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Shaping Buffett's House

“You shape your houses and then your house shape you.”

-Winston Churchill


William Thorndike introduces Warren Buffett in chapter 8 of The Outsiders (pg167) as “The Investor CEO.” He uses the aforementioned (and ironic) Churchill quote then cites Berkshire’s sculptor himself: “being a CEO made me a better investor, and vice versa.”


Although I’ve only been a CEO for 7 years (and, at 40 years old, I’m a very young one at that!), I definitely agree. Running a company is a lot different than generating a hedge fund P&L. Both experiences have taught me invaluable lessons about life and investing.


While Buffett’s former #1 Rule in Investing was “don’t lose money”, he doesn’t really say that anymore when promoting his positions and politics on CNBC. To be clear though, Buffett became Buffett by selling high and buying low.


By 1987, in advance of the October market crash, Buffett had sold all of the stocks in his portfolios, except for his 3 core positions. After his Capital Cities transaction, he did not make another public market investment until 1989” (pg175), when he bought Coke (KO).


The house that shapes Buffett’s commentary today is not the See’s Candies he bought in 1972 for $25 million. Buffett, due largely to his brilliant performance and compounded returns, is now the stock market. His #1 Rule now is to protect that house.


Shaping Buffett's House - b9


Back to the Global Macro Grind


I’m calling that out as there’s plenty of video circulating on CNBC’s backslapping network this morning, replaying a fawning Becky Quick with Mr. Chuckles. If you were able to play the mainstream media to your advantage like this, you’d be chuckling too!


Here’s my 1 minute video on the matter: https://www.youtube.com/watch?v=60zMHvjybZI


Another reason to callout the chart-chasing buy-high-and-hope-to-sell-higher strategy (commonly called momentum and/or performance chasing) is that the US stock market closed at its all-time high of 2117 (+2.8% YTD) yesterday.


All-time, as I like to remind time-series fans, is a long time. And you generally don’t want to have the all-time high as your invested cost basis. You can ask some of the private equity firms who bought upstream and/or MLP Energy assets with a $105-120 price deck about that.


While it might be nice to avoid Buffett’s advice about having no shorts on “when the tide rolls” out, I did have 3 of them on in Real-Time Alerts yesterday, so it’s worth calling all 3 of them out as things that didn’t work for me, in that product, yesterday:


  1. Copper (JJC)
  2. J P Morgan (JPM)
  3. Foot Locker (FL)


Yep, while all 3 of these securities have sucked in 2015 YTD (i.e. they have negative returns), I guess I was the one who sucked having them on the short side yesterday. If you’re not sucking sometimes, you don’t have mirrors in your house either.


To review why I kept these “SELL” ideas on versus others:


  1. Copper – down -1.6% this a.m. (-6.4% YTD) remains one of the most obvious ways to play our top theme, Global #Deflation
  2. JPM – down -1.3% YTD is in 1 of the 2 US Equity Sector Styles I like the least (Financials – sector ETF -0.8% YTD in an up tape)
  3. FL – down 2 cents YTD is on our Best Ideas SELL list (Brian McGough is the analyst, ask our team for his deck for details)


The other thing that went wrong for me yesterday was another one of these counter-TREND moves in US (and global) interest rates. While many might quibble with the simple calculation of +10% move in German Bund and Japanese Government Bond Yields (when you devalue to zero, that is the math), the move on the long-end of the US rates curve is where I seem to have the most lovers and loathers.


After dropping -12 basis points last week, the 10yr US Treasury Yield bounced +9 beeps (basis points) on the day yesterday. That brought back a whole host of tweeters who have been shorting the Long Bond via TLT for, well, the last 25% of the up move (since January of 2014).


One mainstream economic headline that hit the tape was the ISM slowing in FEB to 52.9 versus the initially reported 53.5 for JAN (which was then revised lower). So, other than it not being the worst monthly decline since OCT 2008 (like the PMI was on Friday), I don’t see any fundamental economic reason to be selling Long-duration, low-volatility, high return bonds.


That said, we need to risk manage the range, and here’s some time and space to consider:


  1. Immediate-term TRADE risk range for the 10yr Yield has widened to 1.84-2.16%
  2. Intermediate-term TREND resistance for the 10yr Yield = 2.39%
  3. US monthly Jobs Report is due out on Friday and that will definitely move the bond market


On a jobs miss, I think you test the low-end of that immediate-term risk range. On a jobs beat, I think you test the high end. The house that I built alongside my teammates @Hedgeye won’t make our call any more complicated than that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.84-2.16%
SPX 2096-2122

VIX 12.80-16.39

USD 94.63-95.81

Oil (WTI) 48.04-52.23
Copper 2.55-2.73


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Shaping Buffett's House - 03.03.15 chart

Hedgeye's Macro Show with Keith McCullough

In case you missed it, here is the replay of Hedgeye's Macro Show with CEO Keith McCullough.  



March 3, 2015

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Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%

Mortal and Unsure

This note was originally published at 8am on February 17, 2015 for Hedgeye subscribers.

“Exposing what is mortal and unsure…”



That’s from Act IV, Scene 4 of Hamlet, where Shakespeare goes on to question the motives of Norwegian crown prince, Fortinbras, who was marching his army into Poland to conquer an “eggshell.”


Rightly to be great, is not to stir without great argument,

But greatly to find quarrel in a straw

When honor’s at the stake.”


That’s also a passage Peter Thiel effectively cites in chapter 4 of Zero To One, titled “The Ideology of Competition.” And I’m reminded of it this morning, after getting beat up by Mr. Macro Market last week.


Back to the Global Macro Grind

To be beaten, or not to be beaten (by the market): that is the question. What makes me mortal certainly makes me unsure. And when the market goes against my preferred position, my mind stirs with great argument!


What happened in Global Macro last week was more of the same for the month of February to-date – a counter-TREND move. If you did the opposite of what worked in January, you’ve killed it in the last two weeks.


After Retail Sales, Jobless Claims, and Consumer Confidence (University of Michigan reading) missed, the US Dollar Index declined, and everything inversely correlated with Down Dollar ripped. Here’s how that looked, in rate of change terms, week-over-week:


  1. US Dollar Index -0.6% on the week (-0.7% for FEB to-date) to $94.16
  2. EUR/USD +0.6% week-over-week (still -5.9% YTD)
  3. CRB Commodities Index (-0.97 correlation to USD on a 90-day duration) = +1.9% on the wk
  4. Oil (WTI) was +1.7% wk-over-wk to $52.55 (90-day inverse correlation -0.89)
  5. SP500 +2.0% wk-over-wk, erasing its negative YTD return to +1.9% for 2015
  6. Argentina’s stock market +6.1% on the wk


Don’t cry for me Mucker? Or is that Argentina? You’re telling me you weren’t levered long Argentine inflation expectations and/or the Brazilian stock market last week? What is wrong with you?


Setting aside what would have been violently wrong with your returns for the last 3-6 months if you were long inflation instead of hedged vs. Global #Deflation, being long commodity levered and debt ridden nations last week was mint:


  1. Brazil’s stock market was +3.8% on the wk, erasing 2015 losses, taking it to +1.3% YTD
  2. Greek stocks were +11.3% on wk-over-wk, putting them back in the black at +8.3% YTD
  3. And the Ruskies crushed it, seeing the Russian Trading System Index +10.6% on the wk to +15.6% YTD


And, by the looks of it, Consensus Macro positioning (in CFTC non-commercial futures/options terms) got that right too:


  1. Crude Oil net LONG positioning was +7,938 contracts last wk to a total net LONG position of +335,998
  2. SP500 (Index + Emini) net LONG position was +7,396 contracts to a total net LONG position of +96,734
  3. Treasuries (10yr) net SHORT position dropped -66,223 contracts to a net SHORT position of -83,800


That’s the other thing I got wrong last week – long-term rates went up another 8 basis points wk-over-wk on the 10yr UST Yield to 2.04%. The short-end of the curve (2yr UST Yield) was flat wk-over-wk at 0.64%.


But, with the 10yr Yield down -13 basis points YTD, Oil -2.1% YTD, and Dr. Copper -7.9% YTD, what is the #truth about the Global #Deflation TREND vs. the shorter-term FEB to-date TRADE?


Was Oil Volatility (OVX) down -8.7% last week a new intermediate-term TREND, or does the +223% ramp in Oil’s emotional state (OVX) in the last 6 months have something to do with what may be pending if Russia doesn’t bailout Greece? Or something like that…


“And let all sleep?

The imminent death of twenty thousand men,

That, for a fantasy and trick of fame,

Go to their graves like beds, fight for a plot

Whereon the numbers cannot try the cause?”


Though this macro uncertainty may be madness, there is method in’t.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.69-2.09%
SPX 2063-2101
DAX 10572-11031
VIX 14.39-19.41
USD 93.45-95.44
Oil (WTI) 48.01-53.90


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Mortal and Unsure - 02.17.15 chart


Key Takeaway

CHUY delivered a low quality beat AMC yesterday and offered up a slightly disappointing outlook for 2015.  We continue to believe CHUY will face issues as it seeks to backfill newer markets.  Given the inherent lack of restaurant level and operating margin leverage in the model, one blip could dampen the 2015 outlook.




Low quality beat. While CHUY beat top-line estimates by $8 million and delivered in-line SSS of +3.8%, the overall quality of the print was rather weak as it came on the back of a lower than expected tax rate.  Even though it was the company’s 18th consecutive quarter of positive comparable sales, it’s important to recognize that 1) the majority of the underperforming 2013 class of stores are not in the comp base 2) CHUY took ~2.8% pricing and 3) unit level margins declined for the second straight year with no turn in sight.  This was not, by any measure, an impressive “beat” from CHUY and, remember, it comes at a time when the majority of restaurant chains are crushing it. 


Disappointing guidance looks like a stretch. Guidance of +2.5% comp growth in 2015 was a little disappointing, considering the street’s +2.7% estimate and the +2.5-3% pricing in effect.  Management also guided 2015 EPS in the range of $0.74-0.77 (street was at $0.77), while lowering their targeted new unit openings from 11-12 to 10-11, suggesting 17-19% year-over-year growth.  Though it’s a slight step down from 2014’s unit growth rate of 23%, it’s not enough to make us forget about the costs and dilution associated with these openings.  Let's briefly break down 2014: 23% unit growth, 20% revenue growth, 0% earnings growth.  We haven’t seen anything that would suggest a change in the fundamentals at Chuy’s, making 11% earnings growth on 18% revenue growth more a pipe dream than a reality.


Don’t expect restaurant level margin expansion anytime soon. On the call, management hinted that non-comp unit level margins were running in the mid to high single digit range, a far cry from those of the mature base.  While food cost inflation is expected to ease to +1-2% in 2015, labor costs are expected to add a bit of pressure due to increased training, staffing, and inefficiencies at non-comparable restaurants (particularly in 1H15).  ACA, another headwind, is expected to result in an incremental $500,000 expense.  Restaurant level margins have declined nearly 300 bps since FY12, when they were running close to 20.2%.  Incidentally, this is right around the time management began aggressively expanding the concept outside of its core Texas market.  Even with their altered strategic approach to restaurant development (focused on larger, denser locations), we believe the dilutive impact of this expansion on the P&L will continue to be quite noticeable.



HOLX: Removing Hologic from Investing Ideas

Takeaway: We are removing Hologic from Investing Ideas.

We are removing Hologic from Investing Ideas today.


According to Hedgeye's Healthcare team:


While 3D adoption continues to track closely with our long-term model, the 3D Tomo Tracker showed a deceleration in new placements in February from the prior month.  Given the recent guidance raise we need to see a pickup in March placements for them to hit consensus expectations for the Breast Health segment.  


In addition, as CEO Keith McCullough notes, equity market beta is at all time highs.


According to McCullough: "We can always come back to this name – right now we are booking the big win." 


Hologic is up over +23% since it was added on 1/2/15 compared to around +3% for the S&P 500.


Click to enlarge.

HOLX: Removing Hologic from Investing Ideas - holx1

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