Information Revolution

This note was originally published at 8am on November 05, 2013 for Hedgeye subscribers.

“The mechanization of ginning, spinning, and weaving the cotton launched the industrial revolution.”

-Jack Weatherford


The cotton gin was 1793. Twitter was 2006. Eli Whitney and Jack Dorsey had more than a few things in common. One was their age (Whitney was a 28 yr old teacher and Dorsey was a 29 yr old web developer/failed shoe salesman). That’s where revolutions come from, baby. As my man Brandon Flowers wrote in “Only The Young” (great tune):


“Look back in silence; the cradle of your whole life. There in the distance, losing its greatest prize. Nothing is easy, nothing is sacred. Why? Where did the bough break? It happened before your time. Only the young can break away, break away…“


And so it continues to begin – the unearthing of every single Western academic dogma about economics and markets ever spun. The unraveling of a weave of storytellers that only my God can be smiling down upon as stronger currencies lead new peoples to the promise land of purchasing power. Behold, the Information Revolution in financial markets is here!


Back to the Global Macro Grind


Tomorrow at 11AM EST, Hedgeye veteran blue-liner, Daryl Jones, and Hesham Shaaban will host a Black Book conference call on the Twitter IPO (if you’d like information on how to access the call, ping It’s a fascinating story within the history we are building here @Hedgeye. I see it as our Trojan Horse in taking down the #OldWall of aforementioned dogmas.


Mr. Market, take down that #OldWall!


How is that going to work? Let’s just look at what we did using Twitter yesterday in order to front-run a ridiculous #OldWall financial media meme that the Fed being on taper-hold is a “good” thing for growth:

  1. All research starts with asking the right question – our clients often ask, “Isn’t #RatesRising Bad for Growth?”
  2. So we created a video answering that simple question with a simple answer @HedgeyeTV:
  3. And we went on to answer two more big client questions we have been getting, then tweeted it (and re-tweeted it)

In the stone age of perceived financial market and economic wisdoms, you didn’t have Twitter, Videostreaming, YouTube, etc. So you actually had to take the government’s (and the banks they bail out) word for it on these economic history matters.


Ginning, spinning, and weaving, these academic dudes (and dudettes) who have never risk managed markets can get really creative. So was Karl Marx in introducing the adored Obama concept of #ClassWarfare in the first sentence of the Communist Manifesto.


And who the heck am I to call these people out? Sometimes I feel like a modern day version of some Iroquois or Creek Indian who is sitting here creating things (like cotton and rubber - you know, the stuff all the white dudes actually started to use). But what do I know?


What do you know?


The more I read, the less I know. So, admittedly, I do get a little frustrated to see central planning bureaucrats like Jim Bullard @FederalReserve on Big Government Intervention TV spewing economic forecasts that are rarely right, but never in doubt.


At one point yesterday @CNBC, Bullard actually said that it’s time Americans see QE (money printing, Dollar Devaluation, and 0% rates of return on your hard earned savings accounts) as a “normal policy position.”




Go back to that Iroquois style @HedgeyeTV video Darius Dale and I did and see the next popular client question: “How Concerned Are You About A Major Dislocation in the Credit Markets?”


Bullard, dude, there is nothing normal about credit markets that go no-bid when a bond ticks down half a point. Wake up man. You and your boy Bernanke have a “new normal” alright. It’s called a MBS bond bubble that people can’t get out of!


In other counter-Keynesian-consensus-dogma-economic-news this morning:


BREAKING: UK Services PMI for OCT hits a 16yr high at 62.5


Huh? With austerity and a #StrongerCurrency (we’re long the British Pound) the United Kingdom is seeing #GrowthAccelerating? You bet your Danny Blanchflower (Dartmouth Dogma professor of Currency Devaluation and Big Government Spending) it’s accelerating.


This morning, to be sure on my historical account, I went back to the time period I reviewed with my kids this weekend in the movie “Free-Birds” (where turkeys try to turn back the clocks on being slaughtered for Thanksgiving), and the replay still shows that there has never been a country that has devalued its way to long-term economic prosperity. Danny, you can’t turn back the clock. Gobble, gobble.


#StrongCurrency = Deflates The Inflation and real (inflation adjusted) consumption #GrowthAccelerating.


On the margin, that’s Europe now (not the USA –it was the USA 10 months ago):

  1. Swiss Consumer Prices (CPI) drop to -0.3% y/y in OCT = consumption tax cut for consumers
  2. Eurozone PPI (producer prices) drop -0.9% y/y in SEP = cost of goods tax cut for producers (good for margins)

And on what planet are Old World pundits allowed to fear-monger you that Deflating The Inflation is a bad thing? I guess maybe Pluto, Dartmouth (sorry guys, I’m picking on Blanchflower), or one that doesn’t have Twitter. Good luck keeping that one alive. As another revered American revolutionary, Martin Luther King Jr. reminded us, “a lie cannot live” forever.


Our immediate-term Risk Ranges are now:


SPX 1745-1774

DAX 8918-9055

Swiss Market Index 8159-8232

USD 80.17-80.98

Euro 1.34-1.36

Pound 1.60-1.62


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Information Revolution - Chart of the Day


Information Revolution - Virtual Portfolio


Takeaway: We remain bullish on the British Pound.

Our bullish call on the British Pound was borne out of our Q4 Macro themes call.


We believe the health of a nation’s economy is reflected in its currency. Likewise, we remain bullish on the regime change at the Bank of England, replacing Governor Mervyn King with Mark Carney.


If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.




(Editor's note: This is a brief excerpt from Hedgeye research. For information on how you can subscribe click here.)

RAI E-cig Update: The Migration To Smoke-Free Tobacco Is Underway!

RAI’s Investor Day this morning, while comprehensive in updating the entire portfolio, focused on the launch of its electronic cigarette (e-cig) VUSE.  In fact, the majority of questions (~ 12 of 15) asked following prepared remarks (from analysts and the investor community) centered on e-cigs. This further confirms to us that while e-cigs make up a tiny fraction of Big Tobacco’s portfolio (approx. 1%), the interest in and investment behind the e-cig category will remain a major focal point. We expect that investors will overweight e-cig results in gauging broader company performance as expectations continue to ratchet higher that e-cigs can replace declining traditional tobacco volumes (expected to be ~4-5% in 2013).


Position: We remain extremely bullish on the potential growth of the e-cig category. Our preferred Big Tobacco play remains Lorillard (LO), given its leading share in the e-cig category (~50%) and advantaged menthol portfolio.   


Highlights of RAI’s presentation section on e-cigs:

  • RAI CEO Daan Delen says the consumer migration to smokeless is underway, anchored on:
    • Harm reduction awareness; affordable price; enjoyable experience
  • Consumers have a wider variety than ever of non combustion offerings:
    • Nicotine replacement, dissolvables, snus, moist snuff, and e-cigs
  • Delen describes e-cigs as high consumer interest, but low adoption, in a fragmented category, with product quality and performance issues, but poised for substantial growth if consumer expectations (for the overall experience) are met

On the Product (VUSE):

  • Rolled out exclusively in the state of Colorado in July
  • Expects nationwide distribution by mid-2014
  • Seeing strong Awareness (83%), Consideration (68%) and Trial (48%), but exclusive adoption of e-cigs only 1.4%
  • Similar demographics (age, gender, ethnicity)  and income and education between e-cig users versus traditional cigarette smokers (charts from RAI presentation below)
  • Calling VUSE a “Digital Vapor Cigarette”, not an “e-cig”
  • Available only in rechargeable format (belief in razor-razorblade model to be margin enhancing over time)
  • Packaging design dissimilar to traditional cigs. Has “smart light” at tip to signify when to replace (shuts off after 200 puffs =~ 1 pack of trad. Pack) to ensure quality and signals battery strength
  • Selling only single replacement cartridges per pack to mimic traditional smokers who typically buy by the pack  (versus 5,10, 15, 20 replacement cartridge pack offered from competitors)
  • Assembled in the U.S.A.
  • Safety measures around battery and recharging safety
  • Treating e-cigs like a tobacco product (in marketing, advertising, and age restrictions)
  • In Colorado, VUSE #1 e-cig brand, 60%+ share (said supply could not keep up with demand)
  • No definitive plans to move internationally, focused on U.S. rollout first
  • On FDA, said company has no idea what deeming regulation could be handed down. Confident that whatever is passed, VUSE will stand ahead of the pack due to its quality control


VUSE and E-cigs in Context:

Note that Altria (MO) also recently issued its own e-cig, MarkTen, in August.  Both MO and RAI’s e-cigs distribution lag LO’s purchase of Blu in April 2012. We’re clearly seeing Blu enjoying first-to-market advantage, and taking significant market share in the category (from 40% to 49% in the last quarter alone), albeit on severe promotion and discounting. Given RAI and MO’s entrance, we’d expect more price wars as all try to stoke trialing and achieve brand loyalty.


We continue to see e-cig manufacturers favor the razor-razorblade model of a rechargeable unit and replacement cartridges to disposable e-cigs (the private manufacturer NJOY is one big exception among major distributors), with expectations that they’ll be margin enhancing.  However the point on when, given the infancy of the category and desire by manufacturers to increase trialing, remains unanswered.


Another wild card remains when and to what degree the FDA will regulate the e-cig category.  The agency was expected to announce regulations last month—the government’s shutdown may or may not have moved the goalposts. It’s anyone’s guess now just when that may happen, however manufacturers continue to expect something before year-end.  


It’s our opinion that the FDA wants to protect the consumer, while not stifle e-cig innovation that can ultimately lead people away from the harmful combustible cigarettes. A few of the larger regulations expected to be addressed are online sales, flavors, and marketing, however regulations could go much further. It appears the science on e-cigs remains incomplete, which would suggest to us that the agency may err on the side of less regulation versus more regulation until the science is (more) conclusive.  


RAI E-cig Update: The Migration To Smoke-Free Tobacco Is Underway! - z. ecig1M


RAI E-cig Update: The Migration To Smoke-Free Tobacco Is Underway! - z.ecig2


Matthew Hedrick


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Takeaway: Something is not resonating with McDonald’s customers.

This note was originally published November 08, 2013 at 09:40 in Restaurants

“Around the world, we are focused on providing the menu quality and choice, customer service and affordability that are the hallmarks of the McDonald’s experience.”

- McDonald’s October Press Release


Despite management’s aforementioned focus, there is something that is not resonating with McDonald’s customers.  While MCD is a fundamentally strong company, we find it difficult to believe that it will be able to drive “initiatives that will deliver the greatest benefit” for McDonald’s customers, as promised. 


The charts below show sales trends across MCD’s four main regions – and they are not pretty.  October’s results prove that same-store sales continue to steadily decelerate on a two-year basis.  That said, we are comfortable in reiterating our view that McDonald’s has legitimate, inherent issues that management must address.


Next week, McDonald’s will host its analyst day to address the initiatives management has lined up for 2014 in order to stem the decline in global sales.  Our research tells us that the company will make an aggressive push to sell more coffee in attempt to capture incremental market share in the coffee category next year.  We expect this to be a main topic at the analyst day on November 14, 2013.


Our goal is to understand the potential consequences, both good and bad, of this strategy.  Delving more into this topic, we have conducted a proprietary Retail Coffee Consumer Survey, which features some of the top coffee retailers, including MCD, SBUX, DNKN, KKD, and Peet’s. 


We will be holding a conference call on Tuesday, November 12th at 11: 00am EST in order to present our findings and analysis.







Howard Penney

Managing Director



What's New Today in Retail (11/18)

Takeaway: GOOG opening stores for the Holidays,changes at the top for TIF, AMZN's prices tough to beat, China's e-comm market opportunity



URBN - Earnings Call: Monday 11/18 5:00 pm

BBY - Earnings Call: Tuesday 11/19 8:00 am

HD - Earnings Call: Tuesday 11/19 9:00 am

DKS - Earnings Call: Tuesday 11/19 10:00 am

TJX - Earnings Call: Tuesday 11/19 11:00 am




TIF - Tiffany financial chief resigns



  • "Tiffany’s chief financial officer, Patrick F. McGuiness, has resigned his position effective Nov. 27. The company’s EVP and chief operating officer, James Fernandez, will assume the position of CFO on an interim basis."
  • "Fernandez has been with Tiffany’s since 1983. The board of Tiffany’s has authorized a search for a new CFO."


GOOG - Google Opening Showrooms to Show Off Gadgets for Holidays



  • "Google Inc. is opening showrooms in six U.S. cities, promoting its latest products and stepping up retail efforts against Apple Inc. and Microsoft Corp. as the year-end holiday shopping season gets under way."
  • “Called Winter Wonderlabs, the outlets feature products such as Nexus 7 tablets, Chromebook computers and Chromecast video-streaming devices, the company said on a new website yesterday."
  • "Google is putting the showrooms at or near New York, Washington, Chicago, Los Angeles, Sacramento, California, and Paramus, New Jersey. The company is also building a barge in San Francisco Bay aimed at showing off new technologies."


AMZN - Report: Amazon has best price 80% of the time



  • " has the best price on products in its assortment about 80% of the time. However, the new 'Amazon Holiday Pricing Insights' analysis from pricing technology provider 360pi shows that Amazon does have weak spots…"
  • "For example, once Home Depot decided to be price competitive on Oct. 26, they were instantly and dynamically able to beat Amazon prices on power drills. Meanwhile, tablets and televisions are the categories where a majority of retailers are either price competitive or closer to the mark than other categories, such as printers and video games, which show the least amount of price competitiveness."
  • "Top retailers such as Best Buy, Wal-Mart, and Sears and Costco are less than 5% more, or better priced, than Amazon in televisions, for example. During the Oct. 16 – Nov. 14 period, Amazon had the lowest-priced tablets 68% of the time, which means retailers are currently beating Amazon with lower tablet prices 32% of the time."


KER - Kering Taps Eyewear Executive Roberto Vedovotto



  • "Kering is putting a new focus on its eyewear businesses — and has tapped Roberto Vedovotto, formerly chief executive officer at Safilo Group SpA, who is to start work at Kering effective today, WWD has learned."
  • "Kering president and ceo François-Henri Pinault has tasked Vedovotto with reviewing the French group’s eyewear strategy across all brands in order to optimize and further develop the business. His remit is to coordinate Kering’s efforts across its luxury and sport-lifestyle brands, which include Balenciaga, Stella McCartney, Boucheron, Puma and Volcom."




China Tops E-commerce Opportunity Study



  • "When it comes to market opportunity for e-commerce, China occupies the number-one position, followed by Japan, the U.S., the U.K. and South Korea, according to a new global e-commerce study by A.T. Kearney…"
  • "The Global Retail E-Commerce Index ranks the top countries in online retail, based on a 0 to 100 point scale. A.T. Kearney looked at 186 countries to determine the ranking of the top 30 countries. The index evaluates countries according to online market size, technology adoption and consumer behavior, infrastructure and growth potential."
  • "Over the past five years, online retail has grown at a 17 percent compound annual growth rate, with growth particularly strong in Latin America (27 percent) and Asia-Pacific (25 percent), according to the study. Interestingly, India didn’t make the top 30 because of its low Internet penetration and significant infrastructure constraints."
  • "China’s $64 billion online retail market will explode over the next five years to $271 billion, due to infrastructure improvements, increased Internet access for rural regions, rising wealth and customers’ growing predisposition to spend. China has the world’s largest population (1.36 billion), the most Internet users (517 million) and the most online shoppers (220 million), according to the study."


Apparel Beats Overall Import Growth in September



  • "Total apparel imports (on a CIF basis) were $8.5 billion for the month, a 2.9% increase over September of last year and a drop from August’s $9.1 billion. Apparel imports grew faster than total goods and services imports, which increased 2.4%, due largely to increases in industrial supplies and automotive vehicles and parts."


What's New Today in Retail (11/18) - chart2 11 18

What's New Today in Retail (11/18) - chart3 11 18


Finally, Bangladesh Govt Sets New Minimum Wage



  • " Bangladesh’s government has finally agreed upon a new salary structure, effective December 1. Labor Minister Rajiuddin Ahmed Raju announced that the new minimum wage will be set at 5,300 taka ($68), a...77 percent increase."


What's Selling: Children's



ITTLE’S SHOES, Pittsburgh

  • Nina Kids Cassina
  • Merrell Jungle Moc
  • Stride Rite lighted shoes

Top trend: “People were really shopping for dual-purpose shoes at back-to-school time — shoes the kids can wear outside on the playground and with their uniforms,” said Justin Sigal, president of Little’s. “Now that the weather is getting colder, Ugg Australia, Kamik and Sorel boots are picking up.”


  • Naturino any style
  • Stride Rite any style
  • New Balance 990

Top trend: “Bright pops of color and rainbow colors are really hot for kids,” said Ivan Castro, store buyer and manager. “The colorful soles and combination of colors on the uppers are big for not just adults but kids, too.” 


  • Sperry Top-Sider Bahama and Cupsole
  • Nina Kids Marnee
  • Sam Edelman Fiona

Top trend: “Ballerinas are still big for us and so are the Sperrys,” said owner Eddie Quintana. “We’ve still had hot weather down here, so those categories are huge for us and controlling a lot of our business.”

HANSEL & GRETEL, Wilmington, Del.

  • Jumping Jacks Anaa
  • Livie & Luca
  • Lelli Kelly Mary Jane styles 

Top trend: “We do a lot of dress shoes at our location,” said owner Carol Harvey. “People like the Livie & Luca [label] because it has really well-made dress shoes for kids, and Lelli Kelly because of the soft soles.”



Nevada taxi trips fell again in October


  • The number of Nevada taxi trips declined 3.3% in October 2013 despite the easiest comp of the year
  • Visitation to Las Vegas, which has a 0.86 correlation to NV taxi trips, could be weak in October
  • Taxi trips also has a 0.60 correlation with non-baccarat table volume
  • While MGM has the sell side focused on the strength of Q1 RevPAR, Q4 is looking increasingly soft. We remain concerned surrounding the health of the underlying Strip gaming metrics, particularly slot volumes.


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