Uncle Sam vs Union Jack

Client Talking Points


Let's be clear: Europe is not the USA. Not by a long shot. With #StrongEuro and Pound, my model still says you buy Europe over the U.S. (Cyclical Equities). Today’s pullback of -1.2% in Germany (DAX) and MIB Index (Italian business confidence hits new highs for February at 99.1 versus 97.7 January) are buys. Russia down -2%? Not so much. It's careening to fresh year-to-day lows (worst stock market in the world at -12.5% YTD).


The Yen is still ramping versus the Burning Buck as Janet "Mother of All Doves" Yellen prepares to chirp dovishly to the Senate Banking Committee this morning. USD/YEN weakness continues to keep a lid on every Nikkei bounce to lower highs (-0.32% overnight to -8.3% YTD).


A big week to be long bonds, and I like it (US #GrowthSlowing as inflation accelerates). Don’t buy them today with the 10-year yield signaling immediate-term TRADE oversold (within its bearish TREND @Hedgeye) at 2.65%. The risk range is 2.64-2.80%.

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


GOLD: +0.1% this morning to $1323/oz = +10.7% YTD (vs $SPY -0.2%) @KeithMcCullough


"There are no seven wonders of the world in the eyes of a child. There are seven million." - Walt Streightiff


Tesla's grand expansion plans will be funded in part by raising $1.6 billion through a bond issue announced Wednesday. The money will be used to build what founder Elon Musk has dubbed the "Gigafactory" and for production of a more affordable, new mass market vehicle. The massive factory is expected to produce more lithium ion batteries annually by 2020 than were produced worldwide in 2013. (CNN)

WTW: Why We're Still Short

Takeaway: WTW price suggests limited room for error moving forward; meaning we can stay short until the street finally gets the secular decline theme


We have been mulling over what to do with WTW shares, wondering if there was anymore downside left in the short after selling off almost 30% since its earnings release.  


After further analysis, it appears WTW is now considerably overvalued, which implies that the street is baking in upside to 2014 guidance or a return to revenue growth in 2015.  We do not believe either is likely; particularly the latter (see our most recent notes and slide deck below for more detail).  


So even if the company can surprise to the upside in 2014, we doubt the stock will move much higher in response.  On the other hand, if WTW fundamentals deteriorate further, it could trade much lower; especially as we draw closer to 2015 when the secular themes become more evident.  


WTW: Staying Short

02/14/14 12:09 PM EST


WTW: Short Slide Deck

01/30/14 11:00 AM EST


WTW: Initiating Short

01/22/14 09:21 AM EST 


WTW is now trading near its peak LTM valuation on both a NTM P/E and NTM EV/EBITDA basis (both on an absolute and relative basis).  That statement seems counter intuitive given the considerable miss on 2014 guidance.


Prior to its 2014 guidance release, consensus was expecting 2014 EPS of $2.77.  WTW issued 2014 EPS guidance of $1.30-$1.60, missing EPS guidance by 48% at the midpoint.  However, the stock is down ~29% since its earnings release; resulting in a considerable divergence on P/E basis (the "E" declined more than the "P").  Net-net, WTW's trading multiples have expanded considerably since the 2014 guidance release


In the charts below, we're showing a time series of WTW's valuations relative to its historical peak and trough ranges over the past 1,3, and 5 years.  The first chart is WTW's NTM P/E and NTM EV/EBITDA valuations on an absolute basis; the multiples have expanded roughly 5x and 4x turns, respectively, since its earnings release.  


WTW: Why We're Still Short - WTW   PE Bands 2 26 14

WTW: Why We're Still Short - WTW   EV Bands 2 26 14


The same dynamic holds on a relative basis (vs. the SPX).  In the charts below, we are showing a similar time series of the spread between WTW's multiples vs. those of the SPX (in order to remove the impact of beta from WTW's valuation).  The relative valuations have expanded as well, which implies that the street believes WTW should be trading inline with the SPX on a NTM P/E basis, and 4x above on a NTM EV/EBITDA basis.  


WTW: Why We're Still Short - WTW   PE Spread Bands 2 26 14

WTW: Why We're Still Short - WTW   EV Spread Bands 2 26 14



Hesham Shaaban, CFA




Thomas W. Tobin



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REMINDER - We will be hosting a brief conference call today, February 27th at 11:00am EST to discuss why we think market participants may finally be appropriately bearish on Brazil.



  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 896782#
  • Materials: CLICK HERE (slides will be available approximately one hour prior to the start of the call


With the Bovespa Index down -54% in USD terms since peaking in APR ’11, we now think it’s appropriate to explore whether or not the currently distressed prices of Brazilian assets represent real value or if they remain a value trap. We will conclude the call with a live Q&A session.




  • A review of our bearish thesis and key risks over the next few quarters
  • Scenario analysis on whether or not this is a good time buy
  • Is the bottoming process underway for Petrobras (PBR) and Vale (VALE)?






Contact for more information.


We look forward to your participation on the call. Please email with any questions you'd like us to address.


-The Hedgeye Macro Team

Double Bubble Trouble

“Double, double toil and trouble. Fire burn, and cauldron bubble.”

-William Shakespeare


They say Shakespeare wrote Macbeth sometime between 1. But my contacts tell me he could have written it in 2007. The prescience of his dark tragedy would have been a big call for CNBC.


But, from an economic forecasting and risk management perspective, what has really changed since late 2007? On mute, I can still see the same old broken sources telling me that the future slopes of growth and inflation are going to be what they were in the prior twelve months. Huh?


It’s brilliant really. To get paid to forecast the weather on a 6-12 month lag, that is.


All the while, the anti-consensus fires begin to burn as the next macro risk starts to bubble. What do I think right now? I think that US inflation can absolutely double in 2014; double, double, cut US GDP in half, and there will be trouble.


Double Bubble Trouble - bub


Back to the Global Macro Grind


Turning bearish might sound like it comes right out of Scene 1 of Macbeth. I’m in my dark man-cave, I’m wearing jorts beside a boiling cauldron and three witches. Thunder strikes as my arthritic hockey knuckles pound the keyboard. “Thrice the brinded cat hath mew’d!”


Seriously. Let’s get real here. All the boys know that my first creative writing paper in the English department @Yale was given back to me with the word “ungradable.” While I may have only had upside from there, I have no business writing you poetry this morning.


Back to the call. If I boil down our entire US macro view right now to “inflation doubles, and growth gets cut in half” what does that mean? 

  1. #InflationAccelerating – US Consumer Price Inflation (headline) goes from 1% y/y to 2%
  2. #GrowthSlowing – US GDP growth gets cut in half from our #GrowthAccelerating call high of +4.12% in Q314

So easy a Mucker can do it.


I’ve been on the road seeing some really smart and really successful customers of ours in NYC and Connecticut for the last few days and the feedback to our call is:

  1. “You’re the only strategist hammering on #InflationAccelerating right now”
  2. “When do you think it will matter?”

While I think it will matter a lot more as the year progresses, we are quickly approaching the ides of March… and with the US stock market still down for the YTD, I’d argue it already matters. It already matters.


Gold is ripping (up again this morning to +11% YTD), and plenty of bonds (and/or stocks that look like bonds; Utilities +7% YTD) are crushing consumption growth stocks too. That’s where this call really matters – from both a sector and investment style perspective.


To be clear, my being bearish on inflation’s impact on the slope of US growth expectations doesn’t mean I am universally bearish on every asset class you can buy.  My asset allocation model is basically the opposite of what it was on this day in February of 2013:

  1. Long Commodities
  2. Long Foreign Currencies vs the US Dollar
  3. Long Fixed Income
  4. Net Long European Equities
  5. Net Short Japanese Equities
  6. Net Short US Equities

As you know, I’m big on process. So you shouldn’t be surprised about my re-positioning. As we move towards what we call “Quadrant 3” in our GIP (Growth, Inflation, Policy) risk management process, all I’m doing here is what the playbook tells me to do.


Any monkey can be long something. Over 90% of #OldWall ratings aren’t sell. So when I whip up the bearish brew, I get that people care more about how that might taste than telling them to buy Twitter (we still think you should be short that btw).


So when I say I’m “Net Short US Equities”, there are a few explicit positions you can see on that front:

  1. More US equity SHORTS than LONGS in #RealTimeAlerts
  2. Short Consumer and Financials (XLY, XLP, and XLF) vs long Healthcare and Energy (XLV and XLE)

If you think it’s a low-stress life to be publicly publishing my research team’s Best Short Ideas in a market that is just coming off its all-time highs, think again. The venom we’ve received (from non-customers) on short ideas like Kinder Morgan (KMI) and Nationstar (NSM) is real.


But I like it.


“Swelter’d venom sleeping got,

Boil thou first i’ the charmed pot”


Ah, the poetry of it all. I’m looking forward to seeing how the market reacts to its first big slowdown in US GDP tomorrow morning.


Our immediate-term Macro Risk Ranges are now (our Daily Top 12 ranges are in our Daily Trading Range product). We’ll be hosting a Flash Call on Brazil at 11AM EST today. Please ping if you’d like access.


UST 10yr 2.64-2.80%


Nikkei 144

EUR/USD 1.36-1.38

Brent 108.18-110.69

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Double Bubble Trouble - UNITED STATES


Double Bubble Trouble - Virtual Portfolio

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