Always Learning

This note was originally published at 8am on April 06, 2015 for Hedgeye subscribers.

“Organizations cannot learn unless the individuals within them learn.”

-Edward Hess


“Always Learning” is a nicer title for the morning after the long weekend than the title of the most recent book I cracked open: Learn Or Die, by Edward Hess.


For those of you who missed the Late-cycle slow-down in the US labor report on Friday, Global Macro markets did not. It’s a big Rates Down, Dollar Down (Commodities Up) morning here in America that we need to risk manage.


We’re on the right side of the rates move, so my primary focus will be risk managing the losing side of the Currency move. Will a bearish TRADE in the US Dollar disrupt our bearish intermediate-term TREND view of Commodities? Learning starts by questioning what it is that we believe.


Always Learning - 44


Back to the Global Macro Grind


When it comes to running money or an independent research firm, I think Hess asks the right question as an opening volley to the aforementioned book: “Learn or Die: Is this just a snappy title or is it a business truth?”


Having run both a buy-side and research company, I’d say that it is an absolute truth. Everyone makes mistakes. Not everyone can recover from not learning from those mistakes.


Since what I believe about Global Macro markets today can easily change tomorrow, I try to put myself in a position of perpetually being open to the idea that Mr. Market’s immediate-term TRADE can change the direction of our intermediate-term TREND views.


With that in mind, the easiest call to reiterate this morning is the one where both the TRADE and TREND agree: lower-for-longer on US interest rates. Here’s how that looked both week-over-week, and in the context of the intermediate-term TREND:


  1. US 2yr yield dropped -12 basis points last week to 0.48% (-19 bps YTD) and remains bearish TREND
  2. US 10yr yield dropped -12 basis points last week to 1.83% (-33 bps YTD) and remains bearish TREND


Whereas the toughest call to make is the counter-TREND move (which was caused by the same employment #GrowthSlowing factor – a weak jobs report) in the US Dollar. Here’s how I’d contextualize that, across durations:


  1. US Dollar Index -0.5% on the wk to 96.80 (+7.2% YTD with bullish intermediate-term TREND support of 93.71)
  2. CRB Commodities Index +0.4% last wk to 216 (-6.0% YTD with bearish intermediate-term TREND resistance of 239)


What makes easy even easier (and tough tougher) is Consensus Macro positioning (in non-Commercial CFTC futures and options positioning terms) right now:


  1. Long Bond (10yr US Treasury) net SHORT position still way too short at -134,579 contracts
  2. EUR/USD net SHORT position at its highest short position of 2015 at -225,776 contracts


In other words, Bond Bears got squeezed on Friday inasmuch as Euro Bears did – and now one major question is will there be follow through on either and/or both? The other, of course, is what do slowing growth expectations mean for US stocks?


If you’re purely playing this from a Correlation Risk perspective (like many of the machines are), answering the question on US Equities is tough too. That’s because shorter-term durations have an inverse correlation, whereas longer-term ones have a positive correlation.


Here’s what I mean by that:


  1. US Dollar Index 30-day correlation to the SP500 is -0.70
  2. US Dollar Index 180-day correlation to the SP500 is +0.73


I could be wrong on this, but what I believe Mr. Market is trying to tell us with that juxtaposition is that for the US stock market to go up longer-term, growth expectations need to stabilize and strengthen. That only happens with a #StrongDollar – not a weak one.


But, if growth expectations continue to fall, at an accelerating rate:


  1. US interest rates will fall
  2. US Dollar will fall
  3. And as expectations for an easier Fed rise, stocks could bounce like commodities just did


If I haven’t confused you yet on the potential for multiple scenarios playing out, across multiple durations, let me speak to you every other day as rates, currencies, stocks, and commodities whip around! This is going to be fun.


In the meantime, the only big macro call that I’ll stay with is being long Long-term Bonds. While I’m always learning about theoretical scenarios where the easiest call to make can be wrong, the only thing that’s been dead wrong there is the Rate Hike consensus.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.80-1.93%
SPX 2039-2076
RUT 1226-1273
USD 96.60-98.80
EUR/USD 1.07-1.10
Oil (WTI) 46.48-51.06
Gold 1181-1227


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Always Learning - 04.06.15

April 20, 2015

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Investing Ideas - Levels

Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction investing ideas.

Investing Ideas - Levels - z levels

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

Anything longer than 3 years is unpredictable.


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Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EWG, ZOES, VNQ, EDV, GS, ITB, TLT, MTW, MUB, RH

Below are Hedgeye analysts’ latest updates on our ten current high-conviction long investing ideas.


Please note 1) we added ZOES and EWG this week and 2) we will send CEO Keith McCullough’s updated levels for each ticker in a separate email.


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


Investing Ideas Newsletter      - China cartoon 04.14.2014



We added ZOES to Investing Ideas on April 14th. Below are the key points to our long ZOES thesis:

  1. Strong brand positioning: Zoe’s is a fast casual concept serving a menu of fresh, wholesome Mediterranean-inspired meals. In addition to being a first mover in the space, the brand primarily appeals to educated, affluent, and active females – a demographic that is traditionally difficult to capture.  With more than 70% of dining decisions in America made by women, Zoe’s is uniquely positioned for success. Zoe’s boasts an unparalleled catering program (16% of sales) that drives, consumer trial, brand awareness, and mix and serves as a direct competitive differentiator versus peers.
  2. Impressive early stage profitability: Zoe's has very impressive early stage profitability for a fast casual concept. In fact, it’s the best we’ve ever seen.  Young, high growth restaurant concepts are typically not very profitable as they face significant investment costs in conjunction with efforts to achieve critical mass in individual markets. Zoe’s was able to generate $120k in restaurant level EBITDA per store at only 84 units. This is a level that took Chipotle 400+ units to reach. In addition, at 102 stores, Zoe’s was achieving higher AUVs ($1.470mm) than both Panera ($1,274mm) and Chipotle ($1,056) did at 113 and 227 units, respectively.
  3. Disciplined growth strategy: Zoe’s has a focused, systematic approach to its new unit expansion strategy that separates it from its competitors.  Aside from stringent requirements, Zoe’s approach to new market expansion is refreshingly calculated. The concept entered into one new market (Philadelphia) in 2013 and 2014 and plans to do the same in 2015 (Kansas City). This rapid penetration approach drives brand awareness and benefits these new units as they ramp. Management has pegged the long-term domestic potential of the concept at ~1,600 units, but the fashion in which they plan to get there is what stands out to us.

CLICK HERE to watch an excerpt from Restaurant Sector Head Howard Penney's conference call with institutional investors where he outlines his bullish thesis on Zoe's. 

Investing Ideas Newsletter      - Slide1


Goldman Sachs (GS) sailed through first quarter earnings this week posting a sizeable beat lead by a rebound in both its trading businesses. Earnings for the firm came in at $5.94 per share, over a $1.50 more than expectations of $4.25.


It has always been a directional guessing game forecasting trading results for the major dealers as there aren’t many independent data series on trends intra quarter, but even the most bullish estimate for GS was too conservative. Relative to JPMorgan (JPM) and Bank of America (BAC) who also printed results this week, GS put up the best year-over-year growth in fixed income trading (or FICC) with +10% growth in the period. This mark compared to the +5% increase at JPM and the -10% decrease year-over-year for BAC.


In addition, GS is not normally known for its equity trading franchise however with $1.1 billion in equity trading revenues in the first quarter, an astounding +170% increase from 1Q14, the company may have taken the mantel from perennial equity leader Morgan Stanley (MS) who reports next week. At a normalized ~12% return on tangible capital, our model spits out fair value for the stock in the mid $250 per share range. 

Investing Ideas Newsletter      - chart10


April Showers


The housing data was mixed in the latest week with the April homebuilder confidence survey (NAHB HMI) putting in a strong sequential improvement, while March Housing Starts were a bit soft. 

  • NAHB HMI:  The National Association of Home Builders (NAHB) released its April Housing Market Index survey (HMI) – essentially a survey of builder confidence – on Wednesday. The print was strong as it showed a nice bounce across all three survey categories: Traffic of prospective buyers, current conditions, and expectations 6 months out. The news coming out of the new home market has been less auspicious YTD based largely on weather dynamics that have depressed activity in the Northeast and Midwest. As such, it was good to see builder optimism pick up in the April survey.    
  • Housing Starts/Permits: Housing Starts were up sequentially in March, but by less than the market expected. Total Starts rose by 2% to 926,000 (seasonally-adjusted annualized rate) from 908,000 in February. Markets, however, were expecting a more substantial increase to 1,040,000. The February starts numbers were severely impacted by winter weather in the Northeast and Midwest. We both expected and saw those regions bounce back significantly in March, as Starts in the Northeast rose 115% month-over-month and Starts in the Midwest rose 31%. The culprit for the March shortfall was the West, where Starts declined 19% month-over-month, and as the West is the second largest of the four building regions in the U.S. (trailing only the South in number of units), this was enough to cause the miss. It’s unclear exactly what drove the decline in the West, but the leading theory seems to be the response to the California drought. Apparently, it’s become more difficult for some builders to obtain building permits based on the new, stricter water usage standards. Additionally, some builders seem to be unclear on exactly what the new restrictions entail from a new construction standpoint. This has had the effect of reducing permit filings and depressing housing starts in California. It’s unclear yet whether this represents a time shift in activity, i.e. Permits and Starts will bounce back once the new water regulations are better understood or whether this represents a longer-term reduction in the amount of new construction we should expect in California.

In short, we continue to like the setup for the sector over the current quarter.

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We added German equities (EWG) to Investing Ideas on April 17th. The key bullet points outlining our view are included below:

  • “QE is only just beginning; the Euro will continue to weaken; Germany will disproportionately benefit due to exports; and asset classes like equities will inflate due to money creation (the German economy sits in the sweet spot to benefit from a weaker euro as its exports account for a monster 47% of German GDP)
  • Since the ECB announced QE on 1/22/15 the correlation between the DAX and EUR/USD is -0.84, a strong negative correlation that we expect to persist as the ECB keeps its foot on the QE pedal for longer than its intended target (late 2016)
  • Recommending long the DAX (HEWG or EWG) and short EUR/USD (FXE)”

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On the domestic fixed income front we’re looking at lower yields for longer. The U.S. 10-Year Treasury yield made another lower high late last week then declined week-over-week to 1.90% (-5bps w/w). Lower yields benefit those slow-growth fixed income cash flows tied to the treasury curve (yields down, bonds up). Four of five tickers in our macro lineup for investing ideas are directly tied to this relationship (And so are German equities but not directly).


Of interest to our call on lower rates for longer, CPI printed NEGATIVE y/y for March on Friday and missed consensus estimates on both a m/m and y/y basis:

  • CPI m/m +0.2% MAR vs. +0.3% est. (+0.2% prior)
  • CPI y/y -0.1% MAR vs. 0.0% est. (+0.0% prior)

TLT, EDV, MUB, and VNQ set-up nicely in a slow-growth, deflationary setting because inflation missing=expectation for even easier policy=More central-planning cowbell=lower yields for longer.

One of our three big topics in the @Hedgeye Q2 2015 macro themes deck, which we presented last week, was #LateCycle USA. A reality you won’t here on mainstream media is that many late cycle indicators (which are labeled as proof of a “booming” economy by some) look best before the crest in the economic cycle. The labor market and corporate earnings are two of these indicators which we analyze extensively.


Jobless claims data, while coming in higher than consensus estimates this weeks, showed another week of sub-300K claims from new applicants:

  • Initial jobless claims increased +294K vs. 280K estimated (+281K prior)

GREAT NEWS! Except that this data series among others in the employment arena paints the rosiest picture of the economy before it peaks. Stick with vehicles to play our #lower-rates-for longer thesis. 

Investing Ideas Newsletter      - chart8

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RH is adding a second store on Greenwich Avenue in Greenwich, CT.  This is proof that the 22k sq. ft. Greenwich store is too small. We will likely see fewer Legacy Store closures as RH continues category expansion.


This is the first time we've seen RH swap out a Legacy Store for a Design Gallery in a market and then supplement the new footprint with an additional concept -- in this case it's Baby & Child. Our analysis suggests that the Greenwich market could support a 65k sq. ft. store. Meaning the current 22k sq. ft. store, while in a great location, and at a significant ROI, could and should be much bigger versus how it exists today in order to capture the market opportunity and properly display the company's expanding category portfolio.


Instead of swapping out the door (the current Greenwich Design Gallery has extremely favorable rent economics -- especially given the prime location) for a bigger store, like we saw in West Hollywood and will see in Houston, RH is adding square footage across the street. The new door at 4,800 sq. ft. is taking over space vacated by Gap Kids (the RH Legacy Store the company closed last year was 5,500 sq. ft.).


More than anything, we think this is a very bullish statement on the success of the Greenwich market. The company would not be opening a Baby & Child concept unless the Design Gallery was crushing it in year 1. Between Baby & Child, 2 new pending concepts (which could merit their own doors), and the addition of Kitchens still TBD, we think we'll see a lot more of this. As in, Legacy Store closures as new Design Galleries open up will be lower than most expect.


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CLICK HERE to see images from the Greenwich Design project.



MTW revised down its 2015 guidance for the Foodservice Equipment segment and preannounced a weaker than expected 1Q 2015.  Sales in the quarter are a noteworthy miss, but we do not believe that the release has relevance for our sum-of-the-parts valuation thesis, and see many reasons to anticipate stronger operating results in 2H 2015.  Basically, we think investors stand to be paid for suffering through this volatility, with potential share price upside on separation ranging from the high 20s to low 40s.


Foodservice: A portion of MTW’s larger foodservice customers have reduced capital spending, hurting first quarter results against tougher comps.  Foodservice laps some key operating issues in 2H 2015, with 1H 2015 still mired in lingering cost challenges. Following robust traffic earlier in the year, February and March traffic was fairly weak.  Still, the Foodservice segment has a significant opportunity relative to current customer capital spending environment as it gets its operations in order later this year.  

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Cranes: However, the MTW release also referenced “pockets of improvement” in the Cranes segment.  This is a positive, since a common investor theme has been the avoidance of crane manufacturers on concerns of weakness in crane demand from the oil patch.  Backlog data, not included in the preannouncement, is needed to get a better sense of Crane segment dynamics, but the tone sounded positive. This matches our expectation that the trajectory of crane demand should have been positive coming out of 1Q15.

Investing Ideas Newsletter      - chart12 


Upshot:  Near-term profit weakness is partly why the shares are ‘cheap’, and we think holders may be compensated well for the volatility. The shares are currently trading lower on a weaker than expected 1Q15, but 2Q15 should show improved Crane segment results and 2H should show better Foodservice Equipment results. With potential share price upside on separation ranging from the high 20s to low 40s, we do not expect the preannouncement to have longer-term relevance.



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replay | germany: still bullish

Earlier this week, our European analyst Matthew Hedrick led a discussion on why we are still bullish on the German equity market.

Investing Ideas Newsletter      - z germany

twitter (twtr): are acquisitions enough?

Internet & Media analyst Hesham Shaaban says TWTR tried to warn consensus, but they weren’t listening.

Investing Ideas Newsletter      - z twtr

Cartoon of the Day: Store, Baby, Store!

Cartoon of the Day: Store, Baby, Store! - Oil cartoon 04.17.2015


U.S. oil supply is a key point in Hedgeye's bearish view of oil over intermediate-term TREND and long-term TAIL durations.

The Week Ahead

The Economic Data calendar for the week of the 20th of April through the 24th of April is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - Week Ahead


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