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Stick With What's Working

Client Talking Points


Excellent month to be long our #GrowthAccelerating call. S&P 500 +3.5% in May.  No, we weren’t in the “Sell in May, Go away” camp. Not by a long shot. Financials up almost 8% for the month. Talk about sector divergence: utilities down over 8% for month. 1600 basis point divergence there. Futures were down this morning which represented another buying opportunity. When you’re long #GrowthAccelerating as we are, you don’t buy gold or Treasuries. You buy financials and consumption. Stick with what’s working.


We bought back one of our big macro favorites #StrongDollar yesterday. It was oversold within our bullish intermediate-term trend. Should have shorted the Euro which banged the top end of our risk range at 1.30. Yes, I make mistakes sometimes.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road


Tons of "smart" people in this business; their intelligence often impedes their mental flexibility



“I have noticed even people who claim everything is predestined, and that we can do nothing to change it, look before they cross the road.”  - Stephen Hawking


72,600,000: Record number of Americans enrolled in Medicaid for at least one month in fiscal 2012.

Morning Reads From Our Research Team

Takeaway: A brief look at what the Hedgeye Research Team is reading today.

Daryl Jones - Macro 

Global Oil Demand Seen Falling: 'Cocktail for Weaker Prices' (via Gulf Times)

Chinese Sovereign Fund Shifts Focus to U.S. Real Estate; How This Will Affect Home Prices (via Trefis)


Josh Steiner - Financials

Payday Lenders Evading Rules Pivot to Installment Loans (via Bloomberg)

For a Pundit's Popularity, Confidence Trumps Accuracy (via Washington State University)


Howard Penney - Restaurants

Record Unemployment, Low Inflation Underline Europe's Pain (via Reuters)


Jonathan Casteleyn - Financials

Ken Fisher: Don't Pigeonhole Your Stocks (via Forbes


Matt Hedrick - Macro

Merkel Tells Hollande Reform Is Price of Deficit Waiver (via Bloomberg)

Some Italian Banks Risk Problems, Central Bank Chief (via Reuters)






Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Macro Imagination

“I raise my flags, don my clothes
It's a revolution, I suppose.”

-Imagine Dragons


For the last five plus years, Hedgeye has delivered an Early Look to your inbox every market morning.  Primarily, it has been Keith delivering the goods with the rest of the team chipping in from time to time.  With over 1,000 Early Looks written, you would think it takes some sort of Macro Imagination to get these notes out the door every morning. 


Fortunately for us the world provides a great amount of economic fodder and this morning is no exception, but to be fair some amount of creativity is required to keep these notes at least somewhat interesting.  Moreover our research team, like your teams, requires creativity to generate interesting investment ideas.  But, what exactly is the root of creativity?


A study by Jordan Peterson of the University of Toronto found that the, “decreased latent inhibition of environment stimuli appears to correlate with greater creativity among people with high IQ.”  In layman’s terms, the research says that people whose brains are more open to stimuli from the outside environment will likely be more creative.


Conversely, the risk of too much outside stimuli is mental illness due to overload.  In this regard, the differentiator between creativity and madness is a good working memory and a high IQ. In essence, with these attributes a person has the capacity to “think about many things at once, discriminate among ideas and find patterns”.  Without them, one can’t handle the increased stimuli.


So even if we know the root of creativity and innovation, how do we accelerate it within our companies and ourselves?  Interestingly social networks may be giving us a huge leg up in this regard.  According to Martin Ruef from Stanford Business School:


“Entrepreneurs who spend more time with a diverse network of strong and weak ties...are three times more likely to innovate than entrepreneurs stuck within a uniform network."


In a nutshell, creative people are more open to outside stimuli and best leverage that creativity when exposed to broad network of loose ties. (And just think, my ex-girlfriend used to tell me I spent too much time on Facebook!)


Back to the global macro grind . . .


As I noted earlier, this morning is certainly providing a fair amount of economic fodder.  A few points to call out:

  • The Shanghai composite sold off hard into the close on chatter that tomorrow’s manufacturing PMI will come in below 50.  This is consistent with the flash PMI reading from Hong Kong and also the pattern of economic data being leaked early (we removed long Chinese equities from our Best Ideas list earlier this year);
  • Japanese equities outperformed over night, but finished down -5.7% on the week.  The more interesting data point from Japan was April CPI which came in at -0.4% and clearly signals that the Bank of Japan has more to do before sustainable inflation is generated (Short Yen remains on our Best Ideas list); and
  • Japanese government pension fund with $1.1 trillion in assets indicated it would consider increasing its allocation to equities.  To buy one asset class, another asset class must be sold.  If the action in the Japanese government bond market is telling us anything it is that this allocation is already occurring as yields on 10-year JGBs have been spiking recently.

Domestically, our thesis of economic growth going from stabilization to acceleration continues to be validated.  Market internals clearly support this as the SP500 is up more than 16% this year and the treasury market is literally at 12-month lows.  If you didn’t know, now you know . . . economic growth is good for equities and bad for bonds.


As we dig deeper in the market internals, the performance of the sub-sectors of the SP500 validate this view even more.  As of last night, the top two performing sectors in the year-to-date are healthcare up 23.3% and financials up 23.0% and the two worst performing sectors are utilities up 8.6% and materials up 9.1%.  There we have it again, the growth sectors are dramatically outperforming. 


Now if you are a thoughtful stock market operator, you probably want to call me out on something from the last sentence, which is that materials should do well in an environment in which growth is accelerating.  This is true except for the one important factor: the U.S. dollar.  In the Chart of the Day, we highlight the impact of the dollar and the associated correlations over the last 180 days, which are +0.80 with the SP500, -0.72 with the CRB index, and -0.83 for gold.  A strong dollar equals weak commodities.


This Macro theme of up dollar and down commodities is very positive for a number of sectors.  This year our Restaurant team of Howard Penney and Rory Green has done an outstanding job leveraging the macro call with their stock specific work.  One of their best ideas in my view has been a sell call on McDonald’s on April 25th and since then the stock has underperformed the market by some 800 basis points.


At the time more than 30 firms had recommendations on MCD and no one had a sell.  This is creative and contrarian research at its finest.  Needless to say, our restaurant team eats alpha for breakfast, lunch and most value meals!  Ping us at if you want access to trial our restaurant research.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX, and the SP500 are $1, $101.03-103.89, $83.10-83.98, 100.31-103.71, 2.03-2.19%, 12.28-15.31, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Chief Creative Officer


Macro Imagination - Chart of the Day


Macro Imagination - Virtual Portfolio

Macro Lullabies

This note was originally published at 8am on May 17, 2013 for Hedgeye subscribers.

Jack & Jill:  “Jack fell down and broke his crown & Jill came tumbling after”

Rock a bye baby:  “When the bough breaks, The cradle will fall, And down will fall baby, Cradle and all.”

Rub-A-Dub-Dub:  “Rub-a-dub-dub, three men in a tub”


Have you ever actually listened to the lyrics of the traditional nursery rhymes?


I honestly don’t even remember how the last one ends, but I imagine 3 men in a bath together could go downhill quickly.  Some pretty morbid content for young minds at their peak of neuroplasticity.  


Back to the Global Macro Grind…..


It’s been serene slumbering for the better part of the last 6 months as our macro model front-ran the inflection in domestic #growthstabilizing in late November.   TREND Macro moves are generally self-reinforcing and catching the positive or negative inflection in the slope of growth represents the REM period of actively managed alpha.  


But, alas, Rip Van Winkle and real-time, globally interconnected risk rarely make sustainable bedfellows.  After riding the expedited 300-handle advance in the SPX, we went net short yesterday for the first time since November 2012.


Does that mean we’re abandoning the #StrongDollar-Strong Domestic Consumption mantra we’ve been captaining for the last 5 months? 




Here is where it’s important to understand how the Risk Management & Fundamental Research sides of the Hedgeye model co-integrate to drive invested positioning.   


As Keith highlighted yesterday, “I am getting my first coordinated overbought (SP500) and oversold (Gold) signal of 2013. Both signals are explicitly linked to an overbought one in the US Dollar Index”


What does that mean in the context of our constructive fundamental views on the Dollar, Domestic Consumption, and Housing?  In short, it means that so long as our research view on that trinity of factors remains positive, we’ll cover shorts, buy back the same exposures we sold yesterday and get net long again when the signal indicates we’re no longer overbought or if/when we move towards the oversold 1636 line on weakness.     


Since our bull case was largely predicated on Strong-Dollar, Housing, Employment & Consumption, let’s summarily review the latest across those metrics.


$USD:  Mother Nature likes redundant systems and so do we.  With federal deficit spending declining dramatically, domestic monetary policy turning incrementally hawkish, and explicitly dovish commentary out of Japan & the EU unlikely to ebb, we think the dollar can continue to appreciate via numerous routes.  Ongoing dollar strength, perpetuated by a continuation of the above dynamics, would augur more of the same for commodity and gold price deflation.     


Employment:  We consider the 4-week rolling average in y/y, Non-seasonally Adjusted Claims to be the most accurate reflection of underlying labor market trends.  On that metric, yesterday’s update showed a 20bps deceleration WoW with rolling NSA claims going to -8.9% YoY vs. -9.1% YoY the week prior.  Despite that sequential deceleration, -8.9% YoY improvement represents a very good rate of decline.  Moreover, organic 2Q trends to date have overwhelmed any negative seasonal distortion or sequestration associated drag.  On balance, we’d still view labor market trends as positive. 


Housing:  We continue to maintain a positive view on housing broadly, but in light of yesterday’s weak headline print in housing starts, let’s narrow the focus to our expectations for starts specifically.   In short we would view a multi-year doubling of housing starts to 2M annualized units as a high probability scenario.


Consider this basic imbalance.  Since the start of 2011, new household formation has been running at an annual rate of 1.38 million.  Historically, due to factors such as Vacant Unit demand and Demolitions, the ratio of new housing demand to new household formation has run at approximately 135%-139% (see here & here for the supporting research).  At the current rate of household formation, this equates to demand for 1.89M housing units.  Instead we've begun construction on 0.845 million, or just 46% of the level needed.


Note also, against demand implied by household formation, we’ve incurred a cumulative deficit of 3M new housing units since the start of 2010.  Some percentage of this deferred demand should materialize as the economy improves, exaggerating organic demand trends over the next few years.


One month does not a trend make.  Clearly, there remains a significant delta between new housing units needed and units being created. 


Credit:  The Fed’s 2Q13 Senior Loan officer survey showed bank credit standards continued to ease while business and consumer loan demand, particularly for real estate, showed further sequential improvement.  Household debt burdens are making lower 30Y lows and household debt and debt ratios have retraced most of the exponential move in debt growth that occurred over the 2000-2008 period. 


Ongoing labor market improvement (higher income) alongside rising household net worth (primarily via housing and financial asset re-flation), should continue to support incremental debt capacity while the flow of net new credit looks favorable for credit catalyzed private consumption over the intermediate term.     


So, legitimate upside for the dollar still exists, labor markets trends remain positive, housing remains in the middle innings of a secular upswing, and the household income statement and balance sheet recovery remains ongoing alongside favorable consumer and commercial credit trends. 


Obviously, we could conjure up some bearish data points to counter some of the bullish dynamics we outlined, but employment/housing/consumption/credit have been key items of focus and key drivers capable of catalyzing positive reflexivity in the economic cycle. 


At present, trends across those metric remain positive and supportive of a bullish tilt towards consumption oriented domestic exposure….at a price. 


To clumsily bring this missive full-circle, conventional lullabies did little to placate my teething 6-month old last night.  What finally put her sleep?...Chewbacca and a 2:30am Star Wars re-run that came on accidentally when she knocked the remote onto the floor. 


Lesson?   Embrace Uncertainty - today’s market teething births tomorrow’s Chewbacca P&L opportunity.  Life, risk, and opportunity happen fast.  If fast isn’t your thing….


I hear Hedgeye made the Kessel Run in less than 12 parsecs.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1370-1446, $101.14-105.44, $83.04-84.43, $1.28-1.30, 100.65-103.78, 1.83-1.99%, 12.33-13.86, and 1636-1662, respectively.


Sleep tight.


Christian B. Drake

Senior Analyst 


Macro Lullabies  - Household Debt Burden


Macro Lullabies  - Virtual Portfolio


TODAY’S S&P 500 SET-UP – May 31, 2013

As we look at today's setup for the S&P 500, the range is 33 points or 0.81% downside to 1641 and 1.18% upside to 1674.                  










  • YIELD CURVE: 1.79 from 1.82
  • VIX closed at 14.53 1 day percent change of -2.02%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, April, est. 0.1% (prior 0.2%)
  • 8:30am: Personal Spending, April, est. 0.0% (prior 0.2%)
  • 8:45am: Fed’s Pianalto speaks in Washington
  • 9am: NAPM-Milwaukee, May, est. 49 (prior 48.43)
  • 9:45am: Chicago Purchasing Mgr, May, est. 50 (prior 49)
  • 9:55am: U. of Mich Conf, May final, est. 83.7 (prior 83.7)
  • 10am: Commerce Dept. issues benchmark revisions on retail sales data, wholesale inventories and sales data
  • 11am: Fed’s Liang speaks in Washington
  • 11am: Fed to buy $4.25b-$5.25b notes in 2017-2018 sector
  • 1pm: Baker Hughes rig count


    • House, Senate not in session
    • 1pm: VP Biden addresses media after mtg w/ Brazilian President Dilma Rousseff, Vice President Michel Temer in Brazilia


  • U.S. consumer spending was probably little changed in April
  • P&G said planning to promote 4 as contenders to succeed CEO
  • Apple raises prices for some products in Japan after yen weakens
  • Apple ruling to revolve around who can use standard technology
  • Sony said to engage Morgan Stanley, Citigroup on Loeb plan
  • Treasury 7-Yr auction demand rises with yield at 13-mo. high
  • Boeing sells new 787 as Singapore splits $17b order
  • Dell investors sue over founder’s buyout bid
  • Japan’s April industrial production rose 1.7% m/m, exceeding the highest est. in a Bloomberg News survey
  • Euro-area April jobless rate rises to record 12.2%, est. 12.2%
  • Euro-area May consumer prices rise 1.4% in yr, est. 1.4%
  • Italy jobless rate reaches 12%, 36-yr-high amid recession
  • German retail sales unexpectedly fell for a 3rd mo. in April
  • EMA’s CHMP monthly announcements may include Sanofi, Roche


    • No earnings expected from S&P 500 cos.: Bloomberg data


  • China Gold Demand to Slow From April Surge, Association Says
  • Gold Traders Divided as Physical Buying Surge Slows: Commodities
  • Gold Falls on Speculation Demand May Slow After Price Rally
  • WTI Heads for Weekly Drop as Stockpiles Gain Before OPEC Meets
  • Copper Trims First Monthly Gain in Four Before Chinese Index
  • Soybeans Head for Best Month Since July as U.S. Supply Dwindles
  • White Sugar Gains on Africa, Middle East Demand; Cocoa Retreats
  • Battle Over U.S. Natural Gas Exports Increases as Permits Flow
  • ETF Investors Dumping Gold Add to Platinum Bet: Chart of the Day
  • Tea Output in India Seen at Record as Normal Weather Aids Yields
  • WTI Crude May Fall Next Week on Ample Stockpiles, Survey Shows
  • SHFE Copper Stockpiles Rise for First Time in Nine Weeks
  • Japan Pays Record Price for LNG Imports in April as Yen Weakens
  • Gold Premiums in Singapore at Record Seen Declining Next Month






















The Hedgeye Macro Team












the macro show

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