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Takeaway: Census Bureau revised Healthcare Spending estimates, the lone source of strength in 1Q GDP, a lot lower. A -2% report on deck for June 25.

We’ve highlighted repeatedly over the last few months that reported healthcare spending in 1Q14 was largely a guess by the BEA due to the implementation of Obamacare and a dearth of hard data.  More specifically, we noted the following in March & April:   


*Healthcare Spending:  The strength in Healthcare Services spending stems largely from the implementation of Obamacare. The reported figures, by BEA’s own admission (see their note Here), are very much an estimate and the preliminary data are likely to be revised (significantly) over time as the Census bureau’s quarterly QSS and annual SAS survey’s provide harder data.   


With reported Hospital and Outpatient spending both accelerating materially in 1Q14, it could also be that individuals are accelerating medical consumption ahead of ACA implementation and uncertainty around coverage changes. 


Either way, in the context of the broader spending data, the takeaway is pretty straightforward – Healthcare Services represent ~17% of total household consumption expenditures and certainly impacts the direction of reported, headline consumption growth.   To the extent that deceleration is the larger trend across the balance of services, a mis-estimation of ACA related spending and/or a significant, transient pull-forward in medical consumption could be materially distorting the prevailing, underlying trend. 


The Census Bureau released the 1Q14 QSS data this morning (note: the QSS survey data feeds the calculation of household spending in GDP) and the estimate for Healthcare spending saw a sharp negative revision. 


Specifically, the data showed total revenue for Healthcare and social-assistance declined -2% QoQ in 1Q14 while Hospital revenue (the largest component of healthcare spending) declined -1.3% QoQ. 


Translating that into an exact impact on the final GDP estimate for 1Q14 (June 25th) is complicated by the fact that the reported QSS Healthcare spending data is both nominal and non-seasonally adjusted while the Hospital revenue is not adjusted for price changes (but is reported on a seasonally adjusted basis)


The translation complication is really besides the point, however.  The larger takeaway is simply this:


Services consumption was the singular source of strength in the 1Q14 GDP report and most of that was from Healthcare Services which contributed +1.01% to GDP – that estimate of accelerating healthcare consumption just got revised to negative growth which will take the final GDP estimate for 1Q down to -2.0% plus or minus. 


It also notable that Healthcare consumption growth, while decelerating modestly sequentially, was still very strong in April (again one of the lone sources of strength in household spending).  If the April (& 2Q) numbers get revised lower also then 2Q growth estimates will take a hit as well.


Full year consensus growth estimates for 2014 remain in the +2.5%-3% range - implying 4%+ growth over the balance of the year (exclusive of the forthcoming negative revision to 1Q).  Those estimates still need to come down.  








Christian B. Drake


Cartoon of the Day: We're Lost

Takeaway: We are still on another planet vs Consensus Macro on 2014 US GDP growth. And we're okay with that.

Cartoon of the Day: We're Lost - GDP cartoon 6.11.2014


Patti Hart’s employment contract rewards for change of control




As follow-up to our IGT recent analysis regarding IGT: A BETTER PRIVATE COMPANY, we now call subscribers attention to CEO Patti Hart’s recently revised employment contract filed via 8-K on November 15, 2013.  Hart is clearly incentivized to sell the company and may be leading the discussions with bankers and potential buyers. 


Fearing for the longevity of her employment while also wanting to catch a Golden Parachute and exit gracefully, Hart may pursue a change in control that earns an accelerated compensation payment. 


We continue to believe the Reuters story from Monday has teeth and we’re bullish on the prospects for some sort of value creating event:  a private equity or strategic buyout, some form of separation between Gaming and Interactive, or even a management change.



Patti Hart’s new employment provides for increased pay-outs “if termination of employment occurs upon or within eighteen months following certain changes in control of the Company.”  The increased payout apply to severance compensation, continued medical coverage, accelerated vesting of any time-based awards, unvested equity awards, and stock options. 


Furthermore, the following new compensation disclosures were made in the 2014 Shareholder Proxy:

  • For the “Change in Control (no termination)” the equity acceleration is $20.8 million
  • For the “Termination of Employment” section, note the $25.3 million in equity acceleration value in the new disclosure which follows a change in control

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Exhibit A: Why There Seems to Be No Recovery In the First Time Homebuyer Market

Takeaway: This is an excerpt from a research note published by Hedgeye's financials team earlier this week.

We wanted to take a moment to flag the unstoppable force that is student loan growth in this country. 

Exhibit A: Why There Seems to Be No Recovery In the First Time Homebuyer Market  - STUDENT DEBT 

The chart below (taken from the G.19 data) shows the amount of federally-backed student loans sitting on the books of the United States. Currently the figure stands at $775 billion, up $112 billion (+16.9%) in the last 12 months.


For those wondering why there seems to be no recovery in the first time homebuyer market we offer the chart below as "Exhibit A".


Exhibit A: Why There Seems to Be No Recovery In the First Time Homebuyer Market  - student loans

VIDEO | Keith's Macro Notebook 6/11: UK EURO OIL

Retail Callouts (6/11): ULTA, LULU, TGT, SKX, H&M, ANF

Takeaway: ULTA beats on the 2 lines that matter - Comp & EPS. Chip single biggest liability for LULU. TGT taps GM exec to protect customer security.




  • RH - Earnings Call: 5:00pm



  • LULU - Earnings Call: 9:00am




ULTA - 1Q14 Earnings


Takeaway: Definitely the quarter that ULTA needed to print. Not a blowout by any means, but the company beat on the two lines that matter most to ULTA -- comp and EPS.  Comps were up 8.7% vs expectations of 6.2%. Gross margins were below expectations, but inventory grew well below sales, putting the SIGMA in a positive position (see below). The company maintained full year guidance, but gave every indication that assumptions were very conservative. e-commerce, which was +72% added 190bp to comp,  which is important given that the average ticket for dot.com is $50 vs $35 in brick and mortar. We're not a big fan of this story. But even after today's price action, we'd be very weary about shorting it.


Retail Callouts (6/11): ULTA, LULU, TGT, SKX, H&M, ANF - chart1 6 11


LULU - lululemon Founder Chip Wilson Votes Against Re-Election of Outside Directors



  • "Today, lululemon athletica inc. Founder Chip Wilson announced that he voted against the re-election of Michael Casey and RoAnn Costin to the Board of lululemon athletica inc...At lululemon Mr. Wilson has created a corporate culture that empowers employees and has pushed technical apparel beyond workout clothes to an everyday staple." 
  • "Mr. Wilson stated, 'After being asked by the Board to come back from Australia to help the company recover from the product recall last year, I have decided to vote against the re-election of the company's outside Board members. While I am excited about the new management team that I helped put in place, I am concerned that the Board is not aligned with the core values of product and innovation on which lululemon was founded and on which the company thrived. As a 27% shareholder in the company, I believe change is now needed at the Board level to increase shareholder value.'"
  • "Mr. Wilson continued, 'I was hopeful that we would be able to create a balance at lululemon between product and growth that would complement each other. Instead, I have found a palpable imbalance in Board representation, which is heavily weighted towards short-term results at the expense of product, culture and brand and longer-term corporate goals. I believe this is impacting the company's prospects. My vote today sends a signal to the financial community that the company must address this imbalance if lululemon is to fully recover.'"


Takeaway: Maybe the two Directors in question are not appropriate for LULU. But that's irrelevant. The simple fact is that Wilson's influence far outweighs the economic and voting interest of his shares. The guy 'left' last year, but the fact is that this was only in title.  He remains the single biggest liability for Lululemon. If Wilson really wants the company he founded to succeed, he'll put his stock in a trust, walk away, and leave the company in the hands of a management that is empowered to change LULU without getting Chip's sign-off on every decision.


TGT - Target Names Brad Maiorino Senior Vice President, Chief Information Security Officer



  • "Today, Target Corp. announced it has hired Brad Maiorino as senior vice president, chief information security officer." 
  • "Maiorino joins Target effective June 16 and will be responsible for Target’s information security and technology risk strategy helping to ensure that the company, its guests and team members are protected from internal and external information security threats. He will report to Bob DeRodes, executive vice president and chief information officer."
  • "Maiorino comes to Target from General Motors where he was the company’s chief information security and information technology risk officer. There he was responsible for leading the transformation of the company’s global information security and IT risk organization. Prior to General Motors, he was the chief information security officer at General Electric."


Takeaway: It's quite possible that Maiorino is the best person for the job. But given all Target's issues with consumer trust and confidence, do you think that just MAYBE it could have tapped someone from a company with a little more credibility than GM? The company does not have the kind of direct front-facing customer business that Target has.  And let's face it, its reputation with consumer honesty and transparency leaves much to be desired these days.




H&M - Sales development in May and second quarter 2014



  • "In May 2014, the H&M Group total sales including VAT increased by 19 percent in local currencies compared to the same month last year."
  • "Sales in May were positively affected by calendar effects of approximately 3 – 4 percentage points. In June, this will be reversed, i.e. sales will be affected by negative calendar effects of 3 – 4 percentage points. "
  • "In the second quarter of 2014, i.e. during period 1 March to 31 May, sales including VAT increased by 16 percent in local currencies."
  • Store count increased from 2908 to 3285 year over year, an increase of 13%.


SKX - Skechers' Triple Crown 'Win'



  • Skechers’ sponsorship of the thoroughbred led to a major media windfall. Chief executive officer Robert Greenberg said, 'We were on 400 TV shows in one day. What’s the value of that — my God.'”
  • "...it took seven days of negotiations with California Chrome’s owners before the pre-Belmont deal was struck, Greenberg said. Noting that the horse’s owners adopted the nickname 'Dumb Ass Partners' skeptics once gave them, Greenberg said, 'I’m not saying they’re dumb but that was a tough one.'”
  • "Skechers spent $300,000...The idea of imprinting 'Skechers' on the nasal strip California Chrome wore at Belmont had been discussed but there was concern that visual distraction 'would screw him up,' Greenberg said." 





  • "Abercrombie & Fitch Co. today announced that Christos Angelides has been named President of its Abercrombie & Fitch and abercrombie kids brands, a position he is expected to take up in October 2014."
  • "Mr. Angelides, 51, will report to A&F Chief Executive Officer Mike Jeffries and will have overall responsibility for all product and customer-facing activities for the Abercrombie & Fitch and abercrombie kids brands.  He will also be accountable for the financial performance of the brands."
  • "Mr. Angelides has spent his entire career with Next plc, a highly successful six billion dollar fashion retail and internet chain based in the United Kingdom, where he has most recently served as Group Product Director since August 2000."


Alibaba, EBAY, AMZN - Alibaba Takes on U.S. E-commerce Market With 11 Main



  • "The Chinese Web giant is making its first go at the U.S. consumer with 11 Main, a multicategory e-commerce destination that is launching in consumer beta mode today."
  • "11 Main is focused on small businesses and emerging brands…Consumers can shop via boutique or curated collections that are based on seasonal events or trends picked by 11 Main’smerchandising team, based in San Mateo, Calif. 
  • "Selling goods on 11 Main requires no up-front costs; the site takes 3.5 percent of sales."


9983 - Comptoir des Cotonniers Names Creative Director



  • "Comptoir des Cotonniers on Tuesday named Anne Valérie Hash its new creative director."
  • "A spokesman for the brand, controlled by...Fast Retailing Co. Ltd., said the first complete collection under her purview would likely be for the fall 2015 fashion season."
  • "Hash succeeds Amélie Gillier, who left the company in November."


AMZN, EBAY - eBay’s local delivery plans unravel: eBay Now may shut down



  • "Two years after launching its local delivery service eBay Now, eBay plans to shut it down, a VentureBeat source claims."
  • "The service is blowing a ton of resources, one source claims, and may not last, prompting eBay to walk away from pricing deals with retailers. An eBay spokesperson refused to deny claims that its eBay Now pricing deal with Best Buy has ended."
  • "Back in September 2013, eBay announced plans to launch in London “early next year.” And in October, Deb Sharkey, VP of Local at eBay, laid out an aggressive plan to operate in 25 U.S. cities — including internationally — by the end of 2014. Such plans no longer exist, according to an eBay spokesperson: “We are focused on supporting eBay Now in its current markets (San Francisco, San Jose, New York, Chicago, and Dallas), and we are not announcing any new market expansions at this time.”

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