McCullough: This Is The Best Idea I’ve Heard In Some Time


In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough discusses an idea pitched to him while he was in London meeting with institutional investors earlier this week.


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Keith McCullough Walks Through Real-Time Alerts at 10:45AM ET

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Retail Callouts (6/19): RH - Convert Priced, KSS, JCP, M, JWN - Dept. Store Online Traffic

Takeaway: RH convert deal = pure offense. YTD Dept. Store online traffic trends - JCP/KSS spread widening.

RH - Convert Deal Priced, Again at 0% Coupon


Takeaway: The terms for the $250 convertible bond offering priced yesterday are similar to the deal the company priced in 2014 when it was, to the best of our knowledge, the only small/mid cap company to get a 0% coupon rate. 2015 deal terms are as follows: 0% coupon with a $118 convert price and a hedging mechanism that will offset dilution until the stock hits $189. When all is said and done, we will be looking at ~12% dilution from the two convertible deals once the stock clears $190.

Why now? As we’ve stated many times, RH is the kind of transformative and disruptive growth story that comes along maybe once every decade in retail. But growth does not come cheap. While the company is on the cusp of being cash flow positive, the market is presenting an opportunity – with the stock 5% from its all-time high – to lock up funding for new concepts should they test well. This deal also completely wipes out RH’s net debt position. Simply put, you don’t see great retail concepts with net debt. Now you don’t see it at RH either.



Takeaway: This looks at the YTD trends for four retailers in the department store space (JCP, M, KSS, and JWN).  The current out performance out of JCP is notable for a couple of reasons.

Retail Callouts (6/19): RH - Convert Priced, KSS, JCP, M, JWN - Dept. Store Online Traffic  - 6 19 chart1

  1. Consumers continue to shift online. On a YY basis, traffic ranks are up for the 4 companies charted below between 20-30%, which syncs with what we've seen in either reported numbers or in the case of KSS (which no longer reports DTC metrics) management anecdotes. It's important to note that e-comm sales for the most part in this group have not been incremental, but instead have been cannibalizing Brick and Mortar sales. Take KSS for example which has comped negative in its stores for 13 of the past 14 quarters with DTC growing at a high 20% CAGR.
  2. That's not a positive for margins as the added cost of fulfilling merchandise is a bps headwind. As the free shipping hurdle moves closer to $0 we should see added pressure.
  3. The spread between JCP and KSS is widening. That's especially notable given the survey work we’ve done that points to KSS as the biggest beneficiary of the prior JCP share loss (see chart below). The numbers suggest that KSS captured about $1bn of the $5.4bn JCP gave away. WMT is slightly higher, but as it relates to percent of each retailer’s sales, no one even comes close to KSS at 4.5-5.5% of total sales.

 Retail Callouts (6/19): RH - Convert Priced, KSS, JCP, M, JWN - Dept. Store Online Traffic  - 6 19 chart2





NKE -  Douglas G. Houser and Orin C. Smith notified Nike of their decision not to stand for re-election



TGT - Target cuts 140 more jobs at Minneapolis headquarters



OXM - Thomas C. Chubb III Named Chairman of the Board of Oxford



MSO - Martha Stewart Living Shares Spike on Acquisition Talks



WMT - Report: Walmart puts greeters back in front





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LEISURE LETTER (06/19/2015)



  • June 23 - CCL Q2 2015 10am  

Headline News

Macau forecasts - Secretary of the Economy and Finance Lionel Leong expects MOP16 billion in gaming revenue for the month of June, down 41% YoY.  Separately, Ambrose So, SJM Chairman, offered a full year 2015 GGR forecast of down 40% for the market.


Takeaway: Hedgeye is currently forecasting -34% for June and -32% for 2015 but we have little confidence in either projection. The Street remains more optimistic.


Paradise Entertainment - The supplier of electronic gaming systems Paradise Entertainment is confident that Macau can provide many opportunities to sell products during the coming months as the new projects in Cotai come on line. "New casinos will open in Macau and lots of products will be refreshed” said Jay Chun, the chairman of the company. 



BYD - Boyd is pledging $2.5 million to to support the expansion of the William F. Harrah College of Hotel Administration at the University of Nevada, Las Vegas.



Frasers Hospitality UK Holdings Limited - A wholly-owned subsidiary of Frasers Centrepoint Limited (FCL), successfully completed the acquisition of Malmaison Hotel du Vin group (MHDV) of boutique lifestyle hotels for a consideration of GBP363.4 million (approximately $576.32 million) from an affiliate of KSL Capital Partners, LLC. The Malmaison portfolio consists of 2,082 keys across 25 cities in the UK or ($276,881 per key).


This sale comes two years after KSL purchased Malmaison Group for £200 million ($313 million). Based on those numbers, this recent sale represents approximately an 82% increase over the 2013 purchase price.  



Viking Cruises - Added Mediterranean and Holy Land itineraries for its upcoming vessels Viking Sea and Viking Sky in 2016 and 2017.



Macau - The Gaming Enterprise Staff Association is arguing that workers who recently filled out surveys regarding the proposed "smoking lounges" at casinos, were pressured to answer the surveys in favor of the lounges.The independent study initially showed that 66% of workers would be in favor of the lounges, but the association is arguing these results are skewed.    



Cash handouts - The government will begin making its annual cash handouts to the public on July 6, Executive Council spokesman Leong Heng Teng has said.

Leong said the government would distribute this year MOP5.84 billion (about US$730 million) among 675,696 residents of Macau.


It will give 607,465 permanent residents MOP9,000 each and each temporary resident MOP5,400. Whether they will get more next year will depend on how big the government’s surplus is this year, Mr Leong said.


Takeaway: Even in tough times, citizens get money back. Felix has already applied for citizenship.


Puerto Rico - Facing a cash crisis, Puerto Rico is turning to desperate measures to pay the bills: it may legalize the black-market slot machines in grocery stores.



New Jersey - Lottery ticket sales fall short of budget projections. 

  • Total ticket sales for 2014 were $2.9 billion, according to the lottery’s annual report. But after prize payouts, retailer commissions, fees and administrative costs, that meant $965 million went to the state budget.
  • Northstar, had projected income of $1.047 billion for the 2015 fiscal year, but revised that figure down twice – first to $955 million and then, last month, to $930 million
  • Northstar’s failure to meet projections have bolstered criticism from Democratic lawmakers that privatizing the essential function of the state’s fourth-largest revenue source was a bad deal for New Jersey. 



Hedgeye Macro Team remains negative on Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.


ZOES remains on the Hedgeye Best Ideas list as a LONG


Last night ZOES announced that CFO Jason Morgan has resigned to pursue other business opportunities.  Mr. Morgan has been at ZOES for eight years, this decision reflects his personal career choice and in the coming days and week it will be clear where he is going.  Importantly, transition to a new CFO will likely not have a material lasting impact on the company's prospects.


On the contrary, Mr. Morgan is a very talented restaurant executive and is leaving the company in a very strong position with a deep bench of seasoned financial executives.  Over the coming months James Besch, current Controller will lead ZOES’ financial team as the company begins a formal search for a new CFO.


OUR LONG TERM VIEW IS UNCHANGED - We view ZOES as one of the best small cap growth names.  The company is set-up for long-term success for the following reasons:


  1. Superior brand positioning
  2. Management philosophy and execution
  3. Unit opening geographic profile
  4. Early-stage average unit volumes and returns


Volatility, Gold and the USD

Client Talking Points


They smashed cross-asset volatility on the Fed decision, and that makes a lot of sense to me as a narrowing of our FICC risk ranges (especially UST 10YR Yield and EUR/USD) is short-term bullish for asset prices, including stocks (Utilities) that look like bonds.


Oh the love Gold has for the two-stroke Down Dollar, Down Rates move; being long this for the 1st time in a while felt like sitting on a hand grenade, so the +2.2% pop was appreciated; Gold diverged big from Copper, which is down another -1.1% this morning.


Get the U.S. Dollar right, and you’ll certainly get less things wrong – important overbought signal was $1.14 EUR/USD and the risk range there is now 1.11-1.14, so keep that in mind, especially when risk managing your long Oil position (risk range WTI = 58.51-61.78).


**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET, Keith McCullough is back from London!

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Penn National Gaming will likely tee off on the bears with a strong Q2, upward 2015/2016 EPS revisions, and the start of a 2 year growth period. PENN’s stock has climbed 27% this year on stabilizing regional gaming revenues, transaction-fueled optimism (real estate) surrounding the regional gaming companies and proximity to the opening of the new Plainridge racino on June 24. So what will drive even more upside? More and better. We think regional gaming trends are even better than anticipated by the Street and Q2 earnings should be a solid beat even before Plainridge contributes.


Housing outperformed in the latest week alongside choppy price action in equities and further, extraordinary volatility in sovereign bond markets.  Fundamental data was light with weekly purchase applications data from the MBA the lone release of import for the industry.  The first, high-frequency update on purchase demand in June, however, was positive. Purchase demand rose +9.7% sequentially, taking the index to its strongest level in 2 years at reading of 214.3. On a year-over-year basis, growth accelerated for a  4th consecutive week to +14.6%. Inclusive of last weeks gain, demand in 2Q is tracking +14.3% QoQ and +13.4% YoY.


The market has been jockeying for positioning in front of next week’s policy statement from Janet Yellen. We believe Yellen signaling that she remains “data dependent” (i.e. repeats what she said at the March 18thmeeting) is the most probable outcome. To be clear, we remain the long-bond bulls (TLT, EDV, MUB). With that being said we aren’t claiming to be able to predict the outcome of next week’s meeting (sure we do have biases). What we do know is that Hedgeye estimates for growth and inflation shake out much lower against both consensus and central bank forecasts for the full year 2015 (remember that this is after their forecasts have already been downwardly revised).

Three for the Road


Darius Dale on Fox Business: Fed Unlikely To Raise Rates This Year… @HedgeyeDDale



The task of the leader is to get his people from where they are to where they have not been.

Henry Kissinger


When men hit their mid-50s, the median male worker is making about 127% more than he did when he was just starting out in his career, according to a report released this February by the Federal Reserve Bank of New York.