“I consider that all that I have learned of any value to be self-taught.”



I disagree with Darwin on that. In both my formal Ivory Tower econ education and my Wall Street experiences, I’ve found tremendous value in learning what not to do. Believing gravity-bending-linear-economists and their forecasts tops the list.


In markets and economies there are plenty of theories, but there are also realities. My self-teachings come from both books and Mr. Macro Market – not what some un-elected ideologue is trying to jam down my throat.


Pardon the terseness of that. I’m sick and in no mood to pander to what most financial media did yesterday as Mario Draghi provided 2008 like “shock and awe” to currency and equity markets, but only perpetuated #deflation risk in doing so.

Self-Teachings - Sisyphus cartoon 01.22.2015

Back to the Global Macro Grind


As we learned in both 2008 and 2011, when central planners move into panic mode, they also perpetuate volatility, across asset classes. That’s mainly because they are trying to artificially inflate (centrally plan) asset prices higher.


In doing so, they open up what we call the risk of the market’s most probable range. What I’ve learned by doing over the course of the last 15yrs is that widening risk ranges tend to lead to rising volatility.  


The only way to tone down volatility is for the output of the central plan to actually be believed. So that’s really your #1 risk management question this morning: do you believe that Draghi devaluing the Euro is going to deliver “price stability”?


What does Mr. Macro Market think?


  1. On the “news”, Euro’s burned to $1.12 vs USD, taking the US Dollar Index to multi-yr highs
  2. European equities ripped higher, making them some of the best YTD returns in Global Equities at +7-8%
  3. US Equities had a big up day (SPX 6th + day in the last 15), taking SPX and Russell to +0.2% and -1.2% YTD
  4. Commodities (CRB Index) deflated -1.3% on the “news”, hitting multi-yr lows
  5. US Equity Volatility sold off to higher-lows but held both TRADE and TREND duration support


In other words, if you are long France because the economy sucks, you’re killing it! The CAC 40 (France) is now beating the beloved SP500 by +800bps for 2015 YTD. Oh, and #deflation expectations only rose yesterday in the face of Draghi smirking.


When one of the few reporters with a spine questioned the sly Italian jobber on the actual economic impact of his decision to float a number (50B) to the media that he could beat by 10B, he did everything but answer the question.


Do you think a ramp in Belgian stocks to +7% YTD is going to improve the youth unemployment situation in Southern Europe? Or is the story now that crushing the purchasing power of Europeans is the new consumer spending catalyst?


In other European news this morning:


  1. France’s services PMI for JAN (oui, c’est le service economie, stupide) 49.5 vs 50.6 in DEC
  2. Germany’s flash PMI slowed again to 51.0 from 51.2


Get used to nothing. Unless it’s different this time, I don’t see Draghi delivering inflation or real economic growth.


Does anything in our Global Macro playbook change post yesterday’s central plan? Not really:


  1. BEST IDEA: Our best way to play global #GrowthSlowing and #Deflation = long the Long Bond (TLT, EDV, ZROZ, etc.)
  2. COMMODITIES: while I’m getting interested in Gold, I’ll keep our net allocation to that asset class at 0%
  3. CENTRALLY PLANNED EQUITY MARKETS: from this time/price, I’d rather buy Weimar Nikkei than Europe
  4. US EQUITY LONGS: stick with the long early cycle-consumption and yield chasing sectors (XLP, XLV, XLU, VNQ)
  5. US EQUITY SHORTS: stick with the late-cycle economic and #Deflation ideas (XLE, XLB, KRE, XLI)


Notwithstanding the 2-day ramp in European, US, and Japanese equity beta, the best vs. worst returns (highest absolute, with the lowest volatility = best kind of #alpha people pay for) remain glaring:


  1. YTD Winners: Healthcare (XLV) +4.3%, Utilities (XLU) +3.8%, Consumer Staples (XLP) +3.6%
  2. YTD Losers: Financials (XLF) -2.8%, Energy (XLE) -2.5%, Consumer Discretionary (XLY) -1.6%


Put another way, Mr. Macro Market’s self-teachings have set up for one of the best Global Macro investing environments for active managers (long and shorts – over-weights and under-weights) that I can remember.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.75-1.93%


VIX 16.05-23.03
EUR/USD 1.12-1.15
Oil (WTI) 44.82-49.06

Gold 1

Copper 2.48-2.61


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Self-Teachings - 01.23.15 chart


Takeaway: January Wave bookings slowed down significantly. Europe is performing worse.

Cautious Wave 2015 outlook from agents attending Carnival Vista event in NYC



Wave Commentary

At the Carnival Vista event yesterday, we chatted with several travel agents to get some color on how Wave 2015 is performing.  The mood was pretty somber as there were worries about a January slowdown after a good December.


For several months, we have been most concerned about a potential European slowdown in 2015 and its impact on yields for all the cruise lines, especially Carnival Corp.  


Here are some tidbits we heard from the event:

  • In general, Wave 2015 is off to a slower start than expected
  • Wave 2015 started earlier than usual with a barrage of promotions in late November 2014 and the month of December
  • Optimism was high in December as Wave bookings were off to a hot start
  • A senior agent at a large travel agency mentioned that January bookings took a big hit from the terrorists attacks in France. 
    • There were cancellations from both the US and European consumer on bookings involving destinations in France
    • River cruising was hit particularly hard but the incident affected everyone.
  • Caribbean seems to be improving. The Carnival brand is slowly recovering.

Carnival Vista

  • May 2016 debut in Trieste, Italy

  • 1st European program in 3 yrs for the Carnival brand

  • Will sail to NYC on Nov 3, 2016 for a series of cruises

  • 13-14 voyages; mostly 7 days

  • Final home port not announced
  • Havana Bar is focused on attracting the fun, Hispanic demographic 
  • Beverages have highest return
  • 3 Carnival ships currently have the new, faster Internet technology; it is a positive economics model

SBUX: Closing Best Idea Short

With this note, we are removing short SBUX from our Best Ideas list.


We try our best to be disciplined with all of our calls, both long and short.  In regards to Starbucks, there was enough good news in 1Q15 to make our short thesis look stale.  While we still contend that the food strategy will be less than successful over the long-term, it likely won’t be enough to cause a disruption in the business.  In addition, the apparent success of Mobile Order & Pay could be enough to reaccelerate traffic trends as the year progresses and, after guiding to a 2Q15 miss relative to expectations and holding full-year guidance, it will need to.


SBUX is a great company, which made it a difficult short from the very beginning.  With that being said, we would not be buying it at these levels and will continue to look for evidence of a continued slowdown in underlying traffic trends.  While we wouldn’t be surprised to see our core thesis play out, right now it appears Mobile Order & Pay could allay these concerns.



Starbucks reported solid 1Q15 results after the close yesterday, with revenues and earnings falling in-line with cautious, and lowered, analyst estimates.  Heading into the release, we had serious reservations about a hyped-up holiday season which were proven to be misguided.  Our largest concern over the past several months has been the rapid deceleration of traffic growth in the domestic market, which coincided with menu proliferation and the national rollout of La Boulange.  However, a sequential acceleration to 2% traffic growth temporarily allays these concerns – even though we did not see a similar acceleration in the underlying two-year trend.


SBUX: Closing Best Idea Short - 1


FY15 Guidance

Despite guiding down 2Q15 estimates from $0.68 to $0.64-0.65, management contends that second half sales momentum and some margin favorability (cost of sales and G&A leverage) will allow them to deliver full-year EPS in the $3.09-3.13 range. 


Regional Results


  • Comps +5.0% vs +4.7% estimate
  • Revenues +13% to $4.8bn
  • Adjusted EPS +13% to $0.80
  • Operating Margin -10 bps y/y to 19.1%


  • Comps +5.0% vs +4.8% estimate
  • Revenues +10% to $3.4bn
  • Operating Income +12% to $817.5mm
  • Operating Margin +50 bps y/y to 24.3%


  • Comps +4.0% vs +3.5% estimate
  • Revenues (2)% to $333.3mm
  • Operating Income +49% to $50.0mm
  • Operating Margin +510 bps y/y to 15.0%


  • Comps +8% vs +5.9% estimate
  • Revenues +86% to $495.8mm
  • Operating Income +34% to $108.3mm
  • Operating Margin (860) bps y/y to 21.8%


SBUX: Closing Best Idea Short - 2


Alstead Out, Johnson In

Management bid farewell to former COO Troy Alstead, while subsequently announcing that current Starbucks board member Kevin Johnson will assume the vacant position.  Schultz noted that, while Johnson’s responsibilities will mirror Alstead’s, he will be more heavily involved on the digital side of the business than his predecessor.  Johnson formerly served as a President at Microsoft and, more recently, as CEO of Juniper Networks.  While he doesn’t have much experience in the restaurant space, he has served on Starbucks board of directors since 2008 and is an influential figure in the organization.  Though we could be mistaken, it doesn’t seem likely that Alstead will return to the company.


The Good

  • Revenue, earnings in-line
  • Comps beat estimates across the board
  • Domestic traffic accelerated sequentially to 2%
  • Food contributed 2% to the comp
  • Strong holiday period evidenced by comp acceleration throughout the quarter
  • New holiday seasonal beverage, Chestnut Praline Latte, was a very successful LTO
  • Digital, loyal, card, and mobile all contributed meaningfully in the quarter (one in seven American adults received a Starbucks gift card this holiday; $1.6 billion loaded on Starbucks cards in North America; 13 million customers entered the Starbucks for Life sweepstake; over 9 million MSR members)
  • Rolling out Mobile Order & Pay nationwide in 2015
  • Continue to invest in smaller, alternative store footprints
  • EMEA continues to recover
  • CAP performed well; China comps stronger than region as a whole; Japan immediately accretive to EPS
  • Confident in ability to leverage cost of sales and G&A expenses throughout the year


The Bad

  • Domestic two-year average same-store sales decelerated 150 bps sequentially
  • Domestic two-year average traffic remained flat on a sequential basis
  • Guided down 2Q15 earnings by a few pennies and maintained full-year guidance, putting more pressure on 2H15
  • Consolidated operating margin of 19.1% fell 10 bps short of expectations

the macro show

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January 23, 2015

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Knowledge, Experience and Ability

This note was originally published at 8am on January 09, 2015 for Hedgeye subscribers.

“If money is your hope for independence you will never have it. The only real security that a man will have in this world is a reserve of knowledge, experience and ability.”

-Henry Ford


For those of you that are currently employed on the buy-side, replace “money” with “performance” and “independence” with “job security” and re-read that quote.


Thought-provoking, isn’t it?


I borrowed that quote from the late Henry Ford to help make the following point: the buy-side and, to a large extent, the sell-side (via commission dollars) can be an ultra-competitive environment.


Specifically, it can be argued that no other industry has such an overt focus on consistently producing favorable outcomes as the financial services industry – well, maybe with the exception of NFL head coaching. Moreover, we can all agree that consistent production is integral to remaining gainfully employed in such a competitive industry.


That’s certainly not to say anyone who’s ever been let go was incapable of producing; in fact, I’ve seen some really sharp, incredibly outgoing people let go, and if you’ve been in the industry long enough, you have as well. The good news is that the good ones always land on their feet.


Back to the Global Macro Grind


Keeping with the theme of consistent production, has your favorite macro strategist(s) consistently produced for you over time?


While I have no frame of reference on how to answer that question, the following chart can be used as a rough proxy to reasonably conclude that there is a possibility you have been overpaying for macro research and should strongly consider narrowing your list of service providers to those that consistently add value:


Knowledge, Experience and Ability - Chart of the Day


Contrast that performance data that with the following sampling of key research calls our macro team has made since inception:


  • July ’08: moving to 85% cash in our model asset allocation (CLICK HERE to review)
  • March ’09: bullish on the S&P 500 (CLICK HERE and HERE to review)
  • May ’10: bearish on Eurozone periphery sovereign debt (CLICK HERE to review)
  • June ’11: bullish on long-term Treasury bonds (CLICK HERE to review)
  • November ’12: bearish the Japanese yen/bullish on the Nikkei (CLICK HERE to review)
  • December ’12: bearish on Gold (CLICK HERE to review)
  • January ’13: bullish on the S&P 500 (CLICK HERE and HERE to review)
  • April ’13: bearish on Emerging Market assets (CLICK HERE and to review)
  • May ’13: bearish on U.S. Treasury bonds (CLICK HERE and HERE to review)
  • February ’14: bullish on  U.S. Treasury bonds (CLICK HERE to review)
  • August ’14: bullish on the U.S. dollar and defensive large-cap U.S. equities/bearish on commodities and commodity-linked assets (CLICK HERE to review)


That’s certainly not to say that our performance would have been any good (or bad) if we were running a fund instead of our mouths over the past five-plus years!


In fact, we tip our hats to anyone who’s performed even modestly well throughout this era of centrally-planned markets. Moreover, we would tend to agree with the general assertion that the post-crisis era has provided investors with a difficult macro environment to consistently produce positive absolute returns and/or generate alpha in.


Rather, we highlight these calls to showcase that no matter the setting – i.e. buy or sell side – we’d employ the same top-down quantitative + bottom-up fundamental framework that led us to each of the aforementioned research conclusions.


If Henry Ford were alive today, he’d likely agree with our paraphrasing of his “knowledge, experience and ability” clause as the most important possession anyone in our industry can have – i.e. a #RepeatableProcess.


Will we always be on the right side of such integral macro market moves? Absolutely not! Just as in years past, there will be plenty of things that we completely miss or are flat-out wrong on.


The only thing we can promise you is that our six-person macro team will work tirelessly on your behalf. And in terms of manpower, analytical depth and #RepeatableProcess, we’ve come a very long way over the years; for example, please note the following juxtaposition:



To the extent you have not yet reviewed our 1Q15 Macro Themes, which we introduced yesterday afternoon, we encourage you to do so. As always the presentation is jam-packed with cutting edge data analysis and thoughtful, well-researched assertions.


The thematic investment conclusions of that presentation are as follows:


  • LONG U.S. Treasury Bonds (TLT)
  • LONG U.S. Dollar (UUP)
  • LONG large-cap Consumer Staples (XLP)
  • LONG large-cap Health Care (XLV)
  • LONG Homebuilders (ITB)
  • SHORT Japanese yen (FXY)
  • SHORT Emerging Markets (EEM)
  • SHORT High-Yield Credit (JNK)
  • SHORT large-cap Industrials (XLI)


Email us if you’d like to discuss these views further. As always, we encourage thoughtful pushback and appreciate a healthy debate. That’s what makes a market.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.89-2.11% (bearish = bullish Long Bond)

SPX 1995-2090 (bullish)

EUR/USD 1.17-1.19 (bearish)

YEN 118.10-121.01 (bearish)

WTI Oil 46.43-51.86 (bearish)

Gold 1175-1225 (bearish)


Keep your head on a swivel,




Darius Dale

Associate: Macro Team

Cartoon of the Day | Mario Draghi: A Modern Day Sisyphus

Cartoon of the Day | Mario Draghi: A Modern Day Sisyphus - Sisyphus cartoon 01.22.2015

"Anyone who thinks they can centrally plan economic gravity," Hedgeye CEO Keith McCullough wrote earlier today, "is a certifiably arrogant academic." We'll throw in Sisyphean for good measure.



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