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Q&A | McCullough: Small and Mid Cap US Equity Bubble "Epic"

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

Retail Callouts (9/9): PLCE, KATE, HD, TGT, FRAN, JCP, COH, LULU, WMT

Takeaway: Another big reading from ICSC, PLCE adds Vill from KATE, HD breach could be biggest yet, Rakuten coughs up $1bil for Ebates



Wenesday (9/10)

  • VRA - Earnings Call: 9:30am
  • FIVE - Earnings Call: 4:30pm
  • WTSL - Earnings Call: 4:30pm
  • RH - Earnings Call: 5:00pm


Thursday (9/11)

  • LULU - Earnings Call: 9:00am
  • KR - Earnings Call: 10:00am
  • ULTA - Earnings Call: 5:00pm




Takeaway: Another big reading from the ICSC up 4% YY - with a slight deceleration on the 1yr and 2yr trend line. Looking at the change in growth rate by calendar quarter: 1Q down 85bps, 2Q up 48bps, and 3Q to date up 163bps. We'll reiterate what we said last week. "US retailers should be killing it in this kind of environment. Most are. But for companies that but up questionable quality numbers (like KSS) but get rewarded anyway, we'd simply ask what they'll look like when this strength ends?"


Retail Callouts (9/9): PLCE, KATE, HD, TGT, FRAN, JCP, COH, LULU, WMT - 9 9 chart1

Retail Callouts (9/9): PLCE, KATE, HD, TGT, FRAN, JCP, COH, LULU, WMT - 9 9 chart2



PLCE, KATE - The Children's Place taps former Kate Spade exec as group VP, finance



  • "The Children's Place has appointed Robert Vill as group VP of finance. He will report to Michael Scarpa, chief operating officer and CFO."


Takeaway: This is a big win for PLCE. Some people know Vill as the Investor Relations contact at LIZ/FNP/KATE. But the reality is that he played the CFO role in large part since Mike Scarpa left what was then Liz Claiborne in 2008.  It's natural for the two to connect again for many reasons. But this is not the role we expected to see Vill take. He has always been extremely tight with Scarpa, but was also invaluable to Bill McComb throughout the period he transformed LIZ into KATE. It is only a matter of time before McComb lands another CEO role, and we fully expected Vill to be his CFO. Guess not.


HD, TGT - Home Depot Data Breach Could Be the Largest Yet



  • "Home Depot confirmed on Monday that hackers had broken into its in-store payments systems, in what could be the largest known breach of a retail company’s computer network."
  • "The retailer said the exact number of customers affected was still not clear. But a person briefed on the investigation said the total number of credit card numbers stolen at Home Depot could top 60 million. By comparison, the breach last year at Target, the largest known attack to date, affected 40 million cardholders."


Takeaway: We still think that the key takeaway is that this breach is so big, but so few people seem to care relative to past breaches. Sadly enough, the consumer is getting used to data security lapses. They may be more forgiving for past offenders as well, including Target.


Rakuten to Buy Ebates in Japan’s Biggest E-Commerce Deal



  • "Rakuten Inc. agreed to buy U.S. rebates website Ebates Inc. in Japan’s largest e-commerce deal as the operator of the country’s biggest online mall seeks overseas growth through acquisitions."
  • "Rakuten will pay $1 billion in cash for all of Ebates, it said in a filing to the Tokyo Stock Exchange today. San Francisco-based Ebates offers cash rebates to customers who buy products ranging from laptops to lipsticks from the website’s retail partners."
  • "Rakuten’s billionaire chairman Hiroshi Mikitani is betting the purchase will help the Tokyo-based company push its global e-commerce strategy. Rakuten has also been plowing cash into technologies such as mobile applications and online video as it seeks to add to its online marketplace business."


Takeaway: No direct public company implications here, but the simple fact that a Japanese company is buying an early cycle non-asset-based US e-tail startup for $1bn in cash is pretty much huge any way we slice it. In order of magnitude, this is like when Amazon bought Zappos for $928mm six years ago -- near the top of the last cycle.  At least Zappos had a brand. And a loyal customer base. And warehouses. And suppliers. And revenue. 




FRAN - 2Q14 Earnings


Retail Callouts (9/9): PLCE, KATE, HD, TGT, FRAN, JCP, COH, LULU, WMT - 9 9 chart3


JCP - J. C. Penney Commences Tender Offers for 6.875% Medium-Term Notes due 2015, 7.65% Debentures due 2016 and 7.95% Debentures due 2017



  • "J. C. Penney Company, Inc. announced today the commencement of cash tender offers  by J. C. Penney to purchase up to $300 million aggregate principal amount of the three outstanding series of securities issued by JCP, and for which the Company is co-obligor, described in the table below, except that with respect to the 7.95% Debentures due 2017, J. C. Penney is only offering to purchase up to $100 million principal amount."





  • "Coach, Inc. ... today announced the appointment of Gebhard Rainer, as President and Chief Operating Officer, effective September 29, 2014."
  • "Mr. Rainer joins Coach from Hyatt Hotels Corporation, where he most recently held the position of Executive Vice President and Chief Financial Officer. Previously, Mr. Rainer served as Managing Director for Hyatt International Europe, Africa and Middle East (EAME) LLC from January 2007 to August 2012 overseeing all aspects of the company’s business in the region. Mr. Rainer has more than 30 years of experience in progressively more senior operating and finance roles, and has extensive international experience, having lived in the Caribbean, the Middle East, Eastern Europe, Western Europe, and the United States."


LULU - New Lululemon Flagship Signals Identity Crisis for Embattled Retailer



  • "The recent unveiling of the Lululemon flagship store in downtown Vancouver offers a glimpse into what the future may hold for the embattled retailer. Lululemon has been under intense scrutiny since a series of blunders have hamstrung the brand’s image and damaged its share price. But it's what's missing from the flagship store that may worry investors: the essence of the Lululemon brand."


WMT, TGT - Wal-Mart to Kill 'Express' Store Brand: Report



  • "Wal-mart U.S. will rebrand all its Express stores to Neighborhood Markets in an effort to streamline its retail offer, according to a report in the Arkansas Democrat-Gazette."
  • "Citing an internal company memo from Wal-mart U.S.’ chief development officer, the newspaper reported that the Express moniker will be eliminated, with all new small stores in the future called Neighborhood Markets. The 21 existing Express stores will be converted to the Neighborhood Market banner in coming months"


Twitter's 'Buy' Button Debuts With Burberry



  • "The social network, which boasts 271 million average monthly users, on Monday unveiled a 'buy' button that allows users to buy directly from a tweet. The move is an attempt by the social network to generate another revenue stream and satisfy the ever-hungry Wall Street for ongoing growth."


WAG - Walgreens Appoints Barry Rosenstein of JANA Partners LLC to Board of Directors As Company Progresses Toward Alliance Boots Merger



  • "Walgreens announced the appointment of Barry Rosenstein and a second new director to be named to its board of directors as the company continues moving forward to complete its merger with Alliance Boots GmbH."

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

LEISURE LETTER (09/09/2014)



  • Sept 9: 
    • BofAML Gaming & Lodging Conference
    • GLPI & HPT at Wells Fargo Net Lease REIT Forum
    • EXPE & OWW at DB Technology Conference
  • Sept 11:
    • Macau Legend at Credit Suisse Macau Gaming Day
    • MGM China at Credit Suisse Macau Gaming Day
    • Sand China Ltd at Credit Suisse Macau Gaming Day


CZR (Bloomberg) will begin talks with at least five senior bondholders to restructure the obligations of its biggest unit, according to two people with knowledge of the discussions. Pacific Investment Management Co., Elliott Management Corp., BlackRock Inc., Brigade Capital Management LLC and Beach Point Capital Management LP have agreed to enter confidentiality agreements with the company to formally begin talks, according to the people, who asked not to be identified because the negotiations are private. The agreements signal talks are heating up to restructure about $12 billion of bonds as the company struggles to service debt taken on in its 2008 buyout by Leon Black’s Apollo Global Management LLC and TPG Capital.

Takeaway: Long road ahead but positive development


GENM:MK – received regulatory approval to raise up to 5 billion ringgit ($1.58 billion) with medium-term notes. Funds will go towards operating expenses, capital expenses, investments and property development, the Company said in an announcement to the stock exchange.  Notes from the programme will have a maturity of one to 20 years.

Takeaway: A sizable capital raise for Genting Malaysia, could an acquisition be in the near future?


LVS & 1928:HK – announced an "8-Day Flash Sale - Save Up To 40% Off" room rates at its Macao properties for bookings September 9 - 16, 2014 for stays until February 20, 2015.

Takeaway: Interesting timing to announce a hotel room sale in Macau, given the mass and VIP segment gaming revenue weakness.


PENN (abc22now.com) Hollywood Gaming at Dayton Raceway at 12:01 AM late Friday night/early Saturday morning, a coding error activated a promotion that gave everyone on the floor free play, and workers did not catch the mistake for several hours. Despite the money lost overnight, the Racino held that promotion anyway, which resulted in even more winners.

Takeaway: Despite this error, Dayton outperformed expectations.


SGMS – announced that it has signed an extension of its contract with the Colorado Lottery to continue as a provider of instant lottery games and related services. Under the agreement with the Colorado Lottery, Scientific Games will continue as the Lottery's primary instant game provider for three additional years beginning July 1, 2014.

Takeaway: Good contract extension.


H – announced Gebhard F. Rainer, Executive Vice President and CFO, notified the Company that he will step down effective September 26, 2014 to pursue another professional opportunity. Mr. Rainer’s resignation is not a result of any disagreement with the Company’s independent auditors or any member of management on any matter of accounting principles or practices, financial statement disclosure or internal controls. As of September 26, 2014, Mr. Mark S. Hoplamazian, the Company’s President and Chief Executive Officer, will assume the additional duties of principal financial officer of the Company pending the search for Mr. Rainer’s replacement.

Takeaway: An unfortunate departure for Hyatt. 


HOT – priced an offering of $350 million principal amount of 3.750% senior notes due 2025 and $300 million principal amount of 4.500% senior notes due 2034 through an underwritten public offering. The closing of the offering is expected to occur on September 15, 2014 and is subject to customary closing conditions. Starwood intends to use the net proceeds from the offering for general corporate purposes, which may include the repayment of commercial paper, repurchases of its common stock, or the payment of previously announced special dividends to stockholders.

Takeaway: More evidence of an expedited share repurchase program. As a result of the lower share count, earnings estimates will be revised higher for 2015 and beyond.


HOT – Grand Wailea, the Maui hotel in the Waldorf Astoria portfolio, will receive $30 million in upgrades. Improvements include upgraded meeting spaces, guestroom updates such as 55-inch flat-screen TVs and the addition of property-wide artwork from local artists. Work is scheduled to be completed next year.  The 780-room Grand Wailea opened near the southwestern corner of Maui in 1991. The hotel was acquired by the Government of Singapore Investment Corp. last year.

Takeaway: Repositioning and reprogramming assets for the ADR up trend.


WYN (Pocono Record) is on the verge of selling 525 acres of steep, heavily wooded, undeveloped land in Smithfield Township New Jersey to the National Park Service. According to The Trust for Public Land, the 525 acres will likely be sold for about $4 million. Final sales price will be based on an appraisal yet to be performed. In 2004, WYN purchased the 1,000 acre tract from the original developer. Since then WYN, has decided it was not in its best interest to pursue a home development business and thus is selling the land. 

Takeaway: Simplifying the balance sheet and selling non-performing assets.


CCL – Celebrity Cruises has canceled the November 21 three-night sailing of Celebrity Constellation in order to replace a piece of the ship's diesel engine. Affected passengers are being notified and offered alternate sailings or a full refund. Constellation is using the two gas turbine engines instead of the diesel engine. As such, there has been no impact to the ship's top speed. All passengers booked on the November 21 sailing may rebook on select Constellation sailings in 2015, in like accommodations, at protected/lowest-available rates, or on any Celebrity sailing at prevailing rates and receive $100 in onboard credit per cabin ($200 for those booked in suites). The select dates available for Celebrity Constellation are: January 5 or 24, February 7 or 21, or March 7.

Takeaway:  Celebrity has been having multiple operational problems lately.


CCL(Travel Weekly) is waiving deposits on some cruises and lowering the threshold for tour conductor credits to encourage group bookings in September. Through Sept. 30, initial deposits will be waived on groups booked for sailings between March 1, 2015, and April 30, 2016. Agents doing group bookings are eligible for a free berth for every 10 booked; the normal rate is one free berth for every 15 booked. As a special bonus, Carnival is offering one free cruise berth for every eight full-fare guests berthed on select five- to 14-day sailings from a number of ports, including Galveston, Baltimore, New York, San Juan and Port Canaveral. Group fares for the promotion begin at $249 for three- to five-day cruises and $449 for voyages of six days or longer. Certain restrictions apply, Carnival said.

Takeaway:  Promotional environment has not slowed.


RCL (Travel Weekly) Azamara Club Cruises has changed Le Club Voyage, its loyalty program, by adding new features but dropping others, including free Internet and laundry service. Among the new benefits are more complimentary voyage nights for achieving a higher tier in the program. 


National Basketball Association (NBA) on Sports Betting – Adam Silver, commissioner of North America's National Basketball Association (NBA) league, has predicted that struggling state budgets and a wider acceptance of gambling by US citizens will lead to legalized sports betting across the country. Speaking at the Bloomberg Sport Business Summit, Silver said that the NBA does not have any moral issues with gambling on games and is not against such moves.

Takeaway: Expect the NBA owners group to weigh-in on the topic and demand their fair share of the revenues.


New Jersey Sports Betting – New Jersey Governor Chris Christie and Attorney General John Hoffman declared New Jersey casinos and racetracks can offer sports betting without fear of prosecution or civil liability, setting up another possible showdown with professional and college leagues. Sports wagering at casinos and racetracks is now legal as long as it doesn’t involve New Jersey’s college teams or any collegiate events in the state, according to AG Hoffman.  The directive came as Gov. Christie started his Atlantic City Gaming Summit with industry executives and legislators yesterday. 

Takeaway: Pulling the goalie to help promote New Jersey gaming. Positive for CZR and BYD.


Trump Entertainment Resorts – filed Chapter 11 bankruptcy. The company owns two properties in Atlantic City. Trump Plaza is set to cease operations on Sept. 16, and the Trump Taj Mahal may also shut in November. A bankruptcy court reorganization could give Carl Icahn two additional hotels in Atlantic City. Funds controlled by the New York-based billionaire are Trump Entertainment’s largest creditor. Icahn also controls 68 percent of Las Vegas-based Tropicana Entertainment Inc., which owns the Tropicana in Atlantic City. This will be the third time the entire company was put into bankruptcy -- it sought court protection in 2004 and again in 2009, when Trump gave up the chairmanship. Trump Entertainment sold the Trump Marina hotel to Landry’s Inc. for $38 million in 2011. It has since been renamed the Golden Nugget.

Takeaway: Less competition in AC


Room Key – CEO John Davis will step down at the end of the month. Davis has led the hotel booking website since its 2012 launch. Room Key is owned by six hotel companies: InterContinental Hotels Group, Wyndham Hotel Group, Choice Hotels International, Marriott International and Hyatt Hotels Corp. The website, created to reduce online distribution costs relative to selling though online travel agencies, lists hotels from more than 100 brands. Steve Sickel, a former executive with InterContinental Hotels Group, will take over as interim CEO. Davis is the co-founder of 1-800-FLOWERS and the founder of hotel technology company Pegasus Solutions.  Sickel was most recently senior vice president of distribution and relationship marketing at IHG before stepping down late last year to start a consulting company.


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.

Party Time!

This note was originally published at 8am on August 26, 2014 for Hedgeye subscribers.

“Party like it’s 1999!”



With Total US Equity Market Volume down -35% versus its 2014 average yesterday, breadth weak (only 59% of stocks were up on the day), I kind of felt bad. As my fishing buddies know, I like to party – but that was a pretty underwhelming “SPX 2000!” party.


Cause they say two thousand zero zero…

Party over, oops out of time

So tonight I’m gonna party like it’s 1999


In other news, Amazon is buying Twitch for $970M in cash this morning and Morgan Stanley is going to take Hubspot (HUBS) public. US initial public offerings (in both number of issues and dollars raised) for 2014 are now at their highest level since the internet bubble (1999). No worries.


Party Time! - prince 1999


Back to the Global Macro Grind


I’ve had an interesting career in that I’ve had the opportunity to be held accountable to risk managing two epic US stock market bubbles (1999 and 2007). Newsflash: as you are hitting the highs, almost everything looks like a long and your shorts suck.


Then, one by one, this thing called the cycle comes along and starts to take down some of the early cycle stocks. While I am sure being long Go Bro (GPRO), FireEye (FEYE), or Biotech (IBB) was fun yesterday, the Transports (IYT), Semis (SMH) and Housing (ITB) stocks were actually down.


Unlike high-short-interest momentum stocks that were up on the latest central plan to ban European economic gravity, some of these early cycle sectors were down on reality:


  1. US Markit PMI reading for AUG slowed to 58.5 (vs. 60.6 in JUL)
  2. US New Home Sales for JUL slowed -2.4% m/m (slowing for the 2nd straight month)


To be fair, despite falling interest rates, not as many Americans are either able or in the mood to lever themselves up on a new home these days. With cost of living running right around the all-time highs, many of your median income earning neighbors are broke too.


Rather than rant qualitatively about how bad housing demand is, today I have attached the Hedgeye Housing Compendium as the Chart of The Day. Since we look at everything in rate of change terms, the color coding of red means bad.


But, Keith, dude, look at the no-volume-squeeze in spoos – how bad is bad?

(*refer to how bad the US economy was getting in Q3 of 2007 when the SP500 didn’t stop going up until October for details)


Oil, Corn, and Wheat are straight down now, but for those of you still paying all-time-highs in US Rents (34% of Americans rent and rent represents 29% of the median consumer’s cost of living), and drinking coffee or eating meat, please ignore the following commodity update:


  1. Coffee prices up another +0.6% yesterday to +65.1% YTD
  2. Cattle prices up another +0.4% yesterday to +13.3% YTD
  3. Wheat prices down another -1.7% yesterday to -10.4% YTD


Yep, if you want to be bullish on the US Consumer (after 62 months of US economic expansion) as Boris (Woody Allen) said in Love and Death, “wheat – all there is in life is wheat” (VIDEO https://www.youtube.com/watch?v=Tt2JVOrAZGU).


If you’re not into cream of wheat, both the CRB Food Index and the Long Bond (TLT) are +16% YTD, btw. That certainly crushes being long early cycle growth style factors in US Equities like Housing and the Russell 2000 (IWM).


Oh, and then there’s what got this party started yesterday in US Equity Futures – moarrr central planning from the Europeans. How’s that follow through, worldwide, looking this morning?


  1. Most of Asian Equity markets were down overnight (China -1%, Japan -0.6%, Indonesia -0.6%, India -0.4%)
  2. All of the European major equity indices are failing @Hedgeye TREND resistance
  3. The consensus hedge (SPX Index and Emini futures and options contracts) isn’t up


Even if the SPX was up, I wouldn’t entirely disagree with the why. Don’t forget that the SP500 looks as slow-growth-yield-chasing as it ever has, and while I much prefer being long the Long Bond (TLT) than SPY in 2014, I’m more focused on shorting early cycle small-mid-cap stocks.


If your boss is forcing you to buy something at the all-time highs in SPY, I’d opt for being long big to mega cap liquidity. Why? That’s easy. When this bubble starts to blow (up), you want to be able to get out.


From my analysts, here’s a Top 3 list of big caps that both they and my risk management signals still like:


  1. Capital One (COF) – Josh Steiner
  2. HCA Holdings (HCA) – Tom Tobin
  3. Texas Instruments (TXN) – Craig Berger


If you want to lever yourself up long on early cycle small-mid caps and/or European equities here, have at it! It’s a party. “Say it one more time – two thousand zero zero …” and it’s time to party like we are running out of time.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.34-2.44%

SPX 1975-2010

RUT 1135-1172

DAX 9293-9642

VIX 11.21-13.37

EUR/USD 1.31-1.33


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Party Time! - Compendium 082614

But There's No Bubble

Client Talking Points


EUR/USD taking at peek at $1.28 this morning as Draghi opts for the Policy To Inflate (rather than real growth). We’ve seen this movie before – it’s a move into Quad 3 for Europe in our GIP model (stagflation).


UST 10YR Yield has ramped to lower-highs of 2.50% within a bearish immediate-term risk range of 2.31-2.51%. Volatility in the bond market is starting to come off its all time lows; front month VIX is bullish TREND now too (11.34 support).


Gold doesn’t like the Dollar Up, Rates Up thing – rarely does; looks interesting on the long side if it can hold $1251 and the UST 10YR backs off at our 2.51% resistance line. Hedge funds have cut speculation long (futures) bets in Gold on this correction by 28%.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


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.


Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road


Olive Garden hopes all-you-can-eat pasta leads to skyrocketing sales http://fortune.com/2014/09/08/olive-garden-never-ending-pasta-pass/ "never-ending-boardroom-drama"



If your ship doesn’t come in, swim out to meet it.

-Jonathan Winters


Based on total cost, which includes tuition, room, board, and fees for boarding-only students in grades 9 through 12 for the 2014-2015 school year, Brandon Hall School in Atlanta, Georgia came in at the most expensive boarding school in America with a total cost of $62,300.

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