What’s The Bull Case?

Client Talking Points


Putin continues to try to puppeteer markets, bouncing the Russian Trading System (and Ruble) from the lows. The RTSI is up +4% this morning and all of Europe is chasing that (on bad German/French/Italian economic data - ISM Services for Italy breaches 50 in AUG to 49.8 vs 52.8 JUL).


At least Vladimir Putin didn’t leak the ceasefire to his boys yesterday; I guess Putin the peacemaker is the new bull case for those who love U.S. consumer stocks – makes sense, until the companies have to report. After getting smoked yesterday, Brent Oil holds $100.74 TRADE support, but remains bearish TREND.


UST 10Yr Yield is up +11 basis points in less than 2-days, so this will be our worst start to a month since bonds got blasted in 1st week of July (to higher-lows); they chased the Russell to 1208 on July 7th on that too – painful position for us in the moment then, and it is now – staying with long TLT, short RUT.

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.


The level of activism in the restaurant industry has never been more rampant.  In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers.  Fortunately, its poor operating performance presents a tremendous opportunity. After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Activist investor Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting last month. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

Three for the Road


Another rock solid econ print on the consumption side of the UK economy, AUG Services PMI 60.5 vs 59.1 last



You get self-satisfaction from pushing yourself to the limit, knowing that all the effort is going to pay off.

-Mary Lou Retton


Our two favorite stock markets; China is up another +1% to 11.5% year-to-date and India is up another +0.7% to +30.1% year-to-date.

Follow the Leaders

This note was originally published at 8am on August 20, 2014 for Hedgeye subscribers.

“Leadership is solving problems. The day soldiers stop bringing you their problems is the day you have stopped leading them.  They have either lost confidence you can help or concluded you do not care.  Either case is a failure of leadership.”

-Colin Powell


Compared to many of our Wall Street counterparts, Hedgeye is a relatively young and smallish firm.  We’ve been around just over six years, have right around 60 employees, and still have our growing pains at times.   If we’ve learned anything over those six plus years, it's this: leadership matters.


Leadership, of course, comes in many different stripes.  It can be the proverbial “foot soldier” owning his actions and going above and beyond the call of duty.  Or it can be top down leadership in which the “generals” enable the “soldiers” to do their job more effectively, through encouragement, teaching, and also making sure they are transparently held accountable to their goals and objectives.


Last week, we wrote about Kinder Morgan and even though we tend to disagree with the long term prospects for the company, we readily admitted that CEO Rich Kinder continues to show preeminent leadership in the realm of financial structuring. 


As stock market operators frequently evaluating companies, a key question we ask ourselves is: what makes a good leader?  In January 2004, internationally known psychologist  Daniel Goleman did a groundbreaking study of some 188 companies that quantified leadership success and concluded the following:


“When I analyzed all this data, I found dramatic results. To be sure, intellect was a driver of outstanding performance. Cognitive skills such as big-picture thinking and long-term vision were particularly important. But when I calculated the ratio of technical skills, IQ, and emotional intelligence as ingredients of excellent performance, emotional intelligence proved to be twice as important as the others for jobs at all levels.”


More than ten years later, Goleman’s findings apply now more than ever.


Follow the Leaders - DJ2


Back to the Global Macro Grind...


Across the global macro landscape this morning, we are witnessing all sorts of leadership.  Both perceived and actual.  


In the "actual leadership" category, European equities are leading and so are the central bankers in England.  The BOE released minutes from their most recent meeting and for the first time in more than three years, there were votes to increase interest rates.  Specifically, two policymakers voted to raise interest rates by 25 basis points.  Strong pound equals strong England.


In the "perceived leadership" category, we will have Fed minutes out today as well as a briefing from Jackson Hole. We’ve been decidedly contrarian in our view of bonds and rates this year. And we continue to believe that anything that comes out of Jackson will be incrementally dovish.   In our quantitative model, the ten year yield has immediate term downside risk to 2.34% in advance of Yellen "pushing out the dots" this week.


Finally, in the category of "lack of leadership," the Argentine Economic Minister Alex Kicillof will hold a press conference today after announcing a sovereign debt restructuring plan.  In conjunction with that, he will immediately submit a bill that will pay foreign currency bonds locally, lets overseas debt holders swap into new bonds, and create a separate account for holdouts.   So much for being pulled to par!


In terms of asset price leadership this year, one of the more outstanding performers has been coffee. It's up over 64% year-to-date.  Tomorrow, August 21st at 11am, our commodities macro analyst Ben Ryan will host a conference call on the outlook for coffee, which postulates, “Coffee Prices May Move Much Higher From Here.”


Joining Ben on the call will be Judith Ganes-Chase who has been following the coffee markets for more than twenty years.  They will be looking at such topics as tree scarcity, weather conditions, and scarcity of grades of coffee.  The call is also obviously relevant for a host of different equities, including CAFE, JO, SBUX, DNKN, MCD, MDLZ, GMCR, THI.  Hopefully you will grab a cup of Joe and join us for this call with this commodities leader.


In terms of leadership on Hedgeye's Best Ideas list, our savvy retail vet and Sector Head Brian McGough has had a good run with his long pick on Restoration Hardware (RH).  Given its lofty valuation, RH has become a true battle ground stock.  Since being added to the Best Ideas list just under a year ago, RH is up approximately 36%.  Over the last six months, the stock has mercy crushed the S&P 500 in terms of performance.


As always, though, the key is question is whether RH can continue to lead, or will the short sellers (almost 17% of the float is currently short) prevail.  If we are correct, the short sellers may be grossly underestimating the real estate opportunity.  As McGough wrote last week:


“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.”


As always, contact to learn how to get access to McGough’s deep dive.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.34-2.42%

SPX 1952-1987

RUT 1117-1167

DAX 8991-9360 

USD 81.33-81.97 

WTI Oil 94.56-96.91

Gold 1290-1321 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Follow the Leaders - COD 08.20.14

CHART OF THE DAY: Do You Cover the Russell 2000 $IWM Short? No.

CHART OF THE DAY: Do You Cover the Russell 2000 $IWM Short? No. - Chart of the Day


Excerpt from today's Morning Newsletter:


Q: Do you cover the Russell 2000 short?


A: No. Much like when bond yields had a head fake (to the upside) in early July and the Russell rallied, IWM has been doing the same for the last few weeks on even less volume. To put yesterday’s move to 1179 in context, Total US Equity Market Volume was -32% vs. its YTD avg, and the Russell would still need to rally +3% (from here) to get back to the July 7th breakeven.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.68%

Bear Truce?

“Reconciliation, n. A suspension of hostilities. An armed truce for the purpose of digging up the dead.”

-Ambrose Bierce


In what will undoubtedly be my worst two macro market days to start a month since the first week of July, I am the man in the arena this morning whose face is marred with blood and mud.


Bear Truce? - g5


Back to the Global Macro Grind


I can’t for the life of me find the sell-side note that explained 6-9 months ago that the bull case for both European and US growth equities was that Draghi was going to save Europe from slowing and that Putin was going to declare a truce. #ThesisDrift


But macro markets drift, and whether you like its message or not, the score is the score – and I’ll be held accountable to it. Responsibility in recommendation starts with answering questions in the moment. What do we do next?


I’ll summarize the questions I’ve been getting from Institutional Investors and give you where I stand this morning:


Q: Do you think the UST 10yr Yield has bottomed?


A: No. While yesterday’s ISM print was impressive, it’s not the consumption economy – I think it partly reflects the late-cycle pricing and hope you’ll see at the end of most economic expansions. Risk to Q3 GDP consensus estimates remains to the downside. 10yr yield has immediate-term downside to 2.33% and this makes Friday’s jobs report all the more important now.


Q: Do you cover the Russell 2000 short?


A: No. Much like when bond yields had a head fake (to the upside) in early July and the Russell rallied, IWM has been doing the same for the last few weeks on even less volume. To put yesterday’s move to 1179 in context, Total US Equity Market Volume was -32% vs. its YTD avg, and the Russell would still need to rally +3% (from here) to get back to the July 7th breakeven.


Q: Doesn’t the price of Oil falling get you more bullish on the US Consumer?


A: No. I never was bullish on the median consumer or US housing to begin with! If Brent breaks $95, it might get me less bearish, but not flat out bullish. While the rate of change always matters (WTI crude was -3.2% yesterday as Putin leaked the truce to his boys), the overall consumption tax on US consumers is broad based (Rents at all-time highs, Food prices +16% YTD, Real Wages flat to negative, etc.).


Q: Don’t you think the US stock market looks good on up days?


A: Kidding. No one actually asked it that way. But if you are me and see the reams of questions I get in the heat of the moment (how “bearish” the market looked at the early AUG lows when the Russell 2000 was at 1114 and SPX = 1925), and how this market looks like its “gonna rip”, “never really go down”, etc. after 5 straight up weeks… you’d at least chuckle.


Q: Doesn’t Draghi have credibility with markets?


A: Yes. We don’t doubt this guy means what he says and we don’t disrespect his impact on the currency market either (that’s why I covered the US Dollar short idea on the only pullback we’ve had since he decided to devalue again at Jackson Hole). But don’t confuse market credibility with economic stability. QE is simply a centrally planned policy to inflate asset prices.


Q: Do you buy European Equities on the Draghi put?


A: Not sure. I still need to see how markets respond to what he has to say on Thursday (ECB meeting). Buying European Equities today is a very different thesis than our bullish on European #GrowthAccelerating call was from 2013 until Q2 of 2014. Effectively, you’d be buying into a slowing economy with a broken idea that a renewed Policy To Inflate will “stimulate” real economic growth.


Q: Do you stay with long China and India?


A: Yes. Both the absolute and relative returns of these two stock markets (China +11.5% and India +30.1% YTD) are pulverizing something like the Russell 2000. More importantly, we think that’s happening for the right rate-of-change economic reasoning. In stark contrast to US and European GDP growth (which is slowing both sequentially and y/y), India is flat out accelerating, and China is finally stabilizing.


Q: What’s your sense on sentiment?


A: In the US stock market, I can assure you that many funds have been forced to chase this 4-5 week move off the August lows. In the US bond market, people are still fighting the down rates move too. Looking at the II Bull/Bear US Equity Sentiment Survey this morning, Bears have been blasted to fresh YTD lows of 13.3%, and the Bullish Spread is testing its early July highs of +4,280 (basis pts) wide to the bullish camp.


In other words, there will be no bear truce issued from Stamford, CT today. If you’d like to answer all of these questions differently, I’d be happy to post them to our entire subscriber base. It’s what makes a market.


When my face is bloodied, I love to get right back up, take a stance, and fight.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.33-2.46%


RUT 1151-1184

EUR/USD 1.31-1.33

Brent Oil 100.74-103.71

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bear Truce? - Chart of the Day

Retail Callouts (9/3) – UA, NKE, HD, TGT, Payless, Endorsements

Takeaway: Gisele’s the new KD = $570m for UA. Consumer response to HD breach could be good for retail. Brand diversity at Open. Payless wants LBJ?



Wenesday (9/3)

GIII - Earnings Call: 8:30am

VNCE - Earnings Call: 9:00am


Thursday (9/4)

PVH - Earnings Call: 9:00am

BEBE - Earnings Call: 4:30pm

ZQK - Earnings Call: 4:30pm

ZUMZ - Earnings Call: 5:00pm





UA, NKE, Adi - Under Armour inks Gisele Bundchen



  • "Under Armour has signed [Gisele Bundchen] to be part of its new women's campaign...Sources tell that it's a multiyear deal. Financial terms were not disclosed."
  • "Bundchen will be part of Under Armour's women's campaign, which kicked off last month with the signing of ballerina Misty Copeland, another nontraditional endorsement deal for the brand. The Copeland spot, featuring her against-all-odds story, has garnered more than 5.8 million views on YouTube."
  • "The campaign, with its I Will What I Want slogan, also includes skier Lindsey Vonn, soccer player Kelley O'Hara and tennis player Sloane Stephens."


Takeaway: Tough timing on this one from our perspective. The day UA loses its bid for Kevin Durant, it announces the Gisele deal. The equity market liked the trade-off, though. It was good for $570mm in added market cap. Nonetheless, we think that the Gisele deal is a head-scratcher. It's convenient that she's married to UA's highest-paid endorsee, Tom Brady. But when we think about what type of person will drive the women's business, we think of Misty Copeland, who has an inspiring story of success in a career (ballet) that the average woman can associate with. This was and is a slam dunk for UA.  But does the average woman really associate with a supermodel like Gisele who made $47mm last year ($16mm more than her husband, and $39mm more than Adriana Lima?) and has the kind of body that could make a Hefty Bag look good? Our sense is that the answer is No.  Also, consider that Gisele is a 'serial endorser'. That's not a bad thing, as she is getting the most out of her brand. But in addition to UA, she has contracts with H&M, Chanel, Carolina Herrera, gets a cut from sandals that she designs for Grendene, and has her own line of Hope lingerie 'Gisele Bundchen Intimates'. She is also the face of Pantene and Oral-B in Brazil. But the truth is that we don't know the economics here. If it's only a million bucks, then it's probably worth it. But if UA is paying up for Gisele, we'll view this as a really questionable deal.


UA video link: Click Here


HD - Home Depot Shares Drop After Chain Investigates Data Breach



  • “'We’re looking into some unusual activity,' Paula Drake, a spokeswoman for the Atlanta-based company, said in an e-mailed statement. 'We are aggressively gathering facts at this point while working to protect customers. If we confirm that a breach has occurred, we will make sure customers are notified immediately.'”
  • "Brian Krebs, the independent journalist who uncovered a hacker attack at Target Corp. last year, reported that a 'massive' batch of stolen credit- and debit-card information went on sale this morning. There’s evidence that the cards are linked to Home Depot stores, Krebs said on his website, KrebsOnSecurity."


Takeaway: Ok...this is purely our opinion, but the first thing we thought when we saw the HD breach was "will the consumer really give two hoots about this?". Clearly, people that are directly impacted will be gun shy next time around. But we've got to think that this mindset, if true, will also positively impact the recovery time for people impacted by past data breaches. That probably includes Target. There are two events that we think could really rattle consumers from here, either a) a material breach at WMT, or b) Amazon. Both would be significant enough to move the needle in consumers shopping on-line vs in-store.


NKE - Payless to Revive Pro Wings, Offer LeBron James $500 Million Contract



  • "Following Kevin Durant’s monstrous deal with Under Armour, Payless ShoeSource has offered LeBron James an unprecedented contract which would pay him $50 million per year for 10 years.
  • Payless spokesperson James Weilen admitted the company drew inspiration from Under Armour, who recently offered Kevin Durant a 10 year contract worth $285 million. 'The deal with Durant proved stars will sign with smaller companies if the situation is right,' Weilen stated. 'The prices of shoes have climbed to astronomical heights, and many of today’s stars have realized the need to offer affordable, quality shoes to their supporters and fans. We believe LeBron will make the correct decision for both himself, his fans, and his family.'”
  • "In addition to the large sum of money, the company has offered the Cleveland Cavaliers superstar a large portion of stock in the company. Payless, which has existed since 1956, brings in over $3 billion in sales annually."
  • "The company wants LeBron to revive their sports line Pro Wings, which reached its height in the early 90′s. Pro Wings were often styled similarly to expensive alternatives created by ReeBok and Nike."



Retail Callouts (9/3) – UA, NKE, HD, TGT, Payless, Endorsements - chart1 9 3


Takeaway:  Uhhh...for real Payless? 1) You're not making money. 2) LeBron couldn't care less about lowering the price of his shoes. Nike has sold LBJ footwear for over $300 and he laughed all the way to the bank. 3) LBJ is not gonna wear Red Wings. 4) Do you really think he can be incentivized by stock in Payless? 5) Last we checked, he's in bed with a company called Nike that won't let him go.


Nice try though.




It's usually the Nike and Adidas show at the tennis majors -- and for the most part, it still is (especially with Women). But we can't help but notice how other -- traditionally non-athletic -- brands are sneaking into the big televised Men's matches.  1) Novak Djokovic was one of the early defectors from the big brands by going with Uniqlo, subsidiary of Japan's Fast Retailing. He wears Adidas sneakers when he plays, but it's the distinctive Uniqlo logo that people see the most. 2) Bautista Agut, who lost to a near unstoppable Roger Federer (Nike) last night, wears Lacoste on the court alongside Asics kicks -- an unusual combination. But one that caught our attention nonetheless. 3) Tomas Berdych, who used to be a Nike endorsee, now wears H&M apparel while playing competitively, which is the first time we've seen H&M have such a prominent showing in any sporting event. We don't think this is alarming for the incumbent brands -- but it definitely shows how some non-traditional brands are getting into the endorsement game. If this hurts any of the athletic brands on the margin, it's probably UnderArmour.


Retail Callouts (9/3) – UA, NKE, HD, TGT, Payless, Endorsements - 9 3 chart2


Retail Callouts (9/3) – UA, NKE, HD, TGT, Payless, Endorsements - 9 3 chart3


Retail Callouts (9/3) – UA, NKE, HD, TGT, Payless, Endorsements - 9 3 chart4






FL - MARKET REPORT: Foot Locker puts boot into Ashley as it raises threat to Sports Direct on rumours of private equity plan



  • "Mike Ashley’s Sports Direct International’s comfy position as king of the multi-branded, mass sports retailing market in the UK could soon come under threat."
  • "As shares of New York-based Foot Locker rose a further 1.5 per cent to a 52-week high of $56.97, rumours were rife that a consortium of private equity players were lining up a cash offer in the region of $70 a share."
  • "If successful, new management would then apparently put in motion extensive expansion plans to increase Foot Locker’s presence in Europe, particularly in the UK, with plans to double the number of its sites from the current 23. A move that would certainly query Ashley’s pitch."


CVS - CVS Caremark Announces Corporate Name Change to CVS Health to Reflect Broader Health Care Commitment



  • "CVS Caremark Corporation announced today that it is changing its corporate name to CVS Health to reflect its broader health care commitment and its expertise in driving the innovations needed to shape the future of health. "
  • "'For our patients and customers, health is everything and CVS Health is changing the way health care is delivered to increase access, lower costs and improve quality,' announced Larry J. Merlo, President and CEO, CVS Health.  'As a pharmacy innovation company at the forefront of a changing health care landscape, we are delivering breakthrough products and services, from advising on prescriptions to helping manage chronic and specialty conditions.'"


KER - Kering to Assume Control of Eyewear Business



  • "Spying 'significant' growth potential for frames and sunglasses in the luxury and sport segments, Kering plans to take back control of its eyewear business, allowing it to squeeze extra margin in a promising product universe."
  • "The French group said Tuesday it would “evolve” its 20-year partnership with Italian manufacturer Safilo Group SpA, terminating the current license for the cash-cow Gucci brand at the end of 2016, two years earlier than planned, in exchange for compensation of 90 million euros, or $118.2 million at current exchange, to be paid in three installments."


JCP - J.C. Penney partners with Fanatics for online sports store



  • "J.C. Penney Company is launching a new online sports store on its e-commerce site that will be powered by Fanatics, an online retailer of officially licensed sports merchandise. Fanatics, which operates the e-commerce platform for hundreds of collegiate and professional sports teams, leagues and media sites, will provide fans with a selection of team sports apparel and merchandise at, offering more than 300,000 licensed products spanning all the major sports leagues."
  • "'Our partnership with Fanatics enables us to deliver even more quality team merchandise that our customers want during their favorite sports season,' said John Tighe, senior VP of men's apparel for J.C. Penney. 'Whether it's football in the fall or March Madness in the spring, J.C. Penney has the caps, shirts and collectible gear to make any sports enthusiast a true fanatic.'"


Tom Brady and his dad team up in UGG ad



  • "The Pats poster boy is featured in a new ad campaign for UGG, the fancy footwear Brady’s been endorsing for a few years. The schmaltzy black-and-white spot, shot at Brae Burn Country Club in West Newton, shows Brady and his father, Tom Brady Sr., enjoying some time together."


WTSL - WetSeal CEO Resigns


  • "Pursuant to such agreement, Mr. Goodman’s employment with the Company ended on August 26, 2014, at which time he resigned as the Company’s Chief Executive Officer (and principal executive officer) and from all other positions with the Company, including his position as a director on the Board of Directors."

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