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CHART OF THE DAY: Cowbell & Cannons! (German Bund Yields)

Editor's Note: The chart and excerpt below are from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to begin subscribing and staying a step ahead of consensus. 


"...Unless it’s different this time, Volatility ↑ + Illiquidity ↑ doesn’t end well...


...Cannons, as in unadulterated and obliterating launches of money printings and bond buyings. Cowbell, as in “whatever it takes” when German Bund Yields (10yr) double, in 72 hours!..."


CHART OF THE DAY: Cowbell & Cannons! (German Bund Yields) - z 06.05.15 chart

Cowbell & Cannons!

“To cannon, all men are equal.”

Napoleon Bonaparte


If the 2015 “call” on macro markets has been that bad news is good, what happens when bad news is bad? Yesterday was ugly, globally. Darius Dale did a good job outlining why from a global #GrowthSlowing perspective.


But what about from a “liquidity” perspective? It’s one thing for strategists to be telling you that European Yields are rising because “inflation is back.” It’s entirely another for others to say that’s happening because growth is too.


If both of those lines of reasoning are wrong, and the real reason is the beginning of a liquidity event coupled with #LateCycle growth slowing… to most portfolios, this is going to feel like cannons. Unless it’s different this time, Volatility ↑ + Illiquidity ↑ doesn’t end well.


Cowbell & Cannons! - z canon

***Click here to watch The Macro Show at 8:30am ET with Director of Research Daryl Jones.


Back to the Global Macro Grind


By characterizing European growth and #Deflation risks the way he did, I think un-elected-central-planning-overlord Draghi made his first huge mistake on Wednesday. He tried to talk down stock and bond market volatility, so both ripped!


I’ll say this until I’m dead (so bear with me in the meantime): in the long run, central planners cannot smooth economic gravity and/or control market volatility.


On that front, one of the biggest mistakes Bernanke made between 2006-2011 (too high on growth expectations; too low on volatility expectations) was the same one Draghi is making right now.


If I’m right on Slower-For-Longer (on growth), but wrong on Lower-For-Longer (on rates), that may very well mean we have finally reached the beginning of the end of bad-news-is-good.




A)     That would mean real-time growth forecasts and expectations are getting cut (like they are starting to now)

B)      And markets are starting to believe central planners have lost control of the short-term control mechanism for that


To be crystal clear on what that control mechanism is – it’s cowbell and cannons.


Cannons, as in unadulterated and obliterating launches of money printings and bond buyings. Cowbell, as in “whatever it takes” when German Bund Yields (10yr) double, in 72 hours!


In the absence of both, what do you get? (see your portfolio returns from yesterday for details)


While many of you have rightly risk managed markets since 2009 by understanding the basic mechanisms of bad news = more cowbell/cannon = good (for stocks), here’s the last month in Global Equities:


  1. Dow Transports -3.6% month-over-month
  2. Hang Seng -3.5% month-over-month
  3. South Korea’s KOSPI -4.6% month-over-month
  4. Poland’s stock market -5.7% month-over-month
  5. Brazil’s stock market -5.9% month-over-month
  6. Argentina’s stock market -8.8% month-over-month


Bull markets in Global Growth? Cherry picking? Not really. If this table of 6 channel checks isn’t in your “global growth is accelerating” note to clients, at least we agree to agree you’re obfuscating reality in order to appeal to the bullish proclivities of your base.


The best month-over-month performer in Global Equities is the Shanghai Composite Index at +16.9%. So, if you want to really make some perma bulls some money, you should just call it A) what it is and B) what it has been – Moarrr Cowbell!


At this point, the Chinese are coming out with it daily. That’s right Chinese margin broker. You go bro! That’s how you do this. We taught you how to do this. You get it. So pump it!


Japanese stocks keep working because the BOJ gets the joke too. In both Europe and the USA (where secular demographic slowing is as obvious), extending and pretending that “growth is back” is only going to turn the cannon on the Fed and ECB themselves.


Our immediate-term Global Macro Risk Ranges are now (with our intermediate-term TREND views in brackets):


UST 10yr Yield 2.02-2.39% (bearish)

SPX 2085-2111 (bullish)
RUT 1 (neutral)
Nikkei 209 (bullish)
VIX 13.51-15.75 (bullish)
USD 94.88-96.80 (neutral)
EUR/USD 1.07-1.14 (bearish)
YEN 123.66-125.62 (bearish)
Oil (WTI) 56.80-61.48 (bullish)

Natural Gas 2.53-2.69 (bearish)

Gold 1170-1205 (bullish)
Copper 2.65-2.79 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Cowbell & Cannons! - z 06.05.15 chart

It Gets Late Early

This note was originally published at 8am on May 22, 2015 for Hedgeye subscribers.

“It's tough to make predictions, especially about the future.”

-Yogi Berra


Yogi turned 90 last week.  Hedgeye will turn 7 in June.  From the mound to markets, deep simplicities and pithy aphorisms are still ageless. 


When Berra donned post-war pinstripes en route to 3 AL MVP’s, 18 All-Star appearances and 13 World Series championships, the U.S. was enjoying a productivity boon, the demographic tide was just beginning to come in, the middle class was ascendant, Buffett was still small enough to perform and the prospects of rising household leverage and modern central banking carried an air of secular opportunity. 


“The Future Ain’t What It Used to Be”


It Gets Late Early - Housing Signal


Back to the Global Macro Grind...


Hedgeye’s formal coverage of the Housing sector turned 1 last week and I’ve chronicled our evolving investment view of the sector recurrently in the Early Look over the last year. 


Our 2Q15 Housing Themes call, which we presented back on April 2nd, was titled “If it Ain’t Broke” … the allusion being that our reversal from bear to bull in late 2014 was working with Housing outperforming every other sector through 1Q15 and the fundamental strength looked set to continue. 


The core of the 2Q call could be sufficiently captured in the context of the following four factors:    

  • The Data:  The cocktail of easy comps, improving fundamentals, credit box expansion and rebound demand (i.e. deferred housing consumption due to weather) should conspire to drive accelerating rates of change in reported housing data in 2Q. 
  • The Dilemma:  Housing equity performance shows pronounced seasonality with 4Q/1Q being periods of marked outperformance and 2Q/3Q generally being periods of relative softness.  At the same time, the implementation of new TRID regulations on August 1st could emerge as a mild-to-large speedbump to reported activity.
  • The Distillation:  The convergence of performance seasonality and new regulation (TRID) – along with emergent issues such as the California drought and step function back-up in global bond yields - pose a collective risk to housing activity into the end of 2Q.  While we remain mindful of those quasi-latent risks, it’s likely accelerating rates of change in both demand and price dominate investor mindshare in the more immediate-term.  
  • The (tactical) Decision:  Let’s stay long accelerating improvement in the immediate-term and then look to lower exposure into the collective crescendo of concern as it builds into mid-late summer

To frame it another way:  If I told you housing would put up the best rate of change numbers in all of domestic macro – and, arguably, in all of global macro – would you want to be long or short that?


So, how has the data come in thus far in 2Q? 

  • Housing Starts:  New 7-year high in the latest month
  • Purchase Applications (existing market):  2Q15 Tracking +14% QoQ and +13% YoY, on pace for best quarter in two years. 
  • Pending Home Sales (existing market):  PHS are up an average of +11.8% year-over-year the last two months
  • New Home Sales (new market):  NHS are up an average of +22.5% year-over-year the last two months
  • HPI:  After a year of discrete deceleration in home price growth in 2014, 2nd derivative HPI has seen 3 consecutive months of acceleration through the latest March data. 

How have the stocks performed?

  • April (Rate Rise + Builder Margin Concerns):  Of the four categories we profiled in our 2Q themes call as being beneficiaries of Housing's ongoing improvement, only one, the Mortgage Insurers, beat the market in April.  The builders underperformed significantly and the Title Insurers and Home Improvement chains underperformed moderately.
  • May:  Housing got its mojo back in May, rebounding strongly over the last couples weeks alongside the moderation in rates and ongoing strength in reported price/volume data.

The somewhat confounding part is that even if I knew then, what I know now in terms of how the fundamental housing data would come in in 2Q, I would have made the same decision to lean long in April.   


What about Existing Home Sales yesterday, that missed right?


EHS in April were certainly underwhelming, missing estimates and declining -3.3% sequentially (although they were still +6.1% YoY).  Below is how we contextualized the data in our institutional note yesterday:


Here’s the primary issue at play:   Pending Home Sales and Existing Home Sales have shown recurrent bouts of divergence and re-convergence in recent quarters.   Definitionally, Pending Home Sales (PHS) represent signed contract activity while Existing Home Sales (EHS) represent actual closings.  The two measures are invariably tethered and, given the mechanical nature of the relationship, PHS serve as a strong leading indicator for EHS with the relationship strongest on ~1mo lag. 


There is some chop in the data from month-to-month but, absent some acute shock to the qualifying ratio, the two only diverge for so long and so much in magnitude before re-convergence between the two series occurs.  Practically, this can only occur in a few ways – one series can fully re-couple with the other on a lag, both see subsequent revisions in opposite directions and/or both series (for whatever reason) move in opposite directions with spread compression from both directions.  


As can be seen in the Chart of the Day  below, the recent tendency has been for EHS to re-converge with PHS.  Given the prevailing pattern, unless PHS in April (released 5/28, next Thursday) are very soft and/or March sees a significant negative revision, the path of least resistance is for upside in Existing Sales over the next couple months.  Further, the trend in the high frequency mortgage purchase application data, which is currently running +14% QoQ and +13.3% YoY, argues in favor of that expectation more so than not.   


Universality is the hallmark of acute observation.  Clever linguistics provide the effervescence and perdurability.   Ahead of the holiday weekend – and just because they’re good – I’ll leave you with a few of Berra’s best (annotated with associated investment applicability):


“It gets late early out there” (counter-cyclical investing… remember, the data always looks best before the crest)


Nobody goes there anymore because it’s too crowded” (consensus’s thinking about consensus’s positioning)


“You can observe a lot just by watching” (no annotation needed)



Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.97-2.24% 

SPX 2110-2144 
RUT 1233-1267 
USD 92.92-96.17 
EUR/USD 1.10-1.15 
Oil (WTI) 56.98-61.64 


Have a great weekend!


***Click here to watch The Macro Show live at 8:30am.


It Gets Late Early - EHS vs PHS

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The Macro Show Replay | June 5, 2015



June 5, 2015

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ZOES: Cooks up Something Big

Takeaway: They continue to prove that they are some of the best operators in the industry.

ZOES in on the HEDGEYE Best Ideas list as a LONG


ZOES delivered a fantastic quarter, exceeding our already bullish expectations.  The company beat on nearly every metric, driven by same-store sales, climbing to 7.7% beating consensus by 180 basis points (traffic was up 3.7%). Coupled by top ($63mm vs. consensus $61.4mm) and bottom line beats ($0.7mm vs. consensus -$0.1mm), there was nothing to complain about in this one.


Management increased its full-year 2015 guidance, including higher 2015 revenues of ($218mm to $223mm vs. prior $215mm to $220mm) and vs. consensus $219.9mm.  The higher revenues growth is driven by high-quality 2015 comps of 4.0% to 6.0% vs. consensus +5.1%, but which now incorporates no new pricing in 2H15.  Management also guided to higher restaurant contribution margins of 20.0% to 20.5% vs. 19.7% to 20.2% and new 2015 new store development of 31 to 33 vs 30 to 33.


As shown in the table below, they are effectively growing there business, while intelligently managing cost line items, to maintain a healthy company.


ZOES: Cooks up Something Big - Chart 1 zoes


Same-Store Sales Composition

Same-store sales increased 7.7% during Q1 FY15, consisting of a 3.7% increase in traffic, a 2.8% increase in product mix and a 1.2% increase in price. Since the price increases were taken last year, that consideration will go away this July, leading to management aiming for 4-6% comp sales growth for FY15. The two biggest contributors to mix were catering and new flavors of hummus.


ZOES: Cooks up Something Big - Chart 2 zoes


Controlling Costs

We came out of this earnings report being very positive about management doing all the little things right. They continue to prove that they are some of the best operators in the industry. Importantly, many small cap restaurant companies with an undisciplined unit growth strategy experience significant labor inefficiencies as they expand. ZOES is in a different class of companies.  In a quarter where ZOES opened 12 new company-owned restaurants they managed to decrease both COGS and labor. 


COGS were down 140 basis points, primarily driven by new annual pricing agreements for produce, feta cheese and olive oil. Although some of these Q1 savings will be partially offset by rising chicken prices (which have increased in Q2 by 15% sequentially since Q1). The company is projecting full year COGS to be slightly above 32% which would be flat relative to last year. This is virtually unrelated to avian flu, per or thought leader call, only 1% of chickens used for their meat have been infected. Additionally, eggs represent roughly 1% of COGS, making those price increases insignificant.


Labor costs are obviously a growing concern around the country but ZOES has been methodical about this cost line.  They track labor on a daily basis, run labor matrices, and have become much more efficient at opening stores.  They expect this number to increase slightly as they have added an additional manager at seven high volume locations, to build out the bench of managers to enable future growth. This extra cost now will pay off greatly in the future.



ZOES was added to our Best Ideas list as a long on 4/02/15, admittedly since then the stock hasn’t moved up much, just about 3.8% but the underlying thesis is being confirmed.


LTM Stock Price Performance


ZOES: Cooks up Something Big - Chart 3 zoes


We still like ZOES on the long side for many reasons, including its:

  • Superior brand positioning
  • Management philosophy and execution
  • Unit opening geographic profile
  • Early-stage average unit volumes and returns


We want to close this note with a quote from the CEO that describes the basis for our bullish stance. “Zoës is a differentiated concept offering wholesome, freshly prepared Mediterranean dishes with Southern hospitality, appealing to guests across the country and inspiring them to live Mediterranean. We continue to bring this Mediterranean lifestyle to more guests, opening 12 new restaurants in the first quarter, and we remain on track to open 31 to 33 new restaurants in 2015. We are confident that we can successfully operate over 1,600 units in the US long term.” This is the most differentiated offering in the quick service segment, and this team knows how to take advantage of that.


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