Land of (Serious) Complacency

Client Talking Points


Front-month volatility continues to signal a series of higher-lows in our model and actually closed back above Hedgeye TREND support of 14.71 yesterday. Add that to a wicked wide II Bull Bear Spread this morning (Bulls up +3,770 basis points over Bears). People, we have officially entered the land of serious complacency for US Equities.


Unlike US Equities, Japanese stocks are already getting totally smoked in 2014. The Nikkei was down another -2.6% overnight to essentially 9.0% year-to-date as the Yen strengthens versus America’s Burning Buck, which is at YTD lows. The rate of change in Japanese growth should slow well into Q314. This going to get interesting. Fast.


The Russian Ruble crashing was the leading indicator for the subsequent crashing of the Russian stock market. It's down another -1.6% this morning to -22.6% year-to-date. Since October it's dropped -26.7%. Nice Olympic bump, right? Sorry Vlad.

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


The purchasing power and currency of The People are inseparable #USDollar @KeithMcCullough


"Any fool can criticize, condemn and complain and most fools do." - Benjamin Franklin


"Veronica Mars" shattered crowdfunding records last year; this weekend we'll find out if that translates to box office success. A Kickstarter campaign last spring raised $5.7 million to bring the cult TV hit to the big screen. With backing from 91,585 fans, the film received more contributions than any other project in the crowdfunding platform's history. It is currently the third highest-funded Kickstarter project ever. (CNN

Buying Opium

This note was originally published at 8am on February 26, 2014 for Hedgeye subscribers.

“Opium is like Gold – I can sell it at any time.”

-Robert Taylor


Per British historian Julia Lovell, that’s what one of James Matheson’s first partners told him about selling opium to the Chinese in 1818. Matheson was one of the first Scottish traders to hit the ground running (selling drugs) in China in the early 19th century.


If you’re a market #history student, it’s a fascinating story to try to understand. I’m getting into it via a book all Global Macro investors should have on their shelf called The Opium WarDrugs, Dreams, and the Making of China, by Julia Lovell (pg 25).


The PRC’s state media works hard to convince readers and viewers that modern China is the story of the Chinese people’s heroic struggles against “imperialism” and its running dogs. In reality, the story of modern China could probably be told just as convincingly as a history of collusion with imperialism and its running dogs” (pg 13).


Back to the Global Macro Grind


Teddy Roosevelt wrote poignantly about the American “struggle.” You know, the alarm clock – the grind - the tireless hours we commit to whatever it is that we are committed to. And since most of us are human, we have a tendency to believe that what we are doing is “right”; especially if it gets us paid.


In America today, politicians are trying to pin us against one another using emotional weapons like class and gender. Leaders want the poor to think they are struggling against the rich. They want you to buy into “inequality” being someone else’s (your) fault. In reality, the 2011-2012 all-time highs in US consumer and producer price inflation is a history of US politicians perpetuating a Policy To Inflate.


Why is that?


Q: How do you have the all-time highs in prices for just about everything in your life… and both a Republican and Democrat government telling you there’s a “great recessionary risk of deflation”? A: Debt.


As John Allison simply puts it in The Financial Crisis and The Free Market Cure, “If you owe a great deal of debt (like the US Treasury) it is to your advantage to have inflation.” (pg 21)


In other news, Venezuela is considering defaulting on its debt.


That’s how this bubble story of government debt ends. And no, this isn’t a new story. Countries have been bankrupting their people via currency devaluation for centuries. There’s a 3-step default process – and it takes time:

  1. Politicians have to borrow from The People to meet spending promises (and get paid)
  2. Too much debt leads to deficits and slower growth, which fuels the need for more debt and cheaper money
  3. Inflation crushes real-growth; spending and liabilities run past the point of return, and the country defaults

Cool, eh?


But don’t worry, the stock markets in Argentina and Venezuela aren’t down YTD (in their burning currencies). So, in an effort to get their ratings off all-time lows, CNBC will be moving live broadcasts from NJ to Buenos Aires.


BREAKING: “stocks rally – things must be great”


Oh, and don’t forget to bring on the Top 100 Central-Planning Socialist Bureaucrats of the last 25 years for an “exclusive interview” on how they think Argentina’s Kirchners can keep it going!


Today’s morning missive was inspired by one of the best days of Institutional Investor meetings I’ve ever had in NYC. What’s fascinating about our #InflationAccelerating theme is that some buy siders really get how this ends – and some are just starting to put all of the pieces of the puzzle together.


I have a very privileged research position as I get to hear the best incremental research thoughts of some of the best investors in the world. Some are extremely well versed in the bottom-up analysis of inflation (i.e. the structural part that is born out of this government forcing companies to disinvest). It’s called constrained fixed capital formation, labor, and capacity.


No, I’m not talking about the overcapacity in things like asset managers, social media companies, and tulips. I’m talking about things like cement, fiberglass, and plumbers. Layer on the structural inflation that you’re already seeing due to capacity shortages with a cyclical rip in things like wage, rent, and commodity inflation – and voila, you find yourself approaching the aforementioned step #3.


But don’t worry, inflation that slows growth is like Gold - you can invest in it at anytime; it’s just that poor people (80% of the country) have to eat it.


Our immediate-term Macro Risk Ranges are now:


UST 10yr Yield 2.66-2.79%

SPX 1818-1853

VIX 13.06-15.55

USD 79.83-80.59

Brent 108.02-110.91

Gold 1288-1351


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Buying Opium - The Cycle


Buying Opium - virt

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Sentiment Speaks

“Listen to many, speak to few.”

-William Shakespeare


I love to read, write, and rant. But, other than our top institutional customers and my research team, I speak to few during a typical market day. While I love my best friend (my brother Ryan), our phone conversations are usually 140 words or less.


If you read voraciously, you can listen to the #history of many. If you create the right contra-streams on Twitter, you can watch the sentiment of the crowd. If you embrace uncertainty of timing market sentiment, you’ll always be prepared to change your mind.


But macro markets don’t care about what I think about all of that. Markets are non-linear. They are structured to pulverize the largest number of people at the most inconvenient time. So listen to Mr. Macro Market’s signals very closely. He’s a front-runner of risk.


Back to the Global Macro Grind


With Japanese, Chinese, and American #GrowthSlowing (oh, and Russia crashing to -22.6% YTD), what could possibly go wrong? Rather than have some character tell you “the market is cheap”, you can listen to #history’s lesson on that:


1. When Inflation Accelerates, and

2. Real (inflation adjusted) Growth slows…


You get:


A) Multiple compression in Equities

B) Multiple expansion in Bonds


And, since:


1. #OldWall consensus is still looking for implied multiple expansion (to 17-18x EPS) for the SP500 this yr

2. #OldWall consensus is still looking for implied multiple compression (higher bond yields) for Treasuries this yr


You have yourself basically the opposite consensus to listen to that you had only 1 year ago today. While last year seems like forever ago to a consensus that missed US #GrowthAccelerating, on March 12, 2013:


1. The Dow and SP500 were at 14,450 and 1552, respectively

2. The 10yr US Treasury Yield was at 1.90% (tracking towards its all-time low of 1.7% in April)


Sentiment then wasn’t off by a little bit – it was off by a country mile.


By year-end of 2013:


1. The Dow and SP500 closed at 16,576 and 1848, respectively

2. The 10yr US Treasury Yield has its biggest % move in 50yrs (closing the yr at 3.03%)


Fast-forward to today, with the US Dollar on its YTD lows and #InflationAccelerating, the Dow Jones is actually DOWN -0.6% YTD and US 10yr Treasury Yield is DOWN -28 basis points to 2.75%. But the SP500 is up a whopping +1.0% (plus or minus whatever happens today), so let’s turn on the tube and keep talking up what was supposed to be a US Equity multiple expansion party!


If you’ve studied the #history of debtor nations devaluing their currencies in order to inflate asset prices, you’ll note that the non-government people living in those countries generally develop miserable sentiment. There’s this thing called the Misery Index (inflation + unemployment). This morning, Japan’s Misery Index hit a 33 year high.


So, let’s encourage consensus to keep cheering on a Policy to Inflate but call it by any other name. This is really the only way to envision being really right versus what you read and hear from consensus every day (consensus #OldWall estimates are still looking for both US and Global GDP to accelerate sequentially to new multi-year highs, and for inflation to be benign).


A few other mathematical realities we’ve back-tested as relevant sentiment checks are:


1. Front-month Equity Fear (VIX) versus the term structure of the VIX curve

2. The II Bull/Bear Spread


This morning front-month VIX has A) established yet another higher-low on our TREND duration and B) the term structure of implied volatility is nowhere near as fearful as it was 12-15 months ago.


On the II Bull/Bear Spread, 2013 bears were eviscerated. On today’s reading, Bulls are +3,770 basis points (55.1%) higher than the Bears (17.4%). That’s not the all-time high in terms of the Bull/Bear spread – but December 31st, 2013 was (when the Dow topped).


I’m not saying I’m nailing everything macro this year. I’m simply saying what very few want to listen to when complacency sets in – and that’s that the US stock market “is cheap, multiple expansion” bulls might get nailed in the coming months.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.58-2.80%


Nikkei 144

VIX 13.22-15.72

USD 79.39-79.98

Gold 1


Best of luck out there today,




Keith R. McCullough
Chief Executive Officer


Sentiment Speaks - Chart of the Day


Sentiment Speaks - Virtual Portfolio


TODAY’S S&P 500 SET-UP – March 12, 2014

As we look at today's setup for the S&P 500, the range is 46 points or 1.27% downside to 1844 and 1.20% upside to 1890.                      










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.39 from 2.40
  • VIX closed at 14.8 1 day percent change of 4.23%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, March 7 (est. 9.4%)
  • 10:30am: DOE Energy Inventories
  • NOTE: Monthly Budget Statement moved to March 13


    • Florida Republican David Jolly wins special House election
    • 9am: Senate Armed Svcs Cmte holds hearing on Afghanistan
    • 10am: House Armed Svcs Cmte hears from Marine Corps Commandant James Amos, Navy Sec. Ray Mabus, Chief of Naval Operations Jonathan Greenert on 2015 defense authorization budget request
    • 10am: Senate Health Education and Labor Cmte hears from Labor Sec. Thomas Perez on proposed minimum wage increase
    • 10am: House Ways and Means Cmte hears from HHS Sec. Kathleen Sebelius on her agency’s 2015 budget request
    • 10:30am: SEC to vote on proposal for new risk-management standards for clearing firms such as Depository Trust Co.
    • 10:30am: House Judiciary Cmte holds hearing on the Internet sales tax


  • Apple appeals rejection of Samsung smartphone sale-ban bid
  • AutoTrader owners Cox, Apax said interested in
  • GM criminal probe of recalls seen complicating Barra turnaround
  • Obama meeting with Ukraine’s Yatsenyuk raises stakes with Putin
  • Malaysian air force denies saying plane tracked to Malacca
  • Wilbur Ross says Diamond S Shipping IPO pulled on low price
  • Gross sells Treasuries as Gundlach says U.S. yields will fall
  • Cash abroad from largest U.S. cos. rose 11.8% last yr
  • SoftBank challenge to cable won’t avoid T-Mobile deal scrutiny
  • Christie appointees ban N.J. direct sales for Musk’s Tesla cars
  • Bayer sees 8% growth in drug sales through 2016
  • Buffett’s BNSF leads surge to ease railroad cargo jam
  • VimpelCom says U.S., Dutch authorities probe Uzbekistan unit
  • Intel seeks acquisitions in Europe, Morales tells Handelsblatt
  • China’s Xunlei files prospectus for U.S. IPO: Securities Daily


    • Abraxas Petroleum (AXAS) 6am, $0.05
    • Crescent Point Energy (CPG CN) 8am, C$0.17
    • Dresser-Rand (DRC) 4:45pm, $1.28
    • Express (EXPR) 7am, $0.59
    • Krispy Kreme Doughnuts (KKD) 4:02pm, $0.13
    • Matador Resources (MTDR) 4:05pm, $0.26
    • North West (NWC CN) 4:30pm, C$0.35
    • Orexigen Therapeutics (OREX) 4:01pm, $(0.19)
    • Raven Industries (RAVN) 9am, $0.32
    • Scientific Games (SGMS) 4:12pm, $0.07
    • Semafo (SMF CN) 8:23am, $(0.01)
    • Vail Resorts (MTN) 4pm, $1.88
    • Williams-Sonoma (WSM) 4:05pm, $1.35 - Preview


  • Copper Slumps to 44-Month Low on Concern China Demand Is Slowing
  • WTI Falls as U.S. Crude Stocks Rise, Widening Discount to Brent
  • Soy Crop at Record in Brazil Clogging Ports as China Spurs Trade
  • Iran Thaw Seen Opening $6 Billion Market for Steel: Commodities
  • Palm Imports by India Slumping 30% on Prices Highest Since 2012
  • Gold Advances to Six-Month High as Ukraine Spurs Haven Demand
  • Soybeans Drop After 14% Rally as China May Cancel More Cargoes
  • Sugar Falls Amid Commodities Retreat as Rains Return to Brazil
  • Rebar Climbs From Lowest Since Shanghai Contract Started in 2009
  • Copper’s China-Driven Tumble Seen Near Bottom, Tiger Says
  • China on Course to Exceed 2015 Shale Target With Fuling Find
  • Putin Opens Up Europe’s Energy Fault Line Along Oder-Neisse
  • WTI Crude Shielded From Ukraine on U.S. Output: Chart of the Day
  • Palm Oil Slumps Most This Year as Rally Seen Weakening Demand

























The Hedgeye Macro Team















Takeaway: Despite meaningful downward revisions to same-restaurant sales estimates, casual dining stocks have held up particularly well.

We were recently given a look at February sales trends, which are, on the margin, negative for the casual dining industry.  Same-restaurant sales and same-restaurant traffic trends declined during the month and were down sequentially from January.  Before we delve further into the details, we thought it would be useful to highlight which casual dining chains had CQ (current quarter) same-restaurant sales estimates adjusted since February 3rd.


None of the casual dining companies we track had CQ same-restaurant sales estimates revised up over the course of February.


The following companies had CQ same-restaurant sales estimates unchanged over the course of February: EAT, KONA

The following companies had CQ same-restaurant sales estimates revised down over the course of February: BBRG, BJRI, BLMN, BWLD, CAKE, CBRL, CHUY, DRI, DFRG, DIN, IRG, RRGB, RT, RUTH, TXRH


Despite these negative revisions, casual dining stocks have outperformed the SPX meaningfully over the past month, which implies, to us, that the street has accepted the fact that 1Q will be a difficult quarter.  More importantly, it also implies that expectations are high for the remainder of 2014.



February marks the third consecutive month of decreasing same-restaurant sales and traffic for the industry.  As we wrote last week, Knapp estimates same-restaurant sales and traffic declined -1.5% and -4%, respectively, during the month.  In addition, Black Box Intelligence, which excludes DRI, estimates same-restaurant sales and traffic declined -0.7% and -3.2%, respectively, during the month.  February numbers contracted on a year-over-year basis despite facing some of the easiest comparisons in over three years.  According to historical Black Box data, same-restaurant sales and traffic declined -5% and -6.2%, respectively, in February 2013.


After a tumultuous January, New England was surprisingly the best performing region during the February month with Black Box estimating same-restaurant sales and traffic increased +2.2% and 0%, respectively.  The West Region, on the other hand, was the weakest performing market with Black Box estimating same-restaurant sales and traffic declined -3.7% and -5.8%, respectively, in February.


Overall, trends in the casual dining industry are unsettling and continue to indicate what we believe is a secular decline in the industry as the rise of fast casual and evolution of traditional quick-service continue to steal share from the industry.  Despite this, the market has shrugged off any weakness as weather-related.







To be clear, we believe 1Q14 has been negatively impacted by weather, but to what extent is largely unknown.  With that being said, we believe the street has appropriately taken down 1Q14 estimates to a reasonable level.  Although January and February were difficult months for the industry, we believe March will provide some back end support to aggregate first quarter numbers. 


2Q14 estimates currently appear aggressive to the naked eye, but we will reserve judgment until March numbers are released as we expect it to be a telling month for the industry overall.  Will the industry get a boost from all the “pent-up demand” we are hearing about or will the secular decline persist?  Unfortunately, we don’t yet have an answer to this, but we will continue to monitor the situation closely and comment upon any indicators that may suggest one or the other.





Howard Penney

Managing Director


Fred Masotta


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%