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Video Preview: Q1 2014 Macro Themes

In the video below, Keith walks you through our top 3 global macro themes ahead of our Q1 2014 Macro Themes conference call tomorrow.




REMINDER: We will be hosting our Quarterly Macro Themes conference call tomorrow, January 9th at 11:00am EST. The accompanying presentation will detail the three most important macro trends that our team has identified for the quarter, as well as the associated investment opportunities.


  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 897866#
  • Materials: CLICK HERE (slides will be available one hour prior to the start of the call)


#InflationAccelerating: Across the globe, reported inflation readings are poised to accelerate from post-crisis lows as easy comps, a commodity base effect and accelerating wage pressures all come to a head in the first quarter of 2014. Moreover, the reemergence of inflation as a core macro risk threatens to materially alter the investment landscape going forward.


#GrowthDivergences: Looking to the U.S., Europe, China and Japan, we see the heavyweights of the world economy diverging from an economic growth perspective as some countries and/or regions are much further along in the economic cycle than others. We highlight those divergences and identify which countries and/or regions you want to be allocating assets to at the start of the year.


#FlowShows: in Q1 we expect a continuation of fund flows out of fixed income and into equities: the “Queen Mary” has indeed turned, aided by the Fed’s decision to begin tapering.   


Please email  for more information. 

Stock Report: Quiksilver, Inc (ZQK)

Stock Report: Quiksilver, Inc (ZQK) - HE II ZQK boxes 1 8 14


Consensus is not bullish enough on Quiksilver (ZQK). The consensus view is understandably focused upon the new management team, cost cutting, and improved efficiency. We think that gets the stock to where it is today.  Ultimately, in order to really get this stock to work, we need to see significant top line growth.


The only way we think we can gauge the viability of top line growth coming to fruition (for the first time in 5-years) is to roll up our sleeves, ask actual “action sports” and “surf consumers” (over 1,000 of them) an array of very detailed questions to understand the relevance of the brands, and subsequently determine whether the brands are powerful and relevant enough for the new management team to use effectively as an offensive weapon to create value. 


So that’s what we did.


Our key takeaway here is that the brands – Quiksilver, Roxy and DC – all scored far better than we even hoped.  We believe these brands all possess the relevance needed to grow from here. Statistics regarding brand authenticity, desirability, and customer loyalty (versus 20 other brands) came through as much more positive than we’d have thought, and certainly more than the consensus currently believes.



INTERMEDIATE TERM (TREND) (the next 3 months or more)

This is the only part of the story we’re not thrilled with. Why? 2014 will be all about cost cuts and modest (2%ish) top line growth.  As such, our estimates for 2014 are not too far off of consensus. This is all a logical progression. The management team started in early 2013. The first and easiest thing to do is reorganize the company, cut redundant functions and ensure that the team is filled with ‘A’ players.  Earnings in 2014 should be slightly positive vs. a loss of ($1.53) last year. That’s all due to restructuring. The good news is that this is largely baked, suggesting to us that there’s likely little risk of failure. That gives us confidence in minimal downside in the stock in 2014.


LONG-TERM (TAIL) (the next 3 years or less)

2015 and beyond is a much different story. Our long-term model has ZQK adding $600mm in revenue on top of a $1.9bn base. As a frame of reference, our top line growth forecast is over 1,000 basis points ahead of consensus.  


Ultimately, we’re at over $1.00 per share in 2017, which is 45% ahead of the consensus. In the end, this is a 40%+ EPS grower that’s a double if we use a 20x p/e, which we think is more than fair based on the soon-to-be-realized growth profile.


Bottom line: Put this stock in your portfolio and forget about it. You’ll be pleasantly surprised a year or two from now.


Stock Report: Quiksilver, Inc (ZQK) - HE II ZQK chart 1 8 14

Charts: Germany and UK Strong Start to 2014

Europe is ringing in the New Year with some impressive data!


As a continuation of our top Q4 2013 Global Macro Theme, #EuroBulls, which outlined a bullish outlook on the GBP/USD and bullish positioning on UK and German equities, below we show updates to some of the charts we’re tracking that are supportive of our investment position around this theme.


In the Real Time Alerts Portfolio we’re currently long German equities via the etf EWG and long the GBP/USD (FXB). To get exposure to the UK equity market, we’ve traded the etf EWU in the past.




Steady as She Goes: broadly we continue to see a reduction in the risk profile across sovereigns and banks. Telling is that the Spanish 10YR bond is trading at 3.76% as its Italian counterpart is at 3.86%, and that both have reached spreads with the German Bund of under 200bps – back to where levels stood when Greece required its first bailout back in May 2010!


Meanwhile, the ECB continues to be highly accommodative with the main interest rates at 25bps. The ECB meets as soon as tomorrow to discuss any changes to monetary policy. Despite the media’s ‘deflationista’ frenzy around the inflation level (currently at 0.8% Y/Y in December and down 10bps since last month), we think President Draghi has well outlined the Bank’s forecast for an extended period of low inflation (below its 2% target).  We think the next move from the ECB could be policy measures aimed at stoking real growth to SMEs through loan mechanisms, however not via another rate cut this quarter. We believe this position, as well as its continued posture of “ready and willing to act” (to ensure the survival of the Eurozone at any cost and keep financial conditions accommodative) will continue to support the common currency and strengthen investor confidence in the equity market.


Additionally, despite the Eurozone unemployment rate at a high and sticky 12.1%, we expect lower levels of inflation to help spur exports, consumer spending and broader confidence. Eurozone aggregate Services and Manufacturing PMIs have shown slow and steady progress, as have retail sales and car orders, which we expect to continue in Q1.


Charts: Germany and UK Strong Start to 2014 - z. credit spreads


Charts: Germany and UK Strong Start to 2014 - z.  eurozone cpi


Charts: Germany and UK Strong Start to 2014 - z. eurozone exports


Charts: Germany and UK Strong Start to 2014 - z. eurozone retail sales


Charts: Germany and UK Strong Start to 2014 - z. eurozone business climate


Charts: Germany and UK Strong Start to 2014 - z. eurozone pmis




  • Strong UK: we remain bullish on the British Pound/US Dollar and the UK equity market. Our positioning is supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). We expect the FTSE (up +14.4% last year) to be pushed higher on continued evidence of emergent strength in the economy.  In many cases, the UK’s high frequency data is outperforming that of its western European peers, including PMIs.  We believe that a moderation in CPI should spur consumer spending and that a strong Pound should bolster spending power. 
  • UK Office of Budget Responsibility in its Autumn Statement revised higher its 2014 GDP outlook, to +2.4% vs prior +1.8% and 2014 CPI at +2.3% Y/Y vs prior +2.4%.
  • We outline our levels on the GBP/USD below, and believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term. 

Charts: Germany and UK Strong Start to 2014 - z. uk retail sales


Charts: Germany and UK Strong Start to 2014 - z. uk halifax home


Charts: Germany and UK Strong Start to 2014 - z. uk confidence


Charts: Germany and UK Strong Start to 2014 - z. uk cars


Charts: Germany and UK Strong Start to 2014 - z. uk pound




  • Strong Germany: we continue to like the DAX (up +25.5% last year), which we’re currently long of via the etf EWG. Fundamentals remain grounded with a low unemployment rate (6.9% vs 12.1% in the Eurozone), CPI at 1.2% Y/Y in DEC (vs 1.6% in NOV) that is aiding exports, alongside strong PMIs and consumer and business confidence, and an inflection in factory orders to the upside.
  • Merkel consolidated her coalition late into 2013 – we expect Germany to remain the fiscal hawk vis-à-vis sovereign and bank policy.
  • The upward revision in the Bundesbank’s 2014 GDP forecast last month, to +1.7% vs prior +1.5%, is in line with our bullish outlook.

Charts: Germany and UK Strong Start to 2014 - z. germany DAX


Charts: Germany and UK Strong Start to 2014 - z. germany trade balance


Charts: Germany and UK Strong Start to 2014 - z. germany factory orders


Charts: Germany and UK Strong Start to 2014 - z. germany IFO


Charts: Germany and UK Strong Start to 2014 - z. eur usd



Matthew Hedrick


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


“For man to truly understand himself, he must travel beyond the clouds”

– Socrates


By Michael Blum


When I saw my first Space Shuttle launch as a child, I knew I wanted to be an astronaut.


After I made my first real money selling PayPal/eBay stock, I bought a ticket on Virgin Galactic to go to space aboard SpaceShipTwo. I later bought a second seat on Space Expedition Corporation’s Lynx. As I became more involved in the Newspace community I began speaking at conferences and universities around the world – the topic being “The Potential for & Impact of Commercial Space & Space Tourism”.


Today, alongside my research and engineering team @Hedgeye, I am co-founding Firefly – a ground-based, small satellite launch company, with one of Hedgeye’s greatest supporters and fans, PJ King, as well as propulsion engineer extraordinaire, Tom Markusic.




With a Ph.D. from Princeton in Mechanical & Aerospace Engineering, Tom has conducted research on deep space propulsion systems and since 2006 has held senior leadership positions inside virtually every leader in the Newspace Industry: Elon Musk’s SpaceX, Jeff Bezos’ Blue Origin and Richard Branson’s Virgin Galactic. Tom is Firefly’s CEO and from what I have seen, he will be a fantastic entrepreneur and business executive.


Lowering the cost of small satellite launches to Low Earth and Sun Synchronous Orbits will revolutionize broadband data delivery and earth observation missions. What used to cost hundreds of millions of dollars, is rapidly becoming available in the single digit millions.


While the leaders in the nascent and rapidly developing small sat industry (companies such as PlanetIQ, Skybox, Planet Labs, and numerous others) have raised VC funds well in excess of $100M in the last 1-2 years, there exists virtually no dedicated launcher capacity for these ventures to deliver their payloads to orbit.


With Hedgeye’s help, Firefly will change this.


We have rapidly received our seed funding commitments and are already in discussions with investors looking towards our Series A funding. Since our website launched and word of mouth has spread through the industry, we have been overwhelmed with resumes. We have established our headquarters in Austin, TX and research and development operations in Hawthorne, CA.


What we are setting out to do will be enormously challenging. It is difficult to make exact projections about schedule until we get further along in development, but the team has set itself a goal: To be in orbit in about three years.


Hedgeye has and will continue to support Firefly on a number of fronts: Josh Steiner (today he runs our Financials vertical but in the past he analyzed satellite operators) has worked with us on market sizing.


Jay Van Sciver, who leads Hedgeye’s Industrials team, has worked on valuation analysis for some of the private New Space players. Hedgeye will lend assistance in a variety of operational areas, ranging from finance and accounting to HR, facilities and IT.


We are not in the business of complaining about the 2008 crisis. We are in the business of cutting edge research, intellectual growth, and product innovation. So, I just wanted to take a few minutes this morning to thank you for your business – it’s helping us travel beyond the clouds.


Onward and upward!


Michael Blum is the President of Hedgeye Risk Management. You can follow him on Twitter at @mablum. You can also follow Firefly at @Firefly_Space.




Wynn proving the capacity constrained bears wrong. Street estimates likely to be exceeded, handily.


  • WYNN could do close to $2 in earnings in Q4 and over $9 in 2014  – the Street isn’t even close
  • As we’ve noted for months, Wynn Macau began a more aggressive Mass marketing and promotional campaign in October
  • Not only has Mass share increased but Wynn actually led the market in growth in December


A same-store growth story has emerged big time over the past few months and its name is WYNN.  Yeah, I know the stock has done well but so have all the Macau stocks – business is booming.  But the WYNN thesis was Cotai in 2016, new Asian gaming markets, and best in class safety.  Same-store growth wasn’t part of the thesis.  It is now.




Consistent with our opinion set forth in our 10/25/13 note, “WYNN TO FEAST ON THE MASS COMPETITION?”, we believe Wynn will be a market share gainer in Macau. Wynn’s rewards program and marketing effort was one of the least effective in Macau.  That began changing in October and the results are evident.  We believe much of the recent gains will drop to the bottom line and continue throughout 2014. 


For Q4, we are projecting company EBITDA and EPS of $457 million and $1.97 versus the Street at $414 million and $1.63, respectively.  Our 2014 estimates $1.98 billion and $9.15, respectively, exceed the Street's ($1.76 billion and $7.39) dramatically. 


For Wynn Macau, our Q4 and 2014 property level EBITDA estimate stand at $381 million and $1.59 billion, respectively, versus the Street at $323 million and $1.40 billion.  Our Las Vegas estimates do not differ materially from the Street.

JCP: Stuck in the Penalty Box

Takeaway: JCP is definitely in the penalty box, but after weighing the pros and cons (of which there are many) we're still keeping it on our roster.

If there is any company on the planet that can consistently find a way to disappoint more than JCP, we’d love to see it.  Everyone is saying the same thing this morning, so we’ll try not to be repetitive. On one hand, the fact that the company came out and reaffirmed guidance is positive. It’ll be the only department store this quarter to have positive comps and margins. But on the flip side, do you think that they could have given us a number or two? It’s not much to ask. After all, almost every sales update that they have ever issued included numbers. We don’t think sales updates are critical for a retailer, but it’s kind of like a dividend – once you start, you can’t stop – and you certainly can’t give less information over time (unless you want to destroy equity value).  This thing is down, obviously, and it deserves to be. JCP holders should be irate. We are.


There are 2 key questions we need to ask ourselves.  1) What are they hiding, 2) does this change the thesis we outlined in our Long Summary last night (The Search for Doubles and Triples), and 3) What does this mean for expectations and sentiment?


1)     Hiding?  Our sense is that they’re not hiding much of anything. They’re hoping. Sales growth absolutely tapered since the 10% comp issued around Black Friday. We all know that. If we assume that management’s “positive comps” translates into 3% for the quarter (below consensus of 6%) then the 2-year comp is an atrocious below -30% level as opposed to simply being ‘really bad’ in the -20s (which people expected.  We think that the vagueness is driven by one factor alone – the possibility of making up for a weak December in the month of January. Hope. That means that JCP kicks up the promotional engine. If we were another department store, we wouldn’t want to compete with a promotional JCP – given that its’ Gross Margin is already sitting so far below its peers. But our obvious concern is that JCP will pick comp in Jan over margin. We understand it needs to rebuild customer loyalty (traffic/comp), but at some point it’s going to have to start making money on the revenue. Last we checked, cash is pretty important.

2)     Does this change our thesis? Well… it certainly doesn’t change the fact that this one is last in our Long queue. One thing that could change our thesis is if the company is taking it on the chin with Gross Margin, and still is not seeing any sales acceleration. Gross Margin is the last offensive weapon JCP has. If it shoots and consistently misses the target, then it definitely impacts our call. But for now, we think that even with a 3% comp and 30% GM, liquidity is definitely not an issue this quarter. Importantly, even if we are to cut our comp assumptions in half next year, liquidity is still not a problem. Finally, if the recovery stalls here, there’s one thing you can bank on – Ullman being shown the door. Yes, the Board backed him publicly, but what are they going to say to all the employees (the primary audience of all those management-related messages we selfishly think are directed towards us) “Hey everybody, your boss is probably going to be fired really soon. Happy holidays!”. We think not.

3)     Sentiment: The market is already speaking out loud on this one – something that started when someone had the inside information and started trading the stock down yesterday. In addition, when JCP reported its last quarter and issued the guidance (that it just blessed) the stock was at $8.71. Now with a reiteration of that guidance the stock is struggling to hold $7.50. That’s off 14% on a like for like basis. At the same time, sentiment is already the worst of any name in the S&P (see our sentiment monitor below which triangulates buy side, sell side, and inside transactions). There are 89mm shares short, or 30% of the float.  To put that in perspective before the secondary – when liquidity was a massive concern -- there were 67mm shares short. Now it’s far more heavily shorted despite having patched up the greatest market concern.  This is one thing that keeps us on the positive side.  




JC PENNEY (JCP) (#5 Out of 5 Ideas)

Not a day passes where I don't consider punting this one from the list of longs. Truth be told, it was much more fun being short Ackman at $42. But then I put back on my analytical cap, and come back to the fundamental premise of our long call. And that is that this company can be saved from its' widely accepted death. Our survey work suggests that consumers actually want JCP to succeed, even if Wall Street does not. To be clear, we're not talking about JCP returning to the mediocre retailer it once was. Today it is a horrendous retailer, and we simply think that it can upgrade to being a 'slightly better than bad' retailer. This is best measured by sales productivity. Today Kohl's is operating at $210/ft. JCP's prior peak is close to $190. Current day JCP is cruising along at a whopping $100/ft. We're not suggesting that it could get to $190/ft --- or even $150/ft. But based on everything we learned from consumers we think the JCP can revisit the $140 mark. That's still below Sears, by the way. That, combined with a mid/high single digit EBIT margin gets us to around $1.50 in earnings power. Now…unlike the other quality companies featured in this note, with JCP we've got to deal with another 2-years of cash burn. Two points of good news; 1) it has the cash, unlike earlier this year, and 2) the consensus has the company burning cash in perpetuity. That's simply not realistic -- unless our consumer research all of a sudden turns out to be flat out wrong.


So how do we value a name like this? We're uncomfortable using earnings given the debt burden. But a 8x EBITDA multiple -- which we think is fair for a company that is rebounding like JCP should and is de-levering, gets us to around $16-$17 in 2-years. Definitely the highest-risk double we have on the sheet, but it's one that we're sticking with -- until the research gives us reason not to.


JCP: Stuck in the Penalty Box - jcpstats


JCP: Stuck in the Penalty Box - JCP sentiment

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