Q&A | McCullough: I Haven’t Been This Bearish Since 2007

Short EWI – Italy Has Yet To Find A Bottom

Last Friday Keith added a short signal in Italy (via the etf EWI) to our Real-Time Alerts. We were tactically afforded the opportunity to short EWI as Italian stocks have bounced to lower-highs but remain bearish TREND (21,525 in the FTSE MIB Index).

Short EWI – Italy Has Yet To Find A Bottom - w. italy mib


Getting Short Persistent Italian Underperformance


Our thesis on Italy is relatively simple:

  • GDP Underperformance – a 2H deceleration should lead to 2014 Italian GDP flat to -0.3% versus +0.6% to +0.8% in the Eurozone. 
  • Sticky Unemployment – we expect the unemployment rate to be grounded at 12-13% for the remainder of the year, versus Eurozone average of low to mid 11%.  Italy’s monster Youth Unemployment of 42.9% will continue to present a real drag on confidence and extend the length of a “recovery” over the medium term TREND and pose a generational drag over the long term TAIL.
  • Fiscal/Budget Squabbles – we continue to get mixed signals from the Renzi government. More fiscal consolidation or less?  The lack of a definitive voice should only provide further uncertainty to the populous and dampen consumer confidence around an inflection: late last week undersecretary at the economy ministry Enrico Zanetti said that Italy may seek to delay bringing its structural budget deficit into balance until 2016 (versus the previous guidance of 2015).
  • ECB is No Savior – despite cutting the main interest rates to near zero and deposit rates to negative first in June, the policy move to further cut last week will not lead to increased lending to businesses that are willing to invest in and grow the European economy. We expect investment to the region, and Italy in particular, to remain severely challenged over the medium term.  
  • Regional Partners Also Weak – we have monitored weeks and months of declining data across the region and our propriety GIP model (growth, inflation and policy) for assessing economies suggests the Eurozone economy will land in the ugly quads #3 and #4 in 2H, representing growth slowing as inflation decelerates/accelerates. With 54% of Italy’s exports heading to EU countries, we suspect that weaker demand from the EU in 2H will continue to put downward pressure on growth. 

Short EWI – Italy Has Yet To Find A Bottom - EUROZONE


Just Charts

Below we show 4 charts that are representative of Italy’s underperformance.

  • Italy’s PMI Services for the August reading ticked below the 50 line, indicating contraction
  • Italy’s Unemployment Rate is poised to remain above the Eurozone average
  • Italian Retail Sales have inflected back to the downside
  • Italian Economic Sentiment inflected downward in the August reading – we expect further declines in 2H

Short EWI – Italy Has Yet To Find A Bottom - W. Italy PMI

Short EWI – Italy Has Yet To Find A Bottom - w. ITALY UNEMPLOY

Short EWI – Italy Has Yet To Find A Bottom - w. ITALY RETAIL SALES

Short EWI – Italy Has Yet To Find A Bottom - W. ITALY SENTIMENT


Matthew Hedrick


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Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.    



1.       CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “large speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.


The Sugar, Orange Juice, and Corn markets experienced the most BULLISH relative positioning change in the CRB week-over-week.

The bullish positioning changes in sugar and corn reflect the near-term expectation for prices increases:

  • Sugar and Corn have the most bullish expectation for both near-term and longer-term price increases in the CRB Index as measured by the difference between spot prices and longer-dated futures contract prices--> “basis differential” (see below).  
  • Sugar and Corn prices both lower last week adding to the negative basis spread:
    • Corn: -4.2%
    • Sugar: -3.2%

The Cotton, Heating Oil, and Copper markets experienced the most BEARISH relative positioning change in the CRB week-over-week:

Commodities Weekly Sentiment Tracker - chart1 CFTC Net Positions


2.       Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.

  • The Sugar, Wheat, and Corn markets are positioned for HIGHER PRICES near-term
  • The Lean Hogs, Soybeans, and Gasoline markets are positioned for LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - chart 2 spot 2nd month



3.       Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.

  • The Sugar, Wheat, and Corn markets are positioned for HIGHER PRICES in 1-year  
  • The Lean Hogs, Soybeans, and Gasoline markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - chart3 spot 1 YR basis


4.       Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.

Commodities Weekly Sentiment Tracker - chart 4 open interest   


Ben Ryan



Monday Mashup: BLMN, PLKI and More

Investment Ideas

The table below lists our Investment Ideas as well as our Bench -- a list of potential ideas we are watching closely.  We intend to update this table regularly and will provide detail on any material changes.


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Recent Notes

09/02/14 Post-Labor Day Mashup

09/03/14 DRI: A Logical Fallacy

09/04/14 MCD: Why We Are Short

09/05/14 Employment Growth Encouraging for Restaurants

Events This Week

Tuesday, September 9th

  • DEN, PLKI CL King & Associates Best Ideas Conference
  • KKD earnings call 4:30pm EST
  • MCD August 2014 Sales and Revenue Release

Friday, September 12th

  • DRI earnings call 8:30am EST

Chart of the Day

2H14 and 2015 estimates remain too aggressive for MCD and will likely be revised lower over the coming months.


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Recent News Flow

Tuesday, September 2nd

  • DNKN opened its first two full expression restaurants in Modesto and Santa Monica, California.
  • DRI guided 1QF15 EPS $0.31-$0.33 vs. $0.33 consensus and proposed a new board structure that would include four incumbents, four new company nominees and four Starboard nominees.
  • BWLD launched GameBreak, a multi-platform gaming experiencing that allows guests to play a range of fantasy-style and competitive sports games in the restaurant, online, and on a mobile app.
  • RRGB announced the LTO of its Beam-N-Bacon Boozy Shake made with Jim Beam Maple Bourbon, caramel and vanilla soft serve.  The offer will run through Nov. 2nd.
  • BLMN appointed Donagh Herlihy as Executive VP Digital & Chief Information Officer.  Herlihy previously led eCommerce and global information technology strategy and operations at Avon.

Wednesday, September 3rd

  • PLKI promoted Hector Munoz to VP & Chief Marketing Officer-U.S.  Munoz will lead the company's domestic marketing efforts and will report directly to Chief Brand Experience Officer, Dick Lynch.
  • YUM disclosed the impact of supplier issues on comps in China, estimating the division's sales to be down ~13% in 3Q.

Thursday, September 4th

  • JACK announced that Frances Allen is joining the company as President of the Jack in the Box brand, effective October 27th.  Allen previously held senior leadership roles at Denny's, Dunkin' Brands, Sony Ericsson Mobile Communications, PepsiCo and Frito-Lay.

Sector Performance

The SPX (+0.5%) underperformed the XLY (+0.6%) last week.  In aggregate, casual dining and quick service stocks outperformed the SPX.


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XLY Quantitative Setup

From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.


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Casual Dining Restaurants

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Quick Service Restaurants

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Howard Penney

Managing Director


Fred Masotta


investing ideas

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.