Final Reminder | Invite to Macrocosm: The Dock Debates

A final reminder that limited seats remain for our first institutional conference Macrocosm: The Dock Debates in Stamford, CT on Wednesday, November 18th from 12 - 7pm.  


Please contact sales at  for pricing and availability.


Hedgeye CEO Keith McCullough will moderate five panels with experts on various macro topics including Currency Wars, Consequences of QE, Europe, Demographics and Healthcare. Panelists include David Einhorn, Jim Rickards, Michael Aronstein, Daniel Lacalle and Jurrien Timmer among others. Click here for the full roster and bios. 


Importantly, there will be ample time allocated at the end of each debate for interactive audience Q&A.


Please note that this event is off the record (i.e. not open to any media) and seating is limited.


Final Reminder | Invite to Macrocosm: The Dock Debates - Macrocosm1

Pelosky: Our Worrisome ‘Tri Polar World’ and Its Global Implications

In this second installment of our recent interview with J2Z Founder and Principal Jay Pelosky, Pelosky lays out the implications of his Tri Polar World (TPW) theme. According to Pelosky, TPW simply means we are now in a world of 1) Insufficient demand; 2) Excess supply; 3) No inflation; and 4) Excess debt. It comes from his view that, “2008 was not only a financial crisis and crash, but it also meant the crash of all major global growth models at the same time.” He speaks with Hedgeye Director of Research Daryl Jones.

The Week Ahead

The Economic Data calendar for the week of the 16th of November through the 20th of November is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - 11.13.15 Week Ahead

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Investing Ideas Newsletter

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

Investing Ideas Newsletter - Yellen cartoon 11.11.2015


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. 


Investing Ideas Newsletter - 11 13 2015 5 12 19 PM


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 analyst's original report on Junk Bonds click here.


It was a nasty end to the week for the “growth is back” bulls. It was an equally nasty end to the week in equity markets. The S&P 500 was “going to all-time highs” Tuesday before retreating over 3% from Wednesday to Friday.


Macy’s CEO hinting at the ‘R’ word (“recession”) certainly didn’t instill any confidence or convince us that we should ignore talk of an impending earnings recession. To quote its CEO Terry Lundgren on the Q3 earnings conference call:


“We’re in one of those tough periods that retail experiences every 6 or 7 years.”


Company CEOs in pro-cyclical industries are not incentivized to call for recessions. Interestingly, the last time Terry was on an earnings call was Q4 of 2009. As our retail sector head, Brian McGough reminded us, “Macy’s represents about 10% of soft-line retail, or $28bn. In other words, it matters.”


Friday’s poor retail sales print echoed the softness outlined by Macy’s management.


As you can see in the chart below (artistic wizardry brought to you by Keith McCullough), retail sales peaked last November which means:

  1. The cycle is slowing
  2. The November number is comping on top of a peak 2014 number, so the chance of more deceleration in November is likely

Investing Ideas Newsletter - 11.13.15 retail sales


With continued data-driven confirmation that growth is slowing, the awful deflationary PPI numbers released Friday provides an easy segue into outlining why you want to short junk: 

  • PPI (producer price index) printed -1.6% Y/Y for October
  • On a m/m basis, PPI declined -0.4% 
  • Declines in the energy component certainly bring the index lower, but PPI ex. Food and energy only printed +0.1% Y/Y which is ugly

Investing Ideas Newsletter - 11.13.15 PPI


Deflation crushes the debtor. Especially the debtor with high interest expenses (JNK). Even worse are debtors who borrow at expensive rates and sell something leveraged to commodity inflation because it creates a powerful feedback loop:

  1. Deflation takes commodity prices lower (Rev. & Cash Flows go down)
  2. Companies need more funding sooner
  3. However, a company looks like a worse credit as it’s generating lower cash flows. This means they have to borrow at even higher rates SOONER
  4. Now, as cash flows are going lower, interest expense is increasing, and funding often evaporates as a company can’t find lenders

This is why deflation is already crushing the high-yield energy debtor.


JNK was down -1.8% w/w with the CRB Commodities Index down -3.5% w/w. Picking up that gain on the short side in JNK beats getting clobbered for being long equities this last week. 


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


Editor's note: We added Wabtec to the short side of Investing Ideas back in September. Since then, our call has worked out well with shares falling 18.5%.


The latest carload volume data combined with fleet age demographics continues to point to a sustained period of weak rail car orders, a negative for Wabtec. With Class 1 Railroads curbing capex spending in the face of slowing freight volumes, the downcycle in freight rolling stock is just getting started with WAB still trading at over 19x peak earnings. 


Investing Ideas Newsletter - z wab


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


Hedgeye CEO Keith McCullough added McDonald’s (MCD) to the long side of Real-Time Alerts earlier this week after covering some shorts. McCullough cited a number of catalysts for the stock put forth by Restaurants analyst Howard Penney including the launch of All Day Breakfast, MCD's history of returning value to shareholders and additional cost cutting measures.


On a related note, Penney attended MCD's investor meeting in New York City earlier this week. His takeaway from the meeting was that it was "very very bullish" for investors.


Expectations were high, but CEO Steve Easterbrook came to NYC with big changes which have ultimately exceeded those expectations. "The big smile on Steve Easterbrook's face when talking about the current quarter was very telling," Penney writes. "He could not hide the enthusiasm." MCD increased the dollar value returned to shareholders by $10 billion. 


Penney and his team still see +30% upside from here. 


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


Hedgeye Internet & Media analyst Hesham Shaaban updated his current thinking on LinkedIn in a recent note to institutional subscribers.


While the selling environment remains solid, we're still cautious about staying long LinkedIn into its 2016 guidance release. The good thing is that the release won't be until February. As a result, we will get at least 2-3 more updates to our proprietary LNKD tracker before then.


If our tracker continues to improve, then we may stay long into the release. If not, we're definitely going to get out of the way and will reasses the setup post print. More to be revealed.


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


After going through Wayfair's (W) 3Q and listening to management on the conference call, one question keeps popping up…"Why am I short the stock of a company that is growing its core business over 90% and where 44% of its float is held short?”


But then we consider the following… Wayfair added $266mm in revenue – an astonishing number. But the company still lost money. True, the operating loss narrowed, but only by $13mm. That pegs the company’s incremental margin at only 5.1%. To be clear, companies like Restoration Hardware and Williams-Sonoma – who are consolidating a different end of the home furnishings market (the good end) have incremental flow-through rates of about 20-25%. Heck, even AMZN, which is not afraid to lose money for a very long period of time, has an incremental margin of 15%. Then why are we looking at 5% for W?


The bottom line is that this company is spending – and it’s spending big – around penetrating what management believes to be the company’s total addressable market. Unfortunately, we think they are overestimating it by a country mile, and are building an infrastructure for growth that will not materialize – at least not profitably.


Investing Ideas Newsletter - W Incrmntl GM   EM


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


Tiffany's (TIF) hit 52-week lows on Friday. Major department stores (JCP, M, KSS, JWN) reported earnings this week and results have been less than stellar. 


The biggest sales slowdown and margin hit came at the high end of the space – Nordstrom and Macy’s. Who is TIF’s core consumer domestically? Look no farther than these two comps.


Sprinkle on weaker than expected tourism traffic and you have a pretty bleak picture for TIF numbers when reported next week. Keep in mind that TIF’s flagship store in NYC accounts for 10% of total sales and is highly levered to international tourist traffic.


This callout from JWN management during the company’s conference call paints a bearish picture for TIF consumer demand. When asked about what is going on in the department store landscape Nordstrom management responded very explicitly saying:


"It appears that there has been a slowdown in overall demand from the customer who is purchasing what we sell."


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


Restoration Hardware (RH) shares got caught up in the tumultuous selloff of other high-end retailers. But we're still bullish on RH. Here's why.


RH Tampa has just opened. That makes 4 new Full Line Design Galleries in 90 days. And all will be open before the start of holiday shopping season and just in time to house the new product lines RH Modern and Teen. Add up the four stores and we’re looking at about 210k square feet. That alone represents about 25% growth in square footage.


When all is said and done, we still think this company has $11 in earnings power 4-years out, which is nearly double the consensus.


We remain convinced that the debate should not be ‘if or when’ the stock hits $115, but rather is it going to $200 or $300? We’ll be looking at an earnings CAGR of 40-50% over five years. What kind of multiple does that deserve? 20x? 25x? 30x?


We’d argue the higher end.


Investing Ideas Newsletter - RH tampa


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


Citi launched coverage on the Orthopedics space this week with a very similar take on the industry as ours. Their rating on Zimmer Biomet Holdings and SYK are both Sells, a rare occurance from a bulge bracket firm. Incidentally, I know the analyst from my prior life on the buyside and always found him credible and well versed in his stocks.


As I understand it, the Sell rating is based on assumptions and research conclusions very similar to our own. It turns out Citi and Hedgeye believe the headwinds to growth facing surgical volumes in 2016 are likely to be material as we come up against the ACA tailwinds of 2014 and 2015, or the #ACATaper.


We received a lot of pushback on our research, mainly based on assumption economics, so it will hopefully help us find a more receptive institutional audience for our non-consensus research conclusions.


CMS reported this week that, compared to the same time last year, Public Exchange enrollment was up 17% year over year for the first week of open enrollment period.  This is a decent beginning as a percentage change, but small in magnitude as enrollees grew from 462K to 543K, or only +80K individuals year over year.


Over the coming weeks we will be updating the enrollment chart below as well as continuing to speak to surgeons about their case volume, pricing, and policy impacts on their hospitals.  


Investing Ideas Newsletter - ZBH update


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.


We attribute a lot of last week's weakness in shares of  Zoës Kitchen (ZOES) to style factors. Due to the macro-driven market, high beta, low-cap names such as ZOES have fallen out of favor. We still love the management team and the concept of the restaurant.


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.


We'll have a clearer picture of the company's outlook next Thursday when ZOES reports earnings.   


Cartoon of the Day: (Blind) Eye of the Storm

Cartoon of the Day: (Blind) Eye of the Storm - Fed forecast cartoon 11.13.2015


As our outspoken CEO Keith McCullough has repeatedly warned subscribers in the last few months, "The #1 risk to macro markets remains The Fed’s Forecast."

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth

Takeaway: Although comps are tough this quarter, rising volume is making for improving Y/Y growth rates.

Weekly Activity Wrap Up

Options and futures volumes continued to come in above their 4Q15TD averages this week in a bid to leg out positive Y/Y comps by the end of the quarter. Options volume averaged 16.7 million contracts per day, raising the 4Q15TD ADV to 16.5 million. Y/Y change remains negative at -4%, but that marks an improvement from last week's -5% comp. Futures volume averaged 19.3 million contracts per day this week, raising the 4Q15TD ADV to 18.1 million, still a -6% Y/Y contraction but an improvement from last week's -7% comparison. Cash equities came in at 7.1 billion shares per day, bringing the 4Q15TD ADV to 7.1 billion, good enough for +2% Y/Y growth. In October of last year, the potential Greek exit from the European Union drove outsized activity, making for difficult comps this quarter in '15. However, with recently rising volumes, Y/Y growth rates are grinding into more positive territory.


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon1 2


Additionally, with a Fed rate hike on the table again near term, the following chart shows that historical Fed adjustments have been positive for CME volumes (mainly in Eurodollar futures and options). In the last rate hiking campaign, which lasted from June 2004 through June 2006, CME Eurodollar ADV experienced a clearly positive upward trend with baseline activity accelerating throughout the program. If the Fed raises rates (even marginally), we expect a similar positive impact on CME fixed income activity.


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon16


U.S. Cash Equity Detail

U.S. cash equity trading came in at 7.1 billion shares traded per day this week. That brings the fourth quarter average to 7.1 billion shares traded per day, a +2% Y/Y expansion but -2% Q/Q contraction. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of fourth-quarter volume, a +2% year-over-year increase, while NASDAQ is taking an 18% share, a -9% year-over-year decline.


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon2


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon3


U.S. Options Detail

U.S. options activity came in at a 16.7 million ADV this week, bringing the 4Q15TD average to 16.5 million, a -4% Y/Y and -9% Q/Q contraction. The market share battle amongst venues continues to be one of losses at the NYSE/ICE, which has lost -7% of its share year-over-year settling at just 19% of options trading currently. Additionally, CBOE's market share sits at 26%, -16% lower than 4Q14. NASDAQ, on the other hand, has increased its market share by +15% compared to 3Q15, bringing itself only -1% lower than the 24% share it held a year ago. Additionally, BATS' 8% share of 4Q15TD volume is +29% higher than in 4Q14. Finally ISE/Deutsche's 15% share in 4Q15TD remains consistent with 3Q15, which brings it to +8% Y/Y growth.


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon4


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon5


U.S. Futures Detail

CME Group had its best week all quarter with 14.2 million contracts traded per day, bringing the 4Q15TD average to 13.2 million, a -11% Y/Y and -8% Q/Q contraction. CME open interest, the most important beacon of forward activity, currently tallies 106.6 million CME contracts pending, good for +14% growth over the 93.7 million pending at the end of 4Q14, an expansion from the prior week's +12%.


ICE saw volume of 5.2 million contracts traded per day this week, bringing 4Q15TD ADV to 4.9 million, +12% Y/Y and +15% Q/Q growth. ICE open interest this week tallied 68.2 million contracts, a +15% expansion versus the 59.4 million contracts open at the end of 4Q14, consistent with last week's +15%.


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon6 2


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon8


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon7


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon9 


Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon10


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon11


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon12


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon13


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon14

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon15


Sector Revenue Exposure

The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:


HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon19 3



Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA





Daily Trading Ranges

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