bubble is appropriate.


Napoleon’s levers of “interest and fear” are very much what are driving markets in here in March. Fear in the short selling community drove us to last week’s year-to-date highs on Wednesday in as much as fear of higher interest rates drove the SP500 down from those nosebleed highs on Friday.


Since the March 9th, 2009 Great Depressionista low of 676, the SP500 is up +71.4%. Since the February 2010 closing low of 1057 the US market is up +9.6%. This all ends in fear. Fear of missing the next move higher, and fear of being short squeezed are one and the same.


The fear of the unknown wreaks havoc on the minds of the insecure. This is certainly how I used to feel every morning when my job retention exercise included shorting stocks. I was inexperienced and naïve. The thought that people actually traded on inside information initially seemed far-fetched. It’s a good thing I thought that through again, and again, and again. I learned by watching what people were doing as opposed to what they were saying.


The sad reality is that some people trade on inside information every day. The government sponsors this kind of risk taking. Insider trading is rarely unearthed, and you can become a billionaire in this country if you don’t get caught.


The best way to combat the fear in your mind that someone either knows something that you don’t know (or that they think they know something you don’t know) is to let Mr. Macro Market tell you the truth.


Let’s think about this with a real-time example that’s moving the market every hour right now: the Fed raising interest rates.


If you didn’t know that yields on the short end of the curve did nothing but go straight up since Ben Bernanke delivered the goods for the levered-up-on-zero-percent-money bulls last Tuesday, pull up the chart – now you know.


“Rumors” about the Fed raising the Discount Rate started to really surface on Thursday morning. The Fed at one point even came out saying they don’t comment on rumors. Translation: someone knows something they shouldn’t know.


By Friday, SP500 started to come under much more serious selling pressure (volume was up +23% day-over-day), and this morning you can see that the US Equity futures are once again worried about the same – a rate hike.


If I could, I would get a microphone in front of Mr. Bernanke this morning and ask him how much longer he plans on keeping this unreasonable and unsustainable policy of “extended and exceptional”, but that’s not something people like me get access to.


So what to do with all this inside information? Well, we commoners can wait until Thursday when Bernanke testifies on his “exit strategies” in front of the House Financial Services Committee, or we can let Mr. Macro Market give us a look-see into what these conflicted and compromised politicians are already leaking to the people who pay for their political futures.


Mr. Macro Market doesn’t lie; politicians do. Interest rates on 2-year US Treasuries broke out to the upside on Friday, closing at 0.99%. While there wasn’t any “news” on the tape, there really was – or at least a lot of people who move around a lot of money out there thought there was.


Understanding the fears and economic interest that some big players in this market have in getting the timing right should never be underestimated. There was a day when we could hope Americans didn’t sign off on this kind of behavior by market participants. Names like Fuld, Madoff, and Stanford unfortunately changed that. Hope that all people play this game by the rules is not an investment process.


My immediate term downside support levels for the SP500 are 1054 and 1037, respectively. Unless Bernanke comes out and refutes that he is going to be changing his monetary policy today, I suggest you manage risk around those lines. For now, the highs for 2010 YTD appear to be in.


Best of luck out there today,






VXX – iPath S&P 500 VIX — With the VIX down -38% since the SP500 bottomed -10.2% lower on February 8th, now (3/17/10) is a good time to buy some volatility for the immediate term TRADE as it is oversold.


USO – United States Oil — Despite a sharp correction in oil prices on 3/15/10, the price of WTIC oil remains in a bullish intermediate term position with TREND line support at $77.39/barrel. Buying on red.


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.



MUB – iShares National Municipal Bond IndexThe Hedgeye Macro Team held a conference call on Sovereign Debt in which we discussed how to profit from understanding it from here. We said that we were waiting for another up day in Municipal Bonds to short into, which we got on 3/19/10.


HYG – iShares High Yield Corporate BondSuffice to say, we aren't yield chasers with High Yield priced up here. There is a big difference between high-grade and high-yield; some hopefully learned this lesson back in 2007. We shorted HYG on 3/17/10.


XLP – SPDR Consumer StaplesConsumer Staples was the best performing sector on 3/15/10 in our S&P Sector Model and was immediate term overbought.


EWP – iShares SpainThe etf bounced on 3/3/10 in part from a strong day from Banco Santander, the fund’s largest holding in the Financials-heavy (43.8%) etf. We added to our short position for a TRADE on 3/5 and 3/17 as every sovereign debt risk has a time and price to be short of. We have a bearish bias on the country; massive unemployment, public and private debt leverage, and a failed housing market remain fundamental concerns.


IWM – iShares Russell 2000With the Russell 2000 finally overbought from an immediate term TRADE perspective on 3/1/10, we shorted IWM and added to the position on 3/2 and 3/17.


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.


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.

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