Get the Macro Right

Client Talking Points


The Shanghai Composite tried to go positive last week for the year-to-date. What happened? It got slammed -1.8% overnight (down -1.9% YTD). Ex-ramping credit (which isn’t the answer to their problems), the Chinese data is just terrible. Guess what? That matters to global growth consensus remaining too high.


Last year, we were the bulls on US #GrowthAccelerating. This year? We’re sticking with inflation’s ramp. Check out commodities with the CRB Index up another +2.8% to +7.8% YTD last week (compared to S&P 500 -0.1% to -0.7% YTD). That's a big deal that consensus is still missing. With Mario Draghi saying there is no “deflation” risk, that’s good for the Euro (bad for USD), and good for commodities. Got correlation?


Gold is up another +0.7% to +10.9% year-to-date this morning as A) 10-year yields remain bearish TREND @Hedgeye and B) US Dollar remains under pressure ahead of both Janet Yellen’s regime and Obama’s 2015 budget (#Spending). Gold loves inflation slowing growth (and Team Canada Hockey). Couldn't resist.

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. 


Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike.  The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet.  The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%.  And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.


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.

Three for the Road


COMMODITIES: at +7.8% YTD for the CRB Index, #inflationAccelerating is now obvious @KeithMcCullough


"What a man can be, he must be." - Abraham Maslow


The G20 has pledged to install policies that will add $2 trillion to the world economy over the next five years. The world's 19 richest nations and the European Union -- said the reforms aim to lift collective GDP by more than 2%. (CNN)

Retail Callouts (2/24): VFC, PVH, MW, BKS, JILL, WWW

Takeaway: 4,500 shoe factories close. VFC warms up TNF. Street too positive on PVH? BKS finds buyer, JJill doesn’t. WWW/Hush Pups prices go parabolic.




  • SHOO - Earnings Call: Tuesday 2/25, 8:30am
  • HD - Earnings Call: Tuesday 2/25, 9:00am
  • FNP - Earnings Call: Tuesday 2/25, 10:00am
  • M - Earnings Call: Tuesday 2/25, 10:30am



  • ANF - Earnings Call: Wednesday 2/26, 8:30am
  • LOW - Earnings Call: Wednesday 2/26, 9:00am
  • TGT - Earnings Call: Wednesday 2/26, 10:30am
  • TJX - Earnings Call: Wednesday 2/26, 11:00am
  • JCP - Earnings Call: Wednesday 2/26, 4:30pm



  • BBY - Earnings Call: Thursday 2/27, 8:00am
  • KSS - Earnings Call: Thursday 2/27, 8:30am
  • DECK - Earnings Call: Thursday 2/27, 4:30pm
  • GPS - Earnings Call: Thursday 2/27, 5:00pm




MW, JOSB - Men's Wearhouse Increases Cash Offer for Jos. A. Bank to $63.50 Per Share



  • "The Men's Wearhouse today announced that it has increased its cash tender offer for all outstanding shares of Jos. A. Bank Clothiers, Inc. to $63.50 per share from $57.50 per share.  Expiration of the amended tender offer has been moved up to 5:00 p.m., New York City time on Wednesday, March 12, 2014, unless the offer is extended."
  • "Men's Wearhouse could potentially increase its offer price to $65.00 per share if it is able to conduct limited due diligence (subject to an appropriate confidentiality agreement), with access to Jos. A. Bank's management team.  In addition, the amended offer is conditioned on termination of Jos. A. Bank's recently announced agreement to acquire Eddie Bauer, and Men's Wearhouse will increase the aggregate consideration to be paid to the Jos. A. Bank stockholders dollar-for-dollar to the extent Jos. A. Bank is able to terminate the Eddie Bauer purchase agreement for less than $48 million in termination fees (less any other expense or fee reimbursement paid by Jos. A. Bank in connection with such termination)."

Takeaway: We know what a rational management team and Board would do here -- take the deal. But we don't have a clue as to what JOSB will do given that they're pretty much the worst Board we've ever seen. Then again, could it be that we're the ones in the wrong, and that they've patiently executed a simply tremendous deal for JOSB shareholders -- starting with its own bid for MW? After all, JOSB is currently is sitting at an all-time high, and will make a new one by the end of business today.


VFC - North Face Introduces Workout Gear to Shake Its Wintry Image



  • "...North Face is making a big push into spring and summer gear—a strategic shift that will increasingly put it toe-to-toe with Nike, Adidas, and the rest of the world’s biggest sportswear brands."
  • "Next week, North Face will begin selling a line of lightweight apparel called Mountain Athletics, for training in warming temperatures. The offering will include only 16 styles, but the new line will anchor the biggest marketing campaign the company has ever produced in the first half of a year, according to North Face President Todd Spaletto."


Takeaway: At face value, it doesn't make much sense for a brand called 'The North Face' to make apparel that will be worn when it's 80 degrees. If 99 out of 100 companies tried this, we'd shrug it off. But if there is one company that we would not count out of being able to make this work, it's VF Corp. This is definitely an initiative we'll be watching.


PVH - PVH Corp. Announces Intention to Amend Its Senior Credit Facilities and Call Its 7.375% Senior Notes Due 2020 and Reaffirms Guidance for Fourth Quarter and Full Year 2013



  • “The Company also announced in connection with the discussions regarding the credit facility amendment that it is reaffirming its revenue and earnings per share guidance for the fourth quarter 2013 and full year 2013 previously announced on January 10, 2014. Additionally, PVH announced that during fiscal 2013, it repaid approximately $500 million of term loans under the credit facility, above its initial expectation of approximately $400 million announced in March 2013.”


Takeaway: Overall, a good announcement from PVH. But keep one major factor in mind -- the company anniversaried the Warnaco acquisition on Feb 14th. Instead of printing 30%+ top line growth, it will be struggling to grow in the mid-single digits. The opacity of the acquisition is gone. Now we get to see what this company is really capable of. Not a single analyst out of the 19 covering the stock has a Sell rating (17 Buys). We're not nearly as bullish.


BKS - Barnes & Noble Gets Takeover Proposal From Firm Seeking Breakup



  • "Barnes & Noble Inc., the struggling bookseller, received a proposal from G Asset Management LLC to acquire 51 percent of the company at $22 a share, valuing the total business at $1.32 billion."
  • "G Asset also proposed buying 51 percent of Barnes & Noble’s Nook e-book division at $5 a share as an alternative deal, according to a statement yesterday from the investment firm. It said it was confident that separating the business would unlock 'substantial' shareholder value."
  • "The move represents an increased bid over G Asset’s $20-a-share offer in November of last year, also for 51 percent of the business." 


Takeaway: This does not sound as outrageous to us as the headline suggests. Yes, the concept is in a secular decline. But it has had some miserable initiatives over the past few years (Nook) that destroyed the P&L. There's still value at this company. We're not sure how much -- otherwise we'd be more vocal on the name. But we're not surprised to see someone drawing a line in the sand.


JJill - Women's Clothing Retailer J. Jill Considering A Sale



  • "Women's retailer J. in the process of hiring bankers to run a sales process, the people said."
  • "J. Jill is owned by private-equity firms Arcapita Bank and Golden Gate Capital. Arcapita owns the majority of the retailer while Golden Gate owns about 30%."
  • "San Francisco-based Golden Gate bought J. Jill in 2009 for just $63 million when the company was struggling, according to a person familiar with the matter. Today, the retailer has about $60 million in...Ebitda…"


Takeaway: We think there's value in Barnes & Noble…but JJill, we're not so sure.


WWW - Buzz: Hush Puppies, Jambu & More



  • "Hush Puppies...fall ’14...collection of premium looks for men and women [is] designed to attract a younger, more trend-savvy consumer. The series of contemporary styles includes harness boots and tailored pumps for women, and chukkas and double monk straps for men."
  • "Retailing from $99 to $240 for women’s and $189 to $220 for men’s, the line is aimed at new distribution channels including better independents, specialty and department stores, and e-tailers."


Retail Callouts (2/24): VFC, PVH, MW, BKS, JILL, WWW - chart2 2 24


Takeaway: SO many people think of Hush Puppies as an old, stodgy, geriatric brand. The reality is that WWW has transformed it over the years to be much younger, trend-right and relevant. For what it's worth, the price points on the Hush Puppies boots are comparable to UGG.


LVMH - LVMH Said Investing in Marco de Vincenzo



  • "LVMH Moët Hennessy Louis Vuitton is to reveal today that it has struck a joint venture with the Rome-based designer to develop his fledgling ready-to-wear brand."
  • "De Vincenzo showed his fall collection here Sunday."
  • "According to sources, the agreement gives LVMH a 'significant' minority holding in de Vincenzo’s company, with options to tighten the partnership and increase its stake down the road."




Shoe Factories Close on Safety Scare



  • "More than 4,500 shoe factories in the eastern Chinese city of Wenling have been closed for safety violations after a fire at a local manufacturer killed 16 people in January, state-run media outlets reported."
  • "The January 14th blaze at the Taizhou Dadong factory killed six men and ten women and was probably caused by faulty wiring, according to local media. Wenling produces more than a billion pair of shoes a year, many of which of which are for export."
  • "The Taizhou Dadong factory owners were arrested and the local government vowed to crackdown on shoddy safety practices to prevent a similar incident."






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Golden Defense

“All men can see the tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved.”

-Sun Tzu


That’s most likely a familiar quote to any winner in this world – and it should be. Author John Hamm uses it effectively in his intro to chapter 5 of Unusually Excellent (pg 103) in order to link leadership to processes and plans.


As we like to say here @Hedgeye in terms of positioning for new Global Macro Themes, the plan is that the plan is going to change. That’s because real-time prices and market signals do. Our risk management process doesn’t change so much.


Neither did Team Canada’s in this weekend’s Gold medal hockey win at the Olympics. Sure, offense might win shootouts, but defense wins championships. En route to their second consecutive Olympic win, Team Canada shut out both USA and Sweden. It’s really hard to lose if you don’t get scored on (Canada allowed only 3 goals in 6 tournament games). #GoldenDefense


Golden Defense - 44


Back to the Global Macro Grind


Backcheck, Forecheck, Paycheck. That’s another saying meat-head hockey players like me use when we think about grinding out wins. Note that back-checking comes first. Defense always does.


There are obvious ways to apply this mentality to your risk management strategy. In a US stock market that literally went straight up last year, if all you did was not lose money on the short side, you probably won the season for your investors.


Sure, doing crazy stuff (like trading) may look like “short-term” tactics (primarily because they are) but don’t confuse my tactical back-checking  with a lack of a longer-term strategy to win championships.


What is your long-term strategy?


Mine is don’t lose money. That’s why how you did in 2000, 2001, 2002, 2008 and 2011 matters.  That’s also why most of our Global Macro Themes incorporate what to stay clear of (on both the long and short side) if a big macro theme starts to trend.



  1. During #GrowthAccelerating – don’t short high-short interest, high beta, growth stocks that can beat expectations
  2. During #InflationAccelerating – don’t short commodities, breakevens, etc.
  3. During #InflationAccelerating + #GrowthSlowing – don’t short bonds, utilities, or Gold

If you aren’t in the business of shorting things, substitute the word “short” with SELL! Obviously, the other side of “don’t sell” is buy or hold. And I think anyone who has bought and held commodities for the last 3 months is winning YTD too.


Update on our non-consensus 2014 call for #InflationAccelerating:

  1. US Dollar Index is down again this morning and -1.4% in the last 3 months
  2. CRB Commodities Index was up another +2.8% last week and up again this morning to +7.8% YTD
  3. US Consumer Prices (CPI) hit a 4-month headline high of +1.6% year-over-year last week (JAN report)

I know. I know. The government says there’s no inflation, and since they’ve neutered the inflation report so that the headline number can rarely remain above 4% (or below 1%) for long, academics can argue amongst themselves on that.


Reality is that market expectations trade on the rate of change for both GROWTH and INFLATION expectations. And currently the rate of change on both makes our macro call a very easy one to make:

  1. INFLATION: up from its 3yr low of +0.9% y/y CPI in OCT 2013, CPI is going towards 2%, fast, in February
  2. GROWTH: down from its Q313 sequential peak of +4.12% GDP, you’ll probably see a 2% handle in Friday’s GDP report

So, irrespective of your views on how to play Macro Defense, what if?

  1. Inflation doubles (from 1% to 2%)
  2. Growth gets cut in half (from 4% to 2%)

Market #history fans will recall that when inflation slows growth, stock markets get MULTIPLE COMPRESSION. In other words, with the SP500 trading at 16x this year’s #OldWall projection for “earnings”, all you need is 2 points of multiple compression to get you 1638 (14x) at some point this summer. If the “earnings” (and multiple on them) start to fall, it’ll get gnarly out there, faster.


And while I am sure that the “weather will turn” and that some American consumers are dumb enough to go lever themselves up with a few more houses to flip, that doesn’t change the fact that inflation will A) slow real-consumption-growth and B) have a big impact on reported US GDP via a rising “deflator” (note: the deflator, which is subtracted from GDP, hit a 50yr low last yr and is rising).


With Natural Gas (+17.7% last wk to +46.3% YTD) and Coffee price (+19.1% last wk to +50.1% YTD) #InflationAccelerating to 52-week highs last wk, #GrowthSlowing has both Utilities (XLU) and Gold +7% and +11% YTD, respectively. So don’t be short those. Buying and holding them for the last 3 months has been a #GoldenDefense. Being long the American consumer, not so much.


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


UST 10yr Yield 2.66-2.78%

VIX 13.44-16.69
USD 79.81-80.41

Brent Oil 108.54-110.69  

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Golden Defense - Chart of the Day


Golden Defense - Virtual Portfolio






MGM China wants to develop its own customers to help manage risks, said Bowie, the company’s CEO.  “The junket model is a very successful model in terms of efficiency but we need to diversify,” he said. “No organization should limit themselves to one geographic market or one business strength. It’s too high risk...Direct VIPs give us considerably higher profit margins.”


Meanwhile, LVS is trying to bypass the middlemen by putting its fleet of private jets and limousines at high-rollers’ disposal, night and day, and comps their stays in suites that run to 8,000 square feet and come with on-call concierges.


Junket operators, led by Suncity Group and Jimei Group, have a steady grip on the industry.  Still, some are feeling the pressure.  “We are being squeezed (by direct VIPs),” said Yu Yio Hung, who operates a single VIP room at Altira casino.  SJM relies entirely on junkets to bring in their VIPs and currently has no plan to change its full reliance.  “SJM is comfortable with our junket relationships and with the junket system, which operates legally in Macau,” CEO Ambrose So said.  


As the Lunar New Year falls on January this year, visitor arrivals totaled 2,503,609, up by 8% YoY, attributable to an increase in visitors from Mainland China.  Mainland visitors totaled 1,689,277, with 832,381 (49% of total) traveling to Macao under the Individual Visit Scheme.  The average length of stay of visitors stood at 1.0 day.





"We will spend whatever it takes," said LVS CEO Sheldon Adelson. "Would I put in $10 billion? Yes."  Asked whether he would team up with Japanese companies, Adelson said he would be "willing to embrace Japanese partners" if they can hold up their share of the work and adopt a risk-taking mentality.  He said he would be interested in opening a resort in either Tokyo or the western Japanese city of Osaka, and that his company would be hiring people in Tokyo to expand its presence.


Proponents of gaming hope Japan will start licensing casinos in 2016 and have at least one in operation before the 2020 Summer Olympics in Tokyo.

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