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Client Talking Points

UST 10YR

The yield finally crashes after our TAIL riskline of 2.61% on the 10-year signaled the point of entropy was pending. I see nothing but backpedaling from people who are still positioned for what they should have been last year (#RatesRising). Consensus needs to come our way as inflation slows real growth.

FINANCIALS (XLF)

Back into the red for 2014 year-to-date, and they should be – Down Rates = Yield Spread Compression = Financials Down. It still looks very 2011 stagflation to me – as inflation slows growth, you get equity market multiple compression (and bond market multiple expansion).

COMMODITIES

The CRB Commodities Index is up +9.6% year-to-date versus Growth (Russell2000) down -5.9%. #timestamped. Meanwhile, if it ain’t broke, don’t change it – stay with the long inflation, short US growth program.

Asset Allocation

CASH 20% US EQUITIES 6%
INTL EQUITIES 8% COMMODITIES 22%
FIXED INCOME 22% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
HOLX

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.

OC

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.

DRI

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

TWEET OF THE DAY

Portugal -1.6% looking more and more like the roundtrip Greek stocks have been @KeithMcCullough

QUOTE OF THE DAY

"If opportunity doesn't knock, build a door." - Milton Berle

STAT OF THE DAY

Swiss voters go to the polls this weekend in a nationwide referendum on whether to introduce what would be the highest minimum wage anywhere in the world. If approved, employers would be obliged to pay workers a monthly minimum of 4,000 Swiss francs ($4,470) - which works out as just over $53,600 a year. (BBC)



Polarizing

“Only the wisest and stupidest of men never change.”

  -Confucius

 

I’ve been on vacation for most of the last two weeks.  My first child is projected to be born on June 1st , so I figured it was best to take vacation now.   This was based on the sage advice from some of the more seasoned fathers at Hedgeye.

 

I’m not always good at unplugging on vacation, but this time I did a decent job. As I was getting caught up last night, the most interesting article I read was from Business Insider.  It seems while I was gone they anointed Hedgeye the most polarizing firm in finance! 

 

Polarizing - polarizing

 

I have to admit, even though Business Insider’s journalistic standards aren’t the highest, I thought that was kind of cool.   When we started the firm more than six years ago, our sole intention was to shake things up.  And it seems we have done so.  So far, at least, mission accomplished.

 

Back to the Global Macro Grind...

 

So, the big question now that I’m back in the proverbial saddle is: what did I miss? Based on the return of the SPY, I’d say not too much.  When I left for vacation on May 5th, the S&P 500 closed at 1,884.2. Yesterday it closed at 1870.85.  For those that don’t have their HP-12C handy, that is a negative return of roughly -0.7%.  Nothing to write home about to be sure. 

 

Thankfully, my colleagues were keeping busy despite the lackluster performance in U.S. equities.  Over the last two weeks on the idea side, we added two longs to our Best Idea list: Bob Evans Farms (BOBE) and Och-Ziff (OZM).  Both ideas, though certainly very different, are very compelling.

 

Bob Evans Farms, as many of you may know, is a smallish cap restaurant company.   Although our Restaurant Sector Head, the sage Howard Penney, has been more cautious than not on his sector, BOBE is one company he likes on the long side.  

 

According to Howard the thesis is as follows:

 

  • STODGY, OLD COMPANY: As you know, we are big supporters of change at DRI and feel that BOBE is in a very similar situation. BOBE is a stodgy, old company that has flown under the radar for far too long. It has a history of mismanagement evidenced by flawed strategic rationale, excessively bloated cost structures and severe underperformance relative to peers. Its poor operating performance presents a tremendous opportunity.
  • UNLOCKING SIGNIFICANT SHAREHOLDER VALUE: We believe Sandell has identified significant, largely feasible, opportunities to enhance shareholder value. In our view, the opportunities are endless. More particularly, we see tremendous upside value in separating the foods business from the restaurant business, transitioning to an asset light model to capitalize on its vast real estate holdings, and attacking the middle of the P&L.
  • THE OTHER SIDE OF THE TRADE: We have a ton of respect for Sandell and the work they’ve done. In fact, we believe that, over time, they have uncovered far more than they originally set out to. As a result, there is now an opportunity for them to capture bountiful, low hanging fruit that will immediately impact the company for the better. We believe in Sandell’s resolve and while the street is seemingly betting against them, we’ll gladly take the other side of the trade.

 

I’m not going to steal all of Howard’s thunder, but if you’d like more details, please email .  Incidentally, another of Howard’s top ideas, Darden (DRI) announced this morning that they are selling one of their divisions, Red Lobster, to Golden Gate Capital for $2.1 billion.  Oh snap!

 

More broadly though, and other than a few alpha generating idea, those of us that vacationed for the first half of May didn’t miss a whole lot from return perspective.  In the Chart of the Day below, I’ve highlighted our daily U.S. quant screen and for the month-to-date the worst performing SP500 sector is the Utilities, which is down 2.78%.  Meanwhile, the best performing sector is Materials, which is up +0.13%. 

 

On some level, that is actually new.  Specifically, in May the worst performing sector is actually the best performing sector on the year.  Currently, Utilities are up an impressive 10.6% for the year-to-date.  Who would’ve thunk it?

 

Switching gears, on the global macro front this morning , the United Nations released a 37-page report on the human rights situation in the eastern Ukraine.  On a serious note, that is actually not news, but does exemplify the ineffectiveness of the U.N. and its ability to deal with Vladimir Putin and the gong show in the Ukraine.   But, at negative -13.4% on the year, the Russian stock market seems to be dealing with him appropriately. 

 

Meanwhile, on the bond front, the bears seemingly just won’t give up.  According to Bloomberg, the ProShares Ultra 20+ Year Treasury ETF (TBT) has seen inflows of 21.6% this year.   This comes despite the ETF falling almost 21.6%.  In addition, there are 1.12MM short contracts of treasury futures on the Chicago Board of Trade, which compares to the five year average of 713K. Further, a recent survey of economists expects the 10-year yields to rise 75 basis points by year end.  Didn’t know what consensus in Treasury land was, now you know! 

 

And as our nemesis John Maynard Keynes famously said:

 

“Markets can remain irrational longer than you can remain solvent.”

 

Indeed.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.49%-2.61%

SPX 1

RUT 1086-1112

VIX 12.14-14.52

USD 79.11-80.26

Gold 1 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

 

Polarizing - DQ 051514


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I'm Boorish!

This note was originally published at 8am on May 02, 2014 for Hedgeye subscribers.

“He is illiterate and boorish; austere and offensive.”

-The Mercantile Agency, May 1853

 

In some of Americas most formative years of free market capitalism and innovation, the authorities of perceived wisdom wrote that about one of the greatest wealth creators in US history – Cornelius Vanderbilt.

 

His response:

 

It is said that I am always in opposition, and that the same spirit of resistance which has often hitherto governed my action has influenced it now… I have only to say that this is the same spirit which founded this great Republic.” (The First Tycoon, pg 161)

 

And that’s all the man needed to say about that.

 

Back to the Global Macro Grind

 

In this day and age, the more real-time market illiterate a politician is, the more offensive (to me at least) he becomes. Other than the brilliant financial market mind that is Maxine Waters, these characters are usually he’s by the way – we men think we know everything.

 

While I can’t comprehend how consensus economists are getting to a +3-4% US GDP ramp in the coming quarters, I guess I’ll just have to be all boorish for the next few months and reiterate how ridiculous the Old Wall’s linear forecasting process has become.

 

On a cheerier note, it’s jobs Friday! And while I am sure everyone wants to know what Steve Liesman has for his NFP guess, my boy, Mr. Bond Market, has already front-ran the entire circus:

 

  1. US 10yr Yield got smoked yesterday to 2.63%, taking it DOWN 40 basis points YTD! (consensus is still short Treasuries)
  2. US 10yr minus 2yr Yield (The Yield Spread, which is a growth proxy) compressed another 3bps day-over-day
  3. As our long bond position (TLT) ripped to fresh YTD highs, anything equities that looked like a bond did too

NEWSFLASH (to those waiting on the next qualitative “survey” from our competitors): Bonds rip when growth is slowing.

 

Anything that looks like a bond is called #YieldChasing (they’re ripping too):

 

  1. Utilities (XLU) up another +0.5% yesterday (with the SPX flat) to new YTD high of +14.3%!
  2. REITS (VNQ) punched another fresh YTD high too up at +13.5% YTD

As for the 80% of America that is going to eat both inflation and growth slowing:

 

  1. US Consumer Discretionary Stocks (XLY) are still down -4.1% YTD
  2. US Housing (ITB) is still sucking wind at -4.9% YTD

For the style-factor illiterate who gets on TV and says ‘but the market is up’ (even though both the Nasdaq and Russell are down YTD), in mathematical terms we call this risk developing underneath the US stock market’s hood SECTOR VARIANCE. In chaos theory speak, variance rises when major macro factors are undergoing the initial stage of what physics fans call a PHASE TRANSITION.

 

Phase transitions (like water approaching a waterfall) are really cool, because consensus doesn’t realize what’s happening a foot below the visible surface… Then kabooom! A proactively predictable point of entropy occurs. Variance, Phase Transition, Entropy – offensive terms for those who haven’t evolved their process = excellent defensive strategies for you to deploy.

 

If you want to consistently beat beta in this game, you have to know A) when to go on defense and B) how to rotate offensively from that defensive position. More commonly known as sector rotation, you get what I mean. Our process takes the sector rotation idea up another 10,000 feet because we go all cross-country-cross-asset-class on you.

 

At the beginning of Q2, on the long side here’s where we continued to rotate to (Investment Conclusions – slide 48 of our Q214 Global Macro Themes deck, which all of our Institutional Research customers can get an updated copy of anytime):

 

  1. Bonds (BND)
  2. Long-Term Treasuries (TLT)
  3. Gold (GLD)
  4. Agricultural Commodities (DBA)
  5. Utilities (XLU)
  6. REITS (VNQ)
  7. India (EPI)
  8. Brazil (EWZ)

No matter what this jobs report says today, we want you to keep doing more of this because A) it’s still nowhere in the area code of consensus and B) it’s working.

 

Instead of calling us bearish, bullish, or boorish, I say you call us flexible. This is the opposite position our process suggested you be in at this time last year. Having resistance versus a broken consensus isn’t easy. But being a capitalist in America today isn’t either.

 

Our immediate-term Global Macro Risk Ranges are now (12 macro ranges with a TREND overlay are in our Daily Trading Range product):

 

UST 10yr Yield 2.59%-2.70%

Russell2000 1106-1145

Nikkei 14156-14601

VIX 12.96-14.72

USD 79.31-79.91

Gold 1279-1309

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

I'm Boorish! - Chart of the Day


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 16, 2014


As we look at today's setup for the S&P 500, the range is 21 points or 0.53% downside to 1861 and 0.60% upside to 1882.                            

                                                                                                   

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.14 from 2.14
  • VIX closed at 13.17 1 day percent change of 8.22%

 

MACRO DATA POINTS (Bloomberg Estimates):

 

  • 8:30am: Housing Starts, April, est. 980k (prior 946k)
  • 9:55am: UMich Confidence, May prelim, est. 84.5 (prior 84.1)
  • 12:20pm: Fed’s Bullard speaks in Little Rock, Ark.
  • 1pm: Baker Hughes rig count

 

GOVERNMENT:

    • 8am: U.S. Chamber of Commerce hosts discussion on infrastructure with participants including U.S. Ex-Im Bank Chairman Fred Hochberg, Rio Tinto CEO Sam Walsh
    • 10:30am: Vice President Joe Biden, Time Warner Cable CEO Robert Marcus attend Change the Equation’s National STEM Summit
    • 12pm: Congressional Internet Caucus Advisory Cmte holds discussion on “The FCC’s Internet Plans for an ’Open Internet’ and for the Auctioning of the Mobile Spectrum”

 

WHAT TO WATCH:

  • Credit Suisse said close to $2.5b deal in tax probe
  • Uber said to be in funding talks for $10b-plus valuation
  • Buffett trims GM stake while Einhorn exits amid record recalls
  • Berkshire adds Verizon stake as Vodafone deal reshapes carrier
  • Soros to Perry build Herbalife holdings as Bass buys stake
  • Rackspace hires Morgan Stanley to evaluate strategic options
  • J.C. Penney soars as sales gain for first time in 3 yrs
  • Applied Materials sales outlook tops analysts’ lowest ests.
  • Pinterest valued at $5b in $200m financing round
  • TrueCar auto-buying website raises $70m in U.S. IPO
  • GM’s latest recalls bring company’s total to record 11.2m
  • Drought and hurricanes bigger threats for world’s top cos.
  • Modi-led opposition poised for biggest India win in 30 yrs
  • Fed, BOE Minutes, U.S. Home Sales, EU Vote: Wk Ahead May 17-24

 

EARNINGS:

    • Onex (OCX CN) 7am, $0.32

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

  • Paulson Sticks With Gold Stake as Price Rises on Ukraine Tension
  • Brent Crude Set for Weekly Gain Amid Ukraine Tension; WTI Steady
  • Russian Steel Billionaire Mordashov Seeks U.S. Exit: Commodities
  • Wheat Rebounds as Drop Seen Overdone While U.S. Drought Persists
  • Nickel Advances in Rebound From the Biggest Decline Since 2011
  • Gold Narrows Weekly Increase as Investors Weigh U.S. to Ukraine
  • Coffee Retreats as Export Market ‘Well Supplied’; Cocoa Declines
  • Iron Ore Futures in Singapore Decline to Lowest Level Since 2013
  • Vermillion Hedge Fund Said to Start in Shanghai Free Trade Zone
  • China’s Local Nickel Price Points to More Refined Metal Imports
  • Uranium Retreat on Japan Delays Makes Banks Less Bullish: Energy
  • Kazakhstan Wants to Trade Grain With Iran Using Yuan for Payment
  • Gazprom’s Pipe Control May Hinder Independent Gas: Bear Case
  • Steel Rebar Drops for 3rd Week in China, Setting New Record Low

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


May 16, 2014

May 16, 2014 - Slide1

BULLISH TRENDS

May 16, 2014 - Slide2

May 16, 2014 - Slide3

May 16, 2014 - Slide4

May 16, 2014 - Slide5

May 16, 2014 - Slide6

May 16, 2014 - Slide7

 

BEARISH TRENDS

 

May 16, 2014 - Slide8

May 16, 2014 - Slide9

May 16, 2014 - Slide10

May 16, 2014 - Slide11
May 16, 2014 - Slide12


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