Voodoo Accounting + Face Tattoos

“Reality is wrong. Dreams are for real.”

-Tupac Shakur

My colleague and energy Sector head, Kevin Kaiser, approached me in the office the other day and told me that he had a disconcerting dream about me.  It turns out the dream itself wasn’t all that crazy, but was simply that I decided to get a Mike Tyson-esque face tattoo.  My takeaway was that Kaiser was probably just spending a little too much time on MLP accounting.


Incidentally we are still short Kinder Morgan (KMI) and Linn Energy (LINE) on our Best Ideas list.


In tribute to Kaiser’s dream, though, I’ve included as the Chart of the Day below an exhibit from his most recent note on LINE.  The exhibit shows the actual free cash flow from every quarter in 2013 as well as his projected 2014 free cash flow.  Admittedly, free cash flow might be a bit of a misnomer as cash flow is actually decidedly negative.


Voodoo Accounting + Face Tattoos - ironmike 

In fact, in 2013 free cash flow (defined as discretionary cash flow less cap-ex and contribution to JV) was negative $-374 million.  In 2014E, we are projecting free cash flow of negative $-132 million.  An astute analyst might actually note that at least the free cash flow deficit is improving, which is true if you believe LINE’s guidance.  The bigger issue, though, is one of distributions.


Based on current guidance, LINE will be paying right around $960 million in distribution in 2014E.  How does a company that has negative $-132 million in free cash flow pay almost $1 billion in distributions you might ask?  Well, in this instance, we can only assume that either they are going to issue massive amount of debt and new shares (they already have $9.1 billion in net debt), or as the famous American poet Tupac said in the quote above ...dreams are for real.


(Incidentally, you can rest assured that I won’t be getting a Mike Tyson face tattoo anytime soon!)

Back to the Global Macro Grind ...

Speaking of dreamland, President Putin proved yesterday that he may not actually be living in one based on his press conference to discuss Russia’s actions in Crimea.  We wrote in yesterday’s Early Look that Putin’s ambitions may not actually be as grandiose in the Ukraine as many in the manic media would have us believe.  In fact, it seems the key take away from the rambling press conference is that Putin has no intention to use force and is merely protecting legitimate Russian interests in the region.


The broader take away from this incident may actually be its impact on President Obama and, by default, the Democrats heading into the mid-term elections next fall.  As I wrote yesterday, we did a poll in which the results indicated pretty decisively that Putin would come out as the stronger leader and it seems this is certainly the case.  The New York Post (admittedly a Republican leaning newspaper) made an apt analogy between Obama and Jimmy Carter this morning in an op-ed in which they wrote:


“Vladimir Putin has taken the measure of Barack Obama. He’s found Jimmy Carter.


Like Jimmy Carter, who boasted he was free of any “inordinate fear of communism,” Obama began his term as president vowing to “reset” relations with Russia.


Like Jimmy Carter, who conveyed weakness when Iran took our embassy staff hostage, Obama confirmed his own weakness when he drew a red line in Syria and then backed down from enforcing it.


Like Jimmy Carter, who was rewarded by Leonid Brezhnev with a Soviet invasion of Afghanistan, Putin has returned Obama’s favor with a Russian invasion of Ukraine


And just like Carter, who responded with what his staff called “a strong public statement,” Obama responded with his own statement saying he is “deeply concerned” by Russia’s military movement in Ukraine.


As in the Carter era, Obama-era defenders of inaction suggest there is little they can now do to get Russia out of Crimea. They are likely right.”


Now whether Obama is truly a foreign policy comrade (for lack of a better word) of Jimmy Carter, or the NY Post is actually living in Republican dreamland, is certainly up for some debate.  But there can be no question that that is something that Republicans will push aggressively into the upcoming mid-terms, especially if the Russians remain in Crimea.


Even before the Ukrainian situation, President Obama’s approval rating was doing the Democrats no favors.   Since last summer, the last time his approval rating was higher than his disapproval rating, his rating has turned negative and decidedly so.  Based on the current Real Clear Politics poll aggregate, Obama’s disapproval rating is 52.7 for an almost 10 point spread versus his approval rating of 43.1.


In other news in the world of dreams, the Chinese this morning may be experiencing their first corporate bond default ever.  Specifically, Shanghai Chaoroi Solar announced it won’t be able to pay roughly $14.6 million in interest on a bond issue from two years ago.  It is likely too early to tell whether this is the canary in the Chinese debt coal mine, but one thing is for certain - the Chinese GDP target of 7.5% will be a mere dream if the $1.5 trillion Chinese corporate bond market starts to shake.


Conversely, the European economic recovery seems much less of a dream as PMI data accelerated to 32-month high 52.6 versus 51.6 prior. Additionally, European retail sales came in at a better than expected +1.3% year-over-year gain versus an expected decline of -0.4%.  When combined with the fact the periphery yields are now near all time lows, as evidenced by the Spanish 10-year yield ticking lower ahead of tomorrow’s auction, it may be time to do more than dream about the European revival.


Our immediate-term Risk Ranges are now as follows (our Top 12 macro ranges are in our Daily Trading Range product):



VIX 13.14-15.92 

USD 79.81-80.46 

Brent 108.05-111.85 

NatGas 3.79-5.09

Gold 1 


Keep your head up, stick on the ice and dream big,


Daryl G. Jones

Director of Research


Voodoo Accounting + Face Tattoos - virtual

March 5, 2014

March 5, 2014 - 1



March 5, 2014 - 2

March 5, 2014 - 3

March 5, 2014 - 4

March 5, 2014 - 5

March 5, 2014 - 6

March 5, 2014 - 7


March 5, 2014 - 8

March 5, 2014 - 9

March 5, 2014 - 10

March 5, 2014 - 11



TODAY’S S&P 500 SET-UP – March 5, 2014

As we look at today's setup for the S&P 500, the range is 27 points or 1.38% downside to 1848 and 0.06% upside to 1875.                                          










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.37 from 2.37
  • VIX VIX closed at 14.1 1 day percent change of -11.88%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Feb. 28 (prior -8.5%)
  • 8:15am: ADP Employment Change, Feb., est. 155k (prior 175k)
  • 8:30am: Former Fed Chairman Bernanke speaks in S. Africa
  • 10am: ISM Non-Manufacturing, Feb., est. 53.5 (prior 54)
  • 10:30am: DOE Energy Inventories
  • 2pm: Fed releases Beige Book
  • 7pm: Fed’s Fisher speaks in Mexico City
  • 8:30pm: Fed’s Williams speaks in Seattle


    • Republican Cornyn avoids Texas runoff w/Tea Party challenger
    • President Obama speaks at event on raising minimum wage in
    • Hartford, Conn.
    • Sec. of State John Kerry, Russian Foreign Minister Sergei Lavrov visit France
    • 9:30am: House Oversight Cmte holds hearing on IRS targeting of political group, fmr IRS official Lois Lerner slated to testify
    • 9:30am: Senate Armed Svcs Cmte hears from Defense Sec. Chuck Hagel, Joint Chiefs Chairman Martin Dempsey on auth. request
    • 10am: Senate Appropriations panel hears from Elon Musk on national security space launch programs
    • 10am: Senate Budget Cmte hears from White House Budget Director Sylvia Burwell; House Appropriations panel hears from Agriculture Inspector Phyllis Fong on USDA on budget request
    • 10:30am: Treasury Sec. Jack Lew at Senate Finance Cmttee re budget request
    • 3pm Ruslana Lyzhychko, former Ukraine Parliament member and EuroMaiden protest leader, speaks at Natl Press Club


  • Kerry makes push to ease Ukraine tension with Lavrov talks
  • China keeps 7.5% growth target this yr as challenges mount
  • Li says China to declare war on pollution as smog spreads
  • SEC giving Markey’s Herbalife concerns “every consideration”
  • Honeywell to host annual outlook mtg, discuss targets
  • GM’s China sales gain 20% in Feb. on demand for Wuling vans
  • Time Warner Cable, EBay present at Morgan Stanley TMT conf.
  • Fed’s Lacker sees first rate increase in ‘early’ 2015
  • Fast Retailing chief sees being world’s biggest retailer: WSJ
  • Goldman No. 1 in equities ranking as 2014 IPO pipeline grows
  • JPMorgan repeats at top in fees; bankers anticipate more deals
  • S&P business at risk on Australia liability finding: lawyer
  • Biogen buys rights to Eisai’s experimental Alzheimer’s drugs
  • Adidas sees 2014 net income below analyst est.
  • IPhone 6 likely to see late-summer introduction: Jefferies
  • U.K. services expand for 14th month as confidence increases
  • U.S. Supreme Court hears arguments on Halliburton securities class action suits
  • Obama said to allow 2-yr renewal of extended health plans


    • Boyd Gaming (BYD) 4pm, ($0.26)
    • Brown-Forman (BF/B) 7:45am, $0.76
    • Envision Healthcare (EVHC) 4:05pm, $0.18
    • Giant Interactive Group (GA) 4:05pm, $0.24
    • Hovnanian Enterprises (HOV) 9:15am, ($0.05)
    • Laurentian Bank of Canada (LB CN) 8:40am, C$1.30
    • Linamar (LNR CN) 4:05pm, C$0.71
    • Navistar (NAV) 7am, ($1.75) - Preview
    • PetSmart (PETM) 7am, $1.21
    • Revlon (REV) 6:30am, $0.82
    • Sanchez Energy (SN) 5:44pm, $0.35
    • Semtech (SMTC) 4:30pm, $0.23
    • Veresen (VSN CN) 4:22pm, C$0.06
    • WuXi PharmaTech Cayman (WX) 4:30pm, $0.46
    • Zogenix (ZGNX) 4:01pm, ($0.10)


  • Zinc Climbs to One-Year High as China Retains Economic Target
  • WTI, Brent Decline After Biggest Loss in Two Months on Ukraine
  • Illegal Coal Trade at Indonesian Mine Said to Widen: Commodities
  • Barclays, Deutsche Bank Accused in Suit of Gold Fix Manipulation
  • Gold Below Four-Month High as Palladium at Highest Since April
  • Corn Drops Amid Reduced Concern About Ukraine Export Disruption
  • Palm Oil May Top 3,000 Ringgit for Mistry If El Nino Occurs
  • Jiangxi’s Li Sees China Copper Demand Matching Economic Growth
  • Indonesians Buying Bread to Spur Wheat Imports on Egyptian Scale
  • Indian Sugar Exports Jumping as Brazil Drought Fuels Rally
  • Frigid U.S. Weather Means Highest Power Prices Since ’08: Energy
  • Buffett’s BNSF Crude Cars Spur $5 Billion Safety Spat: Freight
  • Oil Money May Urge Russia to Think Twice About Ukraine
  • Brazil’s Dryness-to-Carnival Boosting Coffee Prices; Sugar Rises


























The Hedgeye Macro Team














Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


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




  • BORGATA EBITDA $15-17m
  • Wholly-owned Adjusted EBITDA post corp:  $105-110m
    • Despite the impact of soft market conditions and winter weather on operations in the Midwest and South and Peninsula segments, the Company's wholly-owned operations performed in-line with expectations in 4Q, benefitting from continued performance in the Las Vegas Locals and Downtown Las Vegas segments. 
    • 4Q Wholly-owned Adjusted EBITDA excludes a favorable property tax adjustment of $9.3m


  • Lower end of our database (“rubies”) - similar amount of trips, but spending less.
  • From September to October, saw recovery at properties in the Ruby tier of the database (not to prior year levels in all cases, but certainly sequentially from September to October improvements)
  • In October, most of our operations are showing improvement over last month


  • Expanding into social gaming…Stardust Casino, another social gaming product is currently in a test period prior to an anticipated roll out in the United States in the coming months


  • Work is underway for our project with the Wilton Rancheria Tribe


  • Launch an enhanced Penny Lane at all seven of our major Las Vegas properties.
  • Begin a phased rollout of Penny Lane in the Midwest and South
  • Ultimately get to the new Peninsula properties sometime next year


  • Expect very modest revenue growth
  • Seeing the benefits of the refinements we have made to our marketing and operations


  • Continue to improve yield on our Hawaiian charter service
  • During the three-month period ending in September, we captured a 31.6% market share
  • A hotel casino just reopened this past weekend returning more than 600 rooms to the Downtown inventory


  • Blue Chip is contending with new capacity in both Michigan and Ohio


  • Benefiting from strong economic conditions in Southeast Texas and gaining market share there
  • Diamond Jo Dubuque successfully grew visitation
  • At Kansas Star, new non-gaming offerings continued to drive top-line growth. However, expenses are naturally higher year-over-year as well to support the significant amenities that have been added. Removed quite a bit of cost out of the business since BYD first opened the permanent facility early this year. And BYD will continue to focus on growing revenue to realize the full potential of our investment.


  • 4Q results were impacted by several short-term factors in December, including an unusually low hold percentage and severe winter weather during two weekends. 
  • 4Q guidance do not include any meaningful impacts from online gaming.

BYD 4Q 2013 YOUTUBE - byd

The Olympiad

This note was originally published at 8am on February 19, 2014 for Hedgeye subscribers.

“The important thing in life is not victory but combat; it is not to have vanquished but to have fought well.”

- Pierre de Coubertin


We’ve been a little quiet commenting on the ongoing Winter Olympics in Sochi, Russia.  For Keith and me, it is probably nervousness over whether our native Canada can defend her Olympic gold, despite a lackluster preliminary round performance (lackluster in the sense that Canada is the first nation of hockey).  More broadly, though, the paradoxical nature of global markets has kept us busy.


In part, the Sochi Olympics represent this paradox.  Admittedly, from a security perspective, the games have been much more successful than anyone expected.  (As far as I can tell, the one downside is that most hotels rooms have a picture of Russia President Vladimir Putin.)  The flip side to the better than expected security (except perhaps in the Ukraine), is that many venues have been disappointing.


This of course goes to the heart of the paradox of the winter Olympics in Sochi, which is that Sochi is actually a beach resort.  Our partner in the Phoenix Coyotes, George Gosbee, has been in Russia since the start of the games. He took a fantastic picture that was picked up by Reuters (see below) showing the beautiful Sochi beach line that spectators walk on to get to the hockey arenas.


The Olympiad - g9


We will be doing an Olympic hockey pool later this week at Hedgeye and the odds are that our own Bob Brooke has the inside edge given his experience playing for the U.S.A. at the Sarajevo Olympics in 1984, but here are my picks:

  1. Gold – U.S.A.
  2. Silver – Canada
  3. Bronze – Russia
  4. Sweden

While it is paradoxical for a Canadian to pick the U.S. to win gold, they have looked much better, so I’m not going to let my emotions rule the day.  What are your picks?


Back to the Global Macro Grind . . .


This morning in the Chart of the Day, I wanted to continue hitting on this ongoing paradox of reported versus actual inflation.  As it relates to reported inflation, we do expect CPI to ramp and likely beat expectations in the U.S., but more importantly is the actual commodity inflation that is occurring.   The chart shows Gold Spot, Gold Miners (GDX) and the CRB Index versus the SP500, Consumer Staples (XLY) and Consumer Discretionary (XLP).


As the chart emphasizes, commodity inflation has been on a tear since our January 9th Q1 Themes Call.   Now, obviously, accelerating commodity inflation and input costs aren’t the reason that a number of our Best Ideas shorts, namely Weight Watchers (WTW) and Boardwalk Pipeline Partners (BWP), have underperformed so dramatically, but they are a reason that we continue to like the series of Best Idea shorts that our Restaurant team led by Howard Penney has added to the list. 


This list of restaurant shorts includes Cheesecake Factory (CAKE), Bloomin’ Brands (BLMN), Potbelly Corporation (PBPB), and Panera Bread (PNRA).  PNRA reported earnings least night and guided 2014 earnings estimates to $6.80 -> $7.05, which is below consensus estimates of $7.30.  Certainly not a meaningful miss, and likely weather did play a part, but when a company trades at close to 25x forward earnings, expectations are, indeed, the root of all heartache.  For more information on how to subscribe to restaurant sector research, please email


Reverting back to inflation, the Congressional Budget Office released a recent report yesterday that had some rather interesting takeaways from President Obama’s proposal to raise the minimum wage (an inflationary pressure), specifically:

  • President Obama's quest to raise the minimum wage to $10.10/hour would eliminate about 500,000 jobs by 2016 but also increase pay for 16.5M workers and lift 900K out of poverty;
  • The report said benefits of an increase would be spread across a broad range of workers, with 19% of the increased wages going to Americans living below the poverty line. Close to 30% of the higher wages would go to people in families that earned more than three times the poverty level; and
  • The report added that the increased cost of labor would encourage employers to upgrade technology or hire fewer, higher-skilled workers. That effect would be partially offset by higher earnings among low-wage workers who retained their jobs.

So, a proposed government policy that slows employment growth and creates inflation . . . that sounds eerily familiar.


This morning and through the duration of the week we will be getting a series of macro data points that will be critical to focus on, which include:

  • Today - MBA Mortgage applications, PPI, Housing Starts and HSBC China Flash PMI.
  • Thursday - CPI, Flash PMI, Eurozone Flash PMI and BOJ Minutes; and
  • Friday - Existing home sales.

Paradoxically, the SP500 has been strong over the last two weeks or so, though it will be interesting to see how and if that strength sustains into an increased, and potentially negative, macro news flow.  Conversely, as it relates to China, our view is fairly explicit.  As my colleague Darius Dale emailed me this morning:


“Thus far in the YTD, the only data that has been supportive of a year-over-year acceleration in Chinese growth has been the credit data; even price-based leading indicators would suggest otherwise. All other data (i.e. PMI surveys) suggests sequential momentum is decidedly slowing. The market is clearly pricing in the expectation that the PBoC will have to ease [materially].”




Our immediate-term Macro Risk Ranges are now:


UST 10yr Yield 2.64-2.79%

SPX 1807-1848 

VIX 11.79-15.93

Gold 1282-1333


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Olympiad - Chart of the Day


The Olympiad - Virtual Portfolio

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%