Investing Ideas Newsletter

Takeaway: Current Investing Ideas: TIF, JNK, W, WAB, ZBH, MCD, RH, LNKD, ZOES, GIS, EDV & TLT

Investing Ideas Newsletter - bubble cartoon 11.02.2015


Below are our analysts’ updates on our twelve current high conviction long and short ideas. As a reminder, if nothing material has changed in the past week which would affect a particular idea, our analyst has noted this. Hedgeye CEO Keith McCullough’s updated levels for each ticker are below. Please note that we removed Gold (GLD) this week. 


Investing Ideas Newsletter - investingideas11.6.2015


Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less



To view our original note on McDonald's click here.


Post earnings, the next catalyst for McDonald’s (MCD) is going to be next week's 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.


To view our analyst's original report on LinkedIn click here.


It was another good week for LinkedIn (LNKD). LNKD shares were up another 4% this week. LinkedIn reported strong 3Q results and 4Q guidance coming in ahead of the Street's expectations on Oct. 29th. In just two weeks, the shares are up 19%.


The next catalyst on the horizon is its 2016 guidance release in February. We’re not 100% sure we want to stay long into that event simply because this management team is notoriously cautious with its guidance, particularly the initial release.


Stay tuned for an update.


To view our analyst's original note on Wabtec click here.


Since Wabtec (WAB) reported, we have gotten some additional information in the 10-Q, as well as in GBX’s fiscal year-end report and other industry reports.


WAB’s quarter still looks poor because of Freight segment implied order rates that were well below sales and weaker non-PTC aftermarket demand.  Unfortunately, the 10-Q does not provide much granularity on the cost side.  We expect 2016 rail car build rates to move lower, if OEMs behave rationally.


Investing Ideas Newsletter - wab 11 6


To view our analyst's original report on Wayfair click here.


Wayfair (W) reports its 3rd quarter earnings on Tuesday 11/10.  E-comm traffic trends for the company looked particularly strong in the quarter and we are modeling a top-line beat for the print.


Could W build from $2bn in revenue to $5bn over 3-4 years? Yes, it could. Given its solid balance sheet and minimal working capital requirements, there’s no reason why that can’t happen.


But don’t forget the bigger picture call on this name. The whole time it will likely continue to lose something in the vicinity of $100mm/yr.  Two core reasons for this are:

  1. Mono Channel does not work. Restricting sales to just the internet in this category is just as bad as a retailer who focuses 100% on physical stores. Both are highly likely to fail over time.
  2. TAM is limited. The categories that W needs to grow its business profitably skew to the higher-end consumer who is focused on aesthetic and assortment. W’s consumer is focused on Price. The competitive set there is not pretty. Of the $323bn home furnishings market, we think that just $20bn is relevant for W, a number much lower than what management and the bulls are counting on.


To view our analyst's original report on Tiffany click here.


Here is an excerpt from Hedgeye CEO Keith McCullough commenting on Tiffany's (TIF) downward move on Friday:


"On the macro market overall, this one-off Waldo of a NFP report (last month was revised down to 137,000) is doing exactly what I thought it might - scaring the market into the idea that the Fed could very well hike into a slowdown, and cause a recession... 


Don't forget how assets, and their #Deflation risks, are priced in US Dollars. A rate hike = #StrongDollar Deflation of anything commodity/debt linked, in Dollars."


58% of TIF's sales come from products that contain diamonds. Nearly all of TIF's sales come from products that contain either Gold, Silver, or Platinum.  There are few retail stocks that could see more risk in this current late cycle economy than TIF. Next year's estimates are sitting at $4.54. We think an optimistic number is $4.25. If our Macro team's bearish call plays out according to plan, TIF will be lucky to earn $4.00. 


To view our analyst's original report on Restoration Hardware click here.


Restoration Hardware (RH) hit all-time highs this week, but this story is far from over. We think RH will earn close to $11 per share in 3 years, which compares to the consensus estimate of just over $6. We estimate that the stock is worth $300.


The square footage component is well known, but we think people are missing…

  1. The productivity and market share that we’re likely to see from each new store,
  2. How scalable this business model is without commensurate capital investment,
  3. The leverage we’re likely to see is below-market real-estate deals being struck today and that should begin to impact the P&L.

Additionally, this week RH opened its first dedicated Modern store on Beverly Boulevard in LA.  The 18,000 square foot store will feature product exclusively from the new Modern line. It’s likely that RH will test a few of these standalone Modern concepts in appropriate markets, think LA, Miami, and New York.


It’s also likely that the concept will prove to be viable as a stand-alone. The punch line there is that RH has a number of new concepts which it has already unveiled, and some yet to be announced that could justify a standalone door, meaning we are likely to see less legacy store closures than most on Wall Street think.


RH Modern LA Store

Investing Ideas Newsletter - RH Modern Store


To view our analyst's original report on Zimmer Biomet click here. Below is an update from Healthcare analyst Tom Tobin:


While our negative thesis is playing out in typical, slow motion fashion in the data, the stock action across Healthcare has been far more volatile.


For Zimmer Biomet Holdings (ZBH), this meant trading from a high of $121.84 in March to a low of $88.77 in October. Fundamentally, trends did not deteriorate nearly as fast, so on the margin a bounce to $108 is to be expected. Looking forward we are seeing the data to support that medical consumption slows dramatically as we grind into 2016. 


Today’s employment report is beginning to show signs of weakness in Healthcare employment trends. For context, we have been able to map growth in Healthcare employment to the sales growth across the S&P 500 Healthcare Index, and the trend has been extremely strong, so strong that the month over month gain in June 2015 was 2.9 standard deviations above the average since 2007. Since it can’t get any higher than 3, we’d call that a peak and be pretty comfortable saying so. 


Earlier this week, we updated a few of our #ACATaper charts and saw the first indication that the elevated consumption of the newly insured is finally rolling over. Lastly, when HCA and the other hospitals reported Q315 admissions numbers, they are all showing signs of slowing. The slowing impact is catching up to ZBH as we’ve noted before; US Knee Revenue declined -1.8% in 3Q15. 


Investing Ideas Newsletter - Admission Trends


This afternoon I am speaking with a radiologist to cover a number of topics. As it relates to ZBH, the #ACATaper should be particularly painful for imaging.  MRI, CT, mammography, are all highly concentrated in the age group where the ACA had it’s biggest impact. If we are right on the #ACATaper, I would expect to hear scan volume is slowing, which will also mean anything else that accelerated 2H14 and 1H15, knee replacement surgery included, will be slowing even further the next several quarters.  


Investing Ideas Newsletter - PENT UP DEMAND


To view our analyst's original report on Junk Bonds click here.


Jobs report Friday was eventful to say the least.


To sum things up, the expectation for a Fed rate hike was pulled forward which is why we are removing GLD. More deflation from a stronger USD with rates moving higher in the near-term (NOTE: A stronger USD vs. potential more cowbell from Draghi) is NOT good for gold. It is good for a JNK short position.


Current policy makers remain fixated on the jobs market, and this Friday’s report was good on the surface. Here’s the rundown:

  • The U.S. added +271K to non-Farm payrolls in October which blew out the expectation for +185K additions (last month’s awful print was revised even lower to +137K additions). Remember that the estimates are useless as the number is near impossible to predict. Keep that in mind.
  • Unemployment Rate moved lower to 5.0% for October from 5.1% in September
  • Wage growth was a positive surprise as Avg. hourly earnings printed a +2.5% growth rate for October vs. an expectation of +2.3%. The growth rate in September was +2.2%

So, again, on the surface it was a positive report. However, as we’ve emphasized, consumption and labor market strength are staples of an economy that is late cycle. Don’t take our word for it. It’s in the data:


Investing Ideas Newsletter - 11.06.15 NFP Chart


To borrow a small section of the rhetorical Q&A from this morning’s Early Look where we outlined the correct way to analyze the labor market:


“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.”


The number was good, but a bucking of the trend in the late-cycle NFP series is unlikely to be optimistic. 


The house view is that bonds work either way (rate hike or not). Growth continues to slow, and a rate hike has the potential to pull-forward a recession and flatten the yield curve. In the event this happens, you’ll be happy you held onto your long-bond position.


On the gold front, more deflation and higher rates is not a recipe for a long gold position. Even if the Fed doesn’t hike in December, the deflation risk for the next month, as the world re-positions up for a rate hike, could continue pressuring gold prices. It’s best to stay out of the way.


If you haven’t bought into the #slower-for-longer view, the market is giving you the chance to buy bonds at another lower high… For the 5th time this year. Again, we don’t expect you to take our word for it which is why we show you the data. See the chart below.


Investing Ideas Newsletter - 11.06.15 policy Expectations


There has not been much notable news on General Mills (GIS) as of late. GIS continues to be one of our top ideas in the Consumer Staples sector. Sector head Howard Penney loves the name for its characteristics during the current macro driven market. Big-cap, low-beta, and their line of sight at growing the top line in a meaningful way, are contributors to our LONG thesis.


Nothing has changed at Zoës Kitchen (ZOES). We still love the management team and the concept of the restaurant. But due to the macro-driven market, high beta, low-cap names such as ZOES have fallen out of favor.


If you are a "buy and hold" type of investor this is a name you want to be in for the long run, especially at these values. This company has a long runway of growth which we believe is only just in the beginning stages. 

Cartoon of the Day: Ready For Liftoff?

Cartoon of the Day: Ready For Liftoff? - Rate hike cartoon 11.06.2016


"I openly challenge the Federal Reserve to hike into this #LateCycle Slowdown," Hedgeye CEO Keith McCullough wrote following today's jobs report. "If perma-stock market bulls are so ready for a rate hike, have at it. See what happens."

[UNLOCKED] Global Growth Has Not "Bottomed"

Editor's Note: Below is a complimentary research note written earlier this week by Hedgeye Macro analyst Darius Dale. If you'd like more information on how you can subscribe to our institutional research please send an email to


* * *


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:


[UNLOCKED] 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.


[UNLOCKED] Global Growth Has Not "Bottomed" - GLOBAL COMPOSITE PMI


[UNLOCKED] Global Growth Has Not "Bottomed" - DM COMPOSITE PMI


[UNLOCKED] Global Growth Has Not "Bottomed" - EM COMPOSITE PMI


[UNLOCKED] Global Growth Has Not "Bottomed" - ISM COMPOSITE PMI


[UNLOCKED] 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.


[UNLOCKED] 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.


[UNLOCKED] 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


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

GLD: We Are Removing Gold From Investing Ideas

Takeaway: Please note we are removing Gold (GLD) from Investing Ideas

Jobs report Friday was eventful to say the least.


To sum things up, the expectation for a Fed rate hike was pulled forward which is why we are removing GLD. More deflation from a stronger USD with rates moving higher in the near-term (NOTE: A stronger USD vs. potential more cowbell from Draghi) is NOT good for gold.


Bottom line? More deflation and higher rates is not a recipe for a long gold position. Even if the Fed doesn’t hike in December, the deflation risk for the next month as the world re-positions up for a rate hike could continue pressuring gold prices.


It’s best to stay out of the way.


GLD: We Are Removing Gold From Investing Ideas - gold bar


Jobs Report: ‘The Better These Numbers Get, The Closer You Are to a Recession’



In this excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough and Macro analyst Darius Dale break down the October jobs report and explain what it means for investors.


Subscribe to The Macro Show today for access to this and all other episodes. 


Subscribe to Hedgeye on YouTube for all of our free video content.

When "Bad Is Good" Goes Bad? | October Employment

Takeaway: Good Domestic Data Perpetuates Global Deflation Risk. The Last Domino Is Still A Domino.

I contextualized a lot of the current labor market dynamics in this morning’s Early Look (HERE), I touch on the incremental below.


The payroll data for October was strong across the board:   Headline NFP & Private Payroll gains, Hourly Earnings, Unemployment/Underemployment Rate (with healthy internals), Positive Sector Hiring Breadth, Employment mix were all better sequentially. 


The Fundamental Read-Through | Here’s what the prevailing narrative will be in the wake of the October data: 


At 5% Unemployment, the domestic labor market is now at or flirting with full employment and, with wage growth making a new cycle high at +2.5%, has finally reached some critical threshold whereby that tightness is beginning to manifest in higher earnings growth


Conventionally, wages are viewed as a lagging indicator, with wage inflationary pressure building as the labor supply declines and the economy moves towards constrained capacity.


The intuition is straightforward:  ↓ Supply + ↑/Stable demand = ↑Prices ….  as the labor market tightens (supply goes down) and job openings and hires remain solid (demand), the price of labor rises. 


That line of thinking is commonsensical and the core of the slack debate has centered on the magnitude of the shift in labor supply-demand dynamics and whether policy should move ahead of or behind any emergent inflationary curve in service of their dual mandate.  


The problem of the last 3 decades, however, has been that, by and large, there has been no inflation curve.  The conventional output-inflation loop in which rising wage growth drives demand pull inflation which drives an acceleration in broader inflation has been almost non-existent over the last 3 cycles.


Even with the inflationary cocktail of peak demographics, peak productivity growth, peaking leverage, asset price bubbles and positive interest rate cycle dynamics coming in-phase in the late 90’s and mid-2000’s core PCE inflation failed to rise much above 2%.     


The bearish/dovish re-joinder to the above is that on a Trending basis payroll growth is slowing, a growing list of lead indicators have moved past peak, the preponderance of domestic and global macro data has slowed in recent months, inflation is not an emergent threat, the Aug/Sept Employment figures were more reflective of the underlying reality and October was the outlier.  Time will be the arbiter. 



On Wage Growth:  Wage growth for production and nonsupervisory employees (~80% of the labor force) was +2.3%, below the private sector average of +2.5% so the improvement was broad based but still disproportionately going to the top quintile.  


Is a return to a halcyonic 4-4.5% level of nominal wage growth of prior cycles (see chart below)  in the face of persistently lower inflation, an aging workforce, top heavy demographics, lower productivity and lower credit growth a reasonable expectation?


Probably not.  Could we accelerate to +3.0%?  … sure, I suppose, but know that you’re (maybe) playing for something like ~50 bps and wage growth peaks at the very tail end of the expansion.   


Income & Consumption Read-through:  Consensus growth expectations continue to rely almost singularly on consumption expenditures and income growth anchors the capacity for consumption growth.  The acceleration in aggregate hours worked + acceleration in hourly earnings will = re-acceleration in aggregate income in Oct (reported 11/25). 


The slope of household spending growth will hold modestly negative (off the 1Q15 peak) but will remain “good” on an absolute basis to start 4Q, particularly if the savings rates stays static at current levels. 



The Market Read-Through:  #DeflationRisk


The Dollar, Yields, and Fed Fund futures which had already been discounting the rhetorically hawkish FOMC commentary all appear to be pricing-in the final price-in of a December hike.  And there's a month of data and another employment report to digest before that policy trigger pull.


A correction in equities alongside an attempt at policy normalization would not be surprising.  After all, if QE = ↓ Yields = ↓ Discount Rate = ↑ Present values, the converse should hold in some measure as well.  


Notably, if you look at the Shadow Fed Funds Rate – which attempts to translate unconventional policy initiatives into Fed Fund equivalents – we have been in a rising rate environment since April, 2014 and the effective Fed Funds rate has risen ~225 bps to -0.75% from -3%.  From a rate of change perspective, the macro data has slowed concomitantly.


Strong $USD:  A policy induced strong dollar only perpetuates global deflation risk.  Global Inflation expectations are priced in dollars (as are the Trillions in $USD denominated EM debt) and further dollar strength will only exacerbate the OUS growth and inflation challenges faced by foreign central banks.  The U.S. will continue to import that deflation on the back end and the industrial and earnings recessions we’ve witnessed the last two quarters domestically will persist.


Sustained domestic de-coupling is a sirenic concept but deflation's dominoes follow a winding path.  The last domino is still a domino.  


A visual tour of the Employment data is below.  


When "Bad Is Good" Goes Bad? | October Employment - NFP YoY


When "Bad Is Good" Goes Bad? | October Employment - Paryoll growth vs earnings growth


When "Bad Is Good" Goes Bad? | October Employment - Goods vs Services


When "Bad Is Good" Goes Bad? | October Employment - Wage Growth Nonsupervisory


When "Bad Is Good" Goes Bad? | October Employment - PCE inflaiton vs Unemployment


When "Bad Is Good" Goes Bad? | October Employment - Available Workers per job opening


When "Bad Is Good" Goes Bad? | October Employment - 20 34 YOA


When "Bad Is Good" Goes Bad? | October Employment - Employment by Age


When "Bad Is Good" Goes Bad? | October Employment - Empl Summary



Christian B. Drake



investing ideas

Risk Managed Long Term Investing for Pros

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.