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Worst Q3 for Stocks Since 2011

Client Talking Points


The DAX bounced, “off the lows” … into month end down -24% since April; nothing new there – bear market bounce within more slowing data post yesterday’s 0.0% German CPI; Eurozone CPI moves into the #deflation zone at -0.1% year-over-year in SEP which should prompt ECB President Marion Draghi’s QE Cowbell.


Copper bounced, off the crashing lows… +2.5% as we’re sure people are starting to concern themselves with another “reflation” as the Fed contemplates more slowing economic data (= USD down, hoped-for-reflation up).


After tapping 2.05% into the close yesterday, it was a great month (and quarter) for the best way to play #Deflation & #GrowthSlowing (Long-Duration Bonds). Since 2.04% is the low-end of our current 2.04-2.15% range, it should be no surprise to see a yield bounce “off the lows” this morning.


**Tune into The Macro Show with Hedgeye CEO Keith McCullough and Macro analyst Darius Dale at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

McDonald’s clearly continues to be well-liked by our Restaurants research team and is a near perfect fit into our macro team’s current "style factor" preferences. This stock is high cap with a low-beta, coupled with a company turnaround story that is currently well underway. We believe this stock will do well through this tumultuous time in the market.


As previously mentioned, the company has all day breakfast starting on October 6. We anticipate this development as not only driving increased visits from existing customers, but also new customers that maybe don’t wake up early enough to get breakfast by 10:30am (or simply just people that enjoy eating breakfast items outside of the morning!)


As Sector Head Todd Jordan notes, "PENN should benefit from the release of state gaming figures over the next few weeks. Recall that August was weaker than many thought. While we predicted this particular slowdown, our model is showing a sharp September rebound.


September revenues should rebound and serve as a catalyst for the stock going into Q3 earnings. On the research side we have not altered our views of PENN’s long term growth story. We continue to see more upside from current price levels.  


Is the U.S. economy still showing signs of a cyclical slowdown? Yes.  If you, like us, remain skeptical on the said policy path from our omnipotent central planners, and you believe growth continues to slow, then we respectfully submit that you sit on your GLD and TLT allocations.


3 GDP comps are difficult. And, once the data comes out, we think expectations will be downwardly revised again. In other words, wait for yet another Fed punt on a 2015 hike.

Three for the Road


VIDEO (2mins) Carl Icahn Can’t Be Serious https://app.hedgeye.com/insights/46597-mccullough-carl-icahn-can-t-be-serious



Formula for success:  rise early, work hard, strike oil.

J. Paul Getty


Mobile ads account for about 76% of Facebook’s ad revenue.

Flawed Beliefs

“The 1st reason we miss insights is that we are gripped by a flawed belief.”

-Gary Klein


As Q3 of 2015 is #timestamped into the market history books, that’s an important quote for those trying to be introspective about what went right and wrong. Alpha generating insights should have an element of surprise. Market risks change, every day.


A good example of a flawed belief would have been thinking US GDP “feels like” +3-4% in Q3. It will be lucky to be half of the low-end of that range (you’ll get the preliminary look at Q3 GDP at the end of October, and final Q3 GDP at the beginning of December).


An even better insight would have been to fade the “rates are going up, because it’s time” belief. While many of your competitors will lament “the worst Q3 for stocks since 2011” today, you can celebrate the absolute and relative performance of the Long Bond.


Back to the Global Macro Grind


With month and quarter-end, you’ll get a lot of “recap” type notes from the Old Wall and its media. And while contextualizing the history of market moves is critical to obtaining future insights, I don’t like to dwell too much on what we already know happened.


What’s next?


Well, for those of you who didn’t take the advice to “not pay so much attention to the data” in Q3, let’s kick off the advent of Q4 with the most recently reported European economic data:


  1. Eurozone CPI (inflation reading) deflated to -0.1% y/y in SEP vs. +0.1% AUG
  2. Germany’s CPI slowed to 0.0% in SEP vs. +0.2% AUG
  3. Producer Price (PPI) #Deflation was -0.9% y/y in France, -2.9% y/y in Italy, and -9.9% y/y in Greece


Yep. It’s a good thing Greece and the rest of Europe is fixed. Maybe their stock markets moving into #crash mode (German DAX -23% since April) will supersede Draghi’s flawed belief that #Deflation risks were dead (in June).


Given the #EuropeSlowing Q3 Macro Theme we introduced in July was accurate, the most recent European data implies that Draghi could/should very well “surprise” markets with another devaluation of the Euro in Q4.


What else might surprise?


  1. Classic #LateCycle gainers like employment + wage growth + consumption slow, sequentially, in the USA?
  2. Both Japan and Europe start slowing at an accelerating rate into recessions?
  3. As China continues to slow, they make up numbers to suggest they aren’t?


I don’t think the China thing would surprise people. Maybe the European and Japanese slow-down will. On the beloved “super-mid-cycle” USA thing people have been pitching, well… the risks to their beliefs are being drawn-down (in P&L terms) daily.


Having spent the last 2-days seeing Institutional Investors in NYC, here are some more things people are thinking about:


  1. What if Hedgeye’s forecast for a top-down GDP slowdown combined with a bottom-up earnings one is still right?
  2. What happens if we get another rate-of-change #EmploymentSlowing report on Friday?
  3. What does the Fed do if both US Employment + GDP reports slow, ahead of the DEC “rate hike” meeting?


Those are obviously thoughts about the US (newsflash: most US based investors still navel gaze at the US). But what if the most basic non-Consensus Macro thought of all is presenting itself to you (in live quote terms) on your screen, every day?


What if we’re entering a Global Recession?


Can the US “de-couple” from that? If the Fed is forced to cut their growth and inflation forecasts again (alongside every major economy on that) and the Dollar falls – what if Oil and Gold rise on that?


Is the new bull case going to be “US Economy To De-Couple On Rising Gas Prices”?


I’ll stop asking questions that challenge the flawed belief system that has been consensus throughout 2015. In other news, “Wall Street Strategists cut year-end SP500 target to 2173.” #Gripping analysis.


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


UST 10yr Yield 2.04-2.15% (bearish)

SPX 1 (bearish)
RUT 1077-1135 (bearish)
DAX 9101-9893 (bearish)

VIX 23.39-28.97 (bullish)
USD 94.82-96.99 (neutral)
EUR/USD 1.10-1.14 (neutral)
YEN 118.69-121.52 (bullish)
Oil (WTI) 43.68-47.41 (bearish)

Nat Gas 2.50-2.69 (bearish)

Gold 1115-1153 (bullish)
Copper 2.20-2.35 (bearish)


Best of luck out there today,



Flawed Beliefs - 09.30.15 Chart

CHART OF THE DAY: #Draghi’s Flawed #Deflation Is Dead Belief

Editor's Note: This is a chart and brief excerpt from this morning's Early Look written by Hedgeye CEO Keith McCullough. Click here if you'd like to beat consensus and subscribe to the firm who made the best call on Wall Street in Q3.


CHART OF THE DAY: #Draghi’s Flawed #Deflation Is Dead Belief - 09.30.15 Chart


...Well, for those of you who didn’t take the advice to “not pay so much attention to the data” in Q3, let’s kick off the advent of Q4 with the most recently reported European economic data:


  1. Eurozone CPI (inflation reading) deflated to -0.1% y/y in SEP vs. +0.1% AUG
  2. Germany’s CPI slowed to 0.0% in SEP vs. +0.2% AUG
  3. Producer Price (PPI) #Deflation was -0.9% y/y in France, -2.9% y/y in Italy, and -9.9% y/y in Greece


Yep. It’s a good thing Greece and the rest of Europe is fixed. Maybe their stock markets moving into #crash mode (German DAX -23% since April) will supersede Draghi’s flawed belief that #Deflation risks were dead (in June).


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The expression “long in the tooth” is an idiom that refers to old people, particularly when their age makes them too experienced or too seasoned for a particular thing, event, or role. When people use this phrase they are generally implying that the subject is past his or her prime.


While the phrase usually refers to horses or people, we are suggesting that CMG is getting older and looks like it will experience some growing pains in the near future. 

  1. Quality real estate is getting harder and more expensive to get
  2. Are the 2015 supply chain issues a one off experience?
  3. Slowing sales trends might not end in 3Q15



We keep hearing from our sources that finding quality real estate sites is becoming a bigger issue for a number of restaurant companies.  Part of the problem is the significant growth of the fast casual segment and the recent restaurant IPO boom that has put pressure on A rated locations.  It goes without saying, it never ends well for restaurant growth stocks when faced with the ever-growing demand and shrinking supply of quality real estate sites.  The majority of Fast Casual restaurant concepts have similar real estate requirements. Most concepts prefer to locate in high traffic shopping centers with good visibility. In most cases, these shopping centers have a mix of tenants, and many have language in their lease restricting the sale of similar products or food.


The real estate issue is an industry wide phenomenon, not just one facing CMG.  That being said, if you are a burrito concept (or a better burger concept), and if there is another burrito/burger concept in the shopping center, the landlord will often be prevented from entering a second lease.  Therefore, in popular locations, it’s not unusual to have an existing competitor on all four corners of a strong intersection.


There is no immediate issue pressuring CMG in 2015, but it’s likely that rents and availability will be a bigger issue in 2016.



The bigger CMG gets the harder it is going to be for them to adhere to their food with integrity mantra.  The challenge is even greater when we come to grips with the notion that the company will likely outgrow the supply chain over the next couple of years.  By 2017, CMG’s sales will account for 8% of all sales of non-GMO products at retail.  Therefore, the bigger challenge for the company is building a supply chain that can feed the ever growing needs of the company.  The Carnitas crisis of 2015, may just be the tip of the iceberg for the company.


What we find strange is, at the same time the company continues to punish (make fun of ) the same supply chain the company needs to be successful.  Evidence of this can be seen in the CMG game called, Friend or Faux – click HERE to try it out. The essence of this game goes beyond attacking McDonald’s or another restaurant company; it goes after the entire supply chain of food products. 


Has CMG gone too far, who is fighting back?  In a recent article, “Chipotle Hypocrisy: American Antibiotics Bad, British Antibiotics Good” (ARTICLE HERE) is clearly calling out CMG’s business model and challenging some of the ways the company does business.  It also put a spotlight on the supply chain issues and some of the complications the company faces as it gets bigger.


The supply chain puts CMG’s long-term same-store sales trends at risk.  First, the obvious, supply of available product is a clear issue.  Second, the more the company invites detractors to expose CMG’s issues, it will hurt the consumer perception of the brand.    






It’s usually never a winning proposition to make a call on any given quarter, especially for CMG.  That being said this quarter CMG is up against the most difficult quarter the company has experienced since coming public in 2006.  

  1. 4% pricing is rolling off sequentially
  2. Comparing against 19.8% same-store sales; 6.3% pricing and 3.4% traffic
  3. The street is expecting a 30bps sequential acceleration in 2-year same-store sales.  Management believes that the pork shortage may have impacted 2Q same-store sales by about 200bps.
  4. The 3Q15 2.4% same-store sales estimates suggest that CMG will see pressure on the labor line
  5. CMG should see a benefit from lower dairy costs
  6. The 2Q15 labor scheduling issue also impacted part of 3Q15
  7. Hourly labor rates continue to accelerate






CMG is a great company and has been on our Best Ideas list for the better part of two years.  There is enough evidence that there is a small shift that will begin to impact valuation.  So we are taking it off the best ideas list and putting it on the bench.



Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw



RL | Fountain of Youth

Takeaway: With one press release and three headcount moves, the average age of RL’s C-Suite came down by 22% -- from 60 1/2 yrs to 47.

We think this CEO change is a huge win for RL shareholders. It’s important, we think, for the age of the executive team at most consumer brands to be as closely aligned with its core customer as possible. For too long, that’s been going the wrong way at RL. But RL just made the biggest adjustment in that regard that we’ve seen at any company – perhaps ever.


We’re definitely more inclined to own RL on this announcement. Questions around management and Ralph’s oversight that we outlined in our June Vetting Book (CLICK HERE) were the biggest factors keeping us back from getting involved on the Long side. Those are now done. Now we need to get through the ongoing restructuring and SAP implementation, and yes, we’re still blown away that these two are happening at the same time.  But that’s 2-3 quarters away from an improving delta on the EBIT line. We think that once the bottom is in (perhaps in the early Feb print), demand to own this one will be strong.


Some Thoughts On The Announcement

  1. It’s Long Overdue. Ralph will be 76 years old in two weeks, making him the 7th oldest CEO in the S&P500. Since Roger Farah left his COO post in May 2014, Ralph has been taking on more and more responsibility, at a time when his age dictates he should probably be doing less.
  2. Jackie Is Out. Jackie Nemerov, current President and COO, will also be leaving in November. It’s amicable, but our sense is that this wasn’t exactly in her immediate-term plan. Nobody will come out and say it…but here goes. We’re happy to see Jackie go. Jackie is tough as nails and is a great leader internally, but her external profile was not good – especially with Wall Street. In her mid-60s, she helped prop up the average age in the C-Suite along with Mr. Lauren.
  3. Chris Peterson (49) remains President of the newly formed Global Brands Group. In other words, the six-headed Hydra that is Ralph’s new Brand structure entirely reports to him. This is a massive project, and the company’s bottom line will go nowhere until it’s done. As noted, we think its 2-3 more quarters until the rate of change turns positive.  
  4. New Guy Is From Where? All the calls we fielded this evening were hyper concerned about one thing…that Stefan Larsson, the new CEO is coming from none other than Old Navy – not exactly a fashion mecca. True.  That said, Old Navy is Gap’s biggest division, and both knows and serves its customer extremely well – even if it’s not RL’s customer. While no one on our team has met him personally, everything we know about his resume is impressive – very much so. First off, he’s 40-years old. He spent the bulk of his time at H&M where he rose from Regional manager, to Head of US Expansion, Head of Global Expansion, and ultimately Head of Global Sales. This is key because one of the biggest threats to RL is getting beat by Fast Fashion retailers like H&M.  Ultimately, he’s got age on his side, time at H&M, International experience, and a background in store growth – all the things that RL needs to grow.
  5. Too Young? We’ve already heard that one several times, and no, we’re not concerned. We’ll take a hyper-overachieving young gun over an ‘above average’ fifty-something anyday. We think age is irrelevant.
  6. Dramatic Changes? We heard this three times tonight. “Will the new CEO come in and make sweeping changes?” Keep in mind that Mr. Lauren’s office will still be occupied everyday, as he will maintain his role of a) Chairman of the Board, and b) driver of the creative process within Ralph Lauren. Also, there’s no coincidence at the massive age gap between Lauren and Larsson. Larsson could almost be Lauren’s son – in fact, he's 3-years younger than David Lauren, SVP Marketing at RL. Ralph was likely attracted to having someone young who is firmly entrenched to carry out his agenda by working side by side with him over the course of 2-3 years without rocking the boat. Remember, Ralph has 81% of the voting stock at RL – the second highest in the S&P (CEO of Universal Health is higher at 83%). In other words, Larsson will likely not so much as change the wattage of light bulbs in the Mansion without Ralph’s approval. The only friction we’d expect would be with Nemerov. But we don’t have to worry about that anymore. 

RL |  Fountain of Youth - Stefan Larsson 2

Stefan Larsson

Image Source: Gap


RL |  Fountain of Youth - RL chart 2

RL |  Fountain of Youth - RL chart 3c

MUST-SEE | McCullough vs. Wesbury on the Fed, Markets and Growth

(In case you needed another reason to tune into Fox Business, we bring you this gem.)


During this recent animated exchange hosted by Fox Business' Maria Bartiromo, Hedgeye Founder & CEO Keith McCullough and First Trust Chief Economist Brian Wesbury square off on the Fed's rate hike delay and the outlook for U.S. and global economic growth.

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.