The Law of Least Effort

“Progress isn't made by early risers. It's made by lazy men trying to find easier ways to do something.” 

-Robert A. Heinlein


When it comes to stocks, progress is having the right answer to a simple question most of the time; is the price heading higher or lower.  A simple question, with only 2 options, yet with an infinite number of ways to get there.


Investors are Heinlein's kind of lazy, they look for short cuts to the answer about the next price.  In defense of the investor, getting the answer right is anything but a lazy man's game.   Sifting through data, other people's opinions, quant, inside information, chart formations, the confidence in a CEO’s voice, you name it, and it takes long hours.


Heinlein would agree with The Principal of Least Effort, as do some corners of Evolutionary Biology.  We may just be hard wired like our Paleolithic ancestors to find food in the most efficient way while not being eaten each day.  In searching for information, the Principal of Least Effort means you stop looking as soon as you find "minimally acceptable result", or for a stock, the answer to the up or down question.


The paradox is that people will go to extraordinary lengths to make the least effort.  It starts innocently enough by saying "wouldn't it be great if....".  Guttenberg might have said something like "wouldn't it be great if I didn't have to copy this Bible by hand!" The founders of Twitter perhaps said "wouldn't it be great to send short 140 character messages to my friends!", although I can't imagine why.  But after they did, they got to work.


Back to the Global Macro Grind


The BIG MAC is one of  Hedgeye Healthcare's  "wouldn't it be great if" ideas.  "Wouldn't it be great if I knew how all of this macro data connected to the stocks I care about."   So we built a database of thousands of macro and company data, tools to update them, tools to sort them, in order to discover how they relate to each other.  In theory, one can react with reasoned calm to new economic data that may be pushing stocks around on a given day, or forecast important company drivers, or recognize a new and unexpected relationship that leads to a great stock idea.


We're constantly evolving the process, adding new data, refining the analysis, looking for easier ways to do things.  Below are some examples of what we've found interesting lately.


Consumer Confidence is rising, that's good for Healthcare stocks, right? No, changes in medical consumption are highly inversely correlated to Consumer Confidence.  Falling confidence sends people to the doctor.  When consumers feel good, they go to the mall.  Consumer Confidence is currently slowing year over year.


Is there a healthcare stock that I can use to get levered to Hedgeye's#Eurobulls theme?  Yes.  Long XRAY, their European growth is tightly correlated with changes in German Unemployment.  Germany happens to be XRAY's biggest EU market.  In the US, the dental market tracks Dentist Office Employment which continues to rise.


Hospitals are up on a rope, should I stick with it?  Yes, highly profitable surgical cases which represent 30% of hospital revenue started growing again and it looks sustainable.  We track a single medical Producer Price Index series (of the hundreds reported each month) to forecast the ICD businesses at BSX, MDT and STJ, while growth for US Orthopedic sales closely follow a  monthly employment number representing 16% of the workforce and just started to turn.  Hospital admissions are weak in Q413 because flu and maternity are weak, and don't pay well, while the surgical indicators are both rising after a multi-year declines.


UNH was down a little on their earnings yesterday, is it a good time to buy it? No. Deflating their medical cost trend with a key macro series suggests utilization is beginning to accelerate after years of soft or declining trends.  At the same time, realized pricing is steadily making new lows, in line with the Employment Cost Index Health Insurance and the Producer Price Index for Managed Care.  Additionally, managed care premium rates are growing slower than the rates they pay to hospitals, their largest expense. A de-levering of the pricing spread is a massive headwind that Obamacare, private exchanges, dual eligibles, or Optum can offset.


Deciding how to weight BIG MAC signals can be challenging sometimes.  While a BIG MAC query is a key part of our process, we still do all of the other things too.  We sift through data, read other people's opinions, listen for the confidence in a CEO’s voice, look at charts, talk to experts; everything except the inside information thing.   Remember, it's a simple question with no easy answer.  You better have a process.


Our immediate-term Global Macro Risk Ranges are now (TREND in brackets):


SPX 1 (bullish)

DAX 9 (bullish)

VIX 11.84-13.55 (bearish)

USD 81.54-81.32 (neutral)

Gold 1 (bearish)


Always be #evolving!


Thomas W. Tobin

Healthcare Sector Head


The Law of Least Effort - UNH Table


The Law of Least Effort - Virtual Portfolio


TODAY’S S&P 500 SET-UP – January 17, 2014

As we look at today's setup for the S&P 500, the range is 18 points or 0.48% downside to 1837 and 0.49% upside to 1855.                                         










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.46 from 2.46
  • VIX closed at 12.53 1 day percent change of 2.04%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Housing Starts, Dec., est. 990k (prior 1.091m)
  • 9:15am: Industrial Prod. m/m, Dec., est. 0.3% (prior 1.1%)
  • 9:55am: UMich Conf, Jan. prelim, est. 83.5 (prior 82.5)
  • 10am: JOLTs Job Openings, Nov., est. 3.930m (pr 3.925m)
  • 12:30pm: Fed’s Lacker speaks in Richmond, Va.
  • 1pm: Baker Hughes rig count


    • 8am: Sec. of State John Kerry hosts Canadian Foreign Minister John Baird, Mexican Foreign Secretary Jose Antonio Meade for North American Ministerial discussions
    • 9:30am: HHS Sec. Kathleen Sebelius; WH Domestic Policy Council Director Cecilia Munoz; Acting Surgeon General Boris Lushniak; CDC Director Tom Frieden release report on smoking
    • 9:30am: Federal appeals court reviews legality of Fed debt interchange regulations
    • 11am: President Obama delivers speech on spy programs, national security
    • 1pm: Rep. Frank Wolf, R-Va., of House Appropriations Cmte’s Commerce, Justice, Science, and Related Agencies sbcmte, holds news conference on provisions in Omnibus Appropriations bill


  • China Mobile started selling Apple’s iPhone today
  • Spending bill’s passage sets stage for U.S. debt limit showdown
  • Canada urging U.S. Keystone pipeline decision
  • Shell profit slumps amid weak refining, losses in Americas
  • Nintendo forecasts net loss as Wii U, game sales stagnate
  • KKR, Permira sell ProSiebenSat.1 shares at EU34.75 apiece
  • J&J-Bayer fail to win U.S. panel vote for wider Xarelto use
  • Regeneron says Bayer barred from buying more than 20% stake
  • Sprint has proposals from banks on T-Mobile financing bid: WSJ
  • Cerberus to sell Kokusai Kogyo stake for $1.25b-$1.34b: Reuters
  • Moelis said to file IPO under jobs act as early as Friday: FT
  • Sysco-US Foods deal to be reviewed by Florida, other states: Reuters
  • EU weighs ban on proprietary trading at biggest banks from 2018
  • ICBC rebuffs call to bail out $495m trust product


    • Bank of New York Mellon (BK) 6:30am, $0.54
    • Comerica (CMA) 6:40am, $0.74
    • First Horizon National (FHN) 7am, $0.17
    • General Electric Co (GE) 6:30am, $0.53 - Preview
    • M&T Bank (MTB) 8:01am, $1.91
    • Morgan Stanley (MS) 7:15am, $0.44 - Preview
    • Schlumberger (SLB) 6am, $1.32 - Preview
    • SunTrust Banks (STI) 7:15am, $0.70


  • Deutsche Bank Withdraws From Gold Fixing in Commodities Cutback
  • Farmers Worldwide Suffer Extreme Weather Wreaking Food Havoc
  • Mining Companies Cutting $10 Billion Heralds Boom: Commodities
  • Nickel Falls on Speculation China Has Ample Stockpiles of Ore
  • WTI Crude Set for First Weekly Advance This Year on U.S. Economy
  • Wheat Poised to Snap Longest Losing Streak Since 2011 on Demand
  • Gold-Dollar Link Weakens on Metal Coin Demand: Chart of the Day
  • Cocoa Falls After North American Processing Data; Coffee Drops
  • Direct Nickel, Antam to Develop Process Plant in Indonesia
  • Boston Beats New York With Record Power Price Premiums: Energy
  • Copper Analysts Switch to Bullish From Neutral for Next Week
  • BTG Said to Withdraw From Auction for JPMorgan Commodities Unit
  • AsiaClear Iron Ore Swap 370% Rise Shows Surging Commodity Trade
  • Gold Heads for First Weekly Drop This Year on Stimulus Outlook


























The Hedgeye Macro Team








At the end of 4Q, Macau gaming tables was 2 tables higher QoQ to 5,750. Slot count declined by 1,669 machines QoQ to 13,106.



Li Gang, the new Macau rep from China, took the opportunity to reassure listeners that he was not a ‘tough cop’ focused on some clampdown on the local casino industry, and also that there would be no ‘blind expansion’ of tourism to Macau.

“My role as a [discipline] commission member is to participate in the anti-corruption works in mainland China, and that does not have to do with the local gaming industry,” he added.


Li also said Beijing has no plans currently to expand the existing individual visit scheme allowing mainland residents from select cities to travel independently to Macau.  “Last year, there were 28 million mainland visitors coming here under the individual visit scheme,” Mr Li said on the sidelines of a cocktail reception for Chinese New Year. He added: “This number could exceed 30 million this year.”



Macau Legend Development said it raised about HK$1.35 billion (US$174 million) selling new shares, less than previously planned of US$300 million.  The company sold shares equal to about 2.9% of its enlarged share capital at HK$7.25 each to fund its proposed redevelopment of Fisherman’s Wharf casino complex in Macau.  Fisherman’s Wharf will focus more on mass-market gamblers instead of high-stakes bettors.



Bloomberry Resorts Corp, who operates Manila’s Solaire Resort and Casino, was suspended at the Philippine Stock Exchange after Global Gaming Asset Management LLC sold its 8.7% stake in the company.  Bloomberry told the exchange it had asked for trading to be suspended until next Thursday.  Bloomberry said it needed to confirm that the buyers of the shares would be unaffected by arbitration proceedings meant to settle its dispute with GGAM.


Bloomberry ended its management agreement with GGAM in September, saying GGAM had failed to manage the Solaire casino-resort. GGAM objected and asked arbitrators in Singapore to settle the argument.



Transportation Infrastructure Office (GIT) Director Lei Chan Tong said that the government was doing its best to ensure that the Taipa section of the Light Rail Transit (LRT) is in operation in 2016.  Lei said  the Taipa section should be completed by late 2015 or early 2016, after which the trains would make trial runs until the system’s official opening.  

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Takeaway: JCP Board: your CEO is failing you, and the investors you represent. His time is over. Replace him – now – and earn our support and respect.

This note was originally published January 16, 2014 at 21:02 in Retail


The fundamentals have not changed nearly as much as JCP’s equity would suggest, but the reality is that the company is giving us very little reason to continue to support the name as the stock slides (note: recent announcements that; a) results are ‘in-line’ (but without any quantification whatsoever), and b) the company will be closing 33 stores and laying off 2,000 employees). The company might be one of the only retailers that is comping positive in this environment at a higher margin y/y, but that’s in stark contrast to its recent behavior. Recent announcements hardly match up with a company that has confidence in its future.


We’re still of the view that there is $1.50 in earnings power tucked away inside JCP, and for people that want to look out several years, we really don’t think that there’s any fundamental change to this story. That makes the company’s recent actions all the more ridiculous. The research has not changed, though the timing is questionable. We don’t like questionable timing. We’ll stomach it for a great company, or even a good one, but have less of an appetite when it comes to a company like JCP.


The reality is that we won’t continue to stick our neck out when Ullman seems to be doing his best to break it. There are too many great businesses that have gotten hit recently that are far more worthy of defending than JCP (such as RH, ZQK, WWW, and FNP). JCP was our only loser in 2013, and we won’t make the same mistake twice.


Management is failing – big. The answer here is for Ullman to jump ship (or get pushed off). The Board has to take action. The company needs a permanent leader. Ullman already made good progress to stabilize the company. We’ll give him that. Seriously. Golf clap for Mike. But it’s time for the next phase of JCP, and he’s not the guy to lead. Not by a long shot.  We’d like to think that accepting the role of Chair of the Federal Reserve of Dallas, and then being elected to the Board of the National Retail Federation is his way of moving off to the next stage in his career. The reality is that being CEO of JCP is easily two-full time jobs, and one of the most challenging roles in Corporate America. JCP’s board had to approve these outside assignments, and we can’t imagine that they’d do so if they thought he was going to be a long-timer.


That thought process certainly lends itself to the prospect of a CEO change over the near-term, but we have no edge on that timing. If you want to speculate on that one, it might be a good trade if it proves to be correct. But it’s not a trade we’re going to make.


Punchline: The Board needs to fire Ullman and hire a powerful and appropriate leader to unlock the value we know exists at JCP. When that happens, and we gain confidence that the new CEO sees the same earnings power we do, then we’ll support this name until the cows come home, because all of our research tells us that the value is there.  That’s true even if it means getting involved at $9 or $10, presuming we’ll see a pop on the CEO announcement.  The reality is that when someone is running the company that has a definitive long-term plan, and the earnings power we’re modeling becomes a reality (or at least earns a spot in the debate), this can be a big stock even a few bucks higher.

Bear Depression

This note was originally published at 8am on January 03, 2014 for Hedgeye subscribers.

“In 1893, the most serious depression the nation had yet experienced settled over the land.”

-Doris Kearns Goodwin (The Bully Pulpit)


Today is not 1893.


While they let some of the 2013 US stock market bears out of their caves yesterday (BREAKING NEWS: “SP500 Falls To Start Year Lower For 1st Time Since 2008” –Bloomberg), I suspect the blizzard will send them right back to where they came from.


This is not 2008 either.


Sure, there’s plenty to concern yourself with (like a market that got pinned up at an all-time high at year-end) in terms of this raging bull market being overbought and both sentiment and flows chasing it, but let’s get real here and get on with our risk managed day.


Back to the Global Macro Grind


Oh, and by the way, in 1893 we didn’t need a bunch of bureaucrats at the Fed to save us from themselves either. The bear depression of the late 19th century was one born out of this thing we call a cycle. Companies back then overbuilt rail capacity and over-extended themselves with bank loan leverage (sound familiar?). This is what happens at cycle tops (like 2007).


Globally (especially in Europe) we aren’t in the area code of a peaking 1893 or 2007 piggy cycle either. In the US we don’t think we’ll be seeing consecutive 4% handles on GDP, but that certainly doesn’t mean fear and panic is going to break-out across the land. With so many still whining about the last war, I say you get yourself a shovel and a smile this morning - move forward.


Back to the business cycle (where companies build inventories, shhh), lets dig through some fresh US economic data:


1. USA’s ISM Manufacturing PMI for DEC was reported yesterday at 57.0 vs 57.3 in NOV

2. The ISM’s New Orders component of the report accelerated to 64.2 DEC vs 63.6 NOV

3. The ISM’s Employment component of the report was steady at 56.9 DEC vs 56.5 NOV


For me, this was a surprisingly strong read-through on the US economy as the data was almost as good as it could get (sequentially) in Q3 of 2013. So to see follow-through in December was a good thing for growth (as an investment style) and bad for bonds.


Employment is a fun one to watch people complain about because:


1. The monthly BLS data is a lagging economic indicator (the one CNBC has dudes guessing on every month)

2. The only coincident to leading indicators (ISM’s, weekly Jobless Claims, etc) are poorly understood

3. NSA rolling 4-wk jobless claims (see Chart of The Day) fit the 10yr US Treasury Yield’s 12 month TREND like a glove


I’ll give you 5:1 odds that if you ask your run-of-the-mill TV pundit what the consequence is of using the NSA # to probability weight the direction of the bond market that they think you are talking about the National Security Agency.


*NSA = non-seasonally adjusted. And the reason why we use the NSA rolling-claims data series on a year-over-year basis is simply because that’s what Josh Steiner (Managing Director of our Financials team) found that Mr. Macro Market cares about.


Who seriously cares that, on very light volume (-14% vs @Hedgeye TREND), it was the 1st market down day “since 2008” when it has no back-test or relevance to the market we have in front of us in 2014? Here are 3 more things to think about:


1. US Initial Jobless Claims of 443,513 (NSA) were down -9.5% y/y yesterday (vs. down -8.2% in the wk prior)

2. US 10yr Treasury Yield held my most immediate-term TRADE line of 2.96% support yesterday; 3.07% = resistance

3. Gold is signaling immediate-term TRADE overbought this morning within a bearish @Hedgeye TREND


So, rather than try to get cute with some Hedgeye panic and depression propaganda yesterday, here’s what I did:


1. Took our Cash positions down from 50% to 40% in the Hedgeye Asset Allocation Model

2. Moved from 5 LONGS, 5 SHORTS on 12/31’s close to 8 LONGS, 4 SHORTS (bought and covered on red)

3. Shorted Gold (GLD) and bought some US Equity Beta (TSLA)


That doesn’t mean I am going to be right. It simply means there’s a process behind every sequence of macro market timing decisions my team and I make. There’s nothing depressing about that.


Our immediate-term Risk Ranges are now as follows (all 12 of my Big Macro Ranges are in our Daily Trading Range product):


UST 10yr Yield 2.97-3.07%

SPX 1809-1856

VIX 11.91-14.91

Gold 1185-1235


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bear Depression - Chart of the Day


Bear Depression - Virtual Portfolio

A Picture Is Worth 1,000 Basis Points

Takeaway: It's a great macro tape for country picking equities.

#GrowthDivergences (one of our Q1 Macro Themes) is actually pretty obvious from a Global Equity market read-through perspective.


In our model, it's all about the rate of change. And it's relative too.


Take a look around... Greece, Portugal, and Denmark are all up between 6-11% year-to-date. Now take a look at China, Japan and Brazil down... all 3-4% year-to-date.


A Picture Is Worth 1,000 Basis Points - drake


It makes for a great macro tape for country picking equities.


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