Macro Is The News

This note was originally published at 8am on July 29, 2014 for Hedgeye subscribers.

“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%

SPX 1961-1987

RUT 1131-1155

VIX 11.94-14.29

Gold 1299-1323

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

TODAY @ 1PM, Slides | Inside the Organic Food Industry Call

Takeaway: Expert call today @ 1pm. New Best Idea (short HAIN) call Thursday @ 1pm.


Toll Free Number:

Direct Dial Number:

Conference Code: 515973#




TODAY, August 12th @ 1PM


This call will feature guest speaker Bob Burke, Principal at Natural Products Consulting Group.  


Since 1998, Bob Burke has provided assistance in bringing natural, organic and specialty products to market across most classes of trade. This includes work in strategic planning, writing sales, marketing and business plans, building distribution, broker selection and management, organizational development and compensation, strategic options, financing, branding, trade spending and assistance around M&A, due diligence and venture strategy groups.  He is also the co-author of the Natural Products Field Manual, 6th Edition and The Sales Manager’s Handbook. Prior to consulting, Bob was with Stonyfield Farm Yogurt for 11 years as Vice President, Sales & Corporate Development.


During the call, Mr. Burke will focus on:

  • The state of the organic industry
  • GMO labeling and its impact on the food industry and supply chain
  • Thoughts on publicly traded organic stocks


TODAY’S S&P 500 SET-UP – August 12, 2014

As we look at today's setup for the S&P 500, the range is 51 points or 2.01% downside to 1898 and 0.62% upside to 1949.                                        













  • YIELD CURVE: 1.99 from 1.99
  • VIX closed at 14.23 1 day percent change of -9.77%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business Optimism, July, est. 96 (pr 95)
  • 7:45am: ICSC weekly sales
  • 8:55am: Redbook weekly sales
  • 11:30am: U.S. to sell $50b 4W bills
  • 1:00pm: U.S. to sell $27b 3Y notes
  • 2pm: Monthly Budget Statement, July, est. -$96b (prior -$97.6b)
  • 4:30pm: API weekly oil inventories



    • Senate, House on Aug. recess; Obama on Martha’s Vineyard
    • Conn., Minn., Wis. hold primaries
    • U.S. ELECTION WRAP: Hawaii Primary; Democrats, GOP Cross Lines



  • Apple’s suppliers said to start production of new iPads
  • GM says China JV contacted by anti-monopoly regulator
  • Gross cuts govt-related debt in July amid Fed rate wagers
  • Sprint CEO plans cost cuts to compete aggressively for users
  • Caesars CEO: no qualified bidders for Revel in Atlantic City
  • Goldman, QNB said to arrange loan for Travelex acquisition
  • Tesla Model S defects emerged over time, Consumer Reports says
  • Samsung, Apple to lose global smartphone mkt share, Fitch says
  • Electronic Arts preps expanding games subscriptions worldwide
  • California smartphone anti-theft bill nears final approval
  • Barclays quant trading unit said to take employees in spinout
  • Russia sends aid convoy to Ukraine as U.S. warns on invasion
  • Maliki bid to block successor al-Abadi escalates Iraq crisis
  • Israel says no progress in Gaza talks as Egypt presses truce
  • German investor confidence slumps as Ukraine crisis worsens
  • Rio Tinto CFO questions Oyu Tolgoi mine expansion, JPM says
  • Mapp Pharma says supply of Ebola drug is exhausted



    • CST Brands (CST) 7am, $0.49
    • Flowers Foods (FLO) 6am, $0.24
    • Insys Therapeutics (INSY) 7am, $0.30
    • Kate Spade (KATE) 7:34am, break-even  - Preview
    • Towers Watson (TW) 6am, $1.25
    • Tribune Media (TRBAA) 8am, $0.62
    • Valspar (VAL) 7:30am, $1.16



    • Cree (CREE) 4:01pm, $0.41
    • Element Financial (EFN CN) 5:06pm, C$0.10
    • Fossil (FOSL) 4:01pm, $0.96
    • Jack Henry (JKHY) 4:15pm, $0.60
    • JDS Uniphase (JDSU) 4:05pm, $0.13
    • King Digital (KING) 4pm, $0.59 - Preview
    • Myriad Genetics (MYGN) 4:05pm, $0.46
    • Russel Metals (RUS CN) 5:05pm, C$0.47
    • Tahoe Resources (THO CN) 4:25pm, $0.21 - Preview
    • URS (URS) 4:05pm, $0.74
    • ViaSat (VSAT) 4:05pm, $0.14



  • Brent Crude Falls a Third Day With WTI as IEA Sees Supply Glut
  • Gold Is Little Changed Below 3-Week High in London on Ukraine
  • Nickel’s 56% Rally Spurs Mine Restarts Amid Ore Ban: Commodities
  • El Nino Signs Re-Emerge as Weakening Trade Winds Warm Pacific
  • Zinc Leads Industrial Metals Higher as Geopolitical Risks Ease
  • Wheat Extends Decline Before USDA Report on U.S. Crop Outlook
  • Palm Oil Futures Rebound From Lowest Level in More Than One-Year
  • Rubber Closes Near 4-Week Low on Concern China Demand Waning
  • China Aims to Approve Rare Earth Groups by Year-end: Sec. Daily
  • California Drought Alters Markets as Growers See Dry Future
  • Weakest Oil Demand Growth Since ’12 Allays Supply Risk, IEA Says
  • Tepco Said to Seek Spot LNG Cargoes for Delivery in Oct., Nov.
  • Dam Burst Won’t Delay Startup of New Mine, Imperial Says
  • Robusta Coffee Falls in London on Vietnam Supplies; Sugar Gains


























The Hedgeye Macro Team
















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August 12, 2014

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RH - Real Estate Oppty Grossly Misunderstood

Takeaway: Our analysis suggests that RH stores should be far bigger, and will be much cheaper than the Street thinks. Numbers are too low.

Conclusion: We’ve spent a lot of time on the road discussing RH over the past three weeks, and most specifically, our recent 45-page deep dive on RH’s real estate. The punchline of our analysis is that a) RH stores could (and probably should) get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. This analysis supports our $11 earnings power in five years (double the consensus), as well as our view that that this stock is headed well above $200. Here are some of the slides that we kept revisiting in our conversations.



1. Market Share Trumps Store Productivity: For the most, people underestimate the ramp in RH’s addressable market as the company continues to expand into new categories. Over the next five years, there should be $45bn upside in market opportunity for RH simply by expanding its presence into new categories at retail, including kitchens. An important note is that we analyzed every market of the US, and isolated only consumers making over $100k annually. The government’s aggregate numbers include every income level. But the fact of the matter is that the average American spends $857 annually on home furnishings, while those making over $100k spend $1,779.  


RH - Real Estate Oppty Grossly Misunderstood - rh 2 1


2. Real Estate Methodology. In our analysis, we look at each market at a micro level. That is, we isolate the existing store, and then look at the demographics within a specific driving radius. We look for income levels, home values, and ultimately, how much money consumers at each income level spend on the categories where RH is expanding. This chart below shows Seattle, but we did this for every existing and potential RH market in the US and Canada.


RH - Real Estate Oppty Grossly Misunderstood - rh2 2


3. Store can get MUCH bigger. The key to how we model RH is based entirely on market share. There are three factors that mater…store size, productivity, and market share. It’s absolutely impossible to pinpoint any one of those without knowing the other two. We think we can get pretty close. We already know that the highest productivity FLDGs are running at 8-9% share of their respective markets – and that’s before adding new categories like kitchens. Our model assumes that each FLDG hits 10% share in year five of our model, and generates $1,200 per foot (reasonable based on what we’re seeing today). That leaves us with an implied store size. In some markets like New York, it suggests that RH could have a store over 100,000 feet. Same for Houston (we think it expands its existing store). Most people we talk to cringe when we discuss anything bigger than the 20-25k box that we’ve seen built over the past two years. But this analysis suggests that RH could support 30 stores over 50,000 square feet, and all but 5 can support a 25,000 foot FLDG.


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4. New Market Potential. In addition to existing markets, there’s another 19 markets where RH can, and should, build FLDGs. In 10 of the markets RH could add a store 45,000 feet or larger, and the biggest market – Montreal – could support an 80,000 sq. ft. store.


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RH - Real Estate Oppty Grossly Misunderstood - rh2 6


5. New Store Math is a Slam-Dunk. In this example (Cherry Creek) RH is taking over a Saks and is going from a 7,500 feet legacy store to a 56,000 foot FLDG. Implied market share at the property goes from 1.5% to 4.3% by our math, and despite the incremental $20mm in revenue, rent only goes from $1.3mm to $2.0mm. That takes occupancy costs from 12.6% to 6.5%, and likely lower as the store becomes more productive.  But the key to this algorithm is that there’s $19.5mm in build-out costs, $15mm of which is being picked up by the landlord. Inventory costs in this business are minimal at the store level. So when you add up all the economics of the store, you get to a 6 month payback. It’s tough to find that elsewhere in retail. This leads us to think that our Gross Margin estimates (which don’t go above 39%) are potentially conservative.


RH - Real Estate Oppty Grossly Misunderstood - RH 9


6. Yes, there are more of these opportunities than most people think. There’s still a nice pipeline of free-standing locations – like what RH has in Greenwich, Houston, and Boston. But we’ll see more examples of the mall-anchor space as outlined above in Denver.  Take for example the Cherry Hill mall in NJ. A high-end property with three anchor tenants – Nordstrom, Macy’s and JC Penney. Which one does not belong? JCP has less than half the productivity of Macy’s and Nordstrom, and arguably does not belong in any ‘A’ mall. That’s not where JCP’s customer shops. We think we’ll see more situations where the landlord buys out JCP, takes the space and carves it into 2 or 3 highly productive retailers – who will collectively transform that end of the mall. In this instance, we use RH, and arbitrarily pick CAKE and WFM. That would take annual REIT income from $10.1mm to $23.7mm (see second table below). That makes it pretty easy for the landlord to justify buying out JCP and building a couple million worth of walls, stair cases and escalators. As a point of reference, JCP has about 140 ‘A Mall’ properties. Yeah…big number.


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Still Bullish on Och-Ziff $OZM

Jonathan Casteleyn, co-head of the Financials sector at Hedgeye, briefly explains why he likes shares of Och-Ziff Capital Management, an idea he highlighted in early May.

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