Get the Macro Right!

Client Talking Points


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. This has implications for investors around the globe. Country/sector/asset picking matters in a lower variance, divergent performance environment.  Some big YTD divergence and the YTD is only a few weeks old.


We expect a continuation of fund flows out of fixed income and into equities during Q1. The “Queen Mary” has indeed turned, aided by the Fed’s decision to begin tapering. According to the latest ICI Fund Flow Survey, Equity flows perked up strongly after a negative week to start '14 with the biggest inflow in 10 weeks. This strong weekly inflow coupled with the slight outflow from last week has now moved the 2014 weekly average to a $3.9 billion average inflow for equities to start 2014, a follow through on 2013's positive trends where $3.0 billion per week on average flowed into stock funds.


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. The reemergence of inflation as a core macro risk threatens to materially alter the investment landscape going forward.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We remain bullish on the British Pound versus the US Dollar, a position 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). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we 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.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.


Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.

Three for the Road


Markets aren't about calling tops and bottoms - they are all about risk managing ranges @KeithMcCullough


"It's not that I'm so smart, it's just that I stay with problems longer."

-Albert Einstein


Treasury prices surged Friday in their second day of strong gains. The 10-year note was down 5 basis points at 2.722%, on track for its lowest close since the end of November.






A jump in room rates in four-star and five-star hotels over the Lunar New Year holidays is due in part to block bookings by VIP gaming promoters. Sources expected rates over the peak period to be at least double what they were usually.  The president of the Macau Travel Industry Council, Andy Wu Keng Kuong, said four-star and five-star hotel rooms were “almost fully booked” for the Lunar New Year holidays, which begin on January 31. “The third to the sixth days of the Chinese New Year holidays are usually the period with the heaviest bookings,” Mr Wu said. “The nightly rates for four-star and five-star hotels in this period range from 3,000 patacas [US$375] to 7,000 patacas,” he said.



A survey by China’s tourism academy shows, among the city dwellers who bought vacation packages for the Chinese New Year, 40% are travelling abroad, 30% are going somewhere within the Chinese mainland, and the rest are travelling to Hong Kong, Macau, or Taiwan, CCTV reports.  China’s Tourism Academy predicts that tourists during Spring Festival this year will number up to 225 million. Yu Zirong, Deputy General Manager of China Int’l Travel Service, Shanxi, said.  Yu Zirong also said the volume of individual and small group travel during Spring Festival has risen by about 30% over last year.



The drive for Macau’s satellite casino operators to acquire interests in VIP junket operations appears to be gathering pace.  China Star Entertainment Group Ltd says in a Hong Kong filing it’s in talks to acquire a company entitled to profits from VIP gaming in the city.  China Star is controlling entity for Hotel Lan Kwai Fong in downtown Macau, a property under a casino licence from SJM.  The significance of the moves is that they could potentially mean defacto casino operators making commercial decisions about VIP credit issuance or at least having a direct commercial interest in policy on such credit issuance – even if the junket room is not on their own premises.

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Life Inside the Box

“If we lack emotional intelligence, whenever stress rises the human brain switches to autopilot and has an inherent tendency to do more of the same, only harder.  This, more often than not, is precisely the wrong approach in today’s world.” 

- Robert K. Cooper PhD


Robert Cooper is a neuroscientist and strategic advisor to CEOs and many Fortune 500 companies.  Taking on the work that Dr. Cooper requires is certainly not easy.  According to Cooper, your brain is organized to reflect everything you know in your life.  Or, in other words, your brain is a record and an artifact of your past. 


Consistent with this line of thought, Cooper poses the following question: Does your environment control your thinking or does your thinking control your environment?


To help you ponder, we ask the following questions:

  • What does your daily routine look like? 
  • Did you wake up today and hop out of bed on the same side? 
  • Did you shut your alarm off with the same hand? 
  • Did you go to the bathroom like you always do? 
  • Did you shower and follow the same grooming routine? 
  • Did you dress the way your coworkers expect you to dress? 
  • Did you follow the same breakfast routine and do you get angry when the morning commute to work is just slightly off the normal pace?

I’m sure many of you will find that you often revert back to a routine in life you are comfortable with or, in Layman’s terms, the same-old, same-old life.  This is considered living life inside your box and it is much more prevalent among us and our colleagues than we’d like to acknowledge.


Admittedly, this may be too much philosophical thinking for a Friday morning.  But, the metaphor of switching to autopilot during rising levels of stress could be the norm for a CEO whose company you have invested hundreds of millions of dollars in and whose stock is underperforming.  Isn’t this a scary thought?  What if this routine keeps him/her in survival mode and prevents him/her from making the right decisions for the company he/she is running?


Back to the Global Macro Grind


I often refer to this decision making process in the restaurant space as the “6 Stages of Grief.”  This is a cycle that some companies tend to go through before they can see life outside the box.  As I see it, today’s activist investors provide a version of neurological therapy for this grief.


Unfortunately, the news of an activist investor can actually provoke a series of decisions based on past experiences that might be inconsistent with what is appropriate for today’s environment.  When an activist investor arrives on the scene, it’s only natural that “as stress rises, the human brain switches to autopilot and has an inherent tendency to do more of the same, only harder.”


Whether it’s a letter from Dan Loeb saying you’re an idiot or a letter that says “we look forward to maintaining an open dialogue and working with you to ensure that value is created for all shareholders,” either one could put management on the defensive and get them to react in ways that could potentially destroy shareholder value.


Sadly, this is precisely the path of destruction that the CEO of Darden Restaurants is headed down.  


As I said earlier this week, the challenge for the Board members of Darden (or any Board) is to recognize the appropriate time to step up, break out of their box, and implement meaningful change.  It is their challenge, their job, and their responsibility not to be more of the same. 


When a Board works closely with a CEO for a number of years, the best interest of shareholders’ can become fuzzy.  As an outsider, it appears that this is the case with the current Board and Chairman/CEO Clarence Otis.  The operational performance of DRI has stagnated and it is, without question, time for a significant change.


As Keith said in yesterday’s Early Look, we are short a significant number of restaurant names.  On yesterday’s earnings call, the CEO of Starbucks, Howard Schultz, went out of his way to emphasize the decline in bricks and mortar retailing.  Starbucks was wisely in a position to win in this environment.  Mr. Schultz is a great example of a CEO, at least in my space, that is willing to take on the difficult task of recognizing when and where he can strengthen his company.


To be honest, I welcome the commentary about bricks and mortar retailing as it relates to my short call on CAKE.  My original thesis was shorter term, but his comments could make our bearish call on CAKE more secular in nature.  In the short run, however, we believe the price spikes in the dairy complex are unaccounted for and suggest that EPS estimates are too aggressive for the company in 2014.


Moving on to a broader concept, the biggest risk to the consumer and restaurant space in 2014 is our MACRO theme of #InflationAccelerating.  The CRB Index, milk, cheese, natural gas, cattle, hogs and coffee are all up more than the S&P 500, as gold continues to signal higher lows.  With the Bloomberg Consumer Confidence Index flat week over week at -31, sluggish Per Capita Disposable Income, and a stagnant job market, it could be challenging for most companies to take price in order to offset inflation.


The irony of all this is that one of the few names I like on the long side is Darden Restaurants.  The CEO’s tendency is to do more of the same, only harder.  While I’m typically not a proponent of this line of action, it has indeed created a significant opportunity for a lot of money to be made.


It has also provided me with the material for a scathing attack on what has arguably been the largest case of value destruction in Casual Dining history.  For the record, if you’re reading this Mr. Loeb, I have everything you could possibly need to write your best letter yet.


Function in disaster, finish in style.


Howard Penney

Managing Director


Life Inside the Box - chartofday


Life Inside the Box - rta1


TODAY’S S&P 500 SET-UP – January 24, 2014

As we look at today's setup for the S&P 500, the range is 28 points or 0.03% downside to 1828 and 1.51% upside to 1856.                           





*Levels  as of 1/23/14






THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.40 from 2.42
  • VIX closed at 13.77 1 day percent change of 7.24%

MACRO DATA POINTS (Bloomberg Estimates):

  • No major data releases
  • 7:05am: BoE’s Carney speaks at Davos
  • 12pm: ECB’s Draghi speaks at Davos
  • 1pm: Baker Hughes rig count


    • Sec. of State John Kerry attends talks on Syria in Montreux
    • Treasury Sec. Jack Lew, Commerce Sec. Penny Pritzker attend Davos
    • House not in session, Senate meets in pro forma session
    • 10:30am Chairman Reince Priebus addresses Republican National Cmte winter meeting
    • 11:30am Homeland Security Sec. Jeh Johnson speaks at U.S. Conference of Mayors winter meeting
    • 1:30pm Gov. Rick Snyder, R-Mich.; former NYC Mayor/Bloomberg LP founder Michael Bloomberg discuss economic case for immigration reform


  • Samsung profit growth slows as iPhones win sales, won gains
  • Ziggo says talks to be taken over by Liberty making progress
  • Starbucks sales trail estimates as U.S. growth decelerates
  • McKesson to purchase Celesio in deal after earlier offer failed
  • China bank regulator said to issue alert on coal mine loans
  • Qualcomm acquires patents from Hewlett-Packard, including Palm
  • JPMorgan’s Jamie Dimon said to get increased compensation: NYT
  • Morgan Stanley gives Gorman $5.06m of shares for 2013
  • Jana partners takes big stake in Juniper: Reuters
  • Goldman may ban some person-to-person instant messaging: WSJ
  • BofA may buy own stake held by Korea Investment Corp: Maeil
  • Boeing to give ANA order discounts as 787 compensation: Nikkei
  • CNN says some of its social media accounts were compromised
  • AT&T unlikely to bid for Vodafone in near-term, Oriel says
  • U.S. says no leeway in Iran oil exports based on inflated data
  • FOMC, Yellen, Obama’s address, Egypt: Week Ahead Jan. 25-Feb. 1


    • Bristol-Myers Squibb Co (BMY) 7:30am, $0.43  - Preview
    • Covidien PLC (COV) 6am, $0.94  - Preview
    • First Niagara Financial Group (FNFG) 7:15am, $0.20
    • Honeywell International (HON) 7am, $1.21 - Preview
    • Kansas City Southern (KSU) 8am, $1.10
    • Kimberly-Clark (KMB) 7:30am, $1.39  - Preview
    • Procter & Gamble Co/The (PG) 7am, $1.20 - Preview
    • Stanley Black & Decker (SWK) 6am, $1.30
    • State Street (STT) 7:30am, $1.19  - Preview
    • WW Grainger (GWW) 8am, $2.62  - Preview
    • Xerox (XRX) 7am, $0.29



  • Natural Gas Set for Biggest Weekly Gain Since 2012 on U.S. Cold
  • Brent Slumps as Premium to WTI Narrows to Least in Two Months
  • Big Data From U.S. Cornfields Spurs Farmer Concerns: Commodities
  • Copper Trades Near One-Month Low Amid China Credit-Risk Concern
  • Wheat Snaps Seven-Week Slump as Freezing U.S. May Harm Crops
  • Gold Extends Gains in London, Rising to Highest Since November
  • Libya Oil Growth Crimped as Gunmen Block Eastern Port Hariga
  • Cocoa Advances as Lower Reserves Add to Shortage; Coffee Falls
  • Rebar Rises for First Week in Seven After China Money Rates Drop
  • Platinum Talks Today Will Seek End to Pay Strike Crippling Mines
  • Colder Weather Forecast for U.S. as Freeze Brings Texas Ice
  • Vitol to Trafigura Chasing U.S. NGLs as Traders Cash In: Energy
  • Curtailment, Trucks, Contracts Are Aluminum Themes: 2014 Outlook
  • Super Bowl Fans Eat 1.25 Billion Wings as Corn Crop Lowers Costs


























The Hedgeye Macro Team














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 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

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.