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CHART OF THE DAY: Creative Accounting at $UAL

CHART OF THE DAY: Creative Accounting at $UAL - 77


Hedgeye industrials sector head Jay Van Sciver on United Airlines: 


“By our estimates, the underlying UAL operations have generated a cumulative loss over the past two years. Further, UAL has burned over $1.4 billion in free cash flow, defined as Cash Flows from Operating Activities - Net Capital Expenditures, in the last two calendar years. As the high cost U.S. major since AMR's bankruptcy-related cost cuts, we expect UAL to struggle to improve its operations relative to competitors. In our view, it is relative costs that matter. We expect UAL to continue to underperform lower cost airlines.  


This is just the tip of the proverbial iceberg.

Creative Mistakes

“Creativity is allowing yourself to make mistakes.  Art is knowing which ones to keep.”

 -Scott Adams


As you may already know, Scott Adams is the creator of the cartoon "Dilbert." The cartoon makes light of the corporate world and was originally created in the early 1990's as Adams was being "downsized" from a major corporation.  Even though Adams isn’t a professional investor like most of you reading this, his quote above is remains rather apropos to the investing world.


Most great portfolio managers and analysts are also incredibly creative.  They are creative in the types of analysis they employ and they are creative in their questions for management. But perhaps most importantly, they are creative in idea selection.  The true skill, of course, then comes in knowing which creative ideas to keep.  Some call this risk management.


We hired a cartoonist recently here at Hedgeye. Cartoons are a great way to communicate our often contrarian investing ideas and themes.  Take for example the cartoon posted below that we included in our 100-page deep dive short call on United Airlines (UAL) earlier this week.


The cartoon emphasizes the craziness (at least from our perspective), of UAL’s accounting policies.  Not unlike our short calls on certain stocks in the Master Limited Partnership (MLP) sector, we have a difficult time reconciling the valuation with UAL with its underlying cash flows.  That said, we also know, to paraphrase Keynes, that the market can remain irrational longer than many investors can stay solvent.


As it relates to airlines, and specifically UAL, longer term we much prefer Warren Buffet’s maxim on the industry. That is, the best way to become a millionaire is to start a billionaire and buy an airline!


Creative Mistakes - United Airlines cartoon

Back to the Global Macro Grind...


Our research team has been busy generating some very contrarian and well researched investment ideas lately.  This morning I wanted to highlight a few.  (As always, if you want more details on the idea and would like to review the more detailed work, please email for details on how to subscribe.)


First up on the runway is naturally United Airlines (UAL).  The core of thesis per our industrials sector head Jay Van Sciver is as follows:


“By our estimates, the underlying UAL operations have generated a cumulative loss over the past two years. Further, UAL has burned over $1.4 billion in free cash flow, defined as Cash Flows from Operating Activities - Net Capital Expenditures, in the last two calendar years. As the high cost U.S. major since AMR's bankruptcy-related cost cuts, we expect UAL to struggle to improve its operations relative to competitors. In our view, it is relative costs that matter. We expect UAL to continue to underperform lower cost airlines.  


This is just the tip of the proverbial iceberg.


In our Chart of the Day below, we highlight this free cash flow deficit versus its peer group.  As the chart shows, UAL appears to have severely disadvantaged economics as compared to its peers.


The second idea I wanted to highlight is Lululemon (LULU), a contrarian long idea.  For many a thoughtful short seller, LULU has been one of the better short plays in retail of late. Rightfully so.  Management appears to be making one misstep after another and doing virtually everything in its power to ruin what is actually a solid brand and product.  The core of our long thesis according to our Retail sector head Brian McGough is as follows:


“There’s a massive bifurcation between the growth potential at this company, and the lack of a plan to execute on it. If management continues to execute in a sub-par way, we see downside to about $31 (stress testing our model at 10x EBITDA). Not pleasant (18% downside), but not the end of the world from its current price ($37.61). If the company/Board adds the operational depth that is necessary, then the discussion returns to this company doubling or tripling its top line, and realizing $3.00-$4.00 in earnings power.  Pick whatever multiple you want, but the stock price on $3.50 in earnings will push it through its all-time high of $82.”


Finally, the last idea (and probably most controversial idea I wanted to highlight) is our short call on YELP.   From a stock price perspective, on the short call we’ve been early, but we are getting increasing confidence in our thesis the more work we do.  Our Internet sector head Hesham Shabaan actually had a call recently with the chief financial officer of YELP to discuss, which is at the core of our short thesis.  This was his takeaway from that call:


“Where we didn’t get a tremendous amount of detail was when we delved into its customer repeat rate, which is how we are backing into its attrition rate.  We did spend some time discussing this topic, and while he wouldn’t explicitly verify or refute our attrition thesis, he did say that YELP has never said that they are not losing customers after we delved into its reported numbers.


The question he wouldn’t answer, which is a spin off of its customer repeat rate metric: “How many of your current customers have been generating revenue for YELP for over a year?”


This is the most important question because it drives at the heart of the retention issue we have been highlighting.  We estimate that in any given period that the overwhelming majority of YELP’s reported Local Business Accounts are accounts the company has signed within the LTM (meaning YELP is losing the majority of its accounts after the first year).”


Clearly, Hesham didn’t get a lot of clarity on attrition in his discussion.


As always, let us know if you have any questions on these or any other creative investment ideas you may be working on.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.46-2.64%


India’s Sensex 247

VIX 10.61-12.97

USD 80.02-80.47

Gold 1  


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Creative Mistakes - 77

LEISURE LETTER (06/26/2014)



  • Friday, June 27 Las Vegas May revenues


ALL.AX/Aristocrat – confirmed the company is in talks to purchase U.S. competitor Video Gaming Technologies Inc for about $1 billion which makes slot machines primarily for Native American casinos. 

Takeaway: It would seem consolidation of the slot equipment companies is in full force - with both VGT and IGT now in play.  This deal solidifes Aristocrat's position in the Class II market.


CZR – in an interview with Bloomberg News, CEO Gary Loveman indicated that a Japan gaming resort would require at least a US$5 billion investment and that Caesars would have no problem financing such a project.

Takeaway: Maybe Mr. Lovemen should recall his Harvard teaching and academic days and revisit the Modigliani-Miller Theorem.


IKGH – (GGR Asia) still chasing HK listing and has been pursuing a dual listing for more than a year. The Hong Kong exercise is expected to be what’s known as a ‘listing by introduction’. In such a process, a company that has shares issued on another exchange can – subject to local regulatory approval – list its shares in Hong Kong without raising new funds or issuing new shares. As part of the HKSE listing process IKGH terminated the personal guarantees of Chairman Lam Man Pou and COO Vong Hon Kun.

Takeaway: Given the HKSE listing by introduction as well as the termination of the personal guarantees, we would not be surprised to see IKGH embark on an offering of HKSE listed shares following the listing.


MGM – will expand its M Life customer loyalty program to include Empire City Casino at Yonkers Raceway.  In the joint marketing agreement, members of Empire City's rewards program will receive promotions at MGM casinos and M Life members will receive promotions for Empire City. 

Takeaway: Interesting alliance and foray into the metropolitan NYC gaming market.


BEE – will ring the NYSE Closing Bell this afternoon. 

Takeaway: Could BEE management also be in NYC for other reasons and could a potential acquisition be in the near future?


H (Chicago Business) plans to sell a portfolio of 32 hotels that could be worth about $500 million and hired Jones Lang LaSalle Inc. to market 21 Hyatt Place and 11 Hyatt House hotels totaling 4,200 rooms across the United States. The portfolio consists mostly of former AmeriSuites, Sierra Suites and Summerfield Suites hotels that Hyatt upgraded to fly Hyatt Place select-service and Hyatt House extended-stay flags.

Takeaway: Recycling of capital continues.


L – Loews Hotels announced a contract to purchase the 556-room InterContinental Chicago O'Hare, located in Rosemount, for $120 million. The property opened in 2008 and will be rebranded as a Loews Hotel.

Takeaway: Loews continues its well broadcast efforts to increase the size and scale of its hotel portfolio.


Insider Transactions

HST - EVP & CFO Gregory J. Larson sold 18,000 shares on Monday, June 23rd at an average price of $22.43 and now owns 116,503 share.


WYN - CEO Geoffrey A. Ballotti sold 70,271 shares on Tuesday, June 24th at an average price of $75.00 and now owns 107,771.

Takeaway: More insider selling from the C-Suite!


US Government Goes to Macau – Agents of the US Department of Treasury Internal Revenue Service’s criminal enforcement unit traveled to Macau during May to gather information regarding the flow of money from Macau to US casinos. The US Treasury Department’s anti-money laundering unit has also been looking into the flow of money across the Pacific.

Takeaway: A continuation of the inquiry efforts announced back in March by the US Treasury.


UnionPay Point of Sale Machines – (Macau Daily TImes) Secretary for Economy and Finance Francis Tam stated yesterday that the Macau Monetary Authority gave no instructions to remove all point of sale (POS) machines from jewelry and luxury stores located inside or outside casinos. Mr. Tam noted those stores located at casinos will not be allowed to increase the number of POS machines they own, starting from July this year.

Takeaway: An interesting debate on the issue.


LEISURE LETTER (06/26/2014) - union pay


Union Pay & ICBC – The Industrial Commercial Bank of China (ICBC), launched its first credit and debit card in the southern hemisphere aimed at providing a more convenient tool for frequent travelers to Asia including China from New Zealand.  The ICBC debit cards with the UnionPay logo can withdraw cash from 30% of ATMs in New Zealand and is accepted by some 10,000 business outlets. As a reference point, UnionPay card holders reached some 4.2 billion, exceeding those of Visa and Master though UnionPay is yet the most widely used card in the world.

Takeaway: UnionPay is not going away and this announcement with ICBC should help quell the concerns regarding UnionPay.


Thailand World Cup Arrests – Thai police arrested more than 1,000 people, including four foreigners, in a crackdown on illegal betting during the World Cup. Police also seized betting slips worth USD525,000 during raids since the World Cup kicked off in Brazil on June 12. On Tuesday, police and military officials arrested four foreign nationals on suspicion of illegal betting at a sauna in downtown Bangkok, Chantavit said.  Of the 3 suspects – one from Macau and two from Hong Kong – were believed to be bookmakers. The fourth, a Malaysian, was placing bets at the time of his arrest

Takeaway: Given today's highly contested match between the US and Germany, we expect more arrest annoucements. 


Saipan Gaming – Saipan’s first electronic gaming facility has had its soft opening. Club C, at Kanoa Resort in Chalan Kanoa, launched six months after the Commonwealth of the Northern Mariana Islands, a U.S. Pacific territory, passed a law to regulate e-gaming. The new club will have its formal opening on July 18, and will be targeted at tourists. Club C currently has 64 machines available for use, out of the total 112 machines ordered.

Takeaway: The build-out of Saipan begins.


Florida Day Boat Gambling – as a follow-up to our Tuesday story regarding Victory Casino Cruises begins offering a gambling-focused day cruise out of Mayport (Jacksonville) -- the 1st sailing was sold out.  Recall, the 600-passengers, high-speed catamaran features 21 table games and more than 300 slots sails twice daily at will sails twice daily at 11 a.m. and 7 p.m. 

Takeaway: We expect good demand as high quality offering such as this experience is much easier for greater Jacksonville residents than a drive to South Florida. 

Las Vegas Tourism – Las Vegas McCarran Airport traffic during May increased 0.3% versus +1.7% during April.

Takeaway: We expect good Vegas revenues this Friday, driven by baccarat.


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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June 26, 2014

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Pay It Forward

This note was originally published at 8am on June 12, 2014 for Hedgeye subscribers.

“For of those to whom much is given, much is required.”

- President John F. Kennedy


Last night Keith and I took a private car service into Manhattan to watch the New York Rangers play the Los Angeles Kings in the fourth game of the Stanley Cup Finals.   Clearly, given such an experience, there is no doubt we are among the fortunate in this fine nation.


While most of you that are reading this have worked hard to achieve your position, we have all also received a helping hand along the way.  That helping hand may have been from a mentor, from a coach, or just being born somewhat lucky.  But, regardless, we all now have the opportunity to give back.


In the spirit of #PayingItForward, Hedgeye has formed a non-for-profit called Hedgeye Cares, which will be dedicated to giving back to charities in Connecticut.  Our inaugural event will be the 2014 Hedgeye Cares Golf Challenge to be held on September 16th at the Great River Golf Club in Milford, CT.   The proceeds from this event will go to Bridgeport Caribe Youth Leaders (BCYL).

Pay It Forward - Pay it forward chart1

BCYL is non-profit based in Bridgeport, CT, one of the more economically disadvantaged cities in Connecticut, and provides athletic and enhanced educational opportunities to youths aged 5 to 18 to whom much has not been given.   Currently, the program provides opportunities for some 500 kids in the Bridgeport area and we will be focused on expanding that number.


We hope you will consider joining us for a golf outing on September 16th and if you aren’t a golfer and or cannot make the event, we hope that you will consider sponsorship or auction donations and join us in #PayingItForward.  Details can be found here.


Back to the Global Macro Grind...


Speaking of giving, the Kings actually gave the Rangers a fighting chance last night by losing 2 -1, so the Stanley Cup Finals return to the City of Angels this Friday.  On some level, the Rangers have already exceeded expectations by winning last night.  Specifically, of the 320 NBA, MLB or NHL teams that have found themselves up 3 – 0 in a seven game series, 65% have gone on to win the next game and close out the series.


In terms of coming back and winning the entire series from a 3 – 0 deficit, it has only happened four times in 171 opportunities in the NHL.  For you math geeks, that equates to right around a 2.3% chance of overcoming a three game deficit.  So is a comeback probable? No. But as they say, hope springs eternal.


Speaking of probabilities, as equity investors we can be pretty sure that volatility on the SP500, as measured by the VIX, won’t stay below 11 for long.   Pull back a long term chart of the VIX on your Bloomberg this morning and you will see what we mean.   The last time the VIX hit this level was actually January of 2007. Thereafter, volatility made a steady climb before peaking in October 2008 at ~60.


So as investors, feel free to bet that VIX will go lower from here, but practically that is about as likely as Iran, Honduras, or Costa Rica winning the World Cup.  According to Oddshark.com, the odds on that are more than 1500 – 1.  Math doesn’t always work, just ask California Chrome, but over time life is much simpler when we play the odds.


Speaking of odds, the likelihood is high that many of us wouldn’t have bet on a Eurozone Industrial production number that came in well ahead of expectations this morning.   According to my colleague Ben Ryan:


“Industrial Production printed much stronger than expected (five-month high) for April with strength in energy and non-durable goods production which increased +2.5% and +2.1% respectively. Month-over-month, seasonally-adjusted industrial production increased +0.8%, beating expectations of +0.5%. Note that March was downwardly revised to -0.4%, so April’s increase follows a pretty bad number."


Following a bad number or not, that is the kind of number that we macro analysts underline with a big green highlighter (green being bullish) in our notebooks.


Even as European data continues to get better on the margin, we remain cautious, to say the least at current VIX levels, on the U.S. economy.  In the Chart of the Day, we’ve highlighted our U.S. GDP summary table going back two years to March 2012.


The key takeaway from this table is that healthcare spending was critical in supporting GDP in the 1st quarter.  With the census bureau’s release of the 1Q14 QSS survey yesterday, that estimate of healthcare spending saw a sharp negative reversal. 


According to my colleague Christian Drake:


Services consumption was the singular source of strength in the 1Q14 GDP report and most of that was from Healthcare Services which contributed +1.01% to GDP – that estimate of accelerating healthcare consumption just got revised to negative growth which will take the final GDP estimate for 1Q down to -2.0% plus or minus. 


The net-net of this is that the final estimate of 1Q GDP (June 25th) will be (even more) dismal and GDP is likely to miss the ever bullish consensus expectations for full year 2014.  When combined with increasing uncertainty in the 2014 mid-term elections, see Eric Cantor, we may just have an opportunity for you equity bears to #PayItForward in the coming months.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.44%-2.67%

SPX 1915-1951

RUT 1138-1178

VIX 10.74-13.34

USD 80.31-80.95

Gold 1240-1274 


Keep your head, stick on the ice and belief in the Rangers,


Daryl G. Jones

Director of Research 


Pay It Forward - chart of the day


TODAY’S S&P 500 SET-UP – June 26, 2014

As we look at today's setup for the S&P 500, the range is 41 points or 1.40% downside to 1932 and 0.69% upside to 1973.                                                  













  • YIELD CURVE: 2.08 from 2.08
  • VIX  closed at 11.59 1 day percent change of -4.45%


MACRO DATA POINTS (Bloomberg Estimates):               

  • 8:30am: Initial Jobless Claims, June 21, est 310k (prior 312k)
  • 8:30am: Personal Income, May, est. 0.4% (prior 0.3%)
  • 8:30am: Personal Spending, May, est. 0.4% (prior -0.1%)
  • 9:45am: Bloomberg Consumer Comfort, June 22 (prior 37.1)
  • 11am: Kansas City Fed Manufact., June, est. 10 (prior 10)
  • 8:30am: Fed’s Lacker speaks in Lynchburg, Va.
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 1:05pm: Fed’s Bullard speaks in New York



    • House, Senate in session
    • Israeli Pres. Shimon Peres to receive Congressional Gold Medal
    • 9:15am: House Financial Services panel holds oversight hearing on SEC’s division of trading and markets
    • 9:30am: Senate Judiciary Committee markup of S. 2454, Satellite Television Access Reauthorization Act; S. 517, Unlocking Consumer Choice/Wireless Competition Act
    • 10am: Senate Finance Cmte Chairman Ron Wyden markup for proposal to shore up highway trust fund through end of year
    • 10:30am: Senate Appros Cmte markup of DHS appropriations bill
    • U.S. ELECTION WRAP: Election Night Preserves Old Guard



  • LSE to buy Frank Russell for $2.7b to boost indexes, ETF
  • Philip Morris cuts earnings forecast amid currency headwinds
  • BNP said to face yr-long dollar-clearing curb in U.S. case
  • Nabors unit, C&J Energy Services to combine in $2.86b deal
  • GoPro IPO raises $427m as shares price at top-end of range
  • China finds $15b of loans backed by false gold trades
  • Ukraine peace deal optimism wanes as cease-fire deadline looms
  • IRS’s Lerner weighed audit involving Grassley, e-mails show
  • BHP considers opportunities to export oil condensate from U.S.
  • Supreme Court to issue rulings



    • Accenture (ACN) 7:01am, $1.21
    • ConAgra Foods (CAG) 7:30am, $0.55
    • Empire (EMP/A CN) Bef-mkt, C$1.22 - Preview
    • Lennar (LEN) 6am, $0.51 - Preview
    • McCormick (MKC) 6:30am, $0.62
    • Nike (NKE) 4:15pm, $0.75 - Preview
    • Progress Software (PRGS) 4:15pm, $0.34
    • Schnitzer Steel Industries (SCHN) 8:30am, $0.06
    • Shaw Communications (SJR/B CN) 8am, C$0.49 - Preview
    • Steelcase (SCS) Bef-mkt, $0.16
    • Winnebago Industries (WGO) 7am, $0.39
    • Worthington Industries (WOR) 8:25am, $0.67



  • China Finds $15 Billion of Loans Backed by Falsified Gold Trades
  • Brent Trades Near One-Week Low as Iraq Supplies Rise; WTI Holds
  • U.S. Corn Glut Expanding at Fastest Pace Since 2005: Commodities
  • Cotton Futures Fall After Entering Bear Market on Global Supply
  • Gold Falls as Investors Weigh U.S. Economy Amid Slower Purchases
  • Aluminum Users Stick With LME as Alternative Yet to Gain Volume
  • Steel Rebar Climbs as Ore Posts Record Gain on China Property
  • China’s Gold Imports From Hong Kong Drop as Yuan Rate Swings
  • Stronger Indian Gold Demand to Support Prices in 2H: Macquarie
  • Goldman Says Shale Gas Boom Driving Fear Out of Market: Energy
  • Danske Bank Says Brent May Slip to $110/Bbl as Iraq Oil Stable
  • Iraq Crude Untouched by Violence Means Options Seen Too Bullish
  • El Nino Has 60% Chance of Starting by End of August, UN Says
  • California Drought Means Record Produce Prices: Chart of the Day
  • Rubber in Tokyo Climbs to 2-Month High as China Inventory Falls


























The Hedgeye Macro Team