M&A, Earnings and Confidence

Client Talking Points


According to Bloomberg, $406B of M&A deals has been announced globally this quarter, including $170B in the past week alone. This puts 2015 on track for a record year with projected volumes north of $1T. Q3-to-date is on track to surpass the previous quarterly record of 3Q07, which occurred during the prior peak year of M&A activity with $933B proposed deals. The annual record prior to that? You guessed it: 2000. As we’ve said over and over again in the year-to-date, when the economic cycle slows capital markets activity peaks as management teams try either sell before it’s too late or front-run the slowdown with financial engineering. 


FactSet data reports that S&P 500 earnings growth is on track to fall -0.7% year-over-year in 1H15, marking the slowest rate of change since 2009. The same data has EPS projected to fall another -2.7% year-over-year in Q3. Despite this fundamental weakness, broad market valuations in the 99th percentile of all readings and dramatically narrowed market breadth, sell-side strategists are sticking with their forecasts for the S&P 500 to rise +8% by year-end 2015. Hedgeye CEO Keith McCullough talked about how certain market participants can only get away with ignoring data for so long in today’s early look and this juxtaposition seems appropriate to highlight on the heels of that.  


Lost in yesterday’s dead-cat bounce across the reflation sectors of the market was the noticeable lack of a bounce in consumer confidence. Specifically, the Conference Board’s measure plunged to 90.9 in July from 101.4 in June, marking the lowest reading since September of 2014 and confirming the slowdown on both a sequential and trending basis. All told, we reiterate our #ConsumerSlowing theme, which calls for domestic consumption growth to continue slowing from its 1H15 peak in rate-of-change terms through a likely recession in 2016.


**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

General Mills (GIS) remains on the Hedgeye Consumer Staples Best Ideas list as a LONG. Key segments across the company are turning the corner and improving performance. Specifically GIS has figured out the yogurt category, after 3 years of struggling with Greek and losing on the core business, management has turned the Yogurt division into a growth segment. Cereal has obviously been a struggle for all companies participating. Although still down, the trend is looking better, in FY16 we hope to see the switch to Gluten Free Cheerios and other improvement, turn performance around.


Penn National Gaming reported Q2 profit of $16.9 million on Thursday. The company's profit of 19 cents per share beat analysts' expectations.  PENN posted revenue of $701 million in the period, which also beat forecasts.  Shares have climbed 40% since the beginning of the year and 58% over the last 12 months, obviously much higher than the S&P 500. Gaming, Lodging and Leisure Sector Head Todd Jordan was at Penn National Gaming's investor day on July 24th. He will provide a detailed update this week.


Those long of #LowerforLonger enjoyed another solid week of 2%+ gains for TLT and EDV. VNQ followed up last week’s gains with a pullback of equal size, but we received a positive sloth of data this week that confirms our long housing theme. A positive housing outlook within a bearish rate environment should be positive for VNQ.

Three for the Road


Hedgeye reiterates longstanding SELL calls on both $YELP and $TWTR @MariaBartiromo



It is one thing to not know, it is another thing to not know that you don’t know!

Eric Hunsader


In a survey Hedegye’s Restaurants Team asked 2,000 people whether they would go to MCD more often if they could get breakfast for lunch, 33.3% of people said yes.

CHART OF THE DAY: Another Classic #LateCycle Rollover > Consumer Confidence

Editor's Note: This is an excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. If you would like to get a step ahead of consensus click here to learn more about subscribing. 

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...Notwithstanding another classic #LateCycle rollover in the US #ConsumerCycle slowing yesterday (US Consumer Confidence getting hammered to 90.9 this month vs. 101.4 last – see Chart of The Day), here’s some important pending data to consider:


  1. US GDP for Q2 (it’s now Q3) will be reported on Thursday and should be a “good” headline number vs. a “bad” Q1
  2. US Employment (Jobs Report) will be reported next Friday and should be a “less great” number vs. the Q1 cycle top


CHART OF THE DAY: Another Classic #LateCycle Rollover > Consumer Confidence - z Confidence CoD

Wavering Data

“The wavering multitude is divided into opposite factions.”



For those of you who have been following us since we called the US economic cycle top in late 2007, you know that there’s frequently an opposite faction to our most important Global Macro Themes – it’s called Wall Street consensus.


Not that we keep score or anything, but if you go back to what we thought were 3 of the most important (already in motion) Global Macro Risks 1-year ago today, they were: #Inflation Slowing, Rates Falling, and Cross Asset-Class Volatility bottoming.


All of those calls were based on forward looking indicators born out of a repeatable research and risk management #process. Today, the biggest disconnect between our indicators and consensus is #GrowthSlowing in the 2nd half of 2015 (in both the US and Europe).


Wavering Data - z cons


Back to the Global Macro Grind


But, “if you don’t want to get caught up in the data” (which is what one of my competitors wrote yesterday in his “unwavering” support for #GrowthAccelerating, despite wavering on his “reflation” call two weeks ago), #NoWorries.


Who needs data and market indicators anyway? Maybe we’ve all become so damn “smart” in this business (after consensus missed calling the last 2 US cycle tops), that we can just ignore the rate of change in the data until it fits our narrative.


This isn’t personal. This is the cycle. It bases, bottoms, accelerates, peaks, then slows. And it takes time. A lot more time, in fact, than the most dogmatic bull on “reflation” can remain solvent.


I’m not going to hammer on whoever is still long inflation expectations this morning (Energy, Metals & Mining, Materials). They had a big beta bounce yesterday (Oil & Gas stocks, XOP +3.7%, after crashing to new lows the day prior), so I’ll play nice.


Instead, I want to re-focus your attention on the Industrial sector (XLI) because:


  1. XLI bounced +1.9% yesterday (to down -5.2% YTD), providing you another selling opportunity
  2. Revenues (for Q2 to-date) for the Industrials Sector are down -3% and earnings are down -4%
  3. And the US/European Industrial cycle only peaked in Q4 of 2014


Sure, you can ignore this “data” until your boss taps you on the shoulder and/or reads you this note. Or you can objectively analyze the risks associated with a #StrongerDollarForLonger colliding with the toughest revenue and margin comps of the year (in Q4).


And you’ll end up where we continue to be on most things cyclical that have perpetual inflation expectations built into them, never mind some kind of mainstream 1990s early cycle “demand.”


I’m not trying to be a bully on this. I’m just trying to make sure you don’t get run-over (like many have in the last 6 weeks) being long “cheap” cyclicals when “cheap” is based on not only the wrong revenue and earnings assumptions, but the wrong commodity prices.


I think this is one of the key differentiators in my process and perspective vs. many of my sell-side competitors. Most of them never worked on the buy-side, traded Global Macro, and/or modeled bottom-up company risks using a top-down macro overlay.


That’s not to say I’m always right. Newsflash: no one is. But it is to remind you that I typically don’t blow you up by ignoring the big stuff like data and market signals. In rate of change terms, they matter and are crystal clear to watch.


Notwithstanding another classic #LateCycle rollover in the US #ConsumerCycle slowing yesterday (US Consumer Confidence getting hammered to 90.9 this month vs. 101.4 last – see Chart of The Day), here’s some important pending data to consider:


  1. US GDP for Q2 (it’s now Q3) will be reported on Thursday and should be a “good” headline number vs. a “bad” Q1
  2. US Employment (Jobs Report) will be reported next Friday and should be a “less great” number vs. the Q1 cycle top


You see, the way consensus looks at GDP is somewhat confusing because they look at what the government calls a “Quarter-Over-Quarter SAAR.” It’s a sequential (i.e. quarterly) read on how they think the economy is trending.


In order to see (and front-run using forward looking Hedgeye “tools”) the cycle though, you need to look at how the economy is trending on both a Year-Over-Year basis and relative to the 2-3 year trend.


I don’t model it this way for kicks and giggles. I model it this way because this is how I model companies and it made no sense to me to model it in a way that an Old Wall “economist” or strategist does. Oh, and did I mention that their way doesn’t work?


The key differentiators in our USA and Europe models (we have 86 countries in the model) are currently as follows:


  1. US GDP 1.6-1.8% for Q3 and Q4 (consensus has back-end loaded the year, we have it slowing)
  2. Eurozone GDP slowing in 2H15 to a CY15 growth rate of +0.6%


Since Bloomberg Consensus on Eurozone GDP for 2015 is still up at +1.5%, that’s the most important component of #GlobalSlowing we see that our competition doesn’t. Then again, if you ignore the last 3 months of #EuropeSlowing data, you’d miss that too.


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


UST 10yr Yield 2.21-2.34% (bearish)

SPX 2069-2098 (bearish)
RUT 1 (bearish)
Nikkei 202 (bullish)

VIX 12.53-14.58 (bullish)
USD 96.61-98.35 (bullish)
EUR/USD 1.07-1.10 (bearish)
YEN 123.03-124.49 (bearish)
Oil (WTI) 47.07-50.49 (bearish)

Nat Gas 2.71-2.92 (bearish)

Gold 1067-1117 (bearish)
Copper 2.35-2.46 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Wavering Data - z Confidence CoD

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

The Macro Show Replay | July 29, 2015


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After Buffalo Wild Wings (BWLD) earnings call last night we want to cover the short call here and move it to the short bench.


Our underlying thesis for the BWLD short was that 2015 earnings estimates were too aggressive.  While that turned out to be correct, the better than feared “miss and cut” is reason enough for the stock to rally.  We would note that management will be raising prices excessively to compensate for increasing costs, an issue that may haunt them in the future.  For the time being, consumers don’t seem to be bothered by the aggressive pricing the company has taken over the past three years. 


As we said, last night BWLD announced 2Q15 earnings, reporting EPS of $1.12 versus consensus estimate of $1.27. Restaurant sales came in under estimates at $401.9 million versus consensus of $404.4 million, a ~17% increase YoY including some newly acquired restaurants. BWLD did beat the comps; Company owned stores reported SSS of +4.2% versus consensus of +3.8%, while Franchise locations reported an increase of +2.5% versus consensus of +2.1%. The comps are largely built up by 3.8% pricing at company owned stores (franchisees price at their own discretion). Margins have been under pressure as wing prices are up 26% YoY, and wage rates have been increasing significantly in certain markets.





Margins across the board are worse sequentially. BWLD Cost of Sales increased 3.9% to 29.3%, although slightly below consensus estimates of 29.5%. Restaurant level margins are down 7.4% YoY to 18.8% versus estimates of 19.1% as labor and food costs weigh on the P&L.





Bottom line, management cannot expect to be able to raise prices at these rates to cover the accelerating costs. Furthermore, it is still unclear whether the addition of the guest experience captain is adding value and making up for the extra expense. We expect the football season may keep this stock afloat in the near term but these rising prices will take its affect in the long run, and we will revisit the short at that time.



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