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February 18, 2014

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Takeaway: As we look at today's setup for the S&P 500, the range is 43 points or 1.83% downside to 1805 and 0.51% upside to 1848.

TODAY’S S&P 500 SET-UP – February 18, 2014

As we look at today's setup for the S&P 500, the range is 43 points or 1.83% downside to 1805 and 0.51% upside to 1848.               










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.42 from 2.43
  • VIX closed at 13.57 1 day percent change of -4.03%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Empire Manufacturing, Feb., est. 9.00 (prior 12.51)
  • 8:30am: CPI benchmark revisions
  • 9am: Net Long-term TIC Flows, Dec. (prior -$29.3b)
  • 10am: NAHB Housing Market Index, Feb., est. 56 (prior 56)
  • 3:15pm: Fed holds open board meeting on bank supervision


    • President Obama scheduled to give remarks on the economy
    • Washington Week Ahead


  • Actavis said to near $25b deal to buy Forest Laboratories
  • Starr, Partners buy MultiPlan in purchase said at $4.4b
  • German investor sentiment falls a 2nd month on growth caution
  • China said to plan tighter rules for direct-sales cos.
  • Yahoo seeks to focus on mobile, contextual search
  • Apple to introduce iPhone 6 in 3rd quarter: Economic Daily
  • BOJ boost to lending programs signals room for further easing
  • Car sales in Europe rose a fifth consecutive month in January
  • Shanghai Fosun, TPG to buy hospitals operator Chindex
  • Tyson Foods said to buy Goldman Sachs’s Michael Foods
  • Novartis buys CoStim to boost immunotherapy capability
  • Philip Falcone’s Lightsquared files new reorganization plan
  • Google buys Israeli login-security firm SlickLogin
  • Total, Hellman & Friedman may raise $1b in cryogenics IPO
  • Blackstone said in talks to buy some Encana assets: NY Post
  • Starwood Capital Group said to consider IPO, WSJ reports
  • Fed district chief expects tapering to continue: L.A. Times
  • HP got Autonomy audit reports showing hardware sales: FT
  • Banks review rules on FX traders making bets with own cash: FT
  • Auto union regrouping after losing vote at Volkswagen plant
  • Wanxiang wins Fisker Automotive asset auction with $149m bid
  • China provinces/natl data gap narrows as Xi changes metrics
  • China’s Goldleaf Jewelry to pay $665m for ERG Resources


    • Coca-Cola (KO) 7:30am, $0.46 - Preview
    • Cumulus Media (CMLS) 9am, $0.08
    • Dentsply Intl (XRAY) 6:31am, $0.61
    • Diana Shipping (DSX) 7:45am, $(0.06)
    • Duke Energy (DUK) 7am, $0.95
    • Genuine Parts (GPC) 8:49am, $0.91
    • Medtronic (MDT) 7:15am, $0.91
    • NiSource (NI) 6:30am, $0.47
    • Norwegian Cruise Line (NCLH) 6am, $0.18
    • Rona (RON CN) 7am, C$0.10
    • Waste Management (WM) 7:30am, $0.61
    • Wolverine World Wide (WWW) 6:30am, $0.20


    • Access Midstream Partners (ACMP) 4:15pm, $0.54
    • Analog Devices (ADI) 4:01pm, $0.49
    • CF Industries (CF) 4:01pm, $4.41
    • Community Health Systems (CYH) 4:15pm, $0.56
    • Fluor (FLR) 4:05pm, $0.98
    • Healthcare Trust of America (HTA) 5:19pm, $0.04
    • Herbalife (HLF) 4:10pm, $1.28
    • KAR Auction Services (KAR) 4:15pm, $0.27
    • La-Z-Boy (LZB) 4:05pm, $0.35
    • MannKind (MNKD) 4pm, $(0.13)
    • Nabors Industries (NBR) 4:01pm, $0.20
    • NPS Pharmaceuticals (NPSP) 4:01pm, $0.03
    • Oceaneering Intl (OII) 5pm, $0.84
    • Panera Bread (PNRA) 4pm, $1.94
    • Photronics (PLAB) 4:30pm, $0.05
    • Retail Properties of America (RPAI) 4:17pm, $0.03
    • SM Energy (SM) 5pm, $1.45
    • Terex (TEX) 4:15pm, $0.49
    • Yamana Gold (YRI CN) 4:20pm, $0.07


  • Arabica Coffee Jumps Most Since 2004 After Brazil’s Dry Weather
  • Vitol Says Brent Oil Benchmark Needs African Fix as Output Drops
  • Top Gold Forecasters Still Bearish After 2014 Rally: Commodities
  • BHP Joins Rio Tinto in Seeing Iron Ore Price Dropping on Supply
  • Gold Drops From 3-Month High as Buying Seen Deterred After Rally
  • WTI Oil Rises Amid Speculation U.S. Snowfall Will Bolster Demand
  • Copper Declines as Top User China’s Central Bank Drains Funds
  • Corn Rises to 4-Month High as Brazil’s Dry Weather May Hurt Crop
  • Iraq Grain Board to Meet Thai Officials Soon on Rice Import Ban
  • China Steel Demand Poised to Plunge as PMIs, Indexes Show Slump
  • Gold Demand in Japan Tripled Amid Abenomics as Prices Slumped
  • Snow Snarls Travel as Another Storm Strikes U.S. Northeast
  • Iron Ore Bests Metals as Prices Have Gone Nowhere Since 1913
  • Rusal Sees Least Output in at Least 8 Years as Smelters Shut

























The Hedgeye Macro Team














Got A Shovel?

This note was originally published at 8am on February 04, 2014 for Hedgeye subscribers.

“In the real world, action and reward go together.”

-Greg Berns


Greg Berns is part of a stealth movement in America – he’s a neuroeconomist working in the Department of Psychiatry and Behavioral Sciences at Emory University in Atlanta, GA.


John Coates introduced me to Berns in a chapter called Thrill of The Search in The Hour Between Dog and Wolf. Coates went on to suggest that “when the Theory of Relativity dawned on Einstein, he must have had the mother of all dopamine rushes… dopamine, like noradrenaline, does a lot more than motivate the brain: it prepares the body for action” (pg 139).


Was your mind and body prepared for this selloff in US and Japanese equities? I can tell you one thing, my back is in spasm. But I think that has more to do with shoveling snow than being long Japan’s Mother’s Index (-18% in two days). Through action and reward, #History, #Math, and #Behavorial economics continue to be the three pillars of our learning process. Risk happens fast.


Back to the Global Macro Grind


In addition to the crash in Japan’s widely held brokerage index, the Nikkei got crushed for another -4.2% lost last night, taking it to -14% for 2014 YTD. How many hedge funds were snowed into the short Yen, long Nikkei trade last year? Lots.


How many stayed long the Russell 2000 at the all-time high? That was only 9 trading days ago, don’t forget. And while I am certain that everyone on CNBC nailed it, for the rest of us a -7.4% nine day correction from an all-time peak provides a bit of a rush too!


The last time the US stock market had this sharp of a 9-day decline (Russell2000 = down -9.1% in 9 days in November of 2011), Ben Bernanke’s resolve was simple – print, print, print. So remind me why Janet Yellen won’t do the same?


If we get one more economic data point that crashes like yesterday’s New Orders component of the ISM did, remind me why the Mother of All Doves won’t:


A)     Stop the tapering

B)      Talk up more quantitative easing


Setting aside the eureka reality that commodity markets inflating and slowing real-consumption growth don’t give the Fed or the Bank of Japan what they are promising The People (sustainable growth), why won’t Yellen go back to the same old saw?


Maybe, just maybe, Mr. Macro Market is already front-running her on this. I know, while markets front-running our central planning overlords has been the only game in town now for the last half-decade, why would they be doing so again?


Humor Mr. Macro Market for another minute and play this probable (not to be confused with definite) scenario out:

  1. US #InflationAccelerating continues to slow real-inflation adjusted growth
  2. As US #GrowthSlowing freaks out the Fed, they whisper “no-more-taper” to Hilsenrath
  3. Whispers start to bury the Dollar again, Food and Gold prices continue higher yet again, and …

Growth slows even faster!


Oh, and by summer time they’ll be whining about “inequality” at Jackson Hole without accepting that Policies to Inflate only pay those who are long of coffee futures and mortgage-backed-securities, while they pulverize the poor.


Back to how bad that Institute for Supply Management’s (ISM) manufacturing report was yesterday:

  1. Headline ISM dropped -10% sequentially (month-over-month) to 51.3 JAN vs 57 DEC
  2. New Orders in the ISM crashed -20% month-over-month to 51.2 JAN vs 64.4 DEC
  3. Prices Paid in the ISM (inflation in costs) ripped +13% from 53.5 in DEC to 60.5 in JAN  

Yes, since I’m so plugged in politically, I rigged the numbers to fit our Top Global Macro Theme of #InflationAccelerating like a glove. But don’t tell anyone I get this inside info or I’ll have to change the name of my firm.


Again, to review, this wasn’t all about the “weather”:

  1. Inflation (prices) rose, fast, month-over-month… and…
  2. Growth (orders) fell, even faster in kind

So enjoy the “green arrows” this morning. I am sure this market will bounce on no-volume again until we get the next US consumption #GrowthSlowing data point (tomorrow) in the ISM Services report for January.


With the CRB Commodities Index +1.4% vs. Consumer Discretionary (XLY) stocks -8.7% YTD, bulls can blame the weather. But that is the score. In the real world, if you don’t shovel your driveway and get to work, you probably won’t get paid that way either.


Our immediate-term Global Macro Risk Ranges are as follows:


SPX 1735-1783

Nikkei 13918-15109

VIX 16.98-21.79

USD 80.80-81.45

Nat Gas 4.91-5.41

Gold 1242-1274


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Got A Shovel? - CortisolRising


Got A Shovel? - rtas


The Economic Data calendar for the week of the 17th of February through the 21st 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.



Game Day

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

“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 14532-15222

VIX 15.89-20.41

EUR/USD 1.35-1.37

NatGas 4.57-5.41

Gold 1229-1264


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Game Day - Savings Rate


Game Day - val55


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

Please see below Hedgeye analysts' latest updates on our high-conviction stock ideas and CEO Keith McCullough's updated levels for each stock.


At the conclusion of this week's edition of Investing Ideas, we feature three institutional research pieces we believe offer valuable insight into the markets.




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



CCL – Shares of Carnival are up 13.6% since it was added to Investing Ideas versus a 2.4% return for the S&P 500. Investors will be keeping a close eye on Norwegian’s (NCLH) earnings next Tuesday to see if there’s any indication of a price war in the Caribbean. CCL has the easiest comps among the big 3 operators, so even if discounting picks up, CCL has the most cushion. We remain bullish on CCL.



DRI – Earlier in the week, activist investor Starboard Value expressed its intent to “hold the board accountable for its actions” if the company decides to follow through with its plan to spin-off, or sell, the struggling Red Lobster chain.  Darden has plans to act upon this plan before the company’s annual meeting at the end of March and if they do, Starboard plans to assume control of the company through a shareholder vote. 


Red Lobster has significant real estate value that Starboard argues would be lost if the company were to divest the brand.  Managing Director Howard Penney sides with Starboard, citing Darden’s real estate value as one of the many features that makes this company so valuable.  All told, the activist pressure continues to build. 


We continue to like Darden as a long-term investment and believe the company has the potential to create substantial shareholder value with the right management team in place.



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 (BOE). We received updated economic and monetary policy guidance this week from the BOE’s Quarterly Inflation Report.  2014 GDP was revised higher to 3.4% from 2.8% previously forecast and the unemployment rate is expected to reach the 7% threshold target in January. In response, this week BOE governor Mark Carney amended his “forward guidance” to increase rates at the 7% unemployment level to signal that the Bank is not yet ready to hike rates despite the improvements seen in the economy and unemployment level. 


The GBP/USD acted favorably to the news, up +1.83% week-over-week.



HCA – There is clearly a lot going on these days with hospitals.  Earlier this week, reports from Health and Human Services indicated a million people had signed up for Obamacare last month, a huge number.  Unfortunately, in a separate report, only a fraction of those who enrolled in the previous months paid their first bill, which means after going through the hassle to fill out the forms, they did not actually get health insurance. 


We received the latest update of our doc survey this week.   The big finding, and negative for our HCA position, was a huge drop in patient visits for patients with private insurance.  If it persists through the quarter AND the balance of our other inputs such as orthopedic case volume and Obamacare enrollment, will probably get us to close the HCA long.  But we will run the survey two more times before getting to that point. We are monitoring this closely.


LVS – Chinese New Year off to a rocking start in Macau.  Through February 9, daily table revenues averaged $1.464 billion up 78% over comparable period last year.  The more appropriate comp is the 3rd week of February last year when table revs averaged HK$1.107 billion – so peak CNY is up about 32%. While it’s still early, Las Vegas Sands is the market share leader at 25.3% thanks to its success in the mass business. We expect another strong week of revenues as VIP high rollers start rolling into town.  For the month of February, we expect revenue growth to exceed 20%. 


RH – We hosted a conference call with our Institutional subscribers earlier this week to address issues facing Restoration Hardware over the 3 durations that we typically look at when making investment decisions. Those of course are Trade (3 weeks or less), Trend (3 months or more), & Tail (3 years or less). RH is still our favorite long in the retail space by a long shot. Here is a quick summary of the points we addressed as it relates to the Trade duration.




During the retail meltdown during December and January – RH was hit far worse than the rest of the retail sector. We’d argue that silence hurt the company more than anything. In our opinion, the market is severely overestimating the impact that the competitive retail environment and cold weather will have on RH. Remember, nearly 50% of RH sales come from the dot-com channel. We are going to have to wait to hear the company’s 4Q numbers – likely until late March, but we think that the company will report numbers in line with their previous guidance, which calls for revenue growth in the mid-to-low 20’s and earnings growth in the high-20’s to low-30’s range.



TROW – The historical relationship of lagged retail mutual fund flow to performance continues to hold into the first part of 2014 with equity mutual fund flow continuing to be positive despite a negative start to the year for U.S. stocks. Our research shows that over a 12 year period, fund flow has trailed performance by an average of 6 months which means that the +30% return in the S&P 500 in 2013 can create continued stock fund inflow through the first half of 2014 (barring any major change to the trajectory of stocks).




While most fund flow surveys focus on net flows (which is new fund sales less fund redemptions) a snap shot of solely mutual fund sales shows the strength in stocks and the continued weakness in bonds. Through December of last year, all stock fund sales are breaking to new highs which means that demand from retail investors continues to increase.


Conversely, all bond fund sales continue to trend lower from their all time highs in early 2013, in an indication of decreasing demand from retail investors. T Rowe Price is well positioned to benefit from this environment as a leading stock fund manager with 85% of its assets in equities. TROW also has de minimus exposure to emerging markets which could be a real negative theme for 2014 and beyond.





WWW – Wolverine Worldwide reports its 4Q Earnings on Tuesday (2/17). While we don’t expect any fireworks on the call due to the company’s preannouncement in early January - we do like WWW going into the print and think that it will print upside to earnings. One thing that we will be looking for on the call is an update on the company’s new international partnership agreements for the recently acquired PLG brands. Other than that, everything has been pretty much spelled out in the company’s press release and at its presentation at the ICR conference.




The company already gave preliminary guidance for FY14 and it called for “mid-single digit” revenue growth and “solid double-digit” earnings growth.  One thing to keep in mind is that WWW may be the best company in retail at managing the Street’s expectations. In the chart above you can see the change in consensus’ ’13 EPS estimates since the company reported earnings in February of 2013. Originally the Street was looking for 15% earnings growth. That number has inched its way up to where it currently sits at 25%. We expect more of the same in ’14.


Consensus is seriously underestimating the top line growth potential for the acquired PLG brands in the international marketplace. We continue to see upside potential in these markets and expect to see continued strength in WWW’s core brands.



ZQK – The key callout for ZQK comes from Friday’s less-than-stellar VF Corp results.  VFC management noted that the #1 use of cash is for acquiring other businesses. Of course, that is only intensified during times like this when organic growth is tough to find, like they’re faced with today. Management noted quite clearly that debt-to-capital is 19%, lower today than when they bought Timberland. In other words -- 'we can buy something big'.  We still think that VFC will ultimately own ZQK. The only catch is that VFC is not good at buying things that are broken. And ZQK -- though there is an exceptional plan in place to fix the company -- is broken. Our sense is that VFC will have a greater appetite for buying ZQK when at $12 once it starts growing again, than at $7 when its' top line is struggling. But it's a matter of time, in our opinion.


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Click on the title below to unlock the institutional note.


Why Is Gold (and Gold Miners) Ripping?

We’ve been calling for investors to get longer of inflation-oriented assets in lieu of consumption-oriented assets, at the margins, as it becomes increasingly likely the Fed stops tapering (or incrementally eases) over the intermediate term.



CAKE: Thin Batter

The Cheesecake Factory (CAKE) remains on the Hedgeye Best Ideas list as a SHORT. The company delivered disappointing 4Q results earlier this week. When in doubt, blame the weather!



ICI Fund Flow Survey: Record Divergence In ETFs...Mutual Funds Carry On

An historic week within ETFs with record outflows in equities and record inflows into bonds...trends unchanged within mutual funds.



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.