A Live Possibility!

“Truth is stranger than fiction, but it is because fiction is obliged to stick to possibilities. Truth isn't.”

-Mark Twain


The New York Federal Reserve’s Bill Dudley rocked the 2yr US Treasury Yield to the upside yesterday by suggesting that there is a “live possibility” that the Fed raises rates in December.


He provided the same caveat that Janet Yellen has guided markets to all year long. That, of course, is that America’s inaccurate forecasters at the Federal Reserve are “data dependent.”


That damn data, I tell you. If the US government simply didn’t report the data the Fed would have raised rates when they said they would (June). Instead, as markets discounted US GDP getting cut to 1.5% in Q3, the truth set accurate forecasters free.

A Live Possibility! - Fed lady cartoon 06.25.2016

Click here to join Hedgeye CEO Keith McCullough live on The Macro Show at 9am. 


Back to the Global Macro Grind


Ah, the possibilities of “green shoots” though – they remain. As does the effervescent hope that by year end stocks can’t go down because the Fed is back on hold.


Wait a minute – aren’t those conflicting possibilities?


Not to get caught up in the actual details or get in the way of any fictional story that may or may not be supported by one’s “company surveys”, our #process doesn’t leave room for cherry-picking data like our competitors do.


As my main man Darius Dale outlined in a note to Institutional Investors last night titled “Global Growth Has Not Bottomed”, we run a predictive tracking algorithm on every relevant data point from every relevant economy in the world.


The goal of this modern-day (math) macro #process is threefold:


  1. To contextualize sequential deltas (in data) as either ACCELERATING or DECELLERATING
  2. To contextualize immediate-term data within its intermediate-term TREND (accelerating or decelerating)
  3. To determine if the absolute value of the most recent data point (s) is at/near a probable mean reversion level


This is the precise process that called for US growth to accelerate coming out of the 2009 and 2012 lows inasmuch as it called for it to slow from the 2007-2008 and 2014-2015 #LateCycle highs. Our model is better than the Old Wall’s. And we don’t apologize for that.


As opposed to trying to write his own history, Ben Bernanke should have had the courage to act and apologize to Janet Yellen for not raising rates when US growth was accelerating in 2013.


Bernanke could have raised rates 4-6x by the time we hit US employment and consumption cycle highs of Q1 2015.


But he didn’t. And now, going on 78 months into a rate-of-change-slowing US economic expansion, Janet has the “live possibility” of making an even bigger mistake than not hiking into an acceleration – she could tighten into a slowdown!


Unless tomorrow’s jobs report flashes something > 317,000, there’s not a hope on this side of centrally planned hell that the TREND in the US Labor Cycle goes from DECELERATING to accelerating.


While the probability of another #GrowthSlowing Non-Farm Payroll (NFP) print remains as high as it’s been since we started making the call that the US Labor Cycle peaked in Q1 of this year (see Chart of the Day with the DEC 2015 NFP top circled in red), what if the perma bulls paint it as “good”?


This is where the fiction of “good” can become very bad for macro markets. But, if you were looking at what happened in FICC (Fixed Income, Currencies, Commodities) yesterday instead of staring at Dow Bro 18,000’s possibility, you already know that.


  1. US Dollar ramped > 98 on the US Dollar Index
  2. Euro (vs. USD) got smoked down to $1.08
  3. CRB Commodities Index deflated -1.7% on the day, resuming its crash


And that, my friends, remains the live possibility you need to be very much prepared for – the possibility that, 7 years after the US driven financial crisis, that the Fed becomes the catalyst that perpetuates the next global one.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.98-2.28%

SPX 2029-2116
USD 97.21-98.24
EUR/USD 1.08-1.10
Oil (WTI) 42.96-48.23


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


A Live Possibility! - 11.05.15 EL chart

The Macro Show Replay | November 5, 2015


Tighten? It’s A “Live Possibility”

Client Talking Points


We’ve only seen 8 alleged “breakout rallies” in rates the last 10 months (and every one of them has been quashed by that damn “data” that the Fed continues to say they are dependent on) – the U.S. labor cycle peaked in FEB and should slow well into the middle of next year.


Apparently the “reflation” bulls who are suggesting global demand has “bottomed” aren’t looking at the entire commodity complex. The CRB Index was down -1.7% yesterday, an indication which ensures the #Deflation Risk remains. Copper appears to be a Red Shoot this morning down another -2% to $2.27/lb.


Emerging crashes continue via #StrongDollar – no worries on that front – raise rates into a slow-down and you’ll see plenty more of this. India and Australia are down another -1.1% and -0.9% overnight, respectively vs. the Nikkei (which enjoys Strong Dollar, Down Yen) +1.0%.


**Tune into The Macro Show with Hedgeye CEO Keith McCullough in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Last week was a big week for McDonald’s (MCD), as they reached the inflection point we were predicting. Post earnings, the next catalyst for the stock is going to be the November 10th analyst meeting.


The meeting will be an opportunity for management to shed more light on the progress of all day breakfast, additional G&A cuts and the potential of doing a REIT. Our Restaurants team remains bullish on the name, and they look forward to giving you some material updates after the meeting.


Restoration Hardware (RH) shares gained 5.8% this past week. The margin story here is explosive. Margins were sitting below 10% on Friday, and we think they will be above 16% in 3 years. The key reason is that expense leverage on these new properties is like nothing we’ve ever seen (i.e. RH pays only 10% more for square footage that’s 300% larger).


In addition, the company does not have to proportionately grow its sourcing organization with the growth in its store base OR its category expansion.


Our estimate is that the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we’re getting to a stock in excess of $300.


Our forecasts for domestic economic growth continue to be more accurate than the consensus. We anticipate economic growth will get a lot worse from here. That is why you want to own long-term bonds (TLT, EDV).

  • Real GDP growth slowed to 1.5% on a quarter-over-quarter seasonally adjusted basis. That was actually right at the top end of our range going into it (remember that the mainstream Q/Q annualized number is unpredictable)
  • On the Y/Y numbers, growth decelerated for a 2nd straight quarter to 2.0% from +2.7%
  • Consumption growth was a huge contributor to the number vs. the manufacturing side of the economy which continues to slow. However, take a look at the important chart below. We’re already past peak consumption growth. Consumption growth was positive on an absolute basis but remained rate of change negative with Q3 representing the 2nd quarter of deceleration off of the Q1 2015 peak
  • Both residential and nonresidential Investment decelerated sequentially and inventories contributed almost -1.5% bps to the headline number
  • Personal Income decelerated to +0.1% for Sep vs. +0.3% in August. The expectation was for a +0.2% print
  • Personal spending decelerated to +0.1% from +0.4%. The expectation was also for +0.2% print.
  • Core PCE printed flat at +1.3% Y/Y for Sep. vs. Aug. on a Y/Y basis. That number missed expectations for a +1.4% print

Three for the Road


The Stock Market Is Out of Breadth and Overstretched… via @hedgeye



Try not to become a man of success but a man of value.

Albert Einstein


According to Volkswagen, the estimated cost of the economic risks inherent in the Volkswagen recall and diesel emissions scandal is roughly $2.19 billion.

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November 5, 2015

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The Habit Restaurants (HABT) is on our Hedgeye Restaurants LONG bench.



HABT defied gravity this quarter, reporting +2.9% same-store sales growth, against a difficult +16.2% YoY comparison (their hardest one this year), walloping consensus estimates of -0.1%. Unfortunately, we did not officially move it to our core LONG ideas due to concerns about the tough compare and how the market would react if there was a miss. The company continues to grow traffic, up +0.8% in the quarter, handedly outpacing the industry. HABT currently trades at 11.38x EV / NTM EBITDA, which we think is a good value. Given the spike after market close, we are going to keep it on the bench for now and wait for a better entry point.


As we wait for that moment we are thinking about a few different things:

  • Commodity basket inflation/deflation
  • California minimum wage in effect on January 1, 2016
  • For the 1H of 2016 HABT will be running 5-6% price, how will this affect traffic?
  • LTO’s are performing well, especially salads, will it continue?
  • In an environment where most of their competitors are discounting, they are emphatic about not discounting
  • What will a healthy MCD system do to the better burger segment?



HABT turned in a stellar quarter beating estimates across the board. Revenue totaled $58.6mm in the quarter, narrowly beating consensus estimates of $58.3mm, representing a +25% increase YoY. Company operated same-store sales (SSS), as stated above, increased +2.9% in the quarter versus consensus estimates of -0.1%. The comp was composed of +2.6% price, +0.8% transactions and -0.5% mix. Most impressive was the traffic growth, evidence that they have converted trial consumers they gained as result of winning Best Burger in America about a year ago. Notably, Labor as a percent of sales increased 190bps YoY to 31.3%, driven by higher costs associated with the affordable care act, paid sick leave in California and the extended hours implemented in the quarter. HABT reported net income of $1.7mm or $0.06 per share, representing a $0.01 beat versus the consensus estimate of $0.05.



  • 47th consecutive quarter of positive same-store sales growth
  • seven restaurants opened in the quarter
  • LTOs performed well, coupled with digital media campaign, promoted without discounting
  • Comps consistent in the quarter, all months were positive, strengthened into September
  • 50bps decline in mix driven by a decline in drink and side incidents
  • Now above the $2.95 entry level price, management still believes they provide great value to the consumer
  • Price is purely a vehicle to protect margins
  • Development will be back end loaded in 2016
  • Looking into 2016 management is expecting commodity basket deflation in the 1H, with it flat to slightly up in the 2H
  • Beef is shaping up to have a favorable year in 2016
  • Halloween and Christmas being on a Saturday and Friday, respectively, are expected to have a minor negative impact



  • Total revenue between $228 million to $229 million
  • Company-operated comparable restaurant sales growth of approximately 6.0% for the full year 2015, which includes comparable sales growth of approximately 2.0% to 3.0% in the fourth quarter of 2015
  • The opening of 26 to 28 company-operated restaurants and three to five franchised/licensed restaurants


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw







Global Growth Has Not "Bottomed"

Earlier today Keith and I were on the road visiting clients in FL and debating some noteworthy victory laps by several of our [bullish] competitors.


Unlike said competitors, our process doesn’t leave a ton of room for cherry-picking data. As you may know, we run a predictive tracking algorithm on every relevant data point from every relevant economy in the world. The goal of that algorithm is three-fold:


  1. To contextualize sequential deltas as accelerating or decelerating;

  2. To contextualize the trend in any given data set as accelerating or decelerating; as

  3. To determine if the absolute value of the latest data point(s) is at/near a probable mean reversion level.


With respect to “global PMIs”, the table below compiles GDP-weighted Composite PMI data in the context of the aforementioned process:


Global Growth Has Not "Bottomed" - Composite PMI Summary


With respect to said process:


  1. Global PMIs did indeed broadly accelerate on a sequential basis in OCT. That is positive for the global growth outlook. Good.

  2. Global PMIs are still broadly decelerating on a trending basis as of OCT. That is negative for the global growth outlook and implies that the aforementioned uptick is not sustainable – at least not yet. Bad.

  3. Global PMIs are still far from “bottoming” given the average and median percentile readings in the far right column. In fact, economies like the Eurozone, Japan and U.S. are far from “bottoming” given where the latest data points fall within their respective cycles. Not good.


With respect to #2:


  1. According to the JPM Global Composite PMI series, global economic growth is still decelerating on a trending and quarterly average basis (1st chart below). Bad.

  2. According to the JPM Developed Market Composite PMI series, DM economic growth is still decelerating on a trending and quarterly average basis (2nd chart below). Bad.

  3. According to the JPM Emerging Market Composite PMI series, EM economic growth is still decelerating on a trending and quarterly average basis (3rd chart below). Bad.

  4. According to the ISM Composite PMI series, domestic economic growth is still decelerating on a trending basis. Bad.

  5. In fact, when analyzing each individual country’s benchmark Composite PMI series, economic growth across the balance of G20 economies continues to decelerate on a trending and quarterly average basis (5th chart below). One month of good data does not a trend make. Bad.


Global Growth Has Not "Bottomed" - GLOBAL COMPOSITE PMI


Global Growth Has Not "Bottomed" - DM COMPOSITE PMI


Global Growth Has Not "Bottomed" - EM COMPOSITE PMI


Global Growth Has Not "Bottomed" - ISM COMPOSITE PMI


Global Growth Has Not "Bottomed" - G20 COMPOSITE PMI


In short, when considering the preponderance of the data, any “bottoming” call with respect to global growth:


  1. Blatantly disrespects the TREND in domestic and global growth data.

  2. Blatantly disrespects the absolute level of the data – especially considering that most investors who are now calling for a “bottom” failed to identify what was an obvious top back in early 2015.

  3. Blatantly disrespects the risk of incremental #StrongDollar debt deflation – almost in cavalier fashion, especially given that the unwind of a #WeakDollar global leverage buildup is what got us in this mess in the first place.


After having done about 30+ meetings all over the country since we introduced our Q4 Macro Themes in early October, Keith and I remain of the view that #3 is arguably the most misunderstood and mispriced risk across asset markets today.


We are the authors of this view and suspect that most equity and credit investors still fail to grasp what macro investors view as a simple concept: a rising U.S. dollar tightens financial conditions globally.


Ten-plus years of financial repression in the U.S. created 10+ years of commensurate financial repression across the global economy (to prevent “Dutch Disease”) – especially in emerging markets (namely China). Such easy financial conditions perpetuated the world’s largest stock of USD and local currency denominated debt and, as a result, unprecedented levels of global demand. Now that cycle is in the process of coming undone, just as every cycle before it.


Global Growth Has Not "Bottomed" - Global Dollar Tightening


Required reading on this subject:


  • Two Schools of Thought Part II (6/8/12): We continue to view a sustained breakout in the USD as the most asymmetric and contrarian outcome facing global financial markets over the long-term TAIL.

  • Emerging Market Crises: Identifying, Contextualizing and Navigating Key Risks in the Next Cycle (4/23/13): We currently see a pervasive level of risk across the emerging market space at the country level and have quantified which countries are most vulnerable. As such, we find it prudent for investors to reduce their allocations to emerging market equity and currency risk in favor of US equity and US dollar exposure. #StrongDollar and commodity price deflation have been and should continue to be key catalysts for EM underperformance.

  • Are You Prepared for #Quad4? (8/5/14): Developing quant signals and fundamental data are supportive of investors adopting a defensive allocation w/ respect to the intermediate term.

  • #EmergingOutflows Round II: This Time Is Actually Different (12/16/14): In the context of our expectations for European and Japanese monetary policy, we think the rally in the U.S. dollar – which, now more than ever, has a profoundly negative impact on EM asset prices and economic growth – has legs.
  • 1Q15 Macro Theme: #GlobalDeflation (1/8/15): Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds (TLT, EDV, ZROZ, etc.).·

  • Are You Prepared for a Deepening of the Global Earnings and Industrial Recessions? (10/22/15): Don’t be fooled by today’s price action in the DOW (which KM shorted into the close today). To the extent the ECB and BoJ incrementally ease monetary policy as our models suggests they will at some point over the next 2-3 months, the ongoing monetary policy divergence across G3 economies is likely continue perpetuating a severe tightening of credit conditions globally via a stronger U.S. dollar. Moreover, that is likely to perpetuate a deepening of the ongoing global earnings and industrial recessions.

  • 4Q15 Macro Theme: #GameOfSlowing (10/8/15): With the Street, IMF, World Bank and OECD all still forecasting global growth of around 3% for 2015, we find it appropriate to reiterate our call for global growth to come in at or below half that rate. Moreover, while China's August CNY devaluation effectively made our #EmergingOutflows theme a consensus bearish cog in the global economic outlook, we do not think investors are appropriately positioned for a likely trend of negative revisions to the respective growth outlooks in the U.S., Eurozone and Japan throughout the balance of the year.


Moving along, the more we are right on our #EuropeSlowing view, our view that Abenomics will fail to achieve “5% Monetary Math”, or our view that the BoE is poised to shift dovish in conjunction with a rising probability of a U.K. recession, the more we will continue to be right on our structurally bullish bias on the U.S. dollar. Despite our bearish view on the U.S. economy, we believe the Yellen Fed is too far out in la-la-land with respect to its “dot plot” and GDP forecasts to implement QE4 quickly enough.


Global Growth Has Not "Bottomed" - Dot Plot vs. Fed Forecasts


Moreover, the more we continue to be right on our structurally bullish bias on the U.S. dollar, the more we will continue to be right on our structurally bearish bias on inflation expectations and the respective growth rates of global capital expenditures, global leverage and EM consumer demand associated with said inflation expectations globally.


In short, the global economy might’ve recorded a few “green shoots” in OCT, but the TREND in global growth is decidedly lower with respect to the intermediate term.


We are hopeful that this late-night rundown of the "data" helps clarify any confusion our competitors may have caused. Yes, this is the same "data" some of them told you to "ignore" and failed to identify as slowing 6-9 months ago.


Keeping it real,




Darius Dale


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