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MCD: A New Beginning

The first email we received from a client following the news of Thompson’s departure yesterday posed a simple question: “Should I chase MCD tomorrow?”


The answer was quite simple as well: “There is no need to chase it.”  The issues at MCD run deep and will take a lot of time to fix.  However, with that being said, we are moving MCD onto the Long Bench of our Investment Ideas list. 


As we’ve said many times, the only way to begin fixing McDonald’s was to get a new CEO.  Getting a new CEO is a step in the right direction, but where we go from here is still unknown.

Thoughts on the Announcement

  1. We like the choice of Steve Easterbrook as the new CEO.  We’ve known him for years and believe he is capable of turning the company around.  The first thing he must do is scrap the current turnaround plan and get a fresh start.  Can he, or will he, do that is the question.
  2. The timing of his departure presents some challenges to effecting change in 2015.  The marketing plans and product pipeline for 2015 are firmly in place.  McDonald’s is a big ship that will take a while to turn around.  Nothing will happen in the intermediate-term.
  3. Anything short of massive changes in the way MCD thinks about its current menu and store operations will fall short of the desired results.  This speaks to the mandate Mr. Easterbrook has been given by the board.
  4. The board of MCD is part of the problem the company faces.  The average age of the board is 64 and the average tenure is 13 years.  Andrew McKenna, non-executive Chairman of the Board of Directors, who announced the changes, is 84 years old.  There are two other board members that are in their 70’s.

The changes at MCD must run deep – starting from the board all the way down to store operations.


More to come.

Keith's Macro Notebook 1/29: Commodities | UST 10YR | S&P500


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

Earnings Season: Not Good

Client Talking Points


Commodities are down another -1.3% yesterday to 215 is a fresh new multi-year closing low for the 19 component CRB Index. Oil is already -16.5% year-to-date and Copper (down another -1.6% this morning) isn’t far behind at -13.4% - this has been a clean cut phase transition to #deflation expectations that will be very difficult for any central planner to reverse.


But don’t confuse Draghi’s move with results where it matters; inflation expectations are falling faster now (Down Euro = Up Dollar à #Deflation Risk) with the CRB Index dropping -1.3% yesterday to multi-year lows. Copper is getting smoked to -10.2% year-to-date this morning, and Oil signaling a lower-low of support down at $44.82.

S&P 500

The SPY broke our intermediate-term TREND line of 2022 again yesterday. This is the 3rd time it has snapped that line since the mid-DEC lows. With massive Euro QE old news now… and no more year-end markups, what is the catalyst to get this puppy back to those nosebleed DEC 29th all-time closing highs of 2090? It’s definitely not earnings.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.


As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.


Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road


Memo to $MCD CEO Mr Easterbrook: Your turnaround plans should resemble a store remodel, but this is one is a major "scrap and rebuild"



The quality of an individual is reflected in the standards they set for themselves.

-Ray Kroc


Apple has now sold over a billion iOS devices, ringing in 74.5 million iPhone sales in its most recent quarter.

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January 29, 2015

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CHART OF THE DAY: The Hedgeye “Avoid, Sell, Short” List

CHART OF THE DAY: The Hedgeye “Avoid, Sell, Short” List  - 01.29.15 Chart


Editor's note: This is a brief excerpt from today's Morning Newsletter by CEO Keith McCullough. 


  1. Energy Stocks (XLE) got smoked for another -3.9% down day yesterday as Oil/Nat Gas continue to crash
  2. Financials (XLF) underperformed a -1.3% SPY, closing -1.8% on the day at -6.2% YTD
  3. Industrials (XLI) “outperformed” at -0.9% on the day but are down the same as SPY YTD at -3.1%


Since all 3 of these S&P Sectors remain on our “avoid, sell, short, etc.” list (they are both late-cycle and carry explicit Global #Deflation risks), I’ll just reiterate that call this morning – because it’s easy to.

Lots of Questions

“The best way to get a good idea is to have a lot of ideas.”

-Linus Pauling


Linus Pauling was one of the most influential American scientists of the 20th century. He locked down his officialdom prize (Nobel) in chemistry in 1954 and is widely considered the forefather of molecular biology and quantum chemistry.


I love his creativity quote. I found it in a chapter of The Medici Effect (page 103) titled “How To Capture The Explosion – MacGyver and Boiling Potatoes.” I highly recommend you take the time to read that book.


I’d also suggest you take Pauling’s independent research advice one step further and apply it to your risk management #process. The best way to manage the risk in your portfolio of ideas is to ask yourself lots of macro questions.


Lots of Questions - Linus Pauling


Back to the Global Macro Grind


With the SP500 down for 3 of the last 4 trading days and down -2.7% for the YTD (vs. the total YTD return of our TLT up over +9%), have you asked yourself whether or not earnings season is what you thought it was going to be?


If you’re honest with yourself, you’ll note that the SP500 has only had 1 up week in 2015, and that had nothing to do with nothing other than the Europeans forcing yet another central plan on what used to be free-markets.


This leads me to asking myself lots of questions in the Global Equity sphere:


  1. On Europe, post the 3-day Viagra ramp, what’s next? Buy European stocks because things are that bad?
  2. On China (down -3.8% in the last 3days on #GrowthSlowing), do I buy it because it’s slowing?
  3. Do I buy #Deflation Domino markets that got crushed yesterday (Argentina -2.8%, Brazil -1.9%, Canada -1.6%)?


What if you can only buy US Equities?


  1. Energy Stocks (XLE) got smoked for another -3.9% down day yesterday as Oil/Nat Gas continue to crash
  2. Financials (XLF) underperformed a -1.3% SPY, closing -1.8% on the day at -6.2% YTD
  3. Industrials (XLI) “outperformed” at -0.9% on the day but are down the same as SPY YTD at -3.1%


Since all 3 of these S&P Sectors remain on our “avoid, sell, short, etc.” list (they are both late-cycle and carry explicit Global #Deflation risks), I’ll just reiterate that call this morning – because it’s easy to.


Back to the questions…


  1. Do we buy more Long Bonds (TLT, EDV, ZROZ), Munis (MUB), and low-volatility-high-return securities like them?
  2. Do we book some gains in some of those and buy more equally “expensive” stock sectors like Utes (XLU) and REITS (VNQ)?
  3. Do we own both long-duration bonds and some lower-beta, higher-return sectors like Staples (XLP) and Healthcare (XLV)?


Oh, and how does one justify bucking up for something that is “expensive” if one didn’t get that they should have bought it when it was less-expensive to begin with? That’s their storytelling problem. Let them deal with it.


Another question on valuation: what if you bought Energy stocks because you thought they were “cheap”, and the earnings just got cut in half, so now you own what’s one of the most expensive sectors in the S&P 500 anyway?


Two more very basic questions in risk managing the macro side of your portfolio:


  1. Doesn’t “expensive” get more expensive when investors seek liquidity and shelter (Long-term Treasuries)?
  2. Doesn’t “cheap” get cheaper when investors shun illiquid investments that have deteriorating fundamentals?


If you’ve studied macro market #history, you know the answers to these questions are not what you will find in bottom-up Value Investing books. In the intermediate-term, Mr. Macro Market doesn’t care about valuation – he cares about risk.


Individual stocks clearly care about their own rate of change fundamentals. If growth is accelerating and margins are expanding, they get multiple expansion. Whereas companies who show #GrowthSlowing and margin compression get multiple compression.


That’s why identifying bottom-up stock ideas like AAPL in an environment like this helps you crush your competition. Don’t you want to own stocks that can generate multiple expansion in a market like US Equities that has multiple compression risk? Indeed.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.71-1.82%


VIX 16.73-23.27

Oil (WTI) 43.69-46.44
Gold 1
Copper 2.42-2.54


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Lots of Questions - 01.29.15 Chart

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