Don't Mind Expectations

“Be who you are and say what you feel because those who mind don’t matter and those who matter don’t mind.”

-Dr. Seuss


I got a lot of feedback early last week that I was being too hard on myself. I don’t think I was. For a few trading days the Thunder Bay Bear was getting beaten up by the bulls. I like to call it for what it is that everyone out there sees. There is no hiding from the real-time score.


After Friday’s smack-down close, the US stock market is right back in the fetal position, down -12.7% from its April 23rd cycle-peak and down -32% from its 2007 Levered-Long high. Friday’s earnings out of Google, Bank of America, and General Electric looked nothing like those that we saw from Intel earlier in the week. Across the board, all of these stocks look a lot like the SP500 does from and intermediate term TREND perspective – bearish.


Earnings are cool. They are catalysts that everyone stares at and they can get you paid on both the long and short side. Getting stocks and earnings right are two completely different risk management exercises however - the difference is usually explained by expectations.


At the heart of our American Austerity theme for Q3 of 2010 are the following forecasts about expectations:

  1. US economic growth expectations for the back half of 2010 are too high.
  2. US Dollar weakness (from debt and deficit spending) is a leading indicator for US stock market weakness.
  3. Consensus about US growth, the US Dollar, and US stocks is not yet Bearish Enough.

As of Friday’s closing price of 1064, the SP500 is broken again across all 3 of our core risk management durations (TRADE, TREND, and TAIL):

  1. Long term TAIL resistance = 1096
  2. Intermediate term TREND line resistance = 1144
  3. Immediate term TRADE resistance = 1078

What’s most interesting about this risk management setup is that last week’s closing highs were right at the long term TAIL line (1096). When considered within the framework of longer term expectations, we don’t think earnings season is going to trump the intermediate term slowdown in US growth. Don’t forget that as you get deeper into US earnings season, the earnings get more consumer discretionary (they report last). And as the US consumer goes…


By all measures of consensus expectations, Friday’s Michigan Consumer Confidence reading was a bomb (66.5 vs. 74.5E). For the bears however, it was very much consistent with the continuing intermediate term TREND story line that Americans aren’t as dumb as their government expects them to be.


Dumb? Yes, that’s what Professional Politicians in Washington must think Americans are when they expect consumers to run out and lever themselves up with another mortgage loan. Every day that the Krugman Empire fear-mongers the citizenry into believing we’re going to have another “great depression” is another day when Americans might actually adjust their spending in anticipation of one!


This week’s macro catalyst calendar isn’t going to make Americans any more confident:

  1. Wednesday – Ben Bernanke will issue his semi-annual report to the Senate Banking Committee and likely downgrade his forecast.
  2. Thursday – Bernanke will repeat the same doom and gloom forecast (that doesn’t match up with his GDP forecast) to the House.
  3. Thursday – Existing US Home Sales for the month of June will continue to rattle the cages of the housing bulls (see our 101 slide presentation).

On Friday, European politicians will be trumpeting the results of a made-up “stress test” that already had a prescribed outcome. That could be a positive catalyst, but maybe more so for Europeans than Americans…


You see, the Europeans are doing exactly what American politicians taught them to – make up some healthy “test” results for their banks and hope that the market buys into it. This will continue to provide a bullish intermediate term tailwind for the Euro (bullish intermediate term TREND support = 1.27) and a bearish intermediate term headwind for the US Dollar (bearish intermediate term TREND resistance = 84.74).


Having been a Euro bear for the first 6 months of 2010, I don’t mind consensus expectations for “Euro Parity.” The Parity Parrots all came to the risk management party just in time for us to cover our Euro and European stock market short positions and shift to shorting the currency and equity markets with more relative downside – those in the USA.


We remain short both the US Dollar (UUP) and SP500 (SPY) in the Hedgeye Virtual Portfolio. My immediate term support and resistance lines for the SP500 are now 1032 and 1078, respectively.  


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Don't Mind Expectations - bear

The Week Ahead

The Economic Data calendar for the week of the 19th of July through the 23rd 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 - c1

The Week Ahead - c2


HST should beat and raise guidance. Blah, blah, blah.  What’s your macro forecast?



We expect Host to report 2Q FFO and EBITDA of $0.26 and $262MM, respectively.  Not surprisingly, we are ahead of the Street for the quarter.  Like everyone else, our estimates for 2010 are ahead of company guidance and we expect HST to take up their guidance range when they report next Wednesday. 


Yesterday, we wrote a HOT preview and gave our thoughts on lodging stocks.  Sorry to be repetitive but we are reprinting that paragraph since it applies to HST as well.  After all, why recreate the wheel on a great piece of prose?  Well, maybe not great but hopefully clear enough.


Now more than ever, the macro environment will drive revenues and lodging profits, and investors’ views of the future macro environment will drive stock prices.  Current RevPAR trends are strong but the reported quarterly results and weekly RevPAR numbers just give investors a glimpse into the rear view of the mirror.  We find it amusing listening to the sell-side repeatedly asking questions on 2011 trends and beyond.  Face it, there is very limited visibility in this space and hotels only have pricing power when occupancies exceed 70%.  Lodging trends have historically been lagging indicators, since what’s on the books today was booked at some point in the past.  If sentiment changes or things begin to deteriorate, future bookings are impacted, and by the time the numbers show a slowing trend, it would be already too late.  No matter what these companies report, how they trade depends on people’s outlook. The issue today is that investors’ collective view of the future is dimming and comps get much tougher in 2H 2010.


Of particular interest for HST will be the cost side of the equation.  Flow through is the reason why investors pay a premium for REITs and real estate owners early in the lodging cycle.  HST’s hefty multiple also implies that investors believe that they can get back to peak margins of 25-26% over the next few years.  After 7 quarters of declining direct expenses, we think that 2Q2010 will mark the first quarter of absolute increases in property level expenses.  2Q2010 should also be the first quarter where we see an increase in CostPAR, as HST laps 4 quarters of declining CostPAR.




Total revenue of $1,105MM; $26MM of which comes from rental income

  • 8.6% increase in RevPAR (1% increase in ADR and 7.5% increase in occupancy).
  • $658MM of room revenues, up 4.7% YoY.
  • F&B up 4% YoY.
  • Other revenues of $85MM, down 2% YoY.

Property level EBITDA of $269MM, with margins up 70bps

  • CostPAR flat YoY, with total room expenses up 3.4%.
  • F&B margins flat YoY.
  • 2% YoY increase in hotel departmental expenses and other property level expenses.  In 2Q09, hotel departmental expenses decreased 17% YoY (1Q09 only decreased 7.4% YoY).

Other stuff:

  • Rent expense: $19MM.
  • Corporate expense: $18MM.
  • D&A: $137MM.
  • Interest expense: $83MM.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


Keith’s covering of CAKE this morning was executed at a critical risk management level in his model.  The fundamental case, however, is unchanged.


As we described in our post yesterday outlining the SIGMA positions in the restaurant space, CAKE faces increasingly difficult restaurant-level margin comparisons going forward.  The second half of this year will be especially difficult in this respect.  CAKE’s management team, along with several peer management teams, has stated that food costs are going to be a headwind in 2H10.  For CAKE, with higher restaurant margin hurdles to comp down the track, this anticipated cost pressure could prove meaningful.   Also evident in the chart is the degree to which top line trends will be harder to lap as the year unfolds.


We also are monitoring the considerable downside risk that exists in the macro-consumer sphere; today’s University of Michigan Consumer Sentiment release is yet another bearish consumer macro data point.  In light of this, and the SIGMA analysis summarized above, we believe estimates will be moving lower in 2H10. Our EPS estimate for 2010 is currently $1.31 versus the street at $1.36.


CAKE – THESIS HOLDS - cake sigma est


Howard Penney

Managing Director




Watch What They Do, Not What They Say . . . The Chinese Are Selling Treasuries

Conclusion: The Chinese say U.S. Treasuries are important and a long term holding, but they are consistent net sellers.  This will be negative for the price of Treasuries if the trend is sustained.


In May, total foreign holding of U.S. Treasury debt increased slightly by $5.8 billion to $3.96 trillion.  The most noteworthy change was in Chinese holdings of Treasury debt.  In May, China’s holdings fell by $32.5 billion to $867.7 billion, which was a 3.6% drop month-over-month.  Japan, the second largest holders of U.S. treasuries, also dropped their exposure month-over-month.


Interestingly, since August 2009, foreign holdings of U.S. Treasuries have increased from $3.5 trillion to $3.9 trillion, which is growth of 11.4%.  In the same period, Chinese holdings of U.S. Treasuries have declined from $936.5 billion to $867.7 billion, or 7.7%.


It is always interesting what the Chinese say.


On March 13, 2009, Chinese Premier Wen Jiabao said: “We lent such a huge fund (sic) to the United States and of course we’re concerned about the security of our assets and, to speak truthfully, I am a little bit worried.”


And more recently the Chinese statement on the State Administration of Foreign Exchange website stated: “US bonds constitute “a very important market for China” and “any increase or decrease in our holdings of US Treasuries is a normal investment operation”.


So, recently the Chinese have been both defending Treasuries, and selling them. 


As Keith noted in the Early Look today:


“This morning, on the heels of a very disappointing earnings report out of one of America’s largest growth engines (Google), yields on 2-year US Treasuries are trading down to 0.58%. The inverse of this yield equates to the highest prices for short term US Treasury Debt EVER.


Ever, as we like to say at Hedgeye, is a very long time. Particularly when considering bubbles and the tail risks they incubate, it’s critical to never accept ever as forever.”


The fact is, short term Treasuries are priced to perfection.  As such, any incremental change in demand, will have a meaningful impact on price and yield.


So, as you think about the next move in Treasuries and what the largest holder is doing, watch what China does and not what they say.  The chart below outlines what they’ve been doing.  And the trend is negative for the price of Treasuries.


Daryl G. Jones

Managing Director


Watch What They Do, Not What They Say . . . The Chinese Are Selling Treasuries - 1


I said this yesterday, and I will say it again today, until the consensus view begins to catch up with the weakening reality, reporting risk continues to be to the downside of expectations. 


I understand why the market is selling off on this news, but who is actually surprised that confidence is declining? 

  1. The economy and public deficits dominate as the nation's most important problems and there is little confidence in Washington’s ability to rectify either issue.
  2. We estimate discretionary spending to be down 2.8% in 2Q10 and 6.4% in 2H10.
  3. Initial jobless numbers improved of late, but the improvements are not significant enough to bring down the unemployment rate.
  4. Consumer demand has not bottomed - we are seeing this in a number of industries we cover at Hedgeye.


Today’s decline in confidence is a clearly not a one-time event.  Two of our key themes in 3Q10 (Bear Market Macro and Housing headwinds) have only just begun to play out.  Unfortunately, if our themes are right, the consumer will face a difficult time in 2H10.


Howard Penney 

Managing Director







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