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This note was originally published at 8am on May 16, 2014 for Hedgeye subscribers.

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



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 sales@hedgeye.com.  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.”




Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.49%-2.61%

SPX 1861-1882

RUT 1086-1112

VIX 12.14-14.52

USD 79.11-80.26

Gold 1281-1315 


Keep your head up and stick on the ice,


Daryl G. Jones


Polarizing - DQ 051514


TODAY’S S&P 500 SET-UP – May 30, 2014

As we look at today's setup for the S&P 500, the range is 31 points or 1.30% downside to 1895 and 0.31% upside to 1926.                                                 














  • YIELD CURVE: 2.10 from 2.09
  • VIX closed at 11.57 1 day percent change of -0.94%


MACRO DATA POINTS (Bloomberg Estimates):


  • 8:30am: Personal Income, Apr., est. 0.3% (prior 0.5%)
  • 8:30am: Personal Spending, Apr., est. 0.2% (prior 0.9%)
  • 8:30am: Fed’s Pianalto speaks on 2nd day of conference entitled, “Inflation, Monetary Policy and the Public”
  • 9am: ISM Milwaukee, May, est. 52 (prior 47.26)
  • 9:45am: Chicago PMI, May, est. 61 (prior 63)
  • 9:55am: U. Mich. Confidence, May final, est. 82.5 (prior 81.8)
  • 12:30pm: Loretta Mester, who takes office as Cleveland Fed president on June 1, speaks at conference
  • 1pm: Baker Hughes rig count
  • 2pm: Fed’s Lacker speaks at Stanford
  • 5pm: Fed’s Williams, Plosser speak at Stanford



    • President Obama attends hurricane preparedness mtg at FEMA
    • House in session; Senate meets in pro forma session
    • U.S., South Korea, Japan defense heads meet during Asian Security Summit in Singapore
    • House Democrats’ campaign chairman calls on Shinseki to resign
    • U.S. ELECTION WRAP: Shinseki Election Politics; Democrats’ Ads



  • Citigroup Mexico probe focuses on changes to loans before fraud
  • Apple must face e-book price-fixing trial before appealing
  • U.S. said to seek >$10b settlement from BNP Paribas
  • CA Technologies accused of $100m U.S. contract fraud
  • Microsoft, Salesforce unveil cloud-computing partnership
  • Google moves to comply with EU ruling on right to be forgotten
  • Manhattan condo prices fall as buyers push back in cooler mkt
  • High-frequency perks said focus of CFTC review cited by Virtu
  • GM seeks N.Y. court for recall suits as more deaths are claimed
  • Musk says SpaceX reusable capsule could ferry astronauts by 2016
  • Siemens to remove 11,600 positions as company reduces costs
  • France may impose brandless cigarette packaging: Figaro
  • U.S. Jobs, ECB, BOE, Obama in Europe: Wk Ahead May 31-June 7



    • Ann Inc. (ANN) 7:31am, $0.31
    • Big Lots (BIG) 6am, $0.44




  • Iron Ore Heads for Record Losing Run as Forrest Sees Risk of $80
  • WTI Set for Monthly Gain as Cushing Supplies Drop; Brent Steady
  • Food Replacing Oil as China M&A Commodity of Choice: Commodities
  • India Gold Import Curbs Said to Continue at Least Until Budget
  • Lead and Zinc Fall as Trading Slows Down Before Chinese Holiday
  • Wheat Heads for Biggest Monthly Loss Since 2011 on U.S. Outlook
  • Robusta Coffee Drops as Liffe Stockpiles Climb; Cocoa Advances
  • Steel Rebar in Shanghai Ends at Record Low After Iron Ore Drops
  • China’s Pork Prices Seen Declining as Farmers Buy More Piglets
  • Lonmin Seen Weakest in Holdout Against 18-Week Platinum Strike
  • Diesel Profit Dropping as Indonesia Ban Shutters Mines: Energy
  • CFTC Should Reconsider Gensler Overseas Advisory, Wetjen Says
  • Libyan Oil Output Slumps Yet Further, With No Sign of Recovery
  • Gold Set for Monthly Drop as U.S. to Ukraine Curbs Haven Demand


























The Hedgeye Macro Team














Real Conversations: Peter Schiff Talks Bubbles, Roubini, Bailouts & More with Keith McCullough

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)

Early Look

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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: 64% Say Apple Made the Right Decision in Acquiring Beats

Takeaway: 64% said YES; 36% said NO.

It's official. Apple is buying Beats for $3 billion. In a statement, Apple CEO Tim Cook said that the acquisition will "complement our product line and will help extend the Apple ecosystem in the future. Bringing our companies together paves the way for amazing developments which our customers will love."


Today’s poll question was: Do you think Apple's $3 billion purchase was the right decision?


Poll of the Day Recap: 64% Say Apple Made the Right Decision in Acquiring Beats - gsmarena 001

At the time of this post, 64% said YES; 36% said NO.

Of those who voted YES, one person explained, “Google bought Nest.  Facebook bought Oculus.  Apple buys Beats.  We'll see more of this, and Apple will take Beats (and other acquisitions) to a new level.”


Another YES voter agreed, nothing, “What is $3BB for a company with a market cap of $500 BB (sad that with their R&D budget that they have to buy innovation but when you lose the innovator and now have an operator...this is what happens).”


On the opposite end, these NO explained why they thought it was the acquisition was a bad decision:

  • “Steve Jobs is rolling over in his grave. They gave away $3 Billion of his money for a headphone brand? Now its not just for your head! Introducing Beats apps, Beats hardware, Beats websites, Beats me over the head! Now not just your headphones will be overpriced and mediocre, your whole experience will be!”
  • “What are they getting, other than a couple rich guys whom they just made richer?”
  • “Beats are an expensive inferior fad product.  If it remains hip and Apple improves quality it might have a chance.”
  • “What could AAPL have done with that $3bn if it invested in building its own technology in that area? Even if it failed to win, it'd still likely be a better ROI than buying Beats.  Whenever a company that has grown organically through such an astounding innovation agenda buys a headphone/hardware company, it says something about organic growth prospects. Bottom line: What would Steve Jobs think? Doubtful that he'd like this one.”
  • “They could've bought anything. ANYTHING. Forget home automation. Forgot in car dash displays. We want headphones!!!!!!” 


Cartoon of the Day: Yield?

Takeaway: #GrowthSlowing, reiterated.

Cartoon of the Day: Yield? - T Note cartoon 5.29.2014


Babies Back In Style?

Takeaway: The longest and deepest baby recession since the 1970s may be coming to an end.

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


Babies Back In Style? - newborn baby boy


U.S. births are down -10% since 2008. In other words, the cumulative decline over the last five-plus years means almost 1.5 million American babies have not been born. That’s obviously a lot of babies who will never exist, never grow up, never go to school, never enter the workforce (not to mention have their own families) and so on—especially when compared to the 3.8 million kids under one-years-old in the United States today.


Babies Back In Style? - chart1


While the economic toll of the Great Depression during the 1930s engineered the biggest decline in birth rates over the last century, this present decline is pretty close in scale. Fortunately, the decline of births which occurred during the Depression was eventually followed by the Baby Boomers, The Boomer Echo, as well as the multiple generations in between. These cycles clearly play big roles in economic, political, and social trends as the synchronized peaks and troughs of millions of people wind through the system. 


The recent decline is suggesting that a large number of young American adults and potential parents are signaling that they are not quite ready—financially or otherwise—to take on the significant commitment of a life, and a lifetime. That’s a lot of “leaning in” going on: (see Lean In: Women, Work, and the Will to Lead by Facebook COO Sheryl Sandberg) if indeed we are witnessing a deeper, secular change in the attitude women and their partners have toward having children.


That said, our model below shows why we believe the baby making tide may be turning. 


Babies Back In Style? - chart2


While we can’t measure attitudes, we can measure the result using some clever manipulation of data the federal government produces each month. Small positive percentage changes in the last 6 months may mark the beginning of a much bigger move over years to come. After all, there are millions of biological clocks ticking away all across the country.


There are plenty of reasons to care about the trend in baby making in the United States. Our focus and work on the US Medical Economy has drawn us into the analysis; For example, having a baby is the single biggest reason anyone not on Medicare is admitted to a hospital, accounting for 30% of all hospital admissions.


But there are many other reasons to care about declining birth rates, some of which can imperil entire economies and countries. Some of the more obvious implications from a drop in births include the related and chilling effect on retail spending, education, housing, food, and so forth. In other words, less babies means less spending on baby clothes (CRI), toys (MAT) and Happy Meals (MCD). Not to mention an aging workforce heading into retirement and attendant strains on Social Security and tax revenue. On the other hand, “Junior” may have a better shot getting into the college of his choice in 2028.


Look no further than countries like Russia and Japan which are both concerned over declining births in their respective countries. Japan is aggressively encouraging its young people to date and mate to reverse its birth rate plunge which has dropped to just half of what it was only six decades ago.


Meanwhile, “Mother Russia” hasn’t exactly been living up to its name of late and is facing its own plunging population crisis. Not too long ago, Vladimir Putin went so far as incentivizing women with $9,200 to have a second baby—that’s in a country where average monthly incomes are a small fraction of that.


Bottom line: We are bullish on American baby making. We believe an uptick in U.S. births is coming.  Of course, there is always the alternative downside scenario lurking in a Children of Men like dystopian future if we’re wrong.


Tom Tobin is the Healthcare Sector Head at Hedgeye Risk Management. You can follow him on Twitter @HedgeyeHC



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