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Mavericks & Milquetoasts

This note was originally published at 8am on December 04, 2014 for Hedgeye subscribers.

“You are the average of the five people you spend the most time with.”

-Jim Rohn


The quote above is lathered in cutesy life-coachy’ness, but I still like it.  It implies that #Greatness is, in part, a choice.  And, empirically, I’ve generally found it to be true. 


For the majority, our confreres in the daily grind constitute most of that top five.   With the Hedgeye firm meeting on Tuesday and our holiday party tonight, I’ll get a chance to look around and re-appreciate the unique team and business model born from the creative destruction of the financial crisis. 


It’ll also serve as the annual reminder not to be the weak-link outlier and bringer of negative skew to our Macro team’s greatness distribution. 


Mavericks & Milquetoasts  - s9 


Back to the Global Macro Grind…


You can choose your colleagues and comrades but you can’t, in large part, choose your neighbors.  You may, however, have more of them in the coming year. 


We’ve been bearish on housing since the beginning of the year with the expectation for the compressed demand shock (rising rates/tighter regulation) in 2H13-1H14 to manifest in a significant deceleration in home price growth and underperformance across housing related equities.   


At this point, most of what we expected at the beginning of the year has played out and, inclusive of the recent rally, housing related equities (ITB/XHB) have been among the worst performing sectors YTD. 


So, what now?


Housing, like most things Macro, is more about better/worse than good/bad.  From a rate of change perspective – how we measure/contextualize data – less good is bad, less bad is good, and the successful front-running of second derivative inflections remains the sangre vital of macro alpha generation.


As it relates to housing, while the macro environment remains a discrete risk, (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. 


In other words, the downside asymmetry that existed at the beginning of the year has largely collapsed and, from a rate of change perspective, demand and price trends are showing a nascent inflection that looks likely to continue as comps ease progressively into 2H15.   


We’ll be hosting a conference call on December 11th updating our outlook for housing in 2015.  Institutional subscribers can ping sales@hedgeye.com for call details/access.


I would, however, caution against conflating our shifting view on housing with our broader view on growth/inflation.  The counter-trend call on housing is more of an idiosyncratic, rate of change call at this point than it is a discrete call for a sustained acceleration in consumer discretionary or early-cycle exposure at large.   


Perhaps we’ll rotate out of our favored Quad #4 allocations to capture another short-cycle oscillation of pro-growth, high beta style factor outperformance but that’s not the call, yet. 


The call, of course, is always that the call can change – particularly when taking a multi-duration view of risk.  


In a tactical, counter-TREND move yesterday, we covered TIPS and bought JO (coffee) and FXY (Yen) in Real-time Alerts.


As the Quad #4 (i.e. disinflation and decelerating growth) callers the last couple quarters, we’ve been out front in slope surfing the strong dollar, down energy/commodities trade.  But that doesn’t mean we need to go full deflation-ista at every price and across every duration.    


As Keith put it:   COUNTER TREND Call = USD Down = Yen (and/or Euro) UP = Nikkei Down = Oil Up = High Short Int Energy Stocks Up


In other words, in the immediate term, with Japanese (Nikkei) and European (EuroStoxx 600) equities overbought and the Euro and Yen oversold, the market is pricing in a potent dosing of Draghi drugs and an ultra-smooth election bid for Abe. 


In other, other words, while our TREND view on deflation/Japan/etc. remains largely unchanged, the probability for a sizeable short-term macro reversal and $USD correlation risk to manifest in the opposite direction for prices is as high as its been. 


Since we get a regular flood of process related questions, it’s probably worth extending and generalizing the thought process under yesterday’s tactical RTA maneuvering.   


Our broader Trend view has been that:   

  1. We are currently late-cycle
  2. Our Trend expectation has been for disinflation and slowing growth
  3. Our favored positioning YTD has been Bonds, Cash and Low Beta/Large Cap/Defensive yield sectors/companies


Inside of that Trend view, the macro and market reality is that:

  1. Tops are processes, not points (as are bottoms)
  2. ‘Perma-‘ anything isn’t a process and there is always a time/price to like and not like something 


How do we integrate those market realities with our particular Trend view?

  1. By having a multi-duration view of risk.  The probability of a particular short-term move need not be the same (or in the same direction) as the probability of a particular intermediate-term price trend. 
  2. Recognizing that the market view should evolve and gross/net positioning should dynamically shift alongside changes in price


How does it work in practice?

  1. Selling/shorting on green and buying/covering on red (ie Fading Beta) within a defined, probability weighted immediate-term risk range allows us to pick off positive P&L in both direction without being overexposed to market risk 
  2. We can maintain a TREND view on the trajectory for macro fundamentals/markets while taking high probability, tactical counter-TREND positions on overbought/oversold conditions. Taking the other side of our own TREND/TAIL view for a TRADE (particularly at immediate-term momentum turns) need not be incongruous if there is a repeatable process for quantifying the balance of risk   


We get that multi-duration risk management and tactical positioning (i.e. “trading”) isn’t conventional investing in the classical sense but that’s why we try our best to explain the process and contextualize ‘the why’ underneath it.  It’s also why we tell you over what duration(s) we like a particular call/idea/theme. 


“If I had asked people what they wanted, they would have said faster horses.” (Henry Ford)


Cars are cool, but only if you know how to drive it.    


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.16-2.30%

RUT 1148-1190

DAX 9631-10092

VIX 11.71-14.53

Yen 117.03-119.99

WTI Oil 63.76-71.72 


To re-learning, defenestrating convention, and macro mavericking,


Christian B. Drake

U.S. Macro Analyst


Mavericks & Milquetoasts  - Compendium 120314

Cartoon of the Day: Russian Bear

Cartoon of the Day: Russian Bear - Russian bear cartoon 12.17.2014

Russia has seen (much) better days.

Q&A: What Deflation Means for Texas and Your Portfolio


The crash in oil is old news by now, so on today's Morning Macro Call Keith McCullough responds to a subscriber question with a breakdown of how deflation impacts the rest of your portfolio, from the MLP space to Healthcare.

HCA: Removing Hospital Corporation of America from Investing Ideas

Takeaway: We are removing HCA from Investing Ideas. Texas exposure could become a problem in 2015 if the decline in crude oil prices continues.

Editor's note: We are locking in the 10% gain in HCA since we added it to Investing Ideas on 11/7/14. For the record, the S&P 500 fell -3% during this time. Healthcare Sector Head Tom Tobin is concerned that Texas exposure could become a problem in 2015 for HCA if the decline in crude oil prices continues. Additional explanation below.


~50% drop in crude oil prices since June


WTI has been nearly cut in half, dropping from a peak of $102 on June 25 to its most recent level of $55.  The carnage is obvious in prices across the energy sector.  However, if the decline persists through 2015, which is the current forecast of the EIA, our analysis shows a likely downward pressure on medical consumption in Texas (a key market for HCA).



  • Texas Gross Product, Non-Farm Payrolls, tax revenue, and the price of crude are tightly related despite a small contribution from the sector to state non-farm payrolls.  Gas extraction jobs in the state were 11,190 in 2013, or 1% of total Texas non-farm payrolls.
  • The Texas state budget has a small direct exposure to oil and gas related tax sources.
  • However, medical consumption in Texas trends with local economy.  The drop in crude oil price will pressure the state economy, and indirectly, medical consumption.

HCA's exposure to Texas is significant with 25% of beds and 24% of revenue in state. 


HCA: Removing Hospital Corporation of America from Investing Ideas - hca1

December 17, 2014


At 12:00PM ET, Hedgeye CEO Keith McCullough answered questions from RTA subscribers about the current RTA positions and this morning's market moves. 

DRI: Expectations for a Recovery Are Premature

We remain very cautious on DRI shares and believe expectations of a 2H15 recovery are not grounded in reality.  The bottom line is that the current consensus FY15 EPS estimate of $2.28 is about $0.28 too high.


As it stands, Darden’s management team is being asked to manage in an extremely difficult environment.  Interim CEO Gene Lee is trying to fix the company, while simultaneously interviewing for the full-time CEO position.  This not only poses inherent conflicts in the internal discussion of current trends, but it also strips him of the authority needed to make pursue value enhancing initiatives.


While most of the street is gloating about Olive Garden’s results this quarter, we have a very different point of view.  In fact, we’d argue that the chain had a disastrous quarter.  Though the sales trends appear to be improving, traffic and average check declined 100 bps and 30 bps, respectively, during the quarter.  This is a worrisome combination for any restaurant company and the results showed in Darden’s P&L.  Despite reporting strong comp growth and achieving, we assume, notable flow through at the majority of its other brands, consolidated restaurant margins declined 60 bps to 18.6%. 


You need not look past the press release to understand that Olive Garden had a weak quarter.


The 1Q15 press release was very specific about the Olive Garden recovery:

"We are pleased with the progress we are achieving across our brands, particularly at Olive Garden," said Gene Lee, President and Chief Operating Officer of Darden.  "The Olive Garden Brand Renaissance is well underway, and the improvements we are seeing in guest satisfaction and traffic trends reinforce our confidence in Olive Garden's potential."


The 2Q15 press release actually omitted comments about the Olive Garden recovery:

"Our brands performed well during the second quarter," said Interim CEO Gene Lee.  "We have been working diligently to execute our strategy, including getting back to basics while delivering the best possible guest experience.  It is starting to show in both improved revenue and profitability.  While it's still early, we believe our renewed focus on operating fundamentals, coupled with our more streamlined support structure, will help us continue to grow and capture market share."


The most damning piece of evidence suggesting the lack of an Olive Garden recovery is the unexpected halt of the remodel program.  While we agree this needed to happen, it was a critical component of the once highly-esteemed Brand Renaissance plan, which appears to be fizzling away. 


Street Suggests a Turnaround, OG Metrics Suggest Otherwise

  • Same-store sales +0.5%
  • Traffic -1%
  • Average check -0.3%
  • Consolidated restaurant margins declined 60 bps year-over-year to 18.6%
  • The remodel program has been put on delay due to insufficient returns


Given the operational short fall at Olive Garden, management consistently referred to opportunities with its real estate portfolio as well as the potential spinoff of other non-core assets.  While these things are nice to hear, they aren’t what’d yield the most shareholder value at Darden (fixing Olive Garden).  Importantly, none of the above will occur prior to getting a new CEO and CFO.


It’s been two months since Starboard took control and the lack of updates or disclosure around the CEO search has been discouraging; in fact, we haven’t seen or heard anything that suggests they are close to naming one.  We find this surprising and believe it may have been a major strategic error on Starboard’s end not to have one in place at the time of its takeover. 


The clock is ticking and it is getting more expensive to fix the company with each passing day.


The Good in 2QF15

  • Top line and bottom line beat of 76 bps and 238 bps, respectively.
  • Positive same-store sales trends across the portfolio (excl. BB): Olive Garden +0.5%, LongHorn +2.6%, SRG +3.2% (The Capital Grille +5.0%, Eddie V’s +4.9%, Yard House +3.7%, Seasons 52 +1.2%. Bahama Breeze -0.6%).
  • Guided to +1-2% system-wide same-store sales growth in FY15 versus the consensus estimate of +1%.
  • Tightened the low-end of its FY15 EPS guidance range to $2.25-2.30 versus $2.22-2.30 prior.


The Bad in 2QF15

  • FY15 will be a transition year, and nothing more.
  • There has been no mention around the timing of naming a new CEO and CFO.
  • Still lacking a strategic long-term vision.
  • There is no sign of a Brand Renaissance at Olive Garden; difficult to decipher between success of initiatives and broader industry trends.
  • Deferring the Olive Garden remodel program due to insufficient returns.
  • Management expects 2H15 food inflation to be up +2-2.5%, up from prior guidance of 1%.
  • Restaurant level margins deleveraged 60 bps to 18.6%, despite strong comp growth across the majority of its portfolio.


DRI: Expectations for a Recovery Are Premature - 1


DRI: Expectations for a Recovery Are Premature - 2


DRI: Expectations for a Recovery Are Premature - 333


DRI: Expectations for a Recovery Are Premature - 4


DRI: Expectations for a Recovery Are Premature - 5


Howard Penney

Managing Director


Fred Masotta


Early Look

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