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Animal Spirits

“In the long history of humankind (and animal kind, too) those who learned to collaborate most effectively have prevailed.”

-Charles Darwin


In his 1936 book, “The General Theory of Employment, Interest and Money”, John Maynard Keynes used the term animal spirits to “describe the instincts, proclivities and emotions that ostensibly influence and guide human behavior.”  He goes on to use consumer confidence as an example of how animal spirits can be measured economically. 


In our Q2 Themes presentation, we did a lot of work on the median consumer and took a detailed look at his / her income statement and balance sheet.  Currently, there are a number of major headwinds for the median consumer.  The obvious first one is the rampant acceleration in food costs in the year-to-date, the second is the anemic interest rate that they get on their savings, and, finally, the last headwind is the softening in the housing market.


For many average consumers, the house is in effect the balance sheet, so as home prices go up so too does net worth.  The two points that bode most negatively in our models for future home prices are the dual facts that pending home sales are down -14.5% from their peak and mortgage applications for purchase are down more than -20%.   Ultimately, home prices follow demand on a lag (as shown in the Chart of the Day), so we should expect that home price growth softens from here.


As it relates to the consumer, late last week the Bloomberg Consumer Confidence slipped to -31.9 from -30.0.  This is well below the long run average of -16.5 and normally a number above -30 is the level at which the economy is considered to be in recovery mode. More alarmingly was the personal finance sub-index which fell to -2.9, the worst level in five months. 


On a higher level, last week Michigan Consumer confidence came in at 82.6.  This was better than the expected 81.0 and an increase from the prior month.  So the animal spirits of consumer confidence appear to be intact . . . at least for now, but keep your eye on those home prices.


Back to the Global Macro Grind . . .


Yesterday was a slow grind in global macro land and today seems to be similar in tenor.  As it relates to the pin action of stock markets, the Shanghai Composite today is -1.36%.  The punditry is attributing this downward move as front running China’s GDP tomorrow, albeit the positive move in Chinese equities yesterday was considered a precursor to positive GDP, so the question of course is: which is it?


At a minimum, it seems that the government may be trying to talk down economic growth and the timing of the following report is suspect coming out one day ahead of GDP:


“Researcher with State Information Center said in Shanghai Securities News that efforts to address overcapacity, deleverage the economy and curb property bubbles could push GDP below 7%, something that would trigger massive unemployment.”


My colleague and our Asia Analyst Darius Dale had some detailed thoughts on the topic:


“In the 15 quarters since Chinese real GDP growth hit a cycle-peak of +11.9% YoY in 1Q10, Chinese economic growth has accelerated sequentially only three times. It’s basically been a straight leg down for four consecutive years – so much so that on a trailing 3Y basis, the current z-score for this series is (0.6x), which is actually up from trough of (1.6x) in 2Q12. In non-statistical speak, this implies that the “surprise factor” of Chinese #GrowthSlowing is burning off.


That isn’t to say that Chinese economic growth is not still slowing. In fact, the broad swath of high-frequency economic data points to a continued slowdown. The current risk range in our predictive tracking algorithm has probable downside to +7.3% YoY for Chinese real GDP growth here in 1Q14, which would: A) be the slowest growth rate since 1Q09; and B) imply that the Chinese economy is not taking advantage of extremely favorable base effect tailwinds – a sign that sequential momentum is indeed decelerating (as evidenced by the MAR PMI data).


One thing that investors should be aware of, however, is that Chinese policymakers are content to stand pat for now. Expectations for big stimulus has been dramatically tempered in recent weeks, most recently by Premier Li Keqiang’s prepared remarks at the Boao Forum for Asia Annual Conference. Perhaps they are storing up their fiscal and monetary “gun powder” to arrest any potential deceleration through the low +7% range in real GDP.


Or perhaps China’s intermediate-term growth trajectory isn’t really isn’t as dour as it has appeared in recent months and their superior visibility into the state-run Chinese economy leads them to believe that a large stimulus is simply not warranted. Time will tell; next up: tonight’s releases of 1Q GDP and MAR high-frequency growth data…”


The Hedgeye team will never be confused of being supportive of the interventionist nature of the world’s central bank.  A key critique we often held is that as a result of activist monetary policy, the markets tend to get manipulated.  We aren’t sure yet whether the Fed is more evil than those dastardly high frequency traders, but recent data on correlations emphasize our concern.


Specifically, according to ConvergEx, since 2009, the 10 industry sectors in the SP500 have averaged 85% correlation to the index.   In the past thirty days, correlations have dropped markedly to 77.5%.  Most interestingly though is the fact that long run correlations, before Fed intervention, have averaged 50%.  (Hint: Michael Lewis, there is a book here somewhere.)


The most challenging part of dealing with central banks may be in discerning whether they mean what they say.   The most recent example of course is the jawboning from ECB head Mario Draghi, who specifically indicated that the ECB was ready and willing to take monetary policy to an extreme level.  The Euro, despite a down move yesterday, has by and large shrugged Draghi off and is up 0.6% on the year-to-date.  Credibility anyone ?


Our immediate-term Global Macro Risk Ranges are now:



Nasdaq 3

Nikkei 135

USD 79.27-80.01

EUR/USD 1.37-1.39

Brent 107.34-109.41

NatGas 4.46-4.71


Daryl G. Jones

Director of Research


Animal Spirits - Chart of the Day

April 15, 2014

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TODAY’S S&P 500 SET-UP – April 15, 2014

As we look at today's setup for the S&P 500, the range is 51 points or 1.45% downside to 1804 and 1.33% upside to 1855.                                                










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.28 from 2.28
  • VIX  closed at 16.11 1 day percent change of -5.40%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:30am: Empire Manufacturing, April, est. 8 (prior 5.61)
  • 8:30am: CPI m/m, March, est. 0.1% (prior 0.1%)
  • CPI Ex Food and Energy m/m, March, est. 0.1% (prior 0.1%)
  • 8:30am: Fed’s Lockhart speaks at Stone Mountain, Ga., conf.
  • 8:45am: Fed’s Yellen speaks to Stone Mountain, Ga., conf.
  • 8:55am: Redbook weekly sales
  • 9am: Net Long-term TIC Flows, Feb. est. $30b (prior $7.3b)
  • Total Net TIC Flows, Feb. (prior $83b)
  • 10am: NAHB Housing Market Index, April, est. 49 (prior 47)
  • 3pm: Fed’s Plosser moderates panel at Stone Mountain
  • 4pm: Fed’s Rosengren speaks in Bangor, Maine
  • 4:30pm: API weekly oil inventories
  • 8pm: Fed’s Kocherlakota speaks in Fargo, N.D.


    • FEC 1Q filing deadline for congressional campaign cmtes, some PACs and some party cmtes
    • 2pm: Bloomberg Government holds “Is This The First (And Final) Act of the Tax Overhaul?” Webinar
    • House, Senate on recess
    • U.S. ELECTION WRAP: RNC’s Focus on Women; First Quarter Funds


  • Diageo offers $1.9b to gain United Spirits majority stake
  • China new credit declines as money-supply growth slows
  • Obama warns Putin on Ukraine after deadly clashes in East
  • German investor confidence declines for fourth month in April
  • Nestle reports slowest 1Q sales growth since 2009
  • Roche’s 1Q sales fall on strength of Swiss Franc
  • SABMiller considers options for $1.04b Tsogo Sun stake
  • Moelis IPO offers founders riches as investment bank shrs fall
  • GM CEO seeks new top spokesman, replaces human resources chief
  • Heartbleed hackers steal encryption keys in test showing danger
  • Hedge fund’s gains on distressed debt decline to 7-month low
  • Dell extends offerings for SAP’s Hana to win business clients
  • JPMorgan, Citigroup, others release monthly delinquencies
  • Encana seeks to tap oil royalties demand with unit IPO by June
  • Rio produces record iron ore output as global supply gains
  • Onex, Cineplex said in lead to buy Dave & Buster’s: WSJ
  • Fed’s Yellen speaks via video to Stone Mountain conf.

     AM EARNS:   

    • Charles Schwab (SCHW) 8:45am, $0.22
    • Coca-Cola (KO) 7:30am, $0.44 - Preview
    • Comerica (CMA) 6:40am, $0.72
    • Johnson & Johnson (JNJ) 7:45am, $1.48 - Preview
    • Northern Trust (NTRS) 7:30am, $0.78 – Preview

     PM EARNS:   

    • Boston Private (BPFH) 4:05pm, $0.19
    • CSX (CSX) 4:03pm, $0.37
    • Intel (INTC) 4:01pm, $0.37 - Preview
    • Interactive Brokers Group (IBKR) 4:01pm, $0.30
    • Linear Technology (LLTC) 5pm, $0.53
    • Wintrust Financial (WTFC) post-mkt, $0.67
    • Yahoo! (YHOO) 4:05pm, $0.37 – Preview


  • Nickel Drops Most in Nine Months as Metals Fall on China Concern
  • WTI Falls From Six-Week High With Brent on U.S. Supply Forecast
  • Profit Tastes Like Chicken in Search for Cheap Meat: Commodities
  • Palm Oil Crop at Risk Across Southeast Asia as El Nino Looms
  • Gold Falls From 3-Week High on U.S. Outlook as Palladium Drops
  • White Sugar Halts Decline Before Delivery as Coffee Also Climbs
  • Corn Declines as Planting Concerns Ease While Soybeans Advance
  • China Gold Demand Rising 25% by 2017 as Buyers Get Wealthier
  • Rio Produces Record Iron Ore Output as Global Supply Gains
  • Coal Returns to German Utilities Replacing Lost Nuclear: Energy
  • Canada’s Climate Warms to Corn as Grain Seeks Great White North
  • Pump Prices in U.S. Climb to Eight-Month High as Supplies Slide
  • Nestle Sees 2H Commodity-Cost Rise, Will Raise Prices: BI Chart
  • Gold Seen Losing 22% by Westpac’s Smirk to End Year at $1,025

























The Hedgeye Macro Team














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 80.51%
  • SHORT SIGNALS 78.32%

Fishy Feelings

This note was originally published at 8am on April 01, 2014 for Hedgeye subscribers.

“It’s ok to eat fish because they don’t have any feelings.”

-Kurt Cobain


One of the core #behavioral principles in Jonah Berger’s Contagious is emotion. You need to make people feel something. And that something can be positive or negative, provided that it delivers what he calls “high arousal.” Awe, Amusement, Anger, and Anxiety (pg 109) will all do the trick.


Fishy Feelings - shark


Whether it was Janet Yellen telling you she is “extraordinarily committed” to burning your currency or Michael Lewis proclaiming his book is for the “little guy,” it was all out there yesterday.


So let’s do it for the children. Let’s keep the risk free rate of return on American Savers at 0% forever and have the FBI raid high-frequency-tweeters. We commoners of capitalism don’t have any feelings anyway.


Back to the Global Macro #Grind


On literally no volume yesterday, the SP500 made its best attempt to bubble itself back up to her all-time-closing high of 1878. Just wait until they ban all technology and bring back the NYSE dinosaurs – when you get squeezed, you’ll feel no volume at all.


I better be careful about calling anything we do innovative, or the fun-cops are going to come after me too. The “little guys” (read big lazy guys at bailed out #OldWall banks that can’t compete with math) have their biggest lobby yet.


At the risk of explaining how fractal math helps investors reading this note front-run the machines, let’s just keep our market update to a simple 3-factor model this morning instead:

  1. PRICE

And let’s score the US stock market (SP500) on all three:

  1. PRICE - making higher-lows, but not yet higher-highs (vs. the all-time closing high)
  2. VOLUME – decelerating on up days; accelerating on down days
  3. VOLTILITY – front-month VIX continues to signal higher-lows and that the term-structure of VIX is way too complacent

Notwithstanding Biotech and Social Media stocks dropping 15-35% in 2-weeks, what could possibly go wrong in Q2?

  1. FX – the US Dollar continues to signal long-term TAIL risk (trading below our TAIL risk line of $81.17 on the US Dollar Index)
  2. 10YR – continues to signal a series of lower-highs and remains below @Hedgeye TREND resistance of 2.81%
  3. SECTOR VARIANCE – Consumer Stocks (XLY) -3.2% vs slow-growth #YieldChasing Utilities (XLU) +9.2% YTD

I know. I know. Yellen has an implicit policy to Devalue the Dollar, let #InflationAccelerating (Food Prices +19% YTD) rip America’s poor a new one, and slow 71% of the US economy (Consumption), but you can go eat a REIT (+8% YTD), and like it.


If inflation slowing real US consumption growth wasn’t enough, now we have a series of non-weather related #GrowthSlowing data points interconnecting around the world. Here’s this morning’s macro data:

  1. CHINA – HSBC PMI (producer manufacturing index) slowed yet again in March to 48.0 vs 48.5 in February
  2. JAPAN – PMI slowed again in MAR to 53.9 vs. 55.5 in FEB
  3. UK – PMI finally slowed sequentially to 55.3 MAR v. 56.9 in FEB

Yep, in spite of its strong (relative) fiscal, monetary, and currency policy, even the United Kingdom is subject to gravity (i.e. at some point the rate of change in the economic acceleration slows). But, don’t worry, Keynesian economic policy makers say you don’t have to feel that.


They’ll smooth it out. You know, rig gravity. Right, right. And Larry Summers is my uncle.


Amused or anxious yet? No worries - all the backward looking political economists will not be writing about any of this today, because they’re still trying to fit the #weather data to a real consumption #GrowthSlowing narrative that they have once again missed.


If you’re in the 10% of America who gets rich on government spending, money printing, and selling books to mediocre minds in the media, you don’t have to have any feelings about that either. Remember, it’s for the children.


Our immediate-term Global Macro Risk Ranges are now:


SPX 1854-1878

Nikkei 14098-14887

VIX 13.56=15.58

USD 79.81-80.44

Pound 1.65-1.67

Gold 1276-1321


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fishy Feelings - Chart of the Day


Fishy Feelings - Virtual Portfolio

LULU - 3 Key Questions

Takeaway: When we get our five minutes with LULU's CEO at the company's analyst day on Thursday 4/17, here's what we'll ask.

We’ve been highlighting ‘3 Key Questions’ for CEOs of different companies in retail. The premise is that you have five minutes with the CEO and need to maximize your time by asking only the key critical uncertainties that exist strategically for the company in question. For the most part, the exercise has been theoretical, as not many people will have time with most of these CEOs. But this Wednesday and Thursday, Lululemon will host an analyst meeting in Vancouver, and most people that are interested in the name will have the chance to meet new CEO Laurent Potdevin on his new home turf. When we get our five minutes with him, this is what we’ll ask.


1) Like it or not, you have a lot to prove. It’s easier for most people to doubt you than believe in you. Sorry, but it’s reality. You come from Toms Shoes and Burton Snowboards – two solid brands in their own right – but both are tiny relative to Lululemon, and neither of those brands have any exposure to vertical retail. There were so many eligible executives LULU could have chosen at the time, including several in C-Suites at some of the largest and most successful companies in retail. To your credit, something in you impressed Chip and the Board enough to give you the title shot in running what was a $9bn Enterprise Value (at the time of your appointment). So the questions here are… a) can you shed some light for us on how exhaustive the interview process was (the purpose is to drill down if this was a multi-month courting process, or if it was a matter of weeks – which would be troubling)? Do you have a mandate to transform this company even if it is counter to what Chip wanted? (keeping in mind that he still owns half a billion worth of stock). What can you do for this company that Christine – or a proven CEO of a $3-4bn company cannot? Are there any advantages to not being jaded by having worked for a retailer before?


2) All companies go through different stages of maturation. After each burst of growth, there’s usually some kind of negative margin event as a) sales slow and b) the company properly reinvests in the business to fuel the next burst of top line growth. Some companies manage this better than others. Nike, for example, has had mixed results in this arena (but the end result is always positive) while UnderArmour has proven to avoid margin hiccups due to a steady, methodical and extremely effective investment philosophy all along. With that narrative set, where do you think Lululemon fits in? Clearly, the brand momentum has slowed. There’s nothing wrong with that – it happens to every brand. But we have yet to see a material hit to margins in order to fuel the next leg of growth. We’re not talking a 100bp hit in margins to fuel another $300-400mm in sales. That won’t get you the multiple you want. What’s it going to take to add another $1.5bn in revenue over 3-5 years? And if it amounts to a 500bp hit to margins, are you willing to make that investment? (Wall Street might hate you for a quarter, but it might be the best thing you can do for your brand).  Do you have the Board’s authority to think and act that big?


3) Lululemon is notorious for not discounting its product – which is an envious position to be in for any brand. But that strategy works when a brand is $500mm, but not when competition is exploding (Nike, UnderArmour, Athleta, Betty, H&M, VS, Prana, Ideology, etc…), and the sales line is topping $1.5bn. To boot, now the brand is clearly moving outside of its traditional core into seasonal products – and is even going so far as to test dresses (about as far from the Performance category as you can get). The point here is the business has been inching closer to having to put in place a more comprehensive promotional strategy, but it seems like it might be at the point where it has to be more draconian in its actions. The big question for us is a) what do you think of the narrative we set forth? If we are wrong, then why is that the case? b) if you start discounting more aggressively, do you have the information systems, logistics network and outlet centers to clear excess inventory in a way that is brand appropriate? c) if you agree that you need these things, but do not have them, how much of a capital outlay should it require?

Note: While we think margins need to come down at LULU as the company invests capital and becomes more promotional, we think that it will ultimately be a significant top line driver. There’s an important nuance here, in that if margins come down because of a weak top line, then this multiple is in serious trouble. But if the company deploys capital on the balance sheet and SG&A line in an offensive way to facilitate an appropriate product clearance strategy, then margins might come down, but the top line should balloon. While stocks rarely go up when margins are coming down, we’d argue that this does not matter with the stock in the low $50s. We’d be more concerned about the margin trend if the stock starts with a 7-handle. 


I-gaming revs are growing in AC but way below expectations.  We don’t find that as relevant as poker share.  Here, BYD leads the pack.

  • NJ I-Gaming revenues increased 15% MoM to $11.9 million while I-Poker eked out only a 3% gain
  • The reality was that New Jersey online gaming was never going to move the needle for the publicly traded gaming companies
  • We continue to focus on Poker share as I-Poker is likely the only form of internet gaming to roll out nationally (through interstate or federal legislation).  Poker relies heavily on player liquidity and with New Jersey the most populous state to offer the online game, first mover advantage here is critical.
  • While most of the investment community has downplayed online gaming as a value driver for any of the stocks, BYD’s interest in the market leading Borgata poker effort has us excited as the site’s share grew in March and commands 51% of the volume.


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