Hell on Wheels

“Mr. Bohannon, Do you want to build this railroad?”

-Senator Grant in the AMC T.V. show, “Hell on Wheels”


Similar to our office, I’m sure most of you don’t have much time to watch T.V., but every once in a while a great show comes around that is really hard to turn off.  A popular one at Hedgeye as of late is AMC’s, “Hell on Wheels.”


Hell on Wheels - HOW facebook timeline 850x315


The show is about the epic struggle to build a trans-continental railroad. Setting aside the obvious struggles of weather, dealing with Native tribes (who felt their treaties were being violated), and limited technology, the building of the transcontinental railroad also occurred at a time when the nation was healing itself from the Civil War.  As a result many former Union and Confederate soldiers worked side-by-side on the railroad.


As Wikipedia describes it:


“The First Transcontinental Railroad (known originally as the "Pacific Railroad" and later as the "Overland Route") was a 1,907-mile (3,069 km) contiguous railroad line constructed between 1863 and 1869 across the western United States to connect the Pacific coast at San Francisco Bay with the existing Eastern U.S. rail network at Council Bluffs, Iowa, on the Missouri River.”


The epic struggle to connect the two sides of the continent took more than six years, but once it was completed dramatically changed the face of commerce in the United States. 


Who knows, perhaps the iWatch will do the same?


Back to the Global Macro Grind...


In the global macro world, the epic struggle du jour seems to be related to Scottish independence.  Simply, will the Scots decide to leave the United Kingdom, or not?  


A few weeks ago, no one was even considering this as a potential global macro issue, but after a recent YouGov.Com poll that showed a slight majority of Scots voting Yes (51%) to independence versus No (49%), the British pound was sold dramatically and Scottish independence became a hot topic with the manic media.


Hell on Wheels - dj


So, will the Scots vote for independence on September 18th?  If we rely strictly on the poll, it would seem there is a real chance of this occurring.   Practically speaking, though, as we have written often in the past it is very unwise to rely strictly on one poll.  In fact, there are a couple of key quantitative points that speak in contrast to the poll:

  • First, the YouGov poll that showed a 2% edge for the Yes side was literally the second poll ever (of those polls approved by the British Polling Council) to show the Yes side ahead.  The other Yes poll was taken by the Scottish National Party back in mid-2013;
  • Second, the most recent poll aggregates (though some admittedly occurred before the most recent debate in which pro-independence leader Alex Salmond was widely judged to have won) still show a lead for the No vote outside the margin of error.  Specifically, a poll aggregate issued by Strathclyde University on September 1st showed the No side ahead by 10 points and a poll aggregate from The Guardian on September 3rd showed a similar 10 point lead.
  • Finally, the online betting website, Bet Fair, shows the market for Scottish Independence at more than 2:1 for No independence.  (Incidentally, there have been almost $5 million pounds wagered on Bet Fair for this topic.)

In the Chart of the Day below, we show the impact that the series of polls have had on the British Pound.   While certainly there are other factors at play, the increasingly pro-Independence polls have been a defined catalyst for aggressive selling of British Pounds.


Setting aside the polls and betting markets, the most notable reasons for Scotland to stay a part of Great Britain are related to the Scottish economy itself.  Hedgeye’s European Analyst Matt Hedrick highlighted a number of major risks to the Scottish economy should the Scots pursue independence, including:

  • Currency – UK politicians have stated that Scotland could not use Sterling. The country would have to issue its own currency
  • Central Bank – until the formation of a central bank there is no backstop for sovereign debt
  • Massive Capital Flight –investors could pull money out of Scottish banks en masse that would destabilize the financial system 
  • EU Membership – it’s unclear if an independent Scotland would be granted EU membership, which could have huge trade implications
  • Regulation – uncertainty if banks would remain regulated under the UK regulatory authority? Tax and trade regulations also uncertain
  • Economic Drag – prominent financial firms likely to move to London
  • Budget –  the Institute for Fiscal Studies pointsout that Scotland's Deficit could be 4.6% if independent. Low credit quality could negatively impact debt raises, and push the country's debt and deficit levels higher, a vicious cycle.

It is certainly possible, even if unlikely, that the most recent poll is the harbinger of Scottish Independence.  But for this to be accurate it would fly in the face of all other polls, the betting markets, and really any semblance of rational analysis by the Scots related to their own economy.  So our view continues to be that the No vote will prevail and the British Pound will rally accordingly.


That said, given the weak nature of the Scottish economy and the fact that 2 out of every 3 Scots are on some form of social welfare, over the long run a Great Britain without Scotland might actually be a stronger economy and certainly more healthy from a fiscal perspective.  So on some level, perhaps the British Pound is in a win-win situation given its recent sell off.  A No vote leads to a relief rally and a Yes votes leads currency traders to asses s United Kingdom’s much improved fiscal health without Scotland, which leads to a long term tail wind for the Pound.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.31-2.52%


RUT 1151-1171

Shanghai Comp 2

VIX 11.34-13.83

Brent 98.74-102.99 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Hell on Wheels - UK EL

Mortgage Apps - From August Anemia to September Slowdown

Takeaway: Plumbing new lows in purchase demand, at least according to the Mortgage Bankers Association Survey.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume


*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point


Mortgage Apps - From August Anemia to September Slowdown - Compendiium


Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended September 5th.


The Composite Index hit a new 10Y low in the holiday week, declining -7.2% sequentially with Refinance and Purchase demand sliding -10.6% and -2.6% WoW, respectively. As this morning's data is reflecting a holiday week, we'll hold our breath for next week's print for confirmation, but, regardless, the intermediate-term trend remains down.

  • From August Anemia to September Slowdown: The purchase Index fell for the 5th time in 6 weeks, declining -2.6% WoW to 161.5 on the Index. This marks the 9th consecutive week at the 160-level and the softest demand streak since April of 1995 – note that outside of 1 week during the peak weather distortion in February (155 on 2/21/14), the Purchase index hasn’t fallen below the 160-level since 3Q11.  Purchase demand remains down -12% YoY and is currently tracking -6.4% QoQ.
  • Refi & Rates:   Refinance activity fell -10.6% WoW with the holiday and the sequential rise in rates both playing negatively.  Rates on the 30Y FRM contract increased for the 1st time in a month, rising +2bps sequentially to 4.27%.  Refi activity remains down -17.2% YoY but the rate of change continues to improve as we move through the easiest 2013 comps.


As we’ve been apt to highlight of late, while the MBA survey states that it covers 75% of all US retail residential mortgage applications, it does not count applications submitted through the broker/correspondent/wholesale channels.  Given the regulation catalyzed share-shift in the mortgage origination channel, it’s likely the MBA survey is modestly understating current demand. 


Mortgage Apps - From August Anemia to September Slowdown - Purchase   Refi YoY


Mortgage Apps - From August Anemia to September Slowdown - Purchase 9wk rolling Ave


Mortgage Apps - From August Anemia to September Slowdown - Purchase LT w summary stats


Mortgage Apps - From August Anemia to September Slowdown - Purchast Qtrly Ave


Mortgage Apps - From August Anemia to September Slowdown - Composite LT w summary stats


Mortgage Apps - From August Anemia to September Slowdown - 30Y FRM


Mortgage Apps - From August Anemia to September Slowdown - 30Y FRM Mo Ave


About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


Christian B. Drake

Bloody Highs

This note was originally published at 8am on August 27, 2014 for Hedgeye subscribers.

“The perpetuation of debt has drenched the earth with blood.”

-Thomas Jefferson


No volume, no worries. We’re at the all-time bloody SPY highs, baby. Didn’t you hear? This time is different. Ask the guys who said bond yields would rise as US growth accelerated (our call in 2013) throughout 2014, who are now saying that US growth will rip, as bond yields fall?


Since I started playing this game in the late 1990s, most of the time was supposed to be “different” (newsflash: it wasn’t). While the stock, bond, and commodity market bubbles have all had different narratives, one thing is not different – prices go up, then down, a lot.


Another thing that has not changed, for literally 200 years, is the bull/bear debate on US government debt, central planning, and easy money. It’s ole school Jefferson vs. Hamilton. And, until the next stock market bubble pops, to some Hamilton will appear to be right.


Bloody Highs - Bull goes... 07.11.2014


Back to the Global Macro Grind


The stock market is not the economy. Drawing down US National Savings in order to A) keep up with the Policy To Inflate USA’s cost of living to all-time highs and B) perpetuate a levered slow-to-no-growth real economy is not the path towards long-term prosperity.


But, Keith, the stock market is up. Indeed. So is Argentina’s.


Argentina is basically in default, but its stock market was up another +1.5% yesterday to +78.4% YTD. If only CNBC could do an inversion from New Jersey to Buenos Aires, they could bounce their ratings off all-time lows trumpeting Argentina’s big government success.


Alexander Hamilton would have been the darling of big debtor, money printing, and taxing TV too. He did, after all, promote a US National Debt as a “public blessing.” Whereas the more libertarian minded Thomas Jefferson said:


“I consider the fortunes of our republic as depending on the extinguishment of the public debt.”

-Hamilton’s Curse (pg 38)


So which one is it that drives your family or country’s fortunes – debt or savings?


As you can see in the Chart of The Day (pg 30 in our current Macro Themes slide deck – if you’d like a copy, ping, the US Personal Savings Rate (% of Disposable Income) has been falling for the past 3 years (as the stock market makes new highs).


How do you solve for sustainable Investment Growth in America if you can’t solve for S (Savings) = I (Investment)?


I’m pretty sure that the answer to that is you get everyone to borrow (lever up) to either buy growth or, in Kinder Morgan’s (KMI) case, to pay the dividend.  Oh, those juicy dividends. Gotta have them - especially if the risk free rate of return on American Savings is centrally planned at 0%.


Who is dumb enough to put money into a savings account that earns 0%? Throughout this summer I have taken my Cash position in the Hedgeye Asset Allocation Model from 10% to 56%. “So”, evidently me. Why?


  1. Raising cash in both 2000 and 2007 worked for me (they were cycle calls)
  2. I’m not a big fan of drawing down my net worth 30-60% every 7 years and telling my family everyone else missed it too


After an economic cycle plays out (we’re going on 63 months into a US economic expansion), if I’ve raised cash at a measured pace, I’ll have it to re-invest it in my business when the proverbial poop hits the fan (see 2008-2009 Hedgeye Risk Management ROIC for details).


But that’s just me. I like to save (raise cash) so that I can invest counter-cyclically.


What does being counter-cyclical mean? It means the opposite of what the Old Wall pressures companies and investors to do, which is chase returns and invest in inventories, capex, etc. at the end (instead of the beginning) of a cycle. In public co. CYA speak, most CFO’s are pro-cyclical.


Which brings up the most important part of my decision making process – the bloody cycle!


You either agree with me or not here, but at SPX 2,000, you do have to make a decision. You either invest up here, or you book gains and raise cash for a rainy day. Which means you have to have a view on where we are in the economic cycle:


  1. If you think it’s different this time, you buy early cycle stocks (Russell 2000 is only +0.8% YTD, gotta be “cheap”)
  2. If you think it’s not (falling bond yields and compressing yield spread = growth slowing), you sell early cycle stocks (and buy TLT)


If this time is different, you don’t have to ever worry about things like no-volume (Total US Equity Market Volume was -13% and -39% vs. its 3 month

and YTD averages yesterday), peak debt leverage ratios to peak cash flows, or the Russell 2000 trading at 55x trailing earnings.


All you have to do is wake up at 9AM every day and tweet me that we’re at the bloody highs.


Our immediate-term Global Macro Risk Ranges are now (all 12 big macro ranges, with intermediate-term TREND signals in brackets, are in our Daily Trading Range product, every day):


UST 10yr Yield 2.34-2.44% (bearish = bullish Long Bond)

SPX 1980-2011 (bullish)

RUT 1138-1178 (bearish)

BSE Sensex 25991-26876 (bullish)

VIX 11.06-13.15 (neutral)

USD 82.01-82.94 (bullish)

EUR/USD 1.31-1.33 (bearish)

Pound 1.65-1.67 (bullish)

WTI Oil 92.34-97.41 (bearish)

Natural Gas 3.81-3.99 (bearish)

Gold 1271-1299 (bullish)

Copper 3.16-3.25 (bullish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bloody Highs - Savings

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September 10, 2014

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TODAY’S S&P 500 SET-UP – September 10, 2014

As we look at today's setup for the S&P 500, the range is 17 points or 0.32% downside to 1982 and 0.53% upside to 1999.                                                       













  • YIELD CURVE: 1.96 from 1.95
  • VIX closed at 13.5 1 day percent change of 6.64%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Sept. 5 (prior 0.2%)
  • 9:45am: Bank of England’s Carney speaks in Parliament
  • 10am: Wholesale Inventories m/m, July, est. 0.5% (prior 0.3%)
  • 10:30am: DOE Energy Inventories
  • 1pm: U.S. to sell $21b 10Y notes



    • 9:30am: Senate Homeland Security Cmte hearing on Islamic State terrorism and cybersecurity
    • 10am: House Ways and Means Chairman Dave Camp, R-Mich., CEA Chairman Jason Furman speak at “Tax Reform: Lessons Learned and the Path Forward” discussion at Business Roundtable
    • 12:30pm: Rep. Mike Fitzpatrick, R-Pa., holds conf. call on legislation introduced to “squeeze” financial assets of Islamic State
    • 2pm: House Financial Services subcmte holds hearing on credit reporting system
    • 9pm: President Obama speaks to nation from White House about strategy to degrade, destroy Islamic State terrorist group
    • U.S. ELECTION WRAP: Presidential Failure; Udall Misstep; Ads



  • Microsoft said to near $2b deal to buy Minecraft maker
  • Dollar General will make hostile Family Dollar bid, Reuters Says
  • EU weighs more Russian sanctions amid fragile Ukraine cease-fire
  • TransFirst said to draw interest from TSYS after IPO filing
  • Sprint CEO deploys ‘IPhone for Life’ plan to win back customers
  • Hertz seen taking $200m writedown on aging vehicle fleet
  • Detroit reaches Syncora deal that may change bankruptcy plan
  • Vivendi said to eye Italy comeback via Mediaset pay-TV stake
  • China said to consider letting car dealers sell multiple brands
  • Japan’s Recruit plans $1.7b IPO to fund deals, expansion
  • AngloGold raising $2.1b amid international split plan
  • Ferrari chief Montezemolo steps down after clash with Fiat



    • Empire Co (EMP/A CN) 7:31am, C$1.35
    • Five Below (FIVE) 4:01pm, $0.14
    • Lands’ End (LE) 7am, $0.17
    • Men’s Wearhouse (MW) 4pm, $1.06
    • Restoration Hardware (RH) 4:02pm, $0.64
    • Vera Bradley (VRA) 8am, $0.19
    • Wet Seal (WTSL) 4:05pm, $(0.15)



  • Industrial Metals Extend Drop on China Concern and Dollar Rally
  • Brent Trades Below $100 for Longest Run in 16 Months on Surplus
  • Steaks for Argentines Mean EU Diners Eat Uruguayan: Commodities
  • Philippine House Ore Export-Ban Debates Unlikely Until Late 2015
  • Corn to Soybeans Trade Near 4-Year Lows on Record Crop Outlook
  • No Named Storms First Time in 22 Years as Hurricane Season Peaks
  • White Sugar Declines for Fifth Day as Arabica Coffee Rebounds
  • Former Obama Aide Summers Backs End of U.S. Crude Oil Export Ban
  • Olam Hires Alex Tan as Head of Palm Oil Trading From Golden Agri
  • Goldman Calls End to Iron Age After ‘Dramatic’ Drop in Ore Price
  • Gold Is Little Changed Near Three-Month Low on Stronger Dollar
  • Ivory Coast Cocoa-Growing Areas Got Increased Rainfall Last Week
  • China Province to Cut Irrigated Wheat to Save Water: Heibei News
  • Philippine Ore Ban Bill Not Priority for President, Senator Says


























The Hedgeye Macro Team

















LULU – More Ways To Win Than Lose

Takeaway: Great category, solid brand, weak company, and a horrendous mgmt team. But in the $30s, we think there are more ways to win than lose.


We like LULU, but it is not for the typical reasons we traditionally look for in a long. We added the name to our best ideas list on June 15 because of our view that things were so pathetically bad at LULU, that it would lead to positive change. Add on what we thought was capitulation by the sell-side (LULU currently has its lowest Buy ratio in history), and very defendable downside in the low-mid $30s due to attractive LBO/acquisition math, we think that this is ripe for a restructuring.  Even most LULU bears would probably admit that this is a very strong brand in a superior category with global appeal – they’ll probably just argue that the competition is too fierce and LULU is ill equipped to face it head-on. We actually agree with that logic. That’s why it needs to be changed radically from what we see today.  Yeah, John Currie is on his way out as CFO – that’s a plus. Also, Chip Wilson sold half his stake to Advent, and we think that the rest of his stake is on the way out.  But, we think the change we’ll see will be a lot bigger than that. The problem is that this is a global mid-cycle growth company approaching $2bn in sales, but it has a management team that is appropriate for a sub-$500mm localized brand.


As for what’s next on the ‘change agenda’, we think that the speed of change depends on the company’s own financial results. If the next couple of quarters pan out as we think – which is not very good – then we think the most probable outcome is that the Board fires Laurent Potdevin – the CEO it hired just 8 months ago. He’s simply not the right guy for the job. Never was, and never will be. He’s only led small brands like Toms and Burton, but he simply does not have the skill set to make LULU a great global brand with efficient operations across multiple distribution channels. Our view is that the only reason the Board approved Laurent is because Chip simultaneously agreed to give up his Chairman title if Potdevin was named CEO. That move left Wilson powerless (no Chair, no CEO, no majority, NO power), which led to him unwinding his stock. It also suggests that the Board is not married to Potdevin, and we think it will make the right call in replacing him if need be. We think that there’s an 80% chance that Potdevin is gone in a year’s time. 


There are a lot of other changes as well beyond human resource management. Other changes should be made regardless of who is at the helm – like developing a competitive pricing process. LULU is the worst company that we’ve seen in many years when it comes to appropriately changing the prices on its product as the selling season progresses. It needs the information systems, potentially physical outlets, and definitely a more sophisticated system to sell aged inventory online and ship directly from stores. And yes, it might even need a wholesale model. These are all decisions that should be vetted by the management team LULU deserves – but does not have.


So basically, if trends weaken further and it is clear that this management team cannot create value and grow this business profitably, then we think we’ll see a completely new executive team put in place to make it happen. Advent did not buy back 14.8% of LULU for $845mm after all these years to passively watch it die on the vine. So in this case, we think Bad News = Good News. If by chance (and we think it would be sheer luck) that this management team gets this engine running, then that’s probably good for the stock as well.  Good News = Good News.


We’re very careful about these ‘things are so bad that it’s good’ calls, because they usually have a way of missing even lowered expectations and destroying value.  But that mattered to us when the stock was near $70, and even earlier this year when it was in the $50s. But with the stock in the high $30s, sentiment worse than it has ever been (EVER is a long time), and value investors increasingly coming out of the woodwork exploring with us what the trough earnings number is for LULU (it’s $1.50, by the way), we’re simply not as concerned at current levels.  Could it trade down on horrible print? Yes, but we think things are bad, not horrible.  In a perverse way, we’d like to see LULU faceplant this quarter. Because we don’t think the equity market would punish it commensurately to the economic impact of the miss itself, but it would be an event that would likely cause the Board to shake things up.  Ultimately, there is $4bn in revenue to be realized here – likely at a high-teens margin. That’s $3-$3.50 in EPS power. At $38, that’s 11.6x earnings, and 7.5x EBITDA. Sounds pretty defendable to us. We just need a team in place that can deliver.


LULU – More Ways To Win Than Lose - lulusentiment1




  • In LULU’s 28 quarters as a public company it has beat estimates 27 times by an average of 16.5%. Over the past 8 quarters the average beat was 7%. There have been pre-announcements and guide downs along the way, especially over the past 12 months, but in general LULU doesn’t miss.
  • Luon Recall was 3/18/13 and Luon was back on shelves 6/4/13 about a month into the 2nd quarter last year
  • Chip comments on Bloomberg fell at the start of the 4th quarter (11/5/13)



  • Internet traffic rank which takes into account organic visits and page views per visit was up 25% relative to all other sites on the internet.
  • Monthly traffic improved sequentially in June and July from trough levels in May and was up 68% in the quarter. A 2000bps improvement sequentially from 1Q14. The improvement could be driven by LULU jamming more inventory through the e-pipe. That could have negative margin implications, or if it does not result in better e-comm sales it could simply mean that the company did a lousy job converting. But the trends initially look decent.

 LULU – More Ways To Win Than Lose - LULU2


LULU – More Ways To Win Than Lose - lulu3


Gross margin – key negative driver here are product margins

  • Over the past 5 quarters (1Q13 -1Q14) product margins have been down by 90bps, 220bps, 220bps, 270bps, and 310 bps respectively. Two year comp in 1Q, -200bps. Management guided margins down another 300bps for the upcoming quarter that would assume product margins down 200bps, 50bps from fx, 30 – 40bps hit from new Ohio DC. Much of deleverage comes from mix away from core to seasonal which has lower IMU due in part to inefficient supply chain and inventory chase.


  • Investments listed below and 14 pop-up shops adding an incremental $10mm in SG&A

Revenue Drivers

Near term stop gap measures intended to drive ‘traffic and sales’. These all seem weak at best. But it’s what LULU has called out.

1) Allocating additional floor space to men’s at store locations in Santa Monica, Vancouver, and Miami

2) London – on track to do in excess of $2,200 per square foot in year one

3) A social media platform focused on Brand Ambassadors

4) In-store tablets allowing guests to shop online inventory

5) Paid search advertisement

6) 14 pop up shops across the US and Canada open from April through September


Long term (these make more sense to us, but only partially address LULU’s problems)

1) Additional 120 stores to be added across North America

2) 40 international stores (20 Europe, 20 Asia) by the end of 2017 in addition to anything added on top of 30 store base in Australia and NZ

3) Go to market calendar – Spring/Fall 2015

4) Rebalance of core and seasonal product – Starts in 2H14 but won’t be fully implemented until 2Q15

5) Revamped product engine – 1Q16


Guidance Considerations

Getting within spitting distance of management guidance for the quarter is not terribly heroic. To get to the mid-point of guidance and in line with consensus for the quarter calling for revenue of $375mm - $380mm and EPS of $0.28-$0.30 we need to assume the following…

1) Revenue growth of 9.6%. Square footage growth of 20% YY, -4.3% consolidated comp (-9% store and +22% DTC).

2) Gross margins down 300bps and flat sequentially from the first quarter on the 2yr trend line

3) SG&A up 25%, implying 440bps of deleverage

4) EBIT margins down 738bps YY.

5) EPS growth of -26%


A little tougher to get to annual guidance. To get to the mid-point of guidance and in line with consensus for the full year calling for revenue of $1.77bil - $1.80bil and EPS in the range of $1.71-$1.76 we need to assume the following…

1) Revenue growth of 12%. Square footage growth of 18%. Flat consolidated comps (-5% store and +24% DTC).

2) Gross margins down 170bps to 51%.

3) SG&A up 24%, implying 300bps of deleverage

4) EBIT margins down 465bps

5) EPS growth = -10%

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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.