Pasta or Burgers?

This note was originally published at 8am on May 07, 2014 for Hedgeye subscribers.

“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%

SPX 1856-1877

RUT 1101-1143

VIX 12.91-14.72
EUR/USD 1.37-1.39

Gold 1297-1318 


Happy Humpday Hunting!


Christian B. Drake


May 21, 2014

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TODAY’S S&P 500 SET-UP – May 21, 2014

As we look at today's setup for the S&P 500, the range is 22 points or 0.63% downside to 1861 and 0.54% upside to 1883.                                         













  • YIELD CURVE: 2.19 from 2.18
  • VIX closed at 12.96 1 day percent change of 4.35%


MACRO DATA POINTS (Bloomberg Estimates):


  • 7am: MBA Mortgage Applications, May 16 (prior 3.6%)
  • 10am: Fed’s Dudley speaks in New York
  • 10:30am: DOE Energy Inventories
  • 11am: Fed’s Yellen speaks in New York
  • 12:50pm: Fed’s George speaks in Washington
  • 1:30pm: Fed’s Kocherlakota speaks in Minneapolis
  • 2pm: FOMC releases minutes from April 29-30 meeting



    • President Obama visits Interior Dept, signs proclamation on new national monument in N.M., holds ambassador credentialing ceremony in Oval Office
    • Nunn aided by Georgia Republicans forced into Senate runoff
    • Senate to vote on confirmation of Stanley Fischer for Fed; likely to hold separate vote later making Fischer vice chairman
    • 10am: Senate Finance Cmte hears from Social Security Admin. chief actuary Stephen Goss on strengthening Social Security
    • 10am: CFTC’s Global Markets Advisory Cmte holds meeting, considers regulatory treatment of foreign-based swap clearinghouses
    • 10am: 2 House Homeland Security Subcmtes hold joint hearing on emerging cyberthreats to U.S.
    • 2pm: House Financial Services Financial Institutions and Consumer Credit Subcmte will review legislation on transparency, accountability at CFPB
    • 2pm: Senate Finance Cmte votes on nomination of Sylvia Mathews Burwell for HHS Sec.



  • FOMC minutes preview: exit strategy, employment view
  • Netflix enters Germany, France in biggest expansion since 2011
  • Woodside scraps $2.6b Israeli gas deal as talks fail
  • ‘Surprised’ Microsoft works w/China after Windows 8 exclusion
  • Senate confirmation vote on Fischer for Fed scheduled today
  • BNP drops as U.S. said to seek $5b in sanctions probe
  • Google says it needs up to $30b cash overseas for deals
  • Nasdaq hunting Alibaba after ‘hundreds’ of smooth IPOs: CFO
  • China’s seeks Jeff Bezos treatment with $1.7b IPO
  • KCG joins Liquidnet in quest for more dark pool transparency
  • Batista bases insider-trading defense on Mubadala share deal
  • Target releases first earnings since firing CEO
  • Skanska moves engineers to California as Apple work helps
  • First Solar, India developers oppose dumping findings in court
  • U.K. retail sales surged in April as discounting boosts food



    • American Eagle Outfitters (AEO) 8am, $0.00 - Preview
    • Booz Allen Hamilton (BAH) 6:30am, $0.31
    • Eaton Vance (EV) 8:38am, $0.55
    • Hormel Foods (HRL) 6:30am, $0.56
    • Lowe’s Cos (LOW) 6am, $0.60 - Preview
    • PetSmart (PETM) 7am, $1.02
    • Raven Industries (RAVN) 9am, $0.33
    • Sears Canada (SCC CN) 7am, NA
    • Target (TGT) 7:30am, $0.71 - Preview
    • Tiffany & Co (TIF) 6:45am, $0.78



    • Giant Interactive (GA) 4:05pm, NA
    • L Brands (LB) 4pm, $0.52
    • NetApp (NTAP) 4:01pm, $0.79
    • Renren (RENN) 6pm, $0.09
    • Semtech (SMTC) 4:30pm, $0.30
    • Sina (SINA) 4:30pm, $0.15
    • Synopsys (SNPS) 4:05pm, $0.60
    • Williams-Sonoma (WSM) 4:05pm, $0.44




  • Goldman Widens Iron Ore Surplus Forecast on China Steel Slowdown
  • WTI Crude Rises to One-Month High on Supply Drop; Brent Advances
  • Copper Reaches One-Week Low as Chinese House Sales Seen Slowing
  • Palladium at Highest Since 2011 With Fund Holdings Near Record
  • Wheat Climbs as Slide Seen Attracting Buyers With Russia Heat
  • Cocoa Extends Longest Rally Since January in London; Sugar Falls
  • China’s Nickel Ore Imports From Indonesia Slump 67% in April
  • China’s Imports of U.S. Corn Plummet as Curbs on GM Seed Tighten
  • Gold Demand in Vietnam Seen Declining by Half as Inflation Slows
  • Tranquility in Crude Repels Chaos-Loving ETP Investors: Energy
  • Ex-Millennium Trader Rosengren Joins Modity Energy in Sweden
  • Christmas Comes Early to LME on China Holidays: Chart of the Day
  • Argentina Shale Has Geological Potential for U.S.-Like Surge
  • Steel Rebar Rises From Record Low After Iron Ore Futures Rebound


























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Poll of the Day Recap: 72% Say $RUT's Next Stop Is 1000

Takeaway: 72% said 1000; 28% said 1200

Hedgeye CEO Keith McCullough noted in today’s Morning Newsletter: “The Russell 2000 bounced on no-volume to yet another lower-high of 1114 yesterday and at -4.3% YTD, the Russell 2000 is still bearish on both our immediate-term TRADE and intermediate-term TREND durations.” But we wanted to know what you think.


Today’s poll question was: What's the next stop for the Russell 2000?


Poll of the Day Recap: 72% Say $RUT's Next Stop Is 1000 - 1

At the time of this post, 72% said the next stop would be 1000; 28% said it would be 1200.

Those who believe it will drop to 1000 say it’s “the next area of support.” One voter explained, “$RUT has been the gift that keeps on giving if you're on the put side. It's entering bear market territory and once that happens... swoosh!”


Additionally, as another voter said, “The last leg up in Feb felt blow-off which usually means a larger drawdown is coming. Also, leverage gets risky and expensive if the market isn't making higher highs and the longer IWM sells off the more pressure is put on the S&P.  I'm thinking at least support at $1050.”


In the opposite camp, voters who chose 1200 said:

  • “Don’t think it hits either 1000 or 1200 in next few months but down 9% from high with SPX near all-time high, the easy trade is RUT trades lower but Mr. Market likes to penalize the easy higher.”
  • “Shorting the $RUT seems like a too-obvious trade now. Wouldn't be surprise, it squeezes higher and traps more people before turning lower again.”
  • “Been down so long it looks like up to me.”


Hedgeye Retail: Urban Outfitters Deserves Credit for Accountability | $URBN

Takeaway: This is the kind of accountability we like to see from companies we invest in.

Hedgeye Retail: Urban Outfitters Deserves Credit for Accountability | $URBN - 2

URBN 1Q15 Earnings


Hedgeye Retail: Urban Outfitters Deserves Credit for Accountability | $URBN - chart2 5 20 large


Definitely a disappointing quarter for Urban Outfitters, and as everybody knows, it's all about weakness in the URBN concept. One thing we give management all the credit in the world for is that it did not use weather as an excuse -- even though everyone else is. They noted that great companies perform regardless of the weather -- as Anthropologie and Free People did. They expect the same from Urban, which is dragging because of its own problems, not Mother Nature's.  That's the kind of accountability we like to see from companies we invest in.


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Editor's Note: This is a research excerpt from Hedgeye Retail sector head Brian McGough. Follow Brian on Twitter @HedgeyeRetail

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