The Race

While that may be true for a regatta, that’s definitely not true for the Old Wall’s stock marketing game.


With Earning Season underway (86 S&P 500 companies have reported) sales “growth” is -3.6% and earnings “growth” is -7.9%, so the substitution on why everyone should be levered long stocks instead of Treasury Bonds is that “it’s all priced in.” #Cool


In other race to the bottom of 2015 “growth” thesis-drift news, Ferrari (not a new company) successfully priced its 17.2M share offering at the “high-end” of the $48-52/share range this morning. And yes, the ticker is RACE!


The Race - Earnings cartoon.spare


Back to the Global Macro Grind


While there was a race for Morgan Stanley to print summer-time US equity strategy notes that explained how the US profit cycle was not peaking (if you look at it “ex-Energy”), here’s the fact of the matter so far in the Q3 US Earnings season:


  1. Energy – Sales -33%, Earnings -56%
  2. Materials – Sales -8%, Earnings -30%
  3. Industrials – Sales -10%, Earnings -6%
  4. Information Technology – Sales -6%, Earnings -15%
  5. Financials – Sales -3%, Earnings -8%
  6. Consumer Staples – Sales -3%, Earnings -1%
  7. Healthcare – Sales +14%, Earnings -1%
  8. Consumer Discretionary – Sales +2%, Earnings +5%


But, if you “back out IBM” … and Industrials and Financials … and you don’t back out that Energy Stocks are the best performing S&P Sector Style to be long for Q4 (OCT) to-date at +11.2%, you should be making a ton of sense to your clients.




How can you not laugh out loud at the thesis-drift that’s out there versus the prior “GDP is going to be +3-4%, Earnings +8-10%, and 10yr Bond Yield > 3%” in 2015?


Yesterday’s stock market (SP500) return was -0.14%, but if you looked a foot beneath the surface:


  1. Biotech Stocks (IBB) were -3.2% on the day
  2. Healthcare (XLV) was -1.6% on the day
  3. Capital Markets (IPO) were -0.7% on the day


Meanwhile Oil & Gas Stocks (XOP) tacked on another +0.8% as the US Dollar continued to drip in the face of both #SuperLateCycle GDP and EPS Season #GrowthSlowing.


Once the race started in Q4 (October 1st), remember that most couldn’t have been long this “reflation” trade in Energy and Basic Materials stocks (and short Healthcare) without having had a horrendous time for the year-to-date.


“So”, as Wall Street likes to say, this makes this macro market much more like what Blackrock’s Chief Fixed Income Strategist, Jeff Rosenberg, told me it was on Fox yesterday - “paranormal.”


By “paranormal” Rosenberg accurately explained that bad news is good (for Stock Market Bulls) and good news is bad (for Long Bond Bulls)… all the while, the credit & growth quality side of this setup continues to punish the companies that miss numbers.


That’s also explains why “active” managers who are selecting:


  1. Contrarian Macro Exposures (Long Duration Bonds, Munis, Utilities, Gold, etc.)
  2. Organic Growth Longs (GOOGL) vs. GDP Slowing Shorts (CAT, WMT, IBM, etc.)
  3. Fortress Balance Sheet Credits (long) vs. Credit Spread Blowups (short)


Are absolutely crushing the field in 2015 and haven’t been forced to substitute a new narrative every 3-6 weeks to their investors in order to explain why their performance boat is taking on water.


This is not to suggest that organic growth stories (companies who can show Sales #GrowthAccelerating during a Top-Down #GrowthSlowing phase) won’t slow. Last night, high-flying multiple Chipotle (CMG) talked about October sales being choppy.


As we head into the final leg of the 2015 performance race, the leadership (in US Equities) is narrowing. That makes high expectation stocks like Amazon (AMZN) reporting earnings big bottom-up macro events. And there will be no time-outs.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.98-2.09%

VIX 14.74-20.41
EUR/USD 1.12-1.15
Oil (WTI) 44.64-47.49


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Race - 10.21.15 chart EL

October 21, 2015

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Special contributor Daniel Lacalle will join Hedgeye’s European analyst Matt Hedrick and DOR Daryl Jones TODAY, October 21st at 11:00am ET to discuss Spain’s economy and market outlook.


Lacalle is a renowned European economist, who previously worked at PIMCO and was a PM at Ecofin Global Oil & Gas Fund and Citadel.  He is the author of Life In The Financial Markets and The Energy World Is Flat and a lecturer for the IE Business School and Master MEMFI at UNED University.





  • Is the IBEX in crash mode?
  • What are the key economic metrics telling us about the direction of Spain’s health?
  • Will Spain make the necessary fiscal reforms or revert back to its ‘old’ ways?
  • Who wins the general election on December 20th and what’s the impact on the sovereign?
  • What are the challenges for the Eurozone with habitual weak economic links like Spain?


  • Toll Free:
  • Toll:
  • Confirmation Number: 13622670
  • Materials: CLICK HERE

Ping for more information.

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


***The roundup below is an example of our data-driven internal research process. Specifically, it helps our team contextualize the key economic releases and policy developments occurring across Developed Asia and Emerging Market economies on a daily basis. To the extent you'd like to be BCC'ed on such emails please shoot us a quick note and we'll add you to the list.***



In China, growth continues to slow on a trending basis across most key metrics except household consumption – which is becoming an increasingly large share of the Chinese economy. That means Chinese demand is unlikely to be as additive to global growth going forward. Elsewhere in China, sanguine talk regarding the near-term growth outlook is leading to reduced expectations of monetary stimulus – which is precisely what is being priced into the market (via the 3M deposit rate and 1Y OIS). Fiscal stimulus (spending up +27% YoY in SEP) is likely to do the overwhelming majority of the heavy lifting going forward – at through at least year-end.






In Japan, the equity market continues to react poorly to reduced expectations of near-term QQE expansion – which is supported by Kuroda and Aso’s latest guidance as well as hawkish core CPI trends. Japanese growth has decidedly inflected to the downside across a variety of key metrics, so it’s a matter of “when”, not “if” for the BoJ. That said, however, acting in 1Q16 vs. 4Q15 could mean a fair amount more consolidation and squeezage for [consensus] USD longs and reflation shorts, respectively… 






In Brazil, political consternation is heating up with last-year’s presidential runner-up Aecio Neves effectively passing on replacing President Rousseff to the extent she is fully impeached, which increases the probability of a subsequent election. Turkey is a great example of why that could be a really negative catalyst amid the growing rift between Brazil’s populous (favoring socialism) and Brazil’s cabinet (favoring austerity). Elsewhere in Brazil, the BRL is looking increasingly attractive on the short side with the currency up nearly a full percent vs. the USD MoM – especially given that it has diverged from the swaps market, which is aggressively pricing in the BCB’s marginally dovish policy shift by pledging to keep rates on hold after +325bps of tightening over the TTM. Brazil remains the disaster we called it out as last December and the data continues to support shorting it on rallies.






In Russia, both the RTSI and the RUB are ripping shorts, each up +7% MoM and +1-2% WoW, respectively. With the YoY crashes in both markets still intact and domestic policy rate expectations continuing to collapse per 3M deposit rates and 1Y OIS, we have to ask ourselves if this move is driven by fundamentals or global reflation short-covering post the disaster that was the SEP NFP print in the U.S. It may sound surprising, but Russian growth has either positively inflected or is outright accelerating on a tending basis across a variety of key metrics, save for household consumption. Moreover, Russian inflation is trending lower across a variety of key metrics as well. With consensus expectations for Russian growth and inflation on the other sides of these developing trends, the recent rip higher in Russian capital and currency markets makes a lot of sense (given the sentiment). If Draghi and Kuroda don’t deliver the QE/QQE bacon on 10/22 and 10/30, respectively, Russia might be the best way to play a continued USD downdraft amid the [growing] ECB and BoJ policy vacuum. Irrespective of what happens with the USD, the data supports a long Russia/short Brazil investment strategy.






Enjoy the rest of your respective evenings,




Darius Dale


WWW | We’re Punting It

Takeaway: WWW has been in our penalty box, and we looked for this print as a last shot to gain conviction it could grow. We found the opposite.

We’re punting this one from our Retail Best Ideas list. The name has been ‘Under Review’ from a research perspective as we were waiting for this quarter as a last shot to gain confidence in the underlying growth story. International expansion of PLG brands, which has been the crux of our thesis, has been tracking at the lower end of what we think is acceptable.  But unfortunately the bigger problem is that the other 70% of the portfolio is in the US, and that business wants to do nothing but decline. The last thing we want to own here is a portfolio of average footwear brands when we’re late in the economic cycle (actually, the only thing worse would be a portfolio of average apparel brands). We’d rather own something at twice the multiple with an asymmetric growth setup.


While this is completely hindsight, we’d point out that in 3Q the company put up a decline of 4.5% in revenue, 17.7% in EBIT, 24.4% in EPS, and -70% in cash flow. Inventory was up 6%, representing a negative 11 point delta in the Sales/Inventory spread. It really has never been worse for WWW in this cycle. Its current SIGMA reading (Quad3) is horrible, and is extremely bearish for Gross Margins in the upcoming quarter.  Its two largest brands, Merrell and Sperry, which account for 40% of sales, have slowed sequentially (on a constant C$ basis – i.e. we’re not dinging it for FX) in each of the past 4-quarters.


WWW | We’re Punting It - 10 20 www chart1  

WWW | We’re Punting It - 10 20 www chart2 


One reason why the value-destructing algorithm is notable is that this company should be throwing off a boatload of cash. And by ‘boatload’ we mean $300mm+. The reality is that this is the first quarter where the TTM cash flow turned down, and we expect that to continue well into 2016. 


Why does this matter? Glad you asked. We have yet to meet anyone who owns WWW who does not think that this story ends in WWW doing another deal. After all, they do a deal at the friction points of almost every economic cycle. But the last thing we’re going to do is stay on board with WWW because of a theoretical backdrop of an accretive acquisition.  Aside from being Thesis Drift – which we won’t succumb to – we’d note that the muted (and now declining) growth in cash flow implies that the company will have to renegotiate its lending agreements to do a deal, and still will only have $600mm-$800mm to spend. That’s nice, but a far cry from when it bought PLG for $1.2bn – effectively growing the size of the company by 66%.


WWW | We’re Punting It - 10 20 www chart3  

WWW | We’re Punting It - 10 20 www chart4 B 

FLASHBACK: Hedgeye's Howard Penney Nails It On Yum! Brands, China | $YUM

Editor's Note: Below is a recent research note on Yum! Brands (YUM) written by Hedgeye Restaurants analysts Howard Penney and Shayne Laidlaw where they speculate YUM would spin-off its China stores. It was a prescient call. Earlier today, the company announced just that. 


FLASHBACK: Hedgeye's Howard Penney Nails It On Yum! Brands, China | $YUM - 10 20 2015 yum 1


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FLASHBACK: Hedgeye's Howard Penney Nails It On Yum! Brands, China | $YUM - 10 20 2015 Yum       


It’s been our long held belief that the Board of Yum! Brands (YUM) has needed to “de-risk” the company from its large China operations.  It now looks like that change is inevitable.  At least there are few large shareholders that hope so!


Yesterday, after the close YUM announced that Corvex’s Keith Meister has joined YUM’s Board of Directors.  This move alone signals a shift in the company’s thinking, which was inevitable following the plunge in YUM’s stock following the company’s recent earnings announcement.  Also, after the close, the company updated its 4Q15 guidance, which contained more bad news.  Fortunately, the updated guidance will take a back seat to the conclusions emerging from the board’s “year-long strategic review.”   YUM said it will announce its decision about a prospective restructuring “shortly”.


Reading between the tea leaves it now appears most likely that YUM will announce plans of a material restructuring on or before its December 10th Analyst Meeting.   


The two most likely events are:

  1. A decision on the new operating structure of the China Division with a possible spin-off (to trade on the Hong Kong exchange)
  2. A material leverage recapitalization


Other possible events include:

  1. A sale/IPO of Pizza Hut
  2. A split of the company into three companies (KFC, PH and TB)


The most important event will be to limit the company’s exposure to the volatility in the China business and return the company to being a high margin high return asset-light global franchise business model.  Currently, YUM is trading at 11.7x NTM EV/EBITDA versus 15.6x for its global asset light peer group and 12.5x for McDonald’s.


We can still value YUM close to $100, but the multiple assumptions behind that can be called into question give the current macro environment in China.  That being said we can still see this stock getting back to $90.


We look forward to hearing what the YUM Board of Directors has to tell shareholders.


 FLASHBACK: Hedgeye's Howard Penney Nails It On Yum! Brands, China | $YUM - 10 20 2015 yum 2


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