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It's The Fed's Fault

“And oftentimes excusing of a fault, doth make the fault the worse by the excuse.”

-William Shakespeare


As we high-earning commoners read the inflationary “minutes” from our un-elected overlords @FederalReserve yesterday, we gave thanks and praise for not being the 80% of America that will be plundered by them.


To be, or not to be plundered (by the aristocracy)? That remains the question that my man William asked The People over 400 years ago. In storytelling terms, Shakespeare’s questioning of the perceived wisdom of his day is timeless.


The aforementioned quote comes from The Life and Death of King John. But what will become of thy modern day central planning Queen Yellen? “Here once again she sits; once again crown’d”… and in real-life terms, the poor are getting hungrier…


Back to the Global Macro Grind


BREAKING: “Beef Price Hits All-Time High” –LA Times


It's The Fed's Fault - cow


And whilst all-time is by many considered a very long time, whatever you do, do not call this #InflationAccelerating! Immediately after the Federal Reserve released their groupthink meeting “minutes” yesterday, commodities ripped to freshly squeezed YTD highs.


Orange juice (+18% YTD) or Coffee (+68% YTD) for breakfast anyone?


I know. Silly Mucker. This, according to the Keynesian jesters in the high court of devaluing the Dollar, is “non-core” to American life. Food prices +20% YTD (CRB Foodstuffs Index) and the broader commodities complex (CRB Index, 19 commodities) +10.7% YTD (versus the almighty Dow down YTD) is nothing but a manifestation of my own cherry picking. At least I can eat those.


But that your royal pleasure must be done, this act is as an ancient tale new told.” –Shakespeare


And that tale is called a Policy To Inflate. Calling it by any other name, would be un-American.


To review what brainiacs in academic call “causal”, this is how the Policy To Inflate works:

  1. The Fed says something along the lines of price fixing the rate of return on American Savings at 0%, forever
  2. Then the Global Currency Market reads price fixing as US Dollar Bearish (that’s why we have a 22% allocation to other FX)
  3. Then the Commodity, Gold Bond, and #YieldChasing community buys everything they can with Burning Bucks

#cool, eh?


For the 20% of us who can buy inflation and slow-growth, maybe. For the 80%, not so much. That’s why the emerging “inequality” in this country that has been perpetuated by both the Bush and Obama administrations is largely the Fed’s Fault.


Unfortunately, you can’t eat an iPad.


It's The Fed's Fault - Burning Cash


If you’re in the top quintile of Americans (yes, most of you reading this are), you don’t have to worry about your kid dropping the next $700 burning bucks on the Qe6 iPhone upgrade either – you just need to keep buying inflation in order to finance his/her spending:

  1. Gold up another +0.7% this morning to +10.1% YTD
  2. Slow-growth Utilities (XLU) up another +1.0% on the Fed “minutes” yesterday to +10.3% YTD
  3. #YieldChasing REITS up another +0.7% yesterday to +10.3% YTD too!

Yes, there is something eerie about all three of these things being up the same % per day and YTD (Hint: it’s called machines front-running the Fed – which, in turn, slows US real consumption growth).


In real-life, you’ll be getting paid in nominal terms today. Nominal means whoever is writing the checks doesn’t adjust your weekly comp as the value of your purchasing power falls (i.e. the things that you need to buy go up in price).


Nominal is always obfuscated by money printers and plunderers alike as real growth. As you can see from the Chart of The Day, nominal US consumption growth is on a death path to perdition (i.e. it’s both secular and cyclical). That’s largely the Fed’s Fault too.


Rather than rant any longer (see our newly minted Q2 Global Macro Themes slide deck for all the non-Fed propaganda details – 48 slides ), I will leave you with the only solution to all of this (from King John):


“What you would have reform'd that is not well,
And well shall you perceive how willingly
I will both hear and grant you your requests”


Unfortunately all that is not well is not being reformed. Neither your Republican nor Democrat governments are hearing your requests. Both parties support weak Dollar policy. Excusing the Fed’s Fault this time will only make all of this worse.


Our immediate-term Global Macro Risk Ranges are now as follows:


UST 10yr Yield 2.63-2.75%


Nasdaq 4041-4203

VIX 13.11-15.67

USD 79.41-80.04

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


It's The Fed's Fault - Chart of the Day


TODAY’S S&P 500 SET-UP – April 10, 2014

As we look at today's setup for the S&P 500, the range is 60 points or 2.25% downside to 1830 and 0.95% upside to 1890.                                      










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.31 from 2.33
  • VIX closed at 13.82 1 day percent change of -7.19%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Bank of England interest rate decision
  • 8:30am: Initial Jobless Claims, April 5, est. 320k (prior 326k)
  • Continuing Claims, March 29, est. 2.835m (prior 2.836m)
  • 8:30am: Import Price Index m/m, March, est. 0.2% (prior 0.9%)
  • Import Price Index y/y, March, est. -0.9% (prior -1.1%)
  • 8:45am  Bloomberg April U.S. Economic Survey
  • 9:45am: Bloomberg Consumer Comfort, April 6
  • 10:30am: DOE Energy Inventories
  • 11:30am: Fed’s Evans speaks in Washington along with Reserve Bank of India’s Rajan, other central bankers
  • 2pm: Monthly Budget Statement, March, est. -$36b (year ago -$106.5b)


    • President Barack Obama speaks at LBJ Library in Texas
    • House takes up Rep. Paul Ryan’s budget proposal
    • 9am: House panel plans to consider whether to hold hold former IRS official Lois Lerner in contempt
    • FY Budget request testimony/panels:
    • 9:30am: Senate Armed Services Cmte: Air Force Sec. Deborah Lee James
    • 10am: House Appropriations panel: HUD Secretary Shaun Donovan
    • 10am: Senate Appropriations Cmte: Commerce Sec. Penny Pritzker
    • 10am: Senate Finance Cmte: HHS Secretary Kathleen Sebelius
    • 11am: Senate GOP leader Mitch McConnell, House Ways and Means Cmte Chairman Dave Camp among speakers at Americans for Tax Reform news conf.
    • 11:15am: House Speaker John Boehner holds press conf.
    • 1:45pm: Morgan Stanley President Gregory Fleming speaks at Sifma Private Client Conf. in  NYC
    • U.S. ELECTION WRAP: Sidelined Donors; Incumbent Disadvantage


  • March retail sales likely hurt by weather, Easter
  • Ally Financial raises $2.38b pricing IPO low end of range
  • Colorado State releases Atlantic hurricane forecast 11am
  • Bed Bath & Beyond drops after profit forecast trails ests.
  • Dimon says banks to gain as crisis-era rules hurt cities, poor
  • Merck data Show potent drug rival to Gilead’s Hepatitis C pill
  • GM argues park-it order unneeded because recalled cars are safe
  • Greece said to get $28b of orders in return to bond mkt
  • China unveils plan to connect Shanghai and Hong Kong bourses
  • BOE seen keeping key rate at record low with slack in focus
  • LVMH rises on fastest fashion rev. growth in 2 yrs
  • White House said to consider community bankers for Fed’s board
  • New Jersey’s rating lowered to A+ by S&P amid budget imbalances
  • PC unit shipments drop; corporate demand slows pace of decline
  • Putin expected to sign China gas deal as crisis forces hand
  • GE may sell 43% stake in Hyundai Capital: Korea Economic Daily


    • Commerce Bancshares/MO (CBSH) 7am, $0.68
    • Corus Entertainment (CJR/B CN) 7am, C$0.32
    • Family Dollar Stores (FDO) 7am, $0.90  - Preview
    • iGATE (IGTE) 6:32 am, $0.42
    • Pier 1 Imports (PIR) 6am, $0.40
    • Rite Aid (RAD) 7am, $0.05
    • Shaw Communications (SJR/B CN) 8:15am C$0.41


  • Brent Crude Premium to U.S. Oil Narrows to Least Since September
  • Sugar Exports From India Seen Sustained Next Year on Inventories
  • Iron-Ore Bear Market Deepens as Aussie Mines Expand: Commodities
  • Gold Rises to Two-Week High in London as Fed Minutes Spur Demand
  • Uralkali Cuts 2014 Global Potash Sales Forecast as Profit Drops
  • Shanghai Clearing House Mulls Yuan-Denominated Iron Ore Swaps
  • Palm Oil Drops After Malaysian Stockpiles Exceed Estimates
  • Rubber Falls to Two-Month Low as China Trade Misses Estimates
  • U.S. Gulf Coast Fills With Crude Oil That Few Ships Can Take Out
  • Polar Politics Threaten Norway’s Deepest Drive in Arctic: Energy
  • Miners Urge Chile Not to Squander Wealth in Development Efforts
  • MORE: European Cocoa Grind Rose 0.4% in First Quarter
  • Hedge Fund Twins Stage Campaign to Undercut Energy Regulator
  • China Aluminum Exports Highest Since 2011 on Overseas Premium

























The Hedgeye Macro Team














April 10, 2014

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LEISURE LETTER (04/10/2014)




Thursday, April 10

Mid-America Gaming Congress (Columbus, OH)


Thursday, April 10

HST Investor Day



PNK - CEO Anthony Sanfilippo and CFO Carlos Ruisanchez met with Albany Mayor Kathy Sheehan and toured a proposed site in the city adjacent to Exit 23 on the New York Thruway, neighboring the town of Bethlehem.  

TAKEAWAY: PNK’s intentions are unclear and whether the company is looking for a management contract or an all-inclusive management and ownership opportunity. Regardless the direction, a new growth strategy is needed.


RHP – Judge Norman Haglund, a Denver District Court judge, on Wednesday dismissed a lawsuit for lack of standing filed by a group hotels (including the Curtis, the Broadmoor, the Brown Palace, the JW Marriott Denver Cherry Creek, the Courtyard Denver Downtown, the Magnolia, the Oxford and the Westin Westminster hotels) against Aurora's Gaylord Rockies Hotel and Conference Center.  The dismissal cleared the path for the 1,500-room hotel and water park near Denver International Airport.  The plaintiffs sought to overturn the $81.4 million award to Aurora under the Regional Tourism Act by the Colorado Economic Development Commission in 2012.  Depending on the outcome of another lawsuit, construction could start on the $750 million to $850 million Gaylord project sometime next year, with an opening in 2017. The property will be located on 64th Avenue between Tower Road and E-470.

TAKEAWAY: Another Gaylord Conference Center for both RHP and MAR in 2017 - a year in which the US will experience a large increase in hotel rooms with more than 3,500 also at Genting's RWLV.


SHO - held an investor day yesterday by the senior management team highlighted the significantly lower leverage (debt plus preferreds divided by LTM EBITDA) >8x to <5x today and a goal of <3x in 3 years) as well as a more focused and improved hotel portfolio. Q1 RevPAR guidance was raised.

TAKEAWAY: Phase 1 of the restructuring is complete, Phase 2 which includes driving room and F&B revenues is more difficult.


NCLH - canceled port stops in Roatan, Honduras this week after a crew member from Norwegian Pearl was killed during an attempted robbery

TAKEAWAY: More negative press associated with the cruise industry.


MTN - in a bizarre twist to the Park City Mountain Resort-Talisker lawsuit, PCMR filed documents with the court wherein PCMR indicated it would dismantle and remove most of the area's chair lifts except for Jupiter, Thaynes, and Motherlode.  Talisker's eviction notice to PCMR maintains that structures and improvements "that are affixed" to the property belong to Talisker. PCMR disagrees and asserted they can remove most of the lifts because although the ski lift towers are bolted to concrete footings, they are not "otherwise affixed to the land."

TAKEAWAY: Sounds like capex will be higher than MTN's forecast.



US Gaming Industry - the United States commercial casino industry generated $37.8 billion in 2013, expanding by 1.3 percent. The growth in gaming revenue was the result of gaming expansion in new markets, but was tempered by existing markets experiencing declining revenue and market cannibalization.  In 2013, there were 23 states with commercial gaming operations. Of these states, six expanded gaming in 2013. Gaming expansion is defined as the opening of new casinos or expanding casino game offerings, such as table games.

TAKEAWAY:  New property openings continue to pressure ROIC. 


Revel Atlantic City - The city's main casino workers' union, Local 54 of the Unite-HERE, issued a report on Wednesday claiming Revel Casino Hotel is worth between $25 million and $73 million.based on Revel's finances through publicly available documents versus $2.4 billion cost to build.  Revel is presently seeking a buyer. Presently, the casino, which is seeking a buyer.

TAKEAWAY: Yeah, yeah we get it. Revel was a disaster.


Las Vegas Valley feeling ill - Southern Nevada Health District officials report they have seen an increase in cases Norovirus , the gastrointestinal illness, over the past few weeks. Health officials said an investigation began March 28 when people at a conference at the Planet Hollywood started feeling unwell.

TAKEAWAY: Norovirus not just for cruise ships. 



Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.

TAKEAWAY:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

RH - Three Key Questions

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

The setup -- you have a five minute meeting with the Gary Friedman, CEO of RH. Here are the key critical uncertainties that we think are relevant to the investment thesis today. We did this earlier this week with Target­ -- one of our top shorts. So let’s keep it balanced and do the same for our top long, RH which we think should triple over 3 to 5 years.


1. Logistics Network -- Today vs. Tomorrow. One of the biggest Bear arguments against RH is its inability to ship product on time and in the right quantity (i.e. a 6-piece living room order could be delivered in 3 shipments over 12-weeks). That not only delays when the company can collect revenue, but could also impact customer attitude towards the brand and its ability to meet delivery expectations. We have no doubt that RH could work through these issues today, especially with its newly upgraded fleet of DCs. But the reality is that RH has been shrinking its square footage base for the past six years. Starting next month, it goes on an explosive run of growth in square footage – from 800k square feet to nearly 3x that amount over a five-year period. So the question here is this…If you are having challenges now as a $1.5bn business over 70 stores and 800k sq feet, how can we be confident that the company can deliver product under a competitive time frame when it is three times the size? Does that mean that instead of having 5 DCs and 7 hubs, it needs to open another 5 mega-regional DCs in the top MSAs? Or another 25 facilities throughout the country? What’s the right answer?


[Note: Though we cannot yet articulate the answer to this question, in our model we assign a capital cost to both the SG&A and Capex lines to account for future capital needed to improve shipping capabilities. We give RH about an extra $80mm per year in capex, while we add an incremental $800mm over 5-years in SG&A – both of which are well North of what is expected for RH to continue on its growth ramp).


2. What’s the Optimal Store Size?  The size range in RH’s fleet is daunting. It has Legacy stores at 8,000 feet, Design Galleries at 25,000, and the Next Gen Design Galleries as large as 60-70,000 sq. feet (Atlanta, Vegas). So far, the company has learned that ‘bigger is better’ meaning that the store productivity on a large box eclipsed the Legacy productivity.  The math is such that there are 8,000 foot stores operating at $700/sq ft, or $5.6mm annually. But then there are stores like Houston at 22,000 feet that are doing about $2,500 per foot. Yes, that’s about $55mm per store. And that’s not a pipe dream…that’s proven.


The questions then, are a) is it realistic for some of these Next Gen Design Galleries to be running at over $100mm per box? b) at what size do you think you hit a point of diminishing returns with box size? c) you have 65 Legacy stores in the fleet, that you indicated you’ll chop away one by one over time. But the reality is that many of these are solid real estate locations, and your rent terms are better there today than if you were to find new space on your own. Why not keep most of these stores open, and use them to focus on a single category – RH Kitchen, RH Baby & Child, RH Furnishings, RH Whatever…

3. Dot.Com Ratio Shrinking? Today RH has the highest ratio of e-commerce as a percent of total sales (47%) out of any retailer shy of Amazon and Williams-Sonoma (48%), but then the competitive landscape craters from there. Pier 1, for example is about 4%.  That’s a pretty huge competitive advantage for RH, in that it has achieved so much success reaching customers who live nowhere near a RH store.  But now that square footage will begin to accelerate so meaningfully, the dot.com ratio almost has to come down. If it does not, then it will likely be due to productivity of the new mega-stores coming in at levels we’d find disappointing. We don’t think that will be the case. We’re modeling that e-commerce comes down to 40% over a four-year time period (while still tripling to a $2bn e-comm revenue stream). Our question to Gary would be ‘how small will you let dot.com get as a percent of the total.’ Our sense is that he’d come back with an answer that sounds something like “I could care less where the sale originates – in a store, or online – as long as we book the sale.” We’re cool with that, and largely agree. But it’s a key question to ask nonetheless.


Bonus Question (for those times you get an extra few minutes to sneak in another question)

Fashion Risk. Even your average non-fashionista type with no sense of design could walk blindfolded into a RH-themed room and know within about 3 seconds that it is RH. It just has that ‘RH look’. It’s a look that has been very relevant for three years now. The question is whether a) RH just happens to consistently nail the current trend, or b) it leads consumer trends by sourcing the product it thinks consumers will want, and then merchandises and markets it in a way that the consumer will want to buy it. Our opinion is that RH is an example of ‘B’ – much like what Ralph Lauren has become in the apparel space (seriously, when is the last time Ralph missed a fashion trend? Answer – never). Though we’re kind of answering this question before we ask it, we would like to know more about Gary’s process for driving demand around a given assortment. He alone can offer the best insight on this one for RH.


RH - Three Key Questions - RH Financials

FLASHBACK: #GrowthSlowing (Lots of Charts)

Takeaway: We are getting increasingly negative on the slope of domestic economic growth.

This note was originally published December 12, 2013 at 17:45 in Macro

FLASHBACK: #GrowthSlowing (Lots of Charts) - turtlecrossingroad

Yesterday, Keith and I did a full slate of meetings with funds in NYC; without violating any confidentiality by getting bogged down in the details, here are the key takeaways we were effectively pounding the table on:

  1. We still like our #EuroBulls theme (CLICK HERE to launch our @HedgeyeTV video) and continue to see opportunities on the long side of European growth equities. We continue to like the UK and GBP then Germany and EUR in that order.
  2. Based on early warning signals, we think 3Q13 is a cycle-peak in the sequential rate of US economic growth. If we were mandated to allocate capital to US equities, it would be in high yield, slow growth, low short interest and/or commodity-linked stocks, at the margins – basically a return to the 2011-12 playbook. The UST 10Y yield has probable downside to 2.5% in this scenario.
  3. A potential 1H14 macro theme we see developing is inflation-hedge/consensus yield chasing plays continuing to make higher-lows alongside US equity volatility (CLICK HERE to launch today’s @HedgeyeTV video on a potential breakout in the VIX). That list would include gold, commodities, emerging markets, TIPS and REITs. The Abenomics trade (i.e. short JPY/long Japanese equities) would make lower-highs in this scenario.
  4. Fund flows have the opportunity to buoy the US equity market well into 1Q14, though we’d expect growth data to be decidedly cooler by then if the Fed does NOT taper. We are very differentiated from consensus in that we think that a return to prudent monetary policy is the only way to promote sustainably faster rates of domestic economic growth. We don’t buy into the consensus fear-based whining about deleveraging and the perceived risk of higher rates in the housing sector.
  5. If the Fed tapers or signals imminent tapering, we’d abandon each of the aforementioned views and would be buyers of any subsequent US equity pullback. If the Fed does NOT taper (as we expect), we’d be sellers of any subsequent US equity strength.


Today, we received a great follow-up question from a very sharp client in the fixed income space: “What is the data you’re looking at to support your view that GDP growth will slow down?”


As with any inflection-based call on growth and/or inflation, we start with the market’s risk management signals – which tend to lead the reported data. The USD is decidedly broken from a quantitative perspective and long-term interest rates are making lower-highs vs. the YTD peak in both growth data and #GrowthAccelerating expectations.


FLASHBACK: #GrowthSlowing (Lots of Charts) - dale1


FLASHBACK: #GrowthSlowing (Lots of Charts) - UST 10Y


Moreover, both are declining on a QoQ average basis, which is historically something you’d see during periods of marginal stagflation (i.e. Quad #3 of our GIP model = Growth Slows as Inflation Accelerates).


FLASHBACK: #GrowthSlowing (Lots of Charts) - GIP Model Backtest


FLASHBACK: #GrowthSlowing (Lots of Charts) - Quad  1 vs. Quad  3


FLASHBACK: #GrowthSlowing (Lots of Charts) - USD  UST Rates and GDP


That reflexive relationship is something we’ve seen throughout the YTD:


FLASHBACK: #GrowthSlowing (Lots of Charts) - 4


As it relates to early warning signals, the ISM data appears have materially inflected here, which confirms what we’ve already seen with respect to the respective trends in consumer and business confidence.


FLASHBACK: #GrowthSlowing (Lots of Charts) - 5


FLASHBACK: #GrowthSlowing (Lots of Charts) - 1


FLASHBACK: #GrowthSlowing (Lots of Charts) - 2


Recall that inventories juiced the 3Q GDP print – which we’ve argued is a healthy, pro-cyclical response to increased business confidence. Well, now said business confidence has inflected to the downside here in 4Q and we anticipate inventories will follow suit when 4Q13 GDP is reported.


FLASHBACK: #GrowthSlowing (Lots of Charts) - 3


Again, our call for an inflection in growth is in the very early innings so you won’t see it in the broad swath reported data just yet – much like you didn’t see a ton of data to support our #GrowthStabilizing and #GrowthAccelerating calls at the start of the year.


FLASHBACK: #GrowthSlowing (Lots of Charts) - US QoQ


I’m guessing to the naked ear we sound about as crazy as we sounded roughly one year ago when we were pounding the table on long side of US equities and on the short side of anti-growth assets (e.g. gold, EMs, commodities, etc.) as the biggest US growth bulls on the street. For now, that’s a position we feel comfortable taking in the absence of a change of heart at the Fed.


Please feel free to email us with any follow-up questions or if you’d like us to forward you the analyses supporting the conclusions laid out at the start of this note.


Have a wonderful evening,




Darius Dale

Associate: Macro Team

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