Keith's Macro Notebook 1/8: Yen | Oil | SPX


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

LEISURE LETTER (01/08/2015)

Tickers:  LVS, WYNN, RLJ, NCLH


27.HK – a fire broke out and was quickly extinguished at the under construction Galaxy Phase 2. The small fire started in the area around a cupola in the roof area of the yet to be completed building. The cause of the fire is believed to be a welding torch.

Article HERE

Takeaway: An unfortunate incident but not likely to delay the opening of Phase 2.  


LVS & 1928.HK – has tenants for about 85% of the shop space it will let in the Parisian according to company executive David Sylvester. 

Article HERE


WYNN – The City of Boston has refused to accept a check for $1 million from Wynn Resorts, which would have been the operator’s first payment linked to a license to build a $1.6 billion resort in the state.  Wynn in turn delivered the check to the Massachusetts Gaming Commission offices to be held in escrow for the City, after the City refused to accept the check.

Article HERE

Takeaway: The Mayor of Boston continues to play hardball in hope of extracting greater financial remuneration from Wynn - ideally as a host city.


RLJ – announced that it successfully executed a $150.0 million unsecured Seven-Year Term Loan facility that will be deployed by the end of the second quarter of 2015. The Company is expected to draw funds once the prepayment windows for its 2015 CMBS debt maturities become available. 

Article HERE



Many Macau Residents Don't Gamble – About 34% of Macau people have never gambled in a casino. The survey, found that of the 416 Macau people questioned, 142 (34%) said they had never been in a casino to gamble, 51 (12%) said they gambled frequently and 223 (54%) said they gambled occasionally.

Article HERE


Operation Fox Hunt Nabs 680 Suspects – A total of 680 fugitives suspected of economic crimes have been repatriated to China as a result of the transnational "Fox Hunt" operation launched in July, according to the Ministry of Public Security. Of those seized, 117 had been at large for over a decade and one had been on the run for 22 years. Of the 680 suspects, 208 were involved in economic crimes involving over 10 million yuan (1.6 million U.S. dollars), 74 of which were involved in cases involving over 100 million yuan. Overall, 390 turned themselves in, with 332 doing so after Oct. 10, the date Chinese authorities announced that criminals that gave themselves up before the deadline of Dec. 1 would receive lighter punishment.

Article HERE


Top CPC Party Official Removed – Yang Weize, Party chief of Nanjing, capital city of east China's Jiangsu Province, has been removed from post for suspected "serious discipline and law violations."  Yang was also member of the Standing Committee of the CPC Jiangsu Provincial Committee.

Article HERE

Takeaway: Another Tiger nabbed. 


Additional Chinese Officials Detained – Five local-level officials have been questioned or arrested over allegations of corruption, according to the Supreme People's Procuratorate (SPP). Wang Baojun, who was former chairman of the municipal committee of the Chinese People's Political Consultative Conference of Hengshui in north China's Hebei Province; and Zhong Ji'an, former inspector of Hebei Provincial Commerce Department. The three additional officials include: Yan Cheng, vice president of a local state-owned bank in Inner Mongolia; Chen Yong, head of the energy bureau in Jiangsu Province; and Zhong Bingming, an official with the Jiangxi provincial poverty alleviation authority. All five have been placed under coercive measures which include summons by force, bail, residential surveillance, detention and arrest. 

Article HERE

Takeaway: Enforcement and crackdown actions continue despite repeated warnings by the CPC and Mainland officials.


Alabama Gambling Expansion – Facing a large shortfall in the State's General Fund, there is increased consideration for legalizing gambling. At present, Alabama does not have a state lottery nor legalized casino gambling.

Article HERE


China Netcom Technology  – released its first electronic lottery terminals to the Chinese Sports Lottery in Hainan province. China Netcom provides technology products for lotteries in China.


South Korean Cruise Industry – South Korea’s Prime Minister Chung Hong-won has urged the country’s parliament to pass 14 pending motions aimed at boosting the economy, including one for promoting the cruise business. Asia’s cruise industry is expected to treble in size by 2020, with an onboard gambling component seen as a crucial offering to attract Chinese tourists. The Asian Cruise Association estimates that the overall Asian market could expand from 1.3 million passengers in 2012 to 3.8 million in 2020, including 1.6 million from China. Between 2008 and 2013, capacity in the Asian cruise industry has increased 302 percent based on a recent industry report.

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. 


Retail Callouts (1/8): DKS LBO, LULU CFO, PVH, FDO, AMZN, EBAY, TGT

Takeaway: If we were Ed Stack we'd be speed dating too. LULU brings in Haselden to shore up Finance department. PVH shuts down Izod DTC operation.



Today (1/8)

FDO - Earnings Call: 10:00am

BBBY - Earnings Call: 5:00pm




DKS - Dick’s Sporting Goods explores going private



Here's yet another example of a company that leaks out a one-liner talking about going private, and all of a sudden public markets get more excited about it. These are early stage discussions, which in no way, shape or form means that DKS actually will, in fact, go private.


Based on our LBO model (ping us is you want a copy), a DKS LBO at the current price -- and even 20% lower -- makes no financial sense. The IRR is negative in both instances.


To be clear, our model assumes…

  1. DKS tops out at 900 stores by 2018, below management's 1,100 goal
  2. 2% comp store sales growth as e-commerce offsets negative store traffic.
  3. Gross Margins fall by 50bp annually as e-commerce dilutes profitability, and aggregate sales growth is not strong enough for DKS to leverage occupancy costs.
  4. EBIT margins fall from 8% today to 5% in 2018.

The problem, however, is that DKS hired a banker that will use the inverse of our model as it shops the company around. Any PE investor worth its salt will see through bulled-up banker assumptions in a heartbeat. But if there's just one that's gullible enough think that DKS can grow its store base to 1,100 while improving margins at a low-mid single digit comp, then DKS might very well have a suitor. If I was Ed Stack (with 61% of the voting stock) I'd be speed-dating to find that partner.



LULU - lululemon athletica names stuart c. haselden chief financial officer



Takeaway: New CFO Stuart Haselden may not be a splashy hire, but we're inclined to give the duo of Michael Casey (ex. Starbucks CFO) and David Mussafer (Advent/new to the Board) the benefit of the doubt in the hiring process. This is the first big move for the Board after the coup that led to Chip's replacement as Chairman and the selling of half of his ownership position. We almost never get too upbeat about a single individual in an organization. But we think that this role is an exception.

Why? The Finance function at LULU has always been extremely weak. Currie (ex. CFO) was appropriate to be Chip's numbers guy in the early days of the company, but  CHIP purposely kept the entire function at bay as the company grew up as he thought it would hurt the culture of the company. Translation = one of LULU's biggest problems is that it grew up without having any finance culture whatsoever. It's impressive that it made it this far.

Now you have Haselden who was hired by the Board led by Casey and Mussafer who both know the caliber of person needed to get this company back on track. Our sense is that new CFO will be tasked with rightsizing the company. If Laurent wants to follow, then great. Everyone wins. But if he resists, then the new CEO will soon be the old CEO.

It's odd…in our conversations with investors, people agree that Currie had to go, but don't necessarily think that there's a problem with the finance organization being so weak at LULU. We think that people will only realize how problematic this has been once it is fixed. 


PVH - PVH Corp. Announces Closing of Izod Retail Division



Takeaway: The KSS bulls will argue that this is a net positive for the company who just picked up distribution in the fall of 2014. We'd point to a couple of things. 1) Most, if not all of the locations set to close are outlets. If you're an outlet shopper you don't go to the mall to buy IZOD, you go to the outlet center specifically to find great value in whatever brands happen to be there. Men's Polo shirts are a dime a dozen and so are the places that sell them. 2) IZOD - is not a KSS exclusive. If you go to Izod's website, which we would note doesn't actually sell anything, you'll see its wholesale partners: Kohl's, Macy's, Amazon, JCPenney, Belk, Bonton, Beall's, and Hudson's Bay. All of whom have a longer standing relationship and association with the brand than KSS. 3) Lastly and probably most importantly, PVH isn't closing these stores because consumers really want the brand. The IZ logo doesn't resonate the way the alligator once did and the brand has been diluted down to the point that it's a commodity. In that context, the closing of DTC makes sense as the brand itself can't drive traffic.


FDO - 1Q15 Earnings

Retail Callouts (1/8): DKS LBO, LULU CFO, PVH, FDO, AMZN, EBAY, TGT - 1 8 chart1



AMZN, EBAY - AMZN 2year trend improvement, EBAY negative data point on 1 and 2 year basis


Takeaway:  ChannelAdvisor's total same store sales for the Holiday (November and December) came in at +16.2%.  AMZN outperformed at +26.9% and EBAY underperformed at +7.3%.  The trend for both companies’ fiscal Q4 wasn't as good as the prior 2 quarters.

Retail Callouts (1/8): DKS LBO, LULU CFO, PVH, FDO, AMZN, EBAY, TGT - 1 8 chart2





TGT - Target Links With Lilly Pulitzer



TSCDY - Tesco’s Lewis Sets Out Revival Plan With Closures, Disposals



TSCDY - Tesco Names Halfords’s Davies as U.K. CEO in Turnaround Bid



MAKSF -Marks & Spencer Clothing Sales Drop Amid Online Delays



FAST - Fast Retailing Q1 Net Profit Jumps 64%



WTSL - Bankruptcy Rumblings Surround Wet Seal Closures



BODY - Body Central Said to Prepare for Bankruptcy Within a Week



Bi-Lo CEO to leave


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Takeaway: In today's edition of Macro Playbook, we revisit the #Quad4 vs. #Quad1 debate. #Quad4 is once again winning the fight and remains our view.


Long Ideas/Overweight Recommendations

  1. Health Care Select Sector SPDR Fund (XLV)
  2. Consumer Staples Select Sector SPDR Fund (XLP)
  3. iShares National AMT-Free Muni Bond ETF (MUB)
  4. Vanguard Extended Duration Treasury ETF (EDV)
  5. iShares 20+ Year Treasury Bond ETF (TLT)

Short Ideas/Underweight Recommendations

  1. iShares TIPS Bond ETF (TIP)
  2. SPDR S&P Regional Banking ETF (KRE)
  3. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
  4. iShares MSCI European Monetary Union ETF (EZU)
  5. iShares MSCI France ETF (EWQ)



Revisiting the #Quad4 vs. #Quad1 Debate: For the past 3-4 weeks, we’ve been highlighting the U.S. equity market’s ongoing internal struggle between #Quad4 – an economic environment where both real GDP growth and reported inflation are slowing simultaneously – and #Quad1, which is an economic environment whereby disinflation is contributing to (or at least concomitant with) an acceleration in real GDP growth.


For equity investors – even the most ardent stock pickers that “don’t do macro” – understanding and, more importantly, navigating this transition will be the key to generating alpha – which is becoming increasingly scarce – in 1H15:


Consumer Cyclical or Consumer Non-Cyclical?






Financials or Healthcare?






Offensive Small-Caps or Defensive Utilities?






On that note, let’s revisit the debate from our usual quantitative perspective. There are two signals we are looking for to justify a transition from our long-held defensive sector and style factor recommendations to a more offensive/cyclical grouping:


  1. The outperformance of pro-#Quad1 sectors and style factors on a trending basis
  2. Pro-#Quad1 sectors and style factors consistently atop the leader board from the perspective of TACRM’s U.S. Equity Style Factor Volatility-Adjusted Multi-Duration Momentum Indicator Ranking System


As the following charts show, neither #1 nor #2 are occurring at the present moment. We’ve seen glimpses of both in recent weeks, but the fact remains neither are occurring on a trending/consistent basis.



Source: Bloomberg L.P. 



Source: Bloomberg L.P. 



Source: Bloomberg L.P. 


Please note that of the top-10 VAMDMI readings, #Quad4 accounts for seven of the ETFs: VNQ, IBB, XLU, IHI, IHE, XLP and XLV, while #Quad1 accounts for only two: ITB and XRT; the former is in line with our team’s now-bullish bias on the domestic housing market and the latter is supported by the recent – and nascent – uptick in consumption data.




All told, the most appropriate call we can make is to stick with our pro-#Quad4 sector and style factor recommendations for the time being (i.e. healthcare, staples, utilities and REITs).


***CLICK HERE to download the full TACRM presentation.***



#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


Captain Obvious: December ISM (1/6)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.


Grexit? Not So Fast (1/6)


#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


#Bubbles: “Hedge Fund Hotel” Edition (Part II) (12/8)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.       

TODAY | Q1 2015 Macro Themes Conference Call (Video Link included)

We will be hosting our highly-anticipated Quarterly Macro Themes conference call today at 1:00pm EST. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and the associated investment implications.




  • HedgeyeTV: Watch the live video stream above
  • Number:
  • Password: 13598477
  • Materials: CLICK HERE (slides will be available approximately one hour prior to the start of the call)



  • Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds (TLT, EDV, ZROZ, etc.)
  • #Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.
  • Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014.  2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex. 


Contact for more information. A replay of the presentation will be distributed following the call.

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