“A remarkable aspect of your mental life is that you are rarely stumped.”

-Dan Kahneman


Lightning struck over 3,000 times in less than 2 hours in the UK last night. Thank God I got out of London in the morning! As I landed in New York, US stock market fear was crashing to the upside (VIX +41% < 2 weeks). Perma stock market bulls on my contra-stream (Twitter) were stumped.


The aforementioned quote comes from one of the forefathers of #behavioral finance (Kahneman wrote Thinking Fast, And Slow) and it’s cited in a book I was reading on the plane by Chip & Dan Heath called Decisive. It’s all about #process and how you make risk managed decisions.


Did you buy Gold Bond before your recent overseas flight? Did you sell the momentum stocks on the June bounce like you should have at the beginning of the year? Everything we do in both business and in life is a decision. It’s a lot easier to read about fighting your emotions and confirmation biases than it is to implement it in your risk management process. But neither life, nor this profession, is easy.


Stumped? - Gold Bond cartoon 07.10.2014


Back to the Global Macro Grind


Decisive is a relatively new book, but the risk management concepts in it don’t deviate much from how we roll here at Hedgeye. In Chapter 3, the Heath’s introduce the strategy of “multi-tracking.”


“When you consider multiple options simultaneously, you learn the shape of the problem.” (pg 67)


In other words, widen your scope. As I was reading this I realized this is the number one thing that has improved my #process since starting the firm. The more macro I’ve gone, and the more research analysts we hire, the more options I have. There are always bull and bear markets somewhere.


From a risk management perspective, I call our #process multi-factor, multi-duration. This stops me from naval gazing at US equities on a simple moving average, 1-factor (price), chart. It also helps me get bullish when I’m right bearish on US growth – bullish on Gold and Bonds, that is…


In addition to the rip in the VIX yesterday (see our recent Q3 Macro Deck on Volatility’s Asymmetry):


  1. Gold and Silver ripped +1.5-1.7%, compounding their absolute and relative 2014 gains
  2. Long-term Treasuries (TLT) had a +1.1% day, hitting fresh YTD highs as bond yields re-tested YTD lows
  3. Inflation Protection (TIP) had another up-day, moving to +5.1% YTD


Beats being long the Russell growth index.


But the relative (and absolute losses) in the Russell 2000 for 2014 YTD shouldn’t surprise anyone who is reading my rants. While it took 62 trading days to give the SP500 a -1% down day (longest streak since 1995), the Russell has already lost -6.2% since July 7th and is -2% YTD.


Consensus Macro can blame the weather, trains, planes, and automobiles at this point … but the reality is that it’s almost August now and excuse making is not where the performance is.


If the only reason why the US stock market was down yesterday was a Malaysian plane crashing in the Ukraine, why did both Chinese and Indian stocks close UP on the session overnight?


Other than the Down Bond Yields, Down Russell, Up Gold move, what else happened yesterday?


  1. Housing Stocks (ITB) -2.5% after a horrendous week of housing data (mortgage purchase applications continue to crash)
  2. Bank Stocks (KRE) -2.3% as the lead indicator for net interest margin (Yield Spread) collapsed to YTD lows
  3. Biotech Stocks (IBB) -2.2% after the entire edifice of the social-no-earnings thing made lower-bubble-highs vs FEB 2014 peaks


Put another way, what worked and didn’t work yesterday was pretty much the same thing that’s leading and lagging on the 2014 scorecard. If you are bearish on rates, the US consumer, US housing, and high-multiple-bubble stocks with no earnings, you’ve been rarely stumped.


Our immediate-term Global Macro Risk ranges are now:


UST 10yr Yield 2.46-2.55%


RUT 1123-1155

BSE Sensex 259

VIX 12.53-14.99

WTI Oil 102.01-104.83

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stumped? - Chart of the Day

July 18, 2014

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TODAY’S S&P 500 SET-UP – July 18, 2014

As we look at today's setup for the S&P 500, the range is 21 points or 0.47% downside to 1949 and 0.61% upside to 1970.                                               













  • YIELD CURVE: 2.01 from 2.00
  • VIX closed at 14.54 1 day percent change of 32.18%


MACRO DATA POINTS (Bloomberg Estimates):

  • 9:55am: UofMich Consumer Sentiment Index, July prelim., est. 83 (prior 82.5)
  • 10am: Leading Economic Indicators, June, est. 0.5% (prior 0.5%)
  • 1pm: Baker Hughes rig count



    • House, Senate out
    • 12pm: Congressional Internet Caucus Advisory Cmte holds panel discussion on NSA surveillance programs
    • UN Security Council holds emergency meeting on MH17 crash, may take place at 3pm
    • U.S. Election Wrap: Colo. Dead Heat; Immigration Concerns



  • Ukraine, Russia point fingers over downed Malaysia plane
  • United Nations Security Council to discuss MH17 crash
  • Israeli forces carry out Gaza entry via land, sea
  • AbbVie to buy Shire Pharmaceutical for $55b in cash, stock
  • Line said to seek U.S. IPO with confidential SEC filing
  • McDonald’s workers claim co. fired them for union activity
  • American Apparel investor said to be close to buying loan
  • DoJ alleges FedEx role in delivering misbranded drugs
  • SEC looking at 10 firms in probe of high-speed trading
  • Microsoft job cuts provoke Finnish demands of worker support
  • Energy Future lenders gang up to force talks on rival plan
  • Amazon considering subscription service for e-books: NYPost
  • Union plans more strikes at 9 German Amazon sites: Bild
  • Petsmart talking with investment banks amid activism: WSJ
  • Twitter to roll out 4 new metrics with earnings: WSJ
  • CBS interested in CNN purchase if channel becomes available
  • DirecTV offering NFL package via web at 10 universities
  • IMF, Home Sales, Apple, Facebook, Ifo: Week Ahead July 19-26



    • Bank of New York Mellon (BK) 6:30am, $0.57
    • First Horizon National (FHN) 7am, $0.16
    • General Electric (GE) 6:30am, $0.39 - Preview
    • Honeywell Intl (HON) 7am, $1.36 - Preview
    • Huntington Bancshares (HBAN) 5:55am, $0.18
    • Interpublic Group (IPG) 7am, $0.25
    • Johnson Controls (JCI) 7am, $0.83
    • Kansas City Southern (KSU) 8am, $1.17
    • Laboratory of America (LH) 7:03am, $1.77 - Preview
    • VF Corp. (VFC) 7am, $0.35 - Preview



  • WTI, Brent Set for First Weekly Gain in a Month on Ukraine, Gaza
  • Gold Declines as Investors Weigh Dollar Against Global Tensions
  • Cocoa Grinding in Asia Climbs as Demand for Chocolate Increases
  • Glencore’s Woman Director Marks Progress for Mining: Commodities
  • ANZ Tightened China Commodity Financing Processes ‘A Little’
  • WTI Crude Seen Rising in Survey on Falling U.S. Supplies
  • MORE: Shanghai Exchange Copper Stockpiles Rise 29% to 108,851 Mt
  • Ban on U.S. Oil Exports Seen Dying One Ruling at a Time: Energy
  • Corn Volatility Rises as Options Traders Bet on Price Rally
  • Wheat Set for Weekly Climb as Investors Assess Black Sea Outlook
  • Buzzard Field Power Restored After July 13 Outage, Nexen Says
  • Colorado Governor Says He Opposes Measures Restricting Drilling
  • Kurdish Oil Grab Fuels Independence Dream as Iraq Unravels
  • Copper Traders Bearish for a Second Week as Supplies Seen Ample


























The Hedgeye Macro Team
















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CMG reports on Monday, July 21st AMC.


Takeaway: CMG has been the best performer in the restaurant space over the past year (+57.1%) and is a name we continue to prefer on the long side.  We are cautious, however, about the upcoming quarter given notable inflation in avocado, beef and cheese prices.  Recall that Chipotle only began taking ~6% of menu price in early June (~1,000 units), with the system-wide rollout likely completed by the end of 2Q.  Therefore, we question the extent to which management was able to protect margins in the quarter in the face of pressing inflationary pressures.  Looking out into 2H14, same-store sales momentum and the full impact of pricing suggests estimates are too low.  We'd therefore be buying on any post-earnings weakness.


Investment Thesis Overview

Chipotle continues to be one of our favorite longs in the big cap QSR space, highlighted by a best in class operating model and recent same-store sales momentum.  Traffic grew 13.4% in 1Q and management has several drivers in place (faster throughput, non-traditional marketing, GMO-removal, sofritas, catering) to help capitalize on this and enable them to deliver +15% revenue growth and +20% EPS growth for the next few years. 


Food inflation driven by high beef, avocado and cheese prices continues to be a cause for concern, but a MSD price increase should mitigate these pressures in 2H14 and 1H15.  We believe Chipotle has ample pricing power which should allow them to raise prices with little resistance and give another leg up to margins.


Chipotle also continues to attract investors with two potential growth drivers (ShopHouse, Pizzeria Locale) and a strong balance sheet (room to accelerate buybacks).


Earnings Expectations

For 2Q14, the street expects revenues of $989.1 million (+21% YoY), adjusted EPS of $3.09 (+9% YoY), and company owned same-store sales of +10.2% (incl. +2% price).  We’re cautious on earnings given food inflation and little impact on the Q from June price increases.


Same-Store Sales Trends

Given recent momentum and menu pricing of ~6%, we expect two-year same-store sales to accelerate throughout 2H14 and into 1H15.











The 2Q margin outlook is dicey given food cost pressures.  As such, we expect to see notable restaurant level and operating margin contraction.  However, this trend should turn moving forward, as we expect price increases in 2H14 and 1H15 to drive restaurant level and operating margin expansion for the next several quarters.









CMG is currently trading at 43.34x P/E and 21.92x EV/EBITDA on a NTM basis.



This quarter depends on the company’s ability to maintain prior same-store sales momentum and mitigate food cost pressure by leveraging labor and other operating expenses.  2H14 performance will also depend on these factors, but will have the full benefit of ample price increases, which should give restaurant and operating margins another leg up.  Any pushback to these price increases (though unlikely), would be a significant blow to our bullish thesis.  Highly promotional QSRs are trying their best to make this happen.  A decline in new unit productivity would also raise a red flag, as CMG begins moving into smaller markets.


Call with questions.


Howard Penney

Managing Director


Fred Masotta


Replay Ballantyne Brands Expert Call - Are Vaporizers Stealing Share from Big Tobacco

Yesterday (7/16) we continued our “Speaker Series” on e-cigarettes and e-vapor with John J. Wiesehan, Jr., CEO of the Charlotte based company, Ballantyne Brands, the maker of Mistic Electronic Cigarettes.  Mistic is the No. 2 brand in the xAOC category, in 60,000 brick and mortar stores including Walmart, Dollar General, 7-Eleven, and Walgreens (to name a few).


We had a chance to put on a similar call with John in June of last year as part of a series of talks we’ve held with industry experts (previous speakers included CEOs of NJOY, LOGIC, Victory, and VMR Products) to help update and define shifts and trends within the e-cigarette/e-vapor industry. 


Here are the links to the presentation and video replay of the call.


John substantiated many trends we are seeing across the industry, perhaps the largest one being vaporizers taking share from cig-alike (or mini) e-cigarettes, which mostly make up the current non-combustible portfolio of Big Tobacco.  Alongside the consolidation we are seeing in the industry (with Lorillard’s e-cig business blu expected to be sold to Imperial as a part of Reynolds’ acquisition of Lorillard), and persistent questions about the regulatory environment around the category, below are our key takeaways from John’s prepared remarks and a robust Q&A session:


How will the FDA come down on flavors, online sales, and advertising?John expects the FDA to take a science based approaching in evaluating e-cigarettes. To this end the FDA recently announced it would spend $270M on future research. On advertising, he says U.S. legislators (see U.S. Senator Committee on E-Cigs Lobs Harsh Criticism Yet Science Inconclusive) are very concerned about advertising targeting children and the Co. has a policy to target only current combustible smokers in its marketing. Hedgeye’s view agrees with a science based approach, which we expect to be counted in years, and we suspect that over time flavors, online sales and advertising will be banned/restricted in similar fashion to combustible cigarettes.


Is there a broader industry trend to bring liquid, filling and manufacturing of e-cigs/e-vapor products to the U.S. (from China)?  John believes that the consumer will increasingly demand that liquids are USA sourced and filled. He also believes U.S. based manufacturers will be better able to facilitate FDA regulation. In 2012/13 Ballantyne Brands was ahead of most of its peers in deciding to source and fill its e-liquid products in the U.S. (the Co. still sources hardware, including batteries, from China).  We expect Big Tobacco and independent manufacturers to increasingly move to U.S. shores. For competitive (pricing) reasons this is yet to make economic sense to most major players, however increasingly it seems prudent from a regulatory perspective.


How do we contextualize the weakness in E-cig sales trends? How long will this persist?   John says there are clear signs that the consumers is shifting to a vapor product. Indicators include the proliferation of vapor products in easily accessible retail channels (including the company’s Haus personal vaporizer) and the rise in vapor shops across the U.S. (estimated at 6,000-10,000). He estimates that the vapor category is worth between 30% to 50% of the entire e-cig/e-vapor industry.  He confirmed many of the opinions we’ve heard in our “Speaker Series” that the customer is looking for an experience closer to combustible cigarettes and he rank ordered current products (from the best consumer product experience to worst) as: 1) e-vapor (tanks, mods, etc.); 2) rechargable cig-alike; and 3) disposable cig-alike. He thinks disposables could eventually go away. We continue to see that the shift toward e-vapor (which is largely not counted by measures channels) as a major contributing factor to the decline in e-cigarette sales data across measured channels. Added to the decline is also a heavily promotional environment as both MO and RAI begin national campaigns to promote their e-cig brands in MarkTen and VUSE, respectively. 


How do the product offerings of MarkTen and Vuse differ from blu’s offering and how might this impact overall market share figures?  John expects that once all of Big Tobacco is marketing products nationwide the dollar share should go back up, despite an initial period of discounting and promotion to get consumers to try the products.  In terms of technology he says VUSE is a product strictly made in the USA (out of Kansas) and doesn’t expect the experience to be much different from blu.  Regarding MarkTen, which is made in China, he does not see innovation that will create much surprise (if any) for the industry. We have no data to size up VUSE or MarkTen, however we suspect that Big Tobacco’s offering may underwhelm the consumer, accelerating sales of alternative e-vapor products. Although there’s initial rumblings of Big Tobacco’s awareness of this shifting landscape and in some cases plans/development for superior non-combustible offerings, we expect in the near-term no great catalyst to arrest falling (measured) e-cig trends.


Is there future M&A in sight for Big Tobacco or will they fund their non-combustible brands internally? (Ex. Lorillard purchased blu and SKYCIG; Altria bought Green Smoke; PM acquired Nicocigs).  John believes there will be much more M&A over the next year. He thinks Big Tobacco will need to pay attention to independents like Mistic Electronic Cigarettes (and NJOY and LOGIC), that and nimble and can create a product category quickly, because he believes Big Tobacco is missing half of the U.S. market.  We expect the e-cigarette/e-vapor market to remain highly fragmented (especially given the FDA’s mild proposed regulatory stance that allows online sales and flavors). We see a handful of private players (like Ballantyne Brands, NJOY, LOGIC, and Victory) that stand to compete with Big Tobacco in retail (despite ever limited shelf space), and therefore are posed as attractive buyouts for Big Tobacco given their potential as established brands with complementary product offerings. 


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


Poll of the Day Recap: 71% Are Bearish on Housing

U.S. housing starts unexpectedly fell 9.3% to a nine-month low to an 893,000 annualized rate in June, versus a 985,000 pace in May which was weaker than initially estimated. For the record, Hedgeye has been bearish on housing since the spring. “Today’s number wasn’t pretty, it confirms our negative outlook,” said analyst Josh Steiner who co-heads Hedgeye's financials and housing sectors.


In our Real Conversations video below Chris Whalen, Senior Managing Director and Head of Research at Kroll Bond Rating Agency and Hedgeye Financials Sector Head Josh Steiner discuss the structural issues within the housing market and how demand peaked in Summer 2013.



In the today’s poll we asked: Are you bullish or bearish on housing over the next year?


At the time of this post, 71% are bearish, 29% are bullish.


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