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WE’VE GOT A BRIDGE TO SELL YOU

Investors seem to buying the "high single digit" corporate rate increase story for 2011.  Think corporate America is buying?

 

 

High single digit corporate rate increases for 2011?  That’s what the lodgers are implying and investors seem to be buying.  At best, that’s the starting point for lodging companies during their negotiations.  Someone needs to ask the corporations on the other side of those negotiations what they think.  Actually, we know of at least one very large firm that spends a lot on travel who doesn’t think they should pay one dollar more of rate.

 

Investors need to understand that it is posturing season.  Lodgers, especially Marriott, were very bullish regarding corporate negotiations on their Q2 conference calls.  We expect the same and more on the Q3 calls.  Marriott and maybe some of the other hotel companies will likely be aggressive in their 2011 RevPAR guidance as well to buttress their negotiating stance that room demand is high. 

 

However, look for less impressive bottom line guidance.  For one, higher EPS/EBITDA guidance won’t help their negotiating leverage so why not leave themselves cushion if their aggressive RevPAR guidance is not met?  Second, we think CostPOR may be 3-4% higher next year, meaning that rates will need to exceed that level for margins to go higher, as analysts are optimistically projecting.  Our private hotel contacts indicated higher cost expectations for next year which don’t appear to be factored into analysts’ projections.

 

So why do we think corporate negotiations may not be so one sided as implied by hotel management teams?  For one, a very large financial institution with a huge number of expected travel room nights up for grabs recently sent out a letter to the hotel companies.  If their hotel partners want to keep their "preferred" status (to which over 90% of their room nights get allocated) they won’t be paying more in rates in 2011 than in 2010.  They want their current rates rolled over.  We’re pretty sure they are not alone.  Employees of big companies are the only ones traveling.  These big companies have leverage.  This will be a fierce battle that will end up in the low to mid single digit rates in our opinion.  

 

Keep in mind that corporate rates are a call option that companies may use if prevailing market rates are above "corporate rates."  Contrary to popular belief, companies do not guarantee any room nights in return but rather historical room nights are used as leverage by companies.  Providing hotel partners "preferred status" is also a leverage tool used to drive deeper discounts.

 

Disagree with us?  Check out the following analysis by Egencia, Inc. which is Expedia’s corporate travel arm.  Egencia projects 2011 corporate rates to increase only 3%.  Incidentally, some of our private hotel contacts agree with us that absolute dollar RevPAR has actually been slowing for a couple of months which may put added pressure on the negotiations.  We think too many analysts take management’s word as gospel in this department.  Keep this in mind during the upcoming conference call (story telling) season.

 

http://www.egencia.com/press/releases/2010/2010_09_14_Global_forecast.pdf


HEDGEYE'S 4Q MACRO THEMES CALL – REPLAY & SLIDES

HEDGEYE'S 4Q MACRO THEMES CALL – REPLAY & SLIDES

Call recorded on: Tuesday, October 5th, 2PM EDT

 

To access the 4Q Key Macro Themes presentation materials, please click here.

 

To access the podcast, please copy/paste the following link into the URL of your browser: https://www.hedgeye.com/feed_items/9746

 

You must be logged in to listen to the podcast; please email if you need a password to our website (www.hedgeye.com).

 

******************************************************************************

 

The Hedgeye Macro Team, led by CEO Keith McCullough, detailed Hedgeye's 4Q Key Macro Themes, which are as follows:

  • Japan's Jugular - The Keynesian experiment that is Japan will continue to implode in Q4. The Yen, JGBs, and Nikkei all remain at risk.
  • Krugman Kryptonite - As the Fed signals its intent to use more Krugman Kryptonite (printing dollars/ quantitative easing) we look at both the short and long term implications behind the faulty math of Dr. Krugman.
  • Consumption Cannonball - U.S. consumption will roll over sequentially in Q4 based on our bottom-up consumption model. This is a negative catalyst for our below consensus Q4 GDP domestic growth projections.

To submit questions for the Q&A, please email 

 

Regards,

 

Hedgeye Macro Team


EARLY LOOK: Japan's Jugular

This note was originally published October 05, 2010 at 08:00 in  

 

“Great spirits have always encountered violent opposition from mediocre minds.“

-Albert Einstein

 

EARLY LOOK: Japan's Jugular - Einstein

 

 

 

 

I am currently in the middle of reading Walter Isaacson’s “Einstein: His Life and Universe.” For a young chaos theorist fighting the winds of Washington and Wall Street Groupthink, Einstein’s independence of thought is highly motivating.

 

Chaos and Complexity Theory are the most important mathematical discoveries since Einstein’s General Theory of Relativity. While we don’t give out our mathematical models here in New Haven, we distribute both their factors (inputs) and themes (outputs).

 

Like any other dynamic ecosystem in this universe, global markets are constantly changing. As a result, analyzing time, space, and gravity are seemingly rational places to start each and every risk management morning. Trivial points in time like a price-to-earnings ratio are what they are – of very little value to our research.

 

At 2PM EST today we’re going to introduce the 3 global macro risk management themes that we think will matter most to global investors in the 4th quarter of 2010 (if you are a qualified investor and would like to sign up for the call, please email sales@hedgeye.com).

 

For Q4 2010 our Hedgeye Macro Themes are as follows:

 

EARLY LOOK: Japan's Jugular - 0 q4 THEMES

 

In sharp contrast to other “top-down” or “global macro” oriented sell-side research that calls everything “long-term”, we focus acutely on time (duration) and space (price). It’s all good and fine to come up with a “long-term” investment thesis (been there, tried that), but if you get time and price wrong, you’re best advised to get a job in academia.

 

I don’t disrespect academia. I just don’t want my firm, family, or country’s risk management system overseen by academics. Einstein himself would be the first to call out the long-term career risk associated with academic dogma. As markets evolve, we need to evolve the risk management process alongside them.

 

Living in the violent opposition of mediocre industry standards is one of the tremendous investment opportunities in global finance today. Schumpeter called this creative destruction. God bless the learning opportunities that are born out of the failures of Fiat Fools.

 

Unfortunately, Washington and Wall Street Groupthink doesn’t get this yet. Neither do the Japanese Bureaucrats who continue to believe that the best way to solve for structurally impaired economic growth is to throw more failed government policy action at the problem.

 

We’ll go through the why on this with a 68 slide presentation this afternoon, but the bottom line is that what you are seeing from Japan this morning is ultimately an admission that QE (Quantitative Easing) didn’t work.

 

In fact, after cutting interest rates from ZERO POINT ONE percent (0.10) to ZERO POINT ZERO percent (0.00), the most recent edition of a Japanese Heli-Ben (BOJ Governor Shirakawa) dropped the QE acronym altogether for a new one – CME (Comprehensive Monetary Easing).

 

 

EARLY LOOK: Japan's Jugular - japanchart

 

 

The best part about CME versus the QE that is sponsored by “New Keynesian Economics” academic dogma (Bernanke, Krugman, Stiglitz, etc.), is that I can actually understand what CME means. It’s very “comprehensive” to see that the Japanese can’t cut interest rates (until they raise them) again.

 

I’m certain Einstein would be a fan of CME. When failed ideologies like QE meet their maker of gravitational force, the next best step for a failed academic is to stop what they are doing. Then either retire, or change as the facts have. After all, it was Keynes himself that would be asking “New Keynesians”, what do you do now Sirs?

 

My immediate term support and resistance lines for the SP500 are now 1126 and 1144, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer


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KNAPP TRACK: SEPTEMBER (RUMORED) TRENDS

If the whisper number is to be believed, casual dining sales trends showed strength in September.

 

The optimistic tone being struck by management teams (PFCB, DRI, MRT) in the casual dining category over the past few weeks resonates with the trend in casual dining sales that began during the summer and is continuing into the fall months.  The whisper numbers for the first three weeks of September, combined with our estimate, leads us to an estimate of 1.5% for the Knapp Track September same-store sales number.  This would constitute an acceleration of 90 bps on a one-year basis and a two-year average trend improvement of 10 bps.  Incidentally, a 1.5% print for September would be the strongest Knapp Track casual dining same-store sales number since August 2007 when a +1.7% result was reported.

 

Hedgeye’s macro view does not support the thesis that overall consumption will remain robust as we progress over the immediate and intermediate term; however, it is worth noting that the restaurant industry’s share-of-wallet seems to be holding up versus other “discretionary” categories.  I will be posting specifically on share-of-wallet trends within consumer discretionary soon.

 

KNAPP TRACK: SEPTEMBER (RUMORED) TRENDS - knapp

 

Howard Penney

Managing Director


MANAGE BLACK SWANS: CONF CALL

 

Black Swan Management Call at 2pm today.  Email sales@hedgeye.com if you are interested in trialing.

 

 

MANAGE BLACK SWANS: CONF CALL -  Black Swans

 

 

 

For Q4 2010 our Hedgeye Macro Themes are as follows:

 

MANAGE BLACK SWANS: CONF CALL - 0 q4 THEMES


HEDGEYE'S 4Q MACRO THEMES CALL

HEDGEYE'S 4Q MACRO THEMES CALL

Today, October 5th, 2PM EDT

 

5-10 minutes prior to the 2 PM EDT start time please dial:

(Toll Free) or (Direct)
Conference Code: 724674#

To access the 4Q Key Macro Themes materials please click here.

To submit questions for the Q&A, please email .

 

******************************************************************************

 

The Hedgeye Macro Team, led by CEO Keith McCullough, will detail Hedgeye's 4Q Key Macro Themes, which are as follows:

  • Japan's Jugular - The Keynesian experiment that is Japan will continue to implode in Q4. The Yen, JGBs, and Nikkei all remain at risk.
  • Krugman Kryptonite - As the Fed signals its intent to use more Krugman Kryptonite (printing dollars/ quantitative easing) we look at both the short and long term implications behind the faulty math of Dr. Krugman.
  • Consumption Cannonball - U.S. consumption will roll over sequentially in Q4 based on our bottom-up consumption model. This is a negative catalyst for our below consensus Q4 GDP domestic growth projections.

Regards,

 

Hedgeye Macro Team


Early Look

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