Shoe Shine?

This note was originally published at 8am on June 03, 2014 for Hedgeye subscribers.

“Dude, look at your dirty shoes – you need a shine!”

-Joe (NYC)


Yesterday I was getting my shoes shined in NYC at one of my favorite spots – on the corner of Avenue of the Americas and 46th Street, right across from the building where I got fired.


Not that I keep track of the when and the why, but I wrote a book about it so it’s out there. Carlyle fired me for being “too bearish” on the US #ConsumerSlowing on November 2, 2007. My 1st son was born on November 7th. And the SP500 dropped 6% by the end of the month.


Yep, risk happens slowly, then all at once. You know when your shoes are dirty too. If you go to my spot, tell Joe I sent you. He’ll chirp anyone who is looking NYC serious with dirty shoes. Within a block, they all look down. They may not like it, but the truth is staring at them from their feet.


Shoe Shine? - boston shoe shine kids archive 66761 600x450


Back to the Global Macro Grind


Our preferred US Equity Growth index to be short of in 2014 remains the Russell 2000. In addition to being down -0.5% on Friday, it dropped another -0.7% yesterday to -3.1% YTD.


BREAKING: SP500 hits all-time highs –CNBC


Yep, as bond yields crash YTD (peak-to-trough decline in the 10yr Treasury Yield = 20%) and the Russell delivers negative returns, the world’s most consensus short position (SPX Index + E-mini) hit another new high on no volume yesterday. #hooray


Whatever you do, don’t look at your shoes yet.


Total US Equity Market Volume was -28% versus its 3-month average (and the average continues to crash!) and the US Equity market’s breadth (advancing vs. decline stocks) was negative yesterday too (46% gained in price, 50% declined). #dirty


But, but, you have to buy the SP500 … because it’s up, right?


As long as you buy SPX vs short Russell (IWM), I’m into that. From a risk Style Factoring perspective, the SP500 is not the Russell:


  1. SP500 has plenty of #InflationAccelerating components (like Energy and late-cycle Industrial companies taking price)
  2. SP500 has many more slow-growth #YieldChasing components (Utilities, REITS, Telecom, etc.)
  3. SP500 has way more consensus short sellers who tend to short low and cover high


Like the FTSE in the UK, the SP500 is much more multinational too. If you want the pure play on short US domestic growth, it’s the Russell.


While there’s no doubt that it’s a lot easier to call the macro game from the seat I have today than the one I used to be in, that doesn’t mean that market truths cease to exist. #OldWall hasn’t been there to help coach Portfolio Managers through US growth slowdowns. We have been.


Being right in an environment with Rising Variance at both the country and sector level gets easier if you know the macro economy we are in. With US #InflationAccelerating perpetuating US #ConsumerSlowing, here are the Top 3 US Equity Sectors you still want to be long:


  1. Energy (XLE)
  2. Utilities (XLU)
  3. REITS (VNQ)


To reiterate the Sector Style Factors you do not want to be long:


  1. Consumer Discretionary (XLY)
  2. Housing (ITB)
  3. Financials (XLF)


If you leave being US Equity market centric (life is easier that way), buying currencies and stocks in countries who had what the USA had last year (#StrongCurrency + #RatesRising and inflation deflating), current equity markets we still like on the long side are:


  1. United Kingdom (EWU)
  2. India (INP)
  3. Brazil (EWZ)


In addition to being long Bonds (TLT), Inflation Protection (TIP), and Commodities in 2014, it’s what you aren’t long when growth slows (bubble multiple stocks) that has made all the difference too.


My call wasn’t consensus in November 2007, and it wasn’t in January of 2014 either. While we need to be loud about seeing something that we don’t think the Street is paying attention to, we don’t want that to feel dirty to you. We want to help augment your process and keep your shoes shiny.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.57%

RUT 1089-1155

VIX 10.94-13.59

USD 80.05-80.75

British Pound 1.67-1.69

Brent Oil 108.42-110.76


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Shoe Shine? - SPX


TODAY’S S&P 500 SET-UP – June 17, 2014

As we look at today's setup for the S&P 500, the range is 35 points or 1.12% downside to 1916 and 0.68% upside to 1951.                                                       













  • YIELD CURVE: 2.13 from 2.13
  • VIX closed at 12.65 1 day percent change of 3.86%


MACRO DATA POINTS (Bloomberg Estimates)             

  • Fed opens two-day policy meeting
  • 7:45am: ICSC weekly sales
  • 8:30am: CPI y/y, May, est. 2% (prior 2%)
  • CPI ex-food and energy y/y, May, est. 1.8% (prior 1.8%)
  • 8:30am: Housing Starts, May, est. 1.03m (prior 1.072m)
  • Building Permits, May, est. 1.050m (prior 1.080m, revised 1.059m)
  • 8:55am: Redbook weekly sales
  • 4:30pm: API weekly oil inventories



    • House, Senate in session
    • Obama travels to Pittsburgh to speak on economy, then to NYC for DNC-LGBT gala, second DNC event
    • WHR CEO Fettig, WMT’s Gloeckler at Select USA forum
    • 8am: Senate Finance Cmte Chairman Ron Wyden
    • WSJ CFO conference in Washington, see program
    • 9am: Natl Assn of Manufacturers President Jay Timmons, Sr VP Aric Newhouse speaks at Bloomberg Government breakfast
    • 9:30am: Senate Permanent Subcmte on Investigations holds hearing on high-frequency trading
    • 1pm: Rep. Patrick McHenry, R-NC, head of House Financial Services’ Oversight panel
    • 10am: Senate Banking Cmte considers nominees: Julian Castro for HUD secretary, Laura Wertheimer for inspector general of Federal Housing Finance Agency
    • 11am: Sifma gives mid-year outlook for monetary policy, economic growth, employment
    • U.S. ELECTION WRAP: Members Vie to Replace McCarthy as GOP Whip



  • Fed will raise rates faster than investors expect: survey
  • GE to add commitment to protect French jobs to Alstom bid: FT
  • Boing, Lockheed JV starts work on new rocket engine: Reuters
  • Apple reaches settlement with U.S. states over e-book pricing
  • Hackers seen using complicit YouTube to sell stolen cards
  • N.Y. retailers agree to list unit prices on website
  • Sony May console sales beat Microsoft fifth straight month
  • Truckers fight federal rest rules after Morgan crash: NYT
  • Retail gasoline seen rising to 6-yr seasonal high
  • U.K. inflation falls more than forecast
  • Chinese holdings of U.S. Treasuries falls to 14-month low
  • ISIL militants attack north of Baghdad as Obama mulls options



    • Adobe Systems (ADBE) 4:05pm, $0.30   
    • Bob Evans Farms (BOBE) 4:02pm, $0.41 
    • FactSet Research Systems (FDS) 7am, $1.25        
    • John Wiley & Sons (JW/A) 8am , $0.68   
    • La-Z-Boy (LZB) 4:10pm, $0.32     
    • Yingli Green (YGE) 6am, ($0.23)



  • Brent Crude Drops for Second Day as Iraqi Oil Secured; WTI Falls
  • Gold Extends Drop From Three-Week High Before Fed Policy Meeting
  • Beef Reaches U.S. Record as Rancher Sees More Gains: Commodities
  • China’s Port Probe May Curb Iron Ore Financing, Demand: ABN Amro
  • Copper Climbs as Higher Auto Sales Bolster Outlook for Demand
  • Kurdish Region Oil Exports At 200K-250K B/D in July: Hawrami
  • Kurds Grab Fourth-Largest Iraq Oilfield as Islamists Advance
  • Iron Ore Futures in Singapore Slump to Lowest Since April ’13
  • Russia’s $8.2 Trillion Oil Trove Locked Without U.S. Know-How
  • Corn Trades Near Four-Month Low as U.S. Crop Conditions Improve
  • Europe’s Swollen Gas Reserves Guard Against Repeat of ’06
  • RasGas Said to Shut LNG Plant in October for Three Weeks
  • BP to Sign $20 Billion LNG Supply Deal With China’s Cnooc Today
  • El Nino Seen Delayed by Australia as Pacific Ocean Warming Eases


























The Hedgeye Macro Team














Poll of the Day Recap: 60% Believe We Are Entering A New Phase of Market Turbulence

Takeaway: 60% voted YES; 40% voted NO.

Should we fear what lies ahead?


As the Wall Street Journal reported this morning, “a raft of unsettling events have shattered the relative calm of the U.S. stock market and put investors on edge.” Concerns over Iraq and rising oil prices, Fed Policy jitters and other worries helped trigger a 12% jump in the VIX fear gauge and sent the S&P 500 down 0.7% last week, its worst performance in two months.


We wanted to know what you thought: Are we entering a new phase of market turbulence?


Poll of the Day Recap: 60% Believe We Are Entering A New Phase of Market Turbulence - turbulence 


At the time of this post, 60% voted YES; 40% voted NO.


Those who voted YES had this to say:

  • Mass murder, religious warfare, ethnic cleansing, civil war.  but who cares?  The S&P is at an all time high!!!  Complacency in the face of serious global turmoil, plus strengthening economic fundamentals in the US/EU - which means the markets may soon run out of positive expectations to build on
  • ... but tops are a process. Markets are a few months away from a significant top
  • Bull markets cannot last forever, especially with the slow growth


Those who voted NO reasoned:

  • It doesn't appear stocks are being bought for economic reasons. It's buybacks and large players like sov wealth funds, those bailing from bonds, etc.


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In Friday’s Early Look (Giddy Up) we highlighted the Fed G.19 Data from April which showed US revolving consumer credit balances rose at a month-over-month annualized rate of +12.3%, the fastest rate of growth since 2001.


While the (potential) inflection was certainly notable, historically, the series has been volatile and subject to significant revision, so the preliminary data is to be taken with some caution. 


In short, it was interesting but, in isolation, hard to build any specific conviction around.


This morning, we received some confirmatory data from Capital One (COF) who reported domestic card loans grew 1.7% MoM in May – a continuation of the strength observed in April.   


There are a few primary takeaways:

  • For COF, the increase in May was well ahead of typical May changes observed over the last decade and a second consecutive month of strength.
  • For consumer credit more broadly, the positive inflection in credit card loan growth is coming after more than 2.5 years of consistent, stagnant 0-1% growth. 
  • Consumption: Despite the acceleration in revolving credit, Household Spending in April was very soft and the collective Retail Sales data for April/May was very much middling

Whether or not rising auto and card balances is reflective of a confident, resurgent consumer or simply an attempt by households to maintain current levels of consumption in the face of rising food and commodity inflation remains open to debate. 


At present, we continue to think the data sides more with the later than the former. 






Christian B. Drake


Cartoon of the Day: Paying Rent

Takeaway: It's not cheap being an American consumer these days.

Cartoon of the Day: Paying Rent - Rent cartoon 6.16.2014

DFRG: Running Through Our Thesis

We added DFRG to our Best Ideas list as a SHORT on 06/05/2014 at $27.27/share.


Last week, we released a 67 page Black Book detailing why we believe DFRG is a short.  The following note is a very brief summary of our presentation.  If you would like more information or a copy of the deck, please email us.


Our short thesis centers on three critical themes:

  1. Slowing Trends, Declining Margins – Company-owned two-year same-store sales and traffic have been decelerating steadily since 3Q11.  Meanwhile, restaurant level margins (LTM) and operating margins (LTM) have been declining since 2Q12.
  2. A Portfolio In Flux – Del Frisco’s Double Eagle Steakhouse is a robust concept, but two-year same-store sales and traffic are decelerating.  The Sullivan’s concept is broken.  Grille is, at this point, nothing more than an unproven growth concept.
  3. Materially Mispriced – At 28.22x P/E (FY14) and 13.39x EV/EBITA (FY14), we believe DFRG is materially mispriced and fails to discount slowing trends, declining margins, rising commodity costs and other issues we’ve identified. Our SOTP analysis suggests significant downside.


As always, we like to put duration into context with all our longs and shorts.


DFRG: Running Through Our Thesis - c2


Over the past two years, DFRG has outperformed the SPX and its Peers by 70% and 62%, respectively.


DFRG: Running Through Our Thesis - c3


The financial performance of DFRG revolves around the performance of Del Frisco’s concept, with the brand generating 48.9% and 62.3% of revenues and restaurant level EBITDA, respectively.


DFRG: Running Through Our Thesis - c4


What are the bulls saying?


DFRG: Running Through Our Thesis - c5


Same-store sales are decelerating and remodels are not the panacea for Sullivan’s.


DFRG: Running Through Our Thesis - c6


DFRG: Running Through Our Thesis - c7


DFRG’s premium valuation is driven by the potential growth of the Grille concept.  With only 11 units, it is premature to call Grille a viable growth vehicle.  In addition, sister concepts traditionally have a poor track record.


DFRG: Running Through Our Thesis - c8


Management is still trying to understand its target market for the Grille and appears unsure of what locations to select.


DFRG: Running Through Our Thesis - c9


At 17.6%, Grille’s restaurant level margins are 1100 bps below that of Del Frisco’s.  This will continue to pressure the margin structure of the company, particularly with management’s current growth plans.


DFRG: Running Through Our Thesis - c10


The Street loves the company.


DFRG: Running Through Our Thesis - c11


But management has struggled to deliver on sales and earnings expectations.


DFRG: Running Through Our Thesis - c12


DFRG is trading near its all-time peak on several valuation fronts.


DFRG: Running Through Our Thesis - c13


DFRG: Running Through Our Thesis - c14


Using a generous sum-of-the-parts valuation analysis, we find that the stock is grossly overvalued.


DFRG: Running Through Our Thesis - c15


Call with questions.


Howard Penney

Managing Director


Fred Masotta



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