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So, Challenge Their God

“It was fortunate that the Commodore was not educated; for had he been, he would have been a god.”

-New York Sun, April, 1878


You know I love 19th century American Capitalist history. You know I love the epic story of Cornelius Vanderbilt too. The aforementioned quote comes from Part Three of The First Tycoon (pg 333). We should all thank our respective gods that Vanderbilt wasn’t an Ivy League economist.


Counter to popular Marxist beliefs in this country, the capitalists built the steamships and rails. They blew themselves up trying to make money plenty of other ways too – and they liked it. That’s the only way to learn and evolve – having a very real chance that you can fail.


Yesterday, Janet Yellen failed to convince me that she isn’t the ideologue that her partner in pulverizing America’s poor was. I don’t think she’s going to persuade anyone who doesn’t get paid by QE either. That’s at least 80% of the country, fyi.


Back to the Global Macro Grind

So, Challenge Their God - Titanic 03.31.2014 

No worries about the long-term in this country. When I am long dead, maybe my son, daughters, or theirs will have an opportunity to live an American life that doesn’t included an un-elected academic droning on like Charlie Brown’s teacher about how the Fed hasn’t perpetuated all-time highs in asset price inflation.


Cost of living in this country is bubbling up to all-time highs. And instead of talking about that yesterday, Yellen was more concerned about what we have been signaling now for months – a redo of a US #HousingSlowdown.


“So” (in classic groupthink lingo, she prefaced every Keynesian comment she made yesterday with that), instead of following the money, follow how her Policy To Inflate Housing Prices plays out from here:

  1. She starts to talk down Housing’s recovery and, in doing so, rhetorically un-tapers…
  2. As she un-tapers the hybrid tightening (tapering), the currency and bond markets look more and more right…
  3. US Dollar Down, Rates Down = Moar Commodity #InflationAcceleraring, and Moar Real #ConsumerSlowing

That’s right. As the cost of living ramps, 80-90% of this country has less dollars to spend. Inflation is real-time, whereas your wages (if you are lucky) adjust on a 1yr lag… and things like rent inflate on a 12-18 month lag to home price appreciation (US Home Prices were +12-13% nationally last year).


“So”, if you are in the 30% (and climbing) of Americans who rent (that’s 1/3 of the cost of living for the median US Consumer – see our Q2 Macro Themes slide deck on the math), Yellen’s narrative on how 0% “is good for housing” is really good for you, right? Yeah, a really good kick in the teeth.


David Einhorn challenged Yellen’s god (Bernanke) on this at a dinner recently (see yesterday’s Bloomberg story: “Einhorn Finds Dinner Chat With Bernanke Frightening”), “so”, take his word for it if you can’t take mine.


Einhorn is obviously a lot smarter than I, but he and the Thunder Bay Bear have a few things in common:

  1. We were raised in the 1970s (Nixon/Carter bipartisan support to Burn The Buck – i.e. The Policy To Inflate)
  2. We both learned linear Keynesian economics at Ivy League schools (Cornell and Yale)
  3. We both learned, as young hedge fund managers in 2000-2001, what Fed bubbles that pop look like when they are popping

“So”, call our paths experience… or something like that. But don’t call us the guys who were buying-the-damn-bubble-stocks on January 1st, 2014. By the way, Twitter (TWTR) is up +3% this morning. “So”, if you bought it JAN 1, you’re down 50%, and only need to be up another +98% from here to breakeven.


In hedgie land (the difference between a hedgie like Einhorn and a Hedgeye is that he runs money and I run my mouth), we call blowing up in names like Zooolilly (ZU) or Fireye (FEYE) or YELP! “drawdown risk.” For the high-multiple momentum bulls, that risk is #on.


“So”, the real reason why Yellen wouldn’t call anything a bubble yesterday – or why Bernanke didn’t call the all-time highs in Housing (2006-2007), Oil (2008), Gold (2011), Food (2012), Bonds (2012), or Junk (2014 – I think Janet called that “high yield”) bubbles, is that they are bubbles.


So, Challenge Their God - Chart of the Day


The only way to prevent a bubble from popping is to: A) not call it one and B) rhetorically signal why you should buy moarrr of it. Or so the Fed thinks. “So”, I think you should take your time observing this gong show and challenge The Fed’s ideological god by shorting the bubbles that start to pop, with impunity.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.56-2.65%


RUT 1101-1121

VIX 12.83-14.52

USD 79.01-79.59

EUR/USD 1.38-1.39

Pound 1.68-1.70


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer

Seeking Revenge

This note was originally published at 8am on April 24, 2014 for Hedgeye subscribers.

“If you prick us do we not bleed? If you tickle us do we not laugh? If you poison us do we not die? And if you wrong us shall we not revenge?”

-William Shakespeare


For those who called it a bubble, the tech sector is seeking its revenge this morning.   Two of the mighty horsemen of technology, namely Facebook and Apple, exceeded expectations and as a result the Nasdaq is trading 1.5% higher this morning according to the futures market.


Seeking Revenge - fba


One of our top contrarian sources, The Street (known as the street.com in the last tech bubble) actually predicted this rally.  Specifically, two days ago the headline on The Street was, “What Will Cause Tech Stocks to Plunge?”   Funnily enough,  Jim Cramer from The Street (retire already Jimbo!) actually critiqued one of the world’s top hedge funders yesterday for not making enough money on the social media swoon in March. 


But, enough talk of side shows and carnival barkers, we actually had some legitimate questions on yesterday’s Early Look on this idea of bubbles and an insightful subscriber from London emailed us back with the following question:


“I’m also not sure why you’re so convinced that we’re in a Social Media bubble. Some Internet stocks are highly valued sure but for the likes of FB and LNKD these are real businesses with major competitive advantages, why are you so bearish on these too?”


Our Internet Analyst Hesham Shaaban had a thoughtful response, which included the following:


“The reason why valuations are so high is because of elevated growth expectations, which you can see in the table below.  The market sees Social Media as one collective industry, assuming the rising tide will carry all ships, and historical growth is a sign of things to come. 


Social Media is not one industry.  These players have varying business models, revenue sources, and growth prospects.  We see at least 2 big losers in the group (TWTR and YELP), and once growth expectations come in, their multiples will collapse with it.”


In the table directly below, we’ve included a summary of the growth expectations and valuations of $FB, $LNKD, $TWTR, and $YELP.  Certainly if there is a bubble, it is not that all of these companies have broken business models (though we believe some do), but rather, as Shakespeare also said, that expectations are the root of all heartache.  (Email us at sales@hedgeye.com if you’d like to be added to an institutional trial of our internet research.)


Seeking Revenge - chart of day


Back to the Global Macro Grind...


One of our other favorite contrarian sources, Peter Tchir from TF Markets, actually made a great contrarian statement on Twitter the other day (you can follow him @tfmkts if you’d like access to the contrarian signal) when he tweeted that he wasn’t a bear on housing. 


Ironically, in many ways, the housing market and the principal supply-demand-price dynamics underneath it are rather straightforward.  Admittedly, in other, sometimes very mechanical ways, understanding the prevailing trends in the housing market can be challenging for the uninitiated or marginally interested.


So, what’s the current state of housing?


Across the 22 primary metrics we track as part of our housing compendium monitor, 15 have worsened sequentially and 18 have worsened from a trend perspective. 


Indeed, the housing data released over the last few days offered further support to our expectation for an intermediate term #HousingSlowdown as current demand metrics (Existing & New Home Sales) continued to wane, while mortgage application data is signaling a further deceleration in forward transaction activity.   


That the deceleration in activity is occurring in the face of both the positive shift in weather and declining interest rates makes it that much more notable.  


To quickly review this week’s data:

  • Mortgage Applications:  The composite MBA mortgage application index declined -3.3% WoW as the Purchase Applications and Refinance sub-indices hit new lows in YoY growth.  As it stands, Purchase Applications are down -19.3% off the May 2013 peak and -18.5% YoY while refinance activity is down -71% YoY!
  • Existing Home Sales:  Existing Home Sales declined -0.2% MoM and -8% YoY.  The March decline marks the 3rd month of  negative year-over-year growth and a third straight month of accelerating decline.  Sales were down across  all geographies with the West region again leading the declines
  • New Home Sales:  New Home sales declined -13% YoY, marking the 1st month of negative year-over-year growth since September of 2011.   The Northeast was the lone region recording a MoM increase in sales while year-over-year sales growth declined across all geographies.

So, the demand deceleration has been both significant, geographically pervasive and has extended through March / April – all of which confute the "it’s the weather" in isolation thesis.  


While weather probably exaggerated some of the underlying weakness to start the year, we continue to think that the collective impact of stagnant income growth, declining affordability, a reversal in institutional interest, and the implementation of QM regulations will serve to pressure housing demand over the intermediate term.  


Home price growth, which follows the slope of demand on ~18mo lag, will follow the demand deceleration.   Given that home prices have a very high correlation to discretionary spending and the U.S. economic output is 70% driven by the consumer, we see the slowdown in housing as a looming headwind for economic growth domestically.  Aye, there’s the rub!


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


UST 10yr Yield 2.59-2.73%

SPX 1836-1890

VIX 13.02-14.72

NatGas 4.63-4.80

Gold 1271-1309 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research

May 8, 2014

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TODAY’S S&P 500 SET-UP – May 8, 2014

As we look at today's setup for the S&P 500, the range is 29 points or 0.92% downside to 1861 and 0.63% upside to 1890.                                  













  • YIELD CURVE: 2.19 from 2.22
  • VIX closed at 13.4 1 day percent change of -2.90%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: BOE benchmark rate decision; est. 0.5% (prior 0.5%)
  • 7:45am: ECB benchmark interest rates decision; est. 0.25% (prior 0.25%)
  • 8:30am: ECB’S Draghi holds press conf. after rate decision, see LIVE <GO>
  • 8:30am: Initial Jobless Claims, May 3, est. 325k (prior 344k)
  • Continuing Claims, April 26, est. 2.758m (prior 2.771m)
  • 9:45am: Bloomberg Consumer Comfort, May 4
  • 8:am: Fed’s Plosser speaks in New York
  • 8:30am: ECB’s Draghi holds news conference in Brussels
  • 9:25am: Fed’s Evans speaks at Chicago banking conference
  • 9:30am: Fed’s Tarullo speaks at Chicago banking conference
  • 9:30am: Fed’s Yellen testifies to Senate Budget Committee
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 2pm: Fed’s Bullard speaks at conference in St. Louis


    • 9:30am: Yellen testifies before Senate Budget Cmte
    • 9:30am: Time Warner Cable Chairman Marcus, Comcast EVP Cohen at House Judiciary Cmte on merger
    • 10am: Treasury’s Lew annual testimony on intl finance system before House Financial Services Cmte
    • 10am: Senate Health and Education Cmte hears from HHS Sec. nominee Sylvia Burwell
    • 1:15pm: Agriculture Sec. Vilsack announces “historic” USDA support for local food systems on media call
    • U.S. ELECTION WRAP: Chamber Beats Tea Party in N.C.; Ad Buys


  • Fed Chair Janet Yellen testifies before Senate Budget Cmte
  • FOMC’s Evans, Plosser, Tarullo to speak in Chicago, New York
  • Barclays plans to cut 7,000 jobs at investment bank by 2016
  • AT&T said to hold talks with DirecTV over acquistion
  • Montebourg prefers Siemens alliance over GE takeover: FAZ
  • JPMorgan wins dismissal of MBIA suit; case may be refiled
  • Web cos. see grave threat with FCC’s fast-lane plan for ISPs
  • Yahoo CEO sees more web traffic via mobile vs PC by end-2014
  • Ford to buy back $1.8b in stock to offset grants, converts
  • Samsung replaces mobile design execs. on flagging phone sales
  • UPS seen matching FedEx’s size-based pricing formula
  • Deutsche Telekom using cash for U.S. unit affects earnings
  • Sheldon Adelson ready to put fortune against Internet gambling
  • Macau casino cos. drop on capital-outflow restrictions report
  • Cogent’s Schaeffer says Comcast-TW merger will mean mkt abuse
  • April U.S. retail sales likely to be ‘good, not great’
  • ECB will keep monetary policy unchanged, economists say
  • U.S. disputes Putin claim of withdrawal from Ukraine’s border
  • House Foreign Affairs Cmte holds hearing on Russia, Ukraine


    • AES (AES) 6am, $0.27
    • AMC Networks (AMCX) 7am, $1.14
    • Ameren (AEE) 8am, $0.32
    • American Realty Capital (ARCP) 6am, ($0.11)
    • Apache (APA) 8am, $1.60 - Preview
    • Athabasca Oil (ATH CN) 6am, (C$0.05)
    • Cablevision Systems (CVC) 8:30am, $0.05 - Preview
    • Canadian Tire (CTC/A CN) 7:46am, C$0.93
    • Crescent Point Energy (CPG CN) 8am, $0.32 - Preview
    • DISH Network (DISH) 6:01am, $0.44 - Preview
    • Fortis (FTS CN) 7am, C$0.64
    • Great-West Lifeco (GWO CN) 12:44pm, C$0.60 - Preview
    • IntercontinentalExchange Group (ICE) 7:30am, $2.61
    • Liberty Interactive (LINTA) 7:30am, $0.24
    • Liberty Media (LMCA) 7:30am, $0.70
    • Louisiana-Pacific (LPX) 8am, ($0.06)
    • Mallinckrodt PLC (MNK) 7am, $0.77
    • Nationstar Mortgage (NSM) 6am, $0.74
    • Priceline Group/The (PCLN) 7am, $6.84
    • Quebecor (QBR/B CN) 6am, C$0.30
    • Regeneron Pharmaceuticals (REGN) 6:30am, $2.27 - Preview
    • Sarepta Therapeutics (SRPT) 7am, ($0.81)
    • Scripps Networks Interactive I (SNI) 7am, $0.81
    • SNC-Lavalin Group (SNC CN) 8:27am, C$0.46
    • SunEdison (SUNE) 7am, ($0.18)
    • Synta Pharmaceuticals (SNTA) 6:45am, ($0.30)
    • TELUS (T CN) 8:30am, C$0.61 - Preview
    • Teradata (TDC) 6:55am, $0.47
    • Valeant Pharmaceuticals (VRX CN) 6am, $1.72 - Preview
    • Visteon (VC) 6am, $0.60
    • Wendy’s Co/The (WEN) 7:30am, $0.05 - Preview
    • WhiteWave Foods (WWAV) 6am, $0.19 - Preview
    • Windstream Holdings (WIN) 6:15am, $0.09
    • WP Carey (WPC) 8am, $0.62


    • AuRico Gold (AUQ CN) 4:37pm, ($0.02)
    • Canadian Natural Resources (CNQ CN) 5pm, C$0.80 - Preview
    • CBS (CBS) 4:01pm, $0.74
    • Computer Sciences (CSC) 4:15pm, $1.04
    • Credicorp (BAP) 6pm, $2.47
    • Darling International (DAR) 4:30pm, $0.26
    • Fifth Street Finance (FSC) 4:37pm, $0.26
    • Great Plains Energy (GXP) 5:10pm, $0.19
    • Hain Celestial Group/The (HAIN) 4pm, $0.86
    • Jazz Pharmaceuticals Plc (JAZZ) 4:05pm, $1.87
    • Medivation (MDVN) 4:10pm, ($0.08)
    • Monster Beverage (MNST) 4:05pm, $0.49
    • News Corp (NWSA) 4:05pm, $0.03
    • Nuance Communications (NUAN) 4:01pm, $0.23
    • Pembina Pipeline (PPL CN) 4:05pm, C$0.35
    • Salix Pharmaceuticals (SLXP) 4:01pm, $0.91
    • Scientific Games (SGMS) 4:12pm, $0.03
    • Silver Wheaton (SLW CN) 5:06pm, $0.22
    • Spectrum Pharmaceuticals (SPPI) 4pm, ($0.19)
    • Symantec (SYMC) 4:01pm, $0.42
    • Ubiquiti Networks (UBNT) 4:05pm, $0.49
    • Zogenix (ZGNX) 4:01pm, ($0.15)


  • Nickel at Two-Year High as Vale Suspension Fuels Supply Concern
  • WTI Falls Most in Three Days After Supplies Drop; Brent Declines
  • Wheat Surplus Eases Crop Risks From Ukraine to U.S.: Commodities
  • World Food Prices Fall as Dairy to Vegetable Oil Costs Drop
  • Gold Trades Near This Week’s Low as Yellen Weighed With Ukraine
  • Wheat Extends Drop Before USDA Report as Ukraine Shipments Climb
  • Coffee Drops as Rain Seen Helping Vietnamese Crop; Cocoa Falls
  • World Ore Glut Outweighs Slowest China Growth Since ’90: Freight
  • China Copper, Iron Ore Purchases Climb as Total Imports Increase
  • Oil Industry Risks $1.1 Trillion of Investors’ Cash, Study Says
  • Mine M&A May Double as China Returns in Coal to Copper Deals
  • World Corn Harvest Seen Falling in 2014-15 by AMIS on U.S. Crop
  • MORE: Russia’s Nickel Exports Declined 0.8% in 1Q as Values Fell
  • Sugar Exports From India Slowing as Subsidy Delay Deters Buyers

























The Hedgeye Macro Team














Poll of the Day Recap: 55% Say $TWTR's Next Stop is $22/Share

Takeaway: It's been tough sledding for TWTR bulls.

Twitter shares got totally shellacked yesterday, dropping almost 18% after its IPO lock-up period ended. Shares finished trading around $32. Today hasn't fared much better for Twitter bulls with shares off around 4%. TWTR is down a remarkable 27% over the last five trading days.


We wanted to know where you thought shares were headed next. So we asked your opinion in today’s poll: What’s the next stop for Twitter? $22/share or $42/share?

Poll of the Day Recap: 55% Say $TWTR's Next Stop is $22/Share - Twitter cartoon 5.7.2014

At the time of this post, 55% said Twitter will soon be trading at $22; 45% said $42.

Of the majority who said trading would drop to $22/share, voters had these diverse explanations:

  • “In this type of market environment, where mo mo gets killed, $22 is more likely than $42. Especially, after reading some comments from people that voted $42, they seem still are long this thing.”
  • “It'll follow the same pattern as Facebook; go down (as it has), but eventually climb back up.  Though the product is mature, the business still isn't, but Dick Costolo will figure it out.”
  • “It's going to $15.”
  • “Both prices look arbitrary, but the stock price looks likely to break down, making new lows.  Longer term, I would expect it to stabilize at higher prices. This is a real business model and probably still has growth ahead.”

Here’s what some voters who think Twitter shares are headed to $42/share next (if not more) had to say:

  • “I am long of Twitter in hashtag terms.I close my eyes and cross one finger over the other and wish upon this falling star. It’s a process.”
  • “The share price will settle around $45. That seems to be a fair price.”
  • “To call this a ‘bubble’ is non-sense.  Most investors lived through the bubble and this is not the same as 1999.  To be temporarily over-valued on hype does not necessarily equal a bubble.  Twitter will create a real and sustainable business out of this; one that'll exceed $42 at some point in the next 18-24 months.
  • The phoenix will rise again.  It needed a serious correction (which it got), and it'll probably dip a little further, but this will go back up to $42 in the next year or two.  Getting this stock in the mid-20's would be perfect, even if it dipped into the low 20's for a period thereafter.  They have a great management team, and lots more potential for the product (and revenue).


KSS Short - Why JCP is the Risk (And Opportunity)

Takeaway: We will be hosting a call titled KSS Short: Why JCP is the Risk (And Opportunity) on Tuesday May 13th at 1pm ET.

We will be hosting a call titled KSS Short: Why JCP is the Risk (And Opportunity) on Tuesday, May 13th at 1:00pm ET to discuss our current short thesis on KSS. We will detail some of the underappreciated dynamics that currently exist between Kohl's and JCP.   


KSS Short - Why JCP is the Risk (And Opportunity) - KSS JCP Call




A) Results of our latest consumer survey on department stores
B) Explore incremental trends in e-commerce
C) A deep dive into each company's real estate profile examining where the greatest risk/opportunity exists for store closure and subsequent share shifts



  • One of the biggest risks to being short KSS is JCP shuttering a third of its stores
    • What is the typical market for a JCP store closure (based on historical precedents)?
    • How many more of those markets exist?
    • What does KSS overlap look like in these markets?
    • What is the revenue opportunity for KSS?
  • Consumer Survey updates on the rate at which sales are coming back to JCP, and which retailers are winning/losing
  • Visitation trends at each department store and how they are changing sequentially
  • Analysis of recent e-commerce traffic on an absolute level for KSS and JCP, but also relative to competitors like M, JWN, DDS, TGT, SHLD and others
  • Why we think that dot.com is a risk for KSS on a longer term basis


  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 294741#
  • Materials: CLICK HERE

Please contact for more information.

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