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Client Talking Points


One way to keep the USD up is to have an un-elected central planner burn the Euro as the elected ones in Japan do the same to the Yen. Don’t confuse these unprecedented and coordinated currency devaluations with the next global economic expansion, but DAX did recover our 9648 TREND line!


Tepper (David Tepper, founder of Appaloosa Management) talk gave those who haven’t been long the Long Bond one more chance to buy them on sale yesterday. The UST 10YR Yield backs off again this morning to 2.44% with no support to 2.32%. We’re one bad employment report away from Yellen looking like Draghi has for the last month.


Yes! It came back (sort of) on yesterday’s down move (that’s when we get volume accelerations, on the down moves) with Total U.S. Equity market volume up +29% and +21%, respectively, vs. its 1 and 3 month averages. Biggest risk to U.S. small and mid cap stocks remains liquidity (on the way down).

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


CHINA: in a down wk for US stocks, Chinese stocks ripped higher to +13.3% YTD (Russell is flat YTD)



While you’re sitting there thinking about it someone else is out there doing it.

-Rodger Halston


It only takes $10,400 to be richer than most millennials (Wall Street Journal).

September 5, 2014

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CHART OF THE DAY: U.S. Economic Indicator Summary


CHART OF THE DAY: U.S. Economic Indicator Summary - Chart of the Day

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Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Gunning For Tepper

“Too close for missiles, I’m switching to guns.”

-Top Gun


As a Thunder Bay boy with a lot of testosterone growing up in the 80’s, there weren’t many movies that beat Top Gun. Admittedly, I’m a little competitive, so pardon my passion this morning – “Goose, it’s time to buzz the tower.”


“The son of a bitch cut me off!” in telling the world my call on the Long Bond (TLT) is wrong yesterday.  I don’t know the guy, so it’s not personal. I just flat out disagree. That guy, you know – the New Jersey Consensus TV folks love him. His name is Tepper.


Tweeters say that David Tepper A) has a lot more money than me and B) has killed it on the levered long side since 2009. He also flamed out in 2008 (down -29.61%), so on his rising rates call, I think he’s beatable. “I think I’ll go embarrass myself with Goose now.”


Gunning For Tepper - tg1


Back to the Global Macro Grind


What we need in this game is more head to head debate. Pro to pro. When someone flips me off with the other side of my position, I want to crush him. I don’t care how much he’s worth or what he’s wearing. I wear a $29.99 watch from WalMart, and I like it.


While I’d love to debate Tepper live on interest rate risk (which I still think is to the downside), the reality is that probably won’t happen. (if you know him and he’s game however, I have a nice little 2.0 studio in Stamford called @HedgeyeTV).


Debating big macro topics isn’t personal. It’s what those of us who want to be the Top Gun wake up thirsting for at the top of every risk management morning. Last year I was making the call that rates would rise alongside both US growth expectations and the Fed being forced to taper. This year I reversed the call saying that rates would fall as y/y #inflationAccelerating slowed real US growth.


Yeah, sweet call Mucker. “Take me to bed or lose me forever.”




God didn’t call me with the rates call. My team and I made this call the old fashioned way, using our own models and process. When it comes to what other players out there think, we respect their airspace, but when we get in tight in a dog fight like this, we aren’t going to back down.


Here are 10 things to think about in terms of why rates are going lower (bonds higher) from here:


  1. US GDP growth slowing sequentially in Q3 vs Q2 of 2014
  2. US GDP growth continuing to slow, year-over-year, in 2014 versus the Q3 2013 #GrowthAccelerating top
  3. US GDP entering an early cycle slowdown (bearish on Housing, Consumer, Regional Banks)
  4. US Housing demand not responding to the downside surprise in interest rates
  5. All of Europe slowing in 2H 2014
  6. Japan slowing Q4 2014
  7. Japanese and German 10yr yields of 0.53% and 0.96%, respectively
  8. Institutional Fund Flows reverting back to their slow-growth mean (into bonds, out of stocks)
  9. US 10yr Yield immediate-term TRADE resistance = 2.51%
  10. US 10yr Yield intermediate-term TREND resistance = 2.81%


The biggest differentiator in our models versus those who were bearish on rates in 2013 (and bullish on them in 2014) is our rate of change forecasts on both growth and inflation.


I have stopped calling it our Growth, Inflation, Policy Model and renamed it our PIG model (same factors, in reverse). Why? Because un-elected central planners are pigs when it comes to devaluing the purchasing power of The People in exchange for asset inflation.


To review how all 3 (Fed, ECB, BOJ) of these central planning committees think:


  1. When growth slows, they get easier (print money, or threaten to do “whatever it takes”)
  2. As they get easier, their currencies fall, and the real cost of living in their countries rises
  3. As cost of living rises, real consumption growth falls faster, and they ease again


Sound familiar?


Top 2 headlines on Bloomberg (Economy Go!):


  1. “Draghi Sees Almost 1 Trillion in Stimulus”
  2. “Aso Signals Japan Prepared To Boost Stimulus”


Aso, as in the one who tore the Japanese people a new one via the Abenomics Policy To Inflate that took Japanese Real Wages to -4-5% year-over-year. Then they blamed the weather. #Nice


If the USA shows as much as a sniffle in this morning’s jobs report, what do you think Yellen’s response is going to be? Tighter or easier? We’re one or two bad labor headlines away from the US doing exactly what Draghi just did.


Unlike Tepper, I fly commercial. But I can still change my position whenever I want. For now, if I am right on growth slowing and the Fed’s proactively predictable reaction to it, Janet is going to be my Japanese wing-woman on bonds.


Out immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.32-2.46%


RUT 1151-1181

VIX 11.34-13.65

EUR/USD 1.29-1.32

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Gunning For Tepper - Chart of the Day


TODAY’S S&P 500 SET-UP – September 5, 2014

As we look at today's setup for the S&P 500, the range is 29 points or 1.03% downside to 1977 and 0.42% upside to 2006.                                                   













  • YIELD CURVE: 1.91 from 1.92
  • VIX closed at 12.64 1 day percent change of 2.27%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Change in Nonfarm Payrolls, Aug., est. 230k (pr 209k)
  • Unemployment Rate, Aug., est. 6.1% (prior 6.2%)
  • 1pm: Baker Hughes rig count
  • 3:45pm: Fed’s Rosengren speaks in Boston



    • Senate, House out on final week of summer recess
    • President Obama views fly-over ceremony, attends NATO summit in Wales, holds press conference, returns to Washington
    • 10am: Nebraska Supreme Court hears constitutionality arguments on Keystone XL pipeline route through state
    • U.S. ELECTION WRAP: Kansas Senate Race; Koch-Backed Ads



  • Jobs-Day guide: U.S. payrolls, participation, wages and hours
  • Barclays, Citigroup accused in suit of manipulating ISDAfix
  • Apple plans new security features after hack of celebrity photos
  • Ukraine ready for truce as NATO cautions on Russian peace offer
  • Gap falls as August same-store sales trail analysts’ estimates
  • Keryx has 82% chance of winning FDA Zerenex approval: analysts
  • Nvidia sues Samsung, Qualcomm after patent deal talks fail
  • German industrial production expands in sign of eco. rebound
  • Eurozone GDP stagnates in 2Q; flash reading unchanged q/q
  • Median incomes fell for all but richest in 2010-13, Fed says
  • Swaps rule requires $644b in collateral, regulator says
  • Autonomy CFO told Lynch of "imaginary deals’’ before HP sale
  • Dollar General’s Family Dollar bid may not be enough: Reuters
  • Bain Capital’s Atento may start U.S. IPO next week: Reuters
  • Apple files reality navigation patents: AppleInsider



  • Long-Term Oil Demand to Slow Even With Higher China Consumption
  • Copper Rises in London Before U.S. Jobs as Surplus Seen Elusive
  • Chemical Boom at Risk as U.S. Ethane Heads Abroad: Commodities
  • WTI Heads for Weekly Drop as Refiners Slow Rates; Brent Steady
  • Raw Sugar Extends Drop to 7-Month Low While Arabica Coffee Falls
  • Gold Is Little Changed Near 12-Week Low Before U.S. Jobs Data
  • Sugar Output in India’s Biggest Producer Seen at Three-Year High
  • Corn Rebounds as Cooler U.S. Temperatures Raise Frost Concern
  • Russia Reports Outbreak of Classical Swine Fever in Southwest
  • Rebar Posts Biggest Weekly Loss in 15 Months as Demand Wanes
  • Palm Trims Biggest Weekly Gain Since November as Reserves Climb
  • Pears Rot in Europe as Putin’s Retaliation Pushes Price Down 70%
  • Copper Traders Most Bearish in Month as Demand Seen Stalling
  • One Putin Ally Sells Stake in Chemical Maker to Son of Another

























The Hedgeye Macro Team
















MCD: Why We Are Short

Although our short thesis is complicated, it can effectively be boiled down to one chart.


MCD plans to release August sales numbers on September 9th and we have a sneaking suspicion it will be a negative event.  In all likelihood, it will lead the street to revise down its full-year sales and earnings estimates.


Recall that McDonald's global same-store sales declined -2.5% in July and we'd expect August to yield similar results. 


In July, performance by segment was:

  • U.S. -3.2%
  • Europe +0.5%
  • APMEA -7.3%


Currently, 3Q14 consensus estimates by segment are:

  • U.S. -2.0%
  • Europe -0.7%
  • APMEA -5.8%


EPS Estimates are too Aggressive

Consensus currently expects MCD to report flat sales and earnings growth in 3Q14.  This looks aggressive, however, considering system-wide sales declined -0.5% in July and are likely to be down again in August.  Flat sales growth is too optimistic and, given the negative leverage inherent in the business model, reporting a flat EPS number is also unlikely.


The street expects MCD to post $1.52 in earnings in 3Q14 after posting the same number last year.  It also expects MCD to post 1.4% EPS growth in 4Q14.  Both of these numbers are, in our view, aggressive.


With a recovery, albeit minor, built into 4Q14 estimates, the trend line is expected to accelerate to 8% EPS growth by 1Q15 and stay at that run-rate for the remainder of 2015.  We often hear the bulls cite easy comparisons to defend their optimism, but the reality is we've been hearing that for several years.  2014 was a time of easy comparisons for the company and it isn't close to hitting estimates published at the beginning of the year.


From our perspective, management isn't willing to take the necessary steps to fix the business and, until this happens, we expect MCD to consistently underperform expectations.


MCD: Why We Are Short - 1


Risk/Reward Setup Suggests the Stock Is a Short

MCD is currently trading at 15.9x the NTM EPS of $5.87, but looks substantially more expensive when assuming that $5.87 is far too aggressive.  Barring some unexpected event, the odds that MCD delivers 8% EPS growth in FY15 are slim-to-none.


We believe that in 2014 MCD could report its first down year in EPS growth since 2002, as we expect full-year EPS to come in between $5.40-5.45 or 2-3% below the current consensus estimate.  More importantly, we suspect McDonald's will even struggle to grow EPS off of this lower $5.40-5.45 base.  As a result, our 2015 EPS estimate of $5.45 is nearly 10% below the current consensus estimate of $6.02.


MCD: Why We Are Short - 2


Looking out over the next six months, assuming a constant multiple of 15.9x on our NTM EPS estimate of $5.40 gives us an $85 stock representing approximately 9-10% downside from current levels.  We understand this is not a "major blow-up," but if the stock saw a little multiple compression (down to the 14-15x range) we're talking about 15-20% downside or about a $12-20 billion decline in market cap.


MCD: Why We Are Short - 3


Feel free to email or call with questions.


Howard Penney

Managing Director


Fred Masotta


Early Look

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