The Best of This Week From Hedgeye

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


Euro Pacific Capital CEO Peter Schiff pulls no punches with Hedgeye CEO Keith McCullough on this latest edition of HedgeyeTV’s "Real Conversations.” Schiff minces no words on his ongoing feud with NYU economics professor Nouriel Roubini, reckless Fed monetary policy, inflation, the beleaguered U.S. middle class, gold prices and much more. (Interview recorded Wednesday May 28th)


Here’s the question-and-answer portion from our daily institutional Morning Call hosted by Hedgeye CEO Keith McCullough and macro analyst Christian Drake.


Click here to subscribe to Cartoon of the Day. 

Inflation is a real drag on the American consumer.

The Best of This Week From Hedgeye - Consumer cartoon 5.30.2014


#GrowthSlowing, reiterated.

The Best of This Week From Hedgeye - T Note cartoon 5.29.2014 normal 

What will the government revise its Q1 GDP estimates to after the dismal 0.1% it reported last month? It's just guesswork after all.

The Best of This Week From Hedgeye - GDP cartoon 5.28.2014 normal


The Best of This Week From Hedgeye - Chart of the Day normal 


In the first minute of his conversation with Hedgeye CEO Keith McCullough, Euro Pacific Capital CEO Peter Schiff discussed the US being “halfway to a recession.” What do you think? Click here to view the poll and results.

 The Best of This Week From Hedgeye - economy finance words large


Babies Back In Style?

The Best of This Week From Hedgeye - b5 normal

The Great Recession triggered a steep decline in the U.S. birth rate, but signs show the downward trend may be slowing. Click here to continue reading.


Non-Traded REITS: A Fool and His Money

The Best of This Week From Hedgeye - Atlas cartoon normal

As the Fed continues sucking yield out of the marketplace, individual investors are desperate for return.  This has fueled a moon-shot in a host of dicey instruments sold only on the basis of percentage returns. Click here for more.


Jobless Claims: Strong Labor Means Falling Rates

 The Best of This Week From Hedgeye - how to get a better job normal

Expect a strong May labor market print next Friday. This should set the stage for more tapering and more downforce on long-term rates. Click here to read more.


Hedgeye Retail: $DSW, $BWS Earnings Wildly Out of Synch

The Best of This Week From Hedgeye - 1 normal

One company missed by 13%, the other beat by 13%.  One comped down 3.7%, and the other comped up 1.3%. One guided up. The other guided down. One blamed weather. The other did not. One SIGMA improved, the other eroded. Click here to continue reading.



Takeaway: Current Investing Ideas: GLD, 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




GLD  We continue to like Gold  on the long-side in the face of a downward GDP revision (-1.0% annualized in Q1 vs. expectations of -0.5%) and a yield spread that continues compressing (-9 bps w/w to 210 bps wide). Confirming our #GrowthSlowing theme, the 10-year yield decreased another 6 basis points week-over-week to 2.42% after breaking our 2.61% TAIL line of resistance two weeks ago. Reiterating our non-consensus call, we think the 10-year yield may test 2.2-2.3% before the route bottoms. The likelihood of Fed tapering shrinks relative to expectations as data surprises to the downside, and we prefer to be long GLD to hedge the dovish monetary response as the printing press operates overtime. As outlined in our Q2 macro themes call, rather than buying into underperforming, consumer-driven sectors like the Russell 2000 or Consumer Discretionary Stocks (both down -2% YTD), we like holding utilities (XLY +12% YTD), commodities (CRB  Index +9% YTD), and treasuries (TLT +12%) as growth slows and inflation accelerates.   

HCA –  Hedgeye Healthcare sector head Tom Tobin remains bullish on HCA Holdings, but has no new updates this week. 

HOLX ­­– We held a call with an expert this week who has been one of the few people we've found who has intimate knowledge of the process by which 3D tomosynthesis will receive a Medicare code and a reimbursement amount.  He confirmed our optimistic view, based on a significant amount of research, of the reimbursement level that will be announced this year.  

We will be updating our 3D facility tracking data next week.  As of this week there were 580 facilities in the United States who had at least one system out of a total of 8700 potential sites.  That's roughly 6.4% penetrated, leaving a lot of upside from here.  The reimbursement will be key to the penetration rising even faster.


LM – The pace of fixed income flow trends within the U.S. mutual fund complex quickened during the week with the latest trends from the Investment Company Institute (ICI) continuing to flash building momentum in bonds versus declining interest in equities. During the most recent week, $2.3 billion of new funds came into all U.S. bond funds according to the ICI versus just $670 million that was collected by equity funds last week. This trend is running into more important intermediate term trends with the second quarter of 2014 shaping up to be the first quarter in 9 months where fixed income is outpacing equities. Thus far in 2Q14, over $17.0 billion in total has moved into fixed income within mutual funds versus just the $8.7 billion that has moved into all stock funds. Leading bond fund managers including Legg Mason and Franklin Resources (BEN) stand to benefit from this emerging trend of which we prefer LM with still dour sell-side recommendations (only 5 Buy recommendations from 19 analysts) and still stubbornly high short interest in the stock (which will need to be covered) as bond trends improve.




LO – To be or not to be taken out?  This is the question that remains square on many investors minds. 

We maintain Lorillard’s fair value long-term price is $80/share.  Should LO get taken out at that price (RAI is rumored to be interested) or appreciate to that level over time, we stand by our belief in the company’s earnings power on its advantaged tobacco and e-cigarette portfolio.

Bottom line: we do not think LO will be imminently purchased and are staying long the stock that we added to Investing Ideas on 3/7/14.


OC – While Owens Corning quietly approaches the end of 2Q, its sector is becoming louder about the upcoming quarter and the rest of 2014. Here are a couple of quick notes:

  • AWI, a floor and ceiling maker, called 2014 an inflection point for the commercial market at their Investor Day last week citing improving nonresidential data.
  • AWI expects the remodel and repair spending to grow in the mid-single digits.
  • Other building product names, Saint-Gobain and USG, expect a rebound in 2Q in both commercial and residential activity.
  • U.S. roofing volumes should snap back for 2Q according to Saint Gobain, a top 4 player in the U.S. roofing market
  • Headwaters and AWI both note the construction recovery is still in the early stages with sales bottoming in 2010 and volume bottoming in 2013.
  • In a recent Investor Presentation, Terex sees the repair and remodeling market increasing FY 2014.
  • The NAHB Remodeling Market Index improved ~10% YoY for April. 


*Special note from Hedgeye Retail team on RH and ZQK: 

Below we take a detailed look at sentiment for our two retail investing ideas. The primary tool we use is our Hedgeye Sentiment Monitor. What it does is uses a quantitative scale to combine Sell-Side Ratings, Buy Side Short Interest, and Insider Trading activity. We pretty much catch all angles.


We use this tool in two different ways; 1) First, we look at directional changes in sentiment for each stock. 2) Second, we analyze the absolute level for each security. A reading above 90 has statistically proven to signal that the market is overly bearish on a name, and that it’s often advantageous to go the other way. Conversely, a reading below 10 suggests that the market is overly bearish, at which time it is usually prudent to go long. 


RH – Restoration Hardware is near an all time low sentiment score. With short iterest accounting for 12.8% of the float. 2014 marks the first year of square footage growth in the past six. That coupled with new categories to fill the bigger footprint Design Galleries are the key pillars in our thesis that calls for a $200+ stock in 2018. It continues to be our favorite name in the retail space.




ZQK –  Quiksilver’s sentiment reading has held steady since the announcement that Andy Mooney would be replace founder Bob McKnight as CEO in January of 2013. The company reports earnings Monday (6/2) after the close and we are expecting an inline quarter. The company is still cycling through product discontinuations and brand divestitures this quarter, but the comps get much easier in the back half of the year. Plus, we continue to expect revenue reacceleration in 2H as the company’s new product design, sourcing, and marketing initiatives begin to take hold. That sets up 2015 for outsized revenue and earnings growth.



*   *   *   *   *   *   *

Click on each title below to unlock the institutional content.


Pending Home Sales Remain Sluggish

April pending home sales rose 40 basis points month-over-month, but are down 9% year-over-year, which is consistent with the trend over the last four months.


PLKI: Delivering the Goods

Restaurants sector head Howard Penney explains why Popeyes Louisiana Kitchen stock is up double-digits and rightfully so.

INVESTING IDEAS NEWSLETTER - popeyes wicked chicken


Mexican Standoff: Claims vs. GDP vs. Expectations

Initial Jobless Claims say the Labor Market continues to improve, 1Q14 GDP & April Pending Home Sales say “escape velocity” remains a Panglossian phantasm, and consensus growth expectations continue to sing a sirenic but delusional tune around 2014 growth.


The Week Ahead

The Economic Data calendar for the week of the 2nd of June through the 6th of June is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - 05.30.14

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Poll of the Day Recap: 58% Say U.S. Is Heading Into Recession

Takeaway: 58% said YES; 42% said NO.

In the first minute of his conversation with Hedgeye CEO Keith McCullough, Euro Pacific Capital CEO Peter Schiff discussed the US being “halfway to a recession.” But we wanted to know what you thought.


Today’s poll question was: Is the U.S. heading into recession? 


Poll of the Day Recap: 58% Say U.S. Is Heading Into Recession - national debt uncle sam begging

At the time of this post, 58% said YES; 42% said NO.

In a sampling of those who said YES, voters explained:

  • "I actually believe we are currently in a depression but with a modest growth bubble within that (same thing happened in the 30's). At 53 years of age, I have to say that my confidence in this economy (country) is at an all-time low. Yes, lower than 2008. To fix the system the system has to be blown up, but that will take 95% of the country with it, which includes my wife and I. We can't afford to start over and neither can the majority in this country."
  • "Yes eventually...but likely not in 2Q14 - the end of 2015 is likely when the trouble begins."
  • "GDP contracting Q114, consumer sentiment waning, price of stuff necessary for subsistence has increased significantly, wage inflation appears to be virtually flat, ability to under-consume/save is shrinking; therefore, most having less to spend will result in continued GDP contraction."
  • "Gas, food, rents & debt vs diminishing incomes are putting pressure on our consumption economy. Retailers are suffering. What happens when they have to raise prices. Seems like the economy is on the edge. Could go either way."
  • "If the CPI was computed accurately Real GDP would indicate we are already in a recession."

McCullough, too, agreed that the U.S. is heading into recession: "The probability continues to rise that we are heading into a US Consumer recession - #InflationAccelerating is slowing consumption growth, fast."

However, one NO voter pointed out, “We will see less than 2% in Q2 but that is growth.”


Cartoon of the Day: The Old Inflation Ball and Chain

Takeaway: Hedgeye continues to reiterate its US #ConsumerSlowing position.

Cartoon of the Day: The Old Inflation Ball and Chain - Consumer cartoon 5.30.2014




Summary:  The savings rate ticked up, the rich reduced spending on luxury goods and the estimate of healthcare consumption growth decelerated.  The result  = negative MoM growth in real consumption across services, durables, and nondurables with all 3 decelerating on a YoY & 2Y basis as well.  Growth estimates will get clipped (again). 





As we’ve suggested repeatedly over 1H14, the current level of consumption growth (which sat as the singular source of strength in 1Q14 GDP) is overstated and/or unsustainable at reported 1Q14 levels. 


Summarily, the thinking is essentially this: 


The savings rate is at historic lows (meaning incremental consumption growth can’t be achieved via further savings reductions) while the conflation of static income growth and rising inflation (growing at multiples of income growth in some instances) will constrain the capacity of other discretionary consumption. 


Accelerating spending on luxury goods buttressed a broader deceleration in demand for durables to start the year and the outlier acceleration in healthcare spending (which is very much an estimate and seemingly overstated in the context of reported 1Q14 Hospital results – see yesterday’s note MEXICAN STANDOFF: CLAIMS vs. GDP vs. EXPECTATIONS) was a primary driver of the reported growth in Services Consumption in 1Q. 


In the context of the above dynamics, the balance of risk to household spending growth is to the downside as the expanding spread between nominal spending and nominal earnings is unsustainable and any combination of higher savings, a deceleration in peak spending growth by the rich or lower estimates for healthcare spending growth would act as deceleration’ary pressures on PCE growth.   


We saw all three of negative dynamics manifest to start 2Q as the savings rate ticked up (from 3.6% to 4%), the rich reduced spending on luxury goods and the estimate of healthcare consumption growth decelerated.  The result  = negative MoM growth in real consumption across services, durables, and nondurables with all 3 decelerating on a YoY & 2Y as well.  


#GRAVITY: APRIL CONSUMER SPENDING  - Nominal Spending vs Nominal Earnings







On the positive side, personal income growth, disposable personal income (DPI) growth, and aggregate private sector & government wage growth all improved marginally, sequentially.  The sequential improvement is positive but not enough to support accelerating consumption growth, particularly alongside a higher savings rate, rising inflation, and a material slowdown in housing.   




#GRAVITY: APRIL CONSUMER SPENDING  - Salary   Wage Growth april


#GRAVITY: APRIL CONSUMER SPENDING  - Income   Spending Table Aprilf



Growth estimates will get clipped (again) on today’s spending data, but consensus expectations for the balance of the year are still too high.


Enjoy the Weekend.


Christian B. Drake



get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.