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Party Time!

This note was originally published at 8am on August 26, 2014 for Hedgeye subscribers.

“Party like it’s 1999!”



With Total US Equity Market Volume down -35% versus its 2014 average yesterday, breadth weak (only 59% of stocks were up on the day), I kind of felt bad. As my fishing buddies know, I like to party – but that was a pretty underwhelming “SPX 2000!” party.


Cause they say two thousand zero zero…

Party over, oops out of time

So tonight I’m gonna party like it’s 1999


In other news, Amazon is buying Twitch for $970M in cash this morning and Morgan Stanley is going to take Hubspot (HUBS) public. US initial public offerings (in both number of issues and dollars raised) for 2014 are now at their highest level since the internet bubble (1999). No worries.


Party Time! - prince 1999


Back to the Global Macro Grind


I’ve had an interesting career in that I’ve had the opportunity to be held accountable to risk managing two epic US stock market bubbles (1999 and 2007). Newsflash: as you are hitting the highs, almost everything looks like a long and your shorts suck.


Then, one by one, this thing called the cycle comes along and starts to take down some of the early cycle stocks. While I am sure being long Go Bro (GPRO), FireEye (FEYE), or Biotech (IBB) was fun yesterday, the Transports (IYT), Semis (SMH) and Housing (ITB) stocks were actually down.


Unlike high-short-interest momentum stocks that were up on the latest central plan to ban European economic gravity, some of these early cycle sectors were down on reality:


  1. US Markit PMI reading for AUG slowed to 58.5 (vs. 60.6 in JUL)
  2. US New Home Sales for JUL slowed -2.4% m/m (slowing for the 2nd straight month)


To be fair, despite falling interest rates, not as many Americans are either able or in the mood to lever themselves up on a new home these days. With cost of living running right around the all-time highs, many of your median income earning neighbors are broke too.


Rather than rant qualitatively about how bad housing demand is, today I have attached the Hedgeye Housing Compendium as the Chart of The Day. Since we look at everything in rate of change terms, the color coding of red means bad.


But, Keith, dude, look at the no-volume-squeeze in spoos – how bad is bad?

(*refer to how bad the US economy was getting in Q3 of 2007 when the SP500 didn’t stop going up until October for details)


Oil, Corn, and Wheat are straight down now, but for those of you still paying all-time-highs in US Rents (34% of Americans rent and rent represents 29% of the median consumer’s cost of living), and drinking coffee or eating meat, please ignore the following commodity update:


  1. Coffee prices up another +0.6% yesterday to +65.1% YTD
  2. Cattle prices up another +0.4% yesterday to +13.3% YTD
  3. Wheat prices down another -1.7% yesterday to -10.4% YTD


Yep, if you want to be bullish on the US Consumer (after 62 months of US economic expansion) as Boris (Woody Allen) said in Love and Death, “wheat – all there is in life is wheat” (VIDEO https://www.youtube.com/watch?v=Tt2JVOrAZGU).


If you’re not into cream of wheat, both the CRB Food Index and the Long Bond (TLT) are +16% YTD, btw. That certainly crushes being long early cycle growth style factors in US Equities like Housing and the Russell 2000 (IWM).


Oh, and then there’s what got this party started yesterday in US Equity Futures – moarrr central planning from the Europeans. How’s that follow through, worldwide, looking this morning?


  1. Most of Asian Equity markets were down overnight (China -1%, Japan -0.6%, Indonesia -0.6%, India -0.4%)
  2. All of the European major equity indices are failing @Hedgeye TREND resistance
  3. The consensus hedge (SPX Index and Emini futures and options contracts) isn’t up


Even if the SPX was up, I wouldn’t entirely disagree with the why. Don’t forget that the SP500 looks as slow-growth-yield-chasing as it ever has, and while I much prefer being long the Long Bond (TLT) than SPY in 2014, I’m more focused on shorting early cycle small-mid-cap stocks.


If your boss is forcing you to buy something at the all-time highs in SPY, I’d opt for being long big to mega cap liquidity. Why? That’s easy. When this bubble starts to blow (up), you want to be able to get out.


From my analysts, here’s a Top 3 list of big caps that both they and my risk management signals still like:


  1. Capital One (COF) – Josh Steiner
  2. HCA Holdings (HCA) – Tom Tobin
  3. Texas Instruments (TXN) – Craig Berger


If you want to lever yourself up long on early cycle small-mid caps and/or European equities here, have at it! It’s a party. “Say it one more time – two thousand zero zero …” and it’s time to party like we are running out of time.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.34-2.44%

SPX 1975-2010

RUT 1135-1172

DAX 9293-9642

VIX 11.21-13.37

EUR/USD 1.31-1.33


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Party Time! - Compendium 082614

But There's No Bubble

Client Talking Points


EUR/USD taking at peek at $1.28 this morning as Draghi opts for the Policy To Inflate (rather than real growth). We’ve seen this movie before – it’s a move into Quad 3 for Europe in our GIP model (stagflation).


UST 10YR Yield has ramped to lower-highs of 2.50% within a bearish immediate-term risk range of 2.31-2.51%. Volatility in the bond market is starting to come off its all time lows; front month VIX is bullish TREND now too (11.34 support).


Gold doesn’t like the Dollar Up, Rates Up thing – rarely does; looks interesting on the long side if it can hold $1251 and the UST 10YR backs off at our 2.51% resistance line. Hedge funds have cut speculation long (futures) bets in Gold on this correction by 28%.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.


Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road


Olive Garden hopes all-you-can-eat pasta leads to skyrocketing sales http://fortune.com/2014/09/08/olive-garden-never-ending-pasta-pass/ "never-ending-boardroom-drama"



If your ship doesn’t come in, swim out to meet it.

-Jonathan Winters


Based on total cost, which includes tuition, room, board, and fees for boarding-only students in grades 9 through 12 for the 2014-2015 school year, Brandon Hall School in Atlanta, Georgia came in at the most expensive boarding school in America with a total cost of $62,300.


Takeaway: MAR set some lofty projections at its analyst day yesterday - similar to mostly failed targets given in 2010 and 2012

How did MAR’s long range projections from 2010 and 2012 fare?


Taking a step back to evaluate MAR’s 2010 "Plans for Ambitious Growth" covering 2011, 2012 and 2013, we found that actual results generally disappointed vs. Marriott’s goals. In addition, on June 19, 2012, MAR senior management hosted an investor meeting in Beijing, China during which management rolled forward their growth plan through 2014.  Similar to the 2010 plan, the 2012 growth plan is trending toward the low end of the company’s forecast range.  Certainly, with yesterday's investor meeting, MAR was once again ambitious in its communicated plan.  While we are positive on the hotel sector over this period, we would err to the low end of MAR’s forward guidance range given the track record.  Further, with MAR’s recent stock outperformance and relatively and historically high valuation, we prefer the stocks of the other branded hotel companies with HOT being our favorite near term idea.


On October 27, 2010, Marriott gathered investors and analysts for an investor conference titled "Marriott Outlines Plans for Ambitious Growth". Yesterday, simultaneous to MAR stock reaching a new 52-week high, MAR senior management hosted a full-day analyst meeting in Washington DC, titled "Marriott International Charts Future Success".  Similar to 2010, MAR once again laid out some aggressive financial targets, the high end of which may be difficult to achieve.  We note, Marriott’s historical forecasts were predicated on forward three year looks; however, yesterday's forecast and outlook included 2014 as well as 2015, 2016 and 2017.  This change in interval timing is important because 2014 includes the Protea acquisition as well as line item trends that are stronger or higher in 2014 than 2015, 2016 and 2017.


The table below compares the 2010 forecasted metrics versus actual and then yesterday's new projections.  Here are some observations: 

  • Actual 2011-2013 compounded RevPAR was 6.25%, only modestly above the low end 5% assumption, but below the midpoint of 7%
  • Year-end 2013 EPS was $1.99 versus the implied $2.10-2.15 guidance based on actual RevPAR growth of 6.25% 
  • Conversely as well as surprisingly, MAR forecasted total fees of $1.57 billion (low-end based on 5% RevPAR growth) yet 2013 total fees were $1.511 billion – less than the low end forecast even with higher than 5% RevPAR growth.  
    • Base management fees in 2013 of $621 million were significantly below MAR’s midpoint projection of $765 million. 
    • Franchise fees were definitely the bright spot with actual of $634 million, slightly above the high-end 2010 projected range of $560-$625 million. 
    • Incentive management fees of $256 million during 2013 were below MAR’s low end guidance of $285 million.
  • Total gross room openings from 2011-2013 were 83,643 versus a projection of 80,000 to 90,000 rooms
  • Total capital returned to shareholders from 2011 to 2013 via share repurchases and dividends were also below the midpoint totaling $3.925 billion versus MAR’s forecast of $3.3B - $5.3B.





On June 19, 2012, MAR called investors to Beijing, China for an informative update on the Company’s Asia Pacific growth strategy as well as providing an update and roll forward on key metrics and growth strategy.  The 2012 plan focused on the calendar years 2012, 2013 and 2014. Similar to the 2010 Growth Outlook, results are trending below the mid-point of Marriott’s forward look. 


The table below compares the 2012 forecasted metrics versus Hedgeye’s forecast for cumulative and year-end 2014 results. Here are some observations: 

  • 2012-2014 compounded RevPAR growth is developing toward 5.6%, below the low end 6% assumption and 140 bps below the midpoint of 7%
  • Year-end 2014 Hedgeye EPS is $2.47 versus current company guidance of $2.40 - $2.51 and the implied $2.30-2.35 guidance based on estimated RevPAR growth of 5.6% 
  • MAR forecasted total fees of $1.795 billion (low-end based on 6% RevPAR growth) and 2014 total fees are estimated to be $1.73 billion – less than the low end forecast.
    • Base management and franchise fees of $1.44 billion in 2014 (based on 6% RevPAR) are above the Hedgeye estimate of approximately $1.42 billion and significantly below MAR’s midpoint projection of $1.47 billion. 
    • Incentive management fees of $355-405 million during 20134 were forecasted but Hedgeye currently forecasts $311 million of IMFs in 2014, $44 million below MAR’s low end guidance of $355 million.
  • Total gross room openings from 2012-2014 were estimated at 90,000 to 105,000 and Hedgeye forecasts 90,500 gross additions.



While we believe the sell-side will "reaffirm" their optimistic ratings on MAR following today's meeting, we are less impressed based on historical results. Don't get us wrong, we are favorably inclined on the lodging sector and its strong underlying fundamentals as well as the likelihood for positive near-term revisions.  However, we prefer some of the less expensive branded hotel stocks with more near-term catalysts such as HOT, H, and HLT. 

CHART OF THE DAY: When This Market Crashes, Will You Be Able to Get Out?


CHART OF THE DAY: When This Market Crashes, Will You Be Able to Get Out? - Chart of the Day

Crossing The Bubble

“First there is a mountain – then there is no mountain. Then there is.”

-Zen Proverb


Replace the word #bubble for mountain and you’ll be right where I think the US stock market is right about now. While April-May of 2014 (when social-cloud-bubble stocks were imploding) may seem so 4-5 months ago, if you want to review the risks, there they were.


The aforementioned quote comes from the beginning of chapter 2 in a Tech #bubble book I’ve been re-reading for the last week, Crossing The Chasm, by Geoffrey Moore. The chapter is called High Tech Marketing Enlightenment.


Originally written in 1991 and re-published in 1999, it was one of the first books that the Quatrone boys in the bubble department at CS First Boston told me that I had to read. So I did. And within 6 months, the entire thing went poof…

Crossing The Bubble - Hindenburg


Back to the Global Macro Grind


What we called the internet back then is now called the “cloud.” And my former employer (CS First Boston) is now called Credit Suisse. Their new head of investment banking ran the Alibaba #bubble road-show at the Waldorf yesterday. If you were there, congratulations – you were crossing the 3rd US stock market bubble I have seen in my career.




On our research desk yesterday I was using the term freely. Not having any conflicts of interest (banking, brokerage, advertising, etc. fees), it was kind of fun – you know, being honest and stuff…


“But Keith, Alibaba is a big company that makes money.”


At 27-30x revenues, imagine they didn’t? (Amazon came public at 10x revs in 1997)


BREAKING: Facebook’s Value Tops $200B –Bloomberg


Oh and today Apple (AAPL) is going to host an Obama-like rock star concert (U2, who I love, will be there!) today at the Flint Center (where Steve Jobs introduced the Macintosh in 1984) with larger screens, wearables, and stuff… #cool.


That stock is “cheap” though. Its market cap is only $600B. That’s with a B, as in bubble or beelion dollars, bros.


Since we’re throwing around billions in one hundred dollar clips right now, why shouldn’t Alibaba be worth $200B? Exxon (XOM) is only worth $400B (and they make money too!).


*PS. If you think I am nuts. Please re-read this 1 year from today.


In yesterday’s Early Look, for some reason this sentence got a lot of attention/feedback: “I haven’t been this bearish since the fall of 2007.” So I’ll reiterate that this morning with one caveat – I haven’t been this bearish on US stocks since yesterday.


In other news, the #bubble formerly known as Bitcoin dropped to $469 today.


And everyone and their brother seems to think that bonds are finally going to prove them right (going down). So I’ll reiterate the bullish on US #Q3Slowing call (bullish on the Long Bond, in TLT, EDV, and BND terms) too this morning.


Since no one on consensus TV will be watching anything but AAPL today, here are some Bond Market levels to monitor:


  1. Immediate-term TRADE risk range of the 10yr UST Yield has widened to 2.31%-2.51% (widening ranges are bearish)
  2. Intermediate-term TREND resistance line for the 10yr Yield = 2.81%
  3. Immediate-term TRADE risk range for the 30yr UST Yield has widened to 3.03-3.29%
  4. Intermediate-term TREND resistance for the 30yr Yield = 3.46%


That’s why I am taking our allocation to Fixed Income (Hedgeye Asset Allocation Model) to 91% of its max this morning. My “max” allocation to any asset class is one-third of total assets.


If I was running my hedge fund, what the 0% US Equity allocation implies is a net neutral (fully hedged on a beta-adjusted basis) book. And my net long position to International Equities would be 16% (and rising) on pullbacks to the low-end of my risk range.


If you’re at CS telling people it’s different this time – best of luck. Crossing the bubble is a big business, so make sure to get either a big allocation or commission! Forget 2007, the drawdown risk in billions of #bubble market cap terms is more epic than it was in 2000.


My immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.31-2.51%


RUT 1154-1179

VIX 11.34-13.56

EUR/USD 1.28-1.30

Pound 1.61-1.64

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Crossing The Bubble - Chart of the Day

BNNY: Closing Best Idea Short

We added short BNNY to the Best Ideas list on 4/7/2014 at $37.16/share.  Since this time, FY15 EPS estimates have been revised down from $1.13 to $0.90.  However, we knew the biggest risk to our thesis was a potential takeout by a much bigger player in the food space.  Last night, this happened.


Yesterday, GIS agreed to buy BNNY for $820 million or 3.3x NTM sales and 24x NTM EBITDA.  We understand why GIS would be inclined to acquire BNNY.  Annie's is a strong brand that will benefit from being a part of the GIS distribution machine.


The downside of having shorts in the market, and especially in the consumer staples space, is excess liquidity and large companies, such as GIS, starving for growth.  The question now is when will K or CPB make a transformation acquisition, if at all?  We wouldn’t view the BNNY acquisition by GIS as a transformation, but rather a slight act of desperation.  With $200 million in revenues and $28 million in EBITDA, BNNY is a rounding error to the financial performance of GIS.  The only way GIS can make this deal look good is by excluding transaction expenses associated with it – otherwise, the deal is dilutive to GIS shareholders.


GIS is looking to the convenient meals and snacks category to help diversify its product portfolio.  The acquisition does not help solve the issues the company is having with its core cereal business.


Obviously, the deal will highlight HAIN and BDBD as other potential targets in the organic space.  While BDBD is a company with a strong brand (Udi’s) in the organic space, HAIN is a conglomerate with an unconventional business model.  This makes HAIN, in our view, an unattractive and complicated potential acquisition.  At the very least, we know the GIS will not be buying HAIN anytime soon!


Howard Penney

Managing Director


Fred Masotta



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