Client Talking Points


Newsy call by Goldman yesterday reiterating what’s been the wrong call in 2014. Gold futures/options contract volume was +27% versus the 5-day average on that, but neither our TRADE line of $1301 support, nor implied volatility (still -2% on a 1 month basis) confirmed the 1-day fear. Buy more!  


If you ask the bond market about yesterday’s Goldman Sachs’ call on Gold or consensus U.S. growth acceleration hopes in Q3, it doesn’t care – 10yr yield right back to 2.53% this morning with immediate-term downside to 2.49% into Yellen’s testimony.


Lines of immediate-term TRADE resistance that matter to us most are EuroStoxx50 = 3241, DAX 9855, and FTSE 6788. We are happy to let the market tell us which way to go in European equities for July and August.

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


Reynolds American To Acquire Lorillard In Transaction Valued At $27.4 Billion, or $68.88.



The way of the pioneer is always rough.

-Harvey S. Firestone


Despite yesterday’s sell-off in Gold the shiny commodity remains up +9% year-to-date and the UST 10yr Bond Yield is down -17% year-to-date.


TODAY’S S&P 500 SET-UP – July 15, 2014

As we look at today's setup for the S&P 500, the range is 31 points or 1.17% downside to 1954 and 0.40% upside to 1985.                                                    













  • YIELD CURVE: 2.08 from 2.09
  • VIX closed at 11.82 1 day percent change of -2.15%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:30am: Retail Sales, m/m, June, est. 0.6% (prior 0.3%)
  • Retail Sales Ex Auto, m/m, June, est. 0.5% (prior 0.1%)
  • 8:30am: Empire Manufacturing, July, est. 17 (prior 19.28)
  • 8:55am: Redbook weekly sales
  • 10am: Business Inventories, May, est. 0.6% (prior 0.6%)
  • 10am: Fed’s Yellen Gives Semi-Annual Testimony to Senate panel




    • FEC reporting deadline for some PACs and parties
    • 10am: FDIC board meets in open session
    • 10am: CBO releases long-term budget outlook
    • 10am: DoD spending bill mkup at Senate Appros. subctme
    • 10am: Senate Judiciary Cmte hearing on S.1696 to prohibit certain limits, requirements for abortion service access
    • 10am: Subcmte on oversight & investigations of House Fin Svcs Cmte on DoJ’s Operation Choke Point consumer lending program
    • 2pm: Joint Economic Cmte holds hearing to assess 5 years of economic recovery
    • 4pm: Reps.  Nancy Pelosi, John Larson, introduce companion to Senate’s proposed campaign finance constitutional amendment
    • U.S. ELECTION WRAP: Drs. for Congress; Bechtel, Schwab Giving



  • Fed Chair Yellen gives semi-annual testimony to Senate
  • U.S. said to push EU envoys for additional Russia sanctions
  • Boeing said to be near orders from lessors of $9.2b in planes
  • Airbus’s $21b in sales tops Boeing at Farnborough opening
  • Draft U.S. defense bill funds 34 F-35 JSFs, extra ship
  • German Zew investor confidence falls for seventh month
  • Sprint said to plan for long U.S. review of T-Mobile purchase
  • Citi, Discover, others to report June credit-card charge-offs
  • Microsoft said to announce job cuts as soon as this week
  • U.S. DoJ probes price coordination among music publishers: WSJ
  • Facebook, Nielsen to track TV viewing habits on devices
  • Alibaba, Lions Gate to start China video streaming service
  • Staples, Postal Service end plans for mini offices: WSJ
  • Novartis to license Google’s “smart lens” technology
  • Oil, railroad lobbies offer plan to phase out old tank cars
  • More energy cos. seen seeking condensate export access
  • U.S.’s Levin calls AbbVie deal tax inversion “wake-up call”
  • N.Y. AG says data breaches more than tripled in 2006-13
  • FedEx says U.S. DoJ to treat asbestos case as criminal
  • President Obama to deliver speech on economy in McLean, Va.



    • Comerica (CMA) 6:40am, $0.76
    • Commerce Bancshares (CBSH) 7:00am, $0.68
    • Goldman Sachs Group (GS) 7:35am, $3.09 - Preview
    • JB Hunt Transport Services (JBHT) 8:30am, $0.79 - Preview
    • Johnson & Johnson (JNJ) 7:45am, $1.55  - Preview
    • JPMorgan Chase & Co (JPM) 6:59am, $1.31 - Preview
    • Wolverine World Wide (WWW) 6:30am, $0.27



    • AAR (AIR) 4:05pm, $0.41
    • ADTRAN (ADTN) 8:15pm, $0.30
    • Boston Private Financial (BPFH) 4:05pm, $0.20
    • Cintas (CTAS) 4:15pm, $0.75
    • CSX (CSX) 4:01pm, $0.52
    • Intel (INTC) 4:01pm, $0.52 - Preview
    • Interactive Brokers Group (IBKR) 4:01pm, $0.29
    • Pinnacle Financial Partners (PNFP) 5:30pm, $0.48
    • Yahoo! (YHOO) 4:05pm, $0.38 - Preview



  • Brent Front-Month Contango at $1/Bbl for First Time in 4 Years
  • Brent Crude Falls to Three-Month Low on Supply; WTI Near $100
  • Asia Chocolate Binge Compounds World Cocoa Shortage: Commodities
  • Albemarle to Buy Rockwood in Cash & Stock Deal Valued at $6.2b
  • Zinc Lured East as Mitsui Sees Support for Premiums in Asia
  • Copper Slips Before Yellen Testifies to Legislators on Policy
  • Crop Sowing in India Seen Gathering Pace as Monsoon Revives
  • North Dakota Expects ‘Big Surge’ in Oil Output Through Aug.
  • Corn to Soybeans Decline as U.S. Crops in Best Shape Since 1994
  • Marcellus Natural Gas in Northeast Drives Record U.S. Output
  • Steel Rebar Falls as Investors Sell After China FDI, Loan Data
  • Palm Imports by India Drop for Second Month as Sunflower Climbs
  • U.S. Condensate Producers Seen Jumping on Export Bandwagon
  • Strong El Nino Seen Unlikely by Australia as Pacific Ocean Cools


























The Hedgeye Macro Team
















CHART OF THE DAY: Let's Connect the Macro Dots


CHART OF THE DAY: Let's Connect the Macro Dots - Chart of the Day

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

My Dear Gold

“Frankly, my dear, I don’t give a damn.”



That’s what Rhett epically told Scarlett at the end of Gone With The Wind.  That pretty much sums up what I think of the Goldman call to sell Gold yesterday too.


Earlier in the movie, Rhett explains the generational gap to Scarlett:


“If you are different, you are isolated, not only from people of your own age but from those of your parents… but your grandparents would probably be proud of you and say, there’s a chip off the old block… and your grandchildren will try to be like you.” (The Fourth Turning, pg 79)


And that pretty much summarizes my generation vs. The Old Wall’s boomer and GI generations. Yes, I’m generalizing to make a point. You can blame my birth year, or blame them.  It doesn’t matter.  History won’t care.  In terms of our Global Macro #process, we are different.  And that’s just fine with me.


My Dear Gold - goldbars thumb


Back to the Global Macro Grind


If you ask the bond market what it thought of the GS call to sell Gold yesterday, evidently it couldn’t give a damn either.  US 10yr Treasury Yields are back down to 2.53% this morning and remain as bearish as Gold is bullish in our model. If you want to get Gold right, get rates right.


Put another way:


  1. If you are bearish on Q3 US GDP growth slowing, you are A) bullish on bonds and B) bullish on Gold
  2. If you are bullish on Q3 US GDP growth accelerating, you are B) bearish on bonds and B) bearish on Gold (like we were in 2013)


Inclusive of yesterday’s newsy selloff in Gold, don’t forget the context of the move:


  1. Gold is +9% YTD
  2. UST 10yr Bond Yield is -17% (-51bps) YTD


So the Goldman growth bulls have some hay to bail. That’s not a personal attack – I have plenty of friends at Goldman who I hold in the highest regard. It’s just the YTD score.


Since Goldman has some very thoughtful people in their research department, this makes for an interesting bull/bear debate. From a macro perspective, their calls for 2014 are fairly uniform. Their highest profile strategists have a bullish growth and interest rate bias:


  1. Abby Cohen is looking for US growth to accelerate and US Equities to see multiple expansion
  2. Jan Hatzius is trying to get the Fed to pull forward the “dots” (raise rates sooner)


Hedgeye, on the other hand:


  1. Is looking for #InflationAccelerating to slow US consumption growth and perpetuate multiple compression in early cycle stocks
  2. And is trying to front-run the Fed’s decision-making process by predicting they get easier (as the economic data slows) in Q3/Q4


Don’t worry – “front-running” is only a bad compliance word if you’re running a bank, broker dealer, or asset management firm with some sort of inside information. I don’t do that. I just run my mouth.


On our Q3 Macro Themes Call last Friday, I went through the bull case for Gold via our #DollarDevaluation theme (ping if you’d like to review our slide deck – I’ll be presenting it in London this week). The sequence of front-running predictable Fed behavior is as follows:


  1. On the margin, Q314 real consumption data slows like the June data did (i.e. the Fed can’t blame FEB weather anymore)
  2. Janet Yellen, being a very particular bureaucrat looking to dot i’s and cross t’s, will want to acknowledge that slowing
  3. By the SEP Fed meeting, Wall Street will be looking at a much more dovish Fed than the tapering one it had at the start of the year


If you agree with me on that:


  1. You short the US Dollar
  2. You buy more Treasuries (and slow-growth #YieldChasing equities that look like bonds)
  3. And you buy more Gold


What I care most about on the GS call is the impact it had on our core 3-factor risk management model yesterday (price, volume, and volatility):


  1. PRICE – Gold held both its immediate-term TRADE line of $1301 and intermediate-term TREND line of $1271
  2. VOLUME – vs the 5-day avg, futures and options contract volume was +27.7%
  3. VOLATILITY – implied volatility didn’t move much (it’s still down -2% and -18%, respectively, on a 1 and 6 month basis)


Put another way, Goldman can still move markets, big time, from a volume perspective. But on my score card, when A) price holds my TRADE and TREND lines of support and B) implied volatility is falling, across durations… I buy more.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.49-2.58%


RUT 1145-1175

USD 79.76-80.32

Gold 1

Copper 3.20-3.30


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


My Dear Gold - Chart of the Day

July 15, 2014

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YUM: Thoughts Into the Print

YUM: Thoughts Into the Print - 88


Takeaway: YUM has been one of the best performers in the restaurant space over the past 6 months (+6.1%) and is a name we continue to prefer on the long side.  Look for strength in China to dispel any remaining fears and the company to solidify its runway for +20% EPS growth in 2014.


Investment Thesis Overview

Despite being a strong performer to-date in 2014, YUM shares have room to run.  We see fair value between $90-100/share.


YUM continues to be one of our favorite longs in the big cap QSR landscape as we believe the company is well positioned to capitalize on a substantial long-term growth opportunity in China and other emerging markets.  Looking near term, we expect easy comps, notable margin expansion and positive earnings momentum to drive performance throughout 2014.  As we’ve stated before, the magnitude of this performance will depend heavily upon the trajectory of the recovery in China.  While management’s guidance of 40% operating profit growth in China may be aggressive, we believe they have multiple levers at their disposal to reach greater than +20% EPS growth in 2014.


Domestically, Taco Bell continues to take share from competitors and drive incremental sales through innovation.  The chain recently launched its national breakfast rollout, supported by a strong advertising campaign.  Early signs indicate that breakfast has been selling well and franchisees are supportive of the move.  We believe breakfast represents a material opportunity for Taco Bell, even if they are only able to capture a small piece of the market.  Taco Bell has significant brand momentum and continues to carry the domestic business.  We expect to see a renewed level of focus at both the KFC and Pizza Hut brands throughout the year, but don’t expect to see any material improvement as they continue to lose share to competitors.


In addition to its strong positioning in emerging markets, YUM has three main levers (growth investments, growing dividend, share repurchases) to continually support the stock and drive shareholder value.

YUM: Thoughts Into the Print - 55


Earnings Expectations

For 2Q14, the street expects revenues of $3.23 billion (+11% YoY), adjusted EPS of $0.72 (+29% YoY), and system-wide same-store sales of +3.3% (led by +11.2% growth in China).  We see upside to earnings driven by strong same-store sales and operating leverage in China as productivity initiatives continue to materialize.


Same-Store Sales Trends

System-wide two-year same-store sales look to have bottomed in 1Q14 and we anticipate a recovery from these lows.  A recovery in China and momentum at Taco Bell following its breakfast rollout should support meaningful system-wide comp growth throughout the year.

YUM: Thoughts Into the Print - 66

YUM: Thoughts Into the Print - 11

YUM: Thoughts Into the Print - 22



Strong comp growth and other efficiency initiatives in China should enable the company to improve restaurant level margins and operating margins in the quarter to an extent comparable to 1Q14.

YUM: Thoughts Into the Print - 33

YUM: Thoughts Into the Print - 44



YUM is currently trading at 22.00x P/E and 12.03 EV/EBITDA on a NTM basis.



The quarter, and really the year, relies heavily upon the performance of the China segment.  Therefore, the main risk to our thesis is any setback or weakness in this market which would likely be driven by disappointing same-store sales.  Over 90% of stores outside China are franchised.  As such, the domestic KFC and Pizza Hut businesses are largely irrelevant when looking at the grand scheme of things.  A continuation of the underperformance we saw at the Taco Bell brand in 1Q14 would be concerning, though to a much lesser extent than any underperformance in China.


Howard Penney

Managing Director


Fred Masotta


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.