Pucks To The Head

“When you are stuck down a well, someone is bound to throw a rock on your head.”

-Chinese Proverb


So don’t get stuck down a performance well. Rocks to the head hurt. Technically, I’m on vaca with my family this week. But, since I don’t really see what I do (read and write) as a job, I do more of the reading part while I’m watching my kids cannonball one another at the pool.


The aforementioned quote comes from a fantastic Chinese/British economic #history book titled The Opium War. It was describing how English Naval Officer, Charles Elliott, felt after Lin Zexu dumped 20,000 chests of opium into the sea.


This happened in 1839 and became “one of the most celebrated moments in 19th century Chinese history” (pg 69). But it also gave birth to a major economic phase transition. The British found a new island to anchor their opium vessels. It’s called Hong Kong. Changing their position worked.


Back to the Global Macro Grind


The Russell 2000, Nasdaq, and SP500 were down -3.6%, -3.1%, and -2.6% last week to -4.5%, -4.2%, and -1.8% for 2014 YTD. The current “corrections” for the Russell, Nasdaq, and SP500 are -8.0%, -8.2%, and -4.0%. If you are levered long high-multiple growth, those are rocks to the head.


Thankfully, the feedback from our battle tested long-only customers is that they didn’t do that. Instead, they are long of inflation in inflation terms (Food, TIPs, Gold, etc.) and they are long of US #ConsumerSlowing in slow-growth-yield-chasing terms (Utilities, Bonds, etc.).


Feedback from our most astute macro hedge fund subscribers couldn’t be better. Not only can they be long inflation slowing growth, but they can be short of who is taking the brunt of all this (US consumers) in one of the deepest and most liquid markets in the world (US Equities).


Here’s the US Equity Sector Return Score for the YTD:


  1. US Consumer Discretionary Stocks (XLY) down another -3.7% last week to -6.9% YTD
  2. S&P Utilities Sector ETF (XLU) UP another +0.6% in a down tape last week to +9.8% YTD

In other words, as the social media bubbles crash (single stocks down -30-50% from their early March peaks - and we remain The Bears on names like Twitter (TWTR) and YELP), there have been plenty of places to make money, never mind “hide” from US growth beta.


In the face of the US centric bubble popping, check out last week’s top Global Macro performers:


  1. Gold up another +0.6% to +9.6% YTD
  2. Emerging Market Equities (MSCI Index) +1.3% to +1.3% YTD
  3. Emerging Markets LATAM (MSCI) +2.2% to +2.9% YTD

Emerging what?


Yep, lots of our Global Macro value buyers were simply waiting for the rockstar of all Emerging Market Equity catalysts to re-emerge – a Down Dollar. Last week, the US Dollar Index was down another -1.2% to re-test her YTD lows; in kind, Emerging Market Equities hit YTD highs.


I know, so easy a Mucker can do it.


Back to who gets pulverized by an un-elected US Policy To Inflate (courtesy of the Federal Reserve), don’t forget that there are winners who emerge versus US #ConsumerSlowing losers à the countries who get the purchasing power of their people (stronger currencies) back.


To a Keynesian central planner, all of this sounds so 16th century solar system, I am sure. But  reality is that reality is priced in local currency terms – and YTD, for the US consumer at least, reality bites.


Here’s how some commodities (priced in Burning Bucks) did last week:


  1. Coffee up another +8.8% to +76.8% YTD
  2. Natural Gas up another +4.1% to +12.8% YTD
  3. Oil (WTIC) up +2.6% last week to +5.9 YTD

Sure, if you back all that out – and blame the weather (which last I checked is fantabulous)… there is no inflation.


But there is some serious YTD absolute and relative return performance!


Which, at the end of the day is what we are all after, is it not? Why would you pay 20x revenues for anything when 2 of the biggest Macro Risk Factors that matter to any economy (GROWTH and INFLATION) are going the wrong way?


Remember, it’s not about absolutes. It’s about rate of change, and:


  1. US inflation is accelerating
  2. US growth is slowing

Our competition can blame YTD lows in the 10yr bond yield (2.63% = down -39bps YTD) on anything but the most obvious. They can blame me, the weather – or whatever… but they’re stuck in a proverbial well of YTD macro market scores that disagree.


And unless they want to keep taking pucks to the head from a bunch of hockey players, they better find a new narrative come summer time…


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.60-2.72%


Nasdaq 3

VIX 14.52-17.99

USD 79.11-80.01

WTIC Oil 101.73-104.99

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Pucks To The Head - Chart of the Day


TODAY’S S&P 500 SET-UP – April 14, 2014

As we look at today's setup for the S&P 500, the range is 46 points or 1.64% downside to 1786 and 0.90% upside to 1832.                                                                 










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.27 from 2.27
  • VIX closed at 17.03 1 day percent change of 7.17%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Retail Sales  m/m, March, est. 0.9% (prior 0.3%)
  • 10am: Business Inventories, Feb., est. 0.5% (prior 0.4%)
  • 11am: Fed to purchase $900m-$1.15b in 2036-2044 sector
  • 11:30am: U.S. to sell $25b 3M, $23b 6M bills
  • 12:45pm: Fed’s Tarullo, ECB’s Noyer speak in New York


    • Treasury Sec. Jack Lew, Ukranian Finance Minister Oleksandr Shlapak discuss situation in Ukraine, U.S. pledge of support for $1b loan guarantee: 9:30am
    • Congressional Budget Office plans to issue new baseline deficit projections: 11am
    • President Obama attends Easter prayer breakfast
    • House, Senate out of session on 2-wk recess
    • U.S. Election Wrap: GOP Forms Joint Fund; Rep. Petri to Retire


  • Citigroup earns: Higher fee income, elevated expenses seen
  • Citigroup said to cut up to 300 jobs in global markets unit
  • East Ukraine clashes turn deadly as Russia seeks UN meeting
  • U.S. stocks seek to rebound after worst week since 2012
  • CME gave high-frequency traders peek at market, suit claims
  • High-frequency traders set for curbs in EU
  • Minmetals Group to buy Glencore Peru mine for $5.85b
  • Memos show regulators held back as evidence grew of GM defect
  • to introduce smartphone in June: WSJ
  • UBS Chair Weber sees lev.-ratio rules tightening globally
  • KKR to sell Ipreo stake for $975m, FT reports
  • Goldman Sachs countersues client over commodities stocks rout
  • Apollo’s Momentive files for bankruptcy with exit financing
  • China tightens oversight of trust as risk of defaults increases
  • Brazil’s Mantega calls for alternatives to U.S. OK on IMF
  • Renewables, nuclear should triple to save climate: UN panel
  • Corn planting behind schedule for second straight yr
  • ’Captain America’ tops ‘Rio 2’, leads N.A. cinemas a 2nd wk


    • Bank of the Ozarks (OZRK) 6pm, $0.64
    • Citigroup (C) 8am, $1.14 - Preview
    • JB Hunt Transport (JBHT) 8:30am, $0.61
    • M&T Bank (MTB) 8:01am, $1.61
    • Pinnacle Financial (PNFP) 5:30pm, $0.46
    • Sensient Technologies (SXT) 4:34pm, $0.66
    • Sirius XM Canada (XSR CN) 4pm, C$0.05
    • Triangle Petroleum (TPLM) 5:58pm, $0.13



  • Goldman Predicts Commodity Declines Amid Rally in Bullion, Crops
  • Brent, WTI Crudes Pares Gains as Libya Offsets Ukraine Tensions
  • Gold Bears Bet Wrong Again as Fed Talk Favors Bulls: Commodities
  • Nickel Rises to 14-Month High as Goldman Sachs See More Gains
  • Palladium Climbs to Highest Since 2011 on Ukraine as Gold Rises
  • Wheat Climbs as Ukraine Tensions Boost Supply Disruption Concern
  • Commodities Rally to Highest in Six Weeks on Crisis in Ukraine
  • Sugar Climbs as El Nino Seen Threat to Brazil Crops; Cocoa Slips
  • Nickel May Rise to $20,000 If Indonesian Ban Stays, Goldman Says
  • Hedge Funds Boosting Bullish Crude Wagers on Output Drop: Energy
  • CME Gave High-Frequency Traders Peek at Market, Lawsuit Claims
  • Rebar in Shanghai Unchanged as Spot Price Gains, Inventory Falls
  • China Soybean Defaults Rattle Copper Traders, Markets: Bear Case
  • Goldman Stands By $1,050 Gold Target on Outlook for Recovery

























The Hedgeye Macro Team















Luxury leads the way




Hotel asset transactions are getting done and while the pace has slowed a touch, we're still optimistic for sellers such as HOT.  Asset sales are a big part of the Starwood investment thesis and to a lesser extent, Hyatt and Hilton.  While not perfect, conditions remain favorable for narrower bid/asks.


Most Lodging REIT stocks are flat to +8% on a YTD basis as of Friday's close, are within 5% to 10% of their respective 52 weeks high prices, and trading flat to +15% above their last equity issuance price.  Combined with decent balance sheets, lodging REITs are well positioned to continue to be buyers of assets from the C-Corps, namely Starwood and Hyatt. 


Upper upscale (UUP) & Luxury Transaction Trends for Q1 2014

  • Q1 2014 worldwide hotel transactions (UUP & Luxury brands) volume was close to $2.5 billion, lower than the $3.3 billion seen in Q4 2013 but slightly higher than Q1 2013's. 
  • The number of US luxury/UUP hotel transactions (where price was disclosed) was 12 in Q1 2014 - 5 less sequentially but 5 more than in Q1 2013
  • The number of non-US luxury/UUP hotel transactions (where price was disclosed) was 11 in Q1 2014 – 3 more sequentially and 4 more than in Q1 2013.
  • Relative to a two-year trailing average, US average price per key (APPK) in the UUP segment was $215k, below 6 quarter average of $266k.  This is attributable to some second/third tier city sales.
  • Luxury was the outperformer in Q1 2014.  APPK was $453k in the US and $527k internationally.  The 12 transactions were the most in a quarter since we started tracking transactions in 2010.
  • RLJ Lodging Trust was the most active in the market
  • There were several multi-asset sales in Q1 2014

Companies of note

Host Hotels

  • Sold Courtyard Nashua for $41k APPK
  • Bought Powell Hotel for $497k APPK


  • Sold Renaissance Barcelona for $499k APPK


  • Sold 10 Hyatts for $201k APPK




  • Sold St. Regis Bal Harbour for $1.03m APPK
  • Sold Hotel Aloft Guadalajara Las Americas for $126k APPK



Our detailed transaction database is available on request.

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 80.43%
  • SHORT SIGNALS 78.35%


Takeaway: Current Investing Ideas: CCL, DRI, HCA, HOLX, LM, LO, OC, RH, TROW and ZQK

Below are Hedgeye analysts' latest updates on our TEN current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.


We also feature three research notes from earlier this week which offer valuable insight into the market and economy.



Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


INVESTING IDEAS NEWSLETTER - Lemmings04.07.2014sm 


CCL – All cruise lines operators, including Carnival, took a hit this past week in a down market.  However, CCL’s performance (-2%) fared better than that of its peers, RCL (-5%) and NCLH (-8%).  There were several bad publicity reports out this week for CCL:  1) couple of operational problems on Carnival Pride and P&O Oceana (CCL brand); 2) AIDAprima delivery to be delayed by 6 months; 3) Norovirus on Crown Princess (CCL brand); 4) Harris poll showed a decline in cruiser sentiment following norovirus cases in early February. 


While these cast a negative light on CCL, ultimately, investors care about what’s going on with Caribbean pricing.  Based on our latest proprietary pricing survey, the large capacity increase in the Caribbean is wreaking havoc with pricing for RCL and NCLH.  We will get more color on how CCL pricing is tracking for Summer 2014 in the week of April 21. Stay tuned.

DRI – There is no news to report this week pertaining to Darden.  We remain bullish on the stock and are closely monitoring the ongoing saga between management and activist shareholders. 

HCA – Healthcare Sector Head Tom Tobin reiterates his bullish thesis on HCA Holdings. He has no update this week.

HOLX ­­– Healthcare Sector Head Tom Tobin reiterates his bullish thesis on Hologic. He has no update this week.

LO – Lorillard traded roughly flat on the week, about in line with the move in Consumer Staples (XLP).  This week LO also moved ahead of WFM for the #220 spot in the S&P500 ranking by market capitalization.

We continue to believe LO will grind higher on advantaged menthol fundamentals, limited regulatory risk, and a growth engine in blu e-cigarettes.  The company will announce Q1 2014 results on April 24th.

OC – Owens Corning Q1 2014 earnings call is set for Wednesday April 23, 2013 at 11 a.m. EST. Beating or missing estimates for Q1 will not change our bullish stance on Owens Corning. In the chart below is U.S. Public Non-Residential Construction Spending YoY %.


In terms of a construction cycle, public construction spending lags residential by up to two years. Non-residential falls somewhere in between the two. People just tend to remodel and fix up their homes before that office or the dreaded DMV receive attention. Despite public construction flailing along the bottom the past four years it is beginning to show signs of stabilizing as state and local budgets approve.


RH – The setup: you have a five minute meeting with the Gary Friedman, CEO of RH. Here are two of the four key critical uncertainties that we think are relevant to the investment thesis today.

  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 three shipments over 12-weeks). That not only delays when the company can collect revenue, but could also impact customer attitude toward 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…


TROW & LM – Both asset managers T Rowe Price and Legg Mason are set to report earnings over the next several weeks with TROW releasing numbers on Thursday April 24th and LM printing results on Tuesday April 29th. In an institutional report this week we examined the pricing of both earnings releases as relayed by the options market (essentially the expected stock moves on earnings day can be extracted from pricing in each company’s options series). Both companies options series are relaying fairly low expectations for the earnings print which can set up a good near term rally in the stocks with even a slightly better than expected print.


TROW has been screening well all quarter in several private surveys as having had good mutual fund inflow which should produce a good earnings result. LM conversely with very high short interest and very low stock ratings from the Street won’t need to do much to impress investors.


We think the LM story gets exciting in the latter part of this year and into 2015 with its repaired fixed income performance and by that time will be a de-risking theme from equities by institutions. The steadiest business line in JP Morgan’s earning report on Friday was Asset Management which was one of the few segments that had a revenue increase year-over-year. We expect the asset managers in this current volatile market to be more stable stocks than the other more transaction oriented financials.   

ZQK – Quiksilver remains one of our top long ideas. While shares have been under pressure lately, we still see over $1 in earnings power and a stock price approaching $20. The key metric in this equation is the top line. Revenues have been on the decline for five straight quarters and we expect a meaningful inflection starting in 3Q as the company starts to bear the fruits of its cost cutting initiatives, SKU rationalization, and streamlined design process.


But, this is more than just a cost cutting story. We see revenues growing to $2.5 billion by 2018 from $1.8 billion in 2013. The big drivers we’ve identified and laid out are footwear, emerging markets, and China. This also means that sales trends in existing markets will stabilize and reaccelerate. Our survey work shows that Roxy, Quiksilver, and DC footwear are extremely relevant to the core consumer even after nearly five years of extremely limited marketing spend. We expect the reallocation of marketing dollars to help reignite the brands as new, more focused product, rolls out for the fall.


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Click on each title below to unlock the institutional content.


McGough: My 3 Questions for Target’s CEO

Retail Sector Head Brian McGough has three questions for Target’s CEO and explains why TGT is one of the better shorts in retail.




Walmart’s ‘Organic’ Push Is Bad News for These Stocks

Given that Walmart is the largest retailer in the U.S., their latest move stands to create winners and loser across both organic and non-organic markets.




Tobin: One Way to Play #Consumption Slowing

Healthcare Sector Head Tom Tobin takes a look at a key subgroup highly levered to one of our new Macro Themes.


INVESTING IDEAS NEWSLETTER - iStock 000009322347XSmall


The Economic Data calendar for the week of the 14th of April through the 18th of April is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



Poll of the Day Recap: Timber! For the Stock Market?

Takeaway: At the time of this post, the majority went to 53% saying TIMBER! and 47% voting HICCUP.

Poll of the Day Recap: Timber! For the Stock Market? - 4


The “You-Know-What” hit the fan again today as continuing weakness in the tech sector spread to the broader market. The Nasdaq was clearly the biggest loser this week falling roughly 1% and on track to end the week basically 3% lower.


We are still banging the non-consensus bubble warning drum here at Hedgeye. But we wanted to hear your thoughts in today’s poll: Has the stock market correction arrived OR is this just a hiccup?


While the voting was virtually neck-and-neck in the morning, the tide began to turn more bearish as the market resumed its fall later in the day. At the time of this post, the majority went to 53% saying TIMBER! and 47% voting HICCUP.


While it was indeed a close poll, voters who think the stock market correction has arrived (TIMBER!) had the most to say:


  •  “I voted Timber because S&P 500 revenues are pretty flat year over year. Not much organic growth other than the Social Media bubble. The Fed continues to devalue the dollar and Russia and China are stocking up on gold. NASDAQ has only [gone] from about 1300 to over 4000 since 2009. Take a look at a chart of the 2000 internet bubble.”
  • “SPX breaks key support at open; PPI finally confirms (for g-men) some inflation; earnings this qtr will spread fear; perfect time of year for a welcome drop.”
  • “I call Timber, but with a long, slow ride to the bottom, wherever that may be. Other trees will hinder the fall. Market conservationists will tie ropes and chains to the tree and declare that no damage has been done. The loggers and the tree huggers will all claim Exceptionalism as their cause. Still, the real, genuine unavoidable truth is that ALL asset classes are mispriced (whether high or low) because there is no genuine market price for money, and no genuine market function for capital allocation. Maybe these things have never truly existed...but in today's planned (and grossly mismanaged) macro environment those fundamental capitalist functions are non-existent. Never fear, however; Mr. Market always has the last word...until the next round of madness.”
  • “The market is overdosing on Keynesian drugs prescribed by global central planners.  Japan didn't add more stimuli as beggars hoped for and Yellen and company have the market confused. The technicals are deteriorating.  Also, Kass went long the QQQ this AM. Anyone know if Gartman bought the dip yet?”

Those who believe this is a HICCUP admitted that time will tell; it depends on what the Fed does. And one voter strongly stated, “This is, without question, a hiccup.  Spring and summer acquisition activity in the tech sector will give the market confidence, at least through the summer.”


Another HICCUP voter was more cautious, “People will get optimistic, probably within the next week or two, though towards the end of the year, it might turn into a timber scenario.”


Ultimately, Hedgeye CEO Keith McCullough put it this way: “Already an 8% ‘correction’ in the Nasdaq that basically no one on #OldWall called for. Give it time, she'll go lower - and consensus will capitulate.”



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