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. 

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

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.

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



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














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