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Fiat Flashes

“They must often change who would be constant in happiness or wisdom.”



As prices and circumstances change; we do. We’ve learned this risk management lesson from many of this world’s great strategists. Unfortunately, most of them don’t have an opportunity to lead us out of this mess. Most of them are dead.


Fortunately, crises of government sponsored groupthink give birth to tremendous change. From the fall of the Roman Empire to the falling of the proverbial Berlin Wall of Wall Street conflicts of interest, opportunities come and go. Sell high and buy low. That’s my kind of capitalism.


I started this business during the crash of 2008 because I believed in one thing – doing my own work. Some of Connecticut’s finest hedgies called me names. Some of Nebraska’s hardest working said thank you. All the while, I took the good with the bad and kept doing that one thing…


In May of 2008, there were 4 of us here in New Haven, CT. Today there are almost 40. In May of 2008, Lloyd Blankfein said the crisis was in the late innings. Today, some of those who said the same about the sovereign debt crisis before the May Showers of 2010 wish they hadn’t too.


Today is a new day in modern finance. No matter where you were positioned yesterday, here you are. Today, there are new rules. Everything you say and do will be You Tubed and Twittered. Everything in finance is moving toward where most industries have already gone. In principle, transparency is winning. Opacity is losing.


Just like me, the professional forecasters on Wall Street and in Washington are storytellers. Barring any intra-game moving of the goal posts by Fiat Fools, our stories are all marked-to-market every day. Real-time accountability in all that we tell stories about is a tremendous progress born out of this crisis of leadership.


In the month of May, we have seen plenty of Fiat Flashes. These flashes of market selloffs were proactively predictable and we aren’t done with them yet. That said, every market has a time and a price. Our task as risk managers is to use the groupthinkers as our backboard to play against. The good news is that there are many more of them than there are us.


I covered our short position in the SP500 yesterday, then went long the SPY intraday. In doing so, I took our allocation to US Equities in the Hedgeye Asset Allocation Model up from zero percent to 3%. I am not levered up long. I still hold a 55% position in cash.


The freak-outs and Fiat Flashes that you’ll see this morning in pre-open futures trading is for reactive monkeys who weren’t proactively prepared for yesterday’s selloff. Some of them literally call risk management a 200-day moving average. Now that that their branch is broken, the 200-Day Moving Monkeys are flailing. Throw them a banana, buy some stocks, and cover some shorts. You’ll find happiness that way.


Yesterday, my inbox started heating up mid-afternoon. I had a lot of questions about price, volume, and volatility. As is usually the case, there aren’t a lot of moves to make after the fact, so I went and got a haircut.


This morning was nice, because I don’t have to use hair product anymore. I have revealed some change in the volume of greys relative to the story that my Canadian hockey hair was hiding. Changing my hair color and market positioning this morning is good. After all, a great strategist once said we “must often change” if we’d like to strive to “be in constant happiness.”


My long term TAIL line (3 years or less in duration) for the SP500 remains 1070. While the plan is always that the plan is going to change, for the next 3-days of market trading I’ll be doing a lot of waiting and watching for that line to hold. There is now a full 6% of immediate term upside in the SP500 to 1136, despite the market’s intermediate term TREND line of 1144 remaining broken.


For now, the largest of the Fiat Flashes in both upside to volatility (VIX) and downside in the market (SPY) appears to be behind us.


Have a great weekend and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fiat Flashes - 1

Fiat Fools (the lyrics)

As I mentioned in this morning’s Early Look, we have an army of you reading our work that believes in proactive risk management using real-time prices as leading indicators. We are looking for change in this business – and the change starts with being the change you want to see.


Below I have attached the most creative response to our call to arms, from a sharp Hedgeye subscriber.






Hi Keith,


I thought you would like – I put together a bailout version of Curtis Mayfield with a hint of hedgeye in it :) 


Sisters, Brothers  
Central Bankers And Their Backers
They're All Political Actors

Hurry, People Running From Their Worries
While The Judge And His Juries
Dictate The Law That's Partly Flaw.

Educated Fools

From-Uneducated Schools
Keynesian Fools

Bailing out is The Rule
Polluted Water In The Pool

And Obama’s Talking About hope
He Says Change is coming
He Says Change is here
He Says Don't worry

But They Don't Know There Can Be No Show
And If There's A Hell Below We're All Gonna Go
Everybody's Praying And Everybody's Saying
But When Come Time To Do
Everybody's Laying

Educated Fools

From-Uneducated Schools
Friedamite Fools

But They Don't Know
There Can Be No Show
If There's A Hell Below
We're All Gonna Go


Educated Fools

From-Uneducated Schools

Fiat Fools


Lord What We Gonna Do
If Everything I Say Is True
This Ain't No Way It Ought To Be
If Only All The Mass Could See

But Everybody Keeps Saying Don't Worry





Deflating Inflation's V

If our global macro risk management process had to be boiled down to 2 words they’d be prices rule. We feel that its critical to maintain data dependence. As prices change; we better change – that’s the model.


In recent weeks, one of our Macro Themes for Q2 (May Showers) has eroded the momentum embedded in one of our other Macro Themes for Q2 (Inflation’s V Bottom). Now this doesn’t mean that the V-Bottom recoveries in the charts Darius Dale has prepared below cease to exist. It simply means that the slope of the year-over-year price moves in both US Consumer and Producer Prices is setting up to rollover in the coming months.


As market prices go, so does inflation/deflation. There is no ideology here. There are no weightings. The mathematical slope of a line is absolute. As we head into the last month of Q2, if commodity prices were to stay where they are today ($65/oil and $2.95/lb copper), Inflation’s V will most likely deflate.


Now, to be clear, inflation is like politics – its local. So what I am talking about here is all about sequential probabilities in US CPI and PPI (as Trichet trashes the Euro, the Europeans will likely see inflation rise, like the British did this week with the highest inflation reading in 17 months at +3.7%).


For the month of April, both CPI and PPI in the US ticked down by 10 basis points sequentially. Yes, even by the government’s compromised and conflicted calculations, these were still inflationary (year-over-year) readings for both the CPI and PPI at +2.2% and +5.5%, respectively. But, and this is a big but, everything that matters to our prices rule model happens on the margin. On the margin, sequential decelerations (month-over-month) in Inflation’s V, are what matter most.


From a modeling perspective, timing the Deflating Inflation’s V is critical. Don’t forget that the lowest deflationary reading of Bernanke’s said “great depression” occurred in July of 2009 at -2.1% (ooh, ahh… what a great deflation reading that was in hindsight… I know, its sad). This mathematical reality only enhances the probability that Inflation’s V starts to deflate against the last of those very easy summer of 2009 deflation compares.



Keith R. McCullough
Chief Executive Officer


Deflating Inflation's V - 1


Deflating Inflation's V - 2

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1Q10 should give us more of an indication of whether the company’s LTO promotions are effectively driving same-store sales higher and whether current estimates are achievable.


RRGB is scheduled to report 1Q10 earnings after the close today.  RRGB’s 4Q09 earnings release and call left me with more questions than answers.  During 4Q09, same-store sales fell 10.5%, decreasing about 40 bps on a 2-year average basis from the prior quarter.  In the first 7 weeks of 1Q10, comparable sales declined 7.8% (including -0.8% impact from unfavorable weather) versus -4.6% in the same period in 2009, implying a 275 bp sequential improvement in 2-year average trends from 4Q09.  Despite this -7.8% result, management guided to flat to slightly lower same-store sales growth for 1Q10 and +2.4% to +3.4% growth for the full year. 


Management’s guidance is aggressive relative to what we have heard from its competitors and is completely reliant on the success of the company’s Spring LTO which was rolled out the week of February 15, combined with the supporting national advertising campaign launched on February 22.  The Spring LTO was scheduled to run 8 weeks supported by 4 weeks (over a 5-week timeframe) of national advertising that was expected to cost $6.7 million in 1Q10.  For reference, RRGB’s total FY10 TV advertising expense is expected to increase to $16-$17 million, up from $2.3 million in FY09.


Based on RRGB’s Fall 2009 LTO promotion, which ran in about one third of its company units, management is comfortable with its current guidance.  In 4Q09, same-store sales growth was -5.1% in the 10 markets which ran the Fall LTO supported by local TV advertising versus -14.9% in the non-TV markets.  This success is driving management’s optimistic growth goals for 2010.  Specifically, RRGB’s FY10 same-store sales growth guidance assumes a 5%-6% lift from its expected three LTO promotions.  I found this guidance slightly questionable because management, themselves, are not yet fully committed to the three promotions as they want to measure the success of the Spring LTO in 1Q10.


It is important to remember that a 1% change in reported same-store sales growth equates to about $0.18 per share on a full-year basis, which is why reported 1Q10 sales results are so important.  If the Spring LTO promotion proves as successful as management hopes, the company will follow with two more.  If it is not, they have said they will not invest the additional $10 million in advertising costs to support two additional LTOs, which would significantly impact management’s full year same-store sales guidance relative to the 5% to 6% lift expected from running all three.  Management also said that depending on trends during the Spring LTO, it would decide whether the two remaining LTOs would be focused on a specific price point, and if so, that it would prefer to move prices higher than the $5.99 price point used in 1Q10.  I can understand management wanting to raise the price point but moving away from a specific price point all together would likely be a mistake from a traffic perspective.


As I said earlier, management guided to a flat to slightly down same-store sales comp in 1Q10 and the street is at -2.2%.  A flat comp would assume a 490 bp sequential improvement in 2-year trends from 4Q09 relative to the casual dining industry’s 215 bp improvement, as reported by Malcolm Knapp.  Given that same-store sales were down 7.8% in the first 7 weeks of 1Q10, a flat comp implies that same-store sales improve to +6.1% in the back half of the quarter (16-week quarter).  The company is facing a much easier comparison of an estimated -10.8% in the back half of the quarter versus -4.6% in the first 7 weeks of 2009.  The +6.1% in the last 9 weeks of the quarter would imply another 385 bps of sequential improvement in trends on a 2-year average basis from earlier in the quarter.  That being said, RRGB has a lot riding on this Spring LTO and reported 1Q10 results could be a real turning point for the company from a top-line perspective, for better or for worse.


From a margin standpoint, it will be important to hear what RRGB says about commodity costs for the remainder of the year.  As of 4Q09, the company was guiding to 2% to 2.5% commodity deflation for FY10.  During the fourth quarter, lower food costs helped restaurant margin by 20 bps on a YOY basis and management commented that its average price of ground beef in the back half of 2009 was below 2008 prices.  Hamburger, which the company does not have under contract, accounts for about 11% of the company’s food and beverage costs and beef prices are moving higher.  Management pointed out on its last earnings call that beef burgers have increased as a percentage of the company’s sales mix as a result of the recent LTOs which have been focused on the company’s gourmet burger offerings.


RRGB – 1Q10 TURNING POINT - rrgb sss


RRGB – 1Q10 TURNING POINT - beef prices


Howard Penney

Managing Director

Game Time: SP500 Levels, Refreshed

While the behavior of masses is proactively predictable around the 200 day moving average, that’s all we use it for – to monitor behavior.


Today, I finally covered my short position in the SP500. The next risk management question would be, if you are covering it, why don’t you buy it? So, I did. We have taken the allocation to US Equities in the Hedgeye Asset Allocation Model from ZERO percent to 3%. From a price (1086) on the SPX, the SP500 is now a long for an immediate term TRADE.


Importantly, the TRADE line of support is converging closer to our long term TAIL line of 1070. So the way I would deal with this is buying some SPY here, then again as we approach that 1070 level, but using 1070 as your stop. There is a 1.5% gap between 1070-1086, and it’s going to feel really hard to believe in this math – that’s one of the primary psychological reasons why you should believe in your bid. Fade yourself.


On the bearish side of the market, updated lines of immediate and intermediate term resistance are outlined in the chart below at 1137 and 1144, respectively. If/when this market bounces, that’s your range to be making sales – as it was in the last week.


In the meantime, don’t ask people who missed seeing this coming for risk management levels of support.



Keith R. McCullough
Chief Executive Officer


Game Time: SP500 Levels, Refreshed - S P


Our NAV analysis is more exhaustive, and we shake out at a lower NAV than “consensus”.



JPM, our consensus proxy, values HOT’s Owned Portfolio at $6.6 billion or approximately $310k per key.  Given the firm’s aggressive $64 price target, we’d expect some pretty aggressive NAV assumptions.  And boy, did we find some aggressive assumptions.  Our NAV analysis values HOT’s Owned Portfolio at "only" $5.1bn or $241.5k per key or almost 18x 2010E owned, leased, and consolidated JV EBITDA.  So why are we so "conservative" compared to consensus?  For one, our analysis is more comprehensive including a review by our real estate consultant.  Second, JPM makes a mistake assuming HOT owns all these assets outright.  Some are joint ventures and leased hotels.





  • We’re about $25k per key below JPM’s Sheraton valuation.
    • The issue is that 7 of the hotels in this portfolio have over 500 rooms and with the exception of Sheraton Manhattan, the sheer size of the assets will cap their per key value.  Excluding the Sheraton Manhattan, the other 6 assets make up 57% of the owned Sheraton rooms.  For example, there aren’t many buyers for an asset like the Sheraton Centre Toronto Hotel for north of $300MM.
    • Airport hotels comprise another 12% of the Sheraton room base.  Airport assets typically fetch low per key values since they have no alternative "higher and better" use and attract a price sensitive customer.  For example, Sheraton Suites Philadelphia Airport and Sheraton Gateway Hotel in Toronto Int'l Airport are unlikely to fetch more than $125k per key.
    • There are only 3 assets in the Sheraton portfolio that we think would fetch north of $300K.
      • The Park Lane Hotel, which we estimate, is worth $750k/key (leased)
      • Sheraton Manhattan Hotel and Sheraton Diana Majestic Hotel (leased), which we estimate are worth $400k/key


  • We’re about $45k per key below JPM’s Westin valuation.
    • The largest HOT owned Westin is the Atlanta Peachtree Plaza.  It would be tough fetching significant north of $100k/key for that asset given its size and the massive oversupply in the Atlanta market.
    • Similarly, The Westin San Francisco Airport is unlikely to fetch more than $125k/key for the reason we already discussed above.
    • We estimate that only 3 Westin assets would fetch north of $300k per key.
      • The Westin Excelsior in Florence & Rome – roughly $500k/key
      • Westin Dublin Hotel - $350k/ key

St. Regis Luxury Collection

  • We’re about $100k per key below JPM’s Luxury collection valuation.
    • The Phoenician, which is the largest asset in this collection, making up 26% of the Luxury collection rooms, is in need of material ($100MM) capital improvements and is in a challenged market.  Arizona is only second to Vegas in terms of housing issues.
    • St Regis NY is the jewel of this portfolio.  We estimate that this asset would fetch $1.25MM/key.  In addition to the NY asset, we believe that only the Italian assets and the St. Regis Aspen would fetch north of $500k/key.  All in, these assets (including NY) represent just 31% of the rooms in the collection.
    • Park Towers BA are also unlikely to fetch more than $250k/key, given the economic reality in Argentina.
    • We’re pretty confident that St. Regis San Francisco wouldn’t fetch much more than $300k/key.
    • While the Spanish assets are nice, they are in secondary cities and the economy is in crisis.  We have them valued at $350k/key.

W Hotels

  • We’re about $150k per key below JPM’s W Hotels valuation.
    • Aside from the Times Square W, we don’t think a single asset in this portfolio is worth anywhere close to $425K/key.
    • Several W’s have recently traded at $200k handles.
    • 510 Keys or 18% of the W’s in this portfolio are at W’s in New Orleans.  Even OEH’s Windsor Court traded for only $137k/key last year.  JW Marriott in New Orleans traded for around the same per key price in 2008.

Four Points

  • We’re about $75k per key below JPM’s Four Points valuation.
    • Second tier markets and limited service – including and airport hotel… find me one asset that’s traded at 125k/key.
    • The last Four Points that traded in July 2009 went for $14k/key (in Revere, MA); another traded in May 2009 for $16k/key  (Minneapolis, MN).

Other Hotels

  • Bottom line – JPMorgan’s estimate on this portfolio looks about $150k/key rich and doesn’t account for the fact that the largest asset is a JV.
  • Starwood owns 6 non-proprietary branded assets.  Most of these assets have material amounts of deferred CapEx. 
    • The largest asset in this group - Boston Park Plaza - is not wholly owned by Starwood.  We believe that HOT owns 51% of the hotel.  Given the size of this asset and the amount of CapEx a new buyer would need to invest in the asset, we think that it would fetch in the neighborhood of $125k/ key
    • The Caesars hotels look like they haven’t had a refresh since the 80s; our real estate consultant pegs the value on those at $75k/key.

Since EBITDA is obviously depressed and current stock market valuations are huge, the bulls are using NAV to justify bulging price targets.  Fair enough.  Our comprehensive NAV analysis produces valuations well below what we consider consensus.  The $66k per key differential between JPM and us translates into $1.4bn in equity value or approximately $7.50 per share.  At our owned valuation of 18x EBITDA, it's hard to accuse us of being conservative.

Early Look

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