• run with the bulls

    get your first month

    of hedgeye free


WMT: Don’t Count Out WMT

We like WMT into any noise around a broker downgrade this morning. Let’s face some facts, doing store checks on a $183bn company isn’t too relevant. They may offer up some nice anecdotes, but we’ll rely on cold hard data.


There’s chart below that shows the spread in Wal-Mart US comps back to the beginning of 2008 vs. US Retail Sales (columns). The line represents the spread between WMT comps less US Retail Sales.


The spread grossly favored WMT at the start of the recession and the consumer started to trade down, but then the economic recovery and the Wal-Mart’s own lack of execution reversed that spread entirely for 4Q09 through 1Q11. What’s notable, however, is the incremental change this past quarter showing a slight downtick in the spread. Hardly consequential, but we look at everything on the margin. And on the margin, this stopped moving against WMT.


If you believe, like we do, that the ‘trade down’ theme for the consumer is still very much alive and likely to accelerate, then WMT is one of the best places to look.


Longer-term (TAIL) we definitely like Target here better. But there’s more risk in that model near-term.

From a TRADE and TREND perspective, stick with WMT.  


WMT: Don’t Count Out WMT - wmt

Institutional Constraint

This note was originally published at 8am on July 28, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We have many constraints as investors.”

-Seth Klarman


Baupost’s Seth Klarman is no stranger to going to cash. Neither is he shy about telling it like it is about how the game of Institutional Asset Management works. The aforementioned quote has nothing to do with the self-directed individual investor. It has everything to do with Institutional Constraints.


“Constraint”, per Wikipedia, “is an element factor or a subsystem that works as a bottleneck. It restricts an entity, project, or system from achieving its potential with reference to its goal.” Institutional Constraint isn’t what Klarman calls it, but I think he’d agree.


In Grant’s back in Q1, Klarman said “we want short-term performance, and are measured by this. There is enormous pressure from clients for short term performance. Mutual funds compete in a relative space. What’s important is absolute returns. The way people do this is forced mediocrity. To do absolute performance, you have to bet against the crowd sometimes.”


Sometimes betting against the crowd too early makes an investor wrong. Sometimes betting against your current positioning can make you less wrong. In a market like this, where Institutional performance chasing is one of the most misunderstood long-term TAIL risks we’re observing, price levels matter – big time. So does considering them on a multi-factor, multi-duration basis.


What does multi-factor mean?


First, let me tell you what it doesn’t mean:

  1. Point and click 1 factor models of simple moving averages (50 day, 200 day, etc)
  2. Being sucked into the Sentiment Vacuum of 1 topic (Debt Ceiling is the #1, #2, and #3 most read on Bloomberg this morning)
  3. Considering Global Macro risk from the vantage point of 1 country and/or 1 asset class (“what’s the Dow doing?”, c’mon)

Within the construct of Chaos/Complexity Theory (my modern day market practitioner’s answer to stale academic Keynesian Dogma), multi-factor is as multi-factor does. You need to build a risk management process that absorbs multiple price, volume, and volatility signals, across multiple asset classes, and across multiple durations.


If I had 10 Chinese Yuans for every person I’ve met in this business who says “well, the chart looks good”, I’d have a lot more money to fund Hedgeye’s growth. What, precisely, do charts mean? The answer to that is as simple as the deep simplicity Chaos Theory aspires to achieve. The chart looks as good as the math you have embedded in the picture!


If bells weren’t going off in your Global Macro Risk Management Process yesterday, I suggest you get a new one. Here are some of the alarms going off in mine that had me take my Cash position back up to 46% from 37% (where I started the day):

  1. EUROPE – both European stocks and bonds are turning into a proactively predictable train wrecks. Our research catalysts remain crystal clear (accelerating debt maturities for the majors through September) but, more importantly, now all of our TRADE and TREND lines across every major European stock and bond market (ex-Russia) have been broken and confirmed by volume and volatility studies.
  2. USA – stocks broke their intermediate-term TREND line of support (1320 in the SP500) and short-term bond yields finally busted a move above my 2-year yield TRADE line of resistance (0.41%).  Credit risk derived by market morons in Congress will be priced on the short-end of the curve (where Bernanke has tried to mark it to model for 2 years), so watch that 0.41% line like a hawk.
  3. GLOBALLY – China’s Shanghai COMP TREND line = 2831 (broken); India’s BSE Sensex TREND line = 18,578 (broken); German DAX TREND line = 7251 (broken); FTSE TREND line = 5985 (broken); SP500 TREND line = 1320 (broken); Russell2000 TREND line = 827 (broken); WTIC Oil TREND line = 103 (broken); EUR/USD TREND line = $1.43 (schizophrenic).

No one at Hedgeye has ever said 2011 Global Growth or 2H2011 Earnings Expectations were priced properly. If you close your eyes to all of my quantitative and research factoring across asset classes and just focus on those 2  - they are VERY large fundamental factors to consider having market impact above and beyond these yahoos in Congress.


Look, I’m not saying I got all of this right. What I am simply saying is that we, as a profession, can get a lot better at this if we just open our minds to re-thinking risk and re-working our asset allocations as the big factors are changing. The market doesn’t care about our respective investment styles, compensation mechanisms, or Institutional Constraints.


My immediate-term ranges for Gold, Oil, and the SP500 are now $1603-1624, $96.03-100.32, and 1298-1316, respectively. I cut my US Equity exposure to 3% (from 9%) in the Hedgeye Asset Allocation Model yesterday.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Institutional Constraint - Chart of the Day


Institutional Constraint - Virtual Portfolio




TODAY’S S&P 500 SET-UP - August 1, 2011


Large bond fund managers who bet on US “credit risk” are either unwinding that theme or need to now – across the US Treasury curve bonds are breaking out to new YTD highs and the US Dollar is strengthening, making higher-all-time lows.  As we look at today’s set up for the S&P 500, the range is 41 points or -0.93% downside to 1275 and 2.26% upside to 1316.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: +195 (+1223)  
  • VOLUME: NYSE 1110.41 (-8.19%)
  • VIX:  25.25 +6.36% YTD PERFORMANCE: +42.25%
  • SPX PUT/CALL RATIO: 2.41 from 2.30 (4.57%)



YIELD SPREAD – one of the highest conviction  long positions we’ve had in 2011 to express our Growth Slowing theme has been a US Treasury Flattener (FLAT); the Spread b/t 10s and 2s is making a new YTD low this morn as bond yields collapse alongside awful US GDP and ISM reports.


  • TED SPREAD: 16.06
  • 3-MONTH T-BILL YIELD: 0.10%
  • 10-Year: 2.77 from 2.82    
  • YIELD CURVE: 2.39 from 2.46


  • 7:45 a.m./8:55 a.m.: Weekly ICSC/Redbook retail sales
  • 8:30 a.m.: Personal income, est. 0.2%, prior 0.3%
  • 8:30 a.m.: Persona spending, est. 0.1%, prior 0.0%
  • 11:30 a.m.: U.S. to sell $23b 4-wk bills
  • 4:30 p.m.: API inventories


  • McGraw-Hill reiterated it was reviewing its portfolio after holder Jana Partners said it had discussions with co.
  • U.S. light-vehicle delivers in July, to be released later today, may have run at 11.8m seasonally adjusted annual rate, trailing the 12.5m rate in 1H, analysts’ estimate



OIL – it may have been out of the headlines, but that doesn’t mean its daily price/volume/volatility signals cease to exist; with the USD strengthening, WTIC oil has broken its TRADE line of support ($96.21) this morning and that matters since Energy is literally the only S&P Sector left that’s bullish in US Equities on both TRADE and TREND durations


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Gold Advances to Near Record as Slowing Growth Increases Demand
  • Sugar Falls for Fifth Day on Brazilian Exports; Coffee Rises
  • Copper May Climb as Strike Continues at World’s Biggest Mine
  • Bank of Korea Boosts Gold Holdings to ‘Reduce Investment Risks’
  • BHP Copper Miners ‘Optimistic’ on Agreement to End Chile Strike
  • Wilmar Says to Raise Cooking Oil Prices in China by About 5%
  • Coffee Seen Rising 10% in Two Months as Vietnam Delays Exports
  • Mining Takeovers Heading for Record in 2011, Ernst & Young Says
  • Rice May Sustain Rally as U.S. Acreage Declines, Ofon Says
  • Japan Widens Cattle Shipment Ban as Tochigi Beef Contaminated
  • BullionVault Lures Most Funds Since Lehman’s Collapse on Haven
  • Barrick Says Gold to Remain High on China, India Inflation



EUR/USD – remains the currency pair that makes the world’s correlation risk go round and this morning we’ve seen another decisive break-down below our $1.43 TREND line; Europig Equities are getting slaughtered – we have no long exposure to anything European Equities; we are long USD and short EUR


THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: a royal Europig mess continues with FTSE and DAX breaking both TRADE and TREND lines as Italy and Spain collapse (stocks and bonds)
  • UK July construction PMI 53.5 vs consensus 53.0, prior 53.4

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: finally breaking some critical TRADE lines of support; Nikkei and KOSPI in particular down hard through lines that matter last night.
  • Australia June residential building approvals (3.5%) vs cons +2.5%.
  • Japan June wages (0.8%) y/y.
  • Japan June monetary base +15% y/y to ¥113.73T

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

Repetitive Drills

“Even in his repetitive drills he had a way of making the mundane seem important.”

-David Maraniss (on Vince Lombardi)


That quote comes from an inspirational excerpt on page 212 of “When Pride Still Mattered” where David Maraniss boils down the deep simplicity of Lombardi’s coaching process. If you’re trying to lead a country, company, or family this morning, I confidently submit that consuming this perspective is well worth your time. America needs you, The People, to lead us out of this mess.


Vince Lombardi was “the football variation of a masterly novelist who could take the muddle of everyday life and bring clarity and sense to it, and allow readers to see, for the first time what was in front of their eyes all along. Bart Starr was on the edge of his seat, listening – getting it for the first time. All the crap was gone; this was right to the bone, simple, yet so refreshing and exciting.”


“Everything was accounted for, labeled, identified, put in order, fundamental and sound. You could tell that the coach believed in what he was doing. His tone of voice, his posture, his manner – it all made you believe. It all made sense.”


So let’s grind. This globally interconnected marketplace all makes sense – you just need to account for “everything”:

  1. US TREASURIES – across the curve, 2s, 10s, and 30-year UST yields are making fresh YTD lows this morning in the face of a very wrong bet by some of our industry’s losing teams that suggested there was US “credit risk” coming down the pike. Not today.
  2. US DOLLARS – had a breakout day yesterday, trading right back above an important line of immediate-term support ($74.11 on the US Dollar Index) as clarity on the “Debt Deal” found her way into the market’s currency expectations.
  3. US EQUITIES – not good folks; not good – but are you surprised? With “Debt Deal” being replaced by “Growth Slowing” in this morning’s headlines, many a macro market observer has come to realize that more than just US politics makes globally interconnected risk go round.

Perversely, since La Bernank has addicted the entire Institutional Investing Community to chasing yield, what’s good for America’s currency is quite bad, in the immediate-term, for stocks and commodities.


We’ve labeled this The Correlation Risk (USD up = stocks and commodities down). Sadly, Bernanke and Geithner have been negligent in addressing this massive tail risk to the American people when under oath.


So what do you do with that?

  1. Short the Euro
  2. Short European Equities
  3. Sell US Equity and Commodity exposure

People want “clarity” in this market place. There it is.


On yesterday’s proactively predictable opening market strength, I sold down my US Equity exposure in the Hedgeye Asset Allocation Model to 0%. That’s ZERO. Like my long exposure to European Equities – ZERO.


As of yesterday’s close, here’s how the Hedgeye Asset Allocation Model is positioned:

  1. Cash = 52% (up from 43% last week)
  2. Fixed Income = 18% (Long-term Treasuries and US Treasury Flattener – TLT and FLAT)
  3. International Currencies = 12% (US Dollar and Canadian Dollar – UUP and FXC)
  4. International Equities = 12% (China, India, and S&P International Dividend ETF – CAF, INP, and DWX)
  5. Commodities = 6% (Silver – SLV)
  6. US Equities = 0%

Now the Hedgeye Portfolio (14 LONGS and 12 SHORTS) is a different product obviously than long-only asset allocation. Neither of these products are perfect. No one’s risk management process in this business ever will be. We get that – but every move we make is based on a repeatable process that changes as the math does. And, believe me, the coach over here believes in what he is doing.


My goal is simple. I want to win. And my team will stand here alongside you on the front lines of Global Macro market risk, just as we did during the thralls of 2008, so that you don’t lose your hard earned net wealth. We don’t make excuses. We make moves.


Since January 2011, we have led the debate that Global Growth Slowing was going to equate to lower than expected US Equity returns. Every morning since, we have been banging the drums with our often Repetitive Drills to remind you what we are seeing and when.


That doesn’t mean I am going to own US Treasuries (TLT), Flatteners (FLAT), or Silver (SLV) forever. I could sell them all today and nothing will have changed unless I deviate from the process in order to make those decisions. If the process changes, I better know why. And I damn well better be able to explain it to my troops.


In a world where people have no reason to believe their country’s leaders…


In a world where politics trump objectively scored performance…


That’s the best we can do as leaders. We have to be accountable. We have to make sense.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1611-1637, $94.11-96.21, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Repetitive Drills - Chart of the Day


Repetitive Drills - Virtual Portfolio


EPS came in at $0.22 versus $0.23 consensus.  The top-line numbers, as we expected were strong, but margins were weaker-than-expected and guidance for full-year EPS growth was as margin pressures were brought to bear on the company’s P&L.  As we wrote this afternoon, there are other companies that we would prefer on the long side in casual dining, particularly given what we view as a lofty multiple for what TXRH offers investors.


Below is our Top Ten Takeaways from the quarter:

  1. The company’s top-line is healthy.  Two-year average trends accelerated sequentially in the second quarter and accelerated in July versus the 2Q number also.  For the first four weeks of the third quarter, comps were reported as +3.9%.
  2. Following a (average system) price increase of 1% in March, a further 1% (average) price increase has been taken to bring the store base up to 2% pricing on the menu.  Despite this, traffic has remained strong and the comp overall, as pointed out above, seems to be improving through July.
  3. Later this month, the company will test an additional price increase of just over 2% at 19 locations.  If successful, the hike could be rolled out system-wide next year if food costs remain at elevated levels.
  4. Despite this impressive top-line performance the comp growth has not been sufficient to offset the significant margin pressure brought on by commodity and labor costs.
  5. The company expects continuing deleveraging on the labor line due to new restaurant labor costs and higher investment in labor hours.
  6. The primary items that boosted the company’s cost of sales were proteins, cooking oil, butter, potatoes.
  7. The company anticipates increased inflationary costs, particularly around proteins, in 2012.
  8. New unit growth is set to accelerate in 2012 with 25% growth in unit openings versus the projected 20 company restaurant openings in 2011.
  9. This stock was priced for near perfection with a lofty EV/EBITDA multiple and, upon not delivering just that, is selling off sharply post-market.  We do not expect this to be the last stock to do so this earnings season.
  10. Sell-side sentiment is certainly not bearish with zero sells on the stock and ~60% of analysts rating it a “Buy”.  There is plenty of room for sentiment to swing.

TXRH: (NARROW) MISS AND LOWER - txrh sell side sentment



Howard Penney

Managing Director


Rory Green


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.