Morning Reads From Our Sector Heads

Keith McCullough (CEO):


J.C. Penney Apologizes in Ad Developed Under Former CEO (via Bloomberg)


Japan Builds Sri Lanka Ties With Aso Visit as China Clout Grows (via Bloomberg)


Yuan Jumps to 19-Year High on Biggest Fixing Boost Since October (via Bloomberg)


Todd Jordan (GLL):


Beijing apoints “tough cop” to watch Macau casinos (via Macau Daily Times)


Princess Cruises Discounts Alaska and Europe Up to 50 Percent (via Cruise Industry News)


Howard Penney (Restaurants):


Watch Your Domino's Pizza Being Made On Live Webcam (via AdAge)


Josh Steiner (Financials):


Small Banks Seek Exemption in U.S. Collection of Fee Data (via Bloomberg)


Ally Says Bondholder Group Pulls Support for ResCap Bankruptcy (via Bloomberg Businessweek)


Jay Van Sciver (Industrials):




Kevin Kaiser (Energy):


C&J Energy Services Announces First Quarter 2013 Results (via C&J Energy Services)



In preparation for HST's 1Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.





  • The Offering is expected to close on March 28, 2013, subject to the satisfaction or waiver of customary closing conditions. 


  • On February 21 Standard & Poor's ("S&P") raised Host Hotels & Resorts, L.P.'s senior unsecured debt rating to 'BBB-' from 'BB+', which represents an investment grade rating by S&P.  The upgrade reflects S&P's expectation that the Company's credit measures will improve in 2013 to a level that represent a cushion relative to their thresholds at the new rating.




  • "While our occupancy levels now exceed our 2007 performance, we have not yet reached our historic peak levels which exceeded 78%, and we believe that there is still upside potential, especially on the group side of our business. Our overall occupancy level is about 0.5 point higher than where we were in 2007, but we have not yet achieved the 78%-plus occupancy we reached at the end of the 1990s. Average rate is still 6% short of 2000 levels on an absolute basis and closer to 17% below if you adjust for inflation."
  • "As we look at lodging fundamentals over the next few years, we expect supply will continue to be constrained, especially in the upper-upscale segments. We would expect demand growth will exceed supply growth as international visitation continues to grow and group demand continues to improve. As group demand improves, we would expect that the hotels will benefit from continued mix shift and be able to increase rates across all segments. As a result, we would expect that RevPAR would be driven more by increases in rates, but we would still expect to experience further increases in occupancy."
  • "Our group booking pace is up 4% in room nights for the full year 2013 and up 6.5% in revenues. Revenues for the last three quarters of the year are up more than 8%, and overall, we expect a strong year from our group segment. Transient bookings are also well ahead of last year's pace, and we are seeing solid rate growth in virtually all segments."
  • "Our RevPAR growth for the first month and a half is averaging more than 9%. While March results are expected to slow, primarily because of the early Easter holiday, we are certainly encouraged by our initial results. Transaction activity across our various markets generally matched the pace we experienced in 2011, although both the U.S. and Europe saw more activity in the second half of the year."
  • "On the disposition front, we remain focused on reducing our exposure to non-core hotels located in suburban and airport locations."
  • "We expect to be active on both the acquisition and disposition fronts as we look to increase our investment in target markets and look to reduce our exposure in non-core locations. On the margin, we would still intend to be a net acquirer in 2013. Our guidance does not assume the benefit of any acquisitions, nor does it assume the impact of any sales beyond the transactions we have already closed."
  • "As we think about sales going forward in 2013, we would certainly love to do sales in at least that same level [$400MM]. But, as always, since it's not liquidity driven or event driven, it's really going to be around what price we can get when we go to be a seller."
  • "In addition to transaction activity, we will continue to look to invest in income-generating additions to our portfolio, which typically drive returns well in excess of our cost of capital."
    • "In 2013, we hope to commence the final phase of the San Diego Marriott Marquis & Marina which will provide a new ballroom and exhibit hall."
    • "We are working on is the repositioning of the Newark Airport Marriott which will include a 10,000-square-foot ballroom which is scheduled to be completed before the 2014 Super Bowl which will occur in the MetLife Stadium just outside of New York."
  • Outlook for 2013:  "We anticipate that hotel demand will continue to grow as the U.S. economy improves, leading to demand growth which will slightly exceed the less than- 1% supply growth projected for 2013. The increase in net demand, combined with solid group bookings, suggests we should experience both occupancy and rate growth in our portfolio."
  • "Looking to our valuation, despite the fact that interest rates are at historic lows and supply is low, our stock is currently trading at approximately a 40% discount to replacement cost and near its average 10-year multiple. When we look at all these factors, it gives us confidence that Host is well positioned to outperform in 2013."
  • Geographic outlook:
    • "We expect the Los Angeles market to continue to perform well in 2013."
    • "We expect Seattle to be one of our top-performing markets in 2013 due to growth in both transient and group demand which will help to drive rate and RevPAR growth."
    • "We expect Hawaii to be a solid market in 2013 due to good group bookings. Results for 2013 will be affected by the construction of the timeshare project adjacent to the Hyatt Maui and a rooms' renovation at the Fairmont Kea Lani in the second half of the year."
    • "We expect our Houston hotels to have a good 2013 due to better demand, which will allow us to shift the mix of business to higher-rated segments."
    • "We expect that the San Francisco market will have a decent year in 2013, although results will be affected by the rooms' renovation of the San Francisco Marriott Marquis in the first half of the year."
    • "The outperformance was driven by both group business, which created compression to drive rate. We expect our Boston hotels to have another good year due to solid in-house group bookings" 
    • "We expect our Chicago hotels to continue to perform well in 2013 due to group demand and ADR improvement through better business mix and overall rate increases."
    • "We expect New York to be one of our top performing markets in 2013 due to an increase in both group and transient demand, less renovation disruption, and no Hurricane Sandy."
    • "With the inauguration in January, RevPAR for the month for our four downtown hotels was up over 24% and RevPAR for all 11 of our D.C. hotels was up 21%. While we expect 2013 to be better than last year, weakness in government travel will limit RevPAR growth."
    • "We expect the 18 European joint venture properties, excluding the Sheraton Roma which was under major renovation in 2012, and including the five hotels recently acquired, to have RevPAR growth in the 2% to 3% range for 2013."
  • "Looking forward to 2013, we expect that RevPAR primarily will be driven by rate growth. The additional rate growth should lead to solid rooms flow-through, even with growth in wage and benefit cost. We expect unallocated costs to increase more than inflation, particularly for rewards in sales and marketing, for higher revenues will increase costs."
  • "Margin expansion for 2013 will be negatively affected by projected above-inflationary increases in both property insurance, primarily due to Hurricane Sandy losses, and property taxes which, when combined, result in a 17- basis-point impact on margins. In addition, a couple of initiatives from the brands, including incremental cost for Marriott CITY initiative and Starwood's paid search revenue initiative which, when combined, results in an incremental 10 basis points in margin as well."
  • "There are two items in particular that impact the comparability of EBITDA and FFO between 2012 and 2013. The first is the sale of the land to the Hyatt Maui timeshare joint venture. We recognized an $8-million gain on the sale in 2012, which reflected the profit we received from Hyatt for their one-third portion of the land. In 2013, the JV expects to start the marketing process for the timeshare and our portion of the expenses will total roughly $4 million, with no offsetting income, resulting in a $12-million decline in EBITDA from 2012 to 2013.  The second item is $9 million of business interruption proceeds related to the New Zealand earthquake that we received in 2012. While the ibis Christchurch reopened in September of last year and we expect the Novotel Christchurch to reopen later this year, the EBITDA generated will be approximately $7 million less than the 2012 EBITDA. When combined, these items generated roughly $19 million of EBITDA and FFO that will not be repeated in 2013."
  • "We have two debt maturities in 2013, the 4.75%, $246-million loan on the Orlando World Center Marriott that is due in the second quarter and an 8.5%, $33-million loan on the Westin Denver Downtown that goes into hyperamortization in December, both of which we intend to repay with available cash."
  • "I think what we've been pretty consistent about saying is that we'd like to get to about three times leverage."
  • "Our focus in Europe is really at this point primarily in Germany, because the portfolio is not well-invested in Germany and that represents a market we have wanted to get some exposure to. And then I also think that if we could find something that was priced appropriately, we'd be interested in buying into London, although we would probably prefer to be buying more off of 2013 numbers than 2012, given that the Olympics was there last year."
  • "We continue to be very bullish on the Brazil market. The initial investment we have made in that market has performed extremely well and so we would like to invest some more capital there. I think in that area – on the full-service side, it would be in the form of acquiring existing assets because we would feel comfortable."
  • "When we look at Asia, the market that's most intriguing to us right now is Australia. The performance of the assets that we have acquired in Australia to date has been very strong. And, as we look at how we expect Australia to perform going forward, I think we have a good understanding that demand will continue to grow"
  • "Just to make it clear to everybody where we're most interested in owning at this point, it's really Boston, New York, D.C., South Florida, Chicago, Seattle, San Francisco, L.A., and San Diego. Those gateway markets are the markets that we think in the long run are going to outperform. We would like the bulk but I don't think I'd say 100%, but certainly the bulk of our EBITDA in the U.S. to be coming out of those markets. I think we're at the point right now where we're probably at about 70% to 75% of our EBITDA coming from those markets."
  • "And then as it relates to the special corporate discussions, I think we're – I think what we've generally seen is plus or minus 5% to 6% in terms of special corporate rate increases." 

ADM – Below Consensus, But Quarter is a Look Back – Let’s Look Ahead

Last night, ADM reported Q1 EPS of $0.48 versus consensus of $0.52 – most of the weakness in the quarter is related to lingering issues with the U.S. drought, and as a result represent more of a look back than a look at either the present or likely future state of the agricultural complex.  Recognizing that, we think investors should be using any opportunity that some reasonably unappealing results might present in terms of stock weakness to become involved in what we still see as a compelling investment case.

We remain bullish of the size of the coming corn crop (it’s admittedly early) and bearish on corn prices – if we are correct, both agricultural services and ethanol at ADM should be poised for substantial improvement.

What we liked:

  • Improved ethanol results, a trend that we think should continue
  • Completed due diligence on GrainCorp, will move forward to acquire company for A$12.20 per share – see our prior note on the topic - quick summary, we like the deal a heck of a lot
  • Balance sheet well-managed – working capital was neutral to cash flow in what is historically a quarter where it is a large use of cash
  • Positive free cash flow versus significant negative free cash flow in the year ago quarter

What we didn’t like:

  • EPS below consensus
  • 42% decline in operating profit in agricultural services (however, linked to ongoing impact of last year’s drought)
  • Oilseeds profit declined 42%
  • Results are likely to remain challenged until we see the U.S. crop

I know we are starting to sound like a broken record in terms of not seeing a great deal of opportunity across our universe, but ADM is one name where we see a favorable risk/reward profile – upside toward $40 per share if the U.S. crop breaks right and back toward $30 if we get a second consecutive year of a once in a lifetime drought.


Call with questions,




Robert Campagnino

Managing Director





Matt Hedrick

Senior Analyst

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Emotional Trading

Client Talking Points

Bad Brent

Brent crude oil is now in bearish formation and has been down for the last few days consecutively as global supply increases and commodity prices feel the wrath of a stronger dollar. Driving season is kicking into gear and consumption is due for a boost as prices come down at the pump. That'll have Americans using both cars in their household instead of carpooling it and getting out the Expect Brent to go lower on an up day for the dollar.

Bernanke Blues

People got really emotional over yesterday's FOMC meeting. Whether they wound up expecting change or not doesn't matter - we knew this was coming. More of the same. Low rates, asset purchases, keeping the markets happy - that's what Bernanke does. As for as America goes, we'll enjoy this tomfoolery for at least another year before anything material changes. But tomorrow, all eyes are on Europe and a possible rate cut from the ECB via Draghi. That'll get people really worked up - just wait and see. 

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


"When all is said and done, $FNP printed what it needed to make the stock not go down." -@HedgeyeRetail


"Only the shallow know themselves." -Oscar Wilde 


Initial jobless claims fall 18,000 to a seasonally-adjusted 324,000 last week, the lowest level since January 2008.

Equilibrium's Test

This note was originally published at 8am on April 18, 2013 for Hedgeye subscribers.

“Only in equilibrium can we not distinguish past from future.”

-Eric Chaisson


If it appears that I have been back and forth on the US stock market all week, that’s because I have been. The nature of any non-linear ecosystem of colliding factors is often just that – uncertain.


Remember, I think of markets in terms of chaos theory and thermodynamics. Markets have blasts of entropy (the price paid when the complexion of the overall market’s energy changes), but they also oscillate back and forth from equilibrium.


What does that mean? Markets are built to confuse. That’s why they impose a lot of pain on a lot of people at the same time. “If not periodically checked, entropy will tend toward a maximum in any system” (Cosmic Evolution, pg 25). Think about that in terms of Gold.


Back to the Global Macro Grind


When my Research and Risk Signals are aligned across durations, it’s easy to make buy/sell decisions. When my front-runner (my immediate-term TRADE duration) whips back and forth between bullish and bearish, making decisions gets a lot tougher.


That’s where the SP500 and VIX are today – and they are hyper correlated:

  1. SP500 = bearish TRADE (1557 resistance); bullish TREND (1515) support
  2. VIX = bullish TRADE (14.27 support); bearish TREND (18.89 resistance)

We also call this Duration Mismatch (i.e. when one duration’s signal has a different conclusion than the other). I get less concerned about our fundamental research view when the TRADE is bearish than when the TREND is – when both are bearish, I short the market.


That’s why bearish TRADE/TREND setups are our Best Short Ideas:

  1. COMMODITIES (CRB Index) = bearish TRADE (289 resistance); bearish TREND (298 resistance)
  2. GOLD = bearish TRADE (1496 resistance); bearish TREND (1641 resistance)
  3. FCX (Freeport McMoran) = bearish TRADE ($31.92 resistance); bearish TREND ($34.18 resistance)
  4. YEN (vs USD) = bearish TRADE (95.87 resistance); bearish TREND (91.17 resistance)
  5. ITALY (MIB Index) = bearish TRADE (15,991 resistance); bearish TREND (16,313 resistance)

It’s a lot more profitable to get bearish about these things when they initially confirm TRADE/TREND breakdowns than it is shorting them after big drops. Obviously the big stuff (Commodities, Gold, Yen) has been breaking down for almost 6 months now, so you want to be proactive in managing the mean reversion risk associated with the immediate-term Risk Range. Bearish TRENDs bounce.


What is the immediate-term Risk Range?


That’s what I consider the most probable range of price within an immediate-term (3 weeks or less) time frame. Since time and space changes, so does my model.


It’s dynamic – meaning I tweak it throughout every day for my volatility and volume assumptions. If you think of it like an engine, I need to monitor accelerations and decelerations and be both proactive and reactive (i.e. I need to manually change the gears).


To use the SP500 as an example:

  1. My immediate-term Risk Range = 1539-1570
  2. My immediate-term TRADE line = 1557
  3. So, I could buy it A) at the low-end of my range (1539) or B) buy it on a breakout > 1557

Since every move I make is #timestamped in real-time, you can see that over the years I’ve evolved. I am more and more indifferent than I have ever been on buying oversold signals versus buying breakout signals.


Theoretically, you’d always like to buy something lower and sell it higher. Sometimes that’s dead wrong (lower can go lower and lower). If the front-runner (TRADE line breakdown of 1557) continues to confirm and attacks the TREND line (1515), and you’re buying it all the way down, you A) better have deep pockets and/or B) a longer-term investment time horizon.


One of my favorite lines on that score is Jeff Gundlach’s coarse description of an “investor” – a trader who is underwater. And when I really think that through in terms of how I risk manage my research team’s best ideas – that’s dead on. If I buy something, I want it to be the right spot. Being too early is also called being wrong.


Astrophysicist, Eric Chaisson, says “the greater the randomness or disorder, the greater the entropy” (pg 24). Agreed. But, in my process at least, it’s a lot easier to make decisions when entropy is obvious than it is when equilibrium is testing my patience.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1303-1399, $97.58-102.91, $82.26-83.12, 95.87-101.91, $1.29-1.31, 1.68-1.76%, 14.27-17.46, 899-929, and 1539-1570, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Equilibrium's Test - Chart of the Day


Equilibrium's Test - Virtual Portfolio


Not to take away from a very good quarter – better than we expected - but we’re coming up with a smaller hold adjusted number.



Q1 was a very strong quarter for LVS but we want to highlight a few things that stood out to us for the Q.  We calculate a net $17 million hold benefit in the quarter across LVS’s properties.  Immaterial yes, but materially different on a property by property basis from what LVS provided in their press release.  The differences can be seen in the table below.  Our respective methodologies primarily differ in that LVS uses theoretical hold for VIP of 2.85% while we use historical averages by property.




So we actually calculate a net hold benefit to the quarter, primarily relating to our use of the historical hold average of 2.70% at MBS versus 2.85% by management.  MBS generated $426 million of hold adjusted EBITDA, in our opinion, versus a $451 million number provided by management.  We would even argue that our number is probably aggressive given that volumes are likely pushed higher when punters play lucky (hold is low).  However, it’s impossible to determine the amount of excess play driven by low hold.  Overall, our hold adjusted property EBITDA estimate is $1.151 billion, $40 million below management’s estimate.   


The big picture here is that even with our lower estimate for hold adjusted EBITDA, this was a great quarter for LVS.  We’re positive on LVS over the long haul so don’t take our commentary as a slap against the company or the stock.  We just like to do our own analysis rather than accept any management's calculations as fact.  Call it healthy skepticism and we feel like we treat both our favorite and least favorite companies with the same approach.


Other Takeaways

  • Las Vegas:  A very unprofitable quarter in Entertainment (Tim McGraw show) drove down EBITDA despite a big increase in other non-casino revenue and good hold on the tables
    • Revenues were $27MM higher while EBITDA was $2MM lower YoY
    • Hold was 3.6% better in 1Q13 vs. 1Q12 (which was also higher than normal)
  • Macau:  Hold adjustment - why our math is different
    • Historical hold rate across all the properties since 2007 has been 2.90%
    • We don’t lump all the properties together but use historical hold for each property.  Flow-through varies across different properties since the mix of Rev Share and RC commission is different as is the level of direct play
    • We don’t have perfect information: don’t know the luck split between RevShare & RC junkets or the exact rebate to direct players; we don’t know the junket commission rate until the filings come out – that also impacts flow-through calculations
  • Despite the addition of tables, fixed expenses look like they declined across all of Sand’s China’s mature properties
  • Looks like Sands Macao shifted the mix of its slots more towards ETG’s as handle increased nicely but win rate continued to plunge to just 3.7%
  • The slot business at Four Seasons is all over the place.  Slot revenues more than doubled from 3Q12 to 4Q12 and round tripped in 1Q13.  After slot handle increased 44% YoY in 4Q; 1Q13 slot handle fell 7% YoY
  • FS direct play keeps shrinking as well.  It was down to 11% this quarter vs. 14% last quarter and 16% last year…and closer to 40% of total VIP roll in 2011.  RC volumes also declined 25% - the first decline in 5 quarters
  • Despite the addition of 2,100 rooms early in the quarter, net non-gaming revenues barely increased – less than 3% QoQ at SCC
  • MBS:
    • Rebate rate was 1.3%
    • Fixed expenses actually declined 2.6% YoY
    • Doubtful accounts were in-line with the last 3Q’s

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