Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EDV, FXB, GLD, LM, OC, OZM, RH, TLT and XLP.

Below are Hedgeye analysts’ latest updates on our nine current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.


*Please note that we removed HCA Holdings (HCA) this week after a 72% gain.


We also feature two institutional research notes which offer valuable insight into the markets and economy.

Investing Ideas Newsletter     - II table


Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


Investing Ideas Newsletter     - Super TLT cartoon 10.01.2014





Yet another solid week for our recommended non-consensus slow-growth, yield-chasing trade (WoW performance):

  • TLT +1.4%
  • EDV +2.4%
  • XLP +0.6%

With the Russell 2000 down a full percent on the week, the market is clearly having a vote of no-confidence for consensus GDP estimates of +3%, per quarter, as far as the eye can see.


Investing Ideas Newsletter     - Consensus GDP Estimates


Perhaps that’s because growth slowed, on  the margin. Again. In fact, the Bloomberg US Economic Surprise Index actually dropped -45% WoW.


While the actual rate-of-change in the economic data was not nearly as dour, there were a number of key #GrowthSlowing data points that were supportive of our fundamental view:

  • Pending Home Sales: -4.1% YoY in AUG from -2.8% in JUL
  • Case-Shiller Home Price Index: 6.8% YoY in JUL from 8.1% in JUN
  • ISM Manufacturing PMI: 56.6 in SEP from 59 in AUG
  • Markit Manufacturing PMI: 57.5 in SEP from 57.9 in AUG
  • Construction Spending: 5% YoY in AUG from 6.9% in JUL
  • ISM Non-Manufacturing PMI: 58.6 in SEP from 59.6 in AUG
  • Markit US Services PMI: 58.9 in SEP from 59.5 in AUG

Now to be fair, PCE (AUG), Initial Jobless Claims and the Jobs Report (SEP) were quite good. In fact, the data was actually really good (per our US macro analyst Christian Drake):

  • “Consumer Spending accelerates as income growth remains strong and savings rate declines modestly from 18-month high.  This month we saw income growth hold just under last month’s highs but the savings rate ticked down, allowing consumption growth to accelerate. Spending improved across services, non-durables and durables, with durables again leading the pack.”
  • “Solid Report overall with private payrolls leading the gains (236k of the 248k). Growth accelerated in September on both a 1Y and 2Y basis across NFP & Private payrolls. The net two-month revision was +69k, which was not surprising. Looking back at historical revision trends August is almost always revised higher & generally with one of the largest magnitudes of any month. The unemployment rate gets a 5-handle as the LFPR ticks down again to another new multi-decade low.”
  • “The initial jobless claims data this morning is reasonably strong. SA rolling claims continue to trend lower, coming in just under 295k this week. The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.5% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.9%We're 7 months into the sub-330k claims environment. The last 2 cycles lasted 31 (2007) and 45 (2000) months before the market top.”

So net-net, there’s some good data and there’s some bad data. The problem with the good data is that the market appears to effectively pricing in its inevitable crescendo. And as long as it’s doing that, we’ll stick with what’s worked all year: long-duration paper and stocks that look like bonds.


Investing Ideas Newsletter     - Z. DAN GBP 

We’ve been offsides on our position in recent weeks, however resilient fundamentals continue to support our positioning and we view BOE policy (expectations around a rate hike) as hawkish compared to dovish intentions of the Fed and ECB.  For the week the GDP/USD was down -1.2%.


That said, the GBP/USD intermediate term TREND of $1.62 has been under attack, and the British have done little to support it.  We’re sticking with the position (strong UK = strong Pound) and watching  to see if/how the Fed acts to devalues the USD. We expect any shift in stance could show a strong mean reversion in the cross.


This week we got a mix of data out of the UK that weighed on the cross:



  • Q2 Final GDP Q/Q revised up 10bps to 0.9%
  • UK Construction PMI 64.2 SEPT (exp. 63.5) vs 64.0 AUG
  • Lloyds Business Barometer 57 SEPT vs 47 AUG



  • UK Services PMI 58.7 SEPT (exp. 59.0) vs 60.5 AUG
  • UK Composite PMI 57.4 SEPT (exp. 58.2) vs 59.3 AUG
  • UK GfK Consumer Confidence -1 SEPT (exp. 0) vs 1 AUG


BOE Minutes continue to show 2 votes (out of 9) to increase interest rates (by 25bps) from the Governing Council. We expect this marginally more hawkish tone taken together with the outperformance of UK growth over the US and Eurozone in 2014 to push the GBP/USD higher over the intermediate term. 


We bought Gold on the oversold signal Friday morning after a pop in the ten-year yield and a big move in the dollar. Is the economy back after a slight beat from the jobless claims report (post-revision) as seen from the lens of the fed regime? We don’t believe so. Nor do we believe it makes for a material data point supporting the committee’s decision to taper.


Draghi has successfully induced a -10% devaluation in the Euro since his first round of rate cutting in the middle of Q2. With growth in the U.S. and European economies slowing at the same time, his relative dovishness has been a tailwind for the dollar (and thus bearish for Gold).  A flattening in the yield curve confirms the disbelief around a sustainable growth outlook domestically (10-year yield -7bps week-over-week).


With that being said, our gold position has held strong to the negative correlations inherent in the expectation for the USD. With this summer’s FX move being the largest since 1997, gold in and of itself has been a losing trade.


The ECB’s implementation of rate cut on two separate occasions and the herd mentality increasingly positioning for a fed taper into the end of the year have perpetuated the USD strength. Tactical currency exposure in front of centrally-planned policy decisions makes this game more difficult than ever:


 Since the May 6th highs in the Euro:


- EUR/USD: -10.2%

- Gold: -9.0%

- USD: +9.6%


Embedded in this move is correlation risk. It is our view that Draghi in a smaller box at this point whereas Yellen has more flexibility in moving incrementally dovish from here. When she does, we want to have an allocation to Gold.   



Shares of Legg Mason continue to perform well up over 18% in 2014 however the story has received a shot in the arm as of late. With last week’s news that leading bond fund manager Bill Gross has left PIMCO, reports of substantial redemptions at Gross’ former shop have been reported with the rest of the large bond fund platform’s likely large beneficiaries.


While PIMCO had already been struggling with over $60 billion in redemptions over the past 18 months, a reported additional $23 billion has been pulled from the platform just this week according to various media outlets. While it is not completely a zero sum game (with PIMCO’s loss someone else’s gain), there is reason to believe that the other major fixed income platforms on the Street will mop up these outflows.


Legg Mason (LM), Blackrock (BLK), and the private Doubleline funds all have strong existing franchises with strong performance that would be a natural destination for these PIMCO funds in dislocation. While LM and BLK have not commented on the environment over the past 10 days, the private Doubleline has mentioned collecting over $500 million in a single day last week as investors exited PIMCO.


This was not a situation we had modeled for in our recommendation of LM shares, however the company will be a beneficiary of a PIMCO in donor mode.



This week U.S. construction spending came in for August with both Nonresidential and Residential spending easing.  Private construction spending for residential home improvement disappointed again.  Lack of significant storm activity such as hailstorms and hurricanes are helping keep improvement spending levels depressed.   

Next week, our industrial’s team will host an update call on pricing in the asphalt roof shingle market, on Tuesday October 7.  If recent price increases in this market hold, we believe it would remove a key overhang from OC shares.

Investing Ideas Newsletter     - oc



Och-Ziff remains on our Investing Ideas list as shares are currently trading at a negative multiple of its incentive fee earnings, a situation that last came about in 2011 when shares were just $7. We arrive at this negative multiple when we apply a traditional asset management earnings multiple of 15.9x to the firm's core asset management earnings of near $0.76 per share which would imply a stock value of $12 per share.


Thus with the current stock value at $11, or $1 per share below its "traditional" implied value, the running incentive fees per share earnings of $0.24 implies a new all time low multiple on this earnings stream.


The average incentive fee multiple for OZM shares since 2009 has been +3.7x providing solid upside when valuation improves. Thus if the firm can hang on to its running year-to-date positive performance, without additional negative regulatory news flow, that the stock should rally off of these depressed levels.


OZM shareholders are getting paid to wait for this situation to rectify itself with a dividend year of 7.3%, well above the average for the S&P 500’s yield of 2.1%.

Investing Ideas Newsletter     - ozm



Please click here to read Hedgeye retail sector head Brian McGough's note released on Friday "RH - Stealth revenue Driver."


* * * * * * * * * * 


Click on each title below to unlock the content.


Draghi Disappoints On Delivering the "Drugs"

We believe the market is finally calling ECB President Mario Draghi’s bluff.

Investing Ideas Newsletter     - d2


Defcon 2.5: The "China Overhang" Is Likely to Continue

We believe prospects are rising for another leg down in consensus expectations for Chinese growth.

Investing Ideas Newsletter     - c2

Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 divergences

Commodities: Weekly Quant - chart2 deltas

Commodities: Weekly Quant - chart3 USD Correls

Commodities: Weekly Quant - chart4 S P Correls

Commodities: Weekly Quant - chart5 volume metrics

Commodities: Weekly Quant - chart6 implied vol

Commodities: Weekly Quant - chart7 sentiment

Commodities: Weekly Quant - chart8 1 mth correls

Commodities: Weekly Quant - chart9 3mth correls

Commodities: Weekly Quant - chart10 6 mth correls

Commodities: Weekly Quant - chart11 1yr correls

Commodities: Weekly Quant - chart12 3yr correls


Ben Ryan



The Week Ahead

The Economic Data calendar for the week of the 6th of October through the 10th of October is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.


The Week Ahead - 10.03.14 Week Ahead


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The Best of This Week From Hedgeye

Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.


Quarterly Macro Themes Q&A

Here’s the question and answer portion from Thursday’s Macro Themes call. Hedgeye CEO Keith McCullough answers questions on a host of topics including #Quad4, #Bubbles and more.


One-Minute Video | McCullough: We Haven’t Seen This Bearish Market Signal In Over 18 Months

In this brief excerpt from Thursday's Morning Macro Call, Hedgeye CEO Keith McCullough warns investors that the Russell 2000 and S&P 500 are both bearish trend and tail in our model for the first time in at least 18 months.


ONE-MINUTE VIDEO | McCullough: ‘Quad 4’ Matters A Lot More to Your Portfolio than a 50-Day Moving Monkey

In this brief excerpt from Tuesday's Morning Macro Call, Hedgeye CEO Keith McCullough discusses the recent move into Quad 4 in our proprietary model and why it matters to markets ahead of Hedgeye’s Q4 Macro Themes call this Thursday.


Deflation (Got #Quad4 Yet?)

The Best of This Week From Hedgeye - Deflantion quad4 10.01.14

Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


Sweet Success?

The Best of This Week From Hedgeye - Jobs sweetsuccess 10.3.14

Hedgeye reiterates its long bond call (in $TLT terms), and to stay away from small caps.


Tweedledee & Tweedledum

The Best of This Week From Hedgeye - techbubble itsdifferentthistime 9.30.14


Legislating Deflation? (10YR Yield vs. U.S. Dollar Index)

The Best of This Week From Hedgeye - COD 9.29.14


#Quad4 [U.S. Growth and Inflation (In Rate of Change Terms) Slowing at Same Time]

The Best of This Week From Hedgeye - COD 10.2.14


Need. Moarr. Drugs. $DXY

The Best of This Week From Hedgeye - COD 10.3.14

Mario Draghi’s Drugs proved to be impotent in yesterday’s real-time market voting session. Germany’s DAX closed down -2% on the day. That puts every major European Equity market index in bearish TREND signal mode @Hedgeye.


Tech Bubble: Who's Right Peter Thiel or Keith McCullough?

Entrepreneur Peter Thiel made headlines Monday telling Fox Business anchor Deidre Bolton that we are not in a tech bubble. Thiel said, “I’m investing in tech stocks to hide from the government bond bubble.” Hedgeye CEO Keith McCullough replied in a tweet to @peterthiel, “I’m hiding in the Long Bond so that I can be short the Tech Bubble.” So, who's right?

Cycles, Slack & Sisyphean Fights: September Employment

Takeaway: We survey slack & seasonal distortions, characterize the labor cycle and peak growth, and review serial bias in revision trends.

From a policy calculus perspective, the existent labor & macro market dynamics can be sufficient summarized by the following duality:


ROW Growth Slowing + Global Disinflation Predominating + Domestic Wage Growth Decelerating + LFPR declining vs. Strong Initial Claims + Solid NFP Gains + Declining Unemployment Rate + Accelerating Aggregate Income Growth


Hilsy says rate hikes could come earlier than expected, inflation target’istas see lower-for-longer, the futures market is still (very slightly) leaning towards June.   


On balance, we think the current labor and manufacturing market data support the expected cessation of QE in October while leaving the internal committee consensus largely unchanged with respect the prospective tightening timeline.  


Overall:  Solid Jobs report across the establishment survey with private payrolls (+236K) leading the headline gain of +248K, a positive +69K net revision to July/Aug extending the positive bias in revision trends, and solid gains across industries driving positive breadth/balance in September hiring.   


On the negative side, wage growth was disappointing as average hourly earnings growth decelerated -20bps to +2.0% YoY while average hourly earnings for supervisory and nonproduction workers decelerated a big -60bps sequentially to +1.8% YoY – the slowest rate of growth in over a year. 


Cycles, Slack & Sisyphean Fights: September Employment  - Employment Table


REVISION TRENDS: The two month net revision was +69K with July revised from +212K to +243K and August revised from +142K to +180K.  The positive revision wasn’t particularly surprising given the broader positive bias in revision trends and the even stronger tendency for positive (& significant) revisions to the August (& September) data.


Cycles, Slack & Sisyphean Fights: September Employment  - NFP Revision Bias  


SEASONALITY & PEAK GROWTH: Seasonal distortions have been ubiquitous across the reported domestic macro data since the great recession as accelerated employment loss and the collapse in economic activity were, at least in part, captured as seasonal variation rather than as a bonafide shock. 


Similar to the Initial Claims data, the NFP figures have reflected ongoing, albeit diminishing, seasonality in recent years resulting in largely steady growth rates alongside sometimes volatile month-to-month changes in the absolute data.    For instance, while net job gains slowed materially last month (Aug) the YoY rate of growth in NFP was actually flat-to-up on both a 1Y and 2Y basis.


At +1.93% YoY,  Nonfarm payrolls in September recorded their fastest rate of improvement since April 2006.  The current pace of improvement is inline with peak growth in the last cycle and may be as good as it gets given the demographic and labor supply headwinds and the secular slowdown in employment growth over the last 30 years.


Cycles, Slack & Sisyphean Fights: September Employment  - NFP Payroll Growth


WAGE GROWTH, INCOME & CONSUMPTION:   Ave Hourly Wage growth was the most disappointing series in the release, growing +0% MoM and decelerating -20bps sequentially to +2.0% YoY. 


Even more disappointing was wage growth for Production and NonSupervisory employees.  After hitting at a 4-year high of  +2.4% YoY last month, wage growth slowed a material -80bps sequentially to +1.8% in September – the slowest pace in over a year.


Cycles, Slack & Sisyphean Fights: September Employment  - Hourly Wage Growth Production   NonSupervisory


BUT.....despite weakening wage growth, in combination with an accelerating employment base, the confluence should be enough to keep aggregate income on its current positive trajectory.  Aggregate private sector salary & wage growth is currently running at +5.8% and holding at its best levels of the recovery outside of the peri-fiscal cliff (income pull-forward) period. 


As we’ve highlighted,  the acceleration in income growth certainly supports the capacity for rising consumption growth.  Its been the steady rise in the savings rate alongside the income acceleration that has depressed the translation to actual household spending growth.    



Cycles, Slack & Sisyphean Fights: September Employment  - Salary  Wage grwoth Sept


CYCLE ACCOUNTING:  In yesterday’s parsing of the Initial Claims data, we highlighted the temporal relationship between claims and equities as claims reach their frictional lower bound at the ~300K level. 


To recapitulate, the chart below shows that over the last two cycles rolling SA claims ran at sub-330k for 45 and 31 months, respectively, before the corresponding market peaks in March, 2000 and October, 2007.  We are currently in month seven at the sub-330K level in the present cycle.  

Cycles, Slack & Sisyphean Fights: September Employment  - IC 330


In relation to economic cycle precedents, historically, over the last half century, initial claims and peak monthly NFP gains have led the peak in equities and the peak in the economic cycle by 3 months and 7 months (using 3Mo rolling averages of the data), respectively.   


Whether the current level of claims or the May-July NFP gains represented peak improvement in those measures remains to be seen, but it’s worth monitoring given the fairly consistent temporal sequence in the labor --> equity market --> economy over the last half century.  


Cycles, Slack & Sisyphean Fights: September Employment  - Initial Claims cycle


Cycles, Slack & Sisyphean Fights: September Employment  - NFP MoM


SLACK:  The U-6 rate fell to 11.8% from 12.0%, falling at a premium to the U-3 rate and providing for a small compression in the spread between the two. 


The short-term unemployment rate (those employed <5wks, % of Total Unemployed) retreated to 25.7%, down from its best level of the cycle last month at 27.4%. 


Those working part-time for economic reasons showed modest improvement in September, dropping -170K sequentially to 7.1MM.


Cycles, Slack & Sisyphean Fights: September Employment  - ST Employment   of Total


Cycles, Slack & Sisyphean Fights: September Employment  - U 6



BASEMENT DWELLING:  Employment growth for the 25-34 YOA age demographic, which sits as the center for 1st time homebuyer demand, didn’t inflect until late 2012.  The broader trend has been positive over the last 18 months with growth accelerating above the 2% level over the last four months. 


Intuitively,  housing demand from this demographic could be expected to improve over the intermediate term as employment growth matures, savings time accumulates, and work history reaches a duration necessary to satisfy mortgage underwriting standards in a tighter regulatory environment.  


Cycles, Slack & Sisyphean Fights: September Employment  - Housing Demand 25 34YOA Employment


Cycles, Slack & Sisyphean Fights: September Employment  - basement dwelling 



Christian B. Drake


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