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Sucking & Guiding

“We are here to guide the public opinion, not to discuss it.”

-Napoleon Bonaparte


By evidence of both his actions and the aforementioned quote, by the time of Napoleon’s self-organized coronation at Notre-Dame on December 2nd, 1804 he wasn’t the same man of The People. Sadly, with most things political power, some level of liberty was lost.


It wasn’t always that way in France. After replacing the aristocracy (The Directory), Napoleon introduced “nobility based on merit – one in which 20% came from the working classes; 58% from the middle classes…” (Napoleon, A Life – pg 465)


Two hundred years later, America is much more like France that it has ever been. After a negative -0.7% GDP report on Friday, both the US government and the un-elected Federal Reserve will be guiding mainstream media opinion this morning, not discussing it.


Sucking & Guiding - GDP cartoon 05.29.2015


Back to the Global Macro Grind


So let’s discuss why the US economic data continues to slow here in 2015. The government has not yet been able to centrally plan away the calendar. It’s June, and it’s not snowing anymore.


Just to get you caught up on the Q2 (non-weather adjusted) US economic data:


  1. US Retail Sales (which represents almost 25% of the GDP report) slowed to 0.9% year-over-year in April
  2. US Durable Goods slowed to -2.3% year-over-year in April
  3. The Chicago PMI got wrecked (that’s a May print) to 46.2 vs. 52.3 in April


To be fair, Chicago’s not all about the Blackhawks right now. The windy city’s debt just got downgraded to junk. And, to be doubly fair, the US Housing data (pending home sales reported last week +3.4% in April) has been as good as the #LateCycle data = bad.


Yeah, being long #LateCycle stuff like inflation expectations and industrial stocks has really sucked for the past few weeks. Then again, that asset allocation has really really really sucked since, well, around this time last year.


Even though the US Dollar slowed its bounce on the bad US GDP report on Friday, bigger picture, it was up for the 2nd straight week, +0.9% to +7.4% for 2015 YTD – and here’s what else happened in macro markets on that:


  1. Burning Euros and Yens dropped -0.2% and -2.1%, respectively (YTD = Euro -9.2%, Yen -3.6%)
  2. Commodities (CRB Index) was -1.1% on the week to -2.9% YTD
  3. Energy (XLE) and Industrial (XLI) stocks led USA losers -1.0% and -1.9% wk-over-wk, respectively


Did I say being long the Industrials during a #LateCycle slowdown sucked? Yep. Big time. Why on earth would you be long anything that is trading on peak-margins as A) the cycle is clearly slowing and B) the US Dollar is strengthening?


To get the US Dollar and Rates right, you do have to get the rate of change in US growth (and its expectations) right. But you can’t ignore what all of these other slowing global economies are seeing from a currency devaluation perspective all the while.


The Brazilian Real, for example, lost another 2.7% of its value last week (it’s -16.6% YTD vs #StrongDollar) and the flailing Russian Ruble had a run of the mill -4.5% currency valuation draw-down.


Right. Right. #LetsNotDiscussThis


Instead, let’s discuss what everyone and their revisionist macro brother was chasing in terms of a narrative (when the German Bund Yield tapped 0.75% three weeks ago; this a.m. = 0.49%) – that “inflation is back and accelerating”, or something like that…


  1. Break-evens (5yr US) dropped 8 basis points and are now down -13bps in the last month to a paltry 1.61%
  2. US 10yr Yield fell another 9 basis points on the week to 2.12% (another -10% correction, on bond yield terms)


I know, I know. Do not tell the Bond Bears that they got plugged calling the mother-of-all-tops in the Long Bond (again). We’re having too much fun front-running this epic mismatch between #GrowthAccelerating expectations and economic reality.


From a sentiment perspective, at least the shorts have been covering their Long Bond positions – here’s the latest Consensus Macro report, in non-Commercial CFTC futures/options contract terms:


  1. Long-Term Treasury (10yr) net SHORT position has been cut in half from -163,965 (6 month avg) to -81,045
  2. US Equities (SP500 index + Emini) net SHORT position has shot up to -56,264 from a +26,103 6 avg (6 months)


In other words, consensus doesn’t believe that the US government can make up another version of GDP fast enough and has expressed #GrowthSlowing explicitly by being A) less bearish on bonds and B) more bearish on stocks.


And if you’re sitting there saying to yourself that this is actually bullish for both stocks and bonds, you’re probably right. All you need is one more bad jobs report and both the Fed and US government is going to guide you to believing that sucking is the new bull case.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.99-2.19%

SPX 2101-2122
USD 96.02-98.39
EUR/USD 1.07-1.13
Oil (WTI) 56.99-61.31

Gold 1173-1200


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Sucking & Guiding - z 06.01.15 chart

The Macro Show Replay | June 1, 2015



Takeaway: A true growth story in regional gaming, finally, ripe with catalysts, same store and new unit growth, and accelerating cash flow


We’re adding PENN to the Hedgeye Best Ideas list as a long.  We see stability in regional gaming revenues over the next several months providing some much needed earnings visibility.  PENN maintains the best new unit growth story in domestic gaming with the opening of the Plainridge casino in Massachusetts in June and the Jamul casino in Q2 2016.  Both properties should well exceed current Street estimates for win per slot and EBITDA.  PENN has a proven track record as the best regional casino operator and recently proved its prowess at successfully opening racinos (casinos at racetracks) with estimate beating Dayton and Mahoning commencing slot operations last year.


The upshot: if we're close to being right on our significantly higher 2015 and 2016 EPS projections ($0.60 vs $0.47 and $1.00 vs $0.74, respectively), PENN has a lot of upside.


PENN: ADDING TO BEST IDEAS - 6 1 2015 6 57 09 AM

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

June 1, 2015

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The Week Ahead

The Economic Data calendar for the week of the 1st of June through the 5th of June 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  - z Week Ahead

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: PENN, GIS, GLD, SHAK, VNQ, EDV, ITB, TLT & HIBB

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


Please note we added Penn National Gaming (PENN) and General Mills (GIS) this week and removed Muni Bonds (MUB).


Also below is a brief, exclusive video from Sector Head Todd Jordan outlining the bullish thesis on PENN.


We feature two additional pieces of content at the bottom. 

Investing Ideas Newsletter      - chart

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      - Lower for longer cartoon 05.28.2015



In the above video exclusive to Investing Ideas subscribers, Gaming, Lodging, and Leisure Sector Head Todd Jordan outlines his bullish thesis on Penn National Gaming



Housing went 3 for 3 as the Trinity of Fundamental Data Points released in the latest week continued to reflect accelerating rates of improvement across both the New and Existing markets.

Investing Ideas Newsletter      - z ho9

To review:   


New Home Sales  

New Home Sales in April rose +6.8% month-over-month to +517K.  More notably, sales were up a remarkable 26% on a year-over-year basis as NHS re-converged back to the trend in New Home construction. Given the favorable comp dynamics (i.e. sales were very soft in the comparable period last year), it’s likely we see similar numbers from a rate-of-change perspective in the coming months.  For context, if sales were to hold flat at current levels, year-over-year growth would come in at +12%, +25% and +28%, respectively, over the May-July period.   


Pending Home Sales  

PHS rose +3.4% sequentially in April, accelerating to +14% year-over-year with the Index making a new 101-month high.  Pending Home Sales represent signed contract activity and are a historically strong lead indicator of Existing Home Sales  The relationship is commonsensical and mechanical;  whereas Pending Sales represent signed contracts, Existing Sales measure actual closing – which typically occur 4-8 weeks after contract receipt.  Given the recent tendency for EHS to re-converge to PHS (see chart below) following short-term dislocations, a second month of burgeoning divergence between the two series argues for upside to Existing Sales over May/June (next release on 6/22). 


Purchase Application  

The MBA’s weekly Mortgage Purchase Application Index re-captured the 200-level, rising +1.2% week-over-week and accelerating +250bps sequentially to +13.1% year-over-year.  2Q15 is currently tracking +14.1% QoQ and +13.2% YoY and remains on pace for the best quarter since 2Q13.   Further, the high-frequency purchase application data suggests the strength reported in New and Existing Sales for April extended into May.   


Investing Ideas Newsletter      - z EHS vs PHS 


Editor's Note: The update below was written by Senior Macro Analyst Darius Dale.

Counting Down to Recession?


Let’s play the riddle game.


Q: What happens when the preponderance of economic data is: A) slowing on both a sequential and trending basis, B) consistently and fervently missing expectations and C) just plain bad (like this morning’s 1Q GDP revision, for example)?


A: You double seasonally adjust it and make it better.


Q: What happens when the economy is: A) in the latter innings of an above-average length economic expansion (Z-Score = +0.4x vs. all cycles over the past century to be exact), B) slowing into extremely difficult base effects that should perpetuate the slowest annual rate of nominal GDP growth since 2009 and C) mired with a myriad of [horribly misunderstood] secular headwinds?


A: The Fed hikes rates on that.


LOL! (pardon the millennial in me)


Regarding the first question, the consistent and fervent missing of expectations for economic data is eerily reminiscent of the start of 2007 when it just continued and continued and continued until the cycle completely rolled over.


Investing Ideas Newsletter      - z economic SURPRISE DD


Regarding the second question, trends across a variety of indicators put us roughly ~12 months away from recession.


Investing Ideas Newsletter      - z recession watch


That may sound like good news to investors, but our predictive tracking algorithm has YoY real GDP growth slowing throughout the balance of 2015. In lay terms, we believe the U.S. economy is past peak in rate-of-change terms and sliding down the slope to an eventual cliff (i.e. recession). That’s our call and we’re sticking to it.


Friday’s negative revision takes our full-year estimate for real GDP growth down to +2% (from +2.3% prior). Both the Fed and Street are up at +2.5%, both of which continue to careen down from perpetual expectations of rainbows-and-puppy dogs (i.e. 3-plus percent growth) earlier this year.


Investing Ideas Newsletter      - z deja vu DD


All told, we reiterate our call to be long of long-duration in its many forms: TLT, EDV, VNQ and GLD (gold has historically performed well in down-dollar and down-interest rate environments and we think the June 17th FOMC statement has a high probability of being dovish and dollar-bearish).


We added General Mills to our investing ideas list this week and are are very bullish on the strength of their brands and the long-term growth potential of the stock.


The 2015 fiscal year was a busy one for GIS as they underwent a major restructuring project in addition to the $820MM acquisition of Annie’s.


Investing Ideas Newsletter      - g 44


We see multiple ways this company can win:


  1. The current management transforms into an Activist management team - 15% chance
  2. Fundamentally – Gluten Free Cheerios is a home run – 20% chance
  3. Management sells the company – 15% chance
  4. An Activist shareholder takes a position  – 50% chance


Management needs to start focusing (temporarily) on their non-core assets that represent roughly 28% of the portfolio such as, Pillsbury, Gold Medal, Green Giant and Progresso.  Divesting these brands would free up resources and provide greater capital to acquire a strong high growth business.


GIS is a company known for great brands. Consumers are proving that once again. The company is growing share in key categories this year with grain snacks dollar share up 187 basis points (bps) versus last year, yogurt up 75 bps and Ready-To-Eat (RTE) cereal up 31 bps. GIS is often a leader in the categories in which they compete and they are continuing to show their strength.


Selling the company is an option, albeit an unlikely one given the current valuation. If the price were to slip a little, some big players in the market will take a harder look at it. This is also the case for an activist coming on board, for someone willing to put in the work there is still plenty of meat on the bone, but most would probably want to see a pullback in the stock before taking a major position.


Bottom line is this stock is built for growth and with it currently paying a generous 3.1% dividend (which has never been decreased or interrupted) it is a worthwhile bet that this ship will turn.


Restaurants Sector Head Howard Penney may be Wall Street's biggest bear on shares of Shake Shack. His uber-bearish view remains that the market is placing entirely too much value on SHAK's differentiated burger concept. He remains confident that the stock is set for a mighty fall.


Hibbett Sports remains one of our top shorts in the retail space. These are the 3 key points we are thinking about as it relates to the call…




HIBB grew up with a niche strategy that gets to maybe 500 stores, during the biggest ASP (average selling price) boom cycle the athletic industry has ever seen. Unfortunately, it is at 1001 stores now and facing much more competition – for stores and customers – that it has ever known. It is the only retailer to have zero presence in a space that is rapidly moving online.




Its 3% hurdle rate to leverage occupancy should drive margins lower given the absence of organic sales growth. If HIBB chooses to go online, it’s likely a 300bps hit to margins. And then it has the call option to book dot.com sales at a margin that is 500bps-1000bps dilutive. This all matters given that HIBB is sitting on an industry leading 12.5% margin. Over the duration of our model we have margins headed to 5%.




This is as close to a perma-short as we have seen in years. But, the consensus estimate is $4.52 four years out. We’re at $1.45. That 70% variance is the biggest we’ve ever modeled for a retailer. A low teens P/E on our number gives us a stock ultimately in the teens. Even at that level, we’re looking at a somewhat expensive mid-single digit free cash flow yield. HIBB is not an LBO candidate. All we worry about is navigating around the quarterly earnings gyrations. But the end game is clear.


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yelp: the new major red flag

The fact this is even remotely an issue suggest this story is going to turn much sooner than we initially expected.

Investing Ideas Newsletter      - z red flag

FUND FLOWS: defensive team on the field

Investors moved defensively last week, making net withdrawals from all equity products and shoring up cash in money market funds.

Investing Ideas Newsletter      - z 56

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