CHART OF THE DAY: Beating Beta (It Isn't Easy, But It Is Achievable) $SPY $TLT

CHART OF THE DAY: Beating Beta (It Isn't Easy, But It Is Achievable) $SPY $TLT - 03.02.15 chart


This is an excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough.


Beating beta isn’t easy, but it is achievable. Full loaded with the February v-bottom US stocks put in after a terrible January, neither the Dow nor the SP500 (+1.7% and +2.2% YTD, respectively) are beating the Long Bond (TLT total return +3.3% YTD).


But that’s not new either. As you can see in the Chart of The Day, the Long Bond (TLT) has been beating CNBC’s core advertising quote (SP500) handily ever since both growth and inflation started slowing at the beginning of 2014.


Hairy Little Forecasters

“A foolish consistency is the hobgoblin of little minds.”

-Ralph Waldo Emerson


I think we all know what little minds are. If you don’t know what their foolish consistencies look like, come watch 5-7yr olds play Mite Hockey. They’ll go offside again, and again, and again – until they finally learn that the referee’s whistle stops them from scoring.


Do you know what a hobgoblin is? Per Wikipedia: “Hobgoblins seem to be small, hairy little men who—like their close relative, brownies - are often found within human dwellings, doing odd jobs around the house while the family is lost in sleep.”


That, to me, seems like a reasonable definition of what people do at the Fed. While the rest of the world is dealing with the realities of economic gravity, these little-known people continue to rummage through data, forecasting both inflation and GDP growth inaccurately.

Hairy Little Forecasters - GDP cartoon 01.30.2015


Back to the Global Macro Grind


Did you know what 2014 US GDP growth was? Per Q4 #GrowthSlowing data that was reported on Friday, US GDP growth slowed to +2.4% year-over-year in 2014, well off what seems like a perpetual consensus growth expectation of +3-4%.


As you know, long-term bond yields have been tracking the rate of change in year-over-year US growth. When US growth finally surprised to the upside (Q413) at +3.1% year-over-year, the 10yr UST Yield climbed over 3%.


With US GDP falling closer to 2%, the 10yr Yield fell that way too. If you know people who still foolishly look at the q/q SAAR GDP number (instead of y/y), send me their contact info and I’ll send them a pair of tickets to  Shakespeare’s A Midsummer Night’s Dream.


The best known hobgoblin has a hockey name (Puck, from Shakespeare’s aforementioned classic). I kind of like that inasmuch as I enjoyed last week’s macro moves (I was in dire need of a good week!):


  1. #StrongDollar – US Dollar Index ramped +1.1% back to its JAN highs at +5.6% YTD
  2. Burning Euros – EUR/USD down another -1.5% on the wk to YTD lows of -7.1%
  3. Commodity #Deflation – CRB Index -0.4% wk-over-wk to -2.6% YTD
  4. Oil #Deflation – WTI down another -2.1% last wk to -8.3% YTD
  5. Lower Rates – UST 10yr Yield -12bps on the wk to 1.99% (-18 bps YTD)


Not to be confused with anything other than a Global #Deflation signal (consumers like it; debtors and their banks do not), the flow-through to the US stock market last week looked a lot like it did in January:


  1. Energy stocks (XLE) led losers -1.9% on wk-over-wk at -0.2% YTD
  2. Financials stocks (XLF) were down -0.4% on the wk to -1.5% YTD
  3. Consumer Discretionary stocks (XLY) led gainers, +0.7% on the wk to +5.3% YTD


Follow the proverbial performance chasing puck (not to be confused with a furry little forecaster by the name of John Williams) and if you’ve picked your Sector Styles in the US stock market right, you’re beating your competition on both an absolute and relative basis.




Beating beta isn’t easy, but it is achievable. Full loaded with the February v-bottom US stocks put in after a terrible January, neither the Dow nor the SP500 (+1.7% and +2.2% YTD, respectively) are beating the Long Bond (TLT total return +3.3% YTD).


But that’s not new either. As you can see in the Chart of The Day, the Long Bond (TLT) has been beating CNBC’s core advertising quote (SP500) handily ever since both growth and inflation started slowing at the beginning of 2014.


In addition to picking the right sectors of the SP500 (Housing, Consumer, Healthcare = +5.3-6.8% YTD) and having an overweight position in the Long Bond, the biggest asset allocation we continue to think you should avoid is Commodities:


  1. Oil (WTI) is down another -1.4% this morning to $49.09 = down -7.8% YTD
  2. Natural Gas (after a -8% drop last week) is down another -1.3% today at $2.70 = down -6.3% YTD
  3. Coffee Prices #deflated another -8.1% last week and are down over -17% for 2015 YTD


Yep, stay with the big cap Consumer Discretionary (XLY) long that is the recipient of that last one, Starbucks (SBUX) – which, incidentally, also has over a 3% weight in the XLY consumption ETF (SBUX +13.9% YTD).


Nah, we’re not perma bullish or bearish on anything really. Every sector and asset allocation has a growth and inflation environment that loves them. Our job is to find the nice little furry ones that make me look more like a teddy bear than your thrashing hobgoblin type.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.88-2.08%

SPX 2093-2115
USD 94.08-95.67
EUR/USD 1.11-1.13
Oil (WTI) 47.66-53.08
Nat Gas 2.65-2.85


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Hairy Little Forecasters - 03.02.15 chart

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The Key to Understanding Financial Statements: Why We Like SBUX


Restaurants Sector Head Howard Penney recently gave a presentation entitled Demystifying Financial Statements at Rutgers Business School.


In this excerpt Howard walks you through what line items he cares most about when analyzing restaurant stocks. Using SBUX as an example he shows you the key drivers to our bull case.

The Week Ahead

The Economic Data calendar for the week of the 2nd of March through the 6th of March is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.

Click to enlarge.

The Week Ahead - Week Ahead

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: TLT, EDV, MUB, HOLX, PENN, YUM and RH.

Below are Hedgeye analysts’ latest updates on our seven current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.


*Please note we added Penn Gaming (PENN) this week and removed Utilities (XLU) and Medidata Solutions (MDSO)


We also feature two additional pieces of content at the bottom.

Investing Ideas Newsletter      - levs 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


Investing Ideas Newsletter      - Yellen cartoon 02.27.2015




Yum! Brands has been on a tear, outperforming the SPX by 4.9% and 6.8% over the past week and month, respectively.  Our thesis is slowly becoming more mainstream, as activist talk has recently heated up. 


In fact, management seems to have gotten the memo as well and is now facing pressure from some of its largest shareholders.  In response, management implemented a shareholder friendly amendment to the company’s by-laws that will permit a shareholder, or group of shareholders, with 3% or more ownership of common stock (for three years or more), to nominate directors representing up to 20% of the board.


This is good news for several reasons: 1) an activist may be involved in the name 2) shareholders are speaking up 3) management is feeling the pressure and 4) management is open to adopting more shareholder friendly policies. 


Albeit seemingly minor, this is the best news we’ve received in a while regarding YUM.  We continue to believe there is significant upside here despite the stock’s strong recent outperformance.  This stock is one major announcement away from hitting $95.


Investing Ideas Newsletter      - fred


Penn National Gaming is the best way to play improving domestic regional gaming trends due to its superior operational management and unit growth opportunities.  Catalysts include positive estimate revisions, the opening of the first Massachusetts casino in June, and industry leading earnings growth in 2015 and 2016.


Click below to watch video we sent to subscribers this week.

Investing Ideas Newsletter      - RPP


Shares of Hologic have risen over 22% since Hedgeye Healthcare sector head Tom Tobin added it to Investing Ideas on 1/2/15. The S&P 500 is up approximately 2% in that time. Tobin will provide an update on his HOLX thesis next week.


Click image to enlarge.

Investing Ideas Newsletter      - hopp



The U.S. economy is not booming, contrary to what you may have heard from various media "sources" after the Q3 2014 quarter-over-quarter annualized GDP print of +5.0%...Year-over-year (that's how you measure growth) U.S. GDP is closer to 2% than 4-5%. This is the most basic information in America despite the obfuscation by some.


Click image to enlarge.

Investing Ideas Newsletter      - whap large


Long-term Treasury (EDV, TLT) and Municipal bond (MUB) exposure is where you want to be during this growth slowing, deflationary environment with a continued trend of U.S. dollar strength (fixed payments, in U.S. dollars are worth more).


Dollar up, rates down, = global deflation of asset prices (get out of commodities and volatile growth stocks)


After a big week of growth slowing data, we recommend you stay with the same positions that have worked over the intermediate-term:



  • Annualized GDP for Q4 revised down to +2.4% YoY in 4Q14 vs. the initial +2.5% print
  • Full-year 2014 GDP remains at +2.4% on a year-over-year annualized basis which differentiates the Hedgeye model
  • Friday’s revision remains far lower than the +3% growth expected by consensus or the “The economy is booming, +5.0% GDP!” allusion from unaccountable mainstream media sources


In short, MORE DEFLATION which crushed those sectors leveraged to price inflation (ENERGY, COMMODITIES, and INDUSTRIALS among others)…

  • Core CPI, which the federal reserve anchors on for gauging a “healthy level of inflation” remained constant at +1.6% on a year-over year basis (which is below its 2% target)
  • CPI miss = lower rates for longer, which = Deflation with more USD strength
  • In other news, meat prices and shelter/rent is up +12% and 3.4% respectively (Does that feel like inflation?)

Policy (Lower for Longer)

A slight pivot in Janet Yellen’s commentary this week when she took the stand on Capitol Hill continues to support our call. IN SHORT, LOWER FOR LONGER.

  • Yellen put an end to the consensus bond-bear (bond bear is bullish on rates) fear-mongering of removing the word “patient”
  • She emphasized her concern (dovish) about inflation not achieving her “target”

Included below is a snapshot on how our GROWTH, INFLATION, POLICY ("GIP") comes together to help us target the asset classes most likely to outperform.

It’s a busy chart but it says to stay LONG of TLT/EDV/MUB!


Click image to enlarge.

Investing Ideas Newsletter      - beno


Shares of Restoration Hardware have underperformed WSM and the XRT index since the company pre-announced on 2/5/15. For the record, we think this story is very much on track and remains our favorite name in the retail space. 

Investing Ideas Newsletter      - RH chart 2 27


The biggest concern we’ve heard from investors following the pre-announce had to do with the company’s 24% sales growth deleveraging to 22% EPS growth. We think a few factors contributed to that.


1) Store closures and Openings – For the quarter sq. ft. grew by 9%, with the two biggest pieces of that growth opening at the end of 3Q and start of 4Q. Because of the shipping window (10-12 weeks) you get the expenses associated with paying rent, but no top line to offset that cost until at the very earliest start of 1Q.  

2) Dead Rent – Based on the company’s new store opening calendar in 2015, new stores that will open in the back half of 2015 just started to hit the P&L. It usually takes RH about 6 months to build out the interior of a new property after it receives the keys from the landlord, and RH pay’s rent the whole time.

3) Distribution Center – RH opened a new distribution center in 4Q. It will help the company gain shipping efficiencies over time, but those costs will be a headwind until they anniversary the opening next January.


If we step back and look at the year holistically. RH grew sales at 20% and earnings close to 40%. We expect that type of growth and then some in 2015.


* * * * * * * * * * 


Ici fund flow survey: slightly less defensive

For the first time in 2015, all equity products outpaced all fixed income products in the most recent 5 day period.

Investing Ideas Newsletter      - z1

pandora: walking the plank

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

Investing Ideas Newsletter      - 9p

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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.