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Takeaway: Our Macro Playbook is a daily 1-page summary of our investment themes, core ETF recommendations and proprietary quantitative market context.


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. Health Care Select Sector SPDR Fund (XLV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. SPDR S&P Regional Banking ETF (KRE)
  2. iShares Russell 2000 ETF (IWM)
  3. iShares MSCI European Monetary Union ETF (EZU)
  4. iShares MSCI France ETF (EWQ)
  5. ADD: SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
  6. REMOVE: iShares US Home Construction ETF (ITB)




  • The U.S. Equity Market Will Never Go Down Ever Again… Right?: Incongruent with the consensus view that “globally coordinated monetary easing” has completely mitigated the risk of a correction (or crash) in the U.S. equity market is the performance of the asset classes, sectors and style factors most correlated to policy-induced asset price inflation. Specifically, 17 of the 20 ETFs exhibiting the greatest amount of negative momentum across the entire global macro complex as defined by our Tactical Asset Class Rotation Model (TACRM) are commodity producers and/or servicers (GDX, IEZ, FILL, XOP), individual commodity markets (USO, NIB, UGA, BNO, GLD, SLV, DBC, SGG), commodity currencies (FXC, CCX) and country indices with a significant degree of commodity price sensitivity (NGE, EWCS, EWC). Either recent price action has created the mother-of-all buying opportunities in these assets, or buy-side consensus will find itself dead wrong on the lazy thesis that the Fed/ECB/BoJ will “never let markets go down”. While the fear amongst hedge fund investors that “the stock market will never correct” is both pervasive and surreal, the real fear should be whether or not these exposures are discounting the eventual end to the market(s) actually responding positively to incremental Policies To Inflate
  • Commodity Price Tail Risks: Two tail risks emerging the commodity complex and all of the global CapEx (i.e. GDP) associated with commodity E&P include: perpetual debasement of the JPY (bullish for the USD) and the recent GOP mandate in Congress, which may portend a meaningful reduction in the Fed's ability to "CTRL+P". We wonder if the same investors buying the spoos here on the #GOPtakeover will be the same ones who sell the lows if the market crashes in realization of that last catalyst... At any rate, we're adding the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) to our core investment recommendations on the short side in anticipation of further #Quad4 downside for commodity prices.
  • Less Bearish on Housing: One of the questions we’ve been wrestling with internally is: “When do we make the turn from bearish to bullish on early-cycle sectors like housing?” Well, interestingly enough, our most recent deep dive into the state of the domestic housing market does indeed warrant reduction in our bearish bias (i.e. less negative). Housing, in ITB terms, continues to make a series of lower-highs so we do not yet think it’s appropriate to get bullish on housing at the current juncture. That being said, however, a failure to make a lower-low versus the intra-day low on 10/13 on the next meaningful pullback would be additional confirmation that our bearish bias is long in the tooth. As such, we are removing the ITB from our core investment recommendations on the short side. All told, a decline of -3.6% YTD for the ITB vs. +8.9% for the SPY is sizeable absolute and relative return for anyone who’s appropriately had our bearish housing thesis on all year.




***CLICK HERE to download the full TACRM presentation.***



#Quad4 (introduced 10/2/14): 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.


Headlines & Under-Hoods: Sept. Income & Spending (10/31)

Hangovers & Late-Cycle Juggernauts: 3Q GDP & Initial Claims (10/30)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.


Early Look: All Boxed In (10/22)


#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


Early Look: Deflated Disputants (10/30)


Best of luck out there,




Darius Dale

Associate: Macro Team

November 5, 2014

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November 5, 2014 - Slide13


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

As we look at today's setup for the S&P 500, the range is 66 points or 2.24% downside to 1967 and 1.04% upside to 2033.               













  • YIELD CURVE: 1.82 from 1.82
  • VIX closed at 14.89 1 day percent change of 1.09%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Oct. 31 (prior -6.6%)
  • 8:15am: ADP Employment Change, Oct., est. 220k (prior 213k)
  • 8:30am: U.S. announces plans for quarterly refunding auctions of 3Y/10Y notes, 30Y bonds
  • 9:45am: Markit US Services PMI, Oct. final, est 57.1 (pr 57.3)
  • 9:15am: Fed’s Kocherlakota speaks in Virginia, Minn.
  • 9:30am: Fed’s Lacker speaks in Washington
  • 10am: ISM Non-Mfg Composite, Oct., est. 58 (prior 58.6)
  • 10am: Fed’s Rosengren speaks in Lima, Peru
  • 10:30am: DOE Energy Inventories
  • 6:45pm Former Fed Chairman Bernanke speaks in Denver



    • President Obama attends meetings at White House
    • Senate, House out of session
    • Sec. of State John Kerry travels to Paris Nov. 4-6 to to meet with French Foreign Minister Laurent Fabius
    • 10am: Supreme Court hears arguments in case over reach of Sarbanes-Oxley provision that makes it a federal crime to destroy documents to impede an investigation
    • 10am: CFTC Chairman Timothy Massad delivers keynote remarks during 1st day of Futures Industry Assn’s conference in Chicago



  • Republicans Profit From Voter Dismay Over Obama Economy
  • White House Puts Distance Between Obama, Losing Democrats
  • Morgan Stanley Expects $1.3b Tax Benefit for This Quarter
  • Gross Exit Prompts $27.5b in Withdrawals From Pimco Fund
  • Apax Said to Prepare $8.8b Bid for Oi Portugal Assets
  • Fox Eyes Digital Options to Counter ‘Fraying’ Cable TV Bundle
  • Antero Midstream Raises $1b in U.S. Pipeline Unit IPO
  • GM Sells First Dollar Bonds Since S&P Rating Upgrade
  • Toyota Forecasts Record Profit on Yen Boon to Lexus Sales
  • LG Electronics, Google Sign Patent Cross-Licensing Agreement
  • Visa Said to Win Best Buy Processing Deal, Replaces MasterCard
  • Monte Paschi Said to Line Up Banks for $3.1b Share Sale
  • Blankfein Sees China’s Century After Growth Transition
  • Xiaomi Seeks $50b Valuation on Apple-Topping Sales Ratio



    • Actavis (ACT) 7am, $3.11 - Preview
    • Ansys (ANSS) 7:09am, $0.82
    • Ariad Pharmaceuticals (ARIA) 7:35am, ($0.30)
    • BroadSoft (BSFT) 7:30am, $0.26
    • Brookfield Infrastructure (BIP) 8am, $0.39
    • CenterPoint Energy (CNP) 8:15am, $0.30
    • Chesapeake Energy (CHK) 7:01am, $0.33 - Preview
    • Cognizant (CTSH) 6am, $0.63 - Preview
    • Covidien (COV) 6am, $1.02 - Preview
    • Denbury Resources (DNR) 7:30am, $0.26
    • Duke Energy (DUK) 7am, $1.52
    • Enbridge (ENB CN) 7am, C$0.38 - Preview
    • Endo Intl (ENDP) 6:30am, $0.99 - Preview
    • Hecla Mining (HL) 8am, $0.01
    • HollyFrontier (HFC) 7am, $0.94
    • Intact Financial (IFC CN) 6:55am, C$1.08
    • Lamar Advertising (LAMR) 6am, $0.39
    • Level 3 Communications (LVLT) 8am, $0.32
    • Louisiana-Pacific (LPX) 8am, ($0.06)
    • Mondelez Intl (MDLZ) 8am, $0.39 - Preview
    • NRG Energy (NRG) 6:59am, $0.49
    • Nu Skin Enterprises (NUS) 7:30am, $0.92
    • OGE Energy (OGE) 7am, $0.95
    • Penn West Petroleum (PWT CN) 7:06am, C$0.08
    • Quanta Services (PWR) 6:07am, $0.58
    • Realogy (RLGY) 7:09am, $0.65
    • RioCan REIT (REI-U CN) 7am, C$0.43
    • Rockwood (ROC) 6am, $0.57
    • Rowan Cos (RDC) 8:15am, $0.53
    • RR Donnelley (RRD) 6:30am, $0.37
    • Sinclair Broadcast (SBGI) 7:30am, $0.34
    • Spectra Energy (SE) 6:30am, $0.27
    • Stillwater Mining Co (SWC) 8am, $0.17
    • Stratasys (SSYS) 7am, $0.58 - Preview
    • Tim Hortons (THI CN) 7:30am, C$0.89
    • Time Warner (TWX) 7am, $0.94 - Preview
    • Towers Watson (TW) 6am, $1.21
    • Vonage (VG) 8am, $0.04
    • Voya Finl (VOYA) 6am, $0.74 - Preview


    • Alnylam Pharmaceuticals (ALNY) 4pm, ($0.63)
    • American Capital (ACAS) 4:18pm, $0.17
    • American Water Works (AWK) 4:15pm, $0.91
    • Annaly Capital (NLY) 4:05pm, $0.31
    • Antero Resources (AR) 4:05pm, $0.31
    • Ashland (ASH) 5pm, $1.36
    • Babcock & Wilcox (BWC) 4:20pm, $0.44
    • Brookdale Senior Living (BKD) 4:51pm, ($0.09)
    • CBS (CBS) 4:01pm, $0.73 - Preview
    • CenturyLink (CTL) 4:05pm, $0.62
    • Concho Resources (CXO) 4:30pm, $0.91
    • Continental Resources (CLR) Aft-Mkt, $0.81
    • Convergys (CVG) 4:15pm, $0.38
    • DryShips (DRYS) 4:02pm, $0.04
    • Dynegy (DYN) 4:30pm, $0.01
    • Energy XXI Bermuda (EXXI) 5pm, $0.07
    • EnerSys (ENS) 4:01pm, $1.01
    • Envision Healthcare (EVHC) 4:10pm, $0.33
    • Franco-Nevada (FNV CN) 4pm, $0.22
    • Genpact (G) 4:01pm, $0.26
    • Genworth Financial (GNW) 5:05pm, $0.21 - Preview
    • Gulfport Energy (GPOR) 4:05pm, $0.04
    • Hologic (HOLX) 4:01pm, $0.38
    • Integrys Energy (TEG) 5:17pm, $0.40
    • J2 Global (JCOM) 4:15pm, $0.82
    • Kindred Healthcare (KND) 6:15pm, $0.10
    • Kinross Gold (K CN) 5pm, $0.03
    • Liberty Global (LBTYA) 5:10pm, $0.01
    • Matador Resources Co (MTDR) 4:01pm, $0.31
    • MBIA (MBI) 4:05pm, $0.04
    • McDermott Intl (MDR) 4:12pm, ($0.11)
    • Molycorp (MCP) 4:02pm, ($0.27)
    • News Corp (NWSA) 4:05pm, $0.05
    • Novavax (NVAX) 4:19pm, ($0.07)
    • Plains All American (PAA) 4:15pm, $0.52
    • Prudential Financial (PRU) 4:07pm, $2.41 - Preview
    • PTC (PTC) 5:57pm, $0.64
    • QEP Resources (QEP) 4:15pm, $0.25
    • Qualcomm (QCOM) 4:01pm, $1.32 - Preview
    • SandRidge Energy (SD) 4:15pm, $0.05
    • SolarCity (SCTY) 4:05pm, ($1.11)
    • Solazyme (SZYM) 4:07pm, ($0.42)
    • Sun Life Financial (SLF CN) 5:10pm, C$0.74 - Preview
    • Symantec (SYMC) 4:01pm, $0.43
    • Tableau Software (DATA) 4:01pm, ($0.06)
    • Tesla Motors (TSLA) 4:14pm, $0.00 - Preview
    • Vivus (VVUS) 4:05pm, ($0.24)
    • WebMD Health (WBMD) 4pm, $0.24
    • Westar Energy (WR) 5:08pm, $1.07
    • Whole Foods Market (WFM) 4:03pm, $0.32
    • Zillow (Z) 4:30pm, $0.09




























The Hedgeye Macro Team



















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All Boxed In

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

“The Italian people are tired of this corruption. Because we have too many people that steal, too many people that put the money in his pocket. We have 40% of people who don’t pay tax. Can you imagine? 40%. It’s unbelievable.”

-Renzo Rosso


Renzo Rosso is an Italian and founder of the Diesel jeans brand. He appeared in a 60 Minutes segment on Sunday titled “Saving Italy’s History Becomes Fashionable” that showed how he along with a number of other prominent Italian fashion houses (Tod’s, Fendi, Bulgari) were donating millions to repair and improve the country’s historical landmarks, from the Colosseum and the Spanish Steps in Rome to the 400 year old Rialto Bridge over the Grand Canal in Venice.


Why? Because the government is too broke to allocate funds to maintain the country’s historic treasures.


While the issues of deep corruption and oversized bureaucracy in Italy remain nothing new, it’s both telling and remarkable to see these individuals and companies take a stand (now), rather than pointing fingers or pushing the problem on to somebody else further down the road.

All Boxed In - z. colosseum


Back to the Global Macro Grind


If only the Italian government could take a similar stand and unilaterally agree to reform itself… NOW.


As we’ve noted in previous work, Italy recently joined France as a standout in the camp of “Austerity Is Dead” in submitting 2015 budget plans that extend out its initial fiscal consolidation targets.


Specifically, Italian PM Matteo Renzi presented a budget last week that included cuts to labor taxes and personal income taxes worth €18 Billion, however some €11 Billion of it will be funded with extra borrowing that will raise the country’s deficit-to-GDP to 3% this year versus its previous target of 2.6% (with 2015 forecast as 2.9%).


And so for the first time in history, the European Commission may exercise its power to reject both Italy’s and France’s budgets and ask for new ones.  A formal resolution is expected to come on October 29th.


What’s clear is that the 39 year old young-gun and reform-minded Renzi has inherited a challenged position and the country is looking for leadership to pull itself out of what will be three years of negative growth:

  • He filled a power vacuum in February 2014 composed of splintered and diverse parties (that legacy continues and challenges reform)
  • Italy has a record high youth unemployment rate at 43% (3rd highest in the Eurozone behind Spain and Greece at 50%+) and an aggregate unemployment rate of 12.3% vs Eurozone 11.5%
  • Italy has put little dent in its record high debt of 133% (2nd highest to Greece’s in the Eurozone and 3rd highest of all countries in the developed world) vs Eurozone at 92% (that remains a persistent threat to raising debt/increasing interest rate costs)

Yet as we described in an Early Look note on 10/10 titled #EuropeSlowing – Austerity Is Dead? the main “rub” throughout the Eurozone is a leadership one. 


On one hand, we have the ECB and European Commission pointing its finger at the member states to do more country-level reforms. On the other hand, we have member states (like Italy and France) saying they’ve already done a significant level of reform and collectively pointing the finger back at the ECB for not doing more to inflect the lack of growth and deflation they’re experiencing.


To fuel the fire, tack on the indecision created by the fiscally conservative Germans calling into question the potential negative consequences that could result for the ECB’s newest policy toolkit, including the TLTROs, ABS and covered bond buying programs. Just in the last few days we’ve heard whispers (because the information is private) that the ECB bought French, Italian, and Spanish covered bonds, ahead of ABS purchases and the second round of the TLTRO program that are slated to begin/issued in December.


We’ve been clear in our research, including in our Q4 Macro theme of #EuropeSlowing, that we do not see Draghi’s Drugs arresting the low levels of inflation in the Eurozone (CPI currently is at 0.3% Y/Y) nor producing sustainable economic growth (recent programs baked in and with record low interest rates).


As we show in The Chart of the Day below, not only do we think that Draghi’s inflation policies will not work, but we expect deflation to hit Italy (CPI at -0.1% Y/Y) and the other countries across the periphery harder, which should only further push out growth expectations and limit business and consumer confidence. 


If Renzi’s Reform is to ever become a success, it will be counted in many years, not many months, and our opinion is that regaining competitiveness within the confines of the Eurozone structure is a sisyphean task.


Our bottom-up, qualitative analysis (e.g. our Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates).


From an investment position we continue to recommend shorting Italian (EWI) and French (EWQ) equities (down -7.6% M/M and -8.1% M/M, respectively) and shorting the EUR/USD (FXE) (down -1.2% M/M).


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.09-2.24%

SPX 1830-1947

RUT 1037-1115

DAX 8508-9103

USD 84.84-86.16

EUR/USD 1.26-1.28


Matthew Hedrick


All Boxed In - z. neu CPI

CHUY: Look Out Below

Takeaway: Significant downside ahead. Let us know if you'd like to review our recent slide deck supporting the short case.

CHUY remains on the Hedgeye Best Ideas list as a short.


The company reported disappointing 3Q14 results yesterday after the close, as revenues and earnings fell short by 36 bps and 594 bps, respectively.  Despite missing, the headline numbers were actually much stronger than the underlying fundamentals would suggest as food and labor cost pressures, in addition to select underperforming restaurants, drove restaurant level margins and operating margins lower year-over-year. 


The lack of leverage in the business model is something that the street has failed to come to grips with and something we thought was blatantly obvious.


Check out the street’s prior 3Q labor cost estimate below.  Estimates suggested that labor cost as a percentage of revenues would only increase 18 bps year-over-year in the quarter, after being up more than 167 bps year-over-year, on average, in the prior three quarters.


CHUY: Look Out Below - 1


As expected, these estimates proved to be woefully misguided, as labor actually deleveraged 110 bps year-over-year in the quarter, which can be seen below.


CHUY: Look Out Below - 2


While there was deleveraging throughout the entire P&L, labor costs were the primary reason Chuy’s missed the number in the quarter.  We wanted to make this point, because it is fundamental to what drives our idea generation process.  Find out where consensus is (sometimes blatantly) wrong, stress test the other line items, and then determine the ultimate impact this disconnect will have on earnings. 


It’s certainly not bullet proof, but it is something that has served us extremely well.  This also supports our case that Chuy’s has been the beneficiary of the Investment Banking Mafia.  Take what management tells you and blindly plug it into your models.


Another issue we had heading into the quarter was the fact that the street expected underperforming restaurants in new markets to suddenly improve.  This isn’t something that happens overnight.  In fact, half of the restaurants in the 2013 class (which comprises 33% of the total restaurant base) continue to struggle with inefficiencies from below average AUVs. 


Importantly, when you are operating a growth concept that is rapidly expanding into new markets, you need to make incremental investments in the business, meaning margins will be difficult to protect.  Management has been able to leverage operating & other and general & administrative expenses in the past, but will be hard pressed to continue this trend moving forward.


CHUY: Look Out Below - 3


CHUY: Look Out Below - 4


As a result of the aforementioned issues, management meaningfully guided down its full-year EPS range from $0.76-0.78 to $0.67-0.69.  This would imply a 4Q EPS range of $0.11-0.13, well below the street’s $0.15 estimate.  Backing out the approximate $0.04 full-year accretive effect of the depreciation change management made, and probably rightfully so, apples-to-apples 2014 EPS is expected to come in between $0.63-$0.65.  Chuy’s delivered $0.69 in earnings in 2013.


CHUY: Look Out Below - 5


Before we run through bullet points of the good and the bad from the quarter, we wanted to share with you our favorite quote from the earnings call which came from CEO Steve Hislop toward the end of his prepared remarks:


“…we are working diligently to tackle what we believe are near term challenges as well as taking a thoughtful look at the evolution of our new unique model as we grow our brand nationally.”


To hear this coming from the CEO of a company that is rapidly expanding nationally at a clip above 20% unit growth is concerning.  At face value, at least to us, it says “we’re not ready to grow,” and the financial results of this company suggest the same.  We still see significant downside to the stock and note that the company may struggle to deliver our base case $0.75 EPS next year.


CHUY: Look Out Below - 6

The Good

  • Comps +3.0% vs. +1.9% estimate; +1.3% increase in traffic; +1.7% increase in average check
  • Management believes they have pricing power and could take another increase in February 2015
  • Four new Chuy's restaurants opened in 3Q (2 in TX, GA, VA) and one additional in 4Q (VA); 2014 unit development is complete
  • Guided up full-year comp growth from +2.3-2.6% to +2.7-2.9%

The Bad

  • Guided to cost of sales as a percentage of revenue between 28.2-28.4% vs. 28.0% estimate
  • Food inflation 4.5-5% for the full-year; beef, dairy, chicken, produce (lettuce, tomatoes) have been issues in 2014; chicken beginning to subside; beef, dairy likely issues in 2015 as well; only contract 25-30% of base; food cost inflation will increase, though potentially at a lower rate than in 2014
  • Guided to labor costs as a percentage of revenue between 33.8-34.0% vs. 33.18% estimate
  • Ongoing inefficiencies at non-comparable restaurants; comprise 33% of open restaurants
  • Expect many new units to mature at lower AUVs
  • New unit volumes in new markets are difficult to predict
  • Guided down full-year EPS range from $0.76-0.78 to $0.67-0.69; implies a 4Q EPS range of $0.11-0.13, well below the street’s $0.15 estimate


Feel free to call, or email, with questions.


Howard Penney

Managing Director


Fred Masotta




RHP’s group business has never looked better as evidenced by the solid Q3 2014 results and strong Q4 2014 and 2015 outlooks. Estimates look like they are going higher aided in part by a too high share count embedded in Street estimates. The bears are grasping to the one negative datapoint – gross bookings declined sequentially. In this regard, however, RHP is a victim of its own success – Q2 was phenomenal and the Q4 pace is accelerating again. Besides, net bookings were still positive and at significantly higher rates. Bottom line: the number of nights on the books is a huge number. We recommend investors take advantage of today’s weakness.


Please see our note:  http://docs.hedgeye.com/HE_RHP_Outlook_11.4.14.pdf

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