The Olympiad

This note was originally published at 8am on February 19, 2014 for Hedgeye subscribers.

“The important thing in life is not victory but combat; it is not to have vanquished but to have fought well.”

- Pierre de Coubertin


We’ve been a little quiet commenting on the ongoing Winter Olympics in Sochi, Russia.  For Keith and me, it is probably nervousness over whether our native Canada can defend her Olympic gold, despite a lackluster preliminary round performance (lackluster in the sense that Canada is the first nation of hockey).  More broadly, though, the paradoxical nature of global markets has kept us busy.


In part, the Sochi Olympics represent this paradox.  Admittedly, from a security perspective, the games have been much more successful than anyone expected.  (As far as I can tell, the one downside is that most hotels rooms have a picture of Russia President Vladimir Putin.)  The flip side to the better than expected security (except perhaps in the Ukraine), is that many venues have been disappointing.


This of course goes to the heart of the paradox of the winter Olympics in Sochi, which is that Sochi is actually a beach resort.  Our partner in the Phoenix Coyotes, George Gosbee, has been in Russia since the start of the games. He took a fantastic picture that was picked up by Reuters (see below) showing the beautiful Sochi beach line that spectators walk on to get to the hockey arenas.


The Olympiad - g9


We will be doing an Olympic hockey pool later this week at Hedgeye and the odds are that our own Bob Brooke has the inside edge given his experience playing for the U.S.A. at the Sarajevo Olympics in 1984, but here are my picks:

  1. Gold – U.S.A.
  2. Silver – Canada
  3. Bronze – Russia
  4. Sweden

While it is paradoxical for a Canadian to pick the U.S. to win gold, they have looked much better, so I’m not going to let my emotions rule the day.  What are your picks?


Back to the Global Macro Grind . . .


This morning in the Chart of the Day, I wanted to continue hitting on this ongoing paradox of reported versus actual inflation.  As it relates to reported inflation, we do expect CPI to ramp and likely beat expectations in the U.S., but more importantly is the actual commodity inflation that is occurring.   The chart shows Gold Spot, Gold Miners (GDX) and the CRB Index versus the SP500, Consumer Staples (XLY) and Consumer Discretionary (XLP).


As the chart emphasizes, commodity inflation has been on a tear since our January 9th Q1 Themes Call.   Now, obviously, accelerating commodity inflation and input costs aren’t the reason that a number of our Best Ideas shorts, namely Weight Watchers (WTW) and Boardwalk Pipeline Partners (BWP), have underperformed so dramatically, but they are a reason that we continue to like the series of Best Idea shorts that our Restaurant team led by Howard Penney has added to the list. 


This list of restaurant shorts includes Cheesecake Factory (CAKE), Bloomin’ Brands (BLMN), Potbelly Corporation (PBPB), and Panera Bread (PNRA).  PNRA reported earnings least night and guided 2014 earnings estimates to $6.80 -> $7.05, which is below consensus estimates of $7.30.  Certainly not a meaningful miss, and likely weather did play a part, but when a company trades at close to 25x forward earnings, expectations are, indeed, the root of all heartache.  For more information on how to subscribe to restaurant sector research, please email


Reverting back to inflation, the Congressional Budget Office released a recent report yesterday that had some rather interesting takeaways from President Obama’s proposal to raise the minimum wage (an inflationary pressure), specifically:

  • President Obama's quest to raise the minimum wage to $10.10/hour would eliminate about 500,000 jobs by 2016 but also increase pay for 16.5M workers and lift 900K out of poverty;
  • The report said benefits of an increase would be spread across a broad range of workers, with 19% of the increased wages going to Americans living below the poverty line. Close to 30% of the higher wages would go to people in families that earned more than three times the poverty level; and
  • The report added that the increased cost of labor would encourage employers to upgrade technology or hire fewer, higher-skilled workers. That effect would be partially offset by higher earnings among low-wage workers who retained their jobs.

So, a proposed government policy that slows employment growth and creates inflation . . . that sounds eerily familiar.


This morning and through the duration of the week we will be getting a series of macro data points that will be critical to focus on, which include:

  • Today - MBA Mortgage applications, PPI, Housing Starts and HSBC China Flash PMI.
  • Thursday - CPI, Flash PMI, Eurozone Flash PMI and BOJ Minutes; and
  • Friday - Existing home sales.

Paradoxically, the SP500 has been strong over the last two weeks or so, though it will be interesting to see how and if that strength sustains into an increased, and potentially negative, macro news flow.  Conversely, as it relates to China, our view is fairly explicit.  As my colleague Darius Dale emailed me this morning:


“Thus far in the YTD, the only data that has been supportive of a year-over-year acceleration in Chinese growth has been the credit data; even price-based leading indicators would suggest otherwise. All other data (i.e. PMI surveys) suggests sequential momentum is decidedly slowing. The market is clearly pricing in the expectation that the PBoC will have to ease [materially].”




Our immediate-term Macro Risk Ranges are now:


UST 10yr Yield 2.64-2.79%

SPX 1807-1848 

VIX 11.79-15.93

Gold 1282-1333


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Olympiad - Chart of the Day


The Olympiad - Virtual Portfolio

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Replay: Long Lorillard (LO): Best Idea Call

Earlier today we hosted a conference call to discuss the key points of our high-conviction bullish thesis on Lorillard (LO). 



Presentation: CLICK HERE


Key Takeaways Of The Call

  • We do not see Menthol Regulation Risk from the FDA over the medium term (1-2 years) and assign less than a 20% probability over the long term.
  • We expect blu e-cigs to benefit from first mover advantage and maintain leading market share despite competitive pressures from Big Tobacco’s entry into the category. Looking out 5 years to 2018, we model blu’s earnings contributing 31% to total LO, and accelerating earnings growth in the combined company that should command a re-rating of the stock to a higher multiple.
  • We expect strong and stable menthol fundamentals driven by lasting consumer and demographic trends that differ from traditional tobacco.

*A supplemental expert report on menthol by a top Washington, DC law firm involved in tobacco public policy is available by request.


Call or email me with any follow-up questions.




Matt Hedrick


EHTH: Déjà vu

Takeaway: We've been here before. EHTH is ripping on another headline without considering implications. Street setting EHTH up more disappointment


  1. EHTH stock is ripping on rumors of another delay for ACA plan compliance; implication is that there will be less attrition risk next year.

  2. MCOs may cancel plans on their own and/or push back on commission rates next year in order to recoup profitability on 2014 plans.

  3. Either way, EHTH will not see the upside that the street is baking into its stock today.  


The White House is rumored to be extending the waiver on plans that are not compliant with the Affordable Care Act (ACA) in order to avoid cancellation letters being sent ahead of mid-term elections.  EHTH is up 11% intraday on the news 


The most obvious takeaway is that the waiver will mitigate EHTH's attrition risk next year.  We're not arguing that point; we're debating by how much.


Two important considerations on the extended waiver:

  1. It's subject to state approval
  2. MCOs make the final decision.

We can't say what states will do next year.  The bigger risk is the MCOs themselves; some of which have already cancelled existing plans regardless of the state's decision for 2014.  Below we explain the rationale for doing so, and why this will only get worse next year.   


Carrying both existing and ACA-compliant plans creates an actuarial mismatch for an MCO. Plan prices for ACA-compliant plans are considerably higher in order to offset the series of new costs facing MCOs in 2014 (e.g. Essential Health Benefits/Out-of-pocket limits).  

It's important to note that ACA limits MCOs from charging older (costlier) individual any more than 3x the rate of younger cohorts, which means they could only increase rates so much on the older cohorts, and explains the barbell-shaped rate increases that we have seen for 2014 plans


EHTH: Déjà vu - EHTH   Rate Increases 2


The main issue is that MCO profitability comes from the younger cohorts, and they're not signing up.  From what we've seen to date in terms of gov't exchange (HIX) enrollment, the population signing up for coverage is considerably older than what the industry is currently accustomed (aka Adverse Selection).  In turn, MCOs are seeing a higher proportion of costlier members, and 2014 plans will be less profitable than what the industry is accustomed to (if at all).


EHTH: Déjà vu - EHTH   IFP vs. HHS demo


 In order for MCOs to recoup profitability in 2015, they will have to do one of three things

  1. Raise prices on ACA-compliant plans, or exit markets if unable to do so.
  2. Cancel non-compliant plans to raise collective premiums
  3. See below


EHTH has suggested that its 2014 commission rates will be flat to slightly up in 2014.  We would have expected greater pressure on 2014 commission rates given the headwinds facing MCOs, but we believe the reason why commissions have remained stable is because the gov't exchanges (HIX) were having technical difficulties during the 2014 selling season.


That changes next year; the gov't HIX are far more functional now, and should only improve from here.  That makes MCOs less reliant on the private HIX (e.g. EHTH) to distribute their plans, and more likely to push back harder on commission rates.  


It's also worth noting that in order for EHTH to sell subsidized plans, its must offer all subsidy-eligible plans available on the public HIXs, regardless of whether is has a commission agreement with those MCOs.  In a worst case scenario, an MCO could pull its commission agreement with EHTH and still gain new members since EHTH has to offer its plans regardless.  


In short, if the MCOs are experiencing headwinds to profitability, it will be that much easier to push back on commission rates in 2015.


EHTH is essentially a distributor without a captive consumer.  It operates in a crowded industry with a growing competitive threat from the public HIXs.  If MCOs are feeling the pressure in 2014, they're going to push back in 2015; and there's not much EHTH can do about it.  



Hesham Shaaban, CFA






Takeaway: We continue to think the growth decelerating trend extends through 1H14.

Editor's note: This research note was originally published February 28, 2014 at 10:26 in Macro. For more information on how Hedgeye can help you click here.


We’ve been vocal in our expectation for a deceleration in the slope of domestic growth over the last couple months and while this morning’s downward revision to 4Q13 wasn’t particularly surprising, it does offer some positive confirmation to that view. 




With the dollar breaking down, #InflationAccelerating, earnings growth still sub-trend, wealth effect (equities/housing) momentum decelerating and little incremental upside for consumption growth via a reduction in savings, we continue to think the growth decelerating trend extends through 1H14. 


GIP MODEL REFRESH:  The net impact to our GIP (Growth/Inflation/Policy) model from this morning’s data is another incremental shift in trajectory towards quadrant #3 – Slowing Growth and Rising Inflation


To the extent that the market continues to discount slowing growth and subsequent, incremental easing in policy – which ironically/unfortunately only perpetuates the move into Quad #3 – we think slow growth exposure (gold/bonds/commodities/utilities) continues to outperform pro-growth leverage. 




GDP DATA SUMMARY:  Below we highlight the notables in this mornings, 1st revision to the 4Q13 GDP estimate. 


Real GDP:  revised lower by 80bps to 2.4% from 3.2%.  Decelerating 170bps QoQ to 2.4%. 

Nominal GDP:  decelerating 200bps QoQ  from +6% in 3Q13 to +4% in 4Q14. 


Inflation:  Inflation estimates marked higher with the GDP Price index and Core PCE measures revised up 30bps and 20bps, respectively. 


C+I+G+E Revision:  Investment revised up small, everything else revised lower.

C: Consumption saw the largest downward revision from a contribution perspective at -.53% with QoQ growth revised from +3.3% to +2.6%.  Durable/NonDurables/Services were all revised lower but Durables (as the latest PCE data has reflected) saw the largest decline.


Whether the emergent deceleration in durables, and luxury and higher-end durables particularly, represents a pull-back in spending across the top income quintiles as equity and home value gains slow remains to be seen. We’ll get the updated PCE detail data on Monday.  


I:  Investment:  Private Nonresidential Investment, which was revised higher by +0.4 from a contribution perspective and +3.5% from a growth perspective, was one of the lone bright spots in the report. 


Inventories were revised lower and with inventory-to-sales ratios continuing to creep higher through year end, its unlikely inventories provide another outsized boost to reported growth in the coming quarters. 


G + NE:  Government was revised down modestly while the revision to the trade balance was the second biggest contributor to the headline decline with export growth revised -2.0% against a +.60% revision for imports. 


Real Final Sales growth (GDP less Inventory Change):  decelerating 20bps QoQ to 2.3%…revised lower by 50bps

Gross Domestic Purchases (GDP less exports, including imports):  Very Weak sequentially - Decelerating 250bps QoQ to +1.4%..revised lower by 40bps

Real Final Sales to Domestic Purchasers (GDP less exports less inventory change):  (Perhaps) The cleanest read on aggregate domestic demand was also weak, decelerating 100bps to +1.2%, revised lower by 20bps.








#GROWTHSLOWING - Eco Summary 022714 



Christian B. Drake


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.