It was announced this morning that Goldman Sachs sold 1.3 million shares of Valeant stock that was pledged by CEO, J. Michael Pearson in exchange for a $100 mill loan.  Pearson owns ~10 mill shares, of which ~2 mill are pledged as collateral in exchange for loans "to fund tax and other equity incentive awards and purchases of Company shares".  There are also 1.2 million shares in addition to the 10 million that belong to Pearson's grantor retained trust (GRAT), but are not included in the total as Pearson has "no pecuniary interest".  The proxy filing does not explicitly state whether the 1.2 million GRAT shares were used as collateral for the loan.


VRX | MORE QUESTIONS... - 2015 11 06 2015


According to Valeant's press release, the $100 mill in loan proceeds was used for "among other things, financing charitable contributions, including to Duke University, and helping to fund a community swimming pool, purchasing Valeant shares, and meeting certain tax obligations related to the vesting and payment of Valeant compensatory equity awards".  


VRX | MORE QUESTIONS... - Valeant Issues Statement


This is a problem if the 1.3 million in pledged shares were unrelated to Pearson's GRAT, because the proxy filing explicitly states that the proceeds of those loans were used only "to fund tax and other equity incentive awards and purchases of Company shares".  There is no mention of charitable donations, and brings into question what else Pearson may have used the proceeds of the loan for? 


VRX | MORE QUESTIONS... - 2015 11 06 Tax


Michael Pearson's large stake in the company and compensation tied to TSR has been a cornerstone of the bull thesis, providing assurance that incentives are properly aligned.  Therefore, it is clearly a problem if Michael Pearson used the loan proceeds for anything other than what is stated in the proxy filing.... even if it is for "charitable" purposes.  It is possible that the charitable contributions were made through the GRAT, although a GRAT is usually established as a way to transfer wealth to relatives to avoid paying a gift tax.


We have no problem with the practice of pledging stock as collateral in exchange for a loan.  What we do have a problem with is if Pearson used the proceeds of the loan for purposes other than what was disclosed to shareholders.  Given the falling stock price and heightened scrutiny, we would welcome an audit of the loan proceeds.

pearson allowed to sell stock

The 2014 proxy filing states that Michael Pearson is not permitted to sell "net shares until 2017".  However, the proxy filing in 2015 "permits Mr. Pearson to sell 3,000,000 net shares.... plus transfer an additional 1,000,000 net shares in charitable contributions".  This represents 50% of his stake (net of the 2 mill shares pledged as collateral), compared to 0% in 2014.  


"Valeant has adopted a policy generally disallowing future pledges and is permitting Mr. Pearson to sell shares, which may reduce the level of pledging"




This is a big change from the policy of prior years.  Pearson has touted that he has "not sold any shares provided to [him] as compensation" since joining Valeant.  However, we don't see any difference between selling stock and pledging shares as collateral for a loan, and based on the commentary in the latest proxy filing, neither does the board.


Please call or e-mail with any questions.


Thomas Tobin
Managing Director 



Andrew Freedman






The 'Where’s Waldo' Jobs Report: Head Fake Before Slowdown?

On Fox Business’ Mornings With Maria, Hedgeye CEO Keith McCullough, Editor Jack Otter and FBN’s Trish Regan analyze the October jobs report.

Click The Image Below to watch.

The 'Where’s Waldo' Jobs Report: Head Fake Before Slowdown? - fox bus  jobs



RTA LIVE: November 6, 2015



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Jobs, USD and Rates

Client Talking Points


Something in the 90% range of questions we’re receiving on this jobs report have to do with the “upside” surprise in the numbers, so we’ll stay with the #LateCycle Employment call and remind you there’s a lot of downside. If you look at a chart of the 10-Year U.S. Treasury Yield you can see long-term investors have understood this for almost 2 years now.


This is the most obvious live quote signaling that expectations are for a “bullish” jobs print – so anything that’s not bullish would be USD bearish with immediate-term downside in the USD Index to 96.52 and upside in EUR/USD to $1.11.


We’re not so interested in nailing the number today as we are getting the 3-6 month rate of change in NFP slowing – the absolute peak was in DEC of 2014 (tough pending comp!) and the rate of change peaked at 2.34% NFP ear-over growth in FEB of 2015 – these cycles are long.


**Tune into The Macro Show 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


Penney: $MCD could trade at a premium to $CMG and why Chipotle Could Easily Fall Another 25%… via @hedgeye



Do not wait; the time will never be "just right." Start where you stand.

Napoleon Hill


Toyota Motor Corp. said it would spend at least $1 billion on a Silicon Valley research center to study autonomous driving and robotics.

CHART OF THE DAY: Twilight Before Recession?

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake.

CHART OF THE DAY: Twilight Before Recession? - EL Income   Consumption Growth


"... In reality, any number of statistics can be trotted out to support a given narrative.  It should not be a secret that our late-cycle narrative expects further deceleration.


Is a recession immediately imminent? …  the balance of lead labor market data doesn’t suggest that, but we are in the twilight of the current expansionary cycle and the slope of the line across a growing number of indicators has gone negative.  Today’s employment report for October won’t change the trend in payrolls."   

Wet Edge

"Success isn't owned. It's leased and rent is due every day."

- J.J. Watt


Most nights the last couple months I’ve been renovating my house. 


Hanging drywall … by yourself … at midnight … on the ceiling … without a lift =  bull market in irritation … and Advil.


And with fingers scraped & sanded,  I also haven’t been able to sign into my Bloomberg “white collar” Terminal for like 5-months (if you’re unfamiliar, the Bloomberg Terminal requires you to swipe your finger for authentication and access). 


I don’t know if it’s a disproportionately finance industry specific phenomenon, but I’ve met a remarkable number of people over the last 8-years who take discrete pride in knowing as few “life skills” as possible … and doing even less. 


None of those people work at Hedgeye.


Back to the Global Macro Grind …. 


Last night, I finally started painting. 


Back when I was a contractor:

1st rule of #PaintClub = don’t talk about Paint Club

2nd Rule of Paint Club = see rule #1


3rd Rule = Always be yourself. Unless you can be Brad Pitt. Then always be Brad Pitt. 


4th Rule = Always keep a wet edge.


In other words, forget about what you already painted – you can’t back brush through a partially dried section or you just end up with more problems.


In other other words, Paint Club and Macro Club employ the same axiomatic strategy – “everything that matters happens on the margin”.   


Remember, in managing macro risk or contextualizing any cyclical or periodic function, it’s all about better/worse, not good/bad. 


Don’t be an absolutist. 


In my eclectic journey to adulthood I also happened to be a teacher.  There aren’t any punchy TeacherClub rules, but conventionally, Socratic dialogue variants remains a staple in the pedagogical arsenal. 


Wet Edge - Jobs report cartoon 06.04.2015


Going with the Jobs Day theme, I’ll describe a statistic or Trend dynamic and you tell me what Macro Fundamental I’m describing: 


Q: 2.34% - February 2015

A: Cycle Peak in Payroll Growth


Q:  +745K

A:  The NFP number in October needed to match the rate-of-change peak in payroll growth recorded in February. Not going to happen.


Q:  3-Month Ave < 6-Month Average < 2015 Ave < 2014 Ave

A:  Net monthly change in Non-Farm and Private Payrolls.  So, not only are we past peak from a growth perspective, the trend on an absolute basis is clearly one of slowing.


Q: Toughest in 5-years

A: Payroll Comps over the next few months.  Again, no (Trend) acceleration for you! (soup nazi voice)


Q: +/- 90K

A: The standard error on the monthly NFP figure.  In other words, if the NFP print is 90K, the BLS is 90% sure we gained between 0 and 180K jobs on the month.  Seeing as how the monthly market mania revolves around whether we beat or miss consensus (on an unpredictable number) by some few thousand, it’s easier to understand why Hedgeye typically takes an amusingly detached view of a middling number in any given month.  1st Rule of Manic Media Club = Our Brand is (fabricated) Crisis


Q: 30%

A: High Wage Jobs as % of total payroll gains in September.  Well below the trailing 3M and 12M average of 49%.  Positive mix has supported rising income growth with wage growth flat in recent quarters.


Q:  -0.11%

A:  Aggregate Income Growth (month-over-month) in September.  Decelerating growth in aggregate hours and flat wage growth in the September employment report translated into a deceleration in income growth. Income growth anchors the capacity for consumption growth and given the slowing trend in payrolls and progressively steeper income and consumption comps, it looks increasingly likely that aggregate income growth is now past peak. 


Q:  17,344

A:  Energy Sector Job-Cuts in October – 6-month high.  Energy-related job losses ramped at the beginning of the year as the commodity price cratering rolled through on a short lag.  After a mid-year respite, we’ve expected a re-ramping in employment adjustments into year-end as hedges roll off and hedge protection fails to buttress profitability in the same way it did previously.   Direct energy sector employment – as classified by the BLS – only represents ~50bps of total NFP employment but those workers make ~2X the average wage, so energy employment represents ~1% of the labor force on an effective worker basis.   


Q: 7.3%

A:  This one isn’t employment related, but it’s worth a highlight.  It represents the net % of banks tightening C&I lending standards in 4Q15 (Fed Senior Loan Officer Survey).  This is only the second time since the last recession that a net positive percentage of banks tightened standards.  Lending is pro-cyclical and, historically, C&I lending standards have been a strong coincident to lead indicator for equity prices and the broader economic cycle.  There have been occasional false positives, but willfully ignoring the signal in a late-cycle expansion ≠ fiduciary feasance. 


Q: Anything >0

A:  Basically any positive number = “some further labor market improvement” and would meet the Fed’s amorphous qualitative threshold.  Slowing improvement still equates to improvement but completely ignores a 2nd derivative consideration of the data.  Is it likely we get something <100K, probably not but the dollar and yields have clearly already discounted the rhetorically hawkish commentary from the FOMC  and most of our conversations have focused on the “upside risk” to the jobs report.


A Q&A format like this, while instructive, is a data cherry-pickers playground.  Here’s a couple to help keep the bull-bear balanced. 


Q: March-April 2015 (+153K), Dec’13-Feb’14 (154K ave), March-April 2103 (151K ave).

A:  Slowdown Headfakes.  In each of the above instances, payrolls hit a multi-month soft-patch only to recover and re-accelerate.     


Q:  24.6-Months

A:  The number of months from the peak in payroll growth to the peak in the economic cycle.  Looking at this indicator, in isolation, suggest some investible runway left in the expansion.  


In reality, any number of statistics can be trotted out to support a given narrative.  It should not be a secret that our late-cycle narrative expects further deceleration.


Is a recession immediately imminent? …  the balance of lead labor market data doesn’t suggest that, but we are in the twilight of the current expansionary cycle and the slope of the line across a growing number of indicators has gone negative.  Today’s employment report for October won’t change the trend in payrolls.   


Keith is on Fox from 6-9am this morning covering the employment release and will anchor the SportsCenter of Global Macro – the @Hedgeye Macro Show - at 9am. 


Alpha is leased and rent is due everyday.  Keep your macro edge wet and mind the margin. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.98-2.31%

SPX 2030-2119 

VIX 13.96-19.07

Oil (WTI) 43.02-48.15 

Gold 1100-1145 

AAPL 114-124


Christian B. Drake

U.S. Macro Analyst


Wet Edge - EL Income   Consumption Growth

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