Growth Slowing, Fast

Client Talking Points


Get the US Dollar right (i.e. get the Yen/USD right) and you’re getting the Nikkei right – with the USD smoked to a fresh year-to-date low yesterday, it was no surprise to see Japanese stocks rocked for a -2.9% Nikkei loss overnight = down -13.2% YTD.

10YR (UST)

The yield bounced (2 beeps) then failed to 2.58%, so the TAIL risk (to the downside for both yields and consensus growth expectations) remains on. Yesterday’s Core Logic (US Housing) price decline (2nd derive) was flat out nasty – both US #ConsumerSlowing and #HousingSlowdown are currently in our Top 3 Macro Themes.


This isn’t the SP500. This is growth expectations slowing, faster – RUT is down -8.3% from its all-time-bubble-high and the high multiple stocks are down a lot more than that. Our risk management playbook says when A) inflation accelerates and B) growth slows, you get equity multiple compression (bond multiple expansion).

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


2 most bearish TREND risk S&P Sectors in our model = Consumer $XLY and Financials $XLF @KeithMcCullough


"Today I will do what others won't, so tomorrow I can accomplish what others can't." - Jerry Rice


Most of the people choosing health plans under the Affordable Care Act — about 80% — are paying their initial premiums as required for coverage to take effect. But the health insurance industry said the total of eight million people who signed up included “many duplicate enrollments” for consumers who tried to enroll more than once because of problems on the website. (New York Times)

Pasta or Burgers?

“Do you want a hamburger or pasta for dinner?”

- To my toddlers, 5/6/14


Parenting is a delicate art of subtle, positive perturbation.    


Many times, it’s what you don’t say that matters.   And much like investment and macro narratives, it’s very much about the #Frame-up.


For the non-parents, the key to coaxing positive behaviors often lies in framing up the optionality.   As it relates to the quote above, note that I didn’t say, “do you want dinner?” or “are you hungry?”.  


Pasta or Burgers? - spaghettibaby


The simple goal of exhausting, thrice daily adventures in toddler nutrition is usually to just get them to eat…something.  


By offering two options in the manner above you maintain the illusion of choice but, in reality, it’s the same choice.  To a fledgling mind, if not eating is not presented as a choice, it doesn’t exist as an option.


That little psycho-persuasive device isn’t full-proof, but it should be a staple in any multi-factor, volatility sensitive parenting model. 


Back to the Global Macro Grind


If there’s a quasi-relevant take-away from that intro perhaps it’s that the act of getting older doesn’t immunize one from the trappings of effective framing.  Indeed, lawyering and political strategy are critically dependent on that reality.


Q:  Would you rather invest in stocks or housing here?  


If you answered #Neither to that ‘framed-up’ question,  you get it.


Let’s stick with housing and extend this Socratic dialogue we’ve got going….


Q:  The Case-Shiller HPI data came out last week, the Corelogic HPI data came out yesterday, and the NAHB HMI data comes out on the 15th.  What period do those respective data releases cover?     


A:  NAHB data = May, Corelogic = April, Case-Shiller = February


Q: Which one should you care about?


Everyone cares about Case-Shiller right?  After all, Professor Shiller is a Nobel prize winner, the media makes a big deal about the indicator every month and analysts and pundits use it as the primary gauge of the state of housing.


In fact, the Case-Shiller HPI is one of the most lagging housing indicators there is.  The Index measures the change in market value of residential real estate across 20 defined MSA’s and is calculated as a three month moving average. 


So, last week’s release represented average home price gains over the Dec/Jan/Feb period.  In other words, while we are getting the (real-time) Corelogic Home price data for April,  Case-Shiller enlightened us as to housing’s temperature back in January.


The simple reality is that unless it’s central to your core coverage or positioning, and even if it is, keeping tabs on the breadth of housing metrics (we have 22 in our core model), the prevailing trends, and notable shifts on a monthly basis can be time intensive and onerous.  


We think we’ve solved for that onerosity with the forthcoming launch of comprehensive, but hyper-consumable, housing coverage led by Josh Steiner, our head of financials research, and myself.   More on that to come. 


If you’ve followed us with any consistency you’re aware that after getting explicitly bullish on housing for the better part of a year beginning in 4Q12, we turned increasingly bearish at the start of this year and elevated #HousingSlowdown to a top macro theme for 2Q14. 


Indeed, the reported housing data since our themes call has reflected continued deterioration and the demand data released over the last few days has offered further positive confirmation to our expectation for an intermediate term slowdown.   


Corelogic HPI:  Corelogic home price data released yesterday showed home prices decelerating -70bps in March to +11.1% YoY.  More notably, the preliminary April estimate reflects another, significant sequential deceleration of  -190 bps to +9.2%.  If the preliminary estimate holds it will be the slowest rate of growth since December of 2012 and the largest sequential deceleration in growth since January 2007.


Mortgage Purchase Applications:  After last week’s decline of -5.9%, this morning’s data showed the composite MBA Mortgage Application Index bouncing +5.3% WoW.  The Refinance Index made another new low in YoY growth, declining -1.4% sequentially to -75.2% YoY!  The Purchase Applications Index was up +8.9% WoW, but note that the bounced came off its worst growth number of the year last week and purchase demand remains down -16% YoY.


It’s worth repeating that the demand deceleration has been geographically pervasive and has persisted in the face of both the positive inflection in the weather and declining interest rates.


Pasta or Burgers? - Corelogic


So, the housing slowdown has already commenced – what do you do with that?


At the individual security level, one way we’ve played housing from the short side has been via the mortgage services.   


The Hedgeye Financials team added NSM to our Best Ideas list on the short side on 1/8/2014 (after being positive and long the name from 2/27/13 to 9/27/13).  It’s down -14.5% since Jan 8th.  We think there is further downside.


Below is a bit of an analytical teaser but it captures a few of the central tenets of our short case on the company.  If you’d like to discuss the idea further please contact   


NSM: BEST IDEA SHORT -  The core of our argument is that when you figure out what servicing a single loan is worth and you multiply that by the number of loans NSM services you arrive nowhere near a valuation consistent with where NSM shares are currently trading


Originations = Great Expectations. We're truly confounded by guidance vs reality in the company's originations business. The company earned 14 cents in 3Q13 originating mortgages. In the fourth quarter it lost 80 cents originating mortgages, and that's on a core basis. The company lost $131-136 million on a pre-tax basis, which we'll split the difference on and call a $133.5 million PT loss. After tax, this works out to $82.8 million. NSM identified $10 million in one-time expenses after-tax. If we add that back and divide by 90.4 million shares, we get to a loss of 80 cents (core) in the quarter from originations. Moreover, the company indicates that it has identified the opportunity  to reduce expenses in the originations business by $15 million per quarter. This works out to 10 cents per quarter. My question is a simple one. How does a business that made 14 cents in 3Q13 and lost 80 cents in 4Q13 produce $1.35 - $1.80 in FY14 earnings (that's guidance) by identifying 10 cents in quarterly expense savings?


#CREDIBILITY: Fool Me Once .... So, to recap, the company started 2013 (post-BofA) with a guidance midpoint of $4.02, raised that to $4.40, lowered it to $2.88 and ultimately did $2.13 (or less).


Now, to expeditiously bring this food and kid themed missive full-circle…..


Q: What do you call spaghetti in disguise?  

A:  An Impasta!


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


UST 10yr Yield 2.56-2.68%


RUT 1101-1143

VIX 12.91-14.72
EUR/USD 1.37-1.39

Gold 1 


Happy Humpday Hunting!


Christian B. Drake


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Accepting Little Bubbles

This note was originally published at 8am on April 23, 2014 for Hedgeye subscribers.

"For a very long time everybody refuses and then almost without a pause, almost everybody accepts."

-Gertrude Stein


That’s the closing quote to David Einhorn’s quarterly letter for the 1st quarter of 2014. Fully loaded with social bubbles and burrito gas, it is vintage Greenlight Capital – self effacing and straight up:


Our longs were modestly profitable, our shorts lost a bit more than we made on our longs, and macro lost a little. The net result was a small loss in a market where some indices were up a little and others were down a little.”


In the March-April performance period, down a lot more than a little is how I’d characterize some of these social media and biotech bubble stocks. Having spent a lot of time with hedge fund investors, I don’t think Einhorn’s view on some of these balloons losing 90% of their value is anywhere in the area code of consensus either. Make no mistake, lots of hedgies are long these things.


Accepting Little Bubbles - bubbles


Back to the Global Macro Grind


There is a lot more than a little hedge fund supply in the marketplace today. HFR (Hedge Fund Research) confirmed that in Q1 of 2014, hedge fund assets under management hit a new peak of $2.7 Trillion. Not ironically, as hedge fund assets under management peak, performance starts to underperform a little too (Q1 2014 was the worst performance quarter for the industry since Q1 2008).


This was one of the main reasons why I was bearish on the US stock market in Q1 of 2008 (when Hedge Fund AUM peaked last time). Too many mo mo funds were long of the same names with the same catalysts. Back then it was an LBO “takeout” bubble. In 2000, it was a tech bubble. Today you can tell me how many funds are long Yahoo (YHOO) for the Alibaba IPO, but that looks a little bubbly too.


To be clear, being long of bubbles can be cool (as long as they don’t start to go down more than a little). Once they start to go down a lot, there’s this thing called draw-down risk that most hedge funds aren’t allowed to let ride anymore. Having toiled as a PM at some major US hedge funds in my day, I can tell you the only long-term strategy to survival is not getting smoked when everyone else does.


Einhorn rarely gets smoked.


Technically, a hedge fund should be hedged. But the super secret reality about the 2 and 20 business (or whatever Stevie was running at 5 and 50 back in the day) is that a lot of hedge funds get smoked, not when the market goes up – but when it goes down.


Yep. I wrote that. Been there, done that too. I’ve made every mistake you can make.


So, are you a consensus hedge fund or one like Greenlight who is willing to give up a little on the short side in order to make a lot? This common quest for the almighty alpha (on the short side) is called #asymmetry. And I like it.


Enough about what I think about this profession – I’m only a battered and bruised product of it. Here are some of the favorite quotes my teammates pulled from Einhorn’s quarterly letter. In terms of both style and substance, they are timeless:

  1. “The corollary to ‘twice a silly price is not twice as silly’ is that when the prices reconnect to traditional valuation methods, the de-rating can be substantial.”
  2. “Our criteria for selecting stocks for the bubble basket is that we estimate there to be at least 90% downside for each stock if and when the market reapplies traditional valuations to these stocks.”
  3. “There is a huge gap between the bubble price and the point where disciplined growth investors (let alone value investors) become interested buyers.”

Yes, it’s my entire team’s job to read, write, and learn about how the best players in this game think. The alternative to that would be depending on what I think (which would easily be the most dangerous thing for our business over time).


So, if you run a hedge fund and you’re having a tougher time than last year out there, don’t get upset with me writing about it. Think about the why and learn/do something about it.


Accepting that little bubbles are going to start to pop bigger ones (like, say, the US stock market’s all-time high price) is a process, not a point. While I agree with David that “what is uncertain is how much further the bubble can expand, and what might pop it” I don’t think the “what” is a silver bullet that can be legally obtained.


Having survived (made $ at a hedge fund in down tapes - 2000, 2001, 2002) the Tech Bubble, The LBO and Oil Bubbles (2008), and The Gold and Bond Bubbles (2011-2012), what I have learned about risk managing these suckers is quite simple:


First, they start to make lower-highs. Then the volume on down days eclipses the volume on the bounces (up days to lower-highs)… then bearish catalysts start to pile up… then what was happening slowly starts to happen more than a little – it happens all at once.


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


Nasdaq 3974-4203

EUR/USD 1.37-1.39

Brent Oil 108.48-110.79

Natural Gas 4.62-4.79

Gold 1277-1310

Corn 4.94-5.12


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Accepting Little Bubbles - Chart of the Day


TODAY’S S&P 500 SET-UP – May 7, 2014

As we look at today's setup for the S&P 500, the range is 21 points or 0.63% downside to 1856 and 0.50% upside to 1877.                                                      













  • YIELD CURVE: 2.17 from 2.17
  • VIX closed at 13.8 1 day percent change of 3.84%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, May 2 (prior -5.9%)
  • 8:30am: Non-farm Productivity, 1Q prelim, est. -1.2% (pr 1.8%)
  • 10:00am: Fed’s Yellen testifies to Joint Economic Cmte
  • 10:30am: DOE Energy Inventories
  • 3pm: Consumer Credit, March, est. $15.5b (prior $16.5b)


    • President Obama surveys tornado, storm damage in Ark., then travels to L.A. for DSCC/DCCC fundraiser
    • 9am: U.S. Chamber of Commerce hosts economic briefing, roundtable
    • 10am: House Armed Services Cmte considers Defense Authorization Act
    • 10:30am: House Ways and Means subcmte hears from IRS Commissioner John Koskinen on 2014 tax return filing season
    • 11am: Ukrainian presidential candidate Valery Konovalyuk holds news conf. to discuss affairs in Ukraine
    • 2:30pm: Senate Banking subcmte hearing on job creation


  • Fed Chair Yellen to speak before Joint Economic Committee
  • U.S. said to seek guilty plea from Credit Suisse on taxes
  • Alibaba files for IPO with initial amount $1b; may seek $20b
  • Co.’s partners keep control with U.S. listing over Hong Kong
  • Prospectus shows Alibaba profitability vs Amazon
  • Encana planning to hold conf. call pre-mkt today
  • Alstom cancels div., delays guidance as GE, Siemens vie
  • Education Management must face fraud lawsuit, judge says
  • Siemens buys Rolls Royce gas turbine, compressor business
  • Microsoft said to use Qualcomm chips in smaller tablet
  • Judge won’t clarify Lockheed-Boeing purchase ban: Reuters
  • Liberty Global says EU to likely probe purchase of Ziggo
  • Kraft sees Vermont GMO law as bellwether in food labeling


    • Allergan (AGN) 9am, $1.13 - Preview
    • Allete (ALE) 8:30am, $0.85
    • AOL (AOL) 7am, $0.45
    • Aqua America (WTR) 7:30am, $0.25
    • Ariad Pharmaceuticals (ARIA) 7:35am, $(0.32)
    • Brookfield Asset Mgmt (BAM/A CN) 7:01am, $0.38
    • Chesapeake Energy (CHK) 7:01am, $0.48 - Preview
    • Cognizant Technology (CTSH) 6am, $0.59 - Preview
    • Devon Energy (DVN) 8am, $1.26 - Preview
    • Duke Energy (DUK) 7am, $1.12
    • Dynegy (DYN) 7:30am, $(0.15)
    • Enbridge (ENB CN) 7am, C$0.57 - Preview
    • Hertz Global (HTZ) 6am, $0.09
    • Humana (HUM) 6am, $1.96
    • Husky Energy (HSE CN) 7am, C$0.61 - Preview
    • Intact Financial (IFC CN) 6am, C$1.16
    • Lamar Advertising (LAMR) 6am, $0.06
    • Molson Coors Brewing (TAP) 7:30am, $0.35
    • Mondelez Intl (MDLZ) 7am, $0.35 - Preview
    • Pepco (POM) 6:03am, $0.24
    • Perrigo (PRGO) 7:42am, $1.51
    • Rockwood (ROC) 6:30am, $0.44
    • Sinclair Broadcast (SBGI) 7:30am, $0.21
    • Spectra Energy (SE) 6:30am, $0.51
    • Tim Hortons (THI CN) 7:30am, C$0.68
    • Twenty-First Century Fox (FOXA) 8am, $0.35 - Preview


    • American Water Works (AWK) 4:05pm, $0.35
    • AmeriGas Partners (APU) 4:45pm, $2.32
    • Annaly Capital Mgmt (NLY) 4:05pm, $0.27
    • Antero Resources (AR) 4:05pm, $0.34
    • Avis Budget (CAR) 4:15pm, $0.08
    • Caesars Entertainment (CZR) 4pm, $(1.33)
    • CenturyLink (CTL) 4:07pm, $0.61
    • CF Industries (CF) 4:05pm, $4.52 - Preview
    • Continental Resources (CLR) 6:12pm, $1.53
    • Corrections Corp. of America (CXW) 4:15pm, $0.43
    • Envision Healthcare (EVHC) 4:05pm, $0.18
    • Furiex Pharmaceuticals (FURX) 4:05pm, $0.22
    • Globalstar (GSAT) 4:05pm, $(0.04)
    • Gulfport Energy (GPOR) 4:05pm, $0.21
    • Halcon Resources (HK) 4:15pm, $0.02
    • Keurig Green Mountain (GMCR) 4pm, $0.94 - Preview
    • Kimco Realty (KIM) 4:01pm, $0.14
    • Kinross Gold (K CN) 5pm, $0.03 - Preview
    • McDermott Intl (MDR) 4:10pm, $(0.12)
    • Nektar Therapeutics (NKTR) 4:15pm, $(0.38)
    • Novavax (NVAX) 4:10pm, $(0.07)
    • Plains All American Pipeline (PAA) 4:05pm, $0.65
    • Prudential Financial (PRU) 4:07pm, $2.25
    • QEP Resources (QEP) 4:05pm, $0.24
    • Regency Centers (REG) 4:30pm, $0.15
    • Sanchez Energy (SN) 5:44pm, $0.25
    • SandRidge Energy (SD) 4:05pm, $0.03
    • Sotheby’s (BID) 4pm, $(0.17)
    • Sprouts Farmers Market (SFM) 4:05pm, $0.20
    • Tesla Motors (TSLA) 4:01pm, $0.07 - Preview
    • Transocean (RIG) 4:39pm, $1.02
    • TW Telecom (TWTC) 4:46pm, $0.10
    • UGI (UGI) 4:45pm, $1.58
    • Unum (UNM) 4pm, $0.86
    • Zillow (Z) 4:30pm, $(0.08)


  • Iron Ore Glut Spurred by Vale, BHP Seen Shuttering China Miners
  • WTI Rises for Second Day as Crude Stockpiles Drop; Brent Climbs
  • De Beers Diamond Prices Rising as Anglo Chases Goal: Commodities
  • Copper Declines as Factory Orders Unexpectedly Slump in Germany
  • Gold Rises on Ukraine as Palladium Near Highest Price Since 2011
  • Soybeans Drop Before USDA Report Set to Show Ample World Supply
  • Cocoa Falls With ‘Good’ West African Crops Seen; Sugar Declines
  • Global Steel Markets Are All Systems Go as Profits Soar
  • Florida’s Fuel Dwindling as State Braces for Hurricanes: Energy
  • Europe Seen Limited in Options to Reduce Russian Gas Reliance
  • Patchy Power Challenges Indonesia Minerals Goal: Southeast Asia
  • Coffee Consumption in Indonesia Seen Climbing to Record in 2016
  • China Copper Imports May Be Subdued as Arbitrage Window Shut
  • Steel Rebar Falls to Record Low in Shanghai as Output Surges

























The Hedgeye Macro Team














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