October 29, 2014

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We hosted a call with Dr. Leonardo Maugeri , former executive of Eni S.p.A., Italy's largest energy company. Dr. Maugeri is currently an associate with the Geopolitics of Energy Project and the Environment and Natural Resources Program at the Harvard Kennedy School's Belfer Center for Science and International Affairs. He is also executive director of the board of Vitale&Associati, an Italian investment bank, and chairman of Ironbark Investments, a U.S. based investment fund.


Replay Link


On a high level, Leonardo covered two major topics which are broadly misunderstood yet heated topics in the energy space currently:

  1. The underestimated technological advancement in oil and gas extraction from shale resources and its impact on the marginal cost of tight oil and shale gas production
  2. The opportunities and obstacles for U.S. participation in global LNG trade



1.       Technological Advancement of Extraction From Shale Resources

  • Most analysis has underestimated technological advancement in production and recovery efficiency
  • Model-driven analysis in this space anchors on old information, holding rapidly changing variables static, rather than leaning on real-time, data-driven facts

The biggest mistake in consensus analysis is that it does not accurately weigh each production area within a formation. It uses a gross average for each area within a formation with each area equally weighted.

At the end of the day the lowest cost areas are by far the largest producers. For example McKenzie County, ND in Bakken makes up almost 1/3rd of the formation's production and is by far the lowest cost area with a break-even price in the $20-$30 per barrel range.

Current break-even costs (full-cycle) calculated as capital cost + operating cost + 10% hurdle rate (IRR) yielded the following breakeven prices:

  • Lowest cost plays in Bakken (46% of total) have a break-even cost of less than $29/barrel
  • 80% of Bakken plays have a break-even below $42/barrel
  • Just 7% have a break-even price higher than $70/barrel


2.       U.S. Position in Global LNG Trade

  • There are many LNG projects underway globally that will bring an excess of supply online
  • LNG additions that are expected to materialize have assumed much higher global LNG prices at the onset of the projects
  • Australian, Canadian, and Mozambique production costs range between $15-$18/MMbtu, and this is higher than the market prices for LNG in Japan and China which are the highest priced regions in the world ($14-$16/MMbtu on average)
  • The only LNG export additions that will contribute to the liquidity in the LNG global trade arena will be in the United States
  • U.S. plays are the lowest cost opportunities. However, current new projects even seem uneconomical at current European and domestic prices:
    • For example,  the marginal cost of the Cheniere Energy LNG export terminal (first one to be approved) is approximately $3.5/MBTU
    • Russia and Nigeria are still more economic and they will be able to wage a price war on the U.S., hindering our ability to tap traditional European markets.

What is OPEC’s likely reaction in the near future?

In short, formal production cuts from OPEC and/or individual production cuts from OPEC members next month at the November 27th meeting (or prior) are highly unlikely.

  • OPEC countries at large underestimate the technological advancement and longevity of the non-traditional, North American plays (which would relieve incremental stress for a production cut near-term).
  • The issue of overcapacity both currently and moving forward in a global slowdown has at least sparked the conversation of production cuts within OPEC negotiations, but collective agreement near-term (and at these non-threatening price levels) among member countries as to who will cut production.


Macro Team 


Takeaway: For OCT-to-date, the “buy-the-dip” crowd is winning. Who wins from here will be increasingly dependent on the data – which continues to sour

Congratulations Are In Order

Kudos to anyone who bought (or told you to buy) the October 15th lows around 1820 on the S&P 500 and 1040 on the Russell 2000; “off the lows” though today’s closing prices, those indices are up +9% and +10.5%, respectively.


Double-kudos to anyone who sold (or told you to sell) the BABA-bubble highs around 2019 on the SPX and/or who told you to be out of domestic small cap equity style factor all year; from the S&P 500’s all-time high through today’s closing price, the market is down -1.7% and the Russell 2000 remains down for the YTD at -1.2%.


Triple-kudos to anyone who nailed both of those moves – if for no other reason than they fact that they possess superior talent at playing the “game of chess” that is institutional investing.


Enough With the Celebrating... Where To From Here?

Going forward, the directional outlook for U.S. equity market appears increasingly tough:


  1. Weak hands have likely been both shaken out of and enticed back into the market from a gross and net exposure perspective.
  2. Meanwhile, domestic high-frequency growth data is readily deteriorating, at the margins.
  3. On top of all this, falling inflation expectations are begetting rising expectations of an increasingly accommodative Fed.


In the context of these three factors, our bearish bias on the U.S. equity market hasn’t changed. If anything, Consensus Macro remains oddly convinced of a pollyannaish economic outlook:




Unfortunately, the data is becoming increasingly unsupportive of that narrative. Specifically regarding point #2, the two drivers of any U.S. economic expansion (i.e. household consumption and CapEx) appear to have lost considerable amount of steam of late. 


Let’s ignore the horrible SEP Retail Sales print (falling gas prices, anyone?) and focus specifically on today’s SEP Durable Goods and OCT Conference Board Consumer Confidence numbers.


Brutal Durable Goods and CapEx Demand
Core Capital Goods dropped the most in 8M (-1.7% MoM) and Durables ex-Defense & Aircraft – i.e. the stuff the average household purchases – was down for a second consecutive month at -0.3% MoM; this was the 1st such instance of back-to-back contraction since the weather-induced weakness we saw in the first quarter.


MAJOR Consumer Confidence Head-Fake
At face value, the OCT Consumer Confidence print was a huge win for anyone who doesn’t really do macro. Specifically, the headline figure inflated to 94.5, which was the highest reading since a 95.2 reading back in OCT ’07.


Recall that this index peaked back in JUL ’07 at 111.9 – or right at the 61.8% Fibonacci retracement level relative to the JAN ’00 peak and MAR ’03 tough. Assuming this trend of lower-highs in consumer confidence continues alongside the structural marginalization of the median-to-low-end consumer, we’re just shy of that key 61.8% retracement level relative to that same peak and the FEB ’09 trough.




Buying stocks at/near the cycle peak in consumer confidence – or at/near cycle peaks in other late-cycle economic indicators (e.g. labor market, corporate earnings and investor sentiment) – has proven to be a VERY unprofitable exercise for the consensus “buy-the-dip” community (think: U.S. equity returns during 2000-02 and 2007-09).


Underneath the hood, results of the Conference Board’s “Plans to Buy Within 6M” sub-survey portends further weakness in household purchases of durable goods: 


  • Automobile Purchase “Yes”: slowed to 10.8 in OCT versus 12.1 in SEP
  • Home Purchase “Yes”: flat at 5.1 in OCT
  • Major Appliances Purchase Total Plans: slowed to 49.1 in OCT versus 51.5 in SEP


Headwinds Developing at the Micro Level as Well

For those bottom-up investors that prefer to “speak with management” in formulating their top-down views, let’s look at the Q3 earnings season-to-date, which is showing a VERY key component of both the market and the economy sucking wind of late – i.e. Consumer Discretionary.


Specifically, 998 of the 2,989 stocks comprising the Russell 3000 Index (~98% of investable U.S. equity market cap) have reported thus far, showing aggregate sales growth of +6.0% and aggregate earnings growth of +13.8%. Heading up the rear in both categories is the Consumer Discretionary sector, where 126 of the 448 index constituents have reported thus far for aggregate sales and earnings growth of +3.2% and -2.2%, respectively.






Janet's Out to Lunch

Regarding point #3, one would assume the Fed can’t go from lacing investors with QE3 drugs straight to plugging them QE4 baggies in such a short order – especially not with the “data-dependent” Janet Yellen at the helm. And since most economic data points come out on a monthly basis, it could be at least ~3M before the Fed has enough political cover to do anything – even though we’ve all agreed to agree whatever policy prescription they eventually decide upon will have little-to-no impact as it relates to stimulating economic growth.


On that note, our proprietary models are indeed supportive of rising expectations for easier monetary policy in the U.S., but only marginally. Stock prices, consensus expectations for growth, reported economic data and the labor market all need to decline/slow further and/or deteriorate for the Fed to be able to use “the data” to support introducing an incremental Policy To Inflate.




Remember Late-2007?

To top it all off, the current stock market trajectory overlays almost perfectly with its late-2007 analog – which is the last time consensus was as wrong on the outlook for domestic economic growth as they are today:




All told, such analyses are indeed frightening in the context of near-universal bullishness on U.S. equities...


Trick or treat!




Darius Dale

Associate: Macro Team

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%


Takeaway: Q3 margins were solid but Wynn highlights mass margin pressures beyond Q3. Estimates for most of the Macau operators need to be reduced.

Q3 a beat but conference call downbeat






  • Mass gains offset VIP losses
  • Central govt very aggressive on corruption and misconduct
  • Still very bullish on Macau
  • Wynn Palace:  on target, on budget
  • Non-gaming offerings on new Cotai properties will be much better
  • Massachusetts: just finished casino design


  • Disappointed with market
  • HK protests disrupting business community
  • October 2014:  had perfect storm; lowest hold ever (had held 0.9% at one point)
  • Mass hold % was really high: have no clue on normalized hold - Hedgeye thinks the high Mass hold contributed to the better Macau margins and drove most of the beat
  • Smoking ban:  do have an impact but not major with respective to revenues
  • Mass increasing because of pressure to VIP? Yes.
  • Margin pressure in Macau? Yes. Competition is very intense resulting in either market share loss or margin loss.
  • Very dramatic capacity coming at Wynn Macau hotel: 2 new VIP areas in January 2015.
  • Mass market margins have been constant over last 3 quarters (+/- 100 bps) Have seen premium mass margins stabilize.
  • October:  more margin pressure going forward. 
  • $56mm incremental spend on Phase II Cotai:  1/2 of it due to pre-opening expense (incremental payroll/HR programs). Have protected contingency on construction budget.
  • VIP:  October is clearly worse than in the past
  • WYNN shares Adelson's thinking (LVS):  if they increase promotional allowances and it can add to the bottom line, he will do it even at the expense of lower margins.
  • Last month, WYNN raised Las Vegas rates by 18% to OTAs
  • Las Vegas:  hoping 2014 EBITDA  will be above >$500; want to have the most profitable hotel in Las Vegas
  • Japan:  not sure what will happen. Thinks the Japanese government wants a domestic operator.
  • Direct VIP Turnover was relatively flat YoY in 3Q; VIP collection has been steady.
  • Junkets are cautious and being conservative. People are not spending lavishly. High-end brands (e.g. Louis Vuitton, Chanel) reporting declines. 

Cartoon of the Day: Hanging By a Feather?

Cartoon of the Day: Hanging By a Feather? - fed cartoon 10.28.2014


"We've been on bear island solo for all of 2014," Hedgeye CEO Keith McCullough tweeted earlier today. We remain there as we head into the almighty central planning decision tomorrow (Fed meeting) and Q3 GDP report this week.

subscribe to cartoon of the day


Takeaway: Q4 decelerating from a strong Q3 but new shareholder friendly financial policy and embrace of asset light strategy the key takeaway

"Need to grow. Leverage balance sheet to drive growth.  Will see use of Balance Sheet to drive growth... so stay tuned"   -- New CFO, Tom Mangas



CEO Fritz:



  • Key Trend lines continued in Q3, driving long-term demand
  • More volatility around our world:  Europe, ISIS, Ukraine, Ebola
  • Pleased with Q3 results - revenue, EBITDA, RevPAR

Q3 RevPAR trends:

  • North America - sixth quarter of record performance ~9% 
    • Hawaii slow due to Japan slowdown; ex HI, NA +10% 
  • South America continues to struggle
  • Central America strong with Mexico very strong +20% 
  • Europe 6%; France & German good
  • A/ME ~5% 
  • China ~9%
  • Asia ex China: flat 
  • Thailand, Vietnam, Malaysia, Japan:  all soft

Outlook for Q4 and 2015

  • Q4: WW RevPAR 3% to 5%
  • 2015 outlook: initial RevPAR 4%-6%
  • Moving quickly toward target leverage
  • Asset sales - more key transactions moving forward, hope for more news before year end.
  • Net rooms growth 2%, below 4% to 5% set last year - slower than forecast. Longer development lead times.

Deliver Value

  • Technology innovations - keyless check-in
  • App to catalog rooms features, SPG members share unique needs & preferences = greater loyalty
  • B2B loyalty offering with SPG Pro, replaced legacy programs

Thoughts on India

  • Follows China and UAE
  • Extended time with local partners
  • Exceptional time: 2nd largest market behind China, Local optimism, global trends playing out locally & propelling middle class, challenging as a place to do business


New CFO, Tom Mangas:


Attracted to Starwood

  1. Brands & Properties
  2. Believe in global secular trends
  3. Confident in shareholder value creation
  4. Joining a winning team & "help accelerate plans to growth ahead of peers in years to come"



Group total revenue up low double-digits with room nights up high single digits and rate up mid-single digits.


Exceptional Q3 group book activity with IQFQ up double-digits and bookings made in Q3 for 2015 up high single digits as well as very strong group booking activity for all future years. 


Leisure and corporate transient travel segments were both up in the mid-single digits. 


For Q4: transient is shaping up to be strong with revenue on the books up low double-digits similar to the second and third quarters.


Transient and group growth projected in the mid single digits in Europe consistent with what we've seen year to date.  Expect transient and Asia-Pacific up mid-single digits but group will be down with weaker demand from Thailand and Malaysia. 


Fees in line with expectations

Core fees: +7.3% and Core Fees = better metric


SVO:  lower average price offset by higher number units sold



Balance Sheet:

  • increased repurchase authorization
  • bond issuance $650 million for repurchase activity
  • implemented Commercial Paper program
  • repurchased 10.4 million shares = ~$857 million ~ 82.57/share
  • continue to be in the market in 4Q
  • cash return $2.3 to $2.4 million by year end 2014
  • net debt / ebitda 1.4 vs. rating agency calculated 2.5x
  • target 2.5 - 3x on rating agency basis
  • Debt to EBITDA at high-end (3x) by year end
  • Comfortable with 2.5x to 3x leverage, could move higher over the longer term


Q4 2015 Outlook:

  • Reduction driven by f(x) rates = $10 million
  • Ebola, Middle East conflicts, China
  • Yom Kippur shift
  • Core fees 2% to 3% in Q4
  • Because of Comm'l Paper program, no longer planning a timeshare securitization


2015 Outlook:

  • Catalysts for strong outlook
  • But still cautious global travel outlook, group pace up L/M SD
  • Lapping $30 million of non-recurring fees
  • Headwinds from f(x)
  • No incremental EBITDA from Design hotels in 2015


Q: Footprint growth

  • Focus on conversions in North America & India, US business key is finding new ways to accelerate growth in specialty select segment.

Q: Q4 2014 share repurchase 4-5 million shares

  • In market, more programmatic approach - get to about $500 to $550 million of repurchase activity in Q4 2014.

Q: Capital returns - higher leverage, balance return of capital vs. acquisitions?

  • Value BBB rating on debt, see company to be in the BBB zone of 2.5x to 3x, with asset sales drop below, with acquisitions get above but always track back into the zone. 
  • Will look at acquisition opportunities - especially on asset light basis.  As business mix shifts to asset light and lower volatility, then take leverage ratio up. 

Q: Dublin Westin Leasehold to franchise?

  • Not well structured, HOT carried volatility, covert lease to other agreement to mitigate volatility.

Q: G&A guidance increase - other lumpy items?

  • Mobile check-in technology largely all the increase, no mechanism to recover the expense over next few quarters.

Q: How much expect North America / International growth to slow in Q4 and 2015? 

  • Deceleration given geographic mix. Still see NA strong mid-single digits in Q4, seeing some weakness in Q4, shift in Citywides into Q3.  Q3 positive impact from Ramadan. Yom Kippur shift in 2014.  Good IYFY, Q4 general weaker for HOT, but momentum is still there for 2015.

Q: Citywide shift from Q4 to Q3?

  • Yes, shifts from Q4 into Q3.

Q: 2015 outlook weakness, why?

  • China pressures on ADR, lapping Sheraton Macao ramp, World Cup.  North America will be strong in same zone as 2014.  4% to 6% range is attractive and good start. 

Q: China

  • Momentum still exist in China, huge outbound travel.

Q: Time share - why sales slowing & current inventory?

  • Sold much of inventory, thus change in pace, need to find balance sheet friendly ways to maintain SVO.  But don't want SVO to be major growth engine, goal not to grow business but need sufficient inventory to maintain momentum.

Q: Q4 slowdown, not one-off, how comfortable lead to reacceleration?

  • In any quarter, numbers move around a bit = variance around mean. Growth in revpar is via rate. 

Q: China pipeline vs. year ago?

  • Seeing a tendency for hotels to open 5-6 years versus 2-3 years, small number of developers with financial difficulties...not a huge number, some financial stress exists.

Q: In quarters same-store revpar vs. fee growth - why fee growth trail revpar growth?

  • See growth when growth in revpar... if not, then 1x fees or new hotels entering at a lower rate.  Slightly more select service hotels coming on line but mgmt fees getting better.  So function of 1x moves.

Q: IMFs lower, imply lower new hotel margin growth - how frame for 2015?

  • Continue to grow, significant non-U.S. contracts based to IMFs  85% of total IMFs from outside North America.

Q: Design Hotels - economics, strategy, opportunity?

  • Looking at ways to bring value to hotels, only recent had full conversations with Design Hotels senior management.

Q: View on SVO/timeshare?

  • Too soon to comment, clearly have world-class vacation ownership business. Will evaluate more intensively in near future.  Needs capital, not sure how to "square circle as move to asset light".  Stay tuned.


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