Un-friending US Growth

“There is no friendship in trade.”

-Cornelius Vanderbilt


Un-friending US Growth - facebook thumbs down


Forget about what Facebook (FB) did on Friday. In one of the more epic 2 hour moves I have ever seen, the US bond market un-friended the US growth bulls, big time.


At 8:30AM the lagging of all lagging economic indicators (the monthly US unemployment rate) was met with some of the funniest tweets my contra-stream has ever seen: “Boom!” (as in this is  great report), “Bye bye Bond Market”, “Stocks gonna rip!”, etc.


By 10:30AM, as you can see in the Chart of The Day, anyone who bought US growth stocks and sold what’s been working all year (Gold, Bonds, etc.) felt shame. #Tweetless


Un-friending US Growth - Chart of the Day


Back to the Global Macro Grind


To be crystal clear, with the 10yr US Treasury Yield -15% YTD to 2.58% and US GDP 0.11% in Q114, Mr. Macro Bond Market has completely nailed it in 2014.


Since everyone other than guys @ISI (who are trying to story-tell about 3-4% US Growth) understands the relationship between a rising bond market (falling bond yields) and falling growth expectations, the real-time price truth is on the tape.


With the Russell2000 (proxy for US Growth stocks) -3% YTD, what else is going on out there on the scoreboard?

  1. US Dollar down another -0.3% last week to $79.51 on the US Dollar Index (re-testing its YTD lows)
  2. The Currency Power Couple (Euro and Pound) were up another +0.3-0.4% last week to +1.9-3.0% YTD vs the Burning Buck
  3. European Stocks (EuroStoxx600) were up +1.3% last week (vs the Russell2000 +0.5%) to +2.9% YTD
  4. MSCI World Equity Index beat the Russell last week too, +1.2% = +1.8% YTD
  5. Canadian Stocks (TSX Composite Index) were up another +1.6% last week to +8.4% YTD

Blame Canada (who also had the “weather”, like the UK did – but didn’t spend the last 3 months blaming it like CNBC growth bulls have).


Now, if they can’t blame the weather for a 9-week high in US jobless claims (reported on Thursday, which isn’t a lagging jobs indicator), what precisely do you think they’ll start to blame as they cut their 2014 US GDP “forecasts”?


Alec, I’ll take US #InflationAccelerating for $500 (pre-tax!):

  1. Food Prices (CRB Foodstuffs Index) were up another +0.7% last week to a tasty +22.3% YTD
  2. Cattle Prices were up another +3.1% last week to +11.1% YTD
  3. Natural Gas Prices were up another +0.6% last week to +14.0% YTD

No worries though, the natural gas thing was all about the weather on the East Coast in February, right? If poor people being pulverized by food and shelter costs can’t afford the air conditioning this summer, tell them to go topless.


Cotton prices up another +1.1% last week to +12.3% YTD are prohibitive to wearing t-shirts anyway. After they eat an iPad, the median consumer in America (who makes $47,296.72 a year pre-tax and spends $42,996.83) can swallow Janet’s un-tapering reaction to slowing data, and like it.


Obviously this isn’t funny – an un-legislated Policy To Inflate (taxing 80% of Americans with QE on their cost of living) rarely is. Looking at the average American’s Spending Breakdown (slide 15 of our Q214 Macro Themes Deck):

  1. Housing = 29.2%
  2. Transportation = 17.6%
  3. Food = 12.5%

Yep, your un-elected Fed tells you all of that stuff is “non-core.” While food and shelter are primitive concepts for some, for most of us they are core costs. And since 30% of the country still rents, the all-time highs in US rents matters to real people with real costs too.


Oh yeah. I almost forgot to tie in the introduction of today’s note with the conclusion. Why is it that bond yields got slammed intraday on a “better than expected jobs report”? That’s easy. As opposed to being a backward-looking-editorial-passive-trend-follower, markets are forward looking.


My read-through on what both the bond and currency markets have been telling you for 4 months is that they’ll be telling you more of the same in the next 4 months. As growth slows, the Fed will get even easier à Dollar and Bond Yields fall further à  Inflation continues to accelerate, and real growth consensus is un-friended, faster.  


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


UST 10yr Yield 2.56-2.68%


RUT 1093-1133

USD 79.19-79.88

Gold 1

Corn 4.96-5.21


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


TODAY’S S&P 500 SET-UP – May 5, 2014

As we look at today's setup for the S&P 500, the range is 28 points or 1.12% downside to 1860 and 0.36% upside to 1888.                                               













  • YIELD CURVE: 2.16 from 2.16
  • VIX closed at 12.91 1 day percent change of -2.57%

MACRO DATA POINTS (Bloomberg Estimates):

  • 9:45am: Markit US Svcs PMI, April final, est. 54.5 (pr 54.2)
  • 10am: ISM Non-Manufacturing, April., est. 54.0 (prior 53.1)
  • 11am: U.S. announces plans for 4W bill auction


    • Democrats should boycott Benghazi select panel, Schiff says
    • Clinton sidesteps 2016 plans in accepting Illinois Lincoln award
    • House, Senate in session
    • Obama will host Djibouti President Ismail Omar Guelleh
    • 9:30am: Supreme Court releases list of cases it plans to consider; may issue opinions at 10am


  • China manufacturing gauge signals deeper slowdown risk
  • Buffett says likely to join with Lemann’s 3G on another deal
  • AstraZeneca rejects Pfizer, which may eye sweetened offer
  • Fed’s Fisher: Economy strengthening as private payrolls rise
  • EU reduces euro-area growth forecast as inflation seen slower
  • Ukraine unrest flares across country as Kiev’s control slips
  • Citigroup wins custody deal from world’s biggest sovereign fund
  • ‘Spider-Man’ leads N.A. box office, tho sales miss some est.
  • U.S. pump price hits 14-mo. high of $3.72: Lundberg survey
  • LightSquared makes closing arguments in bankruptcy exit hearing
  • Siemens said near deal to sell airport unit to Wilbur Ross
  • Twitter lock-up expires as shrs drop 47% from high
  • Swatch objects to authorities over Apple’s use of iWatch label
  • Nokia joins Musk to Google in investing in intelligent cars
  • Alibaba founders seek control with partnership alternative
  • B/E Aerospace puts itself up for sale, cancels investor mtg
  • Ackman, Einhorn speak at Sohn Investment Conference
  • Yellen Testimony, ECB, Bank of England: Wk Ahead May 5-10


    • Auxilium Pharmaceuticals (AUXL) 7am, $(0.22)
    • BroadSoft (BSFT) 7am, $0.11
    • Brookfield Infrastructure (BIP) 7:30am, $0.38
    • Hecla Mining (HL) 8am, $0.00
    • Occidental Petroleum (OXY) 7am, $1.70 - Preview
    • Orbitz Worldwide (OWW) 8:08am, ($0.03)
    • Pfizer (PFE) 7am, $0.55 - Preview
    • Realogy (RLGY) 6:35am, $(0.19)
    • Sysco (SYY) 8am, $0.40
    • Tyson Foods (TSN) 7:30am, $0.63
    • Westlake Chemical (WLK) 6am, $1.13


    • Alleghany (Y) 4:07pm, $8.16
    • American Intl Group (AIG) 4pm, $1.07
    • Anadarko Petroleum (APC) 4pm, $1.15
    • CareFusion (CFN) 4:02pm, $0.62
    • EOG Resources (EOG) 5:11pm, $1.19
    • Genpact (G) 4pm, $0.23
    • Integrated Device Technology (IDTI) 4:01pm, $0.13
    • Mindray Medical Intl (MR) 5pm, $0.38
    • Oasis Petroleum (OAS) 4:15pm, $0.63
    • Tenet Healthcare (THC) 4:30pm, $(0.15)
    • Vivus (VVUS) 4pm, $(0.34) - Preview
    • Vornado Realty Trust (VNO) 4:52pm, $0.53
    • YY (YY) 4:01pm, $0.49


  • Wheat Rises to Highest in Year as Ukraine Boosts Supply Concern
  • Iron Ore Seen Slumping Below $100 as Surge in Supply Widens Glut
  • Hedge Funds Reduce Gold Bets to Lowest in 11 Weeks: Commodities
  • Gold Extends Climb to Three-Week High as Ukraine Spurs Demand
  • Brent Rises to Near 6-Day High as Ukraine Offsets China Slowing
  • Copper Declines as China Manufacturing Gauge Misses Estimates
  • Platinum Mines’ Union Bypass May Disrupt Industry, AMCU Says
  • Speculators Cut Bullish Oil Wagers on Record U.S. Supply: Energy
  • ARA Gasoil Supplies Rose 4.5% in Week to April 25, Genscape Says
  • Palm Oil Output in Indonesia Seen Hurt by Golden Agri on El Nino
  • U.S. Gasoline Rises to 14-Month High, Lundberg Survey Shows
  • Palm Oil Drops to Three-Week Low as Malaysian Output Seen Rising
  • Competition Means New GrainCorp Bid May Win Approval, UBS Says
  • Libya Crude Exports Dropped 36% in March, National Oil Says

























The Hedgeye Macro Team














May 5, 2014

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Early Look

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Despite cautious commentary, big beat on higher VIP volumes in Q1




  • Best performing RC Volume ever
  • 2014 will have a challenging macro economy; Chinese economy unstable; cautious view
    • Indonesia - two elections coming up
  • Mass revenue:  flat in the past two years; will be flattish in the next few months.
  • Macau Junket incident:  must have some repercussions in the Macau market.  Will not know for sure in the next 2-3 months.  Will not significantly affect Singapore since that market doesn't use junkets.
  • VIP RC volume share:  59%
  • VIP revenue share:  55%
  • VIP breakout:  Chinese still most important.  Indonesia and Thailand also a big segment.
  • Japan:  gaming bill may pass in Lower House at end of May.  Will go to Upper House some time in early June - will be more challenging because ruling party does not have majority there
  • Number of high rollers have increased due to improvement in regional logistics
  • VIP win rate %:  3.0%
  • Mass share:  44%
  • Have not seen much impact from Malaysia/Korean incidents
  • Stronger Singapore $:  affects mass market (esp Malaysia); number of trips remain the same but bet per trip has gone down.  Eventually will affect number of trips too.
  • Chinese macro will affect premium mass market
  • Hold-adjusted EBITDA is same as reported EBITDA since they use 3.0% as normal
  • GGR win breakout:  62%VIP,  Mass 38%
  • Higher 1Q receivables impairment:  case by case basis.  
  • Jeju:  will receive building permit by end of June.  Will have groundbreaking event June/early July. 
    • No comment on Landing (their partner).  thinking of acquiring a separate small casino in Korea
    • Have not finalized submission plans; will build a 2,800 room hotel
  • Quite optimistic on Jeju Island - Chinese nationals do not need a visa to travel to Jeju, as opposed to traveling to Seoul;  Jeju only 1 hour flight from Shanghai. Northeast China has 800 million (no more than 2 hour flight).
  • VIP rolling volume grew 19% QoQ and 10% YoY
    • Extended reach of customers
    • 10% YoY growth sustainable?  It will be challenging.
  • 16k visitation breakout:  60% visitation USS, 40% visitation to Marine Life Park;  average spending USS $85, average spending MLP $33
  • Capex guidance:  
    • Jeju:  US$1 billion 
    • Jurong hotel: S$200 million (1Q/2Q 2015 projected opening), most of capex will be done in 2014


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

Below are Hedgeye analysts' latest updates on our EIGHT 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




DRI – On April 30, Darden announced that Chief Restaurant Operations Officer, Dave Pickens, will retire effective May 23.  DRI will not replace Pickens and plans to eliminate the position altogether.  Pickens, a career DRI employee, got a one sentence send off from the company and not even a “thank you” from CEO Clarence Otis in the SEC Filing. 


This move is, in our opinion, very telling as it suggests a very tense environment down at the company’s lavish corporate headquarters in Orlando.  We continue to believe the activists will get their way and, for that reason, favor DRI as a strong long-term investment.


HCA – HCA Holdings put up a good number for 1Q14 even without the benefit of the ACA.  The best part of the quarter in our view was the comment that births had increased 2% overall and commercially insured deliveries had increased 4%.  We think we have a really good model to forecast birth trends and a decent one for surgical trends.  If we get those two things right we think HCA’s stock price could get into the $70s in the next year or so.  

HOLX ­­– The title of our note reviewing Hologic’s earnings report was “Credibility Counts.”  Predictability counts too and we did a good job of seeing the upside in numbers but most importantly the upside in Breast Health that came from having the best 3D mammography placement quarter yet. 


There is still a lot of research ahead of us with HOLX.  The most critical is to figure out what radiologists will be paid in 2015 to run a 3D mammography.  Right now, there isn’t any incremental payment, which has been a headwind to system sales.  SO far HOLX has converted 6% of the facilities in the US, but with an extra payment to cover the cost of the equipment, we should see adoption accelerate meaningfully.


What you might not know is how the government indirectly sets prices for medical procedures like 3D mammography and  how unbelievably obscure and political the whole process is.  The price setting process is deeply political between advocacy groups and manufacturers on one side, and academics and CMS (the government) on the other. 


Advocacy groups want a high price to drive adoption and access and the manufacturers want to sell product, while the academics think there is too much screening, or the wrong kind of screening, and CMS has spending restrictions.  The lower the reimbursement, the less equipment gets sold, and CMS spends less both in the near term and longer term.


While there is indeed a process to define a price, the result can be manipulated easily.  There is no formula.  guess that’s why we have yet to find anyone with a firm answer to our question or guidance on how we can get an answer on our own.  Whatever CMS sets the price for 3D mammography will be the baseline price for every other insurance company to set their price.  


LM – The intermediate term revamping of Legg Mason continued this week with an inline quarter for the period ending March 30th which closed out the firm’s fiscal 2014 period. We are not judging the merits of our recommendation of LM shares on short term quarterly numbers as we believe the value in LM stock is the ongoing turn around after a long period of underperformance. When zooming out from a multi-year view, the LM story is clearly improving which will unwind this long standing negativity now that the firm’s important fixed income business (which is 52% of assets under management and 37% of revenues) is on firmer footing. Legg booked a fixed income inflow in its annual period ending this quarter, the first inflow in over 5 years, which is proof that the firm is on the road to starting to rebuild its asset base. With the run in equities starting to stall out and institutional pension funds starting to increase their bond exposure, we view Legg as a defensive investment in the current well valued stock market.




LO – Lorillard was up a monster +8.5% on the week (vs +1.7% average for MO, PM, RAI), fueled by rumors throughout much of the week that RAI is interested in acquiring LO. Despite the rumor helping our Best Idea Long Call, we think a hypothetical deal (especially an imminent one) is challenged:

  • Our main flag is that a combined RAI + LO would own ~ 67% of U.S. menthol market, which we believe should trigger anti-trust flags.
  • Big tobacco is already a highly concentrated industry in the U.S. across the big three – MO has a leading ~51% of market share; a combined RAI + LO would equate to ~ 42% share.   

RAI could look to divest such menthol brands as Kool, Winston and Salem, which could serve to change the consideration of the FTC/DOJ, however that’s far from a given.  Additionally, we think the recent announcement that Susan Cameron will replace Daan Delen on May 1 could also be fueling speculation that she wants to come out of the box “strong” – which is drumming up rumors about this deal. 


We maintain our bullish stance on LO supported by 1.) Its leading share and profitability of its core menthol business, 2.) Our belief in the limited menthol regulatory risk over the longer term (substantiated by a Washington, D.C. tobacco expert), and 3.) The upside growth in its blu e-cigarette business that commands leading share in the U.S.


As part of the Best Idea’s thesis we have not factored in a RAI + LO deal, nor has there’s been any comment from either LO or RAI to suggest this is more than just a rumor.   


OC – The office market is beginning to show an increase in activity. Office completions in the second graph below displayed a sharp uptick for Q4 2013. Furthermore, heavy construction and machinery companies noted an increase in construction activity in Q1 earning calls. Caterpillar’s Construction Industries segment had sales over 17% Year-over-Year. Crane and aerial work platform companies Manitowoc and Terex noted pickups in their book-to-bill ratio – a positive sign as these booking and sales pass through to companies like Owens Corning.




RH – Last fall Restoration Hardware made the decision to cut its fall Source Book. We’ve discussed the potential implications of this strategy ad nauseum, but the numbers speak for themselves. The company realized an estimated $38mm in cost savings related to this shift in strategy in FY2013, and realized revenue growth of 32% in the 2nd half of the year.


The one drawback in this new strategy, as it relates to 2014, is the timing of the new product assortment release across the company’s three main channels – stores,, and Source Book. 1Q is almost closed and the company is up against a 41% comp in the first quarter of last year with no newness to help drive the comp. Revenue estimates are conservative for the quarter as a result growth is heavily weighted towards the back half of the year to coincide with RH’s 2014 new product launch. Which makes sense to us. We’ve gotten glimpses of the company’s assortment in categories like Outdoor, Baby&Child, as well as Rugs, but the full breadth of the assortment has yet to be released. That changes next week when the 2014 Source Books start arriving in homes which coincides with the launch of the full line up on the company’s website and stores (the stuff that will actually fit). For the full year we are modeling revenue growth of 25% compared to the Street at 20%.




ZQK – This week Quiksilver CEO Any Mooney had an appearance on a major financial network. CEOs appear on TV all the time. But there were two things that stand out to us. 1) Mooney is solitary and reclusive. He never struts his stuff on TV. This was highly unusual for him to do. 2) His appearance was on the last day of the quarter. His tone was upbeat, and consistent with our positive view on the stock. If it turns out that business trends are not positive, we cannot imagine that he would have delivered that message on the last day of the quarter. That would otherwise be a major liability – one that we think he’s smart enough to avoid.  


*   *   *   *   *   *   *

Click on each title below to unlock the institutional content.


Why We Think Target Is a Short

Retail Sector Head Brian McGough explains why Target has more to worry about than just the data breach. 



Panera Bread: Much Noise, Little Clarity

Managing Director Howard Penney breaks down his reasons for keeping Panera on the Hedgeye Best Ideas list as a SHORT.



ICI Fund Flow Survey: Below Average for Stocks, Better Than Average for Bonds

Financials analyst Jonathan Casteleyn takes a granular look at the most recent data which showed a rebound in both equity and fixed income flows, albeit to just running year-to-date averages.


Market Week In Review: Notable Highlights from Hedgeye

Takeaway: Here's a quick look at some of the top video clips, cartoons, market insights and more out of Hedgeye this past week.


Market Week In Review: Notable Highlights from Hedgeye - ktoc

In the first of three parts of an interview with Chris Ciovacco, the founder of independent money management firm Ciovacco Capital, Keith and Chris discuss the cornerstone to a top investor -- the investing process.


In the final part of a wide-ranging interview with Buddy Carter, a private investor and former proprietary trader at Goldman Sachs, Carter and CEO Keith McCullough talk through why it's crucial for investors to have a repeatable process.


Hedgeye retail analyst Brian McGough explains why he doesn't like Target (and it has nothing to do with the recent security breach of its credit cardholders).

Morning Newsletter

Here's a snippet from CEO Keith McCullough's "Morning Newsletter" sent to subscribers Friday morning. (Click here to learn more about becoming a subscriber).


Market Week In Review: Notable Highlights from Hedgeye - km


U.S. GDP posted its smallest gain in three years on Wednesday, barely inching along at only a 0.1% annual pace in Q1. Hedgeye's macro team has been warning about this for months.



Over 800,000 Americans dropped out of the labor force in April, slipping back to a 36-year low.

Market Week In Review: Notable Highlights from Hedgeye - job derby 05.02.2014


Epic Consensus Head Fake In the 10-Year Treasury

Market Week In Review: Notable Highlights from Hedgeye - benryan

Despite an initial, brief sell-off in 10-year yields following this morning's positive jobs number, the bond market showed its immunity to lagging indicators and consensus expectations. Click here to continue reading.


Did You See Panera Bread? You Could've Made Money Listening to Hedgeye's Howard Penney...

Market Week In Review: Notable Highlights from Hedgeye - p5

Fast-casual food chain Panera Bread reported earnings and lowered 2014 guidance which sent its shares tumbling 4.4% in after-hours trading Tuesday evening. Restaurant sector head Howard Penney nailed it. Click here to read more.


Poll of the Day: Will shares of Twitter ever surpass its record high of $74.73?

Market Week In Review: Notable Highlights from Hedgeye - t5

At the time of posting, an optimistic 61% of voters leaned YES; 38% NO. Click here to view the poll and results.



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