• run with the bulls

    get your first month

    of hedgeye free


Cartoon of the Day: A Mountain of Trouble

Cartoon of the Day: A Mountain of Trouble - Yelp cartoon 02.06.2015


Hedgeye Internet Analyst Hesham Shaaban has been the bear on Yelp, and Yelp stock is getting pummeled today.

Rainbows & Puppy Dogs | January Employment

Employment data re-hashing is pretty much ubiquitous across the financial media and there’s little value-add in dog-piling on the data reporting so we’ll keep it tight here.   


Immediately below is our summary review of the data followed by a few data points and trends we think are worth highlighting.  


January Employment | Summary Review:   Net Payrolls adds were strong on an absolute basis and accelerating on YoY basis, wage growth accelerated back up to +2.2%, hours worked held above trend, the positive balance of hiring at the sector/industry level continued, slack measure extended their slow march southward, revisions were unanimously positive and unemployment rose for the right reasons as participation bounced off multi-decade lows.  Manufacturing and Energy employment showed little evidence of ROW demand and Oil-price pressures, respectively.  


Rainbows & Puppy Dogs | January Employment - Employment Summary Table



HOUSING: Residential Construction employment rose +13K MoM, marking the largest sequential rise since November of 2005.  On a year-over-year basis, growth accelerated to +8.7% with the trend remaining one of ongoing improvement.  After having been bearish on housing in 2014 through October, we continue to think housing outperforms over the intermediate term in 2015.  (*Note:  if you do not currently receive our housing sector research but would like access please let us know.)


Rainbows & Puppy Dogs | January Employment - Resi Cons Employment


Rainbows & Puppy Dogs | January Employment - 20 34YOA ST


Rainbows & Puppy Dogs | January Employment - 20 34YOA LT


Consumption/Income Growth:  Today’s report augurs strength for the Consumption and Income/Spending data for January. 


The math is straightforward:   Accelerating employment base + an acceleration in wage growth will = accelerating aggregate income growth. 


Even if a further increase in the savings rate mutes the translation to actual consumption growth (as it did in December), it’s hard to characterize accelerating income growth and rising savings as fundamentally negative. 


Whether increased savings and rising corporate confidence actually translates into an acceleration in business investment – and a support to flagging productivity growth – remains a pretty big “if”, particularly as we traverse the late-cycle period of the current expansion. 


Rainbows & Puppy Dogs | January Employment - Salary   Wage Dec


Rainbows & Puppy Dogs | January Employment - Income   Spending Table


Energy Related Employment:  The BLS classifies oil & gas related employment within four major subsectors:  Oil and Gas Extraction, Oil & Gas Pipeline Construction, Support Activities for Oil & Gas Operation and Mining/Oil/Gas field Machinery.   The data is reported on a one month lag so the January release this morning provided December data for the respective industries. 


In short, payroll employment directly tied to Oil & Gas extraction, while slowing, has yet to show a conspicuous decline. 


We’ll be interest to see if that changes in the February report as the (more leading) initial jobless claims data continues to show a moderate negative divergence in energy state job separations.


Rainbows & Puppy Dogs | January Employment - Oil Industry Employment


Rainbows & Puppy Dogs | January Employment - Claims 020615


Cycle Accounting | Best Before the Crest:  It’s our view that we’re currently late-cycle in the current expansion.  Employment and wage growth always look best before the crest and handicapping where we are on the slope of the cycle line remains the game. 


With the incremental acceleration in employment growth in January, and inclusive of the 2014 revisions, we have now eclipsed the peak rate of payroll growth observed in the last cycle.  Whether January represented the trough in Initial Claims (3-mo rolling ave basis) remains to be seen but historical cycle precedents suggest the clock tick starts to get louder following a negative inflection off peak improvement in initial claims


 Rainbows & Puppy Dogs | January Employment - Cycle Profile


Rainbows & Puppy Dogs | January Employment - NFP YoY


Rainbows & Puppy Dogs | January Employment - Claims cycle


Rainbows & Puppy Dogs | January Employment - NFP cycle


“Patience”:   The “tough March decision for the Fed” headlines are in full crescendo this morning.  For the sake of taking the other side of the strength in the employment report, the charts below are probably the ripest fodder for the “push out the dots” folks. 


Is an acceleration in wage inflation imminent as slack continues its slow march southward, minimum wage changes take effect and net payroll add mix shifts modestly in favor of higher paying jobs?  Perhaps, but that’s been the perennial panglossian talking point for at least the last 18 months.  Elsewhere, the employment-to- population ratio, while improving, continues to signal ongoing slack while labor’s share of income remains decidedly depressed as the transmission of policy from financial asset inflation (wall street) to the real Main St. economy remains doggedly slow.   


Rainbows & Puppy Dogs | January Employment - Emp to Pop Ration total LT


Rainbows & Puppy Dogs | January Employment - Labor Share Income


SLACK:  The painstakingly sluggish trend towards labor market tautness remains ongoing.  Below are the updated charts


Rainbows & Puppy Dogs | January Employment - Workers per job opening


Rainbows & Puppy Dogs | January Employment - ST unemployment


Rainbows & Puppy Dogs | January Employment - NFIB Hiring


Rainbows & Puppy Dogs | January Employment - NFIB Compensation


Rainbows & Puppy Dogs | January Employment - NFIB Hard to Fill



Christian B. Drake



Takeaway: In today's Macro Playbook, we detail our bullish-to-bearish fundamental reversal on Chinese equities. This is both new and worth your time.


Long Ideas/Overweight Recommendations

  1. Utilities Select Sector SPDR Fund (XLU)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. SPDR Gold Shares (GLD)
  4. Consumer Staples Select Sector SPDR Fund (XLP)
  5. iShares U.S. Home Construction ETF (ITB)
  1. LONG BENCH: PowerShares DB U.S. Dollar Index Bullish Fund (UUP), Vanguard REIT ETF (VNQ), Vanguard Extended Duration Treasury ETF (EDV), Healthcare Select Sector SPDR Fund (XLV)

Short Ideas/Underweight Recommendations

  1. SPDR Barclays High Yield Bond ETF (JNK)
  2. SPDR S&P Regional Banking ETF (KRE)
  3. Industrial Select Sector SPDR Fund (XLI)
  4. iShares MSCI Emerging Markets ETF (EEM)
  1. iPath S&P GSCI Crude Oil Total Return ETN (OIL)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)


***Please note we are dropping the DXY from our top-5 long ideas for the time being. Refer to our scenario analysis for the next 4-6 weeks in yesterday’s Macro Playbook for more details. In lieu of the dollar, we are “upgrading” our bullish bias on Utes in light of our bearish outlook for Treasury bond yields from here.***



“We Will Sell China”: Today we are removing our bullish bias on Chinese equities and view this asset class as one to “short on strength” rather than a “buy on weakness”. Since we outlined our bullish bias in our 1/13 edition of the Macro Playbook, the Morgan Stanley China-A Share Fund (CAF) has declined -245bps.


Our decision to not let a small loss turn into a larger one is threefold:


  1. Momentum is breaking down as the market responds poorly to a lack of sufficient liquidity provision by policymakers.
  2. The PBoC is not inclined to deliver a sufficient amount of liquidity provision while the State Council is inclined to stand pat on sovereign fiscal policy – effectively forcing cash-strapped local governments to bear the brunt of any fiscal stimulus.
  3. This is because a large provision of liquidity is likely to put incremental pressure on the Chinese yuan against the backdrop of a preference for exchange rate stability in Beijing.


Regarding point #1:


  • Today the Shanghai Composite Index confirmed a breakdown through what had been intermediate-term TREND support of 3,202.
  • The market is down -3.1% over the past two days – following Wednesday’s post-close announcement of a system-wide -50bps RRR cut out of the PBoC – the first system-wide cut since May of 2012.
  • According to our calculations, that frees up about ~570B CNY into the financial system, which pales in comparison to the estimated 2.05T CNY lockup ahead of 24 IPOs next week or the cumulative 1.98T CNY of capital that has left the country since the steady trend of outflows began in June.
  • Such capital outflows have perpetuated a +155bps back-up in China’s benchmark 7-day repo rate since the start of the fourth quarter.




THE HEDGEYE MACRO PLAYBOOK - China Benchmark Interest Rates



Source: Bloomberg L.P.



Source: Bloomberg L.P.



Regarding point #2:


  • While the PBoC has added a 195 CNY into the banking system via reverse repos over the past three weeks, it has neither lowered rates on those repos nor signaled that such injections are designed for anything more than liquidity provision ahead of the always-tight Lunar New Year holiday.
  • In fact, Lu Lei, head of the PBoC’s research bureau confirmed that to be case – as well as stating firmly that the aforementioned RRR cut shouldn’t be taken as a sign of the start of a broader, stronger monetary easing cycle.
  • On the fiscal policy side of the ledger, growth in central government expenditures continues to slow on both a sequential and trending basis – effectively leaving the “heavy lifting” to the provincial governments.
  • That sounds fine in the context of China’s fragmented political economy – as well as the announced 15T CNY in planned infrastructure investment across 14 provinces  in recent weeks/months – but not in the context of land sales declining -14% YoY and broad credit growth slowing on both a sequential and trending basis, begging the question: how will such projects be financed?
  • Central government fiscal revenue slowed to +8.6% YoY in 2014 – the slowest pace since 1991 – which implies China has limited options besides levering up the sovereign balance sheet to finance such lofty development targets.






Regarding point #3:


  • In an attempt to deter incremental capital outflows, today the PBoC raised the yuan's reference rate to a level that forced appreciation back into the currency’s +/- 2% trading band.
  • Specifically, the CNY reference rate was hiked by +0.17% to 6.1261 per USD, which was +2.06% stronger than Thursday’s close. This move that perpetuated a +0.12% “short-squeeze” in the USD/CNY cross to 6.2447 (a -1.9% discount to the reference rate).
  • Recall that such capital outflows perpetuated a -2.4% decline in the CNY vis-à-vis the USD last year – the first annual decline since 2009. The non-deliverable forwards market is pricing in roughly the same degree of downside over the NTM.
  • That such speculation is occurring in an environment of rising real interest rates speaks volumes to following key economic risks that continue to weigh on Chinese GDP growth estimates:
    • A continued unwind of the fixed assets investment bubble as both demand and prices contract in the property market. Specifically, property prices in first, second and third tier cites are down -3.1% YoY, -4.3% YoY and -4.5% YoY, respectively – and growth is getting incrementally negative by the month.
    • A continued slowdown in the pace of credit intermediation as growth in China’s banking sector liabilities slows amid structural current account rebalancing.
    • A continued slowdown in the pace of credit intermediation as debt rollovers in an environment of negative industrial profit growth (down -8% YoY in DEC) broadly restrain the marginal supply of credit. China’s low-NPL ratio is arguably the root cause of its economic slowdown.


















All told, we now anticipate that Chinese shares have considerable downside risk over the intermediate term – so long as the aforementioned policy stance remains in place. And until that changes, our bias on Chinese equity ETFs – namely the CAF and FXI – will remain bearish.


Chinese stocks are now overvalued vis-à-vis other international equity markets and have been overbid with massive margin leverage (a record 778B CNY on the Shanghai Stock Exchange) relative to what now looks like a rapidly declining probability of meaningful enough monetary stimulus to combat the obvious downside to Chinese growth over the intermediate-to-long term.




THE HEDGEYE MACRO PLAYBOOK - China Iron Ore  Rebar and Coal YoY vs. GDP


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



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.


The Hedgeye Macro Playbook (2/5)


#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.


EARLY LOOK: Anchorman (2/5)


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.


HOUSING: Purchase Apps | Easings & Accelerations (2/4)


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.                

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

January Sales & Traffic Strongest in 6 Years

Black Box reported January results that were the strongest in over six years.  While the majority of this strength is being attributed to a mild winter compared to a year ago, the underlying trends suggest a marked improvement across the industry.  Easy comparisons through February should keep restaurant stocks, particularly fast casual concepts, afloat barring any dismal earnings results.  But, with the data this strong, we expect management teams to have a very upbeat outlook for 2015 – despite some inflationary pressures on their cost of sales and labor lines.  All told, expectations for the year will be high, which means the opportunity to create alpha will widen when sales trends reverse (tough comparisons in 2H15).


Restaurant same-store sales increased +6.1% as traffic increased +2.4% during the month.  These numbers were up 300 bps and 180 bps, respectively, on an absolute sequential basis and up 210 bps each on a two-year average sequential basis.


January Sales & Traffic Strongest in 6 Years - 1


January Sales & Traffic Strongest in 6 Years - 2


January Sales & Traffic Strongest in 6 Years - 3


A number of things (stronger traffic, lower gas prices, higher consumer confidence) has given management teams the confidence to take pricing recently and consumers the ability to increase their spend.  To that extent, average weekly sales per restaurant increased +2.5% per restaurant over December 2014.  This is important, considering the aforementioned pressures managers will face in 2015.  Beef prices are expected to be the largest headwind on the commodity front, while ACA and pressure on staffing (accelerating wage and salary growth) will be headwinds on the labor front.


January Sales & Traffic Strongest in 6 Years - 4


The extent to which restaurant sales remain strong will determine whether or not restaurants will be able to offset these pressures but, currently, there’s no denying the favorable outlook.  We expect sales to continue to remain robust throughout February given the easy comparisons. 

Keith's Macro Notebook 2/6: USD | UST 10YR | China

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

P: Walking the Plank (4Q14)

Takeaway: P gave itself some breathing room, but likely not enough. More importantly, the much bigger risks are approaching.


  1. 4Q14 WORSE THAN IT LOOKED: P missed 4Q14 revenue estimates by 3% on a shortfall in advertising revenue from three industry groups with seasonally stronger 4Q ad spend; the question is why?  Also, P saw accelerating user growth in 4Q, but it was coming off a deflated 4Q13 comp; a quarter that we believe P experienced heightened attrition.
  2. BOUGHT SOME BREATHING ROOM, BUT: Management took the smarter route and rebased expectations, guiding to 2015 revenues of $1.16B at midpoint (vs. $1.20B for consensus).  However, management appears to be hinging part of its outlook on its expectation for mid-teens listener hour growth in 2015, a setup we believe is highly unlikely.
  3. THE BIGGER RISKS REMAIN: We continue to expect users to decline on a y/y basis in 2015 since P’s remaining TAM isn’t large enough to supports its heightened attrition issues.  Meanwhile, Webcaster IV will remain an overhang on the stock.  As a reminder, anything short of a best-case scenario for P on Webcaster IV could derail its entire business model.  Click the note links below for more detail.



P missed 4Q14 revenue estimates by 3% on a shortfall in advertising revenue; specifically from Retail, Telecom, and Consumer Electronic advertisers.  However advertising spend across these three groups is seasonally higher in the 4Q, so the question is why was P seeing pressure here? We're not sure if this is a sign of wavering demand, or a one-off instance, but a concern nonetheless. 


The bright spot from the quarter was its accelerating user growth.  However, the acceleration is coming off what we believe to be a deflated comp in 4Q13, which is when we suspect P experienced heightened level of attrition.  Back in August 2013, P altered its ad feed from 1 ad/15 minutes to 2 ads/20 minutes, and increased its max ad load at the same time.  In turn, P saw its sharpest y/y deceleration in active user growth in its reported history in 4Q13; likely a result of ad load pushing the user away.  So we wouldn't read into the 4Q14 acceleration


P: Walking the Plank (4Q14) - P   Active User Deceleration 4Q14



Management took the smarter route and rebased expectations, guiding to 2015 revenues $1.16B at midpoint (vs. $1.20B for consensus).  However, management commentary during the call suggests that the company appears to be hinging part of its outlook on its expectation for mid-teens listener hour growth in 2015, a setup we believe is highly unlikely.


As we detail in the note below, we're expecting users to decline in 2015.  P has long history of heightened attrition, and our TAM analysis suggests P's remaining TAM will not be able to compensate for much longer.  


P: New Best Idea (Short)

12/22/14 03:56 PM EST

[click here]


Our scenario analysis below suggests that P would require a sharp acceleration in Ad RPMs to hit revenue guidance if it can't produce double-digit listener hour growth as management expects.  However, accelerating Ad RPMs would likely mean increasing sell-through on idle inventory (i.e. increasing ad load), which we believe would exasperate its retention issues further.  In short, P's core growth drivers are working again each other.


P: Walking the Plank (4Q14) - P   Ad Business Model 

P: Walking the Plank (4Q14) - P   2015 Scenario Analysis Guidance



As we mentioned above, we continue to expect users to decline on a y/y basis during 2015 since P’s remaining TAM isn’t large enough to supports its heightened attrition issues.  We suspect that would crush investor sentiment whenever that occurs. 


Meanwhile, Webcaster IV will remain an overhang on the stock.  As a reminder, anything short of a best-case scenario for P on Webcaster IV could derail its entire business model.  Click the note links below for more detail.


P: Webcaster IV = Powder Keg

01/13/15 02:49 PM EST

[click here]



Let us know if you have any questions or would like to discuss in more detail.


Hesham Shaaban, CFA


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.