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HOT CONSENUS SAYS IT WILL BE LIKE LAST TIME

JPM – generally a good proxy for consensus – issued pretty aggressive estimates and price target.

 

 

The sell side seems to have jumped on the momentum bandwagon lately.  Maybe it’s me – they may have always been mo – but with the huge run up in many gaming/lodging/leisure stocks, it seems that price targets are being raised by alarming magnitudes and with assumptions that stretch the bounds of rationality.

 

My friend over at JPM recently raised his price target almost 20% to $64 or 40%+ higher than the current price.  The analyst uses a sum-of-the-parts derivation to reach that price target.  Anna and I (mostly Anna) will tear those assumptions apart in a later post.  In this post, we are taking a look at just the estimates.

 

The chart below show’s JPM’s EBITDA and RevPAR estimates.  RevPAR is projected to grow 7%, 8%, and 8% in 2010, 2011, and 2012, respectively. 

 

HOT CONSENUS SAYS IT WILL BE LIKE LAST TIME - JPM estimates1

 

Pretty aggressive in our opinion and not surprising based on the prior recovery in 2004-2007.  Indeed, in looking at the next chart, one can see that it took 5 years to recover to peak RevPAR.  Using JPM’s own growth estimates implies a 5 year recovery period to 2012 to regain peak RevPAR.

 

HOT CONSENUS SAYS IT WILL BE LIKE LAST TIME - trailing revpar yoy change

 

We have several issues with the 5 yr return to peak assumption:

  • Unemployment – In a recent note, we showed the growing decoupling between GDP and RevPAR in favor of a tighter relationship with Unemployment.  We suspect that the decoupling began to take place as government spending as a percent of GDP exploded beginning in 2008.  The problem is that unemployment has not moderated on the same path as it has in previous recoveries and certainly not in the last one.  Note in the chart below that unemployment peaked at 6% during the last cycle and improved quickly.

HOT CONSENUS SAYS IT WILL BE LIKE LAST TIME - GDP UNEMPLOYMENT

  • Housing – We’ve shown that accelerating housing prices were a big component of the explosion in consumer spending from 1.  Even during the last recession, housing prices held and provided a buffer to the downturn.  The latest downturn was caused by the housing bubble burst, and we remain pessimistic regarding a v-shaped housing recovery.
  • Pent-up demand – We did not expect RevPAR to turn as quickly as it did but we cannot help but think that a significant part of it is just pent-up demand.  We’ll see over the coming months.
  • Sovereign debt issues – Our Macro team remains negative surrounding the impact of all of the sovereign debt issues – including our own – on interest rates and the global economy.  Neither would be good for hotel demand.

For these reasons, a recovery similar to 2004-2007 is unlikely, in our opinion.  Unfortunately, it appears investors are banking on it.


MONTHLY STRATEGY CALL: BEARISH ENOUGH ON SPAIN?

MONTHLY STRATEGY CALL: BEARISH ENOUGH ON SPAIN?

One of Hedgeye's Q2 Themes, Sovereign Debt Dichotomy is a call for an accelerating divergence between the countries with strong, liquid balance sheets and those with the largest debt issues. Furthermore, we called for and have seen a widening performance spread between the equities, bond yields, currencies and CDS of these countries.

On this month's Hedgeye Strategy call focused on one of the weaker countries, and the 9th largest global economy, Spain. We have gone into detail on why we see the market as not bearish enough on Spain, and more importantly, why you should be.

In addition, we updated you on our other two Q2 Themes:

  • April Flowers/May Showers - We expected and have seen U.S. equities lock in intermediate term highs as bonds break down to lower-highs. We have a very healthy degree of skepticism of Government, Politicians and the market's current levels and we are managing risk accordingly. As we think about the setup for the S&P 500 over the next three months, we observe 15 major headwinds for the market, the economy, interest rates, commodities, and the American consumer. Bearish on U.S. equities.
  • Inflation's V-Bottom - We are currently at generational lows of global inflation. As such, we continue to expect the global median inflation rate to accelerate meaningfully. Domestically, we believe CPI will accelerate sequentially throughout Q2, peaking at +3% Y/Y. We expect that and an impending rate hike to continue to be priced in the bond, currency, and commodities markets. We expect it to be priced into the equities markets last. Bearish on 1-3 year U.S. Treasuries.

We’ve resolved the technical error with the link in the previous email, so to hear the podcast for yesterday’s call, click here: https://www.hedgeye.com/feed_items/7923. The link to the accompanying presentation is here as well: http://docs.hedgeye.com/Hedgeye Q2 Themes and SPAIN May 18 2010.pdf.

 

Enjoy,

 

The Hedgeye Macro Team


MONTHLY STRATEGY CALL: BEARISH ENOUGH ON SPAIN?

MONTHLY STRATEGY CALL: BEARISH ENOUGH ON SPAIN?

One of Hedgeye's Q2 Themes, Sovereign Debt Dichotomy is a call for an accelerating divergence between the countries with strong, liquid balance sheets and those with the largest debt issues. Furthermore, we called for and have seen a widening performance spread between the equities, bond yields, currencies and CDS of these countries.

On this month's Hedgeye Strategy call, we focused on one of the weaker countries, and the 9th largest global economy, Spain. We have gone into detail on why we see the market as not bearish enough on Spain, and more importantly, why you should be.

In addition, we updated you on our other two Q2 Themes:

  • April Flowers/May Showers - We expected and have seen U.S. equities lock in intermediate term highs as bonds break down to lower-highs. We have a very healthy degree of skepticism of Government, Politicians and the market's current levels and we are managing risk accordingly. As we think about the setup for the S&P 500 over the next three months, we observe 15 major headwinds for the market, the economy, interest rates, commodities, and the American consumer. Bearish on U.S. equities.
  • Inflation's V-Bottom - We are currently at generational lows of global inflation. As such, we continue to expect the global median inflation rate to accelerate meaningfully. Domestically, we believe CPI will accelerate sequentially throughout Q2, peaking at +3% Y/Y. We expect that and an impending rate hike to continue to be priced in the bond, currency, and commodities markets. We expect it to be priced into the equities markets last. Bearish on 1-3 year U.S. Treasuries.

To hear the podcast for yesterday’s call, click here. The link to the accompanying presentation is here as well: http://docs.hedgeye.com/Hedgeye Q2 Themes and SPAIN May 18 2010.pdf.

 

Enjoy,

 

The Hedgeye Macro Team


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ANOTHER POSITIVE DATA POINT FOR YUM

The double down is here to stay, but I think I might get ill if I took a bite of this beast….

 

KFC has elected to keep the Double Down on the menu “indefinitely”, according to media reports.  The product has attracted a surprising level of attention and Javier Benito, executive vice president of marketing and food innovation for KFC said, “our plans were to feature the product only through May 23, but millions of Double Down fans have spoken and we won’t disappoint them.” 

 

YUM has already been making headlines this week with the rollout of Taco Bell’s new $2 combo meal promotion.  I view the continuation of the Double Down and the $2 combo meal as positive data points for YUM from a sales perspective.

 

ANOTHER POSITIVE DATA POINT FOR YUM - dd kfc

 

Howard Penney

Managing Director

 


The Tea Party Cometh

Conclusion: Signs of the of anti-incumbency theme continue to flash, which should ultimately benefit Republicans in the midterms.  In addition, it should also be a positive for the healthcare sector.

 

With Rand Paul’s victory last night, the Tea Party has in a certain sense become main stream.   We were hashing through the primaries in our morning research meeting, and someone posed the question: What exactly does the Tea Party stand for?

 

Obviously a good question and their website, teapartypatriots.org, is fairly direct in its message.  According to the Tea Party’s mission statement:

 

“The impetus for the Tea Party movement is excessive government spending and taxation. Our mission is to attract, educate, organize, and mobilize our fellow citizens to secure public policy consistent with our three core values of Fiscal Responsibility, Constitutionally Limited Government and Free Markets.”

 

In his victory speech last night, Rand Paul galvanized the mainstream nature of the Tea Party as he referenced them directly in his speech.  He said:

 

“I have a message, a message from the tea party, a message that is loud and clear and does not mince words: We have come to take our government back.”

 

Rand’s victory appears to be a continuation of the Run Against Washington incumbency theme that we have been discussing.  Whether anecdotal or not, it is becoming clear that not being an incumbent has a real advantage in politics these days.  In the past month, this theme has been underscored by the following: 

  • Arlen Specter lost in Pennsylvania even though he was being backed by the sitting President;
  • As mentioned, Rand Paul beat the established Republican candidate for the primary in Kentucky;
  • Senator Bob Bennet lost his party’s nomination earlier in the month in Utah at the State Republican Convention; 
  • Two-term Democratic Senator Blanche Lincoln of Arkansas is being forced into a runoff for her party’s nomination; and
  • John McCain, the most recent Republican candidate for President, currently only has 50% of support in his primary battle in Arizona.

Typically one major incumbency challenge is noteworthy, but when every race becomes a challenge against incumbency that is a sign of an emerging sea of change.  As many studies note, incumbents typically win re-election 90% of the time.  These early data points are noteworthy and mark the beginning of perhaps a serious shift by voters away from incumbency.

 

This idea is also supported in recent polls.  Specifically, a recent ABC News-Washington Post poll indicated that nearly six in 10 respondents they’re not likely to vote for their current representatives to Congress.  This poll, and the evidence above, does not bode well for Democrats in the upcoming midterms – particularly as President Obama’s approval rating is mired near the lowest of his Presidency, with a 48.0 approval rating on the Real Clear Political Poll aggregate.

 

As the party in power, the Democrats are in effect the incumbent political party.  And with support for incumbents at generational lows, this could lead to a shift comparable to the one experienced under President Clinton in 1994, the last time incumbency support was this low.

 

In 1994, the Democrats went from a 57 Senators in the majority to the Republicans reclaiming the majority with 52 Senators.  On the same token, the Democrats went from a majority in the house with 258 members to the Republican’s reclaiming a majority with 230 members.

 

As it relates to your portfolios, the sector that will benefit most from Republicans regaining both houses is Health Care (XLV).  As our Healthcare Sector Head Tom Tobin wrote last week:

 

“A Republican return to the majority in the US House of Representatives this fall may be considered a big positive for Healthcare.  But as the Europeans are showing us now, budget cuts are coming to the US.  With Healthcare spending running 22% of Federal spending, it is likely that cuts will be targeted at Healthcare and other entitlement spending.   On the margin, Republicans are likely better for Healthcare private industry, but Deficit Reduction, tinged with a permanent Tea Party taste, could be an equivalent threat as the Democrat/Progressive world view.”

 

A shift is to the right is likely a positive for healthcare investors, but if the Tea Party movement increases then other healthcare risks increase.

 

Daryl G. Jones
Managing Director


CONSUMER SENTIMENT - SETTING UP FOR A FALL

Home prices down, the market down, the European debacle, a massive natural disaster and the no confidence vote for incumbents is in the books.  Are you feeling any better about the world?

 

After the close last night the ABC consumer confidence index rose to -44 in the week ending May 16, up 3 points from last week; this came as a surprise given the increase volatility in the markets. 

 

According to the consumer survey firm BigResearch, 55.8% of Americans are somewhat/very concerned that the financial problems in Greece and the instability with the Euro will trigger more financial fallout for America.  Only 16.8% aren’t very concerned or not at all concerned (27.4% are neutral).

 

As we witnessed in yesterday’s primaries, anxiety over global markets and their effect on the U.S. market can’t be good for candidates seeking re-election, as most Americans appear to have little-to-no confidence in the current government’s economic policies.

 

According to the Mortgage Bankers Association, a record share of U.S. mortgages was in foreclosure in 1Q10.  The inventory of homes in foreclosure rose to 4.63% from 4.58% in 4Q09.  The combined share of foreclosures and mortgage delinquencies was 14%, or about one in every seven U.S. mortgages.    

 

Next week we will get the Conference Board’s latest Consumer Confidence Index.  It will be the first time we have heard from the Conference Board since the attempted Times Square bombing, which may have shaken consumer sentiment, and the recent downturn in the markets.  The decline in financial markets has been confirming the “April Flowers/May Showers” Hedgeye Q2 Theme.  The latest Bloomberg survey has the conference board number at 58.5 vs. 57.9 last month.  I would not be surprised to a see print below 57.9.

 

Lastly, we are starting to see a big divergence between home prices and consumer confidence.  The Case/Shiller (non-seasonally adjusted) home price data has declined for the past 5 months (at an accelerating rate).  This trend has been contrary to the most recent readings on consumer confidence, which has been to the upside. 

 

In the US Strategy note today I said that “from a fundamental stand point the Consumer Discretionary (XLY) looks to be most vulnerable.”  A declining trend in consumer confidence will play into how the consumer spends his/her discretionary income.  Coming into today the XLY is the second best performing sector up 9.6%.  If you are looking for other shorts as the markets break down, the XLI and XLP could see a reversion to the mean. 

 

Howard Penney

Managing Director

 

CONSUMER SENTIMENT - SETTING UP FOR A FALL - shiller confidence

 

CONSUMER SENTIMENT - SETTING UP FOR A FALL - sector


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