Takeaway: The positive data streak ends at five. While we attribute this mainly to Easter, this morning's print shows considerable w/w softening.

Labor Data Hits a Speed Bump

As we pointed out last week, Easter week is notoriously choppy from a data standpoint so investors should take the data with a grain of salt. Based on this distortion, we've seen significant volatility in the data in the last couple weeks. For instance, on a y/y NSA basis, this week claims were up 5.1% as compared with down 8.3% in the prior week. The 4-week rolling average, the better measure, showed a decelerating rate of improvement, moving to -8.2% from -10.9% on a y/y basis. 


We're not overly concerned by the sudden deterioration in this week's print as the ADP number for April was reasonably strong and the Challenger report, while up slightly m/m, was in-line with recent trends. That said, should we see a continuation of this week's print in next week's data that would be more disconcerting.


For now, it appears the labor market recovery remains on track, albeit at a moderately decelerating rate of improvement.


The Data

Prior to revision, initial jobless claims rose 15k to 344k from 329k WoW, as the prior week's number was revised up by 1k to 330k.


The headline (unrevised) number shows claims were higher by 14k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3k WoW to 320k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -10.9%
































Yield Spreads

The 2-10 spread fell -2 basis points WoW to 224 bps. 2Q14TD, the 2-10 spread is averaging 229 bps, which is lower by -10 bps relative to 1Q14.






Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Retail Callouts (5/1): TGT, ANF, ARO, AMZN

Takeaway: TGT new CIO - PR move. ANF adds more new board members. ARO shuttering P.S. concept. Uniqlo expanding to SoCal.




  • GIL - Earnings Call: Friday 5/2, 8:30am




TGT - Company plans to enable REDcard portfolio with MasterCard chip-and-PIN technology



  • "Effective May 5, Bob DeRodes will lead Target’s information technology transformation as executive vice president and chief information officer. In his role, DeRodes will assume oversight of the Target technology team and operations, with responsibility for the ongoing data security enhancement efforts as well as the development of Target’s long-term information technology and digital roadmap."
  • "DeRodes comes to Target with more than 40 years of experience and is a recognized leader in information technology, data security, and business operations. He has been a senior information technology advisor for the Center for CIO Leadership, the U.S. Department of Homeland Security, the U.S. Secretary of Defense, and the U.S. Department of Justice."
  • "Today, Target also announced a significant new initiative as part of the company’s accelerated transition to chip-and-PIN-enabled REDcards. Beginning in early 2015, the entire REDcard portfolio...will be enabled with MasterCard’s chip-and-PIN solution. Existing co-branded cards will be reissued as MasterCard co-branded chip-and-PIN cards."
  • "Earlier this year, Target announced an accelerated $100 million plan to move its REDcard portfolio to chip-and-PIN-enabled technology and to install supporting software and next-generation payment devices in stores. The new payment terminals will be in all 1,797 U.S. stores by this September, six months ahead of schedule."


Takeaway: This is as much a PR move as anything else. Sure the company needed a new CIO after the former head 'stepped down' in early March, and we can't argue with this guy’s resume. But it means more to the average consumer than it does to the company that a former advisor from the Department of Homeland Security is helping protect their information.


ANF - A&F to Nominate New Directors to Board



  • "The retailer said Wednesday that it would nominate four new independent directors at its annual meeting as part of a settlement agreement with activist investor Engaged Capital, which has been pushing the company for change."
  • "The directors include Hudson’s Bay Co. vice chair Bonnie Brooks, Gap and Ralph Lauren veteran Sarah Gallagher, former Bath & Body Works ceo Diane Neal and former Ernst & Young retail leader Stephanie Shern."
  • "They take the places held by Lauren Brisky, Kevin Huvane, Jack Kessler and Liza Lee, who will not stand for reelection."
  • "Once these changes are made, Abercrombie’s board will be made up of 12 directors — 11 of them independent and seven of whom will have been added this year."


Takeaway: That makes 9 additions to the board and management team since January - 7 board members, COO, and CFO. But, the company refuses to make the move that really matters.




9983 - Uniqlo to enter Los Angeles market in September; announces five locations



  • "Uniqlo will continue its expansion in the United States by entering the Los Angeles market. The Japanese retail powerhouse announced it will open five stores in the Los Angeles area, starting in September, with locations at South Coast Plaza, Costa Mesa; Northridge Fashion Center, Northridge; and Glendale Galleria, Glendale."
  • "In October, the company will open at the Beverly Center, Los Angeles, followed by a store at Los Cerritos Center, Cerritos, in spring 2015."
  • "Currently, Uniqlo operates are 20 stores in the U.S., as well as, which offers nationwide online shopping."


AMZN - Puts Wearable Technology at Your Fingertips with Launch of New Store



  • ", Inc. today announced the launch of its Wearable Technology store – a one-stop shop where customers can easily discover the latest in wearable technology and research wearable devices including activity trackers, smart watches, wearable cameras and more. In addition to the largest selection of items from top brands including Samsung, Jawbone and GoPro, the store features products from emerging brands like Basis and Misfit as well as devices coming soon from brands like Narrative and Bionym."


ARO - Aeropostale Provides Update To Strategic Initiatives



  • "Following a strategic business review, the Company has identified key initiatives it estimates will generate approximately $30 million to $35 million in annualized pre-tax savings, of which approximately $5 million to $10 million is expected to be achieved in fiscal 2014."
  • "Based on changing consumer patterns, particularly of the 'mom' shopper, the Company has made the determination to close approximately 125 mall-based P.S. from Aeropostale stores by the end of fiscal 2014.  The Company plans to restructure the brand to focus on faster growing sales channels, including off-mall locations (including outlets), e-commerce, and international licensing."
  • "In line with prior guidance, the Company continues to expect first quarter 2014 operating losses in the range of$64 million to $68 million, which translates to a net loss in the range of $0.70 to $0.75 per diluted share. This outlook is provided on a non-GAAP basis because it excludes the impact of today's announced strategic initiatives, as well as any expected consulting fees associated with these announcements."


BRBY - Christopher Bailey Begins New Joint Role at Burberry



  • "Christopher Bailey has now been appointed as chief creative and chief executive officer of Burberry and a director of the company, Burberry said in a statement to the London Stock Exchange Thursday."
  • "Ahrendts has left the company to join Apple as senior vice president of retail and online stores, and she stepped down from her role as Burberry ceo and resigned her directorship there April 30."


PVH - Lagerfeld Brand Inks Deal in Middle East



  • "Karl Lagerfeld BV has signed a five-year agreement with Dubai-based Chalhoub Inc. that calls for the retail and luxury specialist to open 10 Karl Lagerfeld concept stores and 15 shops-in-shop by 2018."


Alec Richards


ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow

Takeaway: This past week saw a rebound in both equity and fixed income flows, albeit to just running year-to-date averages.

Investment Company Institute Mutual Fund Data and ETF Money Flow:


In the most recent 5 day period, absolute money flow into both equity and fixed income mutual funds rebounded week-to-week to near the year-to-date averages, reversing last week's negative trends:


Total equity mutual fund flow accelerated sequentially week-to-week, producing a tally only slightly below the 2014 year-to-date weekly average. The $3.5 billion that came into all equity mutual funds during the most recent 5 day period ending April 23rd was split between a $1.4 billion inflow into U.S. equity funds and an improved $2.1 billion inflow into international stock funds. This higher demand for foreign equity products has been consistent over the past two years with international stock fund inflow having averaged $2.9 billion per week this year and $2.6 billion per week last year in 2013 with domestic fund products averaging an inflow of just $1.3 billion thus far in '14 and a $451 million inflow last year in comparison. The 2014 running weekly average inflow for all equity mutual funds is now $4.1 billion, an improvement from the $3.0 billion weekly average inflow from 2013. 


Fixed income mutual fund flow also accelerated substantially on a w/w basis, reversing last week's trend lines in the product graphs below, which had displayed decreasing momentum for bond funds versus equity funds. For the week ending April 23rd, $2.3 billion flowed into all fixed income funds, as opposed to last week's paltry $659 million inflow. The improvement in bond fund inflow this week is the result of $1.7 billion that flowed into taxable products and $531 million that flowed into tax-free or municipal products. The inflow into taxable products this week was the 11th consecutive week of positive flow and the inflow into municipal or tax-free products was the 15th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.9 billion weekly inflow, a vast improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).


ETFs experienced dramatically positive w/w changes in trends, with a notable week subscription for Bond ETFs, which experienced an inflow of $1.2 billion, in contrast to the previous week's $204 million inflow. Stock ETFs left last week's $2.2 billion outflow far behind, netting $193 million in new inflows last week. The 2014 weekly averages are now a $973 million weekly inflow for equity ETFs and a $931 million weekly inflow for fixed income ETFs. 


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $276 million spread for the week ($3.7 billion of total equity inflow versus the $3.4 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.4 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   



ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 1



Most Recent 12 Week Flow in Millions by Mutual Fund Product:



ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 2


ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 3


ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 4


ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 5


ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 6



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:



ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 7


ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 8



Net Results:



The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $276 million spread for the week ($3.7 billion of total equity inflow versus the $3.4 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.4 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week).



ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 9 




Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA


Early Look

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A Terrible, Horrible, No Good, Very Bad GDP Report

Client Talking Points


If you really want to buy #GrowthAccelerating, stay with our Hedgeye playbook and only buy countries with #StrongCurrencies like the Pound. The UK PMI accelerates (again) to 57.3 in April versus 55.3 in March and the FTSE looks solid. Yes – currencies matter.


If I’m right, and inflation continues to slow U.S. growth in Q2, then 2.66% for the 10-year yield looks primed to test my TAIL risk line of 2.59%. It’s great news if you are long slow growth yield chasers (Bonds, Utilites, REITS, etc). Not so great if you’re long the Russell 2000 (IWM) etc.


The US Dollar is on its knees (at year-to-date lows) following the massive GDP miss – if all the weather experts nailed the weather, why didn’t they nail the number? Looks like both the currency and bond market is front-running a Yellen “un-taper” in May to me. Guess we’ll see.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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.


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


Denmark's unemployment rate drops to 4.0% (and to think they didn't need the Fed) @KeithMcCullough


"Every worthy act is difficult. Ascent is always difficult. Descent is easy and often slippery." - Mahatma Gandhi


One out of three Americans now live in a housing market where rent for a three-bedroom home eats up more than 30% of the monthly median income, the traditional threshold for affordability, according to RealtyTrac. Big demand for rental housing has helped push rents more than 21% higher since the housing market peaked in 2006. (CNN)


Pay no mind to EPS - top of the EBITDA guidance range isn’t bad. Non-recurring online costs, high income taxes, and a comp expense adjustment prevented a beat. Borgata looking much better for Q2.




We like the setup here for BYD, assuming the economy behaves.  Q1 would’ve been much better, if not for some non-recurring items.  Instead, the stock is indicating down based on a headline EPS miss.  Despite the items, EBITDA still fell at the high end of company guidance and in line with consensus.  The upcoming catalysts look favorable: 

  • a much better April at the Borgata
  • potential breakeven operations as soon as April for online
  • compensation expense normalizing
  • much easier comps
  • a potentially very material property tax rebate in Atlantic City
  • a lower go forward property tax rate that could add $15-20 million annually to Borgata EBITDA – 13-17% boost to our current Borgata estimate
  • a series of potential debt refinancings beginning in August that could generate $0.15-0.20 in incremental EPS 



The headlines read that BYD missed on EPS.  However, Q1 EBITDA of $144.5 million was in line with consensus and at the high end of management’s guidance of $140-145 million.  Moreover, bad weather impacted the quarter by $2m more than guidance, Borgata online suffered a loss of $3m of which $2m was due to non-recurring start-up costs, a stock compensation adjustment hurt pre-tax income by another $2m, and income taxes were unusually high.  The first two items hit EBITDA while the remaining were below the EBITDA line.  Q1 was a solid quarter relative to expectations.


By region, we suspect BYD posted better results everywhere with the exception of Borgata due in part to the online losses but also very bad weather which seemed to impact the hotel and F&B more than gaming.  Good cost controls helped the LV Locals business post YoY EBITDA growth but the lack of revenue growth remains frustrating.




2014 EBITDA guidance of $600-620 million bracketed the consensus EBITDA projection of $610 million.  Management forward commentary was similar to the PENN and PNK conference calls that April was soft.  We would note that our research indicates that April will be much better than Q1 and March in terms of YoY growth and we are projecting accelerating trends for May and June.  Borgata, in particular, looks much better both on land and in cyber space.  We should be getting New Jersey’s April gaming revenues on May 14 and we suspect Borgata did well.  Borgata’s online operations – a major drag on Q1 – could move into the black sometime in Q2.


Comps look very easy for the back half of 2014 and BYD should post solid growth.  Upside to guidance could come from top line growth in Las Vegas and more cost cutting in other markets.  The big prize will be a favorable resolution to the property tax dispute in Atlantic City.  We don’t think investors have focused on how important this development could be for BYD.  Here is the rundown:

  • In July, a judge will hear the city’s appeal of a favorable court ruling for BYD that awarded the company $54m in rebates and interest for 2009/2010. 
  • In September, a judge will hear for the first time, BYD’s contention that they are due a similar rebate for 2010-2012 totaling $75m.
  • Prospectively, BYD is negotiating all along similar lines for lower property taxes that could result in $15-20m annually in incremental EBITDA for Borgata.
  • Combined, these property tax adjustments would generate $1.75 to $2.00 per share in value to BYD stockholders.



Headline EPS be damned, Q1 and guidance were solid.  Positive catalysts are out there.  Overall, there is a lot of value in BYD, particularly if the company can continue to make operational changes to improve its underperforming margins or pursue any real estate related transactions.  

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