My Dear Gold

This note was originally published at 8am on July 15, 2014 for Hedgeye subscribers.

“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%

SPX 1954-1985

RUT 1145-1175

USD 79.76-80.32

Gold 1301-1324

Copper 3.20-3.30


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


My Dear Gold - Chart of the Day

CHART OF THE DAY: Color-Coded Hedgeye Housing Compendium

Takeaway: For longer-term investors, recent US #HousingSlowdown (see our Q2 Macro Theme Deck for details on why) data is downright frightening.


CHART OF THE DAY: Color-Coded Hedgeye Housing Compendium - Chart of the Day

Macro Is The News

“You see, I’m the event. I am the news.”

-Brad Katsuyama


That’s a beauty quote from a book that finally made it to the top of my reading pile this summer – Flash Boys, by Michael Lewis. Brad Katsuyama and I have a few things in common. Well, sort of. We’re both Canadian – but I’m more of a High-Frequency-Tweeter than a trader.


The context of Brad realizing that his Old Wall order-flow from the Royal Bank of Canada was “news” to the machines front-running his (lack of) technology may have been enlightening to him at the time, but so were late 17th century concepts like the sun rising in the East.


The better one-liner came before the aforementioned one when Katsuyama’s IT guys reminded him that “you aren’t the only one trying to do what you’re trying to do” (pg 33). Everyone and their brother who is trying to short spoos (SPY), at the same time, should always remember that.


Macro Is The News - the dark pool high frequency trading


Back to the Global Macro Grind


On the “news” at 10AM yesterday that US Pending Home Sales “missed” (again), the Housing stocks (ITB) dropped to -1.6% on the day, and Consensus Macro hedgies started shorting SPY, feverishly. If you want to beat your competition in this game, don’t do that.


The time to short Housing (ITB) and the Russell 2000 (IWM) was last week (Tue-Wed) when:


  1. Existing Home Sales were hoped to be a new bullish TREND
  2. The Russell bounced to lower-highs of 1158, and the SP500 hit an all-time high of 1987
  3. Facebook (FB) beat big and every social media’s profitless cow was going to jump over the moon


Hope, obviously, is not a risk management process. And, despite my addiction to tweeting, Twitter is not Facebook. We call selling/shorting on green and buying/covering on red Fading Beta because that’s what it is – fading the machines. You see, consensus capitulating on both the upside and downside is the event. In an oversupplied industry of short-term performance chasers, it is the news.


Don’t get me wrong, for longer-term investors, recent US #HousingSlowdown (see our Q2 Macro Theme Deck for details on why) data is downright frightening. To put some meat on that bone, today’s Chart of The Day  shows what our Housing team calls the Hedgeye Housing Compendium – it rolls Hedgeye-style, in rate of change terms. And it’s color coded (red/green) so that even a Mucker can understand it.


USA’s Pending Home Sales are now trending down -7.2% year-over-year (versus growing at +12% year-over-year when we were bullish on US Housing last year). At the same time, the mother of all behavioral factors (last price) in US Housing has seen US Home Price Inflation (HPI) slow from its CoreLogic data peak of +11.8% last year to a preliminary estimate for June of +7.7%.


Now, if you think in absolutes (instead of rate of change), you might say that Housing is still “good.” Even if I gave you that, in my risk management model going from great to good is bad – and the stocks agree.


It’s not just the Housing stocks that aren’t horning people up YTD – it’s a lot of things US domestic consumer:


  1. Housing Stocks (ITB) -1.3% yesterday to -8.0% YTD
  2. Russell 2000 (IWM) down another -0.6% yesterday to -2.1% YTD
  3. US Consumer Discretionary stocks (XLY) +0.19% yesterday to +0.18% YTD


So why would you be long any of that stuff when you could be long the following:


  1. Utilities (XLU) up another +1.3% yesterday to +13.3% YTD
  2. Energy (XLE) -0.2% yesterday to +12.5% YTD
  3. Healthcare (XLV) +0.1% yesterday to +11.6% YTD


Those are the Top 3 performing sectors in the SP500 and they are clean cut ways to be long of either A) #InflationAccelerating and/or B) the slow-growth #YieldChasing born out of it. One of our favorite ways to be long Healthcare inflation is being long the hospitals (HCA).


If you’re not into the US stock market naval gazing thing and want to diversify, across asset classes, you could also be long things like:


  1. Commodities – Nickel and Coffee were up another +0.2-1.1% yesterday to +39.4% and +63.6% YTD, respectively
  2. Emerging Market Equities – MSCI EM and LATAM indices are +8% and +11% YTD, respectively
  3. Long-term Treasury Bonds – our in-house fav (alongside TIP), the TLT is +13.4% YTD


Remember, “you aren’t the only one trying to do what you’re trying to do.” So try to stop guessing what the spoos or Dow are going to do next, and line up your investable Macro Themes with the asset allocations that will help you front-run your performance chasing competition.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.45-2.54%


RUT 1131-1155

VIX 11.94-14.29

Gold 1

Copper 3.20-3.27


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Macro Is The News - Chart of the Day

Early Look

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July 29, 2014

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“There’s a crack in everything.  That’s how the light gets in.”

-Leonard Cohen


Here is the good news: Clarence Otis is stepping down as Chairman and CEO of Darden Restaurants and the company will separate the Chairman and CEO roles.  Otis will continue to serve as CEO until his successor is appointed or by December 31st, 2014.  A search for his replacement will begin immediately.


In addition, Darden announced it will nominate up to nine of its independent directors for election at the Annual Meeting on September 30th, 2014, effectively giving Starboard three seats on the Board.  Darden continues to pursue a proxy settlement with Starboard, but the two sides have been unable to come to an agreement. 


Starboard needs to get control of this company – and they know it.


The joy of this news is tempered by the fact that Charles Ledsinger, Independent Lead Director, will become Non-Executive Chairman of the Board, effective immediately.  In our view, Ledsinger represents part of the old guard at Darden which oversaw substantial value destruction at the company, including the sale of Red Lobster.  Rewarding him this role should be temporary, because the company needs wholesale changes.


Mr. Otis and the current board were once considered the biggest obstacle to our long thesis.  The shift is beginning, but how far will the company go?  Mr. Otis dug his feet in to fight off the activists and leaves a lasting impression on the company, with the Red Lobster fiasco being his signature dish.  It will take time to fix the disaster he created.


But that’s the past.


Darden has essentially given Starboard three seats on the Board, but the activist wants more.  In fact, they've publicly shared their intentions to replace the entire Board.  This makes a settlement unlikely and while we doubt they'll gain all twelve seats, we'd be willing to bet they get the majority (at least seven) of them.  If this comes to fruition, we could see more wholesale changes on the way, including a new Chairman and management team.  As it stands, we think these three are strong potential candidates for the following roles:


Chairman of the Board: Jeffrey Smith (Managing Member, CEO and CIO of Starboard Value)


Chief Executive Officer: Brad Blum (former President of Olive Garden and Starboard consultant)


Chief Operating Officer: Bob Mock (former Executive VP of Olive Garden and Starboard consultant)


Restoring Olive Garden to the most respected brand in casual dining is the first thing any new management team must do.  While there are other things that need to be done as well, we suspect that bringing in two seasoned restaurant executives like Brad Blum and Bob Mock to reshape the company, specifically Olive Garden, would not only be well-received by the street, but also by current employees of Darden.


While there is still much uncertainty, today’s news is a significant step in the right direction.  This is the first crack to open up in Orlando and while there’s some light, we know the future can be much brighter.


More needs to be done.


Call with questions.


Howard Penney

Managing Director


Fred Masotta



We applaud the lower than consensus Q3 guidance but maintaining full year guidance risks a Q4 guide down.





NCLH reported 2Q numbers that met our estimate and company guidance despite lower revenues.  The NCL brand began discounting in the Caribbean in late January, rankling investors’ nerves but not the sell side.  Approximately 80% of sell-side analysts have maintained buy/outperform ratings (pending Genting stock sale?) even as the stock has fallen 10% this year.  Revenues were indeed disappointing and NCLH did provide lower than expected Q3 guidance.  With unchanged full year guidance, we’ve got to ask: where are they going to pull earnings from to make the higher implied Q4 guidance?


The stock looks to open down but we may see some more pin action today as a somber management team fields questions on the Caribbean and upcoming cost initiatives.  At the end of the day, investors may be tired of waiting for the inflection point.  We find it hard to disagree.




  1. What drove Q2 fuel price per metric ton down by $38 vs management guidance?  Lower fuel costs offset the revenue miss.
  2. Implied Q4 yield guidance looks aggressive.  What is driving that outlook – better pricing or load?
  3. Commissions/transportation costs as a % of ticket revenue has fallen in four out of the last five quarters and offset lower gross ticket yield. Is this an indication of being less reliant on the agent community, renegotiation of tour/shore pricing, or something else?  How sustainable is it?
  4. Why is cost guidance ex fuel going higher when there are a number of cost cutting initiatives are underway?  NEXT program?



We were surprised by the lower than expected 3Q yield guidance and very skeptical of the 4Q implied guidance of ~4% yield growth.  The Hedgeye proprietary cruise pricing survey suggests more difficult pricing conditions in Q4.  While Caribbean comps are easier in 4Q than 2Q and 3Q, more competition (e.g. Quantum) is on the way and NCL will have to deal with that in the New York market - quickly.  In our opinion, NCL has a better shot of exceeding yield expectations in Q3 than in Q4 or early 2015. 


We are not seeing any signs of a less promotional Caribbean pricing environment.  Could the low pricing in the Caribbean becoming a secular trend?  Perhaps.  Oversupply concerns have been understated and the initial hot booking demand cooled somewhat in the Caribbean this year.





Net yields met the low end of the company’s guidance at 3.0% as more cost reductions offset lower gross revenues.  

  • Net ticket yields rose 2.7% as lower commission/transportation/other costs offset the 1stdecline in gross ticket yield since 3Q 2012. 
    • Commission/transportation/other costs only accounted for 15% of ticket revenues, the lowest since IPO inception (an interesting trend…)
    • Gross ticket yield was likely hampered by a double digit decline in Caribbean yields despite the addition of Getaway and Breakaway
    • Ticket margins rose to 79%, a new high
  • Net onboard and other yield grew 4.8%
    • Gross onboard/other yields climbed 1.9%
    • Onboard/other expenses fell 2.1% points YoY to 24.3% of onboard/other revenues
  • Fuel expense was $6 million less than management’s guidance.



Q3:  2.25%-2.75% yield growth guidance came in below our estimate of +3.7% yield growth (Street: +3.5%).  Guidance was surprisingly conservative given the strength in Europe and its largest quarterly contribution at 32% of total capacity in 3Q.  We believe management is estimating Caribbean yields to be a couple % points lower than our projection of mid-single digit yield declines and a less stellar outlook for the Hawaii market.   


Q4:  Guidance suggests 3.8% yield growth to reach the midpoint of FY yield range.  That’s an aggressive forecast.  To achieve that yield target, one would need:  slightly lower European yields than that seen in Q3, flat yields in the Caribbean, slightly lower yields in Hawaii, and modest growth in the Canada/England/other segment.  Can the Caribbean hold its ground for the next couple of months for Q4 sailings even if Breakaway premiums shrink?  NCL seems to think so.

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