“For most of us, failure comes with baggage.”
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:
If you ignored the first 4-5 months of the year, on that scorecard things looked better than bad last week:
Not to be confused with the year-to-date TREND:
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.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.41-2.61%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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.
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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.
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.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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.
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.
Fourth Week of Consecutive Decline in Mortgage Demand
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
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
We've never seen a brand go in so many directions at once. Click here for more.
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