Disorderly Risks

This note was originally published at 8am on August 27, 2013 for Hedgeye subscribers.

“What they lacked was a science of disorder and randomness.”

-George Gilder


Gilder could have been writing about adults making life decisions inasmuch as he was alluding to both Keynesian and Hayekian policy makers who still don’t get the core chaos theory concept of non-linearity. If you don’t know what I am talking about, have kids.


Both life and market risks are grounded in uncertainty. You can take whatever precautions you want; you can be as proactively prepared as you think you can be – but it’s always the surprise of new information that drives decision making.


You cannot learn how to embrace uncertainty in a textbook. You have to learn this game by playing it. Since disorder and randomness typify markets, your risk management process should attempt to absorb that dynamism.


Back to the Global Macro Grind


Three big macro things have really changed in the last 3 months:

  1. Bond Yields in the USA, Germany, and the UK have been rising alongside their respective stock markets #surprise
  2. Growth Stocks (Low Dividend Yield, High EPS Growth, High Short Interest) have been crushing Slow-Growth Stocks
  3. Asian Emerging Market stocks have been dramatically underperforming US Growth Stocks

That sounds a little disorderly, no?


If you are bullish on “growth” doesn’t your local pie chart “diversification” manufacturer have you buying “Emerging Markets”? Or are they re-positioning that bad asset allocation decision to you now as something that looks “cheap.” #ThesisDrift


In Hedgeye-Jedi speak, “cheap” gets cheaper when:


A)     Country Inflation (or costs in the case of a company) Accelerates

B)      Real (inflation adjusted) Growth Slows


Back-test it with Apple (AAPL) and you’ll get my point. It doesn’t matter how “good” a company is if it’s about to see:


A)     Revenue Growth Slow (versus peak)

B)      Margins Compress (versus peak)


When you get A + B, you get multiple compression.


Conversely, in our proprietary GIP Model (Growth, Inflation, Policy), when a country:


A)     Sees Growth go from slowing to stabilizing to accelerating … and

B)      Is the recipient of inflation slowing via currency appreciation…


You get equity market multiple expansion. Look at the chart of any raging “growth” stock that is USA centric (SBUX, TSLA, DDD, NFLX, OPEN, SODA, etc.) and you’ll get what I mean.


Simple, right? Even a hockey player can do it.


Yes, in hindsight, most things macro are easier to see looking backwards. It’s in observing the chaotic system of colliding global macro market trends (where Growth and Inflation patterns develop) that you get an edge. It’s a grind.


Let’s go back to explaining why the aforementioned point #3 (#AsianContagion) has come to be. What’s happening this morning was as obvious in June as it is today:

  1. Indonesia’s Rupiah continues to crash; down big this morning -4.3% (for a currency, that is a lot!)
  2. India’s Rupee continues to crash as well, down another -1.9% this morning

As a country’s currency gets crushed, #InflationAccelerates and #GrowthSlows – then you get:

  1. Indonesia’s stock market down another -4% overnight (down -15% for the month-to-date)
  2. India’s stocks market down another -3.1% overnight (-11.5% since July 23rd)

Sure, it may seem disorderly and random that Asian “growth” markets can dislocate from US domestic growth stocks. It may appear random to the Macro Tourist who doesn’t stare at the matrix of currency and correlation risk like we do all day too.


But the other big point about disorder and randomness embedded in chaos theory is that there is a deep simplicity to it all, in hindsight.


Our immediate-term Risk Ranges are now as follows (we have 12 Big Macro risk ranges in our Daily Trading Range product now too):


UST 10yr Yield 2.71-2.93%

SPX 1643-1670

EEM 32.07-38.99

VIX 13.03-15.44

USD 80.93-81.80

Copper 3.30-3.39


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Disorderly Risks - chart

Disorderly Risks - vp

September 10, 2013

September 10, 2013 - dtr



September 10, 2013 - 10yr

September 10, 2013 - spx

September 10, 2013 - nik

September 10, 2013 - dax

September 10, 2013 - dxy

September 10, 2013 - oil


September 10, 2013 - VIX

September 10, 2013 - yen

September 10, 2013 - gold

September 10, 2013 - copper


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.

End of Their World

Greater than the tread of mighty armies is an idea whose time has come."

-Victor Hugo


I’ve spent many early mornings this year attempting to objectively contemplate the end of the world. Despite the Nasdaq (+23% YTD) closing at a fresh YTD high yesterday, on every downtick in US growth stocks everyone and their brother has been worried about it – and there have been big fear-based advertising businesses built on it. How some people get paid is serious stuff.


Our Big Macro Idea in 2013 (that the world wouldn’t end) has drawn the ire of everyone, from the old-boy financial media network, to the newbie ad-platform from parts unknown (Zero Hedge). Many of you have seen the comments they chose to flog in public – in Twitter, on TV, in the press.  Only a very few of us have seen the ugliness of some of the emails some of these characters have sent me.  Least said, soonest mended (word to the wise…)


We will continue to power forward with an idea whose time has come – a transparent, accountable, and trustworthy independent research platform that has zero conflicts of interest. We have no banking, trading, or advertising revenues to pander to. We aren’t banned from the securities industry either, like some of our snottier critics. We’re right where we want to be - standing in the arena of meritocratic debate.


Back to the Global Macro Grind


Today is what we call an Event Day @Hedgeye, because we are hosting one of our Best Idea Conference Calls on what we believe is a significantly overvalued company called Kinder Morgan. For those of you who follow either our written research from Energy sector all-star Kevin Kaiser or my #RealTimeAlerts, you’ll know we’ve been bearish in both print and #timestamped KMP short sales since the beginning of August.


For the end of the world community that somehow hasn’t called the short side of things that actually go down in 2013 (like Gold, Bonds, or Linn Energy – another short idea from Kaiser), this whole event day thing drives them right squirrel. How dare a “young” and up and coming research and risk management firm interrupt their navel gazing?


Admittedly, I’ve only been making short calls for about 15 years, so I may not know as much as the clients who pay for our work. Every morning of my market life, I wake up assuming that I need to learn something. It’s not my job to assume we’re going to be right – it’s to try to prove myself wrong.


The #OldWall and its media outlets have a different model – they know everything about everything, 5 miles wide and an inch deep:


From our Wall St 2.0 friends at Seeking Alpha > Kinder Morgan Energy Partners (KMP): "There is an outfit that is trying to get this thing down. They are calling it a house of cards. Richard Kinder (the CEO), come on this show. I know they are going to (do) a massive hit job on you. If you want to be able to tell your story, Mad Money welcomes you. This is a stock I like." –Jim Cramer


Mr. Cramer got nowhere with his Sound and Fury in our last public debate – which descended into members of the Old-Boy network trying to suggest we were committing a securities violation with our research call on Linn Energy (LINN).  One has to admire the conviction the man brings to the table today, on what looks like a replay of the same tape. Occasionally wrong, never in doubt.


Whether you’re a media talking head trying to drive advertising revenues, an Old Wall firm that’s banking one of Kinder’s deals, or just a portfolio manger flat out chasing dividend yield because you have to – it’s all cool with us. So is doing our own work on an idea whose time has come.


For those of you who think it’s a big positive that Rich Kinder “bought stock” in KMI here are a few research nuggets to consider as you contextualize that headline:

  1. Kinder bought 500,000 shares = $18M worth of stock = increasing his stake by 0.2%
  2. Kinder holds 241,000,000 shares of KMI = $8.8B (yes, that’s a B, as in $8.8 billion worth)
  3. Kinder receives more than $400M (per year) in dividend and distribution payments from his KMI holdings

In other words, Kinder has more than a few billion reasons to defend both his stock’s crazy valuation and how he gets paid. The old-boy network of Old Wall Street and the media brotherhood are going to help him do that.


After Bear Stearns crashing … and all that we have gone through in the last 5 years as a profession, is this the best the said savants of the closed-network that was Wall St 1.0 can do?


Or, after missing epic declines in both Gold and Bonds (and after trying to freak people out at yet another higher-low for the US stock market at the August lows), is this just the end of their world as they knew it?


We don’t purport to know everything. But we do our own work and we’re looking forward to objective analysis that attempts to refute our well researched opinion. Dial into our call on Kinder Morgan at 11AM (ping for access) and, instead of calling just calling us “young” (Daryl Jones and Todd Jordan are getting old!), please tell us what you think.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.84-3.02%


VIX 14.73-17.41

USD 81.22-82.68

Brent 111.91-115.19

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


End of Their World - Chart of the Day


End of Their World - Virtual Portfolio


TODAY’S S&P 500 SET-UP – September 10, 2013

As we look at today's setup for the S&P 500, the range is 20 points or 0.82% downside to 1658 and 0.38% upside to 1678.                           










  • YIELD CURVE: 2.49 from 2.47
  • VIX  closed at 15.63 1 day percent change of -1.39%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business Optimism, Aug., est. 95
  • 7:45am: ICSC weekly sales
  • 8:55am: Johnson/Redbook weekly sales 8:55am
  • 10am: JOLTs Job Openings, July (prior 3.936m)
  • 11am: Fed to buy $1b-$1.5b TIPS in 2018-2043 sector
  • 11:30am: U.S. to sell 4W bills
  • 1pm: U.S. to sell $31b 3Y notes
  • 4:30pm: API weekly oil inventories


    • President Obama to address nation on need for military intervention in Syria, 9pm
    • New York City holds mayoral primary elections; General Election is Nov. 5
    • House, Senate in session
    • House Armed Svcs Cmte hears from Sec. of State John Kerry. Defense Sec. Chuck Hagel, Joint Chiefs of Staff Chairman Martin Dempsey on proposed use of forces in Syria, 10am
    • U.S. Financial Stability Oversight Council holds closed session at U.S. Treasury
    • House Oversight Committee hears from CFTC Chairman Gary Gensler and former EPA Administrator Lisa Jackson on preventing violations of federal transparency laws, 9am
    • Executives from CenturyLink, DISH, American Cable Assn and National Assn of Broadcasters testify for House Judiciary panel on satellite TV laws, 10am


  • Apple event may focus on iPhone 5C price, new carriers
  • China industrial growth accelerates to 17-mos. high
  • Retail sales up 13.4% vs est. 13.3%; auto sales gain most in 4 mos.
  • China new credit rises more than forecast to 4-mth high
  • Russia bid to get Syria to surrender chemical weapons shifts debate
  • McDonald’s Aug. comps. growth may have slowed m/m
  • Twitter to buy mobile advertising exchange MoPub
  • BofA cuts jobs amid mortgage refinance slump
  • Time Inc. said to be in talks to buy American Express publishing arm
  • Abe ally says failure to raise sales tax may cause Japan selloff
  • Putin’s judo partner may buy Uralkali stake: Kommersant
  • Novartis CEO Jimenez says no decision on Roche stake: JPMorgan
  • Glencore raises Xstrata merger synergies est. to $2b for 2014
  • Thor offers $1.4b for Empire State Building’s title


    • Oxford Industries (OXM) 4pm, $0.98
    • Pep Boys (PBY) 4:30pm, $0.19
    • Restoration Hardware (RH) 4:06pm, $0.42
    • Triangle Petroleum (TPLM) Pre-mkt, $0.14


  • WTI Falls a Second Day as Obama Seeks Syrian Weapons Surrender        
  • Fastest Wheat Sales in Six Years Diminish Inventory: Commodities
  • Tin Exports From Indonesia Seen Down to Seven-Year Low by Timah
  • Gold Declines in London on Russia’s Syria Proposal; Silver Falls
  • Soybeans Drop for Second Day as Midwest Rain May Boost Harvest
  • Sugar Advances a Fourth Day Before Options Expiry; Cocoa Slides
  • Copper Erases Decline in London, Advances 0.1% to $7,203 a Ton
  • Rebar Falls From One-Week High as Steel Mills Boost Production
  • Mutant Wheat Resistant to Killer Ug99 Fungus Seen Lifting Yields
  • Crude Stockpiles Fall to One-Year Low in Survey: Energy Markets
  • Gold’s War History Showing Short-Lived Premium: Chart of the Day
  • Shipping Rates Seen at 2010 High on Record Ore to China: Freight
  • Taxpayer $14 Billion to Crop Insurers Some Call Money Laundering
  • Australia Cuts Wheat Outlook on Dry Weather, Exports to Drop


























The Hedgeye Macro Team














Below we highlight relatively new products and business models that are displacing the more traditional ones, as they appeal to both the Baby Boomer and Millenial generations.

  • Tesla premium electric vehicles
  • Chipotle’s food and preparation process
  • Whole Foods’ holistic approach to selling food and health
  • E-Cigs’ new experience for smokers
  • LinkedIn redefining professional networking, recruiting and job searching
  • Smartphones


Baby Boomers and Millenials Converge

Consumers are constantly making decisions regarding the choice, purchase and use of products and service.  As we have seen in this new consumer landscape, a product or service that can span two generations is a game changer.  I’m the father of three wonderful children, two girls and one boy, who are all in fact Millenials.  It is becoming more and more common that we enjoy shopping and eating out at the same places.  And, while I would say that our taste in music differs, that statement may lack validity, as the Zac Brown Band and Jimmy Buffet have recently come together to perform “Knee Deep.”  The point is, this Baby Boomer and Millenial convergence is fairly widespread.


Whole Foods is an example of a company that spans multiple generations and is driving incremental visits in large part to their multifaceted approach in which they seek to attract new and old consumers.  The following quote from the CEO of WFM is highly indicative of this theme, which leads us to search for companies that are leveraging new business models, while avoiding companies with traditional business models that are coming under pressure:



“We were built by boomers, we are boomers, and I think the boomer you got – you basically have, what a million people retiring every day or something now? You've got people who are coming into that time of their life where their health really matters. And that's just a statistical fact and the alternative around your healthcare, if you don't take care of yourself, it's pretty bad and it's pretty expensive.  So, I think a lot of people, who have realized that this is the time to shift around diet and lifestyle and that all the noise in the world around us basically saying – pointing folks in that direction too.  I think what I've seen with the millennial generation, that we have a lot of team members who obviously are Millennials is that, they are coming to Whole Foods a lot because of that, but because they also like the way the company, the decisions it makes, the values that it stands for, the change it's trying to create in the world. And increasingly, are looking for companies that they can line up with, in a way that feels right to them.”


-Walter E. Robb, CEO Whole Foods



From our perspective, we see three main themes embedded in this quote from Walter Robb:

  1. The aging Baby Boomers desire healthy alternatives from high integrity companies.
  2. Millenials put a high priority on healthy food options and high integrity companies.
  3. Technology, in particular mobile, has emerged as the best channel of communication for producers and suppliers, giving them a competitive advantage and the ability to appeal to a widespread, growing base of consumers.


It All Starts With Stressed Consumers

In today’s consumer environment, with a bevy of public information now available, people consistently seek to make smarter choices, leading them to purchase items with a higher perceived value.  Value is not simply about price and varies from industry to industry.  For example, in the restaurant industry, value is now a combination of price, quality, environment and experience, with an added emphasis to experience.  This is why a $7.50 burrito from Chipotle may have a higher perceived value than a $4 Big Mac from McDonald’s. 


With disposable income and confidence coming under pressure here in the U.S., the consumer base is being stretched.  Between 2000 and 2009, disposable income per capita grew on average 3.8%, as opposed to the 1.1% growth we have seen year-to-date in 2013.  Over the same time periods, the Bloomberg Consumer Comfort Index was on average 13.4, as opposed to -31 so far in 2013.  The point is, consumers want to go out to shop and eat, but what they get from their experience is now more important than ever before.  We believe this is driving consumers toward higher perceived stores and restaurants and away from lower perceived, traditional ones.







Higher Rates = Lower Multiples


Restaurant industry finance guru, John Hamburger, recently shed light on a few developing casual dining issues.  Most notably, in our opinion, was his take on the private equity sector.  He highlighted how a majority of the new private equity investments in the restaurant industry have been to scoop up large pools of franchised stores, rather than ponying up for the brand itself.   


In the past, private equity investors were willing to pay a premium to what the same company would receive on the public market.  In the late 1990’s, which marked the beginning of a decade of growth for the casual dining industry, the average cash flow multiple was 7x.  Today, the average cash flow multiple is 8.1x and most of the larger, more mature names in the space have little to no growth.  Specifically looking at DIN and DRI—the two largest casual dining companies—you can see that despite having limited growth opportunities, both companies trade at a premium valuation of 9.9x and 8.0x cash flow, respectively.  Additionally, both companies carry a high dividend yield of 4.5%.


This leads us to one of our Macro Team’s 3Q13 themes, which is #RatesRising.  We here at Hedgeye believe that the low for the 10Y treasury yield was set back in November 2012.  Part of the #RatesRising theme suggests that growth is accelerating and the economy is strengthening, which likely means one thing: the Fed will begin to taper.  If this happens, we believe the 10Y treasury will begin mean reverting back its 50-year average.  This type of environment would be particularly challenging for both DIN and DRI.  In our opinion, neither company would be able to raise its dividend fast enough to maintain its relative value in a #RatesRising environment.









New Era Growth Stocks

Restaurants – Recent IPOs in the restaurant space have come from companies that are helping to change the consumer retail landscape.  The most recent IPO, and one of the most successful IPOs across all sectors year-to-date, came from Noodles & Company (NDLS).  The company, which is up 152% since its June 27th IPO, offers a wide variety of high quality, cooked-to-order dishes, including noodles and pasta, soups, salads and sandwiches, all of which are served on real china – fancy! 


Importantly, customization is becoming a “must” in the restaurant industry and NDLS plays into this theme very well.  Because each dish is cooked-to-order, it can be customized to each customer’s personal tastes and preferences (they even have gluten free, vegan, vegetarian or low sodium items).  Noodles participates in the ‘fast casual’ segment of the restaurant industry as they strive to provide a medium between quick service and casual dining restaurants.  In other words, fast casual restaurants attempt to provide customers with a combination of impressive speed of service, high quality food and a quality environment. 


Other notable fast casual chains include Chipotle (CMG), Smashburger (private), and Qdoba (owned by JACK).  The NPD Group recently reported that the number of fast-casual restaurants grew by 7%, while traffic grew by 9% for the FY ended May.

Food Retail – Similarly, in the food retail space, recent IPOs such as Sprouts Farmers Market (SFM), Natural Grocers (NGVC) and Fairway Group Holdings (FWM) have expanded natural and organic product selections in addition to fielding extensive perishables departments.  Of the group, Natural Grocers' IPO has enjoyed the largest percentage gain as the stock is up 140% since its first trading day.


On the margin, these new competitors in the Food Retail space will begin to take occasions away form traditional casual dining companies.


Below we highlight a number of relative, recent IPOs and their respective performance.







We currently like high growth stocks that should continue to benefit from the aforementioned trend, including NDLS, KKD, CMG, and OPEN.

We continue to dislike traditional quick-service and casual dining names, including MCD, DRI and RRGB.





Howard Penney

Managing Director



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