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(Scary) Social Media Bubbles

Client Talking Points

NASDAQ

The Nasdaq is down -5.3% from its year-to-date high and, more importantly, it sliced through my intermediate-term TREND line of 4,203 support on real volume Friday. Take a look at our bearish note on YELP from late last week. Some of the expectations embedded in these social media stocks are scary.

COMMODITIES

The CRB Commodities Index is up +0.57% versus Nasdaq down -2.6% on Friday. It’s alpha for the long #InflationAccelerating macro position versus US #GrowthSlowing (and big multiple stock compression). Meanwhile, the CRB Food Index was up another +0.6% last week to +19.8% year-to-date. Food #InflationAccelerating continues to be the contrarian macro call of the year.

UST 10YR

The 10-year yield backed off my intermediate-term TREND resistance line of 2.81% last week like a champ. It makes sense as the rate of change in US employment continues to deteriorate. The 2-year average in Non-Farm Payrolls and private payrolls posted their lowest rates since November 2012 and August 2011, respectively.

Asset Allocation

CASH 32% US EQUITIES 4%
INTL EQUITIES 8% COMMODITIES 16%
FIXED INCOME 20% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

DRI

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

TWEET OF THE DAY

Social Media Bubbles are unique to the US stock market - watch their momentum factors closely @KeithMcCullough

QUOTE OF THE DAY

"When all is said and done, success without happiness is the worst kind of failure." - Louis Binstock

STAT OF THE DAY

More Americans felt rich enough to invest in vacation homes last year. Annual sales jumped nearly 30% to 717,000 homes, according to the National Association of Realtors. Vacation home sales represented 13% of the total market, their highest share since 2006. The median price rose to $168,700, up 12.5% from a year earlier. (CNN)


Quiet Is Not Safety

This note was originally published at 8am on March 24, 2014 for Hedgeye subscribers.

“Quiet is no certain pledge of permanence and safety.”

-James A. Garfield

 

From the innovation that flowed from the US Centennial Exhibition Fair in Philadelphia in 1876 to the uncertainty associated with the Republican Convention in Chicago in 1880, Destiny of The Republic (by Candice Millard) ranks at the top of my #history reading list YTD.

 

Garfield may be one of the lesser known US Presidents, but the prescience and leadership embedded in some of his quotes are quintessentially free-market American. #timeless

 

He embraced uncertainty; he encouraged winning and losing. He didn’t prey on the ignorance of The People; he encouraged its education. He was as progressive as any President before him. He was nothing like the politicians you have to endure today.

 

Back to the Global Macro Grind

 

Today you have to deal with a US government (both Republicans and Democrats) that is either lying to you about real-world economics (inflation) or isn’t market-literate enough to be able to tell you the truth if it tried. I’m not sure what’s worse.

 

However, I am sure that whatever is left of free-markets will front-run the government’s proactively predictable behavior. While they may not be acknowledged in D.C., Burning The Buck and never calling a devalued currency inflationary are core market beliefs.

 

For a few days last week (actually for a day and a half), the market suspended this belief and:

  1. Bought US Dollars
  2. Sold Gold
  3. Sold Bonds

#Cool

 

That’s what you should have done for literally all of Q1 of 2013 though. It’s Q1 of 2014, and the 2013 @Hedgeye TREND is over.

 

On Friday, everything reverted to the mean (towards the 3 month TREND):

  1. Dollar made another lower-YTD-high and went back down
  2. Gold made another higher-YTD-low and went back up
  3. Bonds had another great day, after v-bottoming from their Wednesday #RatesRising headfake

All the while, with the Dow Jones Industrials Index banging its head against the #OldWall to try to get itself to “up” for 2014 YTD (it’s -1.7%), food #InflationAccelerating continued with the CRB Foodstuffs Index up another +1.8% to +18.1% YTD.

 

#NotCool

 

Sure, oil remained under pressure (Brent Oil -1.2% last week) and that remains a bearish TREND signal @Hedgeye this morning (don’t be long oil with +406,967 net long futures/options contracts outstanding!), but that didn’t offset more of the same in terms of what components of the US equity market are delivering you the absolute return bacon YTD.

 

Mmm, #bacon (lean hog prices +31% YTD)…

 

From a sub-sector perspective in the SP500 YTD, this is what I mean by that:

  1. US Consumer Discretionary Stocks (XLY) -0.3% last wk (with the SP500 +1.4%) to -1.7% YTD
  2. Slow-growth-yield-chasing Utilities (XLU) +0.1% last wk to +6.7% YTD

In other words, whether your government calls it inflation or not, inflation slows real-consumption growth in America. So don’t get frustrated by it – just own it. #InflationAccelerating is a position that at least 10-20% of Americans can profit from.

 

No, that’s not a US political leadership message. It’s the winning market message – and, sadly, that is a losing one for at least 80% of America. The quiet and safety of the world buying US Dollars last year is ending. The 1-year average net long position in the USD (CFTC futures and options contracts) is +16,540 contracts, but:

  1. 3 months ago, the net long position went to flat
  2. 2 weeks ago, it moved to modestly net short
  3. Last week it dropped to a 1yr low of -12,167 net short

Yep, as Hemingway would say, at first the risk of your currency losing credibility happens slowly, then it happens all at once. The pledge of permanence of a #StrongCurrency advocated by Presidents like Garfield may be as worn out as (pre-1913 Fed Act days) free-market capitalism itself.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.62-2.82%

SPX 1851-1878

VIX 13.38-17.42

USD 79.11-80.49

EUR/USD 1.37-1.39

Gold 1316-1354

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Quiet Is Not Safety - Chart of the Day

 

Quiet Is Not Safety - Virtual Portfolio



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Destiny's Coincidence

“A thin line separates destiny from coincidence.”

-T.J. Stiles

 

That’s a great quote about a great capitalist by T.J. Stiles in The First Tycoon. Cornelius Vanderbilt was a Dutch boy who learned the ways of one of the most important waterways in world commerce from his family’s waterside farmhouse.

 

Farm life has always tended to erode the line between childhood and adulthood. Cornele (his childhood name) lived a life of work and responsibility, hoeing and milking, piling and shoveling. There was church too.” (The First Tycoon, pg 19)

 

In other words, one of America’s most important self-made capitalists of the early 19th century was a #grinder. He didn’t borrow to spend. He built things that made money. And he bought companies that he didn’t have time to build. He wouldn’t have been long of bubbles in social media terms.

 

Back to the Global Macro Grind

 

What is the destiny of a bubble that #OldWall media refuses to call a bubble? With 74% of companies who have come public in the last 6 months not making any money (only eclipsed by the Nasdaq bubble of 1999 when that number was 80%), what could possibly go wrong?

 

Destiny's Coincidence - Bubbles floating in the a 007

 

BREAKING: Nasdaq -2.6% on Friday, snapping @Hedgeye TREND support of 4203

 

Risk happens fast. With the social media stock bubble crashing (single stock moves have been -20-45% from their all-time peak), the Nasdaq is already -5.3% off its YTD high. Since the SP500 is only -1.3% from her all-time-bubble closing high, it must be a bargain!

 

To review what last weeks snappy correction in the Nasdaq looked like within the context of everything else:

  1. Nasdaq -0.7% on the week to -1.2% YTD
  2. Dow (which we signaled SHORT on Thursday in #RealTimeAlerts) +0.5% last week, but -1.0% YTD
  3. US Consumer Discretionary stocks (XLY) down another -0.1% last wk to -3.3% YTD

This all makes sense to us as our Top Q1 Global Macro Theme was #InflationAccelerating, which:

  1. Slows real consumption growth (short consumer stocks)
  2. Pays those who are long of inflation, in inflation terms

How does one own 2011 style stagflation?

  1. Utilities (XLU) up another +1.1% last week to +9.2% YTD
  2. REITS (MSCI Index) up another +1.3% last week to +9.5% YTD
  3. Gold up +0.7% last week to +8.3% YTD

That boring #GrowthSlowing setup sure beats being long Yelp (-32% since it’s 1st wk of March social media-bubble high)! See our new Internet Analyst, Hesham Shabaan’s, bearish note on YELP from last week. The growth expectations embedded in that stock are scary.

 

Away from being long #YieldChasing, you can also be long things like inflation via:

  1. CRB Commodities Index +0.6% on Friday vs Nasdaq -2.6% (CRB Index = +8.8% YTD)
  2. CRB Foodstuffs Index up another +0.6% last week to +19.8% YTD
  3. Coffee up another +2.4% last week to +63.8% YTD

I know, I know. Some of the smartest hedge funds on the planet are not long Coffee – they are long Twitter (TWTR) and Facebook (FB)! Why would you buy something like Pigs (+20.4% YTD), Soybeans (+15.4% YTD), or what Vanderbilt loved to get long of in his early days (Cotton +9.5% YTD)?

 

Smart in this game is as smart does. That’s capitalism. And so is reminding people of the score. This time won’t be different. Market history says that if A) Inflation Accelerates and B) Growth Slows, equity markets see multiple compression.

 

Two points of multiple compression on the SP500 (to 14x an earnings number that is too high) gets you 1638. Consensus is still looking for what it should have been looking for at this time last year (multiple expansion as inflation fell and growth accelerated). SP500 consensus for 2014 is still 1928.

 

Growth, as an investment style factor, looks like this for the last month:

  1. Top 25% Sales Growth (top quartile in the SP500) is -2.8%
  2. Top 25% EPS Growth is -2.6%
  3. High Beta -1.2%

So, is this the beginning of the end for growth stocks, or is it the end of the correction?

 

Consensus (measured by the net long or short position in futures and options contracts) seems to think the latter. SP500 Index and E-mini moved to a NET LONG position of +38,651 contracts into Friday’s close. That’s the longest the the Street has been of beta since late December.

 

In other words, right as the front-month of US Equity Fear (VIX) made another higher-low last week, consensus hedge funds covered high and got longer. In our playbook that’s no coincidence. The destiny of bubble prices confirming lower-highs on accelerating down-day volume isn’t either.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.66-2.81%

SPX 1

Nasdaq 4090-4203

USD 79.96-80.66

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Destiny's Coincidence - Chart of the Day

 

Destiny's Coincidence - Virtual Portfolio


April 7, 2014

April 7, 2014 - Slide1

BULLISH TRENDS

April 7, 2014 - Slide2

April 7, 2014 - Slide3

April 7, 2014 - Slide4

April 7, 2014 - Slide5

 

BEARISH TRENDS

April 7, 2014 - Slide6

April 7, 2014 - Slide7

April 7, 2014 - Slide8

April 7, 2014 - Slide9

April 7, 2014 - Slide10

April 7, 2014 - Slide11
April 7, 2014 - Slide12


TGT - 3 KEY QUESTIONS

Takeaway: If we had five minutes or less with TGT’s CEO, here’s what we’d ask.

Here’s the deal…you have five minutes alone with the CEO of a company, leaving time for maybe three questions. If you value your time you’re likely to focus on the key critical uncertainties that exist in the market. And make no mistake, they exist for every company out there.

 

We’re going to explore these key questions one company at a time, and we’re going to start with Target – which we think is one of the better shorts in retail.

 

Here’s what we’d ask CEO Gregg Steinhafel if we had five minutes or less.

 

1. Who Are You Guiding? Who are you talking to with your guidance, Wall Street or Main Street? We’ve never had to ask this question before to a CEO. But the reality is that you’re saying that you are going to comp positive this year, AND Gross Margins will be up (in the US and in Canada). And all of this will happen while you are lowering prices to win back customers who left after the data breach. It seems like an impossible combination. That leads us back to the question – are you giving that guidance to Wall Street or Consumers? This is kind of like what Cruise Companies do during their peak booking season – they generally have positive comments because they’re talking to travel agents, not to Wall Street. If they say that bookings are weak, then agents will discount price more heavily. Similarly, is Target sending out this perplexing message to keep consumer opinion high, even if it means the potential to lower expectations with Wall Street later in the year.

 

2. Share Loss. Who do you think is gaining the most business from the customers who left? For argument’s sake, let’s assume that it’s Wal-Mart. Do you think that WMT is prepared to let that business go so easily? Will you match Wal-Mart if it comes down to price? In reality, the people that left did not leave because of price. They left because of trust. You might be able to buy back trust, but you’ll have to undercut Wal-Mart on price rather significantly. If that’s true, refer to question #1.

 

3. What does Target want to be? That sounds like a ridiculous question at face value. But the reality is that it used to be Wal-Mart vs Target – in share of market, share of mind and share of investment dollars. But as bad as Wal-Mart’s rap sometimes can be, it has over 10,000 stores under 71 banners in 27 countries. It has several formats – from Supercenters, to warehouse clubs, to neighborhood markets, and it is even beta-testing C-stores/gas stations. At least it’s trying to evolve. Target has just has one primary format in North America, with a token operation in India. The point is that Target used to be right there with WMT – but now it seems to be somewhere between WMT and Kohl’s. When you look out five to 10 years, what will Target look like?

 

Bonus Question (if he hung around an extra 2 minutes).

Do you think you fired your customer? JC Penney fired its customer. Ron Johnson said at the time that he did not. Lululemon fired its customer. Chip Wilson said at the time that he did not. Both of those retailers will likely take 2-3 years to get an acceptable portion of customers back. Do you think that you have fired your customer? Your guidance suggests that the answer is No. (Note: we’d give him all the credit in the world if he said Yes – because it would suggest he’s doing something about it).


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