Tweet me! Buoyant stock prices are defying the physics of fundamentals. Equities are also floating on mist despite the gravity of the macroeconomic outlook as we believe the equity market falls prey to over-exuberance and excessive optimism. I query, have we entered into a double-dip recession? I'll answer my own question here, No! The reason is because I do not feel we have organically left the previous recession. The positive GDP prints and "green shoots" were the direct result of government bubble (re)blowing through fiscal and monetary stimulus, culminating in QE v1.5. As the effects wear off, we start to see were the economy really stands. Let's just grab the first four headlines today from CNBC.com a day after a 2%+ rally in the S&P:
Despite the flurry of the truth finally emerging from among rampant disinformation negative economic news, the markets is only off 2 points today after rallying 24 points for nothing yesterday. Bubble, Bubble, toil and trouble. Needless to say, this happy slappy effervescence cannot (and will not) go on forever. A typical example of said over exuberance is the highly economy and consumer sensitive US hospitality sector where the entire pack of hotel stocks have witnessed a substantial rebound from their lows in March 2009 owing to the recovery seen in the occupancy levels, while the markets ignore the weak prices that are offsetting most of the revenue gains and are undermining a healthy recovery in the sector. The sector is still struggling with the demand–supply gap that developed over the last two years when demand was pummeled by the economic downturn in combination with new supply that continued to add to the vacant rooms. Rooms are being booked at rates below the 2009 levels (post economic bust!) to boost occupancy with group bookings rates showing significant weakness. The subject of the accompanying forensic analysis’s business model is particularly vulnerable as the company derives nearly 78% of the revenues from group bookings and the prices are being slashed at all of its hotels. Price cuts have been more severe at its hotels in Washington and Orlando because of relatively higher supply-demand gap in these areas. Further, price cuts at a time when costs are increasing due to input inflation are likely to hit the margins at the same time that said inflation outstrips wages, income and asset appreciation, creating a profit sapping stagflationary environment. See Continuing the Deflation/Inflation/Stagflation/Depression/Recession Rant… for more on this topic.
In addition to the pricing pressures outlined above, the subject of our forensic analysis is burdened with the huge leverage and capital expenditure costs. They report relatively soon, so paying BoomBustBloggers should take notice. Subscribers, please reference:
Lodging Co. Forensic Analysis - Retail Lodging Co. Forensic Analysis - Professional and Institutional
