Death Star

“Why would we spend countless taxpayer dollars on a Death Star with a fundamental flaw that can be exploited by a one-man starship?”

- Paul Shawcross, Official White House response to “Construct a Death Star by 2016” Petition


Multiple times over the last decade, a perturbed American populous has locked arms and garnered large scale petition support for the full prohibition of Di-hydrogen Monoxide. 


This noxious compound is a main component of acid rain, may cause severe burns, is found in tumors, causes electrical failures, is involved in the distribution of deadly pesticides and can be acutely deadly if inhaled. 


Thousands of people, numerous times over, have been compelled to pen their signature in full support of completely banning its use.


You, of course, may know this compound by its more colloquial name of H2O …or, water.  


Back to the Global Macro Grind ….


Of course, tens of thousands have officially supported the Resource Procurement and Construction of a Death Star (HERE) and hundreds of thousands have joined the “Deport Justin Bieber” chorus (HERE), so all hope may not be lost for #WeThePeople (note: If a petition gets at least 25K signatures, the administration will publish an official response …the “Janet Yellen for Fed Chair” petition garnered 327 signatures).


Death Star - start wars cartoon


Outside of being generally awesome, Death Stars (i.e. Tech innovation) anchor an ongoing obstacle for Macrophiles.


If I made two computers this year instead of one, how much more output did I produce?


Not hard arithmetic - particularly if those computers are roughly the same in design, construction and functional capacity. 


Now, suppose my new computer is 60% faster than the one I bought last year … or maybe 50% faster if I’m on the road … or maybe 200% faster under a different set of location and task-specific conditions. Oh and my computer is actually my phone … and I’m producing this Early Look on it while checking the status of my amazon order and walking to get a coffee. 


How much more welfare or utility did that technological advancement create?   


How does one translate that rapidly evolving innovation and quality advancement into GDP equivalents or accurately capture the impact to productivity? 


That, in summary, is the measurement challenge faced by economists and government statisticians as our economy has evolved from producing discrete, tangible industrial output to decidedly less-tangible innovation focused on quality improvement. 


Larry Summers addressed the mismeasurement topic in a recent address to the Peterson Institute. He contextualizes the considerations in largely layman friendly format HERE if you’re interested. 


To summarize, the mismeasurement implication flow goes something like this:


Measured Productivity over the last decade plus has been slow => but what if we’re mis-measuring output => productivity growth (& real GDP) may actually be higher => but if productivity and real GDP is understated, it’s likely that inflation is overstated => which means that (core) inflation has really been running <1% => and if the true underlying inflation rate has been understated (& barely positive in recent years) then:


1. Per capita GDP and Income levels have not been as stagnant as official measures suggest;

2. Real Interest Rates are actually higher than policy makers believe and;

3. A sustained attempt at interest rate normalization becomes an increasingly dubious and injudicious policy course.


I happen to agree with Summers that its overwhelmingly likely that we are mismeasuring the magnitude of quality improvements and, by extension, the level of productivity growth. 


It’s also important to remember that mismeasurement only presents a problem if the error is accelerating or getting worse over-time. Does the nature of our evolving economy present compelling evidence supporting a view that the measurement problem could, in fact, be worsening?


I lean toward “yes” but I’m open to other thoughtful perspectives.  


In other mismeasurement news, the changing structure and/or mismeasurement of corporate income may help to explain another macro issue of growing consternation – Inequality.   


In a recent paper (HERE), Treasury Department and NBER researchers analyzed the rising prevalence of “Pass-Through” business entities. Pass-through business entities, such as partnerships, are structured in such a way that income “passes through” the business and is reported on the individuals’/partners’ tax returns instead of at the business level. 


The major findings of the analysis were as follows:


  1. Relative to traditional business income, pass-through business income is substantially more concentrated among high-earners.
  2. The average federal income tax rate on U.S. pass-through business income is 19%—much lower than the average rate on traditional corporations.
  3. Thirty percent of the income earned by partnerships—the largest pass-through form—cannot be traced unambiguously to identifiable, ultimate owners.


Again, to summarize the income inequality implication flow:


~55% of Business Income now goes through pass-through entities vs. ~20% in 1980 => 69% of pass-through income is earned by individuals in the top 1% (vs ~45% for traditional C-Corp businesses) => Tax rates on pass-through business income are significantly lower than traditional corporate tax rates => Thus, not only is the income more unequally distributed, it’s also taxed at a lower rate … further, the distribution is significantly less transparent as both the source and destination of ~30% of partnership income cannot be uniquely linked using conventional administrative tax data.


The researchers estimate the 2011 impact to tax revenue to be at least $100B. In any case, shifting corporate structures and rising convolution and opaqueness appear to be a real contributing factor in the ongoing rise in income inequality. 


While they don’t offer a solution, the analysis is important as untangling the “why” of rising income inequality has been as elusive as fabricating a fix.


Output mis-measurement and inequality are real and important macro considerations, but they’re not particularly investible across most relevant durations. 


Here’s your rundown of this week in domestic macro: 


Existing Home Sales: EHS declined -3.4% MoM – predictably recoupling to the Trend in Pending Home Sales. Recall, pending home sales = contract signings while existing home sales = closings so Pending sales effectively signals existing sales a month in advance. There are a couple notables. First, inventory held below the traditional balanced market level of 6-months for a 38th consecutive month as continued supply tightness remains supportive of price trends. Second, in contrast to the headline decline in sales, sales to 1st-time buyers rose +3.2% MoM and accelerated +220bps sequentially to +11% year-over-year in October. 


Corporate Profits: Both Aggregate Corporate Profits and S&P500 Margins peaked in late 2014 and with earnings down -4.5% in 3Q15 and projected to decline further in 4Q15 the trend in profitability should remain in backslide.    


Income & Spending: Income and Spending in October will be “good” as the strong October employment report was just sufficient to maintain a flattish trend in aggregate income growth. However, the slope of both the income and consumption lines will hold negative as we lap peak payroll gains recorded in 2H14.   


Initial Jobless Claims: Initial Jobless Claims continue to tread at trough levels although the trend in energy states has been worsening in recent weeks.  Inflections in initial claims have been one the most consistent lead indicators for the cycle and year-over-year improvement continues to converge towards zero as the level of claims backs up off of the low but remains around its frictional floor of ~300K. Seasonal distortions and holiday related noise will convolute a clean reading of the underlying trend in separations for most of the rest of the current year. 


My cousin is in charge of toy creation and production for the Star Wars franchise. I actually have a real light saber straight from Spielberg. If the Death Star actually gets commissioned (Trump?), #IKnowAGuy


In the meantime, Hedgeye’s own Keith McCullough, aka Broda, aka Darth Fader, will be fading consensus and channeling the Macro Force all morning on both Fox Biz and The Hedgeye Macro Show. Tune in. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.18-2.34%

SPX 2022-2107

VIX 14.31-20.46
USD 98.55-100.18
Oil (WTI) 39.32-43.75

Gold 1060-1089

Have a great holiday.


Christian B. Drake

U.S. Macro Analyst


Death Star - EL 11 24


Nu Skin (NUS) is on our Hedgeye Consumer Staples Best Ideas list as a SHORT.



Today, November 24th, at 11:00AM ET we will be hosting a thought leader call with Jarrel Price of The Capitol Forum. Jarrel has been deeply engrained in the controversy surrounding Nu Skin and he has some differentiated views that will shed additional light on the issues at hand. It will be structured as a fireside chat, with the ability for subscribers to submit questions to .


Topics we will discuss:

  • Unfair Deceptive Acts and Practices act
  • Is VitaMeal a ticking time bomb
  • Websites run by Su Skin and their distributors continue to misrepresent the sale of VitaMeal
  • Nu Skin is already under investigation for charitable contributions made in China, the scope of that investigation could widen



Toll Free:


Confirmation Number: 13625346

Materials: CLICK HERE


The Justice Department, along with federal partners brought the hammer down on the dietary supplement industry in a news conference on November 17th (link to the release can be found HERE).  As part of a year-long process government agencies pursued civil and criminal cases against more than 100 makers and marketers of dietary supplements. “In each case, the department or one of its federal partners allege the sale of supplements that contain ingredients other than those listed on the product label or the sale of the products that make health or disease claims that are unsupported by adequate scientific evidence.”


The primary case that the DOJ announced was a criminal case charging USPlabs LLC and several of its corporate officers. The report went on to say, “the USPlabs case and others brought as part of this sweep illustrate alarming practices the department found – practices that must be brought to the public’s attention so consumers know the serious health risks of untested products.” In addition to the allegations against USPlabs, there were a number of civil cases that are going after different companies for their attempts to defraud the consumer, making false claims about products and deceptive advertising among others. 


We have found an abundant amount of evidence that Nu Skin Distributors have marketed VitaMeal in a way to deceive consumers. This would be in violation of the Unfair Deceptive Acts and Practices (UDAAP) act, which is exactly what these governmental agencies are attempting to prevent.


The walls are clearly closing in on Nu Skin, now on top of the current SEC investigation looking into their charitable giving’s in China; multiple governmental agencies are poking around the nutritional supplement category for deception and misrepresentation. We believe that it is only a matter of time until their name comes across one of these agencies desks and it catches their eye.



Jarrel "JP" Price helps lead The Capitol Forum's coverage of consumer finance and consumer protection issues. Prior to The Capitol Forum, Mr. Price led a team of analysts at the U.S. Department of Defense’s Task Force for Business and Stability Operations (TFBSO), focused on facilitating foreign direct investment in Afghanistan’s energy sector. Prior to TFBSO, Mr. Price was a Partner at Height Analytics, a Washington, DC-based investment research firm, where he covered a variety of consumer protection issues.

Mr. Price is a Founding Partner of The Park Advisors Group, which helps public and private sector clients manage investment risks in frontier and post-conflict markets. Mr. Price also serves as the President of the Young Professionals in Foreign Policy (YPFP). Mr. Price is a frequent contributor to a variety of national media outlets including CNBC, The Wall Street Journal, Bloomberg News, and NPR. 



Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw





The Macro Show Replay | November 24, 2015


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November 24, 2015


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.34 2.18 2.25
S&P 500
2,022 2,107 2,086
Russell 2000
1,140 1,189 1,180
NASDAQ Composite
5,013 5,152 5,102
Nikkei 225 Index
19,015 19,966 19,879
German DAX Composite
10,623 11,229 11,092
Volatility Index
14.31 20.46 15.62
U.S. Dollar Index
98.55 100.18 99.86
1.05 1.07 1.06
Japanese Yen
122.03 123.91 122.82
Light Crude Oil Spot Price
39.32 43.75 41.99
Natural Gas Spot Price
2.05 2.30 2.33
Gold Spot Price
1,060 1,089 1,068
Copper Spot Price
1.96 2.11 2.02
Apple Inc.
112 120 117
1,218 1,302 1,264
Valeant Pharmaceuticals International, Inc.
65.76 92.31 87.41
Facebook, Inc.
103 110 106
Alibaba Group Holding Ltd.
75.19 82.61 81.31
Nike, Inc.
128 134 132



Cartoon of the Day: Lions And Tigers!

Cartoon of the Day: Lions And Tigers! - Rate hike cartoon 11.23.2015


"The spike in the U.S. 2-year continues to 0.93% this morning as the Fed abandons the “data dependence” thing and goes with whatever the SP500 is doing instead," wrote Hedgeye CEO Keith McCullough in a note to subscribers early this morning. "The US Dollar and short-term rates say December hike – so does the Yield Spread, compressing 9bps last week, which reads as a hike perpetuating both #Deflation and #GrowthSlowing."

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities)

The restaurant industry macro picture is continuing to deteriorate. According to Black Box Intelligence numbers, restaurant traffic growth has been negative for nine straight months, going back to February 2015. In this type of environment one must be very selective on LONG calls, while we continue to see a growing number of SHORT opportunities. Commodity deflation will be an interesting dynamic in 2016. It will help the margins of many restaurant companies, especially those focused on beef, as we highlighted in our THOUGHT LEADER call regarding #BEEFDEFLATION. But on the other hand, the consumer will see a widening divergence between the cost to eat out and the cost to cook for themselves.  


Black Box Sales, Traffic

Black Box released same-restaurant sales and traffic estimates for the month of October that showed a steep deceleration sequentially as the YoY trend continues to deteriorate. Same-restaurant sales posted negative growth for the first time since June 2014, posting a down -0.2% number, which is a 100bps sequentially decline. Same-restaurant traffic decreased -2.8%, a 50bps sequential decline, and down 320bps YoY.

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 1

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 2


Restaurant price increases were down slightly in October. As you can see from the chart below, the convergence between the operators taking price and a decline in traffic that we had been seeing deteriorated in October as traffic trends began to turn south.

 Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 3


Knapp October Sales Trends

Knapp reported that comparable restaurant sales in October 2015 were -0.7% for same-store sales and –2.9% for guest counts.  October comparable restaurant sales represent a 170bps sequential slowdown, additionally traffic was down 220bps sequentially.  On a 2-year basis, sales slowed to +0.6% and traffic declined -1.4%. 

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 4

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 5


Consumer confidence slowing

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 6

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 7


Employment Growth Continuing to Slow

In the month of October we saw a marked deceleration in the employment trend, driven by a decline within the 20-24 YOA cohort. The downward trend that we were concerned about seems be getting worse. This continued slowdown across age cohorts points to troubling labor picture.


October Employment Growth Data:

  • 20-24 YOA -0.35% YoY; -151.3bps sequentially
  • 25-34 YOA +1.73% YoY; -50.9bps sequentially
  • 35-44 YOA +1.15% YoY; +9.8bps sequentially
  • 45-54 YOA +0.05% YoY; -7.4bps sequentially
  • 55-64 YOA +1.78% YoY; +54.5bps sequentially


Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 8

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 9



In 2016, as many restaurant companies have been speaking to, we are headed for commodity basket deflation. With major proteins such as beef expected to have down years, this could be a great tailwind for restaurant companies. In addition to beef, corn, wheat, live hogs and soybeans are trending below year-ago levels.

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 10

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 11

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 12

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 13

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 14

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 15

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 16

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 17

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 18


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw