Morning Reads From Our Sector Heads

Keith McCullough (CEO):


Corn Erases Gain as Supplies May Be Ample Amid Planting Delay (via Bloomberg)

Todd Jordan (GLL):


Online poker is back: Legal website launches in NV (via Yahoo! News)


Norwegian says sales uplift vindicates 10% commission move (via Travel Weekly)

Rob Campagnino (Consumer Staples):


Anheuser-Busch InBev Sales Miss Street Expectations (via Fox Business News)


Josh Steiner (Financials):


Most Banks Could Still Profit Under Tough New Overhaul Proposal (via NYT Dealbook)


MBIA Loses Bid for Ruling on Countrywide Loan Repurchase (via Bloomberg)


BofA Asks Judge to Throw Out Mortgage Suit (via WSJ)


Kevin Kaiser (Energy):


Boom Times for a Tiny Texas Town (via WSJ)


Brian McGough (Retail):


Demands for Action as Bangladesh Death Toll Mounts (via WWD)


Under Armour, On Setup Shop In Rose City (via SGI News)


Euro Trip

Client Talking Points

Talk About It

Everyone is talking about Europe, the ECB and Mario Draghi. Will he institute a rate cute this week? If not, will investors be sorely disappointed or can they swallow the reality that rates could stay the same? Regardless of the actual outcome, the Euro is taking a hit this morning against the US Dollar and has dropped below out TAIL risk line of $1.316

Step By Step

The Asian markets are following the lead of the US and are rallying hard with Korea's KOSPI index putting up +1.2% to the upside overnight. That puts the index back above our TREND line of resistance of 1943. It has the ability to continue to rally if US tech doesn't get clobbered and if the Yen can stop its bleeding. That remains to be seen for now.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company. 


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow 


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road


"Last day of the month...always interesting ~ #BuckleUp" -@TheKillir


"When a thing ceases to be a subject of controversy, it ceases to be a subject of interest." -William Hazlitt


Employment cost index rises 0.3% in first quarter of 2013.


In preparation for HYATT's F1Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • "Our expectation on the market is that there will be periods of time where there maybe is matches between supply and demand as new hotels come online, but over the long haul, we think our positioning in China is very strong."
  • "In India, what we're seeing right now is continued interest in all of our brands. India is a market is experiencing some softness from a macroeconomic point of view, and while that we haven't experienced any softness in our pipeline that's one thing we're mindful of going forward."
  • "With regard to that executed contract base, 45,000 rooms …, less than 10% of it are owned or joint venture rooms, so the majority are managed or franchised. Our total commitments into future periods is… roughly $560 million. Those commitments are in the form of equity, joint ventures, loans, mezzanine debt and other types of investments that we plan on making to support that pipeline. There are two projects in particular that are a little chunkier, one being our investment in the Park Hyatt, New York. We expect to acquire that hotel upon completion of construction mid 2014. And our expectation is our two-thirds interest in that hotel will be $250 million, we have a fixed price purchase contract. Although we could apply some project level debt to that project in which case the amount of funding could be up to $125 million less than the $250 million if you apply 50% leverage. The Andaz Wailea is another high profile project that's within that $560 million, that hotel is under development right now, it's a joint venture with Starwood Capital. We expect to open that hotel sometime in the third quarter of this year."
  • "We think about that executed contract base and 45,000 rooms is that on average these hotels take about five years to open from the time of contract signing, which is when we include it in that executed contract base, to opening. Some of the international full-service hotels in our base will take a little bit longer than that and select service hotels will take a little bit less than that, but on average about five years."
  • "If you look at the openings we've forecasted, for this year we expect to open approximately 30 hotels."
  • "What some of the leading brokerage houses and others are saying, they expect transaction activity in the U.S. for instance to be up at least 25% this year versus last year. So you're seeing more transaction activity and therefore there will be higher ability for us to participate.  On a net basis, we've been an acquirer. Going forward, we'll take a balanced approach."
  • "If you think about our business in North America particularly of full service hotels, 45% to 50% of that mix is group-oriented.  The two main segments of group business are corporate group and association group. On the corporate side, what you're seeing is low levels of visibility…  a lot of bookings for forward 90-day period. So short-term bookings and the bookings are tending to be a little bit smaller, both in terms of number of room nights as well as duration of meetings and I think some of that speaks to uncertainty on the part of corporations to make long-term forward commitments... With regard to associations that have more visibility into the future are making those longer-term commitments. So, you're seeing strength on the association side for future periods."
  • "Markets and hotels that have been more transient oriented have outperformed. So, on the transient side, of course visibility is lower, generally folks don't make their transient room commitments until a few weeks before the travel dates. So, we have less visibility on that piece of the business, but strength continues to be positive."
  • "The focus on the capital base is really building out the platform, that's first and foremost. I think in the context of that, we do recognize that we can create value by return of capital as well, and we have in the past returned capital to shareholders in the form of share repurchases. So, we bought back about $400 million of stock in 2011 and then last year in the summer, our board authorized the repurchase of up to $200 million of stock in the third and fourth quarter. We expended about $135 million repurchasing stock. So that has been a part of the story in terms of value creation over the last couple of years, and we still have capacity left under that $200 million authorization." 
  • "Based on the facts and circumstances, their [Board’s] belief and our belief was return of capital through share repurchases made more sense for us. The way we view dividends is if you look at operating cash flow less CapEx, what's remaining, and is that what's remaining significant enough to pay a meaningful dividend; and frankly if you look at our history over the last few years, operating cash flow has been recovering and we have been spending quite a lot of money  in  CapEx, particularly with regard to improvements at some of our own hotels. Now we're past most of that outsize spending at least with regard to improvements at owned hotels at this point, but that's been a relatively recent occurrence. So I wouldn't say it's off the table, but I would say it's not something that we're looking at implementing in the short-term."
  • "Looking ahead, we expect margin expansion to be a function of and dependent upon higher rates at our hotels and higher levels of food and beverage revenues and profitability. We believe higher rates are likely going forward as occupancies now are at peak or near peak levels. Margin expansion represents significant future earnings potential for the company."
  • "We've also started marketing six owned full service hotels in the U.S. These hotels in the aggregate earned about $25 million in adjusted EBITDA in 2012. If we do ultimately sell these hotels, we'll maintain brand presence through long-term agreements."



  • "Hyatt Regency New Orleans--We anticipated earning a low-teens percentage return when we underwrote the deal. But based on the strong performance of the hotel, our current expectation is that we'll earn a return higher than that, in the mid to high-teens."
  • "In May 2011, we acquired three extended stay hotels in California and projected reaching a 10% cash-on-cash return by stabilization. We're well on our way towards that, with a 2012 adjusted EBITDA yield of over 10%, which we expect to increase after we renovate these three properties."
  • "We acquired the Hyatt Regency Birmingham in England this past November, with an expectation that we would earn $5 million of adjusted EBITDA in 2013. While it's still early days, based on progress at that hotel, we believe we could exceed our initial expectations. "
  • "We expect 2013 to be a year of stable growth. While we believe that the first half of the year has the potential be somewhat choppy, we're optimistic for the whole year based really on four primary indicators."
  • "2013 group pace for full-serviced managed hotels in the U.S. is up about 4%. We're seeing significant levels of group production. December was our busiest group production month since late 2007, and January was good as well."
  • "While the booking window is lengthening in certain cases, we're still seeing high levels of activity for close-in dates. For example, 40% of the group production in January was for the following 90 days."
  • "Our corporate negotiated rate discussions have yielded mid-to-high single-digit percentage rate increases."
  • "Transient demand continues to bolster results."
  • "We expect certain specific items may negatively impact us in the first part of this year and the impact will lessen as the year progresses. These items would include: the ongoing renovations of several large managed hotels, both in the U.S. and the ASPAC region, market conditions in several international markets with significant new supply growth such as Baku and some cities in India, lower levels of government demand in some markets, specific areas of expense pressure, such as insurance costs and real estate taxes for owned and leased hotels, and a continued lag in the recovery of F&B spending as groups and banquet customers limit their spending. We expect these items to negatively impact us by $3 million to $6 million per quarter over the next several quarters, primarily due to lower fees as a result of renovations of managed properties. We expect that this level of quarterly impact will start at the higher end of the range, exacerbated a bit by the timing of Easter this year, and will trend down as the year progresses."
  • "On the buy side, we're looking at a number of potential new investments, including acquisitions and investments in joint venture hotels, both existing JV properties and new properties in the U.S., Latin America and in Europe. Deal flow is higher than it's been over the last few years and we are actively looking at investments in excess of $100 million in these types of projects."
  • "We remain very focused on and disciplined around how we're actually managing costs at our properties. And if you look at cost per occupied room, which is not the only measure that's relevant, but it is one metric, it's been flat basically since 2007. For our select service hotels, partly by virtue of some shared services initiatives, we've actually seen a decline over that period of time in cost per occupied room."
  • "With regard to openings this coming year, about half international and half within the U.S. And two-thirds of all the hotels are managed properties."
  • [Incentive fees] "So for 2013 we will see a continuation of some choppiness"
  • "Maintenance CapEx remains relatively steady at approximately 5% of owned revenues" 
  • "From an owned perspective, we will continue to see supply issues in Baku, where we have an oversupply of hotel rooms. We also expect continuing issues in India with regards to the  economical challenges they have there and some government policies. There are some markets in China where we see some short-term supply impacts. But those will in the medium to long term regulate itself because there is still an undersupply in our belief in the major markets there. And some headwinds are going to be created by the renovations in key gateway cities in Asia."

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Predicting The Past

This note was originally published at 8am on April 16, 2013 for Hedgeye subscribers.

“We cannot predict where it might be headed in the future, but we can describe how it came to be in the past.”

-Eric Chaisson


First, my entire team’s thoughts and prayers go out to all of the people affected by the horrible act at the Boston Marathon yesterday.


Without having inside information, predicting an external event like that is impossible. So is consistently predicting tops and bottoms in markets. They are processes, not points. It’s my job to A) contextualize the past so that B) I put us in the best position I can for the future.


Yesterday’s market collapse started with more of what has been happening for months – commodities collapsing. Combine intermediate-term TREND collapse with an immediate-term external event and you run out of time and space into the market’s close. That’s why describing where we came from to reach an intraday capitulation like that is critical this morning.


Back to the Global Macro Grind


Historical Context:

  1. SP500 was immediate-term TRADE overbought into last week’s all-time closing high of 1593 (so we made sales there)
  2. CRB Commodities Index was already in a Bearish Formation going into yesterday’s open (bearish TRADE/TREND/TAIL)
  3. Gold was not only in a Bearish Formation into Friday’s close, it started crashing pre-open yesterday too

Crashes (20% peak-to-trough declines) are very bad. We don’t buy those. Predicting The Past on that score is actually quite easy. Old Wall calls it “catching a falling knife” for a reason. Unless you have a catalyst, “cheap” gets a lot cheaper during a crash in price expectations.


But the thing about the past, on both things that matter to our process (Research and Risk Signals) is that you can see it today. That’s why our Research and Risk Management Models often get lucky in not being long something like Gold, Energy, or Brazil on days like yesterday. A multi-duration, multi-factor, Research and Risk Management #Process makes its own luck.


Describing how Bernanke’s Bubble (Commodities) is deflating is actually quite easy. You simply have to accept causality in terms of what made Bubble#3 (Greenspan/Bernanke Bubbles #1 and #2 were Tech and Housing) to begin with. If you reverse that causal factor’s intermediate-term TREND (Dollar Up instead of Debauched), you start describing why the Commodity/Gold Bubble is popping.


Reviewing 2013 YTD:

  1. Gold Miners (GDX) are down -37% YTD
  2. Gold is down -18% YTD
  3. Copper is down -11% YTD

Freeport McMoran (FCX) is a Gold and Copper expectations proxy (that’s why we’re short it); it’s down -14% YTD. And Brazil’s stock market (the best liquid proxy for a country commodity index) is down -13.1% YTD. For the month-to-date (APR) alone, Basic Materials (XLB) and Energy (XLE) stocks are down -4.8% and -5.7%, respectively.


This is why describing where we are matters. It’s the #CommodityDeflation that’s been driving US Consumption expectations higher all year long too. Q: So on the biggest down day for both US stocks and commodities of the year, why didn’t I buy US stocks yesterday? A: it’s the signal – and, above all else, I respect the market’s Risk Management Signal.


For US stocks, let’s go through why I’m at 10 LONGS, 9 SHORTS @Hedgeye instead of sending you another “Buyem” email into the close:

  1. SP500 broke my immediate-term TRADE line of 1557 support yesterday (that was new)
  2. US Equity Volatility (VIX) broke out above my immediate-term TRADE line of 14.07 resistance yesterday
  3. S&P Sector Studies flagged 5 of 9 core Sectors broken on our immediate-term TRADE duration

Those 3 things, combined with a nasty volume signal (+32% vs my TREND avg), predicts plenty enough for me to do 1 thing in a situation like that (a situation I have seen many times before) – to simply wait and watch.


I’m not happy to miss a big US stock market open, but if I do, I know why I made that decision. Having sold into an immediate-term TRADE overbought signal of 1593, I’m more than happy to wait and see if the bulls recapture 1557. If they can, with intermediate-term TREND support for the SP500 (1515) and TREND resistance for the VIX (18.69) intact, predicting the past gets easier again.


My Macro Team and I will be hosting our Q213 Global Macro Themes Call at 1PM EST today. Please ping for the details. Our intermediate-term TREND to long-term TAIL Research Views will be the focus of that call. That always helps us contextualize what was confusing about yesterday’s immediate-term duration risk too.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, UST10yr Yield, VIX and the SP500 are now $1291-1464, $100.21-104.79, $82.04-83.14, 95.87-102.11, $1.28-1.31, 1.69-1.76%, 14.07-18.69, and 1537-1568, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Predicting The Past - Chart of the Day


Predicting The Past - Virtual Portfolio

CHART OF THE DAY: Spectators and Actors


CHART OF THE DAY: Spectators and Actors - Chart of the Day

Spectators and Actors

“We have become both spectators and actors in the great drama of existence.”

-Niels Bohr


You can’t geek out on quantum mechanics without giving a big shout-out to the great Danish atomic physicist, Niels Bohr. He won the Nobel prize for Physics in 1922. He would have been a beauty running the Hedgeye Research Team. No offense, DJ.


I was on a plane to Kansas City from Denver yesterday and couldn’t stop thinking about the progress that our research team has made. I’m actually becoming quite humbled when I read the work of junior analysts who have matured into senior analysts at our firm. They are well ahead of where I was 5 years into being in the game. A collaborative culture provides them a convex learning curve.


Applying chaos theory, predictive tracking algos, and the principles of thermodynamics to our Global Macro research is what we are doing. Yes, we are early. And, no, we don’t need to call a management team for “edge” on what the Euro is going to do next. In order to execute on our process, we have to submit ourselves to being both attentive spectators of the game and proactive actors within it.


Back to the Global Macro Grind


Not unlike playing team sports, you have to adapt to the game that you are in and play it accordingly. Because, no matter where you go this morning, here you are – at the all-time highs in the SP500 (+11.7% YTD). And the great drama of our existence within the game continues…


A few weeks ago I contrasted approaching markets from a Darwinian (evolutionary) rather than a Newtonian (time-independent) perspective. “Newton’s 17th century view stipulated the physical world as a closed system dominated by cause and effect” (Cosmic Evolution, pg 34). Whereas opening your mind and risk management process to non-linearity, uncertainty, and interconnectedness is the new frontier.


In both calling market tops on “valuation” and picking stocks irrespective of style factor risks, what we are learning here is that we all have a lot more to learn. “Gone is the deterministic and mechanistic paradigm” (Chaisson). Gone is the idea that central planners can smooth economic gravity and/or the unintended consequences associated with their trying to control the game.


Tomorrow and Thursday, central planners will once again attempt to do precisely the opposite of what I just wrote:

  1. Fed’s Open Market Committee will hopefully do nothing to our intermediate-term #StrongDollar TREND
  2. European Central Bank (ECB) will either cut rates or allude to cutting them soon

Rather than get upset about what we think these people who are paid to print political compensation should do, what we’ve done is build a model that front-runs their proactively predictable behavior (yes that’s sad). We call it our GIP Model (Growth, Inflation, Policy) where:


A)     POLICY is causal to a currency’s price, volatility, and expectations (across risk management durations)

B)     INFLATION is local (to currency moves) and will accelerate or decelerate based on POLICY (causal)

C)     GROWTH reacts (on a currency adjusted basis) to real-time local inflation expectations


No one is going to give my team a Nobel Prize for this. We’d have to had racked up debt and toiled in academia to prove out our practitioner’s model (with no real-world experience) for decades – and by that time we would have been way late. But, our Growth and Inflation forecasts have been better than anyone in the marketplace for the last 5 years, and I’m not going to apologize for that. We’re proud of it.


So back to the why on an ECB rate cut:

  1. #CommodityDeflation is perpetuating “lower than expected inflation readings” across Europe
  2. Both European employment and real (inflation adjusted) consumption growth remain weak
  3. So, in their central planning box of thinking, this provides theoretical air-cover to devalue the Euro

In market speak, this won’t save what the Europeans have been desperately trying to solve for (GROWTH). To the contrary, this POLICY to INFLATE will devalue the Euro versus the US Dollar, rally European stock markets, and plug the people (again). #EuroCrats, Unite.


Sound familiar?

  1. United States of America’s monetary POLICY to inflate (2010-2012) = US Dollar hits 40yr lows
  2. Japan’s Weimar Republic POLICY to inflation (2012 to ?) = Burning Yen, to be continued

Perversely, this is a great opportunity for America. This provides both the President of the United States and his conflicted and compromised Fed and Treasury an opportunity to get out of the way (Treasury just announced they’ll pay down $35B in borrowings!) and let the US Dollar strengthen versus her socialized European and Japanese counterparts.


Politically driven causal factors driving entropy into an unstable and non-linear market ecosystem of colliding global currencies, commodities, and country factors … Yes, this is war - a Currency War (thank you Jim Rickards). We’re just spectators and actors trying to perform within it.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $97.13-104.38, $3.06-3.26, $81.93-83.31, $1.29-1.31, 97.11-100.94, 1.66-1.76%, 11.71-14.61, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Spectators and Actors - Chart of the Day


Spectators and Actors - Virtual Portfolio

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