Takeaway: The recent convoluted, “data-dependent” guidance out of the FOMC has been and should continue to be a boon to EM asset prices.

Don’t look now, but the EM relief rally is happening. We’re not going to spend too much time on the “why” in this note, having already done that 2x last week and in a 72-slide presentation and conference call a little over 1M ago. Today, we’re content to merely call attention to the weather: it’s sunny outside in EM land.



NOTE: Please refer to the explanation at the conclusion of this note for color on how these signals are derived and how to incorporate them into your investment process. Email us if you have additional questions.




This concomitant breakout across EM capital and currency markets and across the capital and currency markets of commodity-producing nations is extremely newsworthy in the context of #GrowthSlowing and systemic risk accelerating in China in 1Q14. We’ve argued this ‘til we were blue in the face over the past 12-18M, but if you didn’t know that Chinese demand was NOT the primary factor in determining asset prices in these markets, now you know.


In reviewing the MAR 19 FOMC statement and Janet Yellen’s recent commentary around the FOMC’s intention to: A) become incrementally more data dependent; and B) keep interest rates well below what they consider appropriate, at every step of the way, for the foreseeable future, one has to come to the conclusion that the Fed is less hawkish on the margin – despite the fact that the board continues to actively and rhetorically support tapering.


We think the market, at least marginally, is starting to sniff out what we’ve been communicating ad nauseam throughout the YTD: both the Fed and the Street are likely to be surprised to the downside with respect to GDP growth and that catalyst is likely to cause the former entity to decelerate the pace of tightening and/or pursue a strategy of outright monetary easing at some point over the intermediate term. That measure can take on various forms – including dovish rate guidance and general ambiguity (vs. communicating a clear path of tightening) – which is exactly what we’ve seen in recent weeks.  








It’s worth noting that the Bloomberg consensus 2014 real GDP forecast has come in -20bps since an early-MAR peak of +2.9%. We already expect 2014E to come in towards the low end of our forecast range, so once again consensus is playing catch up to our preexisting expectations for domestic economic growth – this time in the opposite direction (recall that we were the growth bulls in 2013).




At some point, we expect consensus to start playing catch up to our preexisting expectations for the slope of US monetary policy. Until a marginally dovish Fed (vs. expectations) is fully priced in, we reckon you can continue to go bargain hunting across the spectrum of bombed-out EM assets. That sure beats the heck out of buying the dip in a bubbly social media stock at these ridiculous valuations!






Darius Dale

Associate: Macro Team


TACRM Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI):

TACRM™ is specifically designed to provide tactical security selection, general global macro market color and suggested dynamic asset allocation weightings. One of the ways it does this is by providing a standardized measure of momentum across various asset classes and systematically making sense of those signals.


This VAMDMI score is derived by calculating three independent z-scores of closing price data on a weekly basis and then calculating the arithmetic mean of this sample.


  • Short-term z-score: 1-3M sample
  • Intermediate-term z-score: 3-6M sample
  • Long-term z-score: 6-12M sample


Each independent sample size is determined dynamically by prevailing trends in global macro volatility. Specifically, if the BofA Global Financial Stress Index is making lower-lows on an intermediate-term basis, then each of the sample sizes are larger in duration; if the BofA Global Financial Stress Index is making higher-lows on an intermediate-term basis, then each of the sample sizes are smaller in duration.


The momentum signaling indicator chart we highlight above generates a signal(s) when a particular market(s) crosses a critical quantitative threshold after having been above/below that level for at least 3M:




Starboard released an investor presentation this morning, detailing its analysis of Darden management and the proposed Red Lobster spin-off.  Starboard believes Darden’s real estate portfolio is worth approximately $4 billion and that separating Red Lobster and its real estate from Darden’s portfolio would destroy approximately $850 million in value.


The presentation was deservedly highly critical of Darden’s current management team and is a must-read for interested parties.  Below, we highlight what we believe are the most important quotes from the 100+ page deck. 



A Perpetual Self-Serving Agenda

  • “It appears that the Red Lobster Separation was designed to benefit management, not shareholders.”
  • “We believe Darden has historically shown a blatant disregard for shareholder concerns, a propensity to silence critics, and is similarly now trying to avoid shareholder concerns and input when it comes to the Red Lobster Separation.”
  • “It appears the Board is going to great lengths to ensure that shareholders DO NOT have a say in the Red Lobster Separation.”
  • “We question whether compensation decisions are motivating management to rush the separation of Red Lobster.”
  • “We believe the current management team and Board have a long history of self-interested behavior and disregard for shareholders’ interests.”

Shareholder-Unfriendly Corporate Governance

  • “Darden maintains shareholder-unfriendly corporate governance provisions.”
  • “We do not believe the Board would sanction what we would view as an egregious violation of good corporate governance, like proceeding with the Red Lobster Separation in direct opposition to a clear shareholder directive, especially just months before a potential election contest.”
  • “Despite significant criticism from leading governance firms and shareholders regarding Darden’s poor governance practices, the Company has actually taken steps to further disenfranchise shareholders.”
  • “Darden’s corporate governance is unacceptable and recent Bylaw amendments have made things even worse.”
  • “Darden’s new Bylaw amendments serve to exacerbate Darden’s already alarming corporate governance concerns.”
  • “Rather than look out for the best interests of shareholders, it appears that Darden's Board has taken steps to further entrench themselves.”

Premeditated, Misleading Statements

  • “Management’s arguments in support of the Red Lobster Separation are highly misleading.”
  • “Management has misled shareholders regarding customer demographics at Red Lobster and Olive Garden.”
  • “Management has misled shareholders regarding potential debt breakage costs.”
  • “Management has misled shareholders regarding their own performance.”

The Ill-Advised Wall of Silence

  • “We are troubled by the Company’s continued attempts to avoid open discussion on what we believe to be the most important and difficult issues facing the Company.”
  • “Darden has a long history of silencing critics and trying to avoid an active dialogue on the key issues facing the company.”
  • “Management refuses to share key supporting assumptions to demonstrate how the Red Lobster Separation will create value.”
  • “Management has not adequately addressed Darden’s real estate value.”
  • “Despite repeated inquiries, management has refused to disclose the key valuation assumptions used for Red Lobster in the analysis that led management to conclude that the Red Lobster Separation is the best alternative available to create value for shareholders.”


Howard Penney

Managing Director


Fred Masotta




Surfing Legend Kelly Slater Calls it Quits | $ZQK

Takeaway: We applaud Quiksilver's restraint – which so few brands have when it comes to these ego-driven deals.

Editor's Note: This is a complimentary research excerpt from Retail Sector Head Brian McGough. For more information on our services, click here.

Surfing Legend Kelly Slater Calls it Quits | $ZQK - kelly slater portrait


Quiksilver Celebrates Kelly Slater as He Transitions into His New Business Venture

  • "Quiksilver and world-champion surfer, Kelly Slater, have announced they will be discontinuing their 23-year partnership, effective April 1, 2014."
  • "Quiksilver Executive Chairman, Bob McKnight, first signed an 18 year-old Slater to the brand in 1990. 'Kelly has been a part of the Quiksilver family for over 20 years. It’s been an incredible journey watching him grow from a young surfer with great potential, to the 11-time World Champion he is today.' McKnight continues, 'We wish Kelly all the best as he enters this next phase of his career.'"

Additional commentary from Slater's Facebook page:

  • "As I contemplate the amazing opportunities I've had in life and the amount of good fortune I've encountered along the way, I’m excited to announce today that I’m embarking on a new journey. For years I've dreamt of developing a brand that combines my love of clean living, responsibility and style. The inspiration for this brand comes from the people and cultures I encounter in my constant global travels and this is my opportunity to build something the way I have always wanted to. So I am excited to tell you that I’ve chosen The Kering Group as a partner. They share my values and have the ability to support me in all of my endeavors."

Surfing Legend Kelly Slater Calls it Quits | $ZQK - chart2 4 1 large

Takeaway from Hedgeye’s Brian McGough:

No, this is not an April Fool's prank. Slater is history. He is to Quiksilver what Michael Jordan is to Nike. The difference is that Jordan has transcended his sport and has become a $1 billion-plus commercial brand that is bigger than the entire Quiksilver brand. Quiksilver tried to 'immortalize' Slater with lifestyle product, but it simply did not work. Makes sense for them to let him try his 'lifestyle experiment' with Kering. So the punchline is that we applaud Quiksilver's restraint – which so few brands have when it comes to these ego-driven deals.  We surveyed 1,000 Action Sports consumers about endorsements, and only 41% thought they were important. Of that, while most people likely knew Kelly Slater, only 17% actually knew that he was affiliated with Quiksilver. 

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Bubble, Overbought: SP500 Levels, Refreshed

Takeaway: You just saw 40 handles of upside from our 1842 oversold signal and now you have 30 handles of downside from our overbought signal.



In my last SP500 Levels note, “Bubble Up” (March 26th) I signaled that we’d like re-test the all-time-bubble-highs. Now that bubble is signaling immediate-term TRADE overbought.


While buying-the-damn-bubble #BTDB felt pretty darn good at the beginning of last March, Biotech and Social Media stocks were only down -15-45% from that prior capitulation high. I trust no one forgets that. Risk happens fast.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1885
  2. Immediate-term TRADE support = 1854
  3. Intermediate-term TREND support = 1823


In other words, you just saw 40 handles of straight upside from our 1842 oversold signal – and now you have 30 handles of downside from the overbought signal.


Don’t chase beta. Fade it.



Keith R. McCullough
Chief Executive Officer


Bubble, Overbought: SP500 Levels, Refreshed - SPX


Stall Speed: Is Economic Caution Warranted?

Editor's note: This research note was originally published March 28, 2014 by Hedgeye Macro Analyst Christian B. Drake (@HedgeyeUSA). For more information on Hedgeye, please click here.


Stall Speed: Is Economic Caution Warranted? - CautionTape


  • Both incomes and spending decelerated in February while Core PCE inflation was static at a dovish, stall speed of just 1.1%. 
  • The income/spending deceleration was broad based with some negative weather drag, but the trend is one of deceleration and the primary pockets of spending strength in February are likely to be ephemeral.
  • High End Demand: It turns out that the rich are still pretty rich and high ticket discretionary spending saw a moderate bounce in February.  Wealth effect spending, however, probably continues to ebb.
  • Healthcare Spending: At ~19% of Total household expenditures, spending on Medical Care matters, and Obamacare is distorting the numbers.  
  • Confidence: March marked a second month of mixed consumer confidence reports. Sentiment continues to meander alongside the dollars descent.  
  • FINALLY! Outside of some lagging housing data, all the material domestic, fundamental macro data for February has been reported….enjoy the oversold bounce and blithely enter the weekend knowing the vexatious ubiquity of weather caveat-ed macro releases has finally ended. 

Stall Speed: Is Economic Caution Warranted? - Income   Spending Table Feb large


Stall Speed: Is Economic Caution Warranted? - Eco Summary Table 032814 

PERSONAL INCOME: 3 Months of Deceleration

Weather probably served as a negative distortion on reported, aggregate personal income in February, but with total Personal Income, Disposable Personal Income (DPI), DPI per capita and Private Sector Salary & Wage growth all decelerating for the 3rd consecutive month in February it feels hard to argue that weather is masking a strong underlying trend of acceleration. 


Stall Speed: Is Economic Caution Warranted? - Personal Income Feb


Private Sector Salaries and Wages decelerated by -60bps and -50bps on a YoY and 2Y basis, respectively, while aggregate government sourced wage income accelerated 30bps on a 1Y while holding flat sequentially on a 2Y basis. 


Alongside the spending friendly budget deal and ongoing positive state & local government employment growth, we continue to expect government salary and wage income to provide some modest upside to income growth in 2014. 


The savings rate ticked up to 4.3% from 4.2% but remains near historical trough levels.


The capacity for a further decline in savings to support incremental consumption growth remains very much constrained at current levels.   


Stall Speed: Is Economic Caution Warranted? - Salary   Wages


Stall Speed: Is Economic Caution Warranted? - Savings Rate 


CONSUMER SPENDING:  Healthcare & High End Discretionary supported February consumption expenditures.  The former is either transient or likely to be revised significantly and the latter isn’t likely to repeat last year’s performance.   


HIGH END DEMAND:  Last month we highlighted the deceleration in demand at the high end as implied by the slowdown in spending on luxury durables. 


As it turns out, however, the rich are still pretty rich and high ticket discretionary spending saw a moderate bounce in February (see our previous note for more on the latest income division dynamics - INFLECTIONS OR FALSE POSITIVES?). 


The read through here is mixed as the contribution to total durables growth from higher-end discretionary helped mask more broader weakness. 


Further, with stocks flat YTD, housing decelerating and the Fed beginning to reign in their explicit, asset re-flation (i.e. wealth effect) policy agenda, the probability for the top income quartiles to provide incremental demand growth (in similar magnitude to last year) seems to be diminishing.


Stall Speed: Is Economic Caution Warranted? - PCE Luxury


Stall Speed: Is Economic Caution Warranted? - Luxury Goods   Contribution



Spending on Healthcare Services has been the notable positive outlier over the last few month and the effect stems largely from the implementation of Obamacare.


The reported figures are very much an estimate and the preliminary data are likely to be revised significantly over time as the Census bureau’s quarterly QSS and annual SAS survey’s provide harder data.   


With reported Hospital and Outpatient spending both accelerating materially, it could also be that individuals are accelerating medical consumption ahead of ACA implementation and uncertainty around coverage changes. 


Either way, in the context of the broader spending data, the takeaway is pretty straightforward – Healthcare Services represent ~19% of total household consumption expenditures and certainly impacts the direction of reported, headline consumption growth.    


To the extent that deceleration is the larger trend across the balance of services, a mis-estimation of ACA related spending and/or a significant, transient pull-forward in medical consumption could be materially distorting the prevailing, underlying trend. 


Unfortunately, like the now ubiquitous weather asterisk, we’ll just have to hurry up and wait to get a clearer read on the magnitude of the impact. 


Stall Speed: Is Economic Caution Warranted? - Healthcare PCE


CONSUMER CONFIDENCE: Across the primary survey's, March proved to be a second straight month of meandering for consumer confidence. 


The final University of Michigan Consumer Sentiment reading for March declined -1.6pts sequentially to 80.0 – the worst reading in 4 months. 


The conference board and Bloomberg Surveys, meanwhile, showed consumer confidence improving by 4pts and 1.6pts, respectively, in March.    


Notably, the relationship between the $USD and confidence remains reasonably strong. The dollar is currently in Bearish Formation (Broken Trade, Trend & Tail) and with growth slowing and commodity inflation accelerating the balance of risk for the currency remains to the downside, in our view.  


Stall Speed: Is Economic Caution Warranted? - USD vs Confidence


Stall Speed: Is Economic Caution Warranted? - Confidence Table 032814

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