• run with the bulls

    get your first month

    of hedgeye free


Game Day

“Welcome to game day… Now it’s real. The score counts. And you either win or lose.”

-John Hamm


That’s how golf and life coach John Hamm opens Part Two of Unusually Excellent: Competence – Leading on the Field With Skill. Russell Wilson did just that last night. Seahawks 43 vs. Broncos 8.


Credibility, Competence, and Consequence – per Hamm’s framework, that’s the epicenter of leadership skill. And since I can’t argue with that, I like it.


Note that in this game there is no credibility in A) cheating and/or B) making a few big “calls.” Credibility is scored in our profession by repeatable processes. If you can score in both up and down markets, you win. So let’s get at it this morning and try to do more of that.


Back to the Global Macro Grind


What’s winning so far in 2014 is not what was winning for most of 2013. That’s because:


A)     Global Inflation is no longer deflating, it’s re-flating

B)      Growth (particularly in the US and across most of Asia) is slowing, not accelerating


On the Asian #GrowthSlowing scene, China’s manufacturing PMI came in at 50.5 (which is a six month low) and non-manufacturing PMI came in at 53.4, lowest reading since December 2008.


All of this, of course, will be reported to you by the ultimate lagging indicators (your central bankers and consensus economists paid by Big Government), on a lag. So keep it here, where Game Day happens every morning at 4AM.


In terms of our Top Global Macro Theme for Q114, #InflationAccelerating:

  1. CRB Commodities Index (19 Commodities) = +0.3% last wk to +1.1% YTD (vs SP500 -3.6%)
  2. CRB Commodities Foodstuff Index = +1.1% last wk to +3.3% YTD
  3. Corn +1.0% last wk to +2.8% YTD
  4. Cocoa +4.3% last wk to +7.5% YTD
  5. Coffee +9.4% last wk to +13.1% YTD

So we hope you enjoyed flipping out of some of that long-term Starbucks (SBUX) idea and into some CAFÉ (the coffee ETN). One’s price is winning YTD; one’s is losing.


On the #GrowthDivergences front (Hedgeye Macro Theme #2) YTD:

  1. Russell2000 (IWM) -2.8% vs. Utilities (XLU) +2.98%
  2. Emerging Markets (MSCI Equities Index) -6.6% vs. Europe (EuroStoxx600) -1.7%
  3. Japanese stocks (Nikkei) -10.3% vs. Danish stocks (Copenhagen Index) +5.2%

In other words, being long inflation expectations (particularly via breakevens or food inflation) is crushing it YTD, and so is being long European Equity exposure relative to the slowing growth exposures you could be long in the USA or Japan.


That’s not to say that the score may not continue to trend this way. You can make that change in momentum bet this morning if you’d like. You could have doubled down on the Denver Broncos when they were down 22-0 last night too.


Competence in risk management starts the way Seattle started last night; with their defense scoring a safety! Not getting scored on in this game is easily the best way to win. If your shorts can generate positive P&L, all the better.


From a Style Factoring perspective in US Equities, here’s what’s getting lit up like Denver’s defense did:

  1. Consumer Discretionary Stocks (XLY) -1.1% last wk to -6.0% YTD
  2. High Beta Stocks (by S&P quartile ranking in our model) -4.5% YTD
  3. High Short Interest Stocks (again, by quartile) -4.1% YTD

In other words, if you’re overweight any of these Style Factors in a US Equity only portfolio, that’s bad. This is what we call a bullish to bearish reversal in big beta!


But as the game goes on, the score makes more and more sense. With #InflationAccelerating, who gets hurt the most? The Consumer. But don’t tell the Fed that. If growth continues to slow, Janet Yellen’s 1st move will probably be to stop tapering (i.e. devalue the Dollar) and perpetuate more purchasing power pain on The People.


If you don’t like that game recap, go buy another house – and like it. Because, like Barney Frank, Janet Yellen is big on housing, irrespective of it being the mother of all bubbles that got the US consumer into this savings mess to begin with.


Got Savings? At 3.9% (current US Savings Rate as a % of Disposable Income – see Chart of The Day), Americans are once again dipping into those in order to keep up with their over-spending neighbors (and the government’s understated cost of living).


But no worries, Game Day for the government will include some cochamamy narrative about “inequality” in America while they dream up the next currency devaluation policy to encourage The People to lever up again. If they go for it, the score of that policy will count too – and this time the Keynesians will lose as big as the Broncos did.


Our immediate-term Risk Ranges are now (Our Top 12 Global Macro Ranges are in our Daily Trading Range product):


Nikkei 142

VIX 15.89-20.41

EUR/USD 1.35-1.37

NatGas 4.57-5.41

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Game Day - Savings Rate


Game Day - val55


TODAY’S S&P 500 SET-UP – February 3, 2014

As we look at today's setup for the S&P 500, the range is 52 points or 1.77% downside to 1751 and 1.14% upside to 1803.                        










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.33 from 2.32
  • VIX closed at 18.41 1 day percent change of 6.48%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:58am: Markit U.S. PMI Final, Jan., est. 53.9
  • 10am: ISM Mfg, Jan., est. 56.1 (prior 57, revised 56.5)
  • 10am: Construction Spending, m/m, Dec., est. 0.2% (prior 1%)


    • 9am: Treasury Sec. Jack Lew speaks at Bipartisan Policy Center on need for Congress to extend debt ceiling
    • 1:30pm: Reps. Joe Barton, R-Texas; Diana DeGette, D-Colo.; FTC Commissioner Maureen Ohlhausen speak at Congressional Bi-Partisan Privacy Caucus briefing on consumer data breaches
    • 3pm: Senate Banking panel hears from FTC consumer protection director Jessica Rich, American Bankers Assn representative James Reuter on safeguarding consumer data


  • Auto sales for Jan. come out today; SAAR may be 15.7m
  • Jos. A. Bank tells Men’s Wearhouse offer undervalues co.
  • Jos. A. Bank said to pursue Eddie Bauer
  • Smith & Nephew to buy ArthroCare for $1.7b in cash
  • United to drop Cleveland airport hub in $2b savings push
  • China manufacturing gauge at 6-mo. low signals growth easing
  • AT&T cuts family wireless plans $40 in escalating price war
  • Microsoft’s new director said to seek Windows-sales revamp
  • Lenovo said to turn to U.S. security insiders for deal approval
  • Universal’s “Ride Along” tops N.A. weekend box office
  • Euro-area manufacturing expands faster than estimated
  • FTC chief to meet with activists about Herbalife: N.Y. Post
  • SAC Capital to change name, restructure by mid-March: NYT
  • U.S. can’t yet fix enrollment errors in HealthCare.gov: WPost
  • Shell’s Australian assets draw bids over A$3b, AFR report
  • Liberty, Discovery may buy 49% of Formula One from CVC: NY Post


    • Sysco (SYY) 8am, $0.40
    • Old National Bancorp (ONB) 9am, $0.25


    • Integrated Device Technology (IDTI) 4pm, $0.12
    • Edwards Lifesciences (EW) 4pm, $0.82
    • Anadarko Petroleum (APC) 4pm, $0.90
    • Torchmark (TMK) 4pm, $1.46
    • Prospect Capital (PSEC) 4pm, $0.32
    • Principal Financial Group (PFG) 4pm, $0.94
    • Hologic (HOLX) 4:01pm, $0.31 - Preview
    • Advanced Energy Industries (AEIS) 4:01pm, $0.60
    • American Capital Agency (AGNC) 4:01pm, $0.64
    • General Growth Properties (GGP) 4:01pm, $0.35 - Preview
    • CareFusion (CFN) 4:02pm, $0.54
    • Alexandria Real Estate (ARE) 4:05pm, $1.16
    • Take-Two (TTWO) 4:05pm, $1.42
    • Power Integrations (POWI) 4:05pm, $0.63
    • PartnerRe (PRE) 4:13pm, $2.79
    • Artisan Partners Asset Mgmt (APAM) 4:15pm, $0.76
    • Brown & Brown (BRO) 4:15pm, $0.35
    • Advent Software (ADVS) 4:15pm, $0.30
    • Hartford Financial (HIG) 4:15pm, $0.90
    • Yum! Brands (YUM) 4:15pm, $0.80 - Preview
    • Dun & Bradstreet (DNB) 4:15pm, $2.83
    • Post Properties (PPS) 4:35pm, $0.66
    • BRE Properties (BRE) 4:45pm, $0.65
    • UGI (UGI) 4:45pm, $1.09
    • AmeriGas Partners (APU) 4:45pm, $1.06
    • Kilroy Realty (KRC) 5:02pm, $0.64
    • Crown Holdings (CCK) 5:03pm, $0.50
    • Suncor Energy (SU CN) 10pm, $0.77 - Preview


  • Copper Set for Longest Slump Since 1996 on China Manufacturing
  • WTI Crude Drops a Second Day on Concern Chinese Demand May Slow
  • Perth Mint to U.S. Post Higher January Gold Sales as Price Gains
  • Hedge Funds Raise Gold Bets as Copper Bulls Retreat: Commodities
  • Corn Climbs to Five-Week High on Signs of Demand for U.S. Crop
  • Gold Advances in London as Declining Equity Markets Boost Demand
  • Sugar Extends Gains as Brazil Dry Weather Combines With India
  • Natural Gas Declines a Third Day on Milder U.S. Weather Outlook
  • Speculators Boost Bullish Oil Wagers Most in Six Months: Energy
  • Keystone Foe Steyer Says Flaws in Pipeline Report Require Review
  • Commodity Hedge Fund Run by King, Coleman Gains 9.8% in January
  • CME Settles MF Global Lawsuit for $14.5 Million: Bankruptcy
  • Libya Crude Oil Output More Than Doubled in January: BI Chart
  • Mining’s Dormant $8 Billion of Private Equity Seen Reviving M&A


























The Hedgeye Macro Team














Kung Hei Fat Choi!

Sorry for the belated well wishes but Happy Chinese New Year

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.


The Economic Data calendar for the week of the 3rd of February through the 7th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.




Takeaway: Current Investing Ideas: CCL, DRI, FXB, HCA, JPM, LVS, RH, TROW, WWW and ZQK

Below are Hedgeye analysts' latest updates on our high-conviction stock ideas as well as CEO Keith McCullough's refreshed levels for each stock. At the conclusion of the note, we have selected three institutional research notes we believe offer a valuable look into the current state of the markets, as well as two deep stock dives on the long and short side.




Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers. 

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


The latest on Hedgeye's high-conviction stock ideas.


CCLCarnival was added to Investing Ideas on 11/22/13. Since then, shares have risen 9.2% compared to a 0.7% return for the S&P 500. The Gaming, Lodging & Leisure team will update on CCL next week.



DRI — Activist investor Barington Capital held a conference call this past Thursday to review its strategy for value creation at Darden. The plan called for a separation of the struggling Olive Garden and Red Lobster brands from the higher growth brands. Barington also expressed a desire to improve management focus and operational execution, unlock the value of the company’s real estate portfolio, and further reduce operating expenses.


Barington cited Managing Director Howard Penney’s research several times during the call and ended the session by suggesting the company should immediately “appoint an independent chairman to protect shareholder interests.” As expected, the bull case is gaining steam and we are waiting for the other activist, Starboard Value, to present its plan for value creation in a couple of weeks.



FDX — We removed FedEx from Investing Ideas on Friday. Click here for the full report.



FXB — Hedgeye remains bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from the Bank of England. The BOE continues to be oriented towards hiking, rather than cutting as economic conditions improve.



HCA —  The massive acceleration in the US Orthopedic market is having a positive impact on HCA Holdings and the other Hospitals. The big question is ... will it continue? Zimmer, the largest manufacturer of hips and knees, saw a remarkable 9% growth in US Knees. However, they cautioned analysts to not extrapolate the last two quarters of strength through 2014.


For now, we think growth will continue to accelerate based on our macro analysis. We show in the charts below that the housing recovery has led to faster employment growth among municipal governments. Why does this matter? Because municipal workers make up roughly 16% of the workforce, are much older than the average worker, and carry very good health benefits.


But we're not going to leave it at one or two data items. We're planning to run a survey in February to ask Orthopedic surgeons how full their schedule is during Q114. If we're right, we should hear they are all very busy. What does this mean for HCA? Remember, Orthopedics is the single largest revenue driver for Hospitals at 17%. More positive preannouncements from HCA seem likely if the Ortho trend continues.






JPM — Our intermediate and long-term outlook on JPMorgan are unchanged from a week ago – we remain bullish. However, we’re keeping a close watch on the macro risk factors across Emerging Markets, namely the currency dynamics in areas like Argentina and Turkey. Along those lines, we’ve included an excerpt below from JPMorgan’s most recent 10-K (year-end 2012), which shows their risk by country for their top 20 countries in which they do business, excluding the US. We’ve highlighted the three of those countries that appear to be near the top of the risk pile amid this current environment of rising EM concern. The company has some exposure to Brazil, India and Russia, though, for perspective, none of the three are Top-5 exposures, and collectively represent less than 2% of total assets.


While this should offer investors some comfort, the reality is that global banks like JPMorgan will trade, in the short term, largely based on sentiment around the perceived risk – rising or falling – in these emerging markets. From our vantage point, we are much more interested in the “contagion” risk dynamic, which we actively monitor by watching both the TED-spread domestically and the Euribor-OIS spread in Europe – to date, neither of these measures has shown much reaction to what is happening in emerging markets. Were that to change, we would likely change our view on the performance outlook for JPM shares.


The table below shows JPMorgan’s Top 20 exposures by country (excluding the U.S.). The selection of countries is based solely on the company’s largest total exposures by country.

Click to enlarge



LVS — Gaming, Lodging & Leisure Sector Head Todd Jordan added Las Vegas Sands to Investing Ideas earlier this week. Click here for the full report.



RH — In September, Retail Sector Head Brian McGough wrote a research note arguing that people are asking the wrong questions about Restoration Hardware. The key question according to McGough “is when it will earn $8.00 per share. We think the answer is 2018…That’s $6.50 in incremental earnings in 5-years. Put a different way, that’s a 40% earnings CAGR. Use that as ammo next time anyone tells you that RH is too expensive or that ‘they already missed it’.”


While shares have clearly been under pressure since then, McGough remains convinced that RH’s long term growth story is incredibly bullish. His conviction is fueled by square foot acceleration, new categories, and increased store productivity which is currently being obfuscated by the quarterly guessing game. The quarters and share price will and ebb and flow, but there is no change to his $8.00 in EPS thesis by 2018 highlighted in his note.



TROW — In case you missed it, T Rowe Price reported its fourth quarter earnings results this week, beating consensus on both revenues and earnings and also finishing with record all-time assets-under-management (AUM).


Importantly in the quarter, TROW reported slight complex-wide inflows, which broke a streak of 2 quarters of substantial outflows which had been driven by a handful of Asian sovereign wealth management clients.


After speaking to TROW management after its results, we believe that the bulk of sovereign wealth redemption process is completed as remaining assets in those accounts are "substantially diminished" now according to management. Thus as we move forward into the New Year, TROW can again start to put up improved inflows, which has historically driven a premium valuation versus its peer group.



WWW Wolverine Worldwide has arguably the most diversified brand portfolio in the world. Unparalleled geographic distribution ensures that the company isn’t overly dependent on one market place. The same holds true for its brands. In light of the recent cold weather and The Walking Dead esque photos coming out of Atlanta, we pulled point-of-sale footwear data for the first 4 weeks ending in 2014.


Athletic footwear in general has been soft to start the New Year. Cold weather brands have benefited and athletic-centric brands have seen their sales slide. WWW’s Merrell, Sperry, and their namesake Wolverine have been outpacing the industry average by a wide margin. Below you can see the difference between WWW’s brands (highlighted in gray) and two of the heavy hitters in Nike’s portfolio and perennial cold weather outperformer Timberland. It’s a great example of how WWW’s brand diversity allows it to capitalize on different macro/weather/trend factors better than just about every footwear player in the marketplace.




ZQK — Over 60% of Quiksilver’s sales are generated outside the US market. While that looks like a incredibly diverse business model at face value, it loses some of its luster when you consider that only 19% of Roxy, Quiksilver, and DC’s sales come from undeveloped markets. That revenue is spread across 82 different countries for an average of $4.3mm per country. What’s even more staggering is that revenues from China total approximately $40mm. Yes China, only accounts for 2% of ZQK’s profits. That market alone is a $400mm opportunity.


ZQK is a global brand, but operating inefficiencies have limited the success of its brands in developing markets. With new management’s rationalized brand portfolio and emphasis on global operating efficiency we believe that the company is in a good position to leverage its strong brands in what have historically been underpenetrated markets.




*  *  *  *  *  *  *


Click on the titles below to unlock the institutional research notes.


Making Sense of Equity Style Factors Year-to-Date

There are three key takeaways in this deep macro dive from analyst Darius Dale:

1) Investors are debating the growth outlook.

2) Our Q1 macro theme #InflationAccelerating is working.

3) Hedge funds are regaining confidence in short selling



WTW: Initiating Short in WeightWatchers

This could be WeightWatcher’s worst winter selling season in the last seven years according to analysts Tom Tobin and Hesham Shaaban. Issues could be secular.




EAT: Blueprint for Success at Brinker

We often articulate our view that EAT is one of the best managed companies in the restaurant space.  This morning’s press release and subsequent call merely adds conviction to this belief.  It was nothing short of an awesome quarter. Mind you, this performance comes amid a less than favorable macro backdrop and a three-month period in which we suspect the majority of casual dining companies struggled.


Hedgeye Cartoon of the Week





MO – A Mixed Stick

In our assessment, Altria reported a mixed Q4 in its release yesterday: weak cigarette volumes were offset by cigarette pricing and smokeless and wine results while its e-cigs remain in test markets and a calendar shift in the quarter and full year (one less Monday – a key shipping day) equated to a full week of less volume. In the quarter, this equated to EPS of $0.57 that missed consensus by a penny and sales that were down -1.26% Y/Y.


For reference, our preferred big tobacco play remains long Lorillard (LO) vs short Philip Morris International (PM).


What We Liked:

  • Strong pricing and lower SGA help to offset total volume weakness of -5.8% in the quarter
  • Smokeless segment outperformed, with revenues -0.7% Y/Y in the quarter and +5.1% Y/Y on the year – led by brand Copenhagen
  • The company reported that its e-cig offering MarkTen is performing well in its extended test market of Arizona where it's in 1,900 stores (Indiana was the first state)
  • We believe that MO’s partnership with PMI (announced in December) on e-cigs and reduced-risk tobacco products – to sell through each others distribution channels and share technology – will offer substantial growth prospects and profits for MO in particular given PMI’s legacy of international sales and distribution networks
  •  Company says its 2014 EPS results will benefit from lower interest expense, a lower effective tax rate, and a reduction in shares from the current share repurchase program

What We Didn’t Like:

  • Q4 Cigarette volumes were down -5.8% vs industry average of ~ -4% and last quarter +1.2%
  • We see Marlboro under pressure from lower-priced brands
  • CEO Barrington forecasts U.S. economy and adult consumer in a similar state in 2014 as 2013


For now we’ll remain on the sidelines with MO. The quantitative levels on the stock over the intermediate term TREND suggest a bearish set-up on the stock.


MO – A Mixed Stick - w. mo


Matt Hedrick