• run with the bulls

    get your first month

    of hedgeye free


The Rivalry

This note was originally published at 8am on January 10, 2014 for Hedgeye subscribers.

“One friend in a lifetime is much; two are many; three are hardly possible.  Friendship needs a certain parallelism of life, a community of thought, a rivalry.”

-Brooks Adams


As many of you may have noticed already, my colleagues and I have a bit of a fascination with the sport of hockey.  In particular, Ivy League hockey, since many of us played at Yale (and our firebrand energy analyst Kevin Kaiser played at Princeton).  So, if you will, please tolerate my enthusiasm for just a minute here as this weekend is effectively our Super Bowl.


Specifically, this Saturday at 8pm Yale will be playing Harvard at Madison Square Garden.  In as much as I would like to wish my friends at Harvard good luck this weekend, I would, honestly, not really mean it.  But I sincerely do hope the Crimson don’t totally embarrass themselves, or next year we will have to invite Cornell to play us on the world’s biggest hockey stage. 


Now admittedly Harvard did once win a NCAA championship, albeit it was more than three decades ago.  On the other hand, Yale is the defending NCAA champion and over the last five years has amassed a record of 111 – 53 – 12.  Over the same period, Harvard hockey is 53 – 87 – 24.  As if having Larry Summers on their team wasn’t bad enough... ;)


In Malcolm Gladwell’s new book, “David and Goliath”, he digs into the idea that underdogs do disproportionately well in competition.  He cites a study from political scientists Ivan Arreguin-Toft that looked at all wars between small countries and much larger countries over the past two hundred years.  He found that the much larger country only win 71.5% of the time.  Further as Gladwell writes:


“What happens in wars between the strong and the weak when the weak side does as David did and refuses to fight the way the bigger side wants to fight, and instead uses unconventional or guerilla tactics.  The answer: in those cases the weaker party’s winning percentage climbs from 28.5% to 63.6%.  To put that in perspective, the United States population is ten times the size of Canada’s.  If the two countries went to war and Canada chose to fight unconventionally, history would suggest you ought to put your money on Canada.”


So, who knows, if Harvard hockey were to do something totally unconventional, like say put their football team on skates, maybe they will have a chance this weekend!


Back to the Global Macro Grind...


Yesterday, Keith presented our top three global macro themes for Q1 2014.  Like clockwork, we’ve been doing these themes for the last five years.  Those three themes are as follows:

  • #InflationAccelerating – CPI comparisons globally are easy and commodities are basing, as a result we are expecting a re-acceleration in reported inflation.  From a sector perspective, the three sectors we like in this scenario are technology, healthcare and energy;
  • #GrowthDivergences – This could be the year in which global growth divergences increasingly matter for stocks, especially as rates begin to normalize, and Europe looks set up to see accelerating economic growth.  Conversely, we are starting to question whether Japan’s recovery is losing steam; and
  • #FlowShow – In a world in which 75% of the global financing stock outstanding is in debt, there is a lot money that can flow out of bonds and into equities.  In the Chart of the Day below, we again emphasize that the ratio of debt-to-equity was 50/50% in 1999.

One key supporting point for the idea that Europe could well be the global growth leader, at least on a percentage change basis, is the fact the European sovereign debt markets have all but recovered.   Remember that sovereign debt crisis from a few years ago? Well, the European credit markets barely do.


This morning the Spanish 10-year yield is trading at 3.70%.  This is a mere 74 basis points wider than the U.S. 10-year yield.   In fact, last night Spain kicked off its funding program and raised $7.2 billion in five year debt, overshooting its target.  Further, this debt was sold at 2.411%, which was the lowest funding rated of the Euro era for Spain.


Now in the long run, the Spanish economy still has excesses built up from the parabolic housing bubble it experienced.  Nonetheless, in the short run as the likes of Spain, Italy, France and Portugal are able to sell debt at reasonable rates, this is both a real positive for their governments and their governments’ ability to spend, but more importantly for banks.  As broad borrowing rates go down, this will eventually filter back to corporations who can then borrow at low rates to more aggressively fund capital expenditures and expand. 


Since we are on the topic of housing, I should flag that the U.S. housing market is at the top of our list for worries as it relates to the U.S. economy.   In fact, mortgage applications are down 22% from their 2014 peak reading.


Even if it’s not clear yet that housing headwinds will derail the U.S. economy, it is setting up for some interesting short ideas.  In particular, our Financials team just added Nationstar Mortgage (NSM) to our Best Ideas list this week.  Previously, this had been a top long idea for us, which played out well as our earnings estimates were higher than the consensus.


Conversely, our view is now that the consensus earnings estimate of north of $5 for 2014 could come in as low as $1. 


Now, how’s that for a downside surprise? 


We are doing a deep dive on the name and will outline the thesis this Monday at 11am EST. (Email sales@hedgeye.com to subscribe for access.)  NSM trades more than $30 million in volume per day, so there’s lots of stock out there to short, especially if you believe our Financials team that the best case scenario is that the stock will get cut in half.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Rivalry - Chart of the Day


The Rivalry - Virtual Portfolio


McDonald’s reported mediocre 4Q13 results this morning, as revenues ($7.093B) and global comp sales (-0.1%) missed expectations of $7.106B and +0.5%, respectively.  EPS, however, surprised to the upside ($1.40) versus expectations of $1.39.  4Q was highlighted by disappointing performance across the board, save for Europe, which delivered respectable comp sale growth led by strength in France, the UK and Russia.  December was the weakest month in 4Q, highlighted by disappointment in every region.


4Q Same-Store Sales

  • Global:                 -0.1% vs +0.5% (consensus estimate)
  • United States:       -1.4% vs -0.2% (consensus estimate)
  • Europe:                +1.0% vs +1.1% (consensus estimate)
  • APMEA:               -2.4% vs -1.3% (consensus estimate)




Overall, 2013 proved to be another subpar year for MCD as the company only managed to grow EPS by 3% on 2% revenue growth.  As management reiterated several times on the call, top line sales are critical to driving continual margin improvement and to the overall health of the business.  This growth has been difficult to come by, however, as full year global comp sales (+0.2%) missed expectations of +0.5%.  After a less than stellar two years, it is no surprise that global same-store sales continue to decline on a two-year basis.






We have been bearish on MCD for quite some time now and continue to believe the company has issues in its underlying, core business.  While we believe management has realized they have problems, we have little faith that they have found the proper solutions. 


To their credit, they have been proactive in their attempt to reverse the current downward momentum of the business.  To this extent, they recently introduced a number of initiatives (Dollar Menu and More, new refrigerators, high density prep tables, additional drive thru windows) to operationally “enhance” the U.S. business.  However, these initiatives are not guaranteed to improve operations and, in fact, could negatively impact the business. 


Franchisees have voiced their discontent with the Dollar Menu and More, noting that it provokes customers to order multiple, smaller margin, products rather than a single, higher margin, product.  This tends to slow service times.  Another complaint is menu complexity.  We have called for MCD to simplify their menu multiple times.  This would not only help customers order meals quicker and help the kitchen deliver the food faster, but also improve speed of service, the guest experience and franchisee morale.  Instead, MCD continues to try to be all things to all people.  This desire has led to the manifestation of high density prep tables which are being put in place, at least hypothetically, to organize the kitchen, allow for additional customization, and speed service times.  How those last two points correlate, however, is lost on us.  We think this level of customization could in fact slow production times – a concern that has been shared by multiple franchisees.  We questioned management on this point during the earnings call, to which they pointed out that the additional capacity would help organize the kitchen by keeping employees relatively stationary and eliminating cluster.  Although we could be wrong, this response did not do much to allay our concerns.


We often hear the bulls refer to MCD’s structural advantages (global footprint, strong asset base, significant FCF generation, etc) in support of the stock.  While these are important, they shouldn’t give anyone reason to ignore a slowing top line.  The fact of the matter is, the street is still too bullish on McDonald’s in 2014.  The company delivered 2% and 3% EPS growth on 2% and 2% revenue growth in 2012 and 2013, respectively.  What would make anyone believe they will deliver 7% EPS growth on 5% revenue growth in 2014?  Personally, we do not have enough confidence in the sales drivers management has in place to make this leap of faith. 


When we look at the overall business, we see a challenged top line that has shown zero signs of improvement, declining traffic, shrinking margins, and a diminishing competitive advantage.  With that being said, we believe 2014 expectations will be revised down over the course of the year and lead to multiple contraction.



Howard Penney

Managing Director

[video] McCullough: Media Enabling Icahn's Market-Moving Rants

Jobs: What's Really Going On

Takeaway: We continue to expect the 10-year treasury to re-test 3.00% on strengthening labor data that will become more apparent in ~2 weeks time.

Editor's note: This is a complimentary look at Hedgeye research posted earlier this morning by Financials Analyst Josh Steiner. For more information on how you can become a Hedgeye subscriber click here.


Jobs: What's Really Going On - jobs99

Two Weeks Until Market Gets What's Going On


The initial jobless claims data continues to paint a picture of a strengthening, though not overheating, recovery in the labor market. The most important takeaway that varies from consensus is that the data is sharply at odds with the very weak December Non-Farm Payrolls (NFP) print that caused a rally in long bonds. We expect, based on this claims data, that dynamic to reverse when the January NFP print is released two weeks from tomorrow. 


Our preferred measure of looking at the claims data remains the year-over-year rate (Y/Y) of change in the rolling non-seasonally adjusted initial claims. This week that measure was 469,817, which was down 7.9% from the 510,350 at the same time last year. This compares with the previous week's rate of improvement of 8.5%. On the margin, there was modest deceleration in the rate of improvement, but not enough to warrant emphasis. On a single week basis, an inherently more volatile series, the Y/Y change was 5.8% better, which was better than the previous week's 4.3% improvement. 


We continue to expect the 10-year treasury to re-test 3.00% on strengthening labor data that will become more apparent in ~2 weeks time.


The Numbers

Prior to revision, initial jobless claims were unchanged at 326k week-over-week (WoW), as the prior week's number was revised down by -1k to 325k.


The headline (unrevised) number shows claims were higher by 1k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -3.75k WoW to 331k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.9% lower YoY, which is a modest sequential deterioration versus the previous week's YoY change of -8.5%.


Jobs: What's Really Going On - stein1


Jobs: What's Really Going On - stein2

Join the Hedgeye Revolution.



INVITE: Kinder Morgan Thesis Update Call

We added SHORT Kinder Morgan Energy Partners (KMP) to our Best Ideas List back in September 2013. 


Kinder Morgan is hosting its much-anticipated, annual Analyst Day on Wednesday, January 29th, where it will give its detailed 2014 outlook and financial guidance.  


We will will host a call of our own on Friday, January 31st at 1:00pm EST to discuss the key takeaways from the Analyst Day; we will also refresh our views on the three Kinder Morgan companies, KMI, KMP, and EPB.



  • A review of the 2014 outlook/guidance
  • Coming headwinds and tailwinds for KMI, KMP, and EPB
  • Changes, updates, and additions to our original thesis 
  • Refreshed valuation analysis

We will conclude the call with a live Q&A session.


All Hedgeye Energy subscribers will receive the dial-in info and call materials on Thursday, January 30th.


Let me know if you have any questions,


Kevin Kaiser

Managing Director


Euro Flash PMIs Strong; Spain Encouraging

Strong European PMIs, a reduction in sovereign debt levels, and outperformance from the periphery (of note is Spain) continue to support our Q4 2013 and Q1 2014 macro themes of #EuroBulls and #GrowthDivergences, respectively, that forecast a bullish growth recovery in Europe, specifically with a bullish outlook for UK and German equities and the British Pound vs the USD.


Preliminary January PMIs were released this morning from the Eurozone, Germany, and France. The data showed a pop month-over-month for the Eurozone and Germany; in fact the Eurozone Composite PMI expanded at the fastest pace in two-and-a-half years!  While France improved, it remains grounded under the 50 line (representing contraction) and continues to negatively diverge versus the region. UK PMIs took a slight leg down in January, however remain at/near 3-year highs. 


Euro Flash PMIs Strong; Spain Encouraging - bb. pmis

  • Eurozone PMI Manufacturing 53.9 JAN Prelim (exp. 53) vs 52.7 DEC
  • Eurozone PMI Services 51.9 JAN Prelim (exp. 51.4) vs 51 DEC
  • Eurozone PMI Composite 53.2 JAN Prelim (exp. 52.5) vs 52.1 DEC
  • Germany PMI Manufacturing 56.3 JAN Prelim (exp. 54.6) vs 54.3 DEC
  • Germany PMI Services 53.6 JAN Prelim (exp. 54) vs 53.5 DEC
  • France PMI Manufacturing 48.8 JAN Prelim (exp. 47.5) vs 47 DEC
  • France PMI Services 48.6 JAN Prelim (exp. 48.1) vs 47.8 DEC


Separately, Eurostat data showed that Eurozone government debt in Q3 2013 fell for the first time in nearly six years, signaling the region’s austerity push is in fact reducing fiscal excesses, despite debt levels still well above the EU's 60% limit. The UK remains our poster child for the positive economic impact of its early decision in the ‘crisis’ to reduce its fiscal excesses (debt and deficit).

The data shows that debt across the 17 countries in the region stood at €8.842T in Q3 2013, down from €8.875T in Q2 2013, or slipped to 92.7% as a % of GDP from 93.4% in the previous quarter. 


The highest ratios of government debt to GDP at the end of the third quarter of 2013 were recorded in Greece (171.8%), Italy (132.9%), Portugal (128.7%) and Ireland (124.8%), and the lowest in Estonia (10.0%), Bulgaria (17.3%) and Luxembourg (27.7%).  Germany's debt levels stands at 78.4%, France 92.7%, Spain 93.4%, and UK 89.5%. (two chart courtesy of Eurostat.com)


Euro Flash PMIs Strong; Spain Encouraging - bb. debt 1


When comparing current debt versus Q3 2012, 23 of the 28 member states registered an increase in their debt to GDP ratio at the end of Q3 2013, and 5 a decrease. The highest increases in the ratio were recorded in Cyprus (+25.3%), Greece (+19.9%), Spain (+14.3%) and Slovenia (+14.1%), while decreases were recorded in Germany (-2.8%), Latvia (-2.0%), Bulgaria (-1.4%), Denmark (-0.9%) and Lithuania (-0.8%).


Euro Flash PMIs Strong; Spain Encouraging - bb. debt 2



Spain’s Push and Pull Recovery is Encouraging

We noted this week the peripheral equity markets of Europe are off to a quick outperformance in 2014.  We continue to see positive signs of economic recovery in Spain, and remain well aware of the structural overhangs that still linger, including high unemployment (26.03% in Q4 vs 25.98% in Q3). As we show in the chart below, if we look at Spain’s equity (IBEX35) performance over the last 5 years, there’s plenty of “catch-up” in the spread. Below are some recent data points to consider when sizing up Spain:

  • Bond Issue Raises Record Orders:  Spain's 10-bond issue raised a record €10B – and orders received were almost 4x oversubscribed.   ~ 65% were sold to investors outside the country and institutional investors participation was the second biggest since the euro's launch in 1999, rivaled only by the €44B in demand from the debut deal from the EFSF.
  • Spain formally exited its bailout program for banks:  the €41B borrowed and earmarked for banks (out of the €100B made available in return for the Spanish banking sector reforms and a range of austerity measures) has been paid back. European Commission's Olli Rehn said the Spanish program had worked and cited more stable financial markets, increased liquidity for banks, rising deposits and improved access to funding markets.
  • Bad Loans Spike: Bank of Spain data showed that bad loans at Spanish banks as a percentage of total lending reached a fresh record high of 13.08% in November, up from 12.99% in October. The value of bad loans rose on the month by €1.5B to €192.5B.

Euro Flash PMIs Strong; Spain Encouraging - bbb. spain vs usa


Matthew Hedrick


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.