It's Still 'Crash Mode' for Treasury Yields

Takeaway: The UST 10YR Yield is at 2.38% this morning, it remains in crash mode for 2014.

It's Still 'Crash Mode' for Treasury Yields - 77


The UST 10YR Yield is at 2.38% this morning. It remains in crash mode for 2014 (down -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% as outlined in Daily Trading Ranges - we remain very bullish on the Long Bond (TLT, EDV, etc).


November 7, 2014

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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


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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

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


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