Just Charts - This Bud is for You!


The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.

Just Charts - This Bud is for You!  - 1


Consumer Staples rose +0.4% week-over-week versus the broader market (S&P500) up +1.3%.  XLP is up 5.2% year-to-date versus the SPX at 5.5%.



6/10/14 HAIN Piper Jaffray Consumer Conference 10:35am EST

6/10/14 REV Annual General Meeting TBD

6/11/14 BNNY William Blair Growth Stock Conference 9am EST

6/11/14 SMG William Blair Growth Stock Conference 3:40pm EST

6/12/14 JAH Annual General Meeting TBD


XLP remains bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.

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The Hedgeye U.S. Consumption Model has shown steady improvement over the past month, with 5 of the 12 U.S. Economic Indicators flashing green.

Just Charts - This Bud is for You!  - z us consump


Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:


  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.9x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (recently rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, but rose to 35.1 versus 33.3 in the prior week

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Positive Divergence:  HSH 10.6%; NWL 5.9%; SAFM 4.3%; NUS 4.0%; SJM 3.0%

Negative Divergence:  BNNY -14.1%; RDEN -8.7%; TSN -5.5%; LO -3.9%; FLO -1.7%




In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).


BUD – big cap-slow-growth-low-beta, this Bud is for you! #confirmed bullish intermediate-term TREND with $106.94 support

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DEO - #confirmed bearish to bullish TREND reversal still holding its head above $125.51 TREND support here too

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KO – bullish intermediate-term TREND intact with TREND support of $39.97

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PEP – breakout to higher-highs is always a thing of beauty – if only there was some volume behind this move; TREND support = $84.17

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GIS – since February 2014 this name has looked as good as any on this list; TREND support = $52.91

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MDLZ – signaling some exhaustion (overbought) to the upside, bullish TREND with $35.88 support, this remains

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KMB – one of the top names on this list for the last 6 months – no change on that front; TREND support = $108.16

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PG – worst looking name on the list; bearish TREND breakdown on an absolute basis ($80.73 TREND resistance)

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MO – big-cap-slow-growth-low-beta, yep. Bullish intermediate-term TREND support of $38.94 intact

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PM – same as the MO mo in all the aforementioned slow-growth #YieldChasing Style Factors; bullish TREND support = $84.71

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Howard Penney

Managing Director


Matt Hedrick



Fred Masotta



Chart of the Day: 10 VIX

Takeaway: Front-month VIX officially crashed last wk (-21.7% year-to-date) .

Chart of the Day: 10 VIX - VIX

They Say It’s Different This Time

Client Talking Points


Trade or trend? They finally jacked the Russell on a no-volume rally back to break-even for the year-to-date. With intermediate-term TREND resistance at 1169, this is an important moment of truth – one that may need a few weeks to play out (supports are 1130 and 1094). 


Front-month VIX officially crashed last week (-21.7% year-to-date) and, unless it’s different this time, 10 VIX is not the spot where you lever yourself up on the long side of US Growth Style Factors (it has never sustainably held below 10 – see our Chart of The Day). 


Some called going to negative real rates the “biggest event in ECB history” – and the foreign exchange market didn’t do anything on the week in response to that; long-term TAIL support of $1.35 EUR/USD held. We think the next catalyst for Down Rates is the Fed getting more dovish, on the margin.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


TREASURIES: 2.61% for the 10yr yield w/ plenty of resistance overhead  - staying long bonds



“It’s not the will to win that matters—everyone has that. It’s the will to prepare to win that matters.” - Paul "Bear" Bryant


35, the number of points LeBron James of the Miami Heat scored last night as his team tied the NBA Finals series with San Antonio at one game apiece. 

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June 9, 2014

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Got Baggage?

“For most of us, failure comes with baggage.”

-Ed Catmull


Got baggage? I do. Over the years, it just piles up.


The way I see it, athletically, professionally, and personally, if I wasn’t always failing somewhere, I wouldn’t learn a darn thing.


The guys at Pixar like to say things like “fail early and fail fast” and “be wrong as fast as you can” (Creativity Inc., pg 109). I like that attitude. In this business, there’s nothing worse than being wrong and staying wrong.  We just want to get on with getting it right.


Back to the Global Macro Grind


For most of 2014, being long the Russell 2000 has been as wrong as being bullish on US GDP growth and/or interest rates. Last week, that wasn’t the case. On no-volume (Friday’s Total US Equity volume was -32% vs. the 3 month avg), the Russell 2000 was +2.7%.


After getting smoked on the short side pretty much every way you can over the course of my career, I have learned to wait and watch for my signal. Thankfully, I waited until Friday to re-issue the sell signal on the Russell 2000. I did it in the morning, so it’s -0.22% against me.


As far as my score goes, being wrong by 1 basis point is still being wrong – so the #1 question on my mind this weekend was whether or not I am going to be wrong and stay wrong this week?


In order to answer the US growth question, here are the signals I care about most:


  1. Long-term Interest Rates
  2. US Consumption Growth
  3. US Dollar Rate of Change


If you ignored the first 4-5 months of the year, on that scorecard things looked better than bad last week:


  1. US Treasury 10yr Yield was +12 basis points on the week to +2.60%
  2. US Consumer Discretionary Stocks (XLY) were +1.9% on the week
  3. US Dollar Index was up a whopping +0.1%


Not to be confused with the year-to-date TREND:


  1. UST 10yr Yield is still -43 basis points after starting the year at 3.03%
  2. US Consumer Discretionary and the Russell 2000 are both only +0.1% YTD
  3. USD hit its YTD low in May then v-bottomed when Europe opted for negative interest rates


In other words, who needs to learn from failing with Currency Devaluation Policies To Inflate, when all America has to do is wait for Europe or Japan to take a turn failing faster?


This is all quite sad to watch as we’re sucking every last lemming into buying, well, anything at 10 VIX. As you can see from our Chart of The Day, if you want to fail really, really, fast in this business, get your clients levered-long the US stock market at 10 VIX (US Equity Volatility Index).


I know, I know – they (as in the dudes on the Old Wall who had you chase them to all-time bubble highs in the summer of 2007 when the VIX was at 10 last time) say it’s different this time.


Really? Last week the VIX officially crashed (-5.7% to -21.6% YTD). All the while, that crowded hedge fund short position we’ve been writing about in the SP500 got squeezed. After peaking at -114,248 net short futures and options contracts (SPX Index and E-mini) on May 27th, the Pain Trade was higher.


So here’s your 2nd chance to sell everything US consumer and housing growth that you could have sold in JAN-FEB of 2014. If we’re right, you don’t want to make the same mistake twice. The VIX has never held, sustainably, below 10. Even for those of us with a lot of baggage, never is a very long time.


Got Baggage? - VIX


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.41-2.61%


RUT 1130-1169

USD 80.02-80.73

EUR/USD 1.35-1.37


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer

PNRA: Closing Best Idea Short

We added Panera Bread Company (PNRA) to our Best Ideas list on 04/05/2013 at $177.20/share.  Since this time, 2014 EPS estimates have been revised down substantially from $8.16 to $6.87 and the share price has acted accordingly (down ~10%).  The S&P 500 is up ~26% over this time.  With this note we are removing Short PNRA from our Best Ideas list.


PNRA still has issues, many of which we’ve previously voiced our concerns over, but the stock has been more resilient lately than we’d expected.  At 9.80x EV/EBITDA (NTM) and 22.49x P/EPS (NTM), the stock screens quite attractive relative to other fast casual and quick service companies.  To be clear, we believe disappointing news is largely baked in at these levels and have a difficult time seeing meaningful downside from here.


All told, we believe the Street thinks highly of CEO Ron Shaich – and they should.  Mr. Shaich is a visionary that has built an incredible company and we believe he will be able to turn things around at Panera, but it will be a bumpy ride.  We are also concerned with a lack of earnings visibility, insomuch that we are no longer comfortable staying short.  May was another weak month for the restaurant industry, but it was the first month the trends improved on the margin in quite some time.  2Q14 is a difficult comp, but the back half of the year sets up quite favorably for Panera.  This is not to say they will post blow out numbers, but simply to acknowledge the trends are likely to improve.


We are far from becoming a big fan of the stock, but to remain short, at these levels, would be unwise.  We believe there are now better opportunities, both on the long and short side, elsewhere.


PNRA: Closing Best Idea Short - chart1


Research Recap:

PNRA Hype Makes It Shortable (04/05/2013)

PNRA Short Thesis Playing Out As Expected (04/24/2013)

PNRA Short Thesis Playing Out As Expected, Part II (07/23/2013)

PNRA: No Quick-Fix Recipe (09/26/2013)

PNRA: Stage 1 Denial (10/21/2013)

PNRA: The Pace Of Change? (10/23/2013)

Best Idea Update: Short PNRA (12/19/2013)

PNRA: Expect Some Near-Term Pain (03/26/2014)

PNRA: Much Noise, Little Clarity (04/30/2014)


Howard Penney

Managing Director


Fred Masotta


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