Moody Multiples

This note was originally published at 8am on January 30, 2014 for Hedgeye subscribers.

“Emotions are short lived.”

-John Coates


Whereas “a mood is slower, more like a long-term attitude, a background and slow-burning emotion which slants our view of the world” (The Hour Between Dog and Wolf, pg 107).


I don’t know about you, but up until a few weeks ago, my view of the being long stocks was pretty damn bullish. That’s a good thing, because the US and many European stock markets kept hitting all-time highs. Now they aren’t.


And while there was definitely some emotion associated with fear (VIX) ripping +45.8% last week, I’m not so sure consensus is yet in the mood to sell every bounce. Too many bear scars from 2013, and the mood of those stock market bears doesn’t matter on the margin here anyway. It’s the mood of the bears who turned bullish too late that I think matters most.


Back to the Global Macro Grind


When my man Nouriel Roubini went bullish in December, that definitely got my attention. Then the #OldWall (sell-side economists and strategists) rolled out their bullish US growth and SP500 targets for 2014, and a credible contrarian bear case for US stocks began.


As I pointed out in yesterday’s rant, while he may call the Barron’s Roundtable, god doesn’t call me with a super-secret market multiple for the SP500. There isn’t one. That said, #history fans will note that the stock market’s multiple:


A)     Goes UP with #InflationSlowing and Consumption #GrowthAccelerating

B)      Goes DOWN with #InflationAccelerating and Consumption #GrowthSlowing


The lowest multiples in post WWII US stock market #history go to the dogmatic Republican/Democrat Keynesian presidential duos of:

  1. Nixon/Carter
  2. Bush/Obama

Both duos had bearish US Dollar TRENDs because:

  1. FISCAL POLICY = spend, spend, spend
  2. MONETARY POLICY = print, print, print

And, with the Purchasing Power of The People burning (US Dollar DOWN) and #InflationAccelerating, the SP500 traded at 7-11x EPS. Seven times earnings? Yep. Ole Jimmy Carter was a beauty.


I’m not saying the SP500 is going to 7-11x earnings. I’m saying that the probability of the SP500 seeing multiple compression from 16x (instead of consensus multiple expansion) goes up as A) inflation accelerates and B) growth slows.


Consensus multiple Expansion? Yep, here’s where my friends wash out on this (after having a mean estimate of 1528 for the SP500 for 2013 – nice call):

  1. #OldWall mean estimate for 2014 year-end = 1946
  2. Abby Joseph Cohen = 2088 target for 2014
  3. Tom Lee = 2075 target for 2014

Then you have the funny guy at Morgan Stanley who had the SP500 target of 1434 in 2013 (Adam Parker) who takes himself very seriously with his 2,014 SP500 target for, uh, 2014. It’s a good thing the sell-side has learned from 2008 and evolved…


The #OldWall’s magic-multiple thing is based on a consensus estimate for SP500 earnings of around $117/share. Tom Lee is up at $120, so he slaps a 17x “multiple” on that. Meanwhile Abby goes with the 18x, and there you have it – tah-dah!


But what if they are wrong on growth, inflation, and the SP500 earnings numbers? That’s when the consensus poop hits the fan. So watch out for stepping in that. Bear Droppings can ruin your bullish mood.


What about that Hedgeye Macro Theme #1 (#InflationAccelerating)?

  1. CRB Index (19 Commodities) was up another +0.8% yesterday (with the SP500 -1%) to +1.7% YTD
  2. Natural Gas Prices (for those of you who don’t live in a government hotel) = +30.3% YTD
  3. Oats (yes, I eat Oatmeal, every day!) = +18.9% YTD

So the other Goldman guy who is running the NY Fed now (Dudley) eats iPads and I eat oatmeal. No one cares. What Mr. Macro Market cares about is the 2nd derivative move – the slope of the line – the rate of change! And the fact of the matter is that #InflationAccelerating right now alongside US Consumption #GrowthSlowing is bearish for consumer stocks.


That’s a big reason why US Consumer Discretionary stocks (XLY) are -6.2% YTD and why the US stock market (SPX) is -4.0% YTD vs the CRB Index +1.7%. Dollar Down, Rates Down = Stocks Down. God called me on that too – it’s called a real-time US GDP #GrowthSlowing signal, and America’s mood will be changing if it becomes a reflexive one.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.67-2.80%

SPX 1757-1784

VIX 14.91-20.39

EUR/USD 1.35-1.37

Nat Gas 4.79-5.49


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Moody Multiples - Chart of the Day


Moody Multiples - Virtual Portfolio


CAKE remains on the Hedgeye Best Ideas list as a SHORT.


Blame the Weather!

CAKE delivered disappointing 4Q results yesterday after the close, missing comp, traffic, revenue and EPS estimates by 90 bps, 100 bps,  191 bps and 256 bps, respectively.  Total comparable sales (+0.9%) and traffic (-1.0%) in the fourth quarter represent sequential slowdowns on a two-year average basis of 80 bps and 130 bps, respectively. 


Management blamed unfavorable weather for the poor comp performance in the quarter, estimating that it impacted comparable sales by approximately 70 bps.  This number strikes as us rather arbitrary and facile, particularly when considering this estimate excludes a positive impact from favorable weather on the West Coast and a positive impact from lapping Hurricane Sandy. 


Our skepticism, however, doesn't end here.  We also believe the estimate ignores any pent up demand as a result of unfavorable weather.  A couple of weeks ago, we heard CMG management speak directly to this point, noting that higher volume days typically followed periods of poor weather.  We didn't hear any of this on the CAKE call.  Management also denied any benefit from patio utilization, particularly on the West Coast, which benefitted from record dry and warm weather.  Back on the 2Q13 earnings call, management was quick to blame the inability to fully utilize patio space for the disappointing comp performance.  The point is, we have reason to believe the underlying trends are weaker than management is leading on.


Any way you slice it, these trends need to be reversed for CAKE to appease investors.  Traffic has now been declining for the past 5 quarters (both in favorable and unfavorable weather environments) and, unless fixed, will begin to manifest in margins.







Guiding Down 1Q14 Numbers

Management did its best to reign in 1Q14 expectations during the call by guiding to EPS of $0.48-$0.50 ($0.51 estimate) on 0-1% comp growth (+1.5% estimate).  An unfavorable calendar shift (Easter and spring break pushed into 2Q14) and poor weather are expected to negatively impact comps by 50 bps and 90 bps, respectively, in the first quarter.  The estimated negative impact from weather (storms in the Northeast, Southeast, and Midwest) factors in everything as of February 11th


Prior to the release, we surmised the street was too bullish on 4Q13 and 1Q14.  This has now been confirmed.  We believe the street will need to revise down 1Q14 estimates and, subsequently, FY14 estimates.



Maintaining Full Year Guidance?


Despite the negative recent trends and downward 1Q14 guidance, management reaffirmed FY14 EPS guidance of $2.29-$2.41 on comp growth of 1-2%.  Management cited a better than expected outlook for food cost inflation in 2014 (now 3-4%), largely due to a benefit from lower meat, some cheese, and grocery costs.  Dairy prices continue to rise and management noted there is not any less risk associated with the potential continuation of this trend.


We believe the bar for FY14 is set too high for CAKE and wouldn’t be surprised if management is forced to guide down full-year numbers after a disappointing 1Q14.  The street is currently looking for full-year EPS of $2.38 on comp growth of 1.8%, both of which are at the high end of management’s guidance.  We continue to believe a slow start to 2014, softening trends, and downward estimate revisions will lead to multiple contraction throughout the year.


CAKE: THIN BATTER - cake eps price


CAKE: THIN BATTER - cake ev ebitda



Call with any questions.



Howard Penney

Managing Director


Hurricane Janet

Takeaway: The British Pound remains our favorite major currency.

In case you're unable to read between the lines, Janet Yellen opened the door for “un-tapering” yesterday. No surprise there from the “Mother of All Doves.”


Ducks quack, doves print.


Hurricane Janet - jy


The slow-growth commodity inflation rip-trade loves Yellen. Utilities and Gold are leading the V-bottom S&P 500 parade as the US Dollar remains bearish TREND versus both the Euro and Yen now. 


Got Pounds? Because the Bank of England's Mark Carney is definitely not Janet Yellen.


Hurricane Janet - Hurricane Janet


The BOE doesn't have to do the whole lingo thing about “taper” or un-taper in the UK; they just need to talk about rates and currency higher, which perpetuates purchasing power, consumption growth, etc.


At $1.65 versus the USD, the British Pound remains our favorite major currency.

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$USD: Lower Deficit A Positive, But Not Really...

Takeaway: A lower deficit makes a better talking point than investible thesis for the $USD. We highlight the latest numbers & Trend improvement below

On immediate and intermediate term bases the dollar continues to anchor primarily on monetary policy speculation and relative global central banker interventionalism.  


The impacts of fiscal policy decisions (or the natural reversal in stabilization policies), however, are generally cumulative and build over longer durations.  


With the unconditioned House passage of the Debt Ceiling increase and the Treasury’s monthly budget statement for January, we’ve receive two (somewhat contrasting) updates to secular drivers of the dollar over the last day.


On the margin, an unconstrained, albeit temporary, ceiling on sovereign debt issuance is dollar bearish while the ongoing improvement in federal deficit spending stands as an obvious positive. 


Inclusive of January’s -$10.4B budget balance, fiscal 2014 remains on track to be the least profligate year since 2008.  We show the Monthly and Fiscal YTD totals over the last 10 years in the table below. 


Also, while federal spending/debt issuance has a seasonal component, spending in the first third of the year correlates strongly with full year deficit spending.  The regression implied full year deficit total for fiscal 2014 is $581B – inline with the latest CBO estimate of $518B. 


The deficit-to-GDP ratio is currently 3.4% on a trailing basis and if ~$500B is ballpark correct on 2014 deficit spending, we’d need to see nominal growth accelerate towards 5% to make a run at a 2-handle.   


While we’d apply little weight to the incremental debt ceiling or budget data to our nearer term view on the direction for the $USD, we thought it worthwhile to provide a quick highlight of the current numbers in the context of the broader, multi-year Trend.   


As it stands, the $USD remains in BEARISH FORMATION from a quantitative perspective and with the likelihood for incremental easing of policy with growth ebbing and inflation flowing, at the margin, we continue to think the risk is to the downside for the currency currently.  


$USD: Lower Deficit A Positive, But Not Really... - US Deficit Table


$USD: Lower Deficit A Positive, But Not Really... - Deficit to GDP


$USD: Lower Deficit A Positive, But Not Really... - DXY normal



Christian B. Drake




In preparation for HOT FQ4 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • Transient revenues have been growing at an 8% to 9% clip each quarter, powered by corporate and high-end leisure travel


  • Group pace remains in the mid single-digits expect rate increases in the mid-to-high single-digits for the next year from corporate rate negotiations now underway.
  • Group revenue growth has been slower but steady at around 3% to 4%. Corporate groups generally smaller are the primary driver while larger groups, in particular, association and government business, have been slow to return.


  • North America should continue to perform at or above our 5% to 6% worldwide company-operated REVPAR outlook range in the fourth quarter. There could be some impact from the recent government shutdown.
  • Assume that North American trends stay roughly where they are.



  • See some decline in government demand in the quarter, thanks to the U.S. sequester, but government demand is less than 2% of our North American business. Were relieved that the impasse was resolved and it should not meaningfully affect the fourth quarter. Post D.C. debacle, see positive signs in both transient and group demand.


  • Europe is also showing very little new supply
  • Had a good summer in Spain and Italy with mid single-digit growth and double-digit growth across most of Eastern Europe. Central Europe has been a soft spot. Expect these trends to continue into Q4.


  • Assume that current trends will continue in China with REVPAR growth in the 2% range.
  • It's true that the Chinese economy still seems to be decelerating, but to put that into perspective, occupancy in China was up 3% points across the same-store footprint that was 35% larger than last year.
  • In the east and south where local economies are more diversified, growth has been better than in the north and west, which are more government dependent.
  • Expect continued strength in Southeast Asia and REVPAR growth for the region in the upper half of our global REVPAR outlook range


  • Do not expect the situation in Egypt or Syria to improve anytime soon, so this trend is likely to persist in the near term. Volatility is par for the course in some of these markets, with sharp recoveries once local conditions return to some normalcy.  Are bullish about long-term potential in sub-Saharan Africa, which has many of the fastest-growing economies in the world today.


  • Expect some pickup in REVPAR growth in Q4, mainly from Mexico.
  • Brazil, however, has been slowing.  Business in Brazil is further affected by major renovations currently underway. 
  • Argentina is finally growing REVPAR again.


  • Nearing the end of our work at the St. Regis New York and the Westin Maui; plan to have the Sheraton Rio ready in time for next summer's World Cup. Overall, expect to begin tapering our renovation CapEX in 2014.


  • Marketing and sales costs remain low 
  • Adjusted for these nonrecurring expenses, SG&A growth remained well under control at 2% to 3%.


  • (10/31/2013)  Company’s share repurchase authorization has increased by an additional $250 million. As of October 30, 2013, the total amount available under the authorization is approximately $614 million.
  • Bought over $250 million in stock, and will soon pay an annual cash dividend of $1.35 per share.


In preparation for MPEL's FQ4 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • "City of Dreams has led the way in the premium mass segment, as is clearly evident in the properties mass market table yield which remain well above those of our peers in Macau."


  • "Our premium direct actually grew from last year about 15% to the third quarter, roughly about 20% in COD total rolling volume basis. In fact, on a sequential basis, we grew more than 20% from the third quarter, which is quite substantial, in terms of our premium in-house business."


  • "On track to open in mid 2015."


  • "Preliminary works on Tower Five at City of Dreams which we expect to open sometime in late 2016, early 2017."


  • "Opening is anticipated at be around the middle of next year."
  • "Under PAGCOR's revised gaming guidelines, City of Dreams Manila can now operate up to 365 gaming tables from 242 previously and over 1,680 of each gaming machine and electronic table games."


  • "When 2015 rolls around and Galaxy Phase II and Studio City opens up, we are confident that we will be able to get the required labor that will be necessary to operate the property."


  • "By the end of third quarter September and particularly in October, we see some subsequent improvement on that segment, meaning that from share is actually getting back and also the productivity of per table is improving in that segment."
  • "We look at the liquidity in the last few quarters particularly this year. We only see some improvement in some liquidity."


  • "There is a solution in place that will really neutralize some of the tax issues. But I think they are working it through their government. But again, all four operators are unanimous and working together on this front. So they tell us that they hope to have a resolution sometime end of the year or sometime early next year. So it will be comfortably ahead of when we open our property."


  • "On a luck-adjusted basis, the margin at City of Dreams was up similar to the overall margin, up 200 basis points." "So we got the flow-through on that incremental mass market business as well as having a higher margin within the mass market business."
  • "There were nothing particularly special about our overhead this quarter or call outs. Our provision for bad debt was in line with our normal range."

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