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HOT 2Q2010 QUICK THOUGHTS

HOT’s 2Q2010 results blew past consensus numbers and bested ours. The beat was solid and the raise in guidance – in our opinion – was way too conservative.

 

 

The high end of HOT’s new FY guidance touches our prior estimates while 3Q guidance looks like a sandbag – with the high end of guidance meeting the Street as usual.  If it were another company, we would be worried that they were back end loading results, however, this is classic HOT fashion – beat, raise for the year, and sandbag the coming quarter.  If HOT’s results aren’t up on these results, then only a change in Macro sentiment will help them.

 

2Q2010 Detail:

Starwood reported $723MM of revenues and $226MM of EBITDA, beating our estimates by roughly 4% on both metrics. 

  • Owned revenues of $437MM came in $21MM above our estimate and owned EBITDA of $90MM was $16MM above our estimate or 17% better.
    • The entire beat on Owned, leased, and other hotel revenue came from F&B and Other.  RevPAR of $143.09 was actually $0.07 lower than our number and room revenues were spot in line with our estimate.
    • Food & beverage and other revenues grew a staggering 18% YoY.  While the comp is easy (2Q09 F&B and Other revenues were down 36%), this is still impressive and is likely a reflection of the mix shift to better rated corporate business and a pickup in banquet business.
    • As a result of the strength in non-room revenues, RevPOR increased 5.9% YoY, compared to .7% YoY growth in 1Q2010.
    • Even more impressive was that CostPAR only increased 70bps, which lead to margin improvement of 4% YoY to 20.6%.  We would note that 2Q09 was the easiest margin comp as margins decreased 10.2% YoY that quarter compared to a 6.9% decrease for 2009.
  • Fee revenues of $177MM came in $1MM above our estimate.  Management & Franchise fee growth of 17.5% was better than HOT’s guidance of 11-13% and our estimate of 14.4% growth.
    • Base Management fees of $69MM were spot in line with our estimate, while incentive and franchise fees were each $2MM higher.
    • This was somewhat offset by lower “low quality” other “stuff” which was $2MM light of our estimate.
    • Amortization of deferred gains was still $20MM/Q.
  • Total VOI and Residential Sales and Service revenue of $137MM was $5MM better than our estimate, due to stronger residential sales.  Timeshare results of $34MM were 12% higher than our $30MM estimate.
    • Originated sales revenue of $177MM was lower than our estimate due to lower contract sales and lower YoY pricing, which was somewhat offset by a lower percentage of sales revenue getting deferred.  35% margins on originated sales was inline with our estimate.
    • Residential sales were $5MM higher and there were no associated expenses – which is a bit odd and is why the overall results in this segment was better than our estimate.
    • Other Sales and Services Revenue of $62MM was $1MM higher than we expected but margins 7.6% lower (i.e. expenses were $5MM higher)
  • Other Stuff:
    • SG&A was $12MM higher than our estimate – company claims it's due to timing of incentive-based accruals. However, they raised FY guidance for SG&A growth to 6-8% growth from 3-5%.  Anyway, higher pay for better results is no surprise given the crummy years that the sector has had.
    • D&A was $4MM lower than our estimate.
    • Net interest expense was $2MM below our estimate and $2MM light of company guidance.

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT

Initial claims rose by 37k last week (39k net of the revision), the largest jump since May of 2009.  This comes on the heels of the prior week’s decline of 29k, which was the largest improvement since February of this year and the lowest weekly number since mid-08.  At 464k, the number reported today is right back in line with the 450-470k range the series has occupied for all of 2010.  On a rolling basis, the deterioration was more modest, rising 1.25k to bring the rolling total to 456k. We note that there seems to be significant seasonal volatility at work, as similar gyrations appeared this week in 2008 and 2007 (see the second chart below).  Ultimately, initial claims need to be in the 375-400k range before unemployment meaningfully improves. 

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - rolling

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - raw

 

Below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.Not surprisingly, Consumer Discretionary has the largest inverse correlation to Initial Claims (r-squared = 0.68) on a 1-year basis. On the flip side, it is a surprise to see that the Financials have the second lowest inverse correlation to Initial Claims (r-squared = 0.20) on a 1-year basis.

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - 1

 

As a reminder, May was the peak month of Census hiring, and it will remain a headwind through the September data as the Census continues to wind down.

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - census chart

 

 

Joshua Steiner, CFA

 

Allison Kaptur


INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT

Initial claims rose by 37k last week (39k net of the revision), the largest jump since May of 2009.  This comes on the heels of the prior week’s decline of 29k, which was the largest improvement since February of this year and the lowest weekly number since mid-08.  At 464k, the number reported today is right back in line with the 450-470k range the series has occupied for all of 2010.  On a rolling basis, the deterioration was more modest, rising 1.25k to bring the rolling total to 456k. We note that there seems to be significant seasonal volatility at work, as similar gyrations appeared this week in 2008 and 2007 (see the second chart below).  Ultimately, initial claims need to be in the 375-400k range before unemployment meaningfully improves. 

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - rolling

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - reported

 

Below the jobless claims charts, we show the correlations between initial claims and each of the 30 Financial Subsectors. To reiterate, Credit Card and Payment Processing companies show the strongest correlations to initial claims, with R-squared values of .62 and .72 over the last year, respectively.  Surprisingly, some subsectors show a positive correlation coefficient to initial claims - i.e. Financials that go up as unemployment claims go up.  These names are concentrated in the Pacific Northwest Banks and Construction Banks, though these correlations are usually not very high.  

 

In the table below, we found the correlation and R-squared of each company with initial claims, then took the average for each subsector.  For composition of the subsectors, see Chart 5 below.

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - init. claims subsector correlation analysis

 

The following table shows the most highly correlated stocks (both positively and negatively correlated) with initial claims. Note that the top 15 negatively correlated stocks have a much stronger correlation on average than the top 15 positively correlated stocks - as you would expect, given that most of the Financial space is pro-cyclical. 

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - init. claims company correlation analysis

 

Astute investors will note that in some cases the R-squared doesn't seem to reconcile with the square of the correlation coefficient. This is a result of finding the correlation and then averaging. For example, Pacific Northwest Banks have an average correlation coefficient of .32 and an average R-squared of .52 (with CACB, CTBK, FTBK, and STSA strongly positively correlated and UMPQ strongly negatively correlated). The different directions have the effect of canceling out each other out when finding the average correlation coefficient, but do not cancel out when finding the average R-squared. 

 

The table below shows the stock performance of each subsector over four durations. 

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - price perf

 

As a reminder, May was the peak month of Census hiring, and it will remain a headwind through the September data as the Census continues to wind down.

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


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US STRATEGY – UNUSUALLY UNCERTAIN

TODAY’S SET UP

 

As we look at today’s set up for the S&P 500, the range is 23 points or 1.1% (1,058) downside and 1.1% (1,081) upside.  Equity futures are trading above fair value following Wednesday's declines in the wake of Fed Chairman Bernanke's "unusually uncertain" economic outlook.

 

SBUX, QCOM, and EBAY posted solid results after the close. Today, Bernanke's testimony will be less a factor, as the focus is on corporate earnings, the weekly jobless figures and June home sales. 

 

TODAY’S BULLISH EUROPEAN HEADLINES 

  • Eurozone May Industrial New Orders +3.8% m/m vs. consensus +0.0% and prior revised 0.6%
  • UK June retail sales inc. fuel +0.7% m/m vs. consensus +0.5%
  • UK June retail sales inc. fuel +1.3% y/y vs. consensus +1.0%
  • Eurozone July Services PMI 56.0 vs. consensus 55.0 and year ago 55.5
  • Eurozone Jul Manufacturing PMI 56.5 vs. consensus 55.2 and prior 55.6
  • Germany Jul Services PMI 57.3 vs. consensus 54.5 and prior 54.8
  • Germany Jul Manufacturing PMI 61.2 vs. consensus 58.0 and prior 58.4
  • France Jul Services PMI 61.3 vs. consensus 60 and prior 60.8
  • France Jul Manufacturing PMI 53.7 vs. consensus 54.1 vs. prior 54.8
  • France Jul Consumer Confidence (39) vs. consensus (40) vs. prior (39)

THE HEDGEYE GLOBAL MACRO LOOK:

 

China closed up another 1.1% last night, bringing the four day rally to 5.6%.  Copper is up 7.2% over the last four days.       

 

Following yesterday’s 1.3% decline in the S&P 500, we only have Materials (XLB), Utilities (XLU) and Consumer Staples (XLP) positive on TRADE with XLU the only sector positive on TREND.  Every sector declined yesterday. 

 

China closed up another 1.1% last night, bringing the four day rally to 5.6%.  Copper is up 7.2% over the last four days and materials (XLB) is positive on trade – it’s all related!

 

Treasuries were stronger today on the recovery concerns and expectations for a prolonged period of low interest, according to Fed Chairman Bernanke. 

 

The Consumer Discretionary (XLY) was the worst performing sector yesterday.  The decline was broad-based - the home builders took it on the chin ahead of what we think will be a bearish housing data point this morning.  Notable decliners included MTH (3.3%), HOV (3%), SPF (2.6%) and TOL (2.6%).

 

On a relative basis, the Industrials (XLI) was the best performing sector yesterday.  TXT was one of the bright spots as both top and bottom-line results for 2Q10 came in ahead of expectations; the company also raised full-year guidance above the Street. Analysts were positive on the strength in manufacturing. 

 

THE HEDGEYE MACRO TRADE RANGES:

 

US STRATEGY – UNUSUALLY UNCERTAIN - levels and trends 721

 

US STRATEGY – UNUSUALLY UNCERTAIN - S P

 

US STRATEGY – UNUSUALLY UNCERTAIN - DOLLAR

 

US STRATEGY – UNUSUALLY UNCERTAIN - VIX

 

US STRATEGY – UNUSUALLY UNCERTAIN - OIL

 

US STRATEGY – UNUSUALLY UNCERTAIN - GOLD

 

US STRATEGY – UNUSUALLY UNCERTAIN - COPPER


Fiat Republics

“No one could know it at the time, but 460 years of the free Republic were being brought to an end.”

-Tom Holland, Rubicon

 

I recently finished reading Tom Holland’s “Rubicon – The Last Years Of The Roman Republic.” After listening to what I thought was a Cato-like inquisition by Senator Shelby yesterday of Ben Bernanke, I decided to focus on reviewing my notes from the Rubicon on my flight to Chicago last night. The parallels between the abuses of political power between then and now fascinate me.

 

So here I am this morning with my customary 45 minutes to write my rant trying to reconcile why the US futures are up after such a negative turn of intraday events yesterday and ahead of such an ominous pair of economic data points in the US this morning (jobless claims and existing home sales).

 

The answer, of course, isn’t one that’s US based (that one blew up the bulls yesterday when Bernanke didn’t fold his tent and implement QE2) – it’s the second one that I highlighted in yesterday’s EL as a “very clear and present danger” for my short position in the SP500 (SPY):

  1. Ben Bernanke’s semi-annual Revisionist Forecasting Report to the Senate of Modern Day Rome.
  2. Results for the made-up European “stress tests” that already have a prescribed (positive) outcome.

On the heels of surprisingly positive June economic reports coming out of Europe (some if it because the Euro stopped going down in June; some of it because of the European confidence bred by the World Cup), the rumors are running rampant at this point that the Fiat Fools at the ECB have conducted a successful “stress test.” Shocker.

 

Is this new “news” to anyone who has been watching the Euro rise +8% from the ashes of the Parity Parrots? Is this new “news” for anyone who has witnessed Europeans successfully pile another 50B plus of more sovereign debt upon debt since mid May? Or is this just part of the final countdown that is perceived to be the economic resolve of the Fiat Republic?

 

We get how the storytelling goes. We also get how lemmings from CNBC to your local super market and me react to positive price momentum when coupled with a catalyst and a believable story – if you didn’t believe that the Europeans were going to make up positive results to a made-up test, believe it.

 

Not being short anything European (currency or equities) for the better part of July has certainly been the right risk management move. We’ve focused on shorting both the currency and equities of the US as we think that the storyline of American Austerity will continue to become more forceful than calling Europeans pigs.

 

Ironically enough, it was Ben Bernanke himself who signaled the end of Fiat Spending Freedoms to America’s compromised and conflicted Senate yesterday – and he’ll be doing it again today in the House. Senator Shelby’s line of questioning was the right one – it was about piling more debt upon America’s structural deficit problem. It was also about calling GSE debt for what it is – sovereign debt.

 

Shelby isn’t a modern day Cato. He won’t be a martyr, and he certainly won’t have 60 Senatorial Manipulators with daggers cut the proverbial throat that is their Caesarian fear-mongering rule. But he was the first to take an important step towards reminding Americans of their past history as the world’s great Creditor nation. Everything needs to go back to square one. National pride and credibility built on the strength of our balance sheet.

 

American and European professional politicians may not know it yet, but the proverbial death of their Fiat Republics is nearer today that it was yesterday. Japan’s Fiat Republic has already fallen and professional Japanese politicians have been exiled.

 

Unfortunately, the bearish part of this story is that America still needs to go through a few more stages of grief. In the end, it took the Roman Empire 44 years, from 88BC when Sulla marched on Rome to 44BC (Caesar’s death), to start moving back towards the Rome that the Romans themselves always understood.

 

Maybe our great experiment that “government is good” started with Greenspan and ends with Bernanke – while hope is not an investment process, that’s all I have left when it comes to the timing of this Fiat Republic’s fall.

 

I’ll leave you with Tom Holland’s prescient analogue that can easily be subbed for the American people versus those he described in Rome. It’s as bullish as it has always been:

 

“To the Romans themselves, who remained a conservative people despite all the upheavals of repeated civil wars, there was nothing startling about the perception that the past might shadow the present. The unique achievement of Augustus, however was the brilliance, with which he colonized both. His claim to be restoring their lost moral greatness stirred in the Romans deep sensibilities.” (Rubicon, page 371)

 

My immediate term support and resistance levels for the SP500 are now 1058 and 1081, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fiat Republics - US FED


THE M3: HSBC ALSO LEAVES MGM IPO; CHANGI TRAFFIC; CHINESE PROPERTY TAX TRIAL

The Macau Metro Monitor, July 22nd, 2010


HSBC NO LONGER ON MGM MIRAGE IPO IFR Asia

HSBC is no longer a joint global coordinator for the planned Hong Kong IPO of MGM Mirage, having pulled out of a

US$850m loan for the gaming firm’s Macau unit, according to a source familiar with the deal.


CHANGI AIRPORT'S H1 PASSENGER COUNT UP 17% Channel News Asia

In June, ~3.6 million passengers passed through Changi airport, YoY growth of 19%.  In the 1st half of 2010, Changi Airport saw traffic increase 17% YoY to 20.2 million.

 

CHINA PLAN TO START IMPLEMENTING PROPERTY TAX TRIAL IN 2012, OFFICIAL SAYS Bloomberg

According to a report on 163.com, a Netease website, China's finance ministry plans to start implementing a property tax in 2012 on a trial basis.  Shanghai and Chongqing have already drawn up plans for a property tax.  Chongqing Mayor Huang Qifan said the city wants to impose a 1% levy on homes that are three times the average market price.


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