TODAY’S S&P 500 SET-UP – September 19, 2014

As we look at today's setup for the S&P 500, the range is 20 points or 0.76% downside to 1996 and 0.23% upside to 2016.                                          













  • YIELD CURVE: 2.05 from 2.05
  • VIX closed at 12.03 1 day percent change of -4.90%


MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: Leading Economic Indicators, Aug., est. 0.4% (pr 0.9%)
  • 1pm: Baker Hughes rig count



    • 8am: House Intelligence Chairman Mike Rogers, R-Mich., delivers keynote Intelligence and National Security Summit
    • 9:30am: Sec. of State John Kerry remarks on importance of inclusive economic growth at New Frontiers in Development forum
    • 2pm: Kerry chairs UN Security Council Iraq ministerial debate
    • 10am, 1:30pm: FCC holds open Internet roundtable discussions
    • 1pm: CVS CEO Merlo speaks at Nat’l Press Club
    • U.S. ELECTION WRAP: La., Colo., Kan. Polls; Adelson Donations 



  • Scotland rejects independence 55% to 45%
  • Alibaba raises $21.8b in U.S. IPO
  • Ellison becomes Oracle chairman as Catz, Hurd split CEO job
  • SAP to buy Concur for $129/share or ~$7.4b
  • Home Depot says data breach affected 56m payment cards
  • Arkema bids $2.2b for Total’s Bostik adhesives business
  • Telefonica to buy Vivendi’s Brazil unit GVT for $9b
  • JetBlue names Hayes as CEO as Barger leaving at contract end
  • Clorox says executive Benno Dorer to succeed Knauss as CEO
  • AIG says Wintrob departs after being passed over for CEO job
  • Goldman Sachs faces SEC probe on internship for Libyan: WSJ
  • Regulators said to weigh delay for separating banks’ swaps units
  • Exxon said to halt Arctic well drilling on Russian sanctions
  • Congress clears spending bill with U.S. aid to Syrian rebels
  • Lockheed said close to $4b F-35 deal with Pentagon: Reuters
  • U.S. said to see chance for progress in nuclear talks with Iran
  • Apple IPhone 6 Plus contains Hynix, BRCM, QCOM: iFixit teardown
  • China fines Glaxo $489m, ending investigation of bribery
  • U.K. prosecutors said to ready more charges on Libor this year



  • WTI Oil Falls as Fed Outlook Counters Supply Risk; Brent Steady
  • Fortescue’s Forrest Lauds China City Push as Iron Ore Slumps
  • Natural Gas Supply Gain Hides Risk of Winter Price Shock: Energy
  • Gold Falls Toward 8-Month Low as Fed Outlook Strengthens Dollar
  • Copper Heads for a Fourth Weekly Decline on Slowdown in Housing
  • Cocoa Climbs to Three-Year High as Ebola Seen Risk to Production
  • Wheat Extends Drop to 4-Year Low as Demand Wanes Amid More Crops
  • EU Emissions Drop Seen Accelerating as Lawmakers Mull Supply Fix
  • Earth Baked in Record Fashion This Summer Even If You Were Cool
  • Soybean Traders Bearish for Sixth Week on U.S. Harvest Outlook
  • Oil Clogging U.S. Rail Seen Constricting Grain Exports: Freight
  • Libya Resumes Oil Flows to EU as Africa Exports Remain Subdued
  • Rebar Falls to Record Low as Weak Property Sector Hurts Demand
  • India Monsoon Food Grain Output Seen Falling 6.9% to 120.3m Tons


























The Hedgeye Macro Team

















Why We Removed BofA From Our Best Ideas List (Plus 3 New Ideas) | $BAC $COF $OZM $LM

Hedgeye Financials co-heads Josh Steiner and Jonathan Castelyn discuss why they took Bank of America off their Best Ideas list and offer up three other long ideas.

Cartoon of the Day: Apocalypse Fed

Takeaway: Stocks notch a new all-time high as the Yellen Fed remains dovish.

Cartoon of the Day: Apocalypse Fed - Apocalypse Fed 09.18.2014


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McCullough: The Return of Deflation?


Hedgeye CEO Keith McCullough explains during today’s institutional call why we might be heading into Quadrant 4 of his model. That’s when both growth and inflation slow. Here’s how to position yourself.


Takeaway: Buy RHP for exposure to hotels, a better than expected group outlook, and an attractive dividend yield/valuation

Adding to Hedgeye Best Ideas.  Conference call on Monday September 22nd.


We are adding RHP to the Hedgeye Best Ideas as a long.  Amid a very favorable fundamental backdrop for domestic hotels, RHP is the REIT with the greatest exposure to the group segment.  Our research indicates group could show the most upside versus expectations this year and next.  Indeed, we expect Q3 and Q4 earnings beats for RHP and we enter the 2015 fray above the Street once again.  RHP appears undervalued versus its comp space and with the potential for a major dividend increase and better earnings, we see the potential for a total return of 40% over the next 12-18 months.  


We will be hosting a conference call on Monday September 22nd at 11am to review our investment thesis in more detail. Please email for call details.


  • Investors should be bullish regarding RHP’s leading exposure to the group segment
  • Our primary research suggests the group outlook is stronger than the consensus view and should lead to positive 2014 and 2015 earnings revisions
  • Street overestimating share count, resulting in a $0.25-0.45 AFFO/share understatement on the incorrect share count alone
  • Marriott affiliation is an advantage that offsets the single tenant risk
  • EV/EBITDA valuation discount of over 3 turns looks attractive
  • A likely dividend hike that should improve current yield of 4.7% - already above industry average


The lodging C-corps (the operators) such has Hilton, Marriott and Starwood for the past two quarters have noted a recovery in bookings and events associated with group travel.  Ryman Hospitality Properties, “RHP,” is the lodging REIT with the greatest exposure - approximately 80% of total bookings are group bookings.  We also see a recovery in food and beverage spend.  We believe the lodging sector will continue to experience stronger fundamentals on a prolonged trajectory.  This in turn will result in better revenues, EBITDA and dividend growth for RHP.  Today, RHP trades at a discount to its lodging REIT peer group.



RHP is the REIT with the greatest exposure to the recovery in Group Bookings & increased F&B spend.  Recent comments from the hotel c-corps (operators) indicate the group bookings segment is strengthening.  Here are some comments made during Q2 conference calls:

  • Hilton: 
    • Group Rate +5% systemwide and will pick up in H2 with M/HSD growth in 2H14 and ancillary group spend was +14% during Q2
    • Big 8 hotels will have margin uptick driven by group position
  • Marriott:
    • Group demand is looking very good. Marriott Hotel group bookings made in the second quarter for the next 12 months increased 8%.
    • Marriott hotel brands reported group RevPAR of roughly 3% in the quarter, but MAR estimates it would have been up roughly 5% excluding the timing impact of the shifting Easter holiday.
    • For full-year 2014, group booking pace of the Marriott brand in North America remains up about 5%.
    • Group booking pace is very strong in the third quarter.
    • Q2 group business booked for next 12 months:  +8%
    • July/August huge bookings months for group
  • Hyatt:
    • Group pace trending +8% for 2015
  • Starwood:
    • Group pace good for in the year, for the year, but slower for 2015 but still mid-single digits range is on par with historical booking trends
  • Host Hotels & Resorts
    • Group booking pace very strong: revenues tracking 6% higher
    • Group IQFTY up 14%
    • Seeing a significant increase in corporate business, especially in Q2
    • IQFTQ room nights up 9%, rest of 2014 nights up 5% translates into revenues up 14%. 
    • ADR significantly higher YoY


Over the past two weeks, we have called meeting planners and group agents across the country in an effort to take a current pulse of the lodging business and group booking trends.  As a result of our conversations, we are more upbeat and have conviction that lodging fundamentals remain very strong. 


Specifically, we learned the group booking window is lengthening; however, the hoteliers are holding back inventory to yield up ADR with the transient segment. Consequently, hoteliers are creating a greater in the quarter for the quarter or in the year for the year business strategy.  Categorically, all groups are spending significantly more on hotel rooms.  Due to substantially higher ADRs in primary cities, many agents indicated a willingness by groups to travel to secondary and tertiary cities or going to the suburbs to save on absolute rate but at higher rates relative to prior years at booked hotels.


Regarding food and beverage budgets, all agents indicated F&B budgets are increasing but several agents noted larger budgets because of more attendees.   Interestingly, Nashville, Denver and New Orleans were top cities most often mentioned for desired destinations.  Las Vegas was often mentioned as a desired destination but very difficult to book due to casino hotels extracting “unnecessary” and “outrageous, miscellaneous fees”.


Gaylord hotels are viewed as a great and viable alternative to Las Vegas, West Coast, & New York convention centers.  Also, Gaylord group rates are typically $50 to $100 lower per day than Las Vegas, San Francisco, San Diego or New York.  As a result, the group meeting planners (and attendees) have more dollars to spend on food and beverage dining/events.



Marriott International is the operator of Gaylord hotels. Marriott is able to draw upon its more than 40 million Marriott Rewards members worldwide for group or transient bookings.  Marriott dominates the large group booking and distribution network with nearly 70 convention hotels worldwide.  Marriott’s system is ranked #1 preferred brand for booking large meetings requiring 200 to 2,000 rooms.  On a more local basis, more than 11 million Marriott Rewards members live within 300 miles of a Gaylord Hotel to in-fill transient nights at Gaylord hotels.  


On a yield basis, 1% of occupancy = 50% flow through while 1% of ADR = 85% to 90% flow through.  Higher transient ADRs coupled with higher occupancy, lifts RevPAR.  The resulting higher RevPAR has a significant flow through to EBITDA and FCF.  Finally, Marriott’s operating system also affords better purchasing power than the former Gaylord's owned and managed systems.


The culmination of the stronger group bookings trends, higher ADRs, optimized transient yield strategy coupled with Marriott’s operating system offset any single tenant risk issue for RHP.


For 2H14 and 2015, based on our primary research for continued strength in the group segment coupled with the optimization of the Marriott operating strategy, forecasts are higher than the Street and guidance.  We believe that management has been conservative with Q3 and Q4 guidance, possibly due to the upcoming conversion date of the company’s Convertible Senior Note. 




We forecast significant dividend growth for RHP from $2.30/share current annual dividend (or 4.6% current yield) to $2.60/share in 2015 and increasing to $3.00/share in 2016.



The most misunderstood aspect of the RHP model is how the street models outstanding shares for RHP related to the 3.75% Convertible Senior Notes, maturing October 1, 2014. 

  • Unlike the many analysts on the sell-side, we are NOT modeling an increase in share count, nor are we modeling an equity issuance to address the maturity.  We have seen several models that include a higher share count assumption that could be related to the retirement of the Convertible Note.
  • Every 1 million of additional diluted shares reduces 2015 FFO/share and AFFO/share by about $0.08-.09/share. We think the Street is approximately 3-5 million shares too high in their diluted share count for 2015.
  • As of June 30, 2014, $229.461 million of notes remained outstanding 
  • The Convertible Notes are convertible through the close of business on September 29, 2014 pursuant to the indenture
  • Concurrent with the offering of the Convertible Notes, the Company entered into convertible note hedge transactions with respect to its common stock with counterparties affiliated with the initial purchasers of the Convertible Notes, for purposes of reducing the potential dilutive effect upon conversion of the Convertible Notes.
  • “The Balance Sheet Two Step”:  On September 29, 2014 (prior to the end of the current quarter), the Company will draw down $229.461 million (assuming no change since June 30, 2014) on its corporate credit facility (revolver) and hold the proceeds as “cash” as an asset on the balance sheet.  Then on October 1, 2014 (Q4 2014), the Company will retire/payoff the Convertible Senior Notes with the "cash".
  • The equity share count should not increase materially despite the conversion due to the prior hedge transaction.


RHP is undervalued versus peers in our opinion.  Today, RHP trades at less than 11x 2015 EV/EBITDA versus the peer group average of 14x 2015.  RHP trades at a 2015 dividend yield of 5.5% versus 4.1% (excluding BEE dividend yield) based on our forecasted dividend for RHP.  Fair value for RHP is $66-68/share based on RHP reaching 13x EV/EBITDA valuation levels next year plus the current 4.7% current dividend yield (forecasted to increase significantly over the next six months).  Total return potential could exceed 40% over the next 12-18 months.


RHP is the REIT with the greatest exposure to the group segment which is where we see the most upside vis a vis Street expectation.  Thus, current earnings are likely to be exceeded and dividends raised.  RHP is undervalued versus its comp space and we see the potential for a total return of >40% over the next 12-18 months.

After Being One of the Street's Biggest Bulls on Starbucks, Hedgeye's Howard Penney Turns Bearish

Takeaway: While Starbucks is still a great company with an enviable management team, the stock is far less attractive today.

After Being One of the Street's Biggest Bulls on Starbucks, Hedgeye's Howard Penney Turns Bearish - hwp 1


Editor's note: The following excerpt below is the introduction to Hedgeye restaurants sector head Howard Penney's new 80-page slide deck detailing his short thesis on Starbucks. After five years of being one of the street's biggest bulls on SBUX, Penney now thinks "the stock is far less attractive." For more information on Penney's research please ping


It’s been seven years since Howard Schultz penned his now famous memo to Starbucks’ management and employees, outlining where the company had gone wrong and what it needed to do to get back on track, and it’s been six years since we first turned positive on the stock.

But nothing lasts forever. McDonald’s went on an eight-year corporate revival before it lost its luster and we fear Starbucks is nearing the end as well. In this presentation, we will outline a number of concerns we have with the company which makes us believe the street is too optimistic about its future prospects.


After Being One of the Street's Biggest Bulls on Starbucks, Hedgeye's Howard Penney Turns Bearish - hwp sbux

We recently read that Harvard Business School Professor and Historian Nancy Koehn has studied Starbucks and its leader, Howard Schultz, for nearly 20 years. She recently released a new HBS Case Study, “Starbucks Coffee Company: Transformation and Renewal,” which traces “the dramatic arc of the company’s past seven-plus years – a period that saw Starbucks teeter on the brink of insolvency, dig deep to renew its sense of purpose and direction, and launch itself in new, untested arenas that define the company as it exists today.”

While all of this may be true, we too have been following Howard Schultz and Starbucks for over 20 years. Unlike Ms. Koehn, however, we did not go to Harvard and we’re not HBS Professors. But we did release a Hedgeye Black Book in early 2009 detailing why we believed Starbucks was a great company and the stock was a great buy.


Today, while Starbucks is still a great company with an enviable management team, the stock is far less attractive. More specifically, and perhaps to the heart of the topic, we believe the company’s domestic business is maturing and management is attempting to stem this decline by rapidly deviating from its core. With sentiment near an all-time high, this HBS Case Study merely seems like another example of a Starbucks “top.”

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