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Got Reasons?

“The heart has its reasons, of which reason knows nothing.”

-Blaise Pascal


Leave it to a 17th century mathematician/physicist/philosopher (who was raised by a socialist tax collector in France) to nail what Mr. Macro Market thinks about your investment and risk management reasonings – he does not care.


Of course “he” could be a she – and if the market gods ever let me know on gender, I’ll let you know. The more important point I’m trying to make about markets is that they really don’t care about your political, social, or emotional leanings either.


They don’t care about your research, what school you went to, or your neighbor’s brother’s aunt’s dog. Macro markets care about what they care about – and those things are constantly changing.  Your #process needs to embrace that uncertainty.


Got Reasons? - complacency cartoon 02.10.2015


Back to the Global Macro Grind


Got reasons for what is moving the US Equity futures intraday these days?


  1. Is it another bailout or a blowup in Greece?
  2. Is it a counter-TREND move higher in US Treasury Bond yields?
  3. Is it the Correlation Risk relationship between US Dollars and Oil?


Your portfolio may be affected by one, none, or all of these reasons. If you can tell me which one of them is going to trump all of the others, please tweet me – because, in the very immediate-term, I do not know.


Here’s what Mr. Macro Market thinks about the upside/downside in what I call my immediate-term Risk Ranges:


  1. Greek Stock Market (Athens General Share Index) = 680-883
  2. UST 10yr = 1.62-2.05%
  3. WTI Oil = $45.04-54.78


In other words, what just happened in all 3 of these counter-TREND bounces (newsflash: Greece, Bond Yields, and Oil have been crashing for the last year) was that they all recently tested the top-end of their respective risk ranges.


Unlike who I affectionately call Chart Chasers, Mo Bros, etc., I’m a fader. I don’t chase prices – instead, I try my best to:


  1. Have an intermediate-term TREND research view
  2. Sell/Short at the top-end of the immediate-term TRADE range
  3. Buy/Cover at the low-end of the immediate-term TRADE range


The least complicated part about this research and risk management process are points 2 and 3. It’s just math. The math generates the immediate-term ranges. It’s both dynamic (changing alongside price, volume, and volatility) and non-linear.


The most complicated is point number 1. What is your trending research view? Does it whip around daily? Or do you have a Bayesian inference #process that helps you change both fast, and slow, as critical rates of change undergo phase transitions?


From an intermediate-term research TREND perspective, here’s what I think:


  1. Greece remains bearish and broken
  2. Long-term Bond Yields are bearish inasmuch as our 1H 2015 inflation forecast is
  3. Oil remains a bearish TREND susceptible to ongoing Global #Deflation risk


Yep, there are multiple factors and multiple research and risk management durations incorporated in what I think. And no, Mr. Macro Market doesn’t care about that. But I certainly respect what he/she thinks, and try to listen to him/her very carefully.


Our immediate-term Global Macro Risk Ranges are:


UST 10yr Yield 1.62-2.05%
SPX 2038-2085

DAX 100
Shanghai Comp 3026-3201

VIX 15.81-20.89
USD 93.67-95.49

Oil (WTI) 45.04-54.78


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Got Reasons? - 02.11.15 chart


Takeaway: The positive fundamental momentum continues with more strong State January gaming revenue releases. More to come in February.

Chart Of The Day: A state by state look at the January performance of regional gaming

  • Mature regional Same-store sales (SSS) is trending +8% in January with Louisiana and Mississippi still to report
  • At the end of the day, January will grow faster than any month in 6 years owing to an easy, weather related comp, lower gas prices, and an improved economy
  • So far, West Virginia has been the only disappointment with gaming revenues down ~6% in January. Fierce competition from Ohio, Maryland (Horseshoe Baltimore opened in Aug 2014), and Pennsylvania continue to weigh on the state.



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Bert and Earnings

This note was originally published at 8am on January 28, 2015 for Hedgeye subscribers.

“The media's the most powerful entity on earth. They have the power to make the innocent guilty and to make the guilty innocent, and that's power. Because they control the minds of the masses.” -Malcolm X

Since starting Hedgeye, we have had two main strategic goals in mind. The first was to reinvent how Wall Street produces, packages and sells research. On this goal, we've succeeded in spades thanks to all of you. 


The second goal was perhaps more bold, and has taken more time and planning, but it was to go head-to-head with the traditional financial media outlets and take mind share. 


We were early on social media and now have a prolific presence. We hired a cartoonist, which was surprising to some, but has been a great way to communicate ideas and themes. (Case in point is the cartoon below highlighting the less-than-stellar start of earnings season.). Finally, we built out a state-of-the-art TV studio in our office in Stamford. 


As it relates to TV, today we are hosting our first full day of interactive programming. We are calling it the Hedgeye Market Marathon and we'll be broadcasting it live from the stock market open to the close:  real players, real analysis, and all in real-time. If you'd like to watch or ask Keith, our analysts or guests a question today, you can sign up here: 

Bert and Earnings - earnings cartoon 01.27.2015


Back to the Global Macro Grind...


Other than watching Hedgeye TV, most stock market operators will be taking a break from earnings season to watch the Federal Reserve this afternoon.  The consensus view of the manic media, and frankly a fair bit of the buy side, continues to be that it is not if, but when as it relates to the Federal Reserve reversing policy and beginning to raise interest rates.


For most 2014, as many of you know, we were of the view that rates were going down and not up.  That was a stance that led to some real out performance for those that implemented it into their portfolios. We continue to believe that this is the right stance and that, if anything, the surprise from the Fed over the next few months and quarters is that they will be surprisingly more dovish than consensus expects.


There are two key reasons for that stance from our perspective.  The first is that we think growth will slow incrementally in the U.S. On Friday, we will get the preliminary Q4 2014 GDP print, which will, we believe, show a sequential slowdown from the +2.7% year-over-year growth rate in Q3.


The key reasons we believe Q4 will slow from Q3 are as follows:


1)    Comps – As you know, we model economies like companies and Q4 has the toughest comparison on a 1, 2 and 3-year basis of any quarter in the last seven years


2)    High Frequency Data – The majority of high frequency data we track has slowed sequentially. In particular, PMI has slowed from 59.8 in Q3 2014 to 55.6 in Q4 2014.  As my colleague Darius Dale recently highlighted, the three-month moving average in economy-weighted composite PMI has a r² of 0.83 to YoY GDP, so is highlight correlated


3)    Yields – The last, and perhaps most obvious, signal of slowing sequential growth is 10-year yields.  Frankly, if they aren’t indicating a growth slow down, then what are they indicating?


The second reason we believe that the Fed will ultimately be more dovish than consensus expects is deflation.  As is highlighted in the Chart of the Day, which shows PCE and PCE ex-energy and food going back a decade, inflation is solidly below the Fed’s target of 2%.  The charts also shows, of course, that deflation is far from transitory so far with PCE and PCE ex-energy and food tracking very closely.


Certainly, we don’t expect the Fed to be ahead of the curve on seeing the challenges of growth and deflation, so there is potential that we have a “hawkish” head fake, but nonetheless we continue to believe the path is to easier policy and not tighter.


Another important point to highlight this morning is the other derivative impact of deflation, which is a negative headwind to corporate earnings in the short run.  On a basic level, it is hard to take pricing power when prices are declining.  More acutely, as it relates to the SP500 and the near term, it will be difficult to have much aggregate year-over-year earnings growth for the SP500 with oil down more than 50% year-over-year.


This earnings impact is not just on energy related companies (although roughly 35% of SP500 earnings can be tied back to commodities).  In fact, in our real-time alerts product yesterday, we actually shorted Keith’s former employer the Carlyle Group ($CG) on the back of the derivative impact from oil.  According to Bloomberg estimates, the big three private equity firms' earnings are looking as follows:

  • Carlyle’s expected to lead the decline with a 73% drop, “driven by its energy holdings”
  • Apollo is expected to report a 63% drop in earnings. 
  • Blackstone Group LP (BX) is expected to have a 32% slide.

In particular, Carlyle’s biggest energy holdings were Sandridge (-58% in Q4) and Pattern Energy (-20% in Q4) . . . Yikes !


We hope you can join us for at least part of our market marathon today.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.75-1.85%

SPX 1987-2066

Nikkei 17,311-17835

VIX 16.03-23.04
USD 93.65-95.80

Oil (WTI) 44.02-46.81
Gold 1270-1325 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Bert and Earnings - 01.28.15 chart

VIDEO | HIBB: Ask Brian Questions Live

We will be streaming a video today, Wednesday, February 11th at 11:00am ET for all retail subscribers. Sector Head Brian McGough and Retail Analyst Alec Richards will give a brief thesis overview on Hibbett Sports (HIBB) and then answer all your questions live.  







  • Call during the programming
  • Email


Incremental Thoughts On Key Retail Ideas

Takeaway: Some feedback we’ve gotten recently on our ideas – as well as where we’re incrementally leaning. RH, KATE, KSS, TGT, FL, HIBB, LULU.

Feedback we’ve gotten recently on a few of our ideas – as well as where we’re incrementally leaning.


RH: After the 3Q14 release, incoming call volume in the name dropped by a good 90%. The consensus was that ‘the idea worked, and there’s no major controversy to buy into.” Then RH uncharacteristically pre-announced – when the quarter was otherwise in line. Two different people called asking if there was another convert about to hit the tape, and we can’t count the number of calls asking why such a strong (24%) comp but only 22% EPS growth. The bifurcation between comp and revenue is largely related to stores being pulled out of the comp base due to the real estate plan. Keep in mind that RH will have grown revenue 20% and EPS 37% for the year, and is on track to grow revenue by 30% and EPS by 50% in ’15.  From here, the catalyst calendar is robust. The company’s 4Q earnings release in March begins a significant ramp where there’s a different catalyst about every 6 weeks through Jan (call for details).  We like this one a lot in 2015.


KATE: People will always find a reason to hate this name – most of it is management-related (Black Book: CLICK HERE). But consider this… Kate is closing its dog divisions (Saturday and Jack) and just put up a 28% comp in its core business for the quarter, you got to hand it to the team. Also, with Ralph Lauren comping -2% and blowing up in the worst way, Kors decelerating to a 9% comp and taking down guidance slightly, and Coach struggling to eek out a -22% comp for the quarter, KATE is even more of a standout. What we like about the KATE story is that unlike the others, there’s a square footage story here – and a big one at that. Kate has 237 stores globally, which will more than double. With margins expanding from about 10% to the high teens over 2-3 years, we think that this name has $3.00/sh in earnings power written all over it (earned $0.30 last year). We know that management does a good job of sticking several feet in their mouths at once. But focus on what they do and how they execute, not on what they say.


KSS: This is the first time in years where we can recall KSS not being a consensus short. The 3.7% comp reported last week was big, no doubt, and the sentiment we’re getting sounds something like “KSS just printed a sequentially improving number, and the co is about to go against its easiest comp of the year in 1Q. If the fundamental short call is right, you won’t know until July earnings at the earliest. If anything, I’d be long here.” We can’t argue with a single part of that logic. But should the stock trade near a peak 15x multiple ever, even if you assume that it beats the Street’s $4.50 and puts up a $4.75? But we still believe that earnings for the year will come in below $4.00 due to all the factors we outlined in our Black Book (CLICK HERE) as well as the impact of the new rewards program, which we think poses a risk to SG&A (ALL IN ON THE KOHLS SHORT: CLICK HERE). It’s rare you get an opportunity to short such a damaged asset at an inflated price. It’s our job to help navigate timing over the next 3-6 months.     


TGT: First off, investors’ appetite to short this name is very low (SI as % of float sitting at 3%) due to the concoction of a) new CEO, b) no more Canada distraction, c) lower gas prices (like w KSS), an d) continuing recovery from the data breach. All these things are fine, but the Street is looking for TGT to earn $4.45 this year (Jan ‘16), in the first year where earnings are not muddied by Canada. But that’s 35% above what TGT earned before it decided to go to Canada in the first place. Remember that it went to the Great White North because of the struggles it encountered in its core US market. Cornell made the tough call and closed down Canada, which was a swift and decisive move. But the next moves – to make TGT more competitive in the US – are likely to be much more capital intensive and costly to earnings before they help.  We like TGT Short side.


FL: We think we laid out a convincing short case in our FL Black Book (CLICK HERE), in that the cross currents that came together perfectly over the past 6 years are beginning to unwind. But nearly everyone we speak with on the name -- whether they agree with our call or not (few disagree) -- asks the same questions “when?”, or “what’s the near-term roadmap?”. They are very valid questions. And there’s no doubt that FL could eek out 1 or 2 quarters before this story unwinds. But what we know is this. The Athletic industry is going through a sourcing and selling paradigm shift for the first time in 40 years, and the benefits are accruing to the brands as opposed to retailers. FL is the dominant retailer sitting at peak valuation on peak margins. We don’t need FL’s model to implode for this call to work, we simply need it to stop growing. We think that happens this year. LBO rumors are pervasive, but Nike (68% of sales) has a vested interest in FL remaining public.


HIBB: Nobody wants to hear about this short idea (Black Book: CLICK HERE). And that’s exactly why we want to keep talking about it. Similar dynamics as FL, but it’s traditional growth model is over, forcing it to grow its footprint more aggressively into territory dominated by DKS, Sports Authority and Academy. In addition, HIBB is the only retailer we know of in the US that does not have an e-commerce business. We’re not saying it has a bad dot.com biz, but that it has ZERO presence online. You can go to Hibbet.com to buy a pair of Nike’s and it redirects you to Nike.com. Building an e-comm platform would likely cost 3 points in margin. If there was a perma short in retail, we think this is it. The consensus is modeling $4.80- in 2018. We’ve got HIBB at $1.30. That’s the biggest miss we’ve ever called for in retail.


LULU: We wake up every day asking why we still have this on our Best Idea list as a long after a 75% run. At $37 – and even $47 – we didn’t have to worry about the base business. It was all about changing up the corporate and ownership structure with a call option on LULU comping up a point (even if by accident). There’s one reason we’re hanging in there with this one, and that’s LULU’s new CFO (Stuart Haselden), who started a week ago. We rarely get excited about a single individual’s ability to change a company’s fortunes. But the reality is that Lululemon has not had anything remotely resembling a finance culture since it’s inception. It’s actually borderline miraculous that LULU has grown to nearly $2bn in sales with such a weak financial influence. There’s no tangible strat plan, little recognition of competitive threats, no identification of highest ROI revenue opportunities, etc...  To be clear, this will take a long time to fix. But we can’t imagine that the stock will sell off in the early days of Haselden formulating his plan. We’ll be coming out with a Black Book before the company reports earnings that we think will help Haselden build his game plan. After assessing the opportunities and the capital costs that need to go against them, we’ll know if we should hang in there or cut bait.


More feedback to come. 

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.