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EDV: Adding Vanguard Extended Duration Treasury ETF to Investing Ideas

Takeaway: We are adding EDV to Investing Ideas.

Our macro team is adding EDV to Investing Ideas. As CEO Keith McCullough wrote today:


Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP # this wk and the NFP number), it's time to really think through the un-Teppering of this bond market. This is an extended duration ETF (20-30yr). I am doubling down on our biggest macro call of 2014 - that US growth would slow and bond yields fall in kind. 


EDV: Adding Vanguard Extended Duration Treasury ETF to Investing Ideas - g5

Retail Callouts (9/5): ZQK, PVH, KSS, KORS, Endorsements

Takeaway: SIGMA summary. ZQK equity nearly worthless - ripe to be restructured. PVH/KSS misrepresented by mainstream media – we don’t like either.



ZQK - 3Q14 Earnings


Takeaway: This one definitely deserves some commentary. There's definite brand value here, but there's just no bottom visible on the top line in what was once ZQK's core market. The company continues to have execution issues across several businesses. It will find a bottom -- and our sense is that it will be a matter of quarters instead of years. But until then, cash burn will increasingly be an issue.  But one thing we can't shake is that we're seeing companies like Dollar General bid 12-13x EBITDA for marginal assets like FDO, which seems flat-out egregious from where we sit. And yet there's a company like ZQK with under $1bn in EV, but $1.3bn in NOLs.  At this price, the equity is pretty much worthless, and the reality is that this company shouldn't be public. A purchase and balance sheet restructuring is just a matter of time.


Retail Callouts (9/5): ZQK, PVH, KSS, KORS, Endorsements - chart1 9 5


PVH - 2Q14 Earnings/KSS Read Through


Takeaway: Business is better on the margin, but to be clear, this was one of those 'EBIT is still down, but just not down as bad as we guided' quarters.  We're waiting to see how the Street comes in with EPS estimates. We definitely have a bias to the short side here.


One of the more interesting things was how PVH's comments on KSS were misrepresented by the mainstream media.  Like clockwork, CEO Chirico was on Cramer immediately after the print (one of the few companies to religiously use this format as spin-control 16 hours before the conference call with the Investment Community). The following exchange was hysterical...


Chirico: "At Kohls, we have really started to see our business take off the last couple of weeks there."

Cramer: "That’s what I'm feeling, I'm feeling Kohls is making the turn."


Now, let's put this into context. PVH’s Izod brand launched at Kohl’s in mid-Aug. Of course that business is turning! That does not mean KSS as a whole is improving sequentially. KSS traded up on this, but it shouldn't have.


Retail Callouts (9/5): ZQK, PVH, KSS, KORS, Endorsements - 9 5 chart5



GIII - 2Q15 Earnings


Retail Callouts (9/5): ZQK, PVH, KSS, KORS, Endorsements - 9 5 chart2



BEBE - 4Q14 Earnings


Retail Callouts (9/5): ZQK, PVH, KSS, KORS, Endorsements - 9 5 chart3



ZUMZ - 2Q14 Earnings


Don't let the good-looking SIGMA deceive you -- ZUMZ guided down 3Q due to a weaker than expected sales outlook. Not a shocker that this happened in conjunction with the ZQK miss.


Retail Callouts (9/5): ZQK, PVH, KSS, KORS, Endorsements - 9 5 chart4




KORS - Silas Chou and Lawrence Stroll to Sell Remaining Stake in Michael Kors



  • "Silas Chou and Lawrence Stroll are about to exit the Michael Kors business."
  • "Michael Kors Holdings Ltd. has filed a shelf registration to sell slightly over 11.6 million shares of common stock in a secondary public offering that would have Chou and Stroll resign from the Kors board upon the closing date of the offering."


Takeaway: Chou and Stroll are the longest standing Board members of KORS (12 yrs). On one hand, we're glad they're gone. Their history in retail corporate governance never sat well with us (remember the early days of Tommy Hilfiger? That was Chou). On the flip side, when two Board members -- who have managed their own PA quite well over time -- both leave at the same time, it is never a good sign.


Fast Retailing- Uniqlo Tennis Bet Pays as Endorsers Featured at U.S. Open



  • "Fast Retailing Co. is ready for war. The clothing maker’s battle begins Saturday, when world No. 1 Novak Djokovic takes on 10th-seed Kei Nishikori in the U.S. Open semifinal."
  • "Billionaire Chairman Tadashi Yanai wins, regardless of the outcome. Both players, signed on in the last three years, will be wearing his Uniqlo brand clothes at the final Grand Slam of the year in New York."


Takeaway: Djokovic has always been a huge win for Fast Retailing, but the fact that they have two athletes competing in such a high profile event against one another is pretty huge. The irony is that they will win, but will also lose. Our sense is that this gives FAST the bug and it gets more aggressive in the endorsement game. Not good for the traditional sports brands.




COST, LB, GPS, BKE - August Comparable Store Sales


Retail Callouts (9/5): ZQK, PVH, KSS, KORS, Endorsements - 9 5 chart6



HD - Home Depot asks Canadians to report ‘unusual activity’ on credit cards



  • "A spokesperson said Thursday the big box renovation store can’t yet confirm whether a breach has occurred at Canadian or U.S. stores."
  • "'Our forensics and security teams have been working around the clock since we first became aware of a potential breach Tuesday morning,' Home Depot spokesperson Paula Drake told Global News."
  • "Drake also advised Canadian consumers 'to closely monitor their accounts and contact their card issuers if they notice any unusual activity.'"


TGT - Target to open city store TargetExpress in Berkeley



  • "Berkeley residents often complain there’s nowhere in their city to buy underwear. That might change now that Target has announced it will open one of its new breed of city stores, called TargetExpress, in downtown."
  • "The Minneapolis-based retailer is poised to turn a long vacant building at the corner of Shattuck Avenue and Allston Way into one of its new-concept TargetExpress stores by March 2015."


JWN - Nordstrom Board of Directors Authorizes $1 Billion Share Repurchase Program



  • "Nordstrom, Inc. announced today that its board of directors has authorized a repurchase program of up to $1 billion of the Company’s outstanding common stock, through March 1, 2016. The Company intends to fund the repurchase program from existing cash on hand."

Keith's Macro Notebook 9/5: Euro | UST 10YR | Volume

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 80.46%
  • SHORT SIGNALS 78.35%

LEISURE LETTER (09/05/2014)

Tickers: LVS, PENN, GLPI


  • Sept 6-8: China/Macau - Mid-Autumn Festival
  • Sept 8:  MAR Analyst Meeting
  • Sept 9: 
    • BofAML Gaming & Lodging Conference
    • GLPI & HPT at Wells Fargo Net Lease REIT Forum
    • EXPE & OWW at DB Technology Conference


BEL:PM (GGRAsia) Philippine casino investor Belle Corp informed the Philippine Stock Exchange it has not decided on the “timing or size of any potential secondary offering” for its shares in Sinophil Corp.

Takeaway: Interesting commentary since CSLA was allegedly pre-marketing the offering earlier this week? Could investor demand for this placement be tepid?


LVS & 1928:HK (GGRAsia) the Macau Land, Public Works and Transport Bureau confirmed Sands China has only received the permits for foundation works and construction of the podium area of the Parisian Macao casino resort.  As a result, the construction of the US$2.7 billion Parisian Macao casino resort is still partially suspended

Takeaway:  We could still see a delay in the opening date - early 2016 is our guess.


PENN & GLPI – A federal judge in Pennsylvania on Thursday dismissed a bankruptcy case involving the former Argosy Sioux City. Argosy said it is in the final stages of negotiating a contract with an unidentified third party to purchase the boat and two barges on the Missouri River and demolish the dockside facilities. Argosy is required to remove structures from the city-owned riverfront by the end of September.

Takeaway: Potentially a small residual value for GLPI.



MSC – (Travel Weekly) MSC Cruises unveiled a new pricing structure that bundles cabin categories, dining choices and onboard amenities in four commissionable packages.  Ken Muskat, executive vice president of sales, outlined the four packages that range from a la carte to all-inclusive. The packages will be available for sale starting Sept. 23, for cruises departing on or after Oct. 18.

Takeaway:  Cruisers have been promoting more bundled and all-inclusive deals this year.


Singapore Highest monthly visitor arrivals to Singapore this year in July Channel News Asia

The number of international visitors to Singapore saw a 19.2% spike in July relative to June, representing the highest monthly arrival figure for the year. July visitor arrivals was 1,407,078, up from June's 1,180,533 - which was the lowest for the year.  This was aided by a rebound in visitors from mainland China, with July's 180,487 visitors almost double that of June's 91,422.  Hong Kong visitor numbers, too, were strong at 80,715, 71.2% higher than June's. 

Takeaway:  Positive surprise out of Singapore. 


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

Relative Speak

This note was originally published at 8am on August 22, 2014 for Hedgeye subscribers.

“There’s a lot of cash on the sidelines!”

-Anonymous Pundit

Outspoken hedge fund manager Cliff Asness of AQR recently remarked “Every time someone says, ‘There’s a lot of cash on the sidelines’ a tiny part of my soul dies. There are no sidelines.”

Relative Speak - sidelines

Asness' pet peeve for this common saying implying “this is why the market still has room to run” based on absolute historical fund flows and equity valuations is based on a slightly different interpretation than we prefer to reference. Yet we absolutely agree with his disdain for this statement at face value (although maybe not as pointedly).


With all global market participants attempting to front-run the RELATIVE positioning of each monetary authority, finding the right RELATIVE positioning across asset classes is the key starting point for global macro risk management in today’s environment. We strongly believe that our implication of the POLICY metric into our quantitative model for pinning the convexity of growth and inflation is a key differentiator.  Sticking solely with a strategy that seeks fundamental value through historical, absolute metrics has been a difficult task during the second half of this 6-year bull market.


In an interview discussing his pet peeves and preferable investment strategy, Asness went on to say that in his opinion, two of the main strategies that have worked over the long-term, are value and momentum investing and that combining those works much better than either one.


Value with a catalyst as we prefer to call it?


Back to the Global Macro Grind...


This is only his high level opinion about what works, but when we look at our own process, we believe it’s plausible to back into our own process from this simple statement. We describe our process as “a multi-factor, multi-duration model that utilizes a fundamental and quantitative approach to global macro risk management.”  The quantitative sequence for buying or selling a single security is as follows:


  1. Is the slope of growth and inflation in those economies under the guise of central banks with the ability to print money accelerating or decelerating RELATIVE to consensus expectation as reflected in market prices?
  2. What is the fiscal and monetary response RELATIVE to the other central banks of the “reserve currencies” who, with the confidence of all global participants for now, tighten their credit spread by printing more money? What emerging market economies benefit or suffer?
  3. What do the effects of a stronger or weaker domestic currency mean for real domestic growth based on the componentry of its growth dynamics? How is this observed to confirm or discredit the tendencies in markets?
  4. Now with this overlay, what is fundamentally happening in a domestic economy to strengthen or weaken the outlook for growth?
  5. Which sectors perform better or worse under each scenario (see all four below)?
  6. With this sector bias, pick your long-short ideas
  7. MOST IMPORTANTLY, how do you execute this fundamental call (HINT: Some form of momentum?)
  8. By studying our intermediate-term duration, we can observe key levels of support and resistance to observe the overall TREND in the market.
  9. If in fact the fundamental and TREND signals match up we manage the risk of the range by buying on red and selling on green on the signals.                 


Generating alpha in a market that has gone straight up for the last two years is no easy task. Our best way to seek outperformance begins with #1 above. There are simply four main scenarios in our GIP model (GROWTH, INFLATION, POLICY) for real economic expansion, and front-running the inflection points allows us to pick SECTORS that outperform under each scenario:


  1. Growth accelerating, inflation decelerating
  2. Growth accelerating, inflation accelerating
  3. Growth decelerating, inflation accelerating 
  4. Growth decelerating, inflation decelerating


The monetary response to each scenario and the implications for the strength of an economy’s real purchasing power is predictable in our opinion, but in this never-before seen monetary experiment, front-running the RELATIVE policy response when the centrally-planned machines of different monetary authorities are confronted with the same scenario is difficult. We believe the best- way to front run the big turns is to take in the relevant economic and market data on a day-to-day basis, and position accordingly.


Janet Yellen’s commentary on Wednesday was perceived as more hawkish than the market expected. We weren’t “trading the speech” or hanging on every word, but we didn’t get any indication she is taking a hawkish turn.


Across the pond, Europe has turned severely weaker out of a strong first-half, and the market over the last month has indicated an expectation for a RELATIVELY more dovish Draghi. The tone in his most recent speech reflected his willingness to stand ready for an ABS purchase program. In fact, he more or less said that he would implement an asset-backed purchase program (QE without the government bond and public asset purchase program) immediately if given the authority.


Both the quant signals and our GIP model suggest Europe may slow for the next three consecutive quarters and the FX and gold markets are expecting a relatively more dovish Draghi.


  • The EUR/USD has backed off 1.5% bps over the last month
    • USD breakout vs. EURO breakdown in our model
    • Gold (USD and POLICY-denominated) is down 3% over the last month


CAN DRAGHI CONVINCE THE MARKET HE’LL BE MORE DOVISH FROM HERE? Unfortunately we don’t possess a crystal ball, but our domestic view on overly optimistic growth expectations for the full-year remains intact as it has for all of 2014.


Don’t be afraid to take up your USD exposure and put a little cash on the sidelines (When the USD is going up!)


Have a great weekend.


Ben Ryan



Relative Speak - COD

What's Next?

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).