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Ben + Gold = Love?

Takeaway: A breakout over $1345 would be explicitly bullish.

I sold the US equity open yesterday. I’ll sell it again today. US #GrowthAccelerating is ending. For now anyway.


This is the first time in at least a year that I'm actually considering buying Gold. Now that’s not because I've got religion about it, or anything like that. It's just that my signal is stabilizing for the first time in a year.


We need to see $1316 hold. A breakout over $1345? That would be explicitly bullish.


Ben Bernanke should be so proud of himself. Slow-growth investors, unite!


Ben + Gold = Love? - BFF


Editor's note: This is a brief excerpt from Hedgeye morning research. For more information on how you can subscribe click here.


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance





  • BETTER:  HOT delivers a beat driven by better margins on their owned & leased business and stronger fees growth.   Buybacks and the steady quarterly dividend were also a bonus although not a surprise. 






  • SLIGHTLY BETTER:    Absence of new supply has allowed occupancies to reach record levels and keep RevPAR steady in the 2-3% range.  Mgmt  expects that to continue.  They had a good summer in Spain and strenght in Eastern Europe.  They are optimistic regarding 2014. 
    • Turning to Europe, the economic picture is still anemic overall. But as before though, our business is holding up pretty well. We attribute this to tight supply and our ability to bring in global suppliers to Europe – global travelers to Europe with SPG, and our global sales team.
    • Europe is steady but sluggish, as it has been for the past couple of years. 
    • We expect this 2% to 3% growth rate to continue into Q3 as leisure travel looks good for the summer and we may benefit from Ramadan ending earlier in August.


  • BETTER:  EBITDA of $19MM was ahead of 3Q guidance and HOT raised its 2013 net cash flow forecast to over $200MM from $175MM previously.
  • PREVIOUSLY: At the end of the quarter, we only had 22 condos left to sell or close. We have been raising prices and recent square footage rates have exceeded $1,500. Unfortunately, this gift will stop giving by the end of the year since we will be sold out. We are raising Bal Harbour profit expectations by $20 million to $110 million, and cash flow to at least $175 million


  • BETTER:  HOT repurchased approximately 2.73MM shares for $180.7MM.  Subsequent to the end of the quarter and through October 18, 2013, HOT repurchased an additional 1.14MM shares for $75.9MM.  In addition,  HOT's Board of Directors has an annual cash dividend of $1.35.  There will be quarterly dividends starting in 2014. 
  • PREVIOUSLY:  We will also discuss moving to a quarterly dividend starting in 2014. Stock buybacks remain a priority. 


  • SAME: North American RevPAR came in at 5.8% in 4Q, driven by strong transient revenues (up 8-9%), leisure travel and corporate demand
  • PREVIOUSLY:  North American REVPAR has been growing at about 6% through the first half and we are projecting that this will continue with rate accounting for 80% of the increase.


  • SAME: Group pace remains in the mid-single digits and expect rate increases in the high to mid-single digits
  • PREVIOUSLY:  Group pace for 2014 and 2015 is currently tracking in the mid-single digits. 


  • SAME:  Transient revenues were up 8-9% in the quarter
  • PREVIOUSLY:  Transient demand, especially corporate travel has remained robust. Helped by record low supply, occupancies hit new peaks. 


  • SAME:  RevPAR declined to under 1% this Q.  Owning to political turmoil, Egpyt and Syria dragged down performance.  UAE had a good quarter.
  • PREVIOUSLY:  Middle East: We expect growth rates in Q3 to tick down in this region for a couple of reasons. Egypt, which was recovering nicely, is impacted by the recent turmoil and Saudi Visa restrictions are sharply reducing Ramadan-related travel. Things are expected to recover as we enter Q4.


  • WORSE:  REVPAR only grew 1%, below previous expectations.  Strength in Mexico was not enough to offset weakness in Brazil. 
    • With the crisis in Argentina and now a slowdown in Brazil, Latin America has struggled this year. Brazil was down 6% in the quarter, but by the demonstrations, a slowing economy and the impact of major renovations at the Sheraton Rio, which remains in the same store set. Mexico is helping mitigate some of this as it grows from increasing business activity as well as the return of the American vacationer.
    • As we enter Q3, we lap 16% declines in Argentina last year, so we might actually see Latin American REVPAR grow 5% to 6%.


  • WORSE:  Mgmt is disappointed with results.  Assume that RevPAR growth will be in the 2% range in 4Q.
    • In China, REVPAR growth continues to track well below the expectations we had at the start of the year.
    • As we enter the second half, we begin to lap the slowdown in China last year.  As such, we expect REVPAR growth will pick up a bit to the 2% to 4% range.

HSY – A Sweet Year-End Set-up

Hershey’s reported another strong quarter, furthering our bullish outlook on the stock since last quarter, through solid core brand performance with momentum building going into the holiday season.  While net sales were driven squarely by volume (Volume +6.1%; Net Price +0.5%; FX -0.5%) and today’s -2% move in the stock may reflect concerns about its decision to invest $250MM in cap-ex to build a new plant in Malaysia (to supply markets in Asia and assist existing capacity in China), we think these concerns are overblown and would be buyers on any weakness as we look out to year-end. 


Heading into year-end, the company reiterated its expectations for FY 2013 net sales of 7%, with no change to the input cost outlook, revised up its FY Gross Margins expectations to 240 to 250 bps vs a previous estimate of 220 to 230, and said it sees a more favorable tax rate and earlier Chinese New Year offsetting an increased marketing spend in Q4.  We’re bullish on HSY’s performance across retail channels and its determination to grow it international business, in particular China to its second largest business, and believe the additional cap-ex spend will allow it to enhance its manufacturing scale in China (currently it has a manufacturing JV facility) and across Asia.


From a quantitative set-up HSY is comfortably trading above its intermediate term TREND level, confirming our bullish outlook:


HSY – A Sweet Year-End Set-up   - z. hsy


What we liked:

  • Net Sales increased 6.1% (Volume +6.1%; Net Price +0.5%; FX -0.5%)
  • EPS of $1.04 (beat consensus of $1.01), an increase of 19.5% vs the prior-year quarter
  • Candy, Mint, Gum (CMG), which equals 90% of U.S. retail business, expanded in all retail channels, up +5% Y/Y, with market share gains of 0.7 points in the quarter
  • Q3 Adjusted Gross Margin increased +300bps on lower commodity costs, supply chain productivity, and cost savings initiatives
  • Input cost deflation of $33MM in the quarter (in line with estimates); no change to cost outlook for the year.
  • Expect a meaningful boost in advertising in Q4 due in part to a lighter spend in Q3 (increased 12% vs target of 20% due to timing); FY target expected to increase 22-23%
  • Strong performance from Brookside. Expected to contribute 1.2% to 1.3% of sales growth in 2013
  • Q4 will benefit from earlier Chinese new year
  • International net sales up 14%, led by China, Mexico, and Brazil
  • Expect 2013 net sales of 7% of sales and FY Gross Margins up 240 to 250 bps (vs previous estimate of 220 to 230)
  • 2014 Guidance: 5-7% net sales growth, and 9-11% growth in adjusted EPS

Matthew Hedrick


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Takeaway: Alot has changed in the last few weeks. The strength in the labor market has not. It will "look" a lot different by Feb/Mar 2014 as well....

A lot has changed over the last few weeks.  We’ve gone from the prevailing dynamic of Dollar Up, Yields Up, Stocks Up, Pro-Growth style factor outperformance, and a comparatively high gross and net long exposure in #RealTimeAlerts to Down Dollar, Down Yields, Slow-Growth style factor outperformance, lower gross exposure and (now) a net short position in equities.    


This marked shift has occurred largely as a result of shifting expectations around the Taper timeline in the wake of confused policy communication from Bernanke on Sept 18th and alongside the peak in negative seasonality impacts in the reported U.S. macro data.


What hasn’t changed, in large part, is the ongoing strength in the domestic labor market.  After normalizing, as best we can, for the distortive impacts of California and the government shutdown, the trend in the Initial Claims data continues to look positive.  We expect to see a return towards the 2013 trend line of improvement in reported claims over the next few weeks.    


Elsewhere on the labor front, the unemployment rate, U-6 unemployment rate and long-term unemployment all continue to decline and, while BLS reported hiring has slowed in recent months, we expect monthly NFP gains will follow positive seasonality higher again as we move into 1Q14.    


This morning’s JOLTS data showed the TREND improvement in Job Openings and the Quit Rate remains ongoing while, on the other side, Bloomberg Consumer Confidence dropped again WoW and the preliminary Markit PMI hit its worst level in a year. 


We’ll be interested to see the confidence figures over the next month as we move past the negative impacts of the government shutdown – confidence catalyzes economic activity and 2013 has, thus far, seen a discrete breakout in consumer and business confidence.  


Below is the detailed breakdown of this morning's claims data from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact 


-  Hedgeye Macro










California Exits the Data (Mostly) and Now the Data Looks Pretty Good

Last week we focused on the impact that distortions from California were having on the perceptions of the labor market. This week we'll revisit that theme. Take a look at the first two charts below.


The first chart shows the Y/Y change in NSA initial claims by week since the start of August.  The red line shows the average amount of Y/Y change for the month of August, a reasonable baseline trend ahead of the distortion. We then see the impact of the California and govt shutdown on the data, first suppressing it and then inflating it. Based on this morning's data, it appears that the NSA series is back to baseline. The Y/Y change in NSA claims this morning was a decline of 34,412 vs the same week last year. That compares with the August 2013 average of a decline of 34,508 Y/Y.


The media is reporting that California is still not caught up, but either that's not true, or the underlying data is stronger today than what we were seeing in August, when claims were improving at a rate of 10-11% Y/Y. The second chart shows California in isolation. The key here is that state level data is only available on a 1-week lag. Consequently, we're looking at last week's numbers since they're the most current available. You can see that as of last week, California reported 83,383 initial claims, which was up about 11k Y/Y from 2012.


The trend had been that 2013 claims were coming in at a rate of roughly 21k lower Y/Y, so we would expect to see a roughly 33k sequential improvement this week and that's almost exactly what we saw (again, see the first chart below).


The bottom line is this. The seasonally-adjusted NFP numbers reported Tuesday reflect the low watermark in the labor market. This is no surprise, as August/September have represented the low watermark for the past 5 years due to the distortive effects of Lehman Brothers on the seasonal adjustment models. Just as we've seen in the past 4 years, we would expect the "perceived" labor market data to steadily strengthen over the coming 5-6 months through the Feb/Mar 2014 timeframe and carry with it a steadily rising market but also a steadily rising expectation for tapering sometime in the late first quarter or second quarter of 2014. Plan accordingly.


Revisiting the Ghost of Lehman

For a look at multiple charts illustrating the serious seasonality distortion in NFP caused by Lehman's economic ripples refer to our macro team's note from Tuesday, entitled: SEPTEMBER EMPLOYMENT: MARKING THE LOW?


We've included one chart from that note below (the third chart down). It shows that in each of the past 4 years, the average positive trendline improvement from September through February has been 118k monthly jobs (i.e. you're 118k higher in Feb than you were in Sep). Conversely, the average negative trendline change from March through August has been -56k monthly jobs (i.e. you're 56k lower in August than you were in March). Translation, the market thinks we're at a 140k monthly NFP run rate right now, but by March, the market will think we're at 250-260k. That will create a very different environment for Fed expectations.








Nuts & Bolts 

Prior to revision, initial jobless claims fell 8k to 350k from 358k WoW, as the prior week's number was revised down by 0k to 358k.


The headline (unrevised) number shows claims were lower by 8k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 10.5k WoW to 347.25k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -5.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.2%











Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT



CAKE reported fairly impressive 3Q13 results last night.  Despite the recent weakness surrounding the casual dining industry, the company was able to beat expectations during the quarter.


CAKE reported 3Q13 EPS results in which revenues and EPS both surprised to the upside.  For the quarter, the company benefited from cost of sales (24% vs. 24.2% estimate), as grocery costs, dairy prices and a shift in bakery mix were all favorable.  Other operating expenses also came in stronger than expected (24.3% vs. 24.9% estimate), due to favorable timing of certain expenses, leverage on rent expense and more efficient production in bakery facilities.


Comparable-restaurant sales were strong, as both total comps (+0.8% vs. +0.4% estimate) and Cheesecake Factory comps (+1.0% vs. +0.5% estimate) beat the numbers.  This comes despite lapping the most difficult comps of 2013.  Grand Lux Café comparable sales disappointed (-2.6% vs. -0.1% estimate), as they appear to have trended more in line with anemic casual dining trends.


4Q13 guidance was generally held flat, as management expects EPS to come in between $0.57-0.60 on +1.5-2.5% comps.  The outlook for FY14 is a different story, however, as management guided down FY14 EPS to $2.29-2.41 on +1-2% comps, primarily due to anticipated shrimp and salmon inflation.  Management plans to take 2-2.25% pricing next year in order to partially offset the cost of sales increase.  We don’t necessarily view the guide down as a negative.  In fact, we would argue management is being conservative and has put in place reasonable expectations.


Overall, we believe our bull case was validated by the recent results.  CAKE has proven it can withstand a difficult competitive and macro environment, while the majority of their peers struggle.  One concern we have is in regard to traffic, which was down -0.9% in 3Q13.  While this is certainly better than the casual dining industry in general, we do believe it is an issue.  Traffic has now fallen for four consecutive quarters and management must reverse this trend.  We are confident they will be able to do so in 2014. 


What we liked in 3Q13 results:

  • Both revenues and EPS beat
  • System-wide same-restaurant sales beat expectations
  • Cheesecake Factory same-restaurant sales beat expectations
  • Lapping easy comps in 4Q13
  • Board of Directors declared a quarterly cash dividend of $0.14 per share
  • Repurchased $90.2m worth of shares in 3Q13
  • Plan to repurchase another $65 million worth of shares in 4Q13
  • New unit openings continue to exceed expectations
  • Domestic and international growth plans remain on track
  • Cash flow generation is strong and predictable
  • Management remains committed to returning cash to shareholders

What we didn’t like in 3Q13 results:

  • Traffic was down -0.9% and has been negative for four consecutive quarters
  • Grand Lux Café same-restaurant sales missed expectations
  • Shrimp and salmon inflation could cause problems in FY14
  • FY14 EPS guidance was revised down to $2.29-2.41





Howard Penney

Managing Director




Solid Q and typically low ball guidance. Continue to like HOT due to European exposure, better transactions market, and cash returns to shareholders.



“We delivered solid results in the face of an uncertain global economic environment... In North America, where occupancies remained at all-time highs, REVPAR increased by 6.9% at our Company-Operated hotels... We remain bullish on the long-term trends of rising wealth and increasing demand for travel in fast growing economies, even in the face of slower growth in China, unrest in the Middle East, and economic challenges in Latin America.”


- Frits van Paasschen, CEO




  • Trends of increasing global demand for travel is helping them
  • In mature markets there is still low supply
  • Transient corporate and leisure is growing at a healthy rate
  • Gov't demand which is less than 2% of their business was negatively impacted in the quarter
  • Europe is also showing very low supply as demand is building. Excluding London, owned and leased hotel RevPAR was up 3%. 
  • Chinese SPG nights outside of China were up 20%. Occupancy in China was up over, but they did get hit on rate in China.
  • In Latin America - Mexico strength was not enough to offset Brazil weakness. Argentina improved.
  • Given that they have completed most of the renovations to their owned portfolio this positions them more attractively for potential buyers. 
  • In the past, they have sold hotels with minimal tax leakage and are working to continue that for future sales
  • SVO: $1BN of CF since 2009. Concentrating on markets where they can replenish inventory and maintain good profit market.  A larger portion of their business is generated outside of unit sales. Fees & resort operations account for about 30% of SVO EBITDA. 
  • Mgmt & franchise fees:  70% of their pipeline is UUP and Luxury. 70% are being built outside the US
  • Over the past few years they pulled over 60 UUP/Luxury hotels from their brand portfolio
  • HOT brands accounted for 1 in 5 new UUP/Luxury openings worldwide
  • Sales through their web channels have doubled over the last few years. Their global sales team sells 2x as much as a few years ago. Delivering over 50% of their occupancy.
  • Intend to return cash to shareholders
  • Net benefit from around $5MM from termination fees offset by some one-time expenses in SG&A
  • Bal Harbour Condos are 97% sold
  • North America- very steady RevPAR growth of 4-6% despite a weak macro environment given the lack of new supply.  Robust transient revenues have been growing by 8-9% followed by leisure and corporate travel.
    • Expect these trends to extend into 2014
    • Group pace remains in the mid-single digits and expect rate increases in the high to mid-single digits
    • Expect RevPAR to be in the 5-7% range for 2014
  • Europe:  Absent of new supply has allowed occupancies to reach record levels and keep RevPAR steady in the 2-3% range. Expect that to continue.  They have a good summer in Spain and strenght in E. Europe. Hope that demand situation will improve in 2014 which would increase their pricing power.
  • China: disappointing this year and in Q3. Saw a small increase in demand but not as good as expected. In the East and South growth has been better as the economies are less government dependant. 
    • 122 operating hotels and should end the year at 140
    • No change in pace of new openings and signing
    • Assume that RevPAR growth will be in the 2% range in 4Q
  • Asia: 9.3% RevPAR growth but they were hard hit by FX.  Expected continued strength in 4Q at the upper end of their 5-7% range.
  • Middle East/Africa:  Egypt declined 33% in 3Q. Nigeria was also impacted. The gulf continues to grow in the high single digits.  Trends are likely to continue in the 4Q.
  • Latin America: US travel to Mexico is back but Brazil travel is slowing - their business is impacted by renovations.
  • Finishing at the high end of their guidance range despite unfavorable FX movements that hurt them by $14MM and asset sale impact of $8MM
  • Expect to complete sell out of Bal Harbour this year
  • Have LOI's signed on additional hotels on top of the 2 they expect to close next Q
  • Have lowered their capital spend program for the year again - as a result of decisions to delay projects and asset sales
  • They will not be doing a securitization deal this year but will resume next year
  • They will be reducing their capex spend on owned hotel next year


  • Are putting more effort and seeing more interest in their assets than 6 months ago. They are motivated sellers perhaps than 6 months ago.
  • $12MM of EBITDA impact in 2014 includes the 2 that should close soon
  • Most of the international buyers are looking for trophy assets - 1 to 2 at a time.  In the US, it's mostly REIT buyers
  • They do have some larger hotels on the market than a year ago.
  • Appetite for exploring a spin-off of their assets to accelerate getting to asset light.  They continue to look at different options - but in the past this option has not been as attractive.
  • It's a bit premature to say that they are behind their goal of selling an additional $3BN of assets. Tax planning is part of it.
  • 90% of their incentive fees comes from outside the US and do not have preferred returns, hence their incentive fees are more stable. 2/3 of hotels are paying incentive fees WW and 80% of hotels outside the US are paying incentive fees.
  • Why not a higher dividend? 
    • want to be able to consistently grow it
    • can always do a special
    • want it to be safe and sustainable through out the cycle
  • Leverage target?  Just want to be investment grade.
  • Impact of government shutdown - have seen some cancellations in DC/ San Diego. Have some lead time to fill the cancellations from other business. Whatever the impact turns out to be, it will be transitory.
  • Net impact of pushing back the securitization this year is $100MM of cash
  • Their growth in China now is really in Tier 2 & 3 markets, so they are geographically shifting to the middle of the country.  West and central China is where the government is directing most of the development. Mix of business in those markets is more national.
  • Sheraton: UUP segment in NA is a challenging place to be. Their base of hotels is older than many of their peers.
  • In 2014, the hope is that Europe will begin to improve and that they begin to lap the weaknesses in ME, Latin America and China
  • Other Management Revenues: had higher termination fees - (sounds like the net benefit was $5MM net of the SG&A charges) - so that implies about $10MM of termination fees
  • Interest in selling assets is not solely in NA 



  • Starwood’s Board of Directors has declared the Company’s annual cash dividend of $1.35 per share. The Board of Directors has also decided to pay dividends to stockholders on a quarterly basis commencing in 2014.
  • In the third quarter of 2013, the Company repurchased approximately 2.73 million shares at a total cost of approximately $180.7 million and a weighted average price of $66.14 per share. As of September 30, 2013, approximately $443.3 million remained available under the Company’s share repurchase authorization. Subsequent to the end of the quarter and through October 18, 2013, the Company repurchased an additional 1.14 million shares at a total cost of approximately $75.9 million and a weighted average price of $66.69 per share.
  • During the quarter, the Company signed 36 hotel management and franchise contracts, representing approximately 7,800 rooms, and opened 15 hotels and resorts with approximately 3,700 rooms.
  • At September 30, 2013, the Company had approximately 400 hotels in the active pipeline representing approximately 100,000 rooms.
  • During the third quarter of 2013, 15 new hotels and resorts (representing approximately 3,700 rooms) entered the system and eight properties (representing approximately 1,400 rooms) were removed.
  • Special items in the third quarter of 2013, which totaled a benefit of $20 million (after tax), primarily related to a favorable adjustment to a legal reserve, tax benefits associated with a non-core asset sale and the reversal of a valuation allowance on deferred tax assets which are now deemed realizable.
  • Excluding special items, the effective income tax rate in the third quarter of 2013 was 31.3%
  • Total vacation ownership revenues increased 11.3% to $157 million in the third quarter of 2013, when compared to 2012, primarily due to increased revenues from resort operations, which included the transfer of the Westin St. John’s revenues from owned hotels to vacation ownership. Originated contract sales of vacation ownership intervals and number of contracts signed increased 1.2% and 2.3%, respectively. The average price per vacation ownership unit sold decreased 1.9% to approximately $14,000, driven by inventory mix.
  • The Company realized residential revenues from Bal Harbour of $40 million and generated EBITDA of $19 million, compared to revenues of $62 million and EBITDA of $12 million in the same period of 2012. During the third quarter of 2013, the Company closed sales of 12 units at Bal Harbour and realized incremental cash proceeds of $40 million associated with these units. From project inception through September 30, 2013, the Company has closed contracts on approximately 97% of the total residential units available at Bal Harbour and realized residential revenue of $1.1 billion and EBITDA of $268 million.
  • The increase was primarily due to the timing of expenses in 2013 when compared to 2012 and certain non-recurring expenses including an elective payment to maintain a management contract. The Company continues to expect selling, general, administrative, and other expenses to increase 2% to 3% for the full year
  • The Company recorded a favorable adjustment to a legal reserve of approximately $22 million in the three months ended September 30, 2013, related to judgment and settlement, interest costs, legal fees and expenses in regards to a long standing litigation. This adjustment was treated as a special item in the third quarter results.
  • Gross capital spending during the quarter included approximately $33 million of maintenance capital and $70 million of development capital
  • During the third quarter of 2013, the Company completed the sale of a non-core asset for cash proceeds of approximately $12 million and recorded a gain of approximately $4 million. The Company has also entered into an agreement to sell two hotels that is expected to close in the fourth quarter