Global Macro Complex Signaling #Deflation

Client Talking Points


The Yen has a wacky wide risk range (which is the leading indicator for volatility) at 111.55-117.39 as the Japanese and Europeans battle it out, burning their respective currencies – USA gets #StrongDollar out of that, but don’t confuse that with a growth signal (you’d need #RatesRising too!)


The Russian stock market continues to crash -27.8% year-to-date (Brazil down another -2% yesterday too), but no worries, the USA is going to “decouple” from 6 of the top 7 economies in the world accelerating their respective slowings (until the “chart” of the S&P 500 looks like it did on Oct 13th).


The UST 10YR Yield is at 2.38% this morning, it remains in crash mode for 2014 (-21% from 3.03% where it started the year), so today’s jobs report really matters – if only because there’s so much asymmetry in SPY vs. everything else in the world. Immediate-term downside risk in the UST 10YR Yield to 2.22% - we remain very bullish on the Long Bond (TLT, EDV, etc.).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).


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


Got questions for @KeithMcCullough? He'll answer them live on @HedgeyeTV at 830 ET. You can watch live here:



Be steady and well-ordered in your life so that you can be fierce and original in your work.

-Gustave Flaubert


“Gas prices” represent only 6.4% of the median consumer’s budget.

CHART OF THE DAY: #Bubble's Birthday [Price Paid > Value Received] $SPY

"On this day in 2007, my first of three children, John Henry McCullough (we call him Jack) was born," CEO Keith McCullough wrote in today's Morning Newsletter. "It was the most humbling, yet inspirational moment of my life...Today is also my bubble’s birthday. Shortly after Jack was born, the US stock market #bubble of 2007 stopped going up. It actually started to go down fast, closing down 6.6% in November of that year – and didn’t bottom for 16 months after that."

CHART OF THE DAY: #Bubble's Birthday [Price Paid > Value Received] $SPY - 11.07.14

My Bubble's Birthday!

“Today you are you! That is truer than true! There is no one alive who is you-er than you!”

-Dr. Seuss


On this day in 2007, my first of three children, John Henry McCullough (we call him Jack) was born. It was the most humbling, yet inspirational moment of my life. While he won’t quite get what that means until he reads this many years from now – I’ll give him a big hug when he wakes up this morning and thank him for it anyway.


At the time, I thought Jack inspired me to say goodbye to a life in the hedge fund business that was very good to me. Little did I know that my goodbye (to the head hunter community) was more like a “top of the risk management morn” hello to all of you.


So I just wanted to thank all of you this morning too. I started building this company 7 years ago with only 1 thing in mind – being true to who I am. To do that, I could only build alongside teammates and business partners who share the same principles and purpose. While we may not get everything right, today I can still say that we are who we are, truer than true.


My Bubble's Birthday! - 80


Back to the Global Macro Grind


Today is also my bubble’s birthday. Shortly after Jack was born, the US stock market #bubble of 2007 stopped going up. It actually started to go down fast, closing down 6.6% in November of that year – and didn’t bottom for 16 months after that.


Today’s all-time #bubble high in the SP500 is approximately +30% higher than that one was…


And while I haven’t been explicitly bearish on the SP500 this year (my focus has been much more on the small/mid cap illiquidity #bubble that was the Russell 2000, which is still -3.1% from its all time high), I’m obviously getting there!


What a long, strange, but thoroughly enjoyable trip…


What’s the same between now and November of 2007?


  1. They were both all-time SPY highs – and in both cases, all-time was/is a very long time
  2. As we hit all-time highs, in both cases, both local and global growth was already slowing
  3. In both cases, there were/are a myriad of “it’s different this time” perma bull cases being made


Away from that – this day of November 2014 versus that in 2007 are entirely different.


How so?


  1. This time, every major central planning agency considers itself some version of a gravity bending god
  2. There are fewer hedge funds that are actually hedged for a crash (hedge fund correlation to SP500 beta = +0.9)
  3. Where I am most bearish (Russell 2000), this market is way more expensive (55x trailing earnings) and illiquid


I’m also grayer and fatter, but you already know that.


What we don’t know now is similar to what they didn’t know then (with they being those who bought them at the all-time high). There is a buyer and seller at every cost basis don’t forget.


I am the way I am, partly because I am a Canadian hockey player, but largely because I’ve never lost money in a down US stock market (2000, 2001, 2002, 2008).


While I think I was as bullish as anyone on small/mid cap US growth stocks in both 2009 and 2013, but I’m definitely not the guy who is going to give you reasons to buy #bubbles. At least 90% of the Old Wall can get you that call this morning (for a brokered fee!).


So don’t expect that from me today and/or on Monday if the jobs report is magically “better than expected” this morning either. The main reason for that isn’t an ideology or a marketing model – it’s a risk management process.


My catalyst in both 2007 and 2014 was/is the same. It’s called the economic cycle. Whether naval gazing US stock market consensus is forced to acknowledge it today, next week, or next month isn’t the point.


Long-term Bond Yields, Oil, Gold, Japan, Russia, Brazil, Europe, Emerging markets, Russell 2000, etc. have already confirmed it.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.22-2.40%


RUT 1121-1181

Nikkei 148

VIX 13.29-17.14

WTI Oil 76.23-79.92


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


My Bubble's Birthday! - 11.07.14

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

HAIN: Organic Deception?

HAIN in on the Hedgeye Best Ideas list as a SHORT.


HAIN reported earnings yesterday, and the quarter was less than natural.  The company missed revenue estimates, while conveniently beating EPS estimates by $0.01.  While the bulls will likely point to the success of its roll-up strategy, there are a number of cracks that are beginning to appear in management’s story.  We believe these will manifest into bigger issues as we progress over the balance of FY2015.


While we attribute most of the stock’s hype to that surrounding organic food companies in general, we tend to believe the street has placed the CEO on a pedestal.  This typically raises a red flag for us because, in our experience, it can lead to a number of issues, including:

  • Management incentives are often short-term
  • Significant insider selling
  • Charismatic CEOs tend to stand above the company
  • The more successful the CEO, the less he/she is held to account
  • Symbiotic board/CEO relationship results in excessive compensation
  • Management tends to overstate the growth it is seeing


Does any of this sound familiar to companies you’ve come across in the past?  How did those stories end?  HAIN certainly fits the bill.  In our view, this is a classic bubble stock and the company is not being built to last.


The following are some of our thoughts about 1Q15:



We’ve never seen a company make such a large, and increasingly large, number of adjustments in their quarterly reports.  Regarding 1Q15, the sheer size of the adjustments and the rate of growth on a year-over-year basis are staggering.  How can any portfolio manager be okay with this?  How can you not question the quality of earnings the company is producing?  As we laid out above, charismatic, well-liked CEOs tend to have their word taken at face value because people want to believe in it.


HAIN: Organic Deception? - 1


HAIN: Organic Deception? - 2



Consistent with what you’d expect from a company that must adjust number to hit EPS estimates, we believe HAIN is overstating its true organic growth rate, which management said was 8% on a global basis in the quarter.  Given the numbers they presented, it is very difficult for us to get to this 8% organic growth rate, particularly when considering that we estimate the organic growth rate in the US in 1Q15 was a mere 4.6%.  Based on our math, this represents a 180bps sequential slowdown.

HAIN: Organic Deception? - 555



HAIN operates a very opaque business for such a hyped up stock.  Management wants you to believe they are disclosing everything you need to understand the underlying trends of the business, but this is far from the truth.  In fact, in this regard, they virtually give you nothing beneficial.  What they do give simply masks the real issues.  To make matters worse, deceit and obfuscation are prevalent during quarterly earnings call. 



In 1Q15, adjusted gross margin was 23.5% (down 156 bps y/y) due to the acquisition of Hain Pure Protein.  Management has guided to a 150-160 bps gross margin decline for the full year.  To offset this decline, the company cut SG&A by 170 bps and guided to another $50 million in SG&A cuts in FY15.  How long can they push this line lower?  It’s a trend that we believe is highly unsustainable and also one that suggests the company in underinvesting in its brands. 


Roll-up strategies generally work so long as the company maintains positive economies of scale.  As you can see below, this is precisely what HAIN is failing to do.


HAIN: Organic Deception? - 4.



The company did not generate any free cash flow in the quarter.


HAIN: Organic Deception? - 6



Inventories have been growing faster than sales for the past several quarters.  This is consistent with a slowing core business.


HAIN: Organic Deception? - 5



Other issues are beginning to manifest, including:

  • HAIN’s supply chain – MaraNatha could be the tip of the iceberg
  • Private label competition is increasing
  • Penetration
  • Suspect financials


We believe this story is beginning to unravel.


Feel free to call, or email, with questions.


Howard Penney

Managing Director


Fred Masotta



TODAY’S S&P 500 SET-UP – November 7, 2014

As we look at today's setup for the S&P 500, the range is 79 points or 3.16% downside to 1967 and 0.73% upside to 2046.                                                    













  • YIELD CURVE: 1.84 from 1.84
  • VIX closed at 13.67 1 day percent change of -3.53%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Chg in Nonfarm Payrolls, Oct., est. 235K (pr 248k)
  • Unemployment Rate, Oct., est. 5.9% (prior 5.9%)
  • 9:15am: Chicago Fed President Charles Evans delivers remarks at community bankers forum held by Fed, FDIC, OCC in Chicago
  • Also speaking: Comptroller of the Currency Thomas Curry, Fed’s Daniel Tarullo
  • 10:15am: Fed’s Janet Yellen speaks in Paris
  • 1pm: Baker Hughes rig count
  • 3pm: Consumer Credit, Sept., est. $16b (prior $13.525b)



    • Obama holds Cabinet meeting, meets with congressional leaders at White House
    • Senate, House out of session
    • Sec. of State John Kerry travels to Beijing
    • 8:30am: Federal Trade Commission Chair Edith Ramirez remarks at 100th anniversary celebration
    • 9am: Andrew Ceresney, head of SEC’s enforcement division particpates in panel discussion in NYC
    • 1pm: VA Sec. Robert McDonald speaks at Natl Press Club
    • 1pm: U.S. Ambassador to the UN Samantha Power at American Enterprise Institute



  • Fed Said to Seek More Time to Mull Actions Against FX Traders
  • Libor Banks Ask U.S. Judge to Dismiss 17 Rate-Swap Suits
  • Home Depot Says 53m E-Mail Addresses Were Taken in Breach
  • Allianz to Lift Payouts, Affirms Goals Amid Pimco Outflows
  • Singapore Returns Up to $9b to Banks After Rate Probe
  • Kutxabank in Talks on Bad Bank With GS, Lone Star: Expansion
  • Takata Said to Have Tested Air Bags in 2004: NYT
  • Citigroup Said to Await Final Bids for Japan Retail Bank
  • Mitel CEO Won’t Rule Out Higher, Hostile Bid for ShoreTel
  • Twitter Says Recent Debt Deal Makes Co. Harder to Acquire
  • Co. to Open Greater China Office in HK Amid Developer Push
  • PetSmart Said to Invite PE Firms for Final Bid Round: WSJ
  • Retailers Ponder Whether Opening Worth Ruined Thanksgiving
  • China Auto Sales Hasten First Time Since June on Discounts
  • Lenovo Says ‘Hypergrowth’ in China Smartphone Market Ending
  • Retail Sales, Obama in Asia, G-20, Paschi: Week Ahead Nov. 8-15



    • Athabasca Oil (ATH CN) 6am, (C$0.05)
    • Bankers Petroleum (BNK CN) 7am, $0.08
    • Berkshire Hathaway (BRK/A US) $2,593.00, Aft-Mkt (tentative)
    • Brookfield Asset Mgmt (BAM/A CN) 8am, $0.61
    • Cogent Communications (CCOI) 7am, $0.03
    • Cooper Tire & Rubber (CTB) 7:30am, $0.73
    • Dresser-Rand (DRC) After-mkt, $0.64
    • Enerplus (ERF CN) 8:47am, C$0.21
    • EW Scripps (SSP) 7:30am, $0.05
    • Fortis (FTS CN) 6am, C$0.26
    • Humana (HUM) 6am, $2.01
    • Isis Pharmaceuticals (ISIS) 8:30am, ($0.20)
    • Magnum Hunter Resources (MHR) 7am, ($0.16)
    • ViaSat (VSAT) 9am, $0.15



  • Brent Heads for Longest Weekly Drop Since 2001 on OPEC Outlook
  • ICE to Run Replacement for Century-Old London Gold Fixing
  • Jiangxi Copper Seeks Record Treatment Fees on Higher Ore Supply
  • Gold Trading Near Four-Year Low Heads for Weekly Drop on Dollar
  • Iron Ore Completes Biggest Weekly Loss Since May on Global Glut
  • Tin Set for Biggest Weekly Gain Since February Before Jobs Data
  • China Gold Buyers Signal Slumping Price Nears Nadir: Commodities
  • Gold Speculation Points to Lasting Bear Market: Chart of the Day
  • Banks Face Lawmaker Scrutiny Over Physical Commodities Units
  • Port Worker Slowdown Seen Spreading to Nation’s Biggest Hub
  • California Oil-by-Rail Volumes Drop as Canada Faces Competition
  • China Oil Producers Face Cuts After Period of ‘Runaway’ Spending
  • Four Takes on OPEC’s Vienna Decision as Selloff Deepens: Energy
  • Corn Traders Bearish 13th Week on Ample Supply From U.S. Harvest
  • Gold Seen Extending Decline 12% by Second-Best Forecaster Gan


























The Hedgeye Macro Team



















KATE – Chump Change

Takeaway: By the time KATE approaches year 3-4 of our model, yesterday’s stock action should look like chump change.

The 17.9% pop in KATE’s stock yesterday leaves little for us to add regarding the event itself. But we want to make one thing crystal clear, by the time KATE approaches year 3-4 of our model, yesterday’s stock action should look like chump change. We think there’s $3bn in revenue for this brand (at the consolidated P&L level -- $4.8bn in aggregate brand sales at retail), a high teens margin, and $3+ in EPS power. The 50-60% CAGR (depending on base year) makes us more than comfortable with a 30x+ multiple in the out years (much higher near-term), and a roadmap to a $90-$100 stock.  We hosted a call on Wednesday where we outlined our thesis in a 40-page slide deck. Here’s the replay info and link to the presentation materials in case you missed it.


Materials Link: CLICK HERE

Replay Link: CLICK HERE


As for the quarter, the biggest positive for us (and probably for the stock) was the dramatic change in management’s tone. Again, this is a team that inadvertently evaporated $1.7bn in equity value during the 2Q call in the face of otherwise stellar results due to an odd mix of way too much information in the face of insufficient disclosure, and no real command of its future. But fast forward 13 weeks, and this time it was as if we literally heard a different management team.


1) First off, the call was tight – less than an hour. It is the shortest call on record for KATE, FNP, or LIZ back to at least 1998. The company has always drowned the Street with way too much information that ultimately does not matter.  But this time the message was concise, and the company prevented a situation where the 20th analyst in the queue from a no-name shop could pester the CEO about why the store in Mercedes, TX was out of inventory of chambray totes.


2) The overall tone, cadence, and command of the business and message – especially from Craig Leavitt – was at least as good as one would expect from a company twice the size of KATE. In fact, when we juxtapose Leavitt with KORS CEO John Idol on their respective calls this quarter, KATE definitely gets the nod. (Now all Leavitt needs to do is execute like Idol has).


3) A definite tonal change on the part of management is that there appears to be zero tolerance for sustaining the existence of dilutive businesses – most notably Jack Spade and Kate Spade Saturday. Though KATE will move forward with its plan to invest in these businesses, it sounds like they are both on a short leash. At best, they only account for 5% of total sales for now. We’d rather see the real estate converted to KSNY, which would probably double the revenue contribution of those real estate assets. But 3 months ago, it seemed like the company would let these brands be dilutive forever. That’s clearly no longer the case (truth be told, it probably never was the case – but the public perception is that it was, which drained KATE’s multiple).   




  1. Resetting the base: 2016 targets now call for Kate Spade & Co. EBITDA margins to be in the range of 18%-20% on a sales number that is tracking well ahead of plan. Two small changes in the language here: 1)  Corporate expenses are now fully allocated in that target (which we knew was coming), and 2)  it is now looking at the consolidated company which includes Adelingtion for the time being. If we pin Corporate at 5% and add that to the new targets that equates to about 23-25% on an apples-to-apples basis with the old reporting structure. To add context, it's important to note that corporate was 7%-8% of sales in FY 13 depending on which number you look at (Comparable Adjusted vs. plain old Adjusted).
  2. Comp: Guidance for the year (19%-21%) looks beatable to us. It assumes a window for 4Q between 8% and 14%. We're at 18%. Given the moving parts in 3Q, 4th of July and Semi-Annual sale moved into 2Q, we should see a sequential acceleration heading into Holiday. The elimination of 'Surprise Sales' is a bit of a headwind, but we are not overly concerned. Assuming that now accounts for 25% of sales (up from 18% in 3Q13), that implies a 21% growth rate in the quarter.  At a 20% penetration number it’s 23%.
  3. EBITDA: KATE (and its predecessors) is not known for taking up guidance – it’s been the opposite historically more often than not. The company guided the range up $10mm for the year from $120m to $130m on an in line print. The lion share of that beat comes from upside in Gross Margin targets though we still see upside given the run rate over the past two quarters. -75bps in 2Q (ex. 240bps Kate Spade Saturday dilution) and +144bps in 3Q. To get to the high end of guidance which calls for 125bps of dilution we'd have to see a 300bps sequential declaration on the 1 year trend line and 150bps on the 2yr.

KATE – Chump Change - kate financials

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.