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McCullough: It’s Looking A Lot Like November 2007


In this brief excerpt of The Macro Show earlier this morning, Hedgeye CEO Keith McCullough discussed “significant decay” in the stock market, lackluster earnings and why it reminds him of 2007. 


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Here's Why McDonald's Still Has 30% Upside | $MCD

Takeaway: Hedgeye's McDonald's call has been spot on. Our analyst says the stock still has significant room to run.

Over the weekend, Barron’s ran a bullish story on McDonald’s (MCD) highlighting the research of Hedgeye Restaurants analyst Howard Penney. He has been extremely vocal about the fast-food company's company’s turnaround. In fact, just prior to the fast-food chain’s breakout earnings release on October 22, Penney wrote that McDonald’s stock “will never trade below $100 again.” 

Here's Why McDonald's Still Has 30% Upside | $MCD - CHART 1 Cartoon


Here are some of the catalysts he highlighted in his recent Fortune piece on McDonald’s, prior to its breakout earnings release on October 22:

  • All Day Breakfast could be a game changer for McDonald’s
  • Management has brought back the value message in its advertising.
  • McDonald’s has a long history of returning value to shareholders.
  • If the company established a REIT it could save billions in taxes.
  • McDonald’s CEO Steve Easterbrook has announced $300 million in cost cutting measures.

It's been a very good call. Shares are currently trading around $113 and are up 19% since Penney's team added the stock to their Best Ideas Long list.


Here's Why McDonald's Still Has 30% Upside | $MCD - mcd chart long


Despite all this, much of Wall Street continues to miss the upside in MCD. As Barron’s writer Vito Racanelli points out in the story:


“Only about a third of the 32 sell-side analysts following the Oak Brook, Ill.-based company rate its stock a Buy. That’s a useful contrarian indicator, but there are other, fundamental reasons to like the stock.”


Here’s another key section from the story:


“Penney says: “Slow growth temporarily, cut costs, and focus on the four walls.” That’s what McDonald’s has been doing since Steve Easterbrook took over as CEO last March, after years of corporate and stock underperformance. Prior to his arrival, the company had added dozens of new menu items and McCafé coffee offerings, increasing complexity in the back of the house and decreasing throughput.


Easterbrook is cutting general and administrative costs, so far to the tune of $300 million, but there’ is more to come, Penney says. McDonald’s will also eliminate about 800 underperforming stores.”


We’ll get more clarity on McDonald’s strategy today (particularly about cost cutting measures and the potential the company will create a REIT), as McDonald's management meets with investors in New York City.


Here's Why McDonald's Still Has 30% Upside | $MCD - mcd analyst day


Bottom line: We added McDonald’s to the long side of Hedgeye’s “Best Ideas List,” in August, when the stock was trading for $99. While the stock is up almost 20% since then, Penney and his team still see 30% upside.


Asia, Copper and the S&P 500

Client Talking Points


Ex-Japan, which loves Burning Yens (Up Dollar), Asian Equities have not enjoyed this Fed hike into a slow-down concept, at all. The Hong Kong Index and the KOSPI are both down -1.4% overnight; India is down -1.6%, and Indonesia is down -1.1% (all of those markets still signaling bearish TREND).


#Deflation Risk is depressing the “reflation” bulls with Copper breaking to new lows down -0.7% this morning at $2.21/lb. Copper’s immediate term risk range is 2.19-2.30.

S&P 500

The S&P 500 is down for 4 straight days and starting to signal moderately oversold in the 2050-2070 zone, so we would cover some green shoot shorts so that we can lay them out again on the next bounce to lower-highs vs. that all-time #bubble high of 2130.


**Watch The Macro Show replay - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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. 

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.

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. 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.

Three for the Road


VIDEO (2mins) The Cyclical + Secular Slowdown Call https://app.hedgeye.com/insights/47433-2-things-sabotaging-the-bullish-cheap-oil-narrative… via @hedgeye



First say to yourself what you would be; and then do what you have to do.



So far this year U.S. exports are down 11%. The only other times they have fallen this dramatically since the turn of the century were during the last two recessions.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%


Hain Celestial (HAIN) remains on the Consumer Staples Best Ideas list as a SHORT.


Three issues crept up on the company this quarter and they will likely not go away any time soon:

  • Increased competition from bigger brands that are household names
  • Across many categories in the grocery store HAIN is being forced to lower their price points to drive volume
  • Outsourcing critical sales functions to cut costs is a big risk 


HAIN issued a disaster of a quarter and management did their best job trying to make the issues the company faces seem to be just one quarter issues.  A closer looks suggest that the landscape is changing and HAIN is going to struggle to defend itself across multiple categories and channels, competing against significantly bigger competitors. 


It’s well documented that the food landscape has changed dramatically. Fresh, organic and natural products continue to take share from conventional brands and products and every retailer and foodservice operator is expanding into this space.  HAIN’s efforts to be all things to all people by having food for sale at every cash register is an impossible task to manage.


How is it that a company whose G&A expenses are less than half that of its bigger competitors, could be expected to effectively compete in the market.  As Irwin Simon loves to say, “Hain is increasingly becoming more and more channel agnostic. Today our products may be found in many different channels and many different places around the world, illustrating customers' heightened awareness of overall health, wellness and their desire for Farm to Table organic natural products wherever they shop today. Where there is a cash register, as I said many times, or e-commerce, I want a Hain product and I want to sell a product.”


This business philosophy could actually be the company’s downfall.  Unfortunately, the company’s product lines are focused on the center of the store and that is not where the consumer is going. 


Increasingly, many consumers are moving towards more fresh products and Farm to Table product offerings, whether it's at home or eating out. Unfortunately, HAIN is lacking in that area.  Most of HAIN’s products come in boxes or bags and are sold in the center of the store.  The parts of the business that make up that type of offering, fresh juices, antibiotic free and organic protein and the meat-free and plant-based products are insignificant to the total company. 


HAIN missed 1Q16 on the back of a disappointing performance for Hain U.S.  Hain Celestial U.S. Q1 net sales of $331.2 million were down 4.6% versus a year ago.


The Q1 net sales shortfall was driven primarily by:

  • Natural channel consumption softness
  • Unprofitable year ago baby and nut butter club programs that they chose not to repeat
  • Lost sales and inventory from a distributor and account shifts
  • Currency on Ella's Kitchen UK

These four factors cost approximately $16 million in 1Q16 net sales.


HAIN U.S. 1Q16 adjusted operating income of $46.6 million was down 11% YoY.  Adjusted operating income margin was 14.1% down 100 bps YoY.  The 1Q16 income and margin declines resulted from:

  • Top line shortfall
  • Higher YoY nut butter cost
  • Partially offset by productivity savings of $7.6 million


IRI 1Q16 consumption for the top 13 brands (which account for over 80% of MULO sales) were up 6% YoY.  The increase was led by double-digit gains on:

  • Sensible Portions
  • Greek Gods
  • Terra Chips
  • Alba Botanica


On the positive side of HAIN U.S., personal care, yogurt, tea, snacks and Ella's delivered high single-digit sales growth and double-digit operating income growth for 1Q16.


Management boiled down the issues at HAIN U.S. to two products - MaraNatha and Spectrum.


According to the company “MaraNatha is still recovering from last year's voluntary recall, specifically in regard to the loss of almond butter sales velocity, peanut butter distribution and private label losses, which was a business that totaled $20 million in annual sales for MaraNatha prior to the recall.”


Here is managements strategy to fix MaraNatha:

  1. Strategically reducing the product on shelf to eliminate or reduce competitive price deltas and increase MaraNatha sales velocity
  2. Offsetting peanut butter losses with innovative new products like no-added sugar or added salt almond butter
  3. Recapture our lost private label customers
  4. New see-through labels on MaraNatha packages


Here is managements strategy to fix Spectrum:

  1. Spectrum is getting attacked by lower price competition in coconut oil, which accounts for about 40% of HAIN’s business
  2. Crisco has introduced an organic coconut oil that competed with Spectrum.  Management said on the call “Easy for us to take Spectrum down to that level and get that price, but Spectrum does not stand for that quality and we won't to it”
  3. But then they went on to say – “strategically lowering prices on shelf for key customers to eliminate or significantly reduce competitive price deltas.”
  4. Work to communicate particularly on shelf, Spectrum's superior product quality


There are many instances in the organic space where HAIN is the premium product and bigger name competitors are introducing “organic” products at much lower price points.  The fix for HAIN is to lower price and/or invest in building awareness of the brand.  Given that many of HAIN’s brands have very little household awareness; this is going to be an expensive proposition.  Part of the 2H16 recovery story is predicated on “very optimistic” assumptions of MaraNatha and Spectrum which carry high risk.


Another opportunity for HAIN is to improve "Retail Mix Optimization" or said another way focus on the top 500 brands SKUs which “are significantly outperforming” the total business.


In theory, by putting increased emphasis on driving the top 500 SKUs, the retailer benefits because they'll get better velocity out of their slots on the shelf.  On the HAIN side, management is tying field sales incentive compensation to achieving specific top 500 SKU distribution gains at each customer.


Consistent with recent past call, HAIN management team focuses the street on on the increase of 100,000 points of distribution (POD).  Given that 80%-90% of these PODs are on the shelf as of 1Q16, it does not seem to be having much impact, given 4% decline in distribution. 


Lastly, management believes that the Celestial Seasonings restage will drive significant growth; the initiative is based on the new packaging graphics expanding the target market - millennials.  On the call management said, “The Celestial Seasonings brand has already started to get some traction here, because what we've seen is we've experienced an 8% increase in purchases by millennial households in the last 12 weeks.”


In an attempt to drive out costs, HAIN outsourced retail merchandising to Advantage in March.  Initially, this shift has caused some problems. Over time HAIN believes that the partnership will be a competitive advantage in regards to retail merchandising, promotional execution and distribution expansion in the natural channel, especially in 2H16.


In summary, none of what management said on the call makes me concerned about my SHORT thesis.



Net sales for the first quarter this year were $687 million representing an 11% increase on a constant currency basis but coming in well short of consensus estimates of $703 million.  Net sales were negatively affected by foreign currencies of $24.4 million and reduced nut butter sales. The Mona Group, Empire, Kosher and Belvedere acquisitions represented $52 million of net sales in the quarter. Mona net income was $31.3 million compared to $18.9 million in last year's first quarter.


Gross margin on an adjusted basis were 22.4% as compared to 23.5% in the prior year quarter, coming in 110bps short of consensus estimates. This 110 basis point decline was principally driven by the composition of the sales mix, increased costs associated with improvement to preventive controls in the nut butter business and, to a lesser extent, higher inflation. SG&A expense for the quarter on an adjusted basis and excluding amortization of acquired intangible assets was 12.5% of net sales, a 120 basis point improvement from last year.


Operating income for the quarter was $57.5 million on a GAAP basis compared to $28.8 million last year. On an adjusted basis, operating margin was 9.2% of net sales at $63.2 million this year, increasing 7.5% from $58.8 million, narrowly missing consensus estimates of $63.6 million.  Adjusted operating margins improved across all segments on a constant currency basis except in the U.S. Operating margin improvement was driven principally by HPP segment, which realized improved sales mix and productivity gains and the UK from improved commodity pricing and productivity gains.


HAIN reported adjusted earnings per share of $0.37 compared to $0.34 per diluted share in last year's quarter, coming in line with consensus estimates. Earnings per share this year were negatively impacted by $0.01 due to FX and a dilutive effect of the Mona acquisition.



Management reiterated their full year fiscal 2016 guidance, expecting net sales to be in the range of $2.97 billion to $3.11 billion. And earnings per diluted share to be in the range of $2.11 to $2.26 for the full year.



“So as those get in and we keep driving against them for the second half, that's when we will see our strongest growth and we expect the second half, they rally us back to high mid-single digit growth or high single digits growth."


“Can you just remind us how much the natural channel is now as a percentage of either your overall U.S. sales or your total company sales?  - It's about 25% of our sales, the whole natural channel.”


“BluePrint needs to evaluate price and I think BluePrint, and that category, has become crowded. I think there is such a big opportunity, and there is some repositioning going on in that category too. We’re just going through something like that right now on BluePrint with them. How do we get the right price to BluePrint to drive volume, because you can sit there $10.99 and move one per store per day or bring it down to a reasonable price whether it's $6.99, $7.99 and you see numbers grow 30%, 40%. So hopefully you're going to get more efficiencies.”


“Focusing on the top 500 primarily for conventional because, as we've talked in the past, basically in an average grocery store, you'll find 300 to 500 Hain SKUs, and in the average mass merch, you'll find 100 to 175 SKUs. So that's where the greatest impact will go.”


“The natural channel prides itself on having more variety. And so we have to figure out what's the right number there, just like we found 500 for conventional. And the key there is just always – it's fundamental, get the right mix on shelf, show the retailer what your research shows the best mix to drive sales and profit on their shelves for them.”


“And that again – just to go back to what John said, part of the problem was distributors brought into supermarkets some of these SKUs that didn't have a chance of selling in grocery stores and belong in natural food stores. So either there was spoils and that's why you see some of the consumption numbers with SKUs out there that just never had a chance. They were priced wrong. It was a wrong product. And that's kind of some of the things going on with Safeway right now and Albertsons.”


“Good. First, I apologize if I missed this, but did you guys give U.S. organic growth in the quarter? Well, U.S. organic growth from the U.S. businesses were down.”


“Our Tilda rice business is strong and not so much bagged rice. It's the ready-to-eat as consumers – millennials today want to be able to heat it up and heat it up at home.”


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw




CHART OF THE DAY: Stock Market Breadth Reminiscent of Summer 2007

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more and subscribe. 


"... With almost 2/3 of stocks in the Russell 3000 (98% of US stocks you could buy/sell) trading below their 200-day Moving Monkey, even the non-quant-one-factor-price-momentum-chart-chaser sees the decay in the internals of the US stock market at this point."


CHART OF THE DAY: Stock Market Breadth Reminiscent of Summer 2007 - Chart of the Day

Invisible Shoots

“The effect was invisible to an observer of the overall market or someone studying just a few stocks.”

-Lasse Heje Pedersen


The aforementioned quote comes from a thick book I cracked open on the way to Houston, Texas yesterday titled Efficiently Inefficient, where the author (Pedersen) prefaces his learnings about markets with his experience working at AQR in 2007.


In the summer of 2007 quant fund AQR (co-founded by the colorful Cliff Asness who is a must follow on Twitter) “was profiting from some bets against the subprime market but was starting to experience a puzzling behavior of the equity markets…”


“… equity investors had started liquidating some of their long and short positions, which affected equity prices in a subtle way. It made cheap stocks cheaper, expensive stocks more expensive, while leaving overall equity prices relatively unchanged…”


Sound familiar?


Invisible Shoots - Bull goes... 07.11.2014


Back to the Global Macro Grind


With almost 2/3 of stocks in the Russell 3000 (98% of US stocks you could buy/sell) trading below their 200-day Moving Monkey, even the non-quant-one-factor-price-momentum-chart-chaser sees the decay in the internals of the US stock market at this point.


While every risk management overlay I use signaled the subtle bubble effect in US Equity prices at the summer 2015 high (1st time we went bearish on SPY = July 2015 Macro Themes call), after equity volatility went from 12 to 40 (VIX), it wasn’t subtle anymore.


As a result, consensus equity market bulls spent AUG-SEP “taking down gross long exposure” and “tightening net exposure” to the point that we had the biggest net SHORT position (CFTC futures/options contracts) of the year at the end of September.


Then the epic October squeeze…


Now, after consensus hedge funds have covered some of that -281,000 net short position (down to -181,291 contracts as of last Tuesday’s non-commercial CFTC positioning data), the SP500 has been down for 4 straight days.


But what does it all mean? Does it matter if the SP500 isn’t “down huge” (if you pick the lower-all-time-high as your reference point)? Or is that just a brain-dead thing to say for someone who is supposed to be selling active management products?


Remember, the SP500 was “flat” in 1987 too.


Much like how we measure everything else here @Hedgeye (in rate of change terms), after an epic OCT squeeze, both the SP500 and Russell 2000 are still -2.4% and -8.6% from their all-time closing highs.


Is that a buying opportunity?


How about in the expensive stocks that continue to get more expensive as the cyclicals (which looked “cheap” on the wrong numbers) continue to get cheaper?


Watching Priceline (PCLN) yesterday was interesting, if only because it tests the narrative of how expensive growth stocks can get in a top-down #GrowthSlowing macro market:


  1. Long-term “growth investors” could have bought all the PCLN in the world at $45/share in OCT of 2008
  2. Short-term chart chasers could have established a cost basis of $1454/share in OCT of 2015
  3. After losing -10% of its market cap in 2 weeks, the stock is still expensive at 28x trailing 12 month earnings


I personally have no opinion on PCLN, so please don’t take this subtle US equity market observation personally.


We’ve had an explicitly bearish opinion on inflation expectations (for almost 18 months now) and continue to see Red Shoots this morning when I look across the risk spectrum of Global #Deflation:


  1. Trending Foreign Currency (FX) #crashes around the world are firmly intact
  2. Both the Hang Seng and KOSPI were down -1.4% overnight after failing @Hedgeye TREND resistance
  3. Copper’s crash continues, down another -0.7% this morning to $2.21/lb (-22% YTD after starting 2015 at $2.82/lb)


So, if you’re still telling clients to buy “reflation” on some bogus PMI lag thing, they’re getting deflated by both marked-to-market risk and trending economic demand data. Reminder, last week’s ISM print in the USA was 50.1 (down -7.8% year-over-year).


But, if you’re being honest about everything that’s crashed (so far) in 2015 (Foreign Currencies, Oil, Commodities, Emerging Markets, Energy/Basic Material Stocks, etc.), you might just be subtly cautious about buying expensive stocks at their all-time highs.


To my sell-side competition, the effect of everything I’ve been signaling all year long is as invisible to them today as it was in November of 2007. And I’m totally cool with that. It’s what makes a market.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.06-2.38%

SPX 2050-2095
RUT 1149--1205
USD 97.68-99.55
EUR/USD 1.07-1.09
Copper 2.19-2.30


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Invisible Shoots - Chart of the Day

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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.