Trading In A Range . . . President Obama's Approval Rating

We’ve outlined the Rasmussen Presidential Approval Index going back 18-months below and the interepretation is quite clear.  Since the start of the year, President Obama’s approval has been mired between -10 and -20 on this index (a comparison of Strongly Approve versus Strongly Disapprove), which indicates that between 10 and 20% more Strongly Dissapprove of the job President Obama is doing.  At this point, it seems very unlikely that this range bound negative approval rating will change much heading into the midterms this Fall.  This will not help the Democrats in defending their majority in both houses. 

  • Battle for the House – Currently the Democrats hold 255 seats, the Republicans hold 178 seats, and there are two vacancies.  If the midterms were held today, according to a Real Clear Politics poll aggregate, the Democrats would win 202, the Republicans would win 202, and 31 would be toss ups.  In effect, there is a jump ball for the house, which is huge shift from 2008. 
  • Battle for the Senate – Currently the Democrats hold 59 seats and the Republicans hold 41 seats.  According to a Real Clear Politics poll aggregate, if the election were held today the Democrats would have 48 seats and the Republicans would have 42 seats, with 10 seats being a toss up.  Since only 1/3 of the Senate is up for re-election very two years, this is actually a meaningful shift and once again suggests the potenital for change in power. 

While the potential shift in Congress has been widely bandied about, what is more interesting is the threat to President Obama in 2012.  According to a poll out from Quinnipiac University today, if the 2012 Presidential election were held today 36% of those polled would vote for Obama, 39% would vote for a generic Republican candidate, and the remainder are either undecided or it would depend on the candidate.


In aggregate, the point, which is probably somewhat obvious, is that the Democrats are currently in a world of potential electoral hurt.


In another poll by Fox News (and we do get that Fox News may have some biases), the key issues that Republicans are seen to have an advantage with are outlined below.  According to the poll:


“By double-digit margins, Republicans are seen as the party that would do a better job on terrorism (+16 points), the size of government (+16 points), the federal deficit (+15 points) and immigration (+13 points).”


The implication of this poll, and others that mirror it, are that the Democrats, and President Obama specifically, may try to overcompensate to make up ground in the areas in which they are being perceived poorly.  From our perspective, one key area is likely to be American Austerity. As the drum to cut the budget and narrow the deficit beats louder, the more likely it is that the Democrats shift their stance in attempt to regain approval in these areas.  Politics and the need to get re-elected will ultimately trump the strict adherence to Krugman orthodoxy.


While not technically a politician, Chairman Bernanke sounded the American Asuterity horn today when he introduced the idea of beginning to reduce the balance sheet of the Federal Reserve, which is certainly a slight change of tone, especially versus expectations of further quantitative easing.  In our view, this is likely a precursor to a more gradual political shift from the Democrats towards supporting broad based spending cuts and deficit reductions.


The short term implications of this change in policy would ultimately be a potential for slower economic growth in the short term and it is increasingly looking like the Democrats will need to dramatically shift sentiment in the coming months to retain political control.  A hail mary  pass of American Austerity policy could well be the catalyst.  Certainly though, President Obama needs to do something to break out of his range and help his party’s fortunes in the upcoming midterms.


Daryl G. Jones

Managing Director


Trading In A Range . . . President Obama's Approval Rating - 1


After last quarter, I was somewhat concerned about the company’s ability to continue to surprise to the upside.  And, although SBUX reported an in-line quarter from an EPS standpoint after five consecutive quarters of earnings surprises, the reported 9% growth in U.S. same-store sales relative to the street’s 6.0% comp estimate did not disappoint. 


This 9.0% growth implies a 200 bp sequential improve in 2-year average trends (following the 250 bps of sequential growth in the prior quarter), which was driven entirely by better traffic trends as average check growth held steady on a 2-year average basis.  Traffic was up 6.0% in the quarter in the U.S., which is impressive in this current economic environment.  We will hear from MCD on Friday, but I would venture to say that even with the McCafe Frappes (smoothies were not launched until July) that MCD will not come close to matching Starbucks’ sequential improvement.  International same-store sales growth was up 6.0%, in line with expectations, and flat with the prior quarter on a 2-year average basis. 


U.S. operating margin was up 350 bps to 16.5%, in line with the street’s expectation, whereas International margin came in better than expected, up 280 bps to 10.9% (vs. street’s 9.4% estimate).  As I said after the second quarter, the rate of improvement will slow, but margin growth should continue to materialize from here.  To that end, SBUX is now guiding to the high end of its previously-stated 15%-17% U.S. operating margin range and expects another 100 to 150 bps of growth in FY11.  In the International segment, the company guided to 100 to 200 bps of margin growth in FY11 on top of the 8% to 10% range maintained for this year.  To be clear, these FY11 margin growth goals follow on about 600 bps of YOY growth in the U.S. in FY10 at the high end of the guidance and 180 to 280 bps in the International segment.


Starbucks continues to surprise but my biggest concern here is that expectations have caught up with the company.  Although the company raised its FY10 EPS guidance to $1.22 to $1.23 (from $1.19 to $1.22), the street was already at $1.23 going into the earnings report.  For FY11, SBUX guided to 15% to 20% EPS growth to $1.36 to $1.41 and again, the street is already at the high end of the range at $1.40.   


Howard Penney

Managing Director




Relatively cheap but not that exciting. We see a small Q2 miss relative to consensus.



MPEL may report a small Q2 miss, driven by low hold at City Of Dreams.  We estimate that MPEL will report $567MM of revenue and $84MM of EBITDA, 1% above but 6% below the street consensus, respectively.  MPEL has been quite aggressive with junket commissions and giveaways which probably explains why we are higher on revs but lower on EBITDA, along with the low hold at CoD.  We’re about 2% below consensus EBITDA for the year but in-line with 2011 estimates.  MPEL is trading at 10.3x 2010 and 8.7x 2011.  Not exactly rich, but with all the supply coming online next door to them in 2011 & 2012, there remains a lot of uncertainty.


2Q2010 Detail:

We estimate that CoD will report $314MM of revenues and a disappointing $50MM of EBITDA as their good luck from last quarter did a 180 degree turn this quarter.

  • $11.8BN of Rolling Chip, with 15% coming from direct play, at an estimate hold of 2.3%, producing gross VIP win of $274MM
  • Mass win of $106MM and slot win of $29MM
  • Consensus is $70MM in EBITDA

Unlike its sister property, Altira had good luck for a change this quarter.  This will be the first quarter since 1Q08 where the property held over 3%.  As a result, we estimate that Altira will report $227MM of revenues and $40MM of EBITDA.

  • $9.45BN of RC volume which held roughly 3.2%, producing gross VIP win of $300MM
  • Mass win of $11MM
  • Consensus is $21 MM

Early Look

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Bear Market Macro: SP500 Levels, Refreshed...

Yesterday’s rally was based on a rumor that Bernanke was going to implement quantitative easing (or QE2). That rumor has rendered itself just that – a false rumor.


I’ll give Ben Bernanke some credit here. He didn’t fold like a tent to the “once in a lifetime” levered-long community’s “buying opportunity” and expand quantitative easing. As I wrote in my Early Look this morning, additional Japanese style QE would be devastating for both the US Dollar and the citizenry that holds it in whatever is left of their zero percent interest bearing savings accounts.


What was immediate term TRADE support this morning (1081) is now resistance again and there is no support for the SP500 down to 1059. Tomorrow morning’s US Existing home sales print is next. That will be as bearish as the Housing Headwinds in Q3 have become.


Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed...  - S P

In a Sorry State Indeed

Conclusion: Bearish data points regarding state and local government budgets spell incremental trouble for U.S. GDP growth in 2H10 and 2011.


The first sentence of the executive summary of the latest National Association of State Budget Officers (NASBO) Fiscal Survey of State Budgets reads: “Fiscal 2010 presented the most difficult challenge for States’ financial management since the Great Depression and fiscal 2011 is expected to present states with similar challenges.”


 The reason many (if not all) States around the country have such long faces is because they are having to do just the opposite with their budgets: shorten them. As mandated by federal law, every State except Vermont is required to balance its budget and as a result of declining sales, personal income, and corporate income tax collection (80% of States’ general fund revenue) States and municipalities have had to undertake very drastic measures to combat this – including laying off over 200,000 state and local government employees since June 2009.


In a Sorry State Indeed - State   Local Government Jobs Shed


The pain is likely to intensify, with States facing a $140 billion budget gap in fiscal 2011, according to the Center of Budget and Policy Priorities. Federal stimulus is expected to fall by $55 billion and recently, the Senate failed to pass a measure to provide States $16 billion for extra Medicaid funding. Furthermore, States have already spent 89% of their American Recovery and Reinvestment Act of 2009 funds, which accounted 30% of state spending in 2010.


Despite the erosion of Federal government spending tailwinds, Governor’s recommended budgets imply a 3.7% Y/Y increase in spending, which, by law, has to stem from their estimates of an 3.9% Y/Y increase in tax collections in 2011. Easy comps are what they are (tax collections declined  -2.3% Y/Y in fiscal 2010), but the fiscal 2011 budget implies a 2Y-trend increase of 0.8%.


An increase of any magnitude seems lofty based on current trends regarding state level personal income taxes (see: 9.5% unemployment and jobless claims hovering well above the 400,000/week needed to see improvement in employment). Perhaps that’s why fiscal 2010 revenue collection from sales, personal income taxes, and corporate income taxes are below original projections in 46 States. Expect that trend to continue in fiscal 2011 if we have any semblance of slowing growth and/or federal government austerity in 2H10.


Luckily for local governments, which have been feeling the negative effects of State budget balancing, they mark revenue collection to model, particularly regarding property taxes. As I pointed out in a note back in April, home appraisals for municipal property tax collection (roughly 35% of local government revenue) lag market prices by 2-3 years. As a result, property tax revenue has been positive throughout the housing downturn.


Well, that tailwind is becoming a headwind and a rather large one at that. Recent data shows that 1Q10 marks the first time property tax receipts declined on a Y/Y basis since 2Q03. Backtrack three years from 1Q10, and we see the first of an accelerating series of declines in housing prices. Again, this will become a major 3-5 year headwind for local government tax receipts – especially when factoring in our bearish outlook for housing prices in the next 12-18 months (see: Hedgeye’s Q3 Macro Theme of Housing Headwinds). Expect this to be a double tax on the consumer as falling home values are paired with rising property tax rates as municipalities across the country hike property taxes to try to hold flat income from this important source of revenue.


In a Sorry State Indeed - Property Tax Case Shiller


In summary, waning federal funding, slowing tax receipts, and declining home prices will put additional strain on State and local government budgets, which have an incremental negative effect on the U.S. economy at large. Job cuts at the state and municipality level are affecting all areas of the economy – from public transportation to private companies that work with state governments. Research from the Center on Budget and Policy Priorities suggests that a total of 900,000 private sector jobs could be lost as a result of State and local government cost shedding. All told, further job losses will make it even more difficult for State and local governments to meet revenue estimates, which will force them to cut even further.


As a result of this self-perpetuating cycle, U.S. GDP growth in 2H10 and 2011 may end up even lower than our current 1.7% forecast.


Stay tuned.


Darius Dale



As expected, HST beat and raised and held a bullish conference call. While they missed our EBITDA estimate, it was due to lower cancellation and attrition fees. Here are our notes from the conference call.




  • "The increase in RevPAR was significantly affected by an increase in transient demand of 8.1%, combined with an improvement in average room rate of 2.8%, the first such rate growth since the second quarter of 2008. Group demand increased 10%, though this was partially offset by a 4.7% decrease in rate."
  • "Comparable hotel adjusted operating profit margins were unchanged as a decrease of $16 million in incremental attrition and cancellation fees reduced margins by 100 basis points compared to 2009. For year-to-date 2010, margins declined 110 basis points and the decrease in attrition and cancellation fees was $28 million, which resulted in a similar 100 basis point decrease in operating margins."
  • Acquisitions & Developments:
    • "On July 14, 2010, the Company participated in a settlement agreement with the owner of the W New York - Union Square and the property's mezzanine lenders under which the hotel owner will be acquired by a venture led by the Company and in which Istithmar World will be a minority member... Closing is anticipated to occur by September of 2010 and is subject to bankruptcy court approval."
    • "On July 20, 2010, the Company reached an agreement to acquire the 424-room Westin Chicago River North for approximately $165 million... The Company expects to complete this acquisition, which is subject to customary closing conditions, in August of 2010."
    • "On July 20, 2010, the Company's joint venture in Asia, Asia Pacific Hospitality Venture Pte., Ltd. (the "Asian joint venture"), in which it is a 25% partner, reached an agreement with Accor and InterGlobe to develop seven properties totaling approximately 1,750 rooms for a total cost of approximately $325 million in three major cities in India; Bangalore, Chennai and Delhi (the "Indian joint venture"). The Asian joint venture will invest approximately $50 million to acquire approximately 36% of the interest in the Indian joint venture. The properties will be managed by Accor under the Pullman, Novotel, and Ibis brands. Development of the properties is underway, and the first hotel is expected to open in the second quarter of 2011."
  • 2010 FY Guidance:
    • RevPAR: 4% to 5.5% [1.5% to 3% increase over prior guidance]
    • Operating profit margins (GAAP): increase 205 to 270 basis points
    • Comparable hotel adjusted operating profit margins:  -50bps to flat [50 to 75bps better then prior guidance]
    • FFO per diluted share: $.66 to $.70 [$0.05 to $0.08 raise from prior guidance - consensus is $0.66]
    • Adjusted EBITDA: $795 to $825MM [$25-45MM raise from prior guidance]


  • RevPAR improved throughout the quarter, with period 6 RevPAR up 10%; ADR also turned positive in the quarter.
  • Hotels are becoming less reliant on discounted room nights.
  • Average rate in premium and corporate business increased more than 6%.
  • 1% decrease in discounted business in the quarter.
  • Average decline in group ADR was less than 5% in the quarter.
  • Booking pace had improved to +8% by quarter end for 3Q2010.
  • Timeline for opening the hotels in India: early 2011-2013.
  • Guidance assumes that they will complete at least one additional deal this year and no dispositions.
  • Comparable RevPAR results and outlook:
    • Boston was their top performing market - +23.8% (13pts occupancy growth, 3.4% ADR growth). Mix shift, easier comps due to renovations underway last year.  For 3Q, expect Boston to perform in-line.
    • New Orleans: (+7.9pts Occ, 7.5% increase in ADR).  Expect outstanding 3Q.
    • NY: 19.1% (7% rate increase). Expect strong 3Q.
    • Miami / Ft Lauderdale (rate was down 2.9%) RevPAR +14%.  Expect a weak 3Q due to the renovations and tougher comps.
    • Orange county: expect it to underperform in the 3Q due to business booking decline.
    • San Fran: 10.2% RevPAR, expect them to slightly underperform in 3Q.
    • Chicago: 9.2% RevPAR, Swisshotel had 26% increase in RevPAR due to renovation. Expect outperformance in 3Q.
    • Hawaiian hotels: RevPAR down 2%, ADR was down 12.4%. Expect Maui market to outperform in the 3Q.
    • Phoenix: 3.9% RevPAR decline, (group rate discounting).  Expect continued underperformance in 3Q.
    • San Diego continued to underperform - RevPAR was down 12.9%.  Expect them to outperform in the 3Q though.
    • European JV: 5.6% increase for RevPAR (ADR down 5%) in local currency.
  • Property level bonuses increased in the quarter and negatively impacted margins in the quarter by 25bps.
  • Mix shift to more banquet and audio & visual business helped margins in the quarter.
  • Wages and benefits increased 3.5%, unallocated expenses increased 6% (credit cards fees, rewards, etc- occupancy related). Utility increased .6%, property taxes decreased 2.8%, insurance increase 15%.


  • +/- 80% flowthrough on the room when RevPAR is ADR driven.  50% flowthrough in F&B this quarter, but 40%ish is more normal.
  • Feel like there is a better opportunity to invest in the mid and upscale sectors in markets like India and China vs. upper upscale & luxury sectors in US.
  • Update on the hotel transaction market
    • Have seen a pick up recently, but we are nowhere near a "hot" market.  Most deals are either distressed or have near term maturities that are difficult to refinance.
    • In looking at the assets that they would like to sell, it makes more sense to wait until 2011/2012 to market them.
    • In general will be more active in the US than international markets over the next few years, but not imbalanced.
    • In certain markets, you can see some sub 5% cap rates and in others, it's a little higher, but that assumes nice recovery.  Europe has slightly lower cap rates then the US.  Asia Cap rates are far more varied given emerging markets and stable market mix. In EM, there is a higher projected ROI.
    • Ultimately, they are looking for acquisitions that will exceed their cost of capital using a 10 year unleveraged IRR.
  • Desert Springs Marriott is encumbered by a $74MM loan, and it's the only one in breach of its covenants and has negative coverage but they are making the payments for it.
  • They would need an improvement above their forecast to increase their dividend.  However, if they sell assets and have capital gains, then they would do a special dividend.
  • Why did they pay so much per key for the Chicago asset?
    • assumes that there were fairly material capex needs in other assets that traded hands in that market.
    • This hotel doesn't need a lot of capex.
    • This hotel is performing very well among its peers. The management contracts expired in 2020 - they have the option whether to extend it or not -so that's unusual and attractive. 
  • They have seen consistent short term bookings strength for the last 2 quarters, so they are getting more optimistic. Corporate demand has really been growing and corporate pays the best rate.  Hotels also feel less need to offer discounts in order to get occupancy.  So not only is the pace of bookings up but also the rate on those bookings are up YoY.
  • Doesn't think that the reinstitution of brand standards will cause their capex to tick up, since they have been consistently investing in their portfolio. However, over-leveraged hotels purchased in 2006/7 may be pushed over the edge by the reinstitution of brand standards.
  • There was a relatively small group of bidders for the Chicago Westin - it wasn't a widely marketed deal.
  • Have 2 assets that they are close on acquiring and feel confident that at least one will come through.
  • Union Square deal - don't expect cash flow to be negative at the hotel and the capex program they are contemplating is nowhere near $25MM.
  • Performance over the last 2-3 weeks has been good for them. Corporate travel trends have still been strong. Group bookings pace has also been normal.
  • Thinks that ground up development for them will be primarily in Asia.
  • How much EBITDA growth is from contributions from acquisitions?
    • Approximately $5MM, since they now have to expense acquisition costs.
  • For business that is booked close in, there is very little cancellation and attrition fees. Part of that is that they don't negotiate for fees since it's so close in and because they would rather get higher rates on F&B and rooms. However, for further out conferences, they are negotiating for some cancellation and attrition fees but they are lower than what they used to get back in 2006 & 2007.
  • Current pricing and occupancy trends
    • June/July RevPAR came in around 9-10%, some rate growth there
  • So far they aren't seeing a pullback from customers. They are expecting rates to go up nicely for corporate rate negotiations and their sense is that their corporate customers are accepting that.
  • Property bonuses are $11MM annualized this year.
  • 2011 is still a little behind (4%) for what's on the books now. From a rate perspective, they are flat already-- expect that tide to turn in 2H2010.  Will start out 2011 at least as good as 2010 if not a little better.