Best Idea Call Invite: Long YUM

We recently added YUM to our Best Ideas list as a long.


We are hosting a call next Tuesday, December 2, 2014 at 10am EST to run through our thesis and field questions. We will send out dial-in information and materials for the call next week.


Key Topics Will Include:

  1. Vulnerable to Activism – There have been a number of events over the past two years that suggest the timing is optimal for YUM to simplify its corporate structure.  While there several different avenues of value creation, one thing is clear: YUM’s new corporate structure, multiple brands and underleveraged balance sheet almost ensure that the company is vulnerable to change.  What remains to be seen, however, is if the new CEO will be proactive and effect change or be reactive to the changing marketplace.
  2. Spinoff China (and/or Pizza Hut) – For the better part of the past two years, management has been asked about a potential spinoff of the China business.  In our view, this move would be the first step in a series of potential transactions that would simplify the structure and improve the operating performance of the company.  We find it likely that a group of influential shareholders begin to push the board in this direction.  It also makes sense to consider spinning off the dilutive Pizza Hut (co-owned stores) business, which would trade at a substantially higher multiple as a standalone entity.
  3. Multiple Ways to Win – The new global reporting structure of the company allows for a clean split of YUM's business units into multiple asset-light business models.  We also believe there is an opportunity to increase leverage (to repurchase stock or pay a special dividend), cut excess SG&A, refranchise additional restaurants and command a premium valuation. 


Under the scenario we will layout in our upcoming presentation, we see approximately 30-50% upside to the stock from current levels.


Howard Penney

Managing Director


Fred Masotta


Are You (Still) Waiting for Godot on Treasury Yields?

The verdict is in. The UST 10YR Yield is reading Japanese/Chinese/European PANIC (i.e. global growth slowing) as bearish ... as it should.


Are You (Still) Waiting for Godot on Treasury Yields? - g7

It’s 2.29% for the UST 10YR this morning… That’s a 2 week-low as the total return of the Long Bond in 2014 continues to be:


A) higher than most U.S. stock market averages and

B) without all the SEP-OCT volatility


If you’re new to Hedgeye research, we’ve been making this non-consensus bearish call on Treasury yields and global growth slowing throughout 2014 despite a ton of naysayers.


Are You (Still) Waiting for Godot on Treasury Yields? - pck


Case in point was the first week of September when hedge fund manager David Tepper grabbed headlines proclaiming to Bloomberg’s Stephanie Ruhle that we were witnessing “the beginning of the end of the bond market rally."


That hasn’t worked out so well.


After beginning 2014 at 3%, the yield on the ten-year fell to less than 2.4% during the summer, and is currently trading south of 2.30%. Hedgeye CEO Keith McCullough and our macro team thinks yields go lower from here and are continuing to advise our customers to stay long TLT.

Retail Callouts (11/25): NKE, UA, WMT, ICSC, TIF, DSW, BWS

Takeaway: Odell’s ‘The Catch’ made wearing Nike gloves, big UA snub – again. WMT CMO leaves 3 days before Black Friday. TIF, DSW, BWS SIGMAs.



Takeaway: Not the type of strength we'd expect to see out of the ICSC through Nov. so far in light of the fact that disposable personal income was slightly negative during the same month last year.  Comps get easier throughout the month and December when DPI was -3.1% YY. We could talk all day about cheap gas and easy comps, but the fact is that we haven't seen any data points during this earnings season that would make us get more constructive on the US consumer.

Retail Callouts (11/25): NKE, UA, WMT, ICSC, TIF, DSW, BWS - 11 25 chart1





WMT - Wal-Mart’s Chief Merchandising Officer to Leave



Takeaway: What does this tell you when Wal-Mart loses (or fires) it's Chief Merchant three days before Black Friday?


TIF - 3Q14 Earnings

Takeaway: The US business continues to look rock solid and Europe surprised to the upside as comp trends improved by 1100bps sequentially and 400bps on the two year. The rest of the Globe underperformed expectations though each region improved sequentially on a 2yr basis. Comps get easier on the top line over the next 3 months, but over a little longer duration we don't love the set up. Gross margins are at peak and consensus has that expanding by another 100bps by 2018. SG&A is at post recession lows. Not a name that we want to put on our short bench -- yet at least -- but one we'll avoid on the long side unless an unwarranted price drop gives us an opportunity for a TRADE.  

Retail Callouts (11/25): NKE, UA, WMT, ICSC, TIF, DSW, BWS - TIF SIGMA


NKE - Odell Beckham Catch Means $2.2 Million for Nike Gloves



  • "Nike Inc.’s official football Twitter account sent a photo of the 22-year-old New York Giants rookie with the tagline 'Drop Jaws. Catch Everything Else.'"


Takeaway: That catch will be played on Sports Center's 'best catch' top ten (potentially in the #1 slot) for decades to come. Nike definitely is using that as a big authenticator for it's football gloves -- especially when the picture shows that Brandon Carr, the Cowboy cornerback who fouled Odell and still couldn't make him drop the ball -- was wearing UnderArmour gloves.

Retail Callouts (11/25): NKE, UA, WMT, ICSC, TIF, DSW, BWS - 11 25 chart5

Source: NBC Sports


BWS - 3Q14 Earnings

Takeaway:  Perennially-underperforming BWS definitely beats out DSW yet again this quarter.  Its SIGMA looks better, as margins remain strong and inventory position is right-sizing. Absolute EPS growth was 20.9% on top of 3.7% revenue growth. DSW, however, de-levered 5.8% sales growth into a -3.5% earnings decline, and inventories still look problematic.

Retail Callouts (11/25): NKE, UA, WMT, ICSC, TIF, DSW, BWS - 11 25 chart3


DSW - 3Q14 Earnings

Retail Callouts (11/25): NKE, UA, WMT, ICSC, TIF, DSW, BWS - 11 25 chart4





AMZN - Amazon to team up with Royal Mail to allow parcel collection



KSS, TGT - ‘Frozen’ Overtakes Barbie as Holiday Season’s Most Popular Toy



Chow Tai Fook’s sales hurt by China’s economic slowdown



WMT - Wal-Mart names former American Airlines CEO to board



  • "Wal-Mart Stores Inc. has appointed Tom Horton, former chairman and CEO of American Airlines, as a new member of the company’s board, effective Nov. 21."


ODP - Office Depot using new location-based marketing app Shazam In-Store


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.


Takeaway: The rate of change in home price growth matters to prices and the 2nd derivative is stabilizing.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 




With the Corelogic data in hand for about a month already, we completed the HPI trinity for September with the Case-Shiller and FHFA price series releases this morning.    


THE DATA:  The Case-Shiller HPI data for September showed home prices growing +4.9% YoY, decelerating -70bps vs. +5.6% in August.  Meanwhile, the FHFA series showed home prices growing at +4.2% YoY, decelerating -60bps vs the 4.8% rate of increase reported for September. 


So, home price growth continues to decelerate.  However, its that rate of deceleration that we’re principally concerned with. 


THE DERIVATIVE:  Its worth re-highlighting our base conceptual, top-down framework for housing as its been effective across cycles and centers on HPI trends:


Housing Demand leads HPI --> Home price growth follows the slope of demand on an 12-18mo lag --> Housing related equities follow the slope of home price growth


We have anchored on the 2nd derivative move in HPI trends as a key signal because, historically, equity prices across the housing complex have followed the slope in home price growth. 


The 1st chart below illustrates the Equity Price-HPI relationship.  The 2nd chart shows the emerging 2nd derivative stabilization in HPI trends.






We’ve seen this same cycle dynamic play out again in 2014 with housing related equities significantly underperforming alongside the ~6 months of discrete deceleration since home price growth peaked in February.   


INFLECTION INSPECTION:  Our tone on housing has shifted (we were explicitly bearish from Jan-Oct) in the last month as many of the negative dynamics that we flagged earlier this year have largely or completely played out. 


While the macro environment remains a discrete risk to housing, (very) easy volume compares, the lapping of weather/QM Implementation/FHA loan limit reductions, looser regulation, and a fledgling stabilization in 2nd derivative HPI trends all sit as modest, prospective tailwinds for 2015. 


Essentially, the balance of risk from a rate of change perspective has largely shifted.   


We'll be hosting a call on December 11th to update our views on housing heading into 2015. 











About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.


Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.



Joshua Steiner, CFA


Christian B. Drake


Keith's Macro Notebook 11/25 Oil | Russia | UST 10YR

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

LEISURE LETTER (11/25/2014)

Tickers:  GTK.IM, MGM, RCL


  • Dec 1:  8:30 am  IKGH Q3 earnings
  • Dec 17:  Upstate NY casino decision


GTK.IM – The GTECH-led Northstar Consortium managing the New Jersey Lottery fell short of its revenue target by $24 million in the year ended June 30 and lottery collections, New Jersey's fourth-largest revenue source, were down 9.2% from July 1 through Oct. 31 versus a forecast for annual growth of 7.4%.

Article HERE

Takeaway: Statewide lottery results are down for most States (notably Illinois and Indiana) on a year-over-year basis.


MGM – completed its $1.25 billion 6% Senior notes unsecured notes due 2023.  $1.15 billion was issued at par, while an additional $100 million was issued at 100.75%.

Takeaway: MGM attributes the raised offering from $1.15 billion previously to 'strong demand' from the investment community.

RCL – Celebrity Cruises canceled two port stops on Celebrity Millennium in Indonesia this week due to an undisclosed 'dispute' with Indonesian authorities. The line has canceled a two-night stay in Bali scheduled for this Thursday and a port call in Komodo Island on Sunday November 30 on Celebrity Millennium. Instead, the sailing will call in at Ho Chi Minh City and Bangkok. Millennium is on a 14-night cruise round-trip cruise from Singapore that had been scheduled to call in Indonesia, Thailand and Malaysia.

Article HERE


MSC– MSC Cruises has started a fleetwide optimization enabled by Marlink to improve shipboard Very Small Aperture Terminal (VSAT) connectivity. MSC Cruises is the first cruise line to use the iDX 3.2 software and X7 modem from iDirect for enhanced service delivery and performance.

Article HERE

Takeaway:  WiFi has become an essential onboard offering for potential cruisers.  MSC doesn't want to be left behind.


Macau VIP Junket Operator Seeks HKSE Listing– Sing Hou Entertainment Group Ltd is seeking to list its shares at the Hong Kong Stock Exchange. The company’s draft application for listing says it wishes to expand its customer base and market share. Sing Hou Entertainment runs a VIP gaming room in the StarWorld casino, but intends to reduce its dependence on Galaxy Entertainment Group Ltd by operating junkets to casinos run by other gaming companies.

Article HERE

Takeaway: Junkets seeking other capital markets solutions to their liquidity constraints.


Macau Political Reform – Comments delivered by lawmaker Ng Kuok Cheong sparked further debate on Macau’s political reform, but it remains clear that, for some, democracy is not a priority. The government reiterated the stance that democracy is not only about introducing universal suffrage. A large number of legislators said that there are rather more pressing matters needing the administration’s attention, namely housing and public transportation. Ng believes that the electoral system is not being developed taking into account Macau’s reality. As only 14 lawmakers have been directly elected by Macau’s citizens, it’s not enough to represent the local population.

Article HERE

Takeaway: Thus far, Macau has not experienced the public protests against the the Mainland China SAR system. While the upcoming visit by Chinese President Xi Jinping to Macau around December 20 could present potential for protests, Macau is not Hong Kong.


Macau Public Transit Criticized – There are simply not enough buses. This topic reappeared, as lawmakers questioned the government on its policy to provide residents with an improved public bus system. Public commentary by legislator Au Kam San prompted debate as well as questions directed to the deputy director of the Transport Bureau (DSAT), Chiang Ngoc Vai, regarding the priority of this issue.

Article HERE

Takeaway: Worker transportation and housing remain key issues and may become tenants of gaming concession renewal discussions.


Singapore Changi Airport Traffic – Changi Airport handled 4.49 million passengers in October, a 1.9% YoY increase. Passenger movements between Singapore and China rose 5%.

Article HERE


LEISURE LETTER (11/25/2014) - cha

Takeaway:  Visitation at Changi have been flattish since June 2014


Hong Kong Police Begin Clearing Protest Barricades – Hong Kong police began removing protesters from a key road at a pro-democracy protest site in Mong Kok as hundreds continued to block Argyle Street hours after authorities began enforcing a court injunction to open the road. The main occupation area at Mong Kok, a densely populated working-class district that is a popular tourist and shopping area. 

Article HERE


Massachusetts – The state gaming commission set January 30 as the deadline to apply for the southeastern region casino license. Only KG Urban (New Bedford project) has formally applied but the Mashpee Wampanoag (Taunton project) and Foxwoods may apply as well.

Global Hotel Rate Outlook for 2015 –  American Express Global Business Travel released its 11th annual Business Travel Forecast for 2015 and highlights include:

  • North America: hotel rates growth for mid-range hotels of 3% to 6% and upper-range hotels 3.5% to 7%.
  • Latin America: hotel rate growth of 5% to 8% and upper-range hotels 5% to 7%.
  • EMEA: hotel rate growth of 1% to 6% for mid-range hotels and 0% to 5% for upper-range properties.
  • Asia Pacific: hotel rate growth ranges from 0.8% to 3.5% for mid-range hotels and 0.7% to 3.5% for upper-range hotels.

Article HERE

Takeaway: Solid rate growth projections from AMEX


China Additional Interest Rate Reductions – the PBoC reduced 14-day repo rate to 3.2% from 3.4%, the third time in three months. Prior rate reductions include a cut to 3.4% from 3.5% on October 14 and from 3.7% to 3.5% on September 17. 

Takeaway:  More loosening policies


Singapore GDP Growth – the Singapore economy expanded 2.8% during Q3 2014, better than the consensus advance estimate of 2.4%. Despite the better growth, manufacturing and construction remained anemic. Singapore's Ministry of Trade and Industry expects full-year economic growth to come in at 3%. 

Article HERE


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (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) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. Following CCL's F3Q 2014 earnings release, we recently turned negative on those stocks based on the negative European thesis. 


Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is 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.


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