McCullough: Don’t Chase Charts!


In this excerpt from today’s edition of The Macro Show (click HERE for the full replay), Hedgeye CEO Keith McCullough reveals how he looks at volume relative to price when analyzing a security, and how moving averages trumpeted by traditional media don’t show the whole picture.

RH – Positive 10k Disclosure on Revenue Pipe

Takeaway: We expected to see deferred revenue pop this qtr, but not +37% -- the highest rate since 2Q13. The setup for RH remains outstanding in 2015.

Conclusion: Deferred revenue at RH accelerated to +37% in the quarter. That makes sense to us given the port issues and lower inventory numbers (Inventory growth was below sales growth for the quarter, which for RH at this stage in its growth plan is a problem). But, it gives us a lot of confidence in the company's ability to deliver on the top line.


Since 2Q13, this line item has been an exceptional indicator of growth in the upcoming quarter -- over the past 7 quarters, R2 = .923.   Due to product ordering patterns and revenue recognition accounting, each quarter RH will defer a given amount of revenue, which then accrues to the next quarter.


The point here is that deferred revenue is the highest we've seen in over 6 quarters. Port disruptions probably explain a part of the growth, but we'd also point out that due to the late Source Book release this year, orders were pushed later into 2H when compared to last year. The last time we saw the same level of deferred revenue growth (coming out of 1Q13), the company posted a 38% combined brand comp and 39% consolidate revenue growth. It's not likely that we'll see that type of sales growth in 1Q as the port bottlenecks will curtail the product and revenue flow in 1Q. But, the order and demand pipeline look very healthy headed into the new year. 


RH – Positive 10k Disclosure on Revenue Pipe - rh def rev


Other 10k Callouts


Ad Spend - Marketing expense was up $32mm for the year (in-line with our Source Book cost math), and delevered by 80bps. That was driven almost 100% by the doubling of the Source Book page count. Those costs are amortized over a 12-month time period dependent on the sales curve. We should note that capitalized catalog costs were down 5% YY, compared to FY13 year end when capitalized catalog costs were +53%. Based on the commentary from the 4Q14 Q&A, RH will add additional mailers this year as it decouples the Baby&Child and Outdoor books from the 17lb source book and add two new concept mailers in the fall. But, the company will be more prudent this year on who and what it sends to its bulk mailing list in 2015. We're expecting significant ad leverage in 2015.


No Growth?

Takeaway: Domestic economic growth remains fairly anemic with mounting risks to the downside as we progress through the balance of the year.

The Good: With the inclusion of this morning’s [fairly soft] personal income and spending data, Real PCE (~70% of GDP) is averaging +3.2% YoY for Q1-to-date (up from ~2.8% in Q4). That remains supportive of our #Quad1 forecast for 1Q15.


No Growth? - Personal Income   Spending


The Bad: Outside of housing, not one key economic indicator category is accelerating on both a sequential and trending basis. This pervasive lack of economic momentum will become a major headwind to annual growth rates once base effects become unsupportive throughout the following two quarters. Our full-year estimate of +2.4% real GDP growth – which is already well below the Street and below the Fed’s latest downwardly revised target(s) – could have a 1-handle on it by the time Q3 GDP is reported if growth surprises our expectations to the downside over the next 3-6 months.


No Growth? - U.S. Economic Summary Table


The Ugly: If GDP comes in at the +3% YoY midpoint of our GIP Model forecast range in 1Q15 (up from +2.4% in Q4), the QoQ SAAR growth is likely to be in the +0.2-0.3% range (down from +2.2% in Q4). As always, we should not anchor on any QoQ SAAR forecast given its sensitivity to even the most marginal changes in our YoY growth rate forecast range, but just being in the area code of 0% sequential growth is not good. It’s worth noting that “forecast” is perfectly corroborated by the Atlanta Fed GDPNow Model, which many FOMC and market participants anchor on.




The Conclusion: We reiterate our bullish bias on long-term Treasuries – a view we’ve held for over a year now – as the Fed is likely to continue downwardly revising their “dot plot” closer to subdued market expectations, at the margins. 2015 is shaping up to be the 2nd straight year in which long bonds bulls outperform their counterparts in the equity market: TLT and EDV appreciated +23.6% and +39.6%, respectively in 2014 vs. a return of +11.3% and +7.5% for the SPY and DIA, respectively. For those of you who must remain long of U.S. equities, we reiterate our preference for domestic revenue and EPS exposure in lieu of international exposure, which translates to favoring small-caps (IWM) over large-caps (SPY), as well as being long of Consumer Discretionary (XLY) and Housing (ITB) stocks.


No Growth? - FOMC Dot Plot


No Growth? - S P 500 Revenue and EPS Growth


Best of luck out there,


Darius Dale


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 80.47%
  • SHORT SIGNALS 78.71%

Keith's Macro Notebook 3/30: China | USD | Oil


Hedgeye CEO Keith McCullough shares the top three things in his macro

notebook this morning.

RTA Live with Keith McCullough

Here is the replay from today's edition of RTA Live, available exclusively to Real-Time Alerts subscribers.



Takeaway: Street estimates still too high but some metrics less bad


With in-line weekly numbers reported this morning and following our trip to Macau last week, we are probably a little less negative.  Indeed, some takeaways were positive on the margin but there still appears to be too much risk, particularly with Street estimates still too high. 


We still think Street estimates for the Macau operators remain too high, despite recent reductions, particularly in the base or grind mass segment.  However, our Macau trip last week revealed some less negative trends.  Direct VIP seems to have stabilized (and maybe growing again?) and while junket VIP and premium mass probably haven’t, direct VIP carries higher margins.  Additionally, there was more optimism among market participants that the highest margin segment, grind mass, may be basing sequentially.


Unfortunately, the Street seems to be still projecting YoY growth in grind mass for the operators in 2015 which appears unlikely given the volumes in the early part of the year.  By contrast, simply projecting current volumes forward through the rest of the year yields a high teens YoY decline in total mass and a high single digit decline in grind mass.


Please see our detailed note:

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.