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


CAKE: Closing Best Idea Short

We added The Cheesecake Factory (CAKE) to our Best Ideas list on 01/16/2014 at $47.51/share.  Since this time, 2014 EPS estimates have been revised down approximately $0.10 from $2.38 to $2.28, but the share price has been resilient (down ~1%).  The S&P 500 is up ~6% over this time.  With this note we are removing Short CAKE from our Best Ideas list.

CAKE was intended to be an intermediate-term short call, hinged on our expectation for a disappointing 1Q14.  This came to fruition, as notable margin pressure manifested in a $0.06 earnings miss.  In fact, we even got the full-year guide down we were looking for (FY14 EPS $2.24-2.33 from prior $2.29-2.41) but the stock’s resistance to follow suit has been discouraging.  Six consecutive quarters of declining traffic continues to be concerning, but this appears to be the new norm in casual dining.


At 8.85x EV/EBITDA (NTM) and 19.59x P/EPS (NTM), the stock screens quite attractively relative to other casual dining companies.  Given the company’s superior same-store sales and revised FY14 estimates that appear achievable, we can no longer recommend it as a high conviction short.  We wish the stock followed the fundamentals more closely to-date, but hope is not an investment process.


On to the next one.


CAKE: Closing Best Idea Short - chart1


Research Recap:

New Best Idea: Short Cake (01/16/2014)

CAKE: Risk Profile Rising (01/17/2014)

CAKE: Operational Observations (01/21/2014)

CAKE: Dairy Prices Rising (01/29/2014)

CAKE: Thin Batter (02/13/2014)

CAKE: Still Short (04/24/2014)


Howard Penney

Managing Director


Fred Masotta


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.


TODAY’S S&P 500 SET-UP – June 9, 2014

As we look at today's setup for the S&P 500, the range is 31 points or 1.25% downside to 1925 and 0.34% upside to 1956.                           













  • YIELD CURVE: 2.21 from 2.19
  • VIX closed at 10.73 1 day percent change of -8.13%


MACRO DATA POINTS (Bloomberg Estimates):

  • No major reports scheduled
  • 9:10am: Fed’s Bullard speaks in Florida
  • 12:45pm: Fed’s Tarullo speaks in Washington
  • 1:30pm: Fed’s Rosengren speaks in Guatemala



    • Obama said to prepare action to ease student debt payments
    • Kerry calls threats of freed Taliban to resume war ’baloney’
    • House Veterans’ Affairs Cmte hearing on “Data Manipulation and Access to VA Healthcare: Testimony from GAO, IG and VA
    • 9:30am/10am: Supreme Court to issue orders, opinions
    • 11am: NABE holds conf call to discuss economic outlook
    • 9pm: Former Sec. of State Hillary Clinton to be interviewed on ABC News on new book ‘‘Hard Choices”
    • U.S. ELECTION WRAP: Mississippi Politics; Calif. 31st CD Race
    • Washington Week Ahead



  • Tyson said to win bid for Hillshire, besting Pilgrim’s Pride
  • Treasury discloses limits on bank-data sharing w/spy agencies
  • Credit Suisse may sell more of fixed-income venture
  • Netflix holders vote whether to split chairman/CEO role
  • China said to suspend import permits for Sygenta’s MIR 162
  • McDonald’s May comp-sales growth seen led by Asia, Europe
  • SABMiller seeks to ramp up shr of U.S. premium-beer mkt: FT
  • Buffett auction gets $2.17m winning bid from Singaporean
  • Kraft joins J.M. Smucker in raising coffee prices
  • Japan growth picks up more than estimated on investment
  • Macau yr gaming growth est. cut to 12% at Deutsche Bank



    • Casey’s General Stores (CASY) 4pm, $0.53
    • Comverse (CNSI) 6:50am, $(0.06)
    • Ferrellgas Partners (FGP) 7am, $0.59
    • Hertz (HTZ) 6:02am, $0.09
    • Pep Boys-Manny Moe & Jack (PBY) 4:30pm, $0.06
    • Triangle Petroleum (TPLM) 5:48pm, $0.12



  • WTI Trades Near Three-Day High on U.S. Employment; Brent Rises
  • Cotton Acres Expanding in India as Prices Climb to Two-Year High
  • Copper Bets Cut Most in Month as Metal Leads Losers: Commodities
  • China Said to Suspend Import Permits for U.S. Corn Product
  • Copper Declines as Lower Chinese Imports Stoke Demand Concern
  • Corn Drops as U.S. Crop Conditions Boost Production Prospects
  • Gold Near One-Week High as Palladium Reaches Highest Since 2011
  • Sugar Rises Amid Signs Physical Demand May Recover; Coffee Falls
  • Steel Rebar Falls as China Imports Drop Signals Weakening Demand
  • Hedge Funds Retreat From Record Crude Wagers on Supplies: Energy
  • Vale Too Rich for Barclays on Iron’s 30% Plunge: Brazil Credit
  • World Needs Saudi Arabia to Supply Record Oil as OPEC Meets
  • U.S. Mint Gold Coin Sales Fall 49% on Fed Tapering, Flat Prices
  • Mitsubishi UFJ Trust’s Gold ETF Grows to Record as Prices Drop


























The Hedgeye Macro Team














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.


Liz Ann Sonders, chief investment strategist at Charles Schwab, sits down with Hedgeye CEO Keith McCullough to talk markets, the economy and much more in this latest edition of HedgeyeTV's "Real Conversations."


Hedgeye CEO Keith McCullough gives his outlook for the broader market and Russell 2000 on Fox Business' Opening Bell last Monday.


Here's the question-and-answer portion from our daily institutional Morning Call hosted by Hedgeye CEO Keith McCullough and Macro analyst Darius Dale from Tuesday.


Click here to subscribe to Cartoon of the Day. 


The Best of This Week From Hedgeye - Blinders cartoon June 2014


The Best of This Week From Hedgeye - shark cartoon June 2014 

The Best of This Week From Hedgeye - Job growth 6.5.2014


The Best of This Week From Hedgeye - SPX 


As bond yields crash year-to-date and the Russell delivers negative returns, the world’s most consensus short position (SPX Index + E-mini) hit another new high on no volume on Monday. Click here to view the poll and results.

 The Best of This Week From Hedgeye - poll


Fourth Week of Consecutive Decline in Mortgage Demand

The Best of This Week From Hedgeye - 18x74ymmndzzhjpg

Despite falling rates and solid labor market indicators, the demand to buy homes keeps dropping. Click here to continue reading.


Jobless Claims: Back at Best Levels Year-To-Date

 The Best of This Week From Hedgeye - jobs1

A second week of accelerating improvement brings rolling non-seasonally adjusted claims back to best levels YTD. Click here to read more.


Hedgeye Retail: Wary Of Skechers' (Mis)Direction | $SKX

The Best of This Week From Hedgeye - chart1 6 2 large

We've never seen a brand go in so many directions at once. Click here for more.



Takeaway: Current Investing Ideas: GLD, HCA, HOLX, LM, LO, OC, RH, and TIP

Below are Hedgeye analysts' latest updates on our EIGHT current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.


*Please note we added TIP and removed ZQK from Investing Ideas this week.


We also feature three institutional research notes from earlier this week which offer valuable insight into the markets 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 –  On Wednesday afternoon we reiterated our call to buy Gold ahead of the ECB meeting which was anticlimactic relative to expectations.


The ECB made the following rate cuts:

  • Benchmark Rate Cut from 0.25% to 0.15% (0.10% estimated)
  • Marginal Lending Facility from 0.75% to 0.40% (0.60% estimated)
  • Deposit Facility from 0.0% to -0.10% (-0.10% estimated)

After the announcement at 7:45 a.m., the Euro (ETF: FXE) opened down -0.35% from its Wednesday close and moved higher throughout the day to close +0.43% on the session. Gold (ETF: GLD) rallied on the announcement and closed +0.75% on the day. Gold is up +0.55% week-over-week, and we remain long into the Fed policy meeting on the 18th.


Because we believe Gold is a hedge against the expectation for forward-looking dollar devaluation, Gold’s strong correlation to the Euro as soon as Mario Draghi mentioned a potential asset purchase program back in February is not the least bit surprising. 



HCA – We’ve been attempting to measure deliveries with a monthly survey of OB/GYNs. Our May/June survey shows a modest improvement, but deliveries reported by the surveyed OB/GYNs continue to decline year over year. The results have been consistently showing a decline over the last several months despite comments from hospital companies, including HCA Holdings, and data from the US Census showing that births accelerated in 4Q13 with growth continuing into 1Q14. 


The US Census will update their data for May by the fourth week of June, giving us what would appear to be the most accurate indication of maternity trends.  We continue to track these data closely as maternity is the  largest contributor to inpatient admissions.


INVESTING IDEAS NEWSLETTER - Deliveries completed May

HOLX ­­– The monthly OB/GYN survey of Pap utilization shows we are on track with our estimate of an annual rate of decline of -10% for Hologic’s ThinPrep franchise.  While some physicians are seeing volume decline at 20% or more in some cases, there are many others who are already compliant with the 2012 Cervical Cancer Screening Guidelines, or at the other extreme will never reach 100% compliance of testing every 3 years. 


Patient volume weakened somewhat sequentially, particularly among commercially insured patients. Medicaid volume remained positive, likely supported by the ACA.  Regionally, the Midwest was particularly weak relative to other regions.




LM – Shares of leading bond fund manager Legg Mason had another good week rising 4% as the hunt for yield among stocks and bonds continued. With the European Central Banks cutting rates again, the outlook for most global paper brightened as when an important developed market lowers prevailing interest rates, existing fixed income can appreciate.


Legg Mason also sold a small sub-scale asset management division to Stifel & Co. during the course of the most recent 5-day period which relays that LM management is focused on delivering strong shareholder returns by selling non-core assets and executing share repurchases and dividend hikes. The year-to-date outperformance of an investment in Legg Mason is undeniable with LM shares now up over 16% in 2014, some 11 points higher than the next best performing asset management stock.


We still like the long position until Street consensus recognizes this out of favor investment.




LO – The stock pulled back off all-time highs this week on no new news events. For yet another week the investment community is wondering if Lorillard will be taken out, likely by Reynolds American (RAI).


We continue to suggest that investors hold this stock into potential news of the buyout or until our long-term fair value price of the stock at $80/share is realized.  And we continue to assert that the company’s powerful earnings generation is anchored 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 –  Owens Corning’s roofing & insulation segments draws more revenue from the renovation/repair segment versus raw housing starts. This makes intuitive sense as weather, plus wear and tear, occurs more frequently than construction of new homes.


Looking at the graph below, the variance between NAHB’s Remodeling Index and the Home Builders Index is easily noticeable. The Home Builders Index fluctuated from 8 to 70 compared with 21 to 57 for the Remolding Index. In other words, the remodeling market is less cyclical than the housing market, which should provide Owens Corning with stable earnings compared to housing related names such as Lennar, D.R. Horton, and KB Homes. 




RH – Restoration Hardware reports earnings Wednesday, June 11th after the close, and we are expecting revenue growth in the high teens. This is a tale of two halves for RH, with square footage growth weighted towards the back half of the year and the anniversary of the change in Source Book strategy starting in 3Q.


Our model is calling for low 20% revenue growth in the first half compared to high 20% in the back half, and 25% for the full year. That coupled with slight margin expansion puts us significantly ahead of the street for the both the first quarter and the balance of the year.


TIP –  Hedgeye's macro team added the iShares TIPS Bond ETF to Investing Ideas this week. Click here to read the full report from macro analyst Darius Dale.


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Click on each title below to unlock the institutional content.


China to Implement QE?

Macro analyst Darius Dale takes a look at why it remains unlikely that he sees anything resembling meaningful monetary stimulus in China over the intermediate term.


Corelogic Data for May Show Housing Is Slowing Rapidly

Hedgeye's Housing team analyzes CoreLogic's May HPI report, which showed further marked deceleration in the rate of home price growth nationally.



Eye-Catching Industrials Data 

Industrials analyst Jay Van Sciver explains why ISM Manufacturing new orders continues to imply that the 1Q 2014 slowdown was a bit more than just weather.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.