Invite: Expert Call on MLP Non-GAAP Accounting

Continuing our work in the MLP space, we will host an Expert Call on Monday, 11/18 at 1pm EST with Roger Burks, Founder and Managing Director of WG Consulting (WGC) and formerly the Lead Partner for Deloitte’s energy practice.


Given the importance of non-GAAP financial measures to MLPs (distributable cash flow, adjusted EBITDA, maintenance CapEx, etc.), we are looking to gain a better understanding of how and why MLPs use them.  We also seek to understand how the use and calculation of non-GAAP measures is audited (independent auditors) and regulated (SEC), if at all.


A few questions on our mind…

  • What is “maintenance CapEx”?  What is this measure supposed to represent?
  • Is “maintenance CapEx” a non-GAAP financial measure?  Why isn’t “maintenance CapEx” reconciled back to its nearest GAAP financial measure?
  • Why are recurring, non-cash expenses like stock-based compensation and non-cash interest expense added back to non-GAAP financial measures like adjusted EBITDA and distributable cash flow?  What is the rationale for doing so?
  • To what extent are non-GAAP financial measures audited?
  • To what extent are non-GAAP financial measures regulated by the SEC?
  • With the SEC’s renewed focus on accounting fraud, do you think that MLPs’ use of non-GAAP financial measures will come under increased scrutiny?  Have you any indication of this already happening?
  • And more…

Dial-In Info…


Monday, 11/18, 1pm EST

Toll Free Number:

Direct Dial Number:

Conference Code: 536617#


About Roger Burks…


Roger Burks is Founder and Managing Director of WG Consulting (WGC).  Mr. Burks is a CPA with over 30 years of experience, including over 20 years with Deloitte & Touche and 10 years as a senior executive in the energy industry.  Prior to WGC, Mr. Burks led Deloitte’s energy practice.  He served as Lead Partner for many of Deloitte’s energy clients, and led various transaction projects including external audits, acquisitions, divestitures, public and private stock, debt offerings, and merger integration, many involving early Master Limited Partnerships (MLPs).  In 2012, Mr. Burks founded a financial advisory firm that was effectively merged into WGC.  Today, Mr. Burks and his team at WGC serve as the Interim-CFO for a number of companies and provide all financial, operational, and transactional services to them.  Additionally, Mr. Burks serves on the Board of STR Marketplace, The Houston Chapter of CPAs, and has previously served on the Board of Superior Offshore International as well as various other private company and non-profit boards.


Kevin Kaiser

Managing Director


A delicate time for the cruisers – we’d like to share our thoughts



Fears that overcapacity in the Caribbean is causing soft bookings volume and down pricing persist.  Cruise Week pedaled the weak Q4/Q1 again this week.  While not a new theme, it’s not abating.


As pointed out by Cruise Week, agents continue to see RCL as best positioned in the current demand environment.  However, we remain cautious as RCL’s capacity in the Caribbean will be at its highest since 2010 due to the debut of Quantum of the Seas in November 2014.  Moreover, we’re not sure RCL’s guidance reflects the potentially weak environment.


For CCL, we believe the low yield guidance for 1H 2014 already takes into account the soft picture from the Caribbean, particularly for FQ1.  As seen from our recent pricing survey, CCL may be experiencing incremental improvement in that market despite the negative scuttlebutt


Here is what we are seeing/hearing/feeling:

  • On a longer-term trend, the number of cruise passengers has been steady but selling price is down.
  • River cruising segment is outperforming ocean cruising by a wide margin particularly in the summer.  Onboard spend has been exceptional.
  • Luxury cruises have been immune to the recent weakness
  • Europe 2014 is trending much higher than 2013
  • Onboard yield will continue to go higher
    • Bar drink prices not discounted
    • Oasis of the Seas and Allure of the Seas getting higher yields due to strong onboard spending
  • Mainstream land vacations for Mexico/Florida have been doing well
  • OTAs are not having a significant impact on the cruise business

Recent industry news:

  • (Nov 7) Costa Cruises will spend 10MM euros for 3 dry docks
    • Costa Voyager starting 11/7/13 for about two weeks
    • Costa neoRiviera from 11/7/13 to 11/12/13 
    • Costa Classica from November 12 to December 21.
  • (Nov 7) Starting January 2014, the number of cruise ships that are permitted to enter Venice is cut by 20% while in November 2014, any ship over 96k tons will be banned from the Giudecca Canal (lies south of Venice).
  • (Nov 11) Small fire on Dawn Princess on 11/8 on New Zealand sailing. There were no passenger or crew injuries and the itinerary did not need to be altered. 
  • (Nov 11) Due to propulsion problems on Allure of the Seas, the ship may be drydocked in 2014 rather than 2015. The Oasis of the Seas drydock is scheduled for 2014 but may be pushed back to 2015.
  • (Nov 13) Starting in 2014, the VAT in Mexico's border states will rise to 16% from 11% previously.  This means the cost of goods and services will rise 5% in leading cruise ports like Cozumel, Costa Maya, Ensenada and Cabo San Lucas, among others.  Transportation - not subject to VAT anywhere in the country before - will be taxed at 16%.  CCL recently learned about the increase and is currently examining the matter. 
  • (Nov 13) Princess Cruises said it will pay 2% bonus commissions on short cruises departing January through April next year.  The 3-5 day cruises leave from Los Angeles and Fort Lauderdale. The bonus applies on bookings made Nov. 15 through April 22.

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling

Takeaway: Equity funds posted their 3rd consecutive robust week with bond funds outflowing again - we also highlight our favorite idea TROW

Investment Company Institute Mutual Fund Data and ETF Money Flow:


Total equity mutual fund flow for the week ending November 6th was a robust $9.0 billion, the fourth best week in all of 2013. Domestic equity mutual fund flow was $5.4 billion, an acceleration from the week prior with world equity funds collecting $3.6 billion in new investor capital. Total equity mutual fund trends in 2013 now tally a $3.0 billion weekly average inflow, a complete reversal from 2012's $3.0 billion weekly outflow 


Fixed income mutual funds continued persistent outflows during the most recent 5 day period with another $4.3 billion withdrawn from bond funds. This week's draw down worsened sequentially from the $4.1 billion outflow the week prior which has now forced the 2013 weekly average for all fixed income funds to an $885 million outflow which compares to the strong weekly inflow of $5.8 billion throughout 2012


ETFs experienced declining weekly subscriptions in the most recent 5 day period, with both equity and fixed income ETFs seeing declining flows week-to-week. Passive equity products lost $4.9 billion for the 5 day period ending November 6th, a sequential weekly reversal from an inflow the week prior, with bond ETFs experiencing a $74 million inflow, also a sharp deceleration from the week before. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results


ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 1



For the week ending November 6th, the Investment Company Institute reported the 4th best week in 2013 for equity inflows with over $9.0 billion flowing into total equity mutual funds. The breakout between domestic and world stock funds separated to a $5.4 billion inflow into domestic stock funds and a $3.6 billion inflow into international or world stock funds. Both results for the most recent 5 day period within stock funds were above the 2013 weekly averages, with the domestic stock fund 2013 weekly mean at just a $552 million inflow and world stock funds having averaged a $2.5 billion weekly inflow during 2013. The aggregate inflow for all stock funds this year now sits at a $3.0 billion inflow, an average which has been getting progressively bigger each week and a complete reversal from the $3.0 billion outflow averaged per week in 2012.


On the fixed income side, bond funds continued their weak trends for the 5 day period ended November 6th with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $4.3 billion outflow, a sequential deterioration from the $4.1 billion lost in the 5 day period prior. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $3.5 billion, which joined the $833 million outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 18 of the past 23 weeks and municipal bonds having had 23 consecutive weeks of outflow. While the sharp outflows that marked most of the summer and the start of the third quarter have moderated, the appetite for bonds has hardly rebounded. The 2013 weekly average for fixed income fund flows is now a $885 million weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.


Hybrid mutual funds, products which combine both equity and fixed income allocations, continue to be the most stable category within the ICI survey with another $1.3 billion inflow in the most recent 5 day period. Hybrid funds have had inflow in 19 of the past 21 weeks with the 2013 weekly average inflow now at $1.6 billion, a strong advance versus the 2012 weekly average inflow of $911 million.



ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI revised chart 2 final

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 2 revised

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 4

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 5

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 6



Passive Products:



Exchange traded funds produced weak trends within the same 5 day period with equity ETFs posting a $4.9 billion outflow, a sequential decline from the strong $8.7 billion subscription the week prior. The 2013 weekly average for stock ETFs is now a $3.2 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.


Bond ETFs managed an slight inflow for the 5 day period ending November 6th with a $74 million subscription, also a sequential decline from the week prior which netted a $551 million inflow for passive bond products. Taking in consideration this most recent data, 2013 averages for bond ETFs are flagging with just a $303 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.



ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 7 revised

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 8 revised



Hedgeye Asset Management Thought of the Week - TROW is Historically Cheap:


Our favorite asset management stock continues to be T Rowe Price which has one of the highest exposures to equity products (mutual funds and separately managed accounts) in the investment management industry. TROW drives 83% of its revenues from equity products and directly benefits from the emerging reversal in equity fund flows from redemptions last year in 2012, to subscriptions and inflows this year in 2013. T Rowe shares have always traded at an industry premium on a forward P/E basis because of its high cash balance ($1.6 billion in cash on its balance sheet), strong free cash flow generation ($1.2 billion of free cash flow generation for 2014), and no debt, however shares currently are the cheapest they have been relative to the rest of the asset management group in 3 years. Currently TROW shares fetch just a 12% premium to a group average forward P/E (a 3 year low) versus a 23% average premium since 2010. We estimate that the current institutional outflow that TROW is experiencing from a handful of sovereign Asian wealth funds has compressed the stock's valuation but being that this issue is not a systemic situation, we would expect TROW shares to unwind this discount and appreciate versus the rest of the industry.


ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 9



Jonathan Casteleyn, CFA, CMT







Joshua Steiner, CFA



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A New Idea

“Where is the knowledge we have lost in information?”

-T.S. Eliot


That’s the opening quote from the latest book I cracked open on an airplane this week – The Idea Factory, by Jon Gertner. I did 3 cities (Kansas City, Denver, and Minneapolis) in 3 days and came up with a new idea for the next crisis – prayer.


Whether you like it or not; whether you have realized that the Fed completely missed its opportunity to taper or not; whether you agree that the US government is getting dumber with market and economic information or not – newsflash:  it doesn’t matter.


All that matters today is what the next un-elected-central-planner-in-Chief-of-your-hard-earned-currency thinks. While hope is not a risk management process, many still hope Janet Yellen won’t be as “dovish” as Bernanke. If she walks and quacks like a dove, she’s not a hawk. She will redefine a new species of accountability ducking doves.


Back to the Global Macro Grind


In textbook Fed front-running form, the US stock market got a leak intraday yesterday as to what Yellen was going to say and ripped to another new all-time high. Gold and Bonds went up too. Everyone was a winner!


But who is everyone?


I think we all know the answer to that question. And this, sadly, is not a new idea in the world either. Marxist/Socialist political regimes have plundered The People across centuries. The power of information is no longer in entrepreneurial ideas, it’s in having insider knowledge on the next central plan.


Since Obama didn’t get the asymmetric risks embedded in Obamacare, there’s less than a 1% chance he will be in the area code of comprehending the long-term TAIL risks associated with the Bernanke Bond Bubble. But don’t worry about that, for now. Buy the damn bubble (#BTDB), and pray you aren’t the one without a chair when the music stops.


I’m not kidding, as my Canadian sniffer caught a downwind leak of the Yellen’s pending plan, I:

  1. Bought Bonds (TLT)
  2. Bought Gold (GLD)
  3. Bought Utilities (XLU)

In other words, I bought everything that I was short for the better part of the last year on my other 2013 New Idea that the Fed was going to finally get out of our way (and taper).


Do you think I’m crazy? I do.


In fact, I spread a full 1/3 of the Hedgeye Asset Allocation across 4 asset classes at 8% each. Crazy Eights!

  1. Commodities 8%
  2. Fixed Income 8%
  3. International Equities 8%
  4. US Equities 8%

With a little dovish leaky-peaky from the boys who worked for and/or hang with Dudley’s Goldman boys at the New York Fed (I believe they are all old and young boys, but don’t quote me on that), why not roll the bones? Spreading our bets around a casino where everyone wins takes down our “VAR” too!


People who don’t make money in down markets love to talk about “Black Swans”, but they have yet to make it a known known to The American People that this eventual bond market crash isn’t a TAIL risk at all. Our risk management process considers it a rising probability in 2014-2015.


And what are all the poor souls who are long the PIMCO “total return” fund going to do when they realize that it was lathered up with the a sub-asset “class” within the Bernanke Bond Bubble that people won’t be able to get out of (MBS)?


Or was the plan always that the New York Fed was going to buy the Bond Bull Lobby time to get out? Was the plan to change the goal posts every time non-linear economies surprise these central planners’ forecasts? Evidently, it was.


So pull up a seat. Meet your maker -Janet Yellen - the Mother of All Doves. She’ll outline why, despite the USA running +2.84% GDP in Q313, that her unaccountable definition of the economy is “far from potential.”


She’ll make up some new rules. She’ll look real serious about it too. Because when her MBS (mortgage backed security) bond bubble pops, this is going to be very serious. That’s why my best New Idea is recommending prayer.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.66-2.82%


VIX 12.12-14.46
USD 80.43-81.39

Pound 1.59-1.61

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


A New Idea - Chart of the Day


A New Idea - Virtual Portfolio

$KSS Misses Big, McGough Nails It

Kohl's (KSS) shares are deep in the red this morning after a bad earnings miss. Hedgeye Retail Sector Head Brian McGough nailed this call. Check out video below. Go to the 3:10 mark for his take on Kohl's. 


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