General Confusion

This note was originally published at 8am on May 04, 2015 for Hedgeye subscribers.

“To be a good General, you must know mathematics.”



If macro markets haven’t been confusing you as of late, give me a buzz. This 5’9 General needs to know the math that gave you clarity!


Napoleon went on to say that mathematics “serve to direct your thinking in a thousand circumstances” (Napoleon, pg 11). And in attempting to risk manage Global Macro markets, it’s tough to disagree with that.


The math simply gets tougher when correlations start to break-down. While they are not collapsing across durations (yet), correlations between the US Dollar, Rates, and Equities definitely don’t look like USD vs. Commodities do. That’s new. Welcome to a new week.


General Confusion - a.nap


Back to the Global Macro Grind


I’ll get into the point about correlations in a minute, but first let’s look at the FX move, in context:


  1. US Dollar Index dropped another -1.7% on the week, taking its 1mth correction to -2.9%, but still +5.6% YTD
  2. Euros (vs. USD) got squeezed +3.0% wk-over-wk, taking its 1mth rally to +4.1%, but still -7.4% YTD
  3. Canadian Dollar inched up another +0.2% on the week, taking its 1mth bounce to +3.8% (still -4.4% YTD)


In other words, whether it was priced in what became the most Consensus Macro FX position (short Burning Euros post the drop to $1.05 vs. USD in March) and/or a Commodity Currency like CAN/USD, that was one heck of a 1-month move.


The impact on macro markets, however, was not homogenous from a correlation perspective:


  1. CRB Commodities Index +1.7% last wk = +5.5% 1-month, but -0.9% YTD
  2. Oil (WTI) up another +3.5% last wk = +14.3% 1-month = +6.3% YTD




  1. Gold 0.0% last week = down -2.8% in the last month to -0.9% YTD
  2. UST 10yr Yield = +20 basis points last wk to 2.11% = down -6 basis points YTD


It’s pretty easy to argue that Gold doesn’t work when Bond Yields rise as market #history suggests that the absolute return of Gold then has to compete with higher yields. It’s harder to argue why USD and Bond Yields moved in the opposite direction.


So let’s go there and put the US 10yr Treasury Bond Yield move in the context of Global Yields:


  1. Germany’s 10yr Yield was +22 basis points (bps) on the wk to +0.36%
  2. Netherland’s 10yr Yield was +22bps wk-over-wk to +0.52%
  3. Austria’s 10yr Yield = +23bps wk-over-wk to +0.50%
  4. Belgium’s 10yr Yield = +22bps wk-over-wk to +0.65%
  5. Canada’s 10yr Yield = +22bps wk-over-wk to 1.66%
  6. Australia’s 10yr Yield = +15bps wk-over-wk to 2.68%


Not only was that a completely correlated move across bonds markets (un-correlated to the USD Down move), it was the biggest week-over-week percentage gain in Global Yields, ever.


And while I’m sure the next thing an absolutist will say is “but it’s from a low level”, that doesn’t matter when most of the institutionalized world runs money and chases returns, on a relative basis!


Yes, math majors who specialize in mean reversion history will also keenly note that “ever” is a long time. And for that reason alone I think it’s fair to say that US Bond Yields weren’t charging to lower-highs on bullish US economic data.


To the contrary, actually, the ISM report for the US that was reported on Friday was still plenty slow at 51.5 APR vs. the same in MAR (and it didn’t snow in April). Moreover, the employment component of the ISM slowed to sub 50 at 48.3.


That makes this week’s US jobs report all the more important as almost everyone I talk to thinks that the non-farm payrolls recover month-over-month (even though almost none of the Global Macro data did!).


Confused yet?


Just to add some Consensus Macro color to where the crowd is positioned coming into this week, here’s the most recent CFTC (non-Commercial) futures and options positioning:


  1. Russell 2000 net SHORT position at its lowest level of 2015 at -5,486 contracts (6mth avg -25,989)
  2. 10YR (US) Treasury net SHORT position at its lowest level of 2015 at -115,917 contracts (6mth avg -158,559)
  3. Crude Oil net LONG position tracking around its highest level of 2015 at +371,486 contracts (6mth avg +306,931)


This tells me (partly) why the Russell 2000 was the dog of the US major indices last week (many covered shorts high and are now too long small/mid caps lower) and what Bond Bears really think (i.e. they don’t think rates go up a lot from here).


As for people who are in the business of being bullish on Oil. There are many. There are also many, many, more Americans whose confidence and real-spending power slows alongside rising gas prices and a general confusion about markets vs. economic reality.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.86-2.12%

SPX 2087-2117
RUT 1217-1250
VIX 11.77-14.84
USD 94.25-96.71
EUR/USD 1.05-1.13
Oil (WTI) 54.62-60.15


Best of luck out there this week,



General Confusion - 05.04.15 chart

CHART OF THE DAY: What #Gold Loves

Editor's Note: The chart and brief excerpt below are from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here for information on how you can subscribe.  


"...On the heels of an ugly Retail Sales slow-down to 0.9% year-over-year growth (and the worst US Consumer Confidence report of the year via the University of Michigan), this is what the big macro stuff did last week ... US Dollar Index -1.8% on the week (and now -5.3% in the last month) ... Gold +3.1% on the week to $1225


That last one (Gold) was the best performing of the Dollar Down inverse-correlation-love lot … primarily because there was this extra-cherry on top that Gold loves more than anything else. It’s called Down Rates..."


CHART OF THE DAY: What #Gold Loves - z 05.18.15 chart

Constructively Dissatisfied

“You are, in a word, constructively-dissatisfied.”

-Jim Casey


After editing the founder of UPS’s famous business-building quote I am, in two words, constructively dissatisfied this morning. It’s the last citation I wanted to highlight for you from one of the better books I’ve read this year, Learn or Die, by Edward Hess.


Per Casey via Hess, here’s the UPS DNA: “Learn, Improve and Adapt” and there are “four primary strands: 1. Mutual Accountability 2. Constructive Dissatisfaction 3. Process Improvement and 4. Employee Centric Culture.” (pg 180)


Casey’s people-model isn’t perfect. No one’s is. But it certainly worked for him and his team. For me, it’s transparency, accountability, and trust. And I can’t give lip-service to that. My teammates and I need to live that out loud, every day.


Constructively Dissatisfied - ztree


Back to the Global Macro Grind


Let’s say I was constructively dissatisfied with how last week went for Global Macro markets. Constructive because I think we made the right research pivot on Dollar Down, Commodities Up. Dissatisfied because devaluing the Dollar isn’t the answer for America’s stagnating economy.


On the heels of an ugly Retail Sales slow-down to 0.9% year-over-year growth (and the worst US Consumer Confidence report of the year via the University of Michigan), this is what the big macro stuff did last week:


  1. US Dollar Index -1.8% on the week (and now -5.3% in the last month)
  2. Euro (vs. USD) +2.3% on the week (and now +7.2% in the last month)
  3. Commodities (CRB Index) +1.0% on the week (+6.9% in the last month)
  4. Oil (WTI) +0.5% on the week to $59.69 (+15% in the last month)
  5. Gold +3.1% on the week to $1225


That last one (Gold) was the best performing of the Dollar Down inverse-correlation-love lot … primarily because there was this extra-cherry on top that Gold loves more than anything else. It’s called Down Rates.


Down Rates finally did what they usually do and correlated positively with Down Dollar on slowing US economic data, with the 10yr US Treasury Yield dropping from an intra-week-freak-out-high of 2.36% to 2.14% as economic gravity won, again.


On Friday, the Down Dollar, Down Rates move looked a lot like 2011 all over again. Remember that? Markets did. Financials (XLF) -0.4% on the day vs. Utilities (XLU) +1.3%. It’s the Fed is going to stay Lower-For-Longer move that Hilsenrath confirmed in the WSJ this morning.


Back to the week-over-week moves and how those synched in the land of Global Equities:


  1. US Financials (XLF) were down in an up tape, -0.2% on the week, staying in the red for the YTD at -0.1%
  2. US Healthcare (XLV) continued to outperform beta, +1.1% on the week to +8.6% YTD
  3. European Stocks (EuroStoxx600) flashed another bearish divergence vs Global Equities -0.9% wk-over-wk
  4. Germany’s DAX lagged its European continent bogey, falling -2.2% on the week
  5. Emerging Market Stocks (MSCI Index) flagged another bullish divergence vs Global Equities +0.8% on the week


Yep, Down Dollar = Up Euro à Emerging Market Equities beat European Equities.


If you didn’t pick-up on the year I called out, let me hammer the num-lock pad on that one more time: 2011. That was a big year for both Gold and Emerging Markets. It was also a very bad year for Europe and US Financials.


2011 was the year of stagflation being priced into US Federal Reserve Policy. It was the year where the initial Quantitative Easings didn’t provide the centrally planned elixir of a real US growth “recovery” … and The Bernank had to deliver more QE Cowbell.


As markets front-ran the next QE, the US Dollar burnt to a crisp (not mentioned once by big Ben in any of his statements, but it was a 40 year low) and Gold hit its all-time highs. US interest rates hit all-time lows and the Financials posted their widest losses vs. Utilities, ever.


Constructively dissatisfied with that?


If you’re a money manager, maybe not. “Fighting” an easier Fed (read: pushing out the dots, from here, would be an easing, on the margin) has proven to be elusive for most who have expressed their bearishness in 2009-2015 Zero Hedge Bear terms.


But if you’re looking for mutual accountability between policy makers and economic outcomes, you can UPS that request in the mail and kiss it goodbye. Until we have real leadership in this country that gets the difference, in real Dollars, it’s The People’s purchasing power that loses.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.95-2.22%

SPX 2100-2131
RUT 1211-1251
USD 92.84-94.44
EUR/USD 1.10-1.14
Oil (WTI) 55.97-61.57

Gold 1198-1231


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Constructively Dissatisfied - z 05.18.15 chart

Early Look

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May 18, 2015

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Takeaway: HAIN can’t cut G&A and be a company that is built to last.

HAIN in on the HEDGEYE Best Ideas as a SHORT!

Being short HAIN has been the pain trade for me. 


That being said, the FY15 financial performance (negative earnings revisions and declining margins) over the past 12 months does not warrant a multiple expansion.  Unfortunately, over the past 12-months the NTM EV/EBITDA multiple expanded from 13.6x to 16.8x today.  At the time of our SHORT call we argued the company was overvalued because the international business (UK) was a slow growing, low margin food business that did not deserve to trade at a U.S. Organic food company multiple.




The exact opposite happened!


To that end, our thesis has not changed but has strengthened over the past six months.  The company continues to provide little evidence that they have a sustainable business model, additionally management does not disclose the basic information analysts need to understand what the real organic growth rate is.  We believe that there are structural impediments to future margin improvement, making the bull case even more suspect.  The biggest impediments to margin expansion are:  

  • Global geographic diversification put pressure on margins
  • The two most recent acquisitions are low margin protein businesses
  • The limited supply of global Organic ingredients is hurting gross margins
  • Increased trade spending will lower gross margins

According to the current sell-side models the HAIN business model will look very different in FY16 versus the past four years.  Frankly, I have no explanation for the change in the sell-side logic other than they need to be bullish on the stock due to its Natural & Organic attributes.


The key components to the changes are:

  • Gross margins will expand in FY16 after declining for the past four years
  • The company will not be cutting SG&A any more
  • Operating margins will expand in FY16 after declining in FY15

The following is a look at why the current models are too aggressive in FY16:


Over the course of six quarters (to establish its international business), HAIN bought four international businesses for a total of $600 million. 

  1. October 29, 2012 (2Q FY13) HAIN acquired Premier Food and Jams for $315.8 million. 
  2. On April 27, 2012 (4Q FY12) HAIN acquired Cully & Sully Ltd. for $19.8 million. 
  3. On October 25, 2011 (2Q FY12) HAIN acquired Singapore Food Industries Ltd. from SATS Ltd., for $254.5 million.
  4. On October 5, 2011 (2Q FY12) HAIN acquired Europe's Best, Inc. from The J. M. Smucker Co.

Importantly, none of these businesses are organic or all-natural.  This is in direct conflict to the U.S. business which is primarily Organic and the reason why the UK business should trade at a lower multiple. 


Collectively HAIN’s new international businesses are producing low single digit operating margins, while the U.S. is running at 17%.  Going forward, with the company now seeing 20% of its revenues coming from international with 1/3 of the margins and another ~12.3% from its latest protein acquisitions with mid-single digit margins it will be hard to grow overall margins.  To summarize, HAIN can’t cut G&A to offset the gravitational pull of lower margins or it will sacrifice performance in other areas of the company.   



For the past three years HAIN gross margins have been declining at a fairly steady rate.  Since 2Q FY11 the company’s adjusted gross margins have declined from 29.3% to 26.6%, or 270bps.  Gross margins are under significant pressure from commodity headwinds, mix shift and increased trade spending.  We don’t see these issues abating in FY16.  The current consensus sees a dramatic shift in HAIN’s gross margins in 1Q FY16.  What has changed in order for management to guide to better gross margins in FY16? 





Can any company cut G&A at the rate HAIN has and sustain critical mass?  Does outsourcing G&A functions create sustainable long term advantage?  I feel this is a big risk to the HAIN business model!


Prior to making the series of international acquisition in FY12 HAIN had not relied on G&A cuts to drive margin expansion.  Obviously when they acquired lower margin business they need to cut significant amounts of G&A to prevent the overall margin structure of the company from collapsing.  Until FY15 they have achieved the intended goal.


Prior to 2QFY12, over the previous five quarters HAIN had only cut G&A by 9bp.  Since 2QFY12 the need to cut significant amounts of G&A has become critical to the overall story.  From 2QFY12 to 3QFY15 the company has experienced on average 132bps reduction in G&A.  Over that same time G&A has gone from 18.7% to 13.45%, or 496bps. 


Over the past 12 months HAIN’s G&A has run has 13.75% of sales, as compared to 20% for most of HAIN non-organic companies and 23% for the biggest organic companies.  Either HAIN has figured out a better mouse trap or this company is structurally set up to fail.    


Now the company is in a very difficult position, the margins internationally have stopped improving and there is incremental pressure on the margins in the U.S. business.  HAIN can’t cut G&A and be a company that is built to last. 





Looking forward into FY16 the street consensus has HAIN returning to growth in operating margins.  The improvement is entirely coming from improved gross margins, which seem counter intuitive to what is happening in the market place.    

HAINS LTM EBIT margins have gone from 9.5% in 4QFY11 to 11.6% in FY4Q15.  In FY15 LTM EBIT margins have gone from 11.8% to 11.6%.  FY15 will represent the first time in 4 years that the company has not shown margin improvement.  Why will the trajectory change in FY16? 




Our bottom line for HAIN is that the margin story is over!


When the music stops it going to be real ugly!



The following charts are a look at the top line growth rate for the HAIN’s important regions.  As you can see the two most important markets U.S. and UK are showing a significant slowdown in revenue growth.  Importantly, the UK business revenue growth is estimated to slow 1% over the balance of FY16.  What is the organic growth rate of a company with 1% revenue growth?  And why should it trade at a premium multiple?  Even the U.S. business is slowing to the mid-single digits.  Again, the company organic growth will not be in the high-single digits in FY16.  









What do you pay for a company that is seeing a significant slowdown in revenues and can only grow margins by cutting massive amounts of G&A? 


I understand that my bearishness on HAIN ignores the roll-up story and all the hype surrounding the growth taking place in the organic market.  At best the UK business is seeing low single digit organic growth of 1-2 and high single digit operating margins.  We believe the UK business should trade at a significantly lower multiple than the U.S. business.


Our sum of the parts table is below:




REPLAY | Is A Significant Headwind For The Healthcare Sector Coming Soon? $ZMH $ACA

Hedgeye Healthcare Sector Head Tom Tobin and Analyst Andrew Freedman hosted a live Q&A session in our studio today.


They discuss how the Affordable Care Act (ACA) will be an emerging headwind for Zimmer Holdings (ZMH) in 2015, and likely create a tough environment for the Healthcare sector as a whole.

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