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The Best of The Macro Show This Week


Miss The Macro Show this week? Here are three clips featuring Hedgeye CEO Keith McCullough's trademark rants that detail how to use his risk ranges and some key portfolio considerations ahead of the much telegraphed Fed rate hike.

The Week Ahead

The Economic Data calendar for the week of the 7th of December through the 11th of December 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 - 12.04.15 Week Ahead

Investing Ideas Newsletter

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

Investing Ideas Newsletter - Rate hike Grinch 12.03.2015


Below are our analysts’ updates on our thirteen 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. We will send CEO Keith McCullough’s updated levels for each ticker in a separate email.



Earlier this week we sent out a stock report outlining Consumer Staples analyst Howard Penney's bearish thesis on Nu Skin. Click here to read the report.


Earlier this week we sent out a stock report outlining Financials analyst Jonathan Casteleyn's bullish thesis on Federated Investors. Click here to read the report. Below is an update from Casteleyn.


With the economic cycle eclipsing 72 months, we think it is time to get defensive. In addition to improved profitability from even marginally higher rates, the money fund business is attractive to us as it is about the time for capital to flow back to cash products as investors get defensive.


Over $1 trillion has come out of money funds sourcing the big bull market in stocks and bonds which becomes the longer term opportunity set for leading money fund managers.


With roughly 9% market share in industry money fund assets, Federated Investors will recapture these funds as returns in risk assets subside as the economy enters late cycle returns. We have modeled +$200 billion in positive money flow for the money fund industry in 2016 and +$400 billion for 2017. This assumption reflects some conservatism allowing for some funds to remain outside the money fund channel.


Every $100 billion in industry assets returning to money funds translates into $0.05 in annual EPS for Federated. Our FII estimates are $2.50 into next year versus the Street at $2.20.


Investing Ideas Newsletter - z chart 7

Investing Ideas Newsletter - z chart 8



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


On went the game of slowing this week with a little central planning un-secretive sauce. Despite the ECB’s move to cut the deposit rate to -0.30%, Draghi didn’t ring the cowbell loud enough. Meanwhile, Friday’s jobs report might have been just enough for Janet to hike rates into a late cycle slowdown. The consensus long USD crowd was crushed on the ECB news. The dollar lost over 2% on Thursday and rates were pushed higher.


If growth is going to continue to slow, with a rate hike on the horizon, a relative fixed income spread play (long TLT, short JNK) is exactly what you want on.

The Jobs Report Friday highlighted a continuation of late-cycle labor market strength:

  • On an absolute basis, +211K jobs were added in November on a positive revision from October
  • On a rate of change basis NFP gains decelerated to +1.88% Y/Y for October, down from +2.04% in October (the peak on a rate-of-change basis was February at +2.34% Y/Y)


Investing Ideas Newsletter - 12.04.15 NFP


In classic #late-cycle fashion, the reported labor/income/consumption data will remain good over the next month+ but the slope of the line will remain negative. 


The bottom line is that the Fed looks very intent on hiking rates to show they can. However newsy a hike might be in the short-run, the Fed will have a difficult time ignoring the ongoing and prospective degradation in domestic economic growth that is embedded in our #LateCycle theme:

  • Various measures of household consumption growth (e.g. Real PCE, Retail Sales) are decelerating on both a sequential and trending basis;
  • Industrial production growth is decelerating on both a sequential and trending basis;
  • Export growth is decelerating on a trending basis and still contracting from a YoY perspective;
  • PMI readings are decelerating on both a sequential and trending basis;
  • Consumer confidence is decelerating on both a sequential and trending basis; and
  • Producer price inflation (a proxy for corporate revenue growth) is decelerating on both a sequential and trending basis.


Investing Ideas Newsletter - 12.04.15 Economic indicators


Rate hike, or not, we expect the bond market to remain the proxy for forward looking growth expectations. It’s been a long ride with TLT, but stick with us for direction as this trade continues to unfold. 


Editor's note: We added LinkedIn to Investing Ideas on August 3rd. Since then shares have risen over 18% while the S&P 500 has fallen 1.17%.To view the original report on LinkedIn click here. 


Our Internet & Media Sector Head Hesham Shaaban has no new update on LinkedIn (LNKD) this week.


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


As rail congestion picked up in 2014, the slower speeds tended to pull equipment on to the track. Now that speeds are picking back up, we expect that equipment to be pushed back out.  One can think of it as turning existing assets more quickly.


NSC illustrates the relationship below.  More speed results in less equipment in service. If speeds continue higher, freight railroads may find themselves with ample excess equipment and reduced aftermarket needs amid slow volume growth – a negative combination for Wabtec (W).


Investing Ideas Newsletter - wab traffic 


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


The market might have blown off this ugly print, but we're not.


Tiffany (TIF) will miss again. We’re staying short TIF in the wake of the company’s 3Q results. Simply put, in the absence of 2016 guidance, the consensus will remain too high – likely in the range of $4.30-$4.40. We’re clocking in about $0.30 lower. Is that a huge miss? No. But:

  1. We also don’t assume a material worsening in the economy in our model, which could push numbers closer to $3.50.
  2. After last holiday’s blow-up, the Street was at $4.45 for FY15, and now is at $4.02. Not a huge earnings miss by our standards – yet the stock is down 28% year to date. There’s no reason we can’t, and won’t, see that again.


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


The Holiday sales numbers Wayfair (W) reported this week were big with direct sales up 130% this year and up 103% on a 2yr basis.


Management called out the fact that it would up the ante during this holiday season in areas like seasonal décor, housewares, etc. as it realized last year that could play the Black Friday game in areas less tied to furniture and more directly competitive with retailers like Bed Bath, Target, Walmart, Kohl’s, etc.


While the press release came 6 weeks ahead of last year's, there was no comment this year on the number or percent of orders that were placed by repeat customers which is an interesting omission in its own right.


Also, let’s not forget two things:

  1. Most people did not know what Wayfair was last Black Friday
  2. People don’t use Black Friday as an excuse to buy higher-ticket/margin furniture.

The bottom line on Wayfair is that this company is spending – and it’s spending big – around penetrating what management believes to be the company’s TAM. 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.


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


A lot has happened in 13 weeks... not the least of which is that 
Restoration Hardware (RH) is underperforming not only the market by 16%, but Retail as well (by 7%) – despite RH being more insulated from some of the issues that are clipping earnings today for retailers more broadly. 


Over this time period, however, RH meaningfully accelerated square footage growth, launched two new concepts. Some say it’s bad timing. We disagree. RH is our favorite name in the retail space, and we like it across all three durations. Trade, Trend, and Tail.


Editor's note: We added McDonald's to Investing Ideas on August 11th. Since then shares of MCD have risen 16.9% compared to a -0.7% return for the S&P 500. To view our original note on McDonald's click here.


Restaurants Sector Head Howard Penney had no material update on McDonald's (MCD) this week. However, here is what Penney wrote around when we added MCD to Investing Ideas. It's worth reiterating our high conviction in the stock: 


"We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. We are going to be looking at a much different company 1-3 years from now."  


"Urgency has been instilled from the top down by new CEO Steve Easterbrook," according to Penney. "This ship is in gear and headed north. 2015 will be the last time this stock is below $100."


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


As growth in employment slows, the impact to Zimmer Biomet's (ZBH) America’s Knee revenue growth rate is likely to slow as well.   While it’s not perfect in the very short term, the trajectory seems pretty clear to us. 


From our Macro Team, we’ve been seeing ample evidence that the US and global economies continue to slow. For Non-farm payrolls in the US that means the peak growth rate in February 2015 likely marks the top of any economic tailwind we might see in patients heading into the operating theater.


Investing Ideas Newsletter - nfp tobin


Not that getting surgery is the first thing I would think to do if I was benefitting from a strong economy, but that won’t stop consensus from thinking positive economic growth = positive Knee growth. If you’re wondering, we do think the drivers are much less obvious, but simple none the less.


Does it make more sense that employment in Outpatient Care Centers might be more tightly related to Knee surgical volume? We think so and the chart below suggests as much. If I was giving an estimation of the impact of the “economy” and ZBH, I think it’s probably more informative to believe a slightly more elaborate statement.


Investing Ideas Newsletter - macro monitor


Slowing economic growth => slowing employment => slowing insured population => slowing heathcare demand => slowing outpatient care center employment


ZBH has other complicating issues in the shorter term such as the CCJR, pricing, demographics, but as long as the statement above holds together, and the data comes our way, we’re staying short the stock.


We might add the Q415 preliminary to the Employment Outpatient to the chart above.


General Mills (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 this 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.


Since adding GIS to Investing Ideas at the end of May, the stock is up 3.8% versus down 1.6% for the S&P. 


"Zoës Kitchen (ZOES) was never a one or two quarter call for us," Hedgeye Managing Director Howard Penney recently wrote.


Given the high multiple nature of the stock, it is ultra-sensitive to the volatile market. This stock does not contain style factors that the market likes right now (high-beta, low-cap), so we expected a turbulent ride, but you must stay strong and buy on the dips.


This week was a prime example, with the stock off 2.5% through Tuesday but then rallied, finishing the week essentially flat (-0.3%). Such selloffs create great buying opportunities. As Penney wrote recently, "we would be buyers of ZOES on any big down day."


There was nothing wrong with the latest quarter. Besides the comp number missing expectations slightly (4.5%, versus consensus expectations of 5.4%), ZOES reported revenue of $56.4 million, representing 29.4% YoY growth and beat consensus expectations of $55.7 million. The company also raised its guidance. 


For longer-term investors, ZOES is still one of our high-conviction stocks.

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Cartoon of the Day: 'I Think I Can, I Think I Can...'

Cartoon of the Day: 'I Think I Can, I Think I Can...' - rate hike cartoon 12.04.2015


"I will be shocked if the Fed doesn't raise rates on this super #LateCycle jobs report," wrote Hedgeye CEO Keith McCullough earlier today. "For those of you measuring US jobs in rate of change terms, 211k is yet another #slowing vs. the Q1 Labor Cycle peak."


HEDGEYE Exchange Tracker | Acceleration at CME

Takeaway: CME's 4Q15 Y/Y change remains negative given the tough 4Q14 comp, but activity expanded Y/Y in Nov and is continuing to expand in Dec.

Weekly Activity Wrap Up

Trading activity for equities and options was light in the 5-day period ending December 3rd, which included the Friday after Thanksgiving. Cash equity volume came in at 6.6 billion shares traded per day, bringing the 4Q15TD ADV down to 7.0 billion, which is flat versus 4Q14 and -4% lower than 3Q15. Options put up an average of 13.2 million contracts per day this week, blending the quarter-to-date daily average to 16.3 million, -6% lower Y/Y and -10% lower Q/Q.


HEDGEYE Exchange Tracker | Acceleration at CME - XMon1


Total futures activity (both on CME and ICE) came in at 18.7 million contracts per day in the most recent 5 days, blending 4Q15TD ADV to 18.3 million, a -5% Y/Y change and -2% Q/Q change. Although quarterly comps are still tough against last year with the threat of the Grexit in 4Q14, monthly activity is starting to accelerate. Activity levels on CME rose to +6% in November Y/Y and December is comping currently at +15% higher. In concert with rising activity, open interest levels are up +10% from year-end 2014 which will drag trading volume to higher levels into 2016. We estimate that CME should also announce its variable dividend of up to $3 per share over the next 2 weeks continuing to make shares attractive in the short run as well.


HEDGEYE Exchange Tracker | Acceleration at CME - XMon16




U.S. Cash Equity Detail

U.S. cash equity trading came in at 6.6 billion shares traded per day this week. That brings the fourth quarter average to 7.0 billion shares traded per day, a 0% Y/Y change and -4% 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 -10% year-over-year decline.


HEDGEYE Exchange Tracker | Acceleration at CME - XMon2


HEDGEYE Exchange Tracker | Acceleration at CME - XMon3


U.S. Options Detail

U.S. options activity came in at a 13.2 million ADV this week, bringing the 4Q15TD average to 16.3 million, a -6% Y/Y and -10% 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 19% of options trading currently. Additionally, CBOE's market share sits at 25%, -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 +34% higher than in 4Q14. Finally ISE/Deutsche's 15% share in 4Q15TD remains consistent with 3Q15, which brings it to +7% Y/Y growth.


HEDGEYE Exchange Tracker | Acceleration at CME - XMon4


HEDGEYE Exchange Tracker | Acceleration at CME - XMon5


U.S. Futures Detail

CME Group activity came in at 13.2 million contracts traded per day, bringing the 4Q15TD average to 13.4 million, a -10% Y/Y and -7% Q/Q contraction. CME open interest, the most important beacon of forward activity, currently tallies 103.4 million CME contracts pending, good for +10% growth over the 93.7 million pending at the end of 4Q14, an improvement from last week's +9%.


ICE saw volume of 5.5 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 69.4 million contracts, a +17% expansion versus the 59.4 million contracts open at the end of 4Q14, an improvement from last week's +12%.


HEDGEYE Exchange Tracker | Acceleration at CME - XMon6


HEDGEYE Exchange Tracker | Acceleration at CME - XMon8


HEDGEYE Exchange Tracker | Acceleration at CME - XMon7


HEDGEYE Exchange Tracker | Acceleration at CME - 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 | Acceleration at CME - XMon10


HEDGEYE Exchange Tracker | Acceleration at CME - XMon11


HEDGEYE Exchange Tracker | Acceleration at CME - XMon12


HEDGEYE Exchange Tracker | Acceleration at CME - XMon13


HEDGEYE Exchange Tracker | Acceleration at CME - XMon14

HEDGEYE Exchange Tracker | Acceleration at CME - 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 | Acceleration at CME - XMon19 3



Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA





NSC | Working Independently

Upshot:  We continue to think that NSC offers relative upside, and would look to initiate a position in the mid-70s to low 80s as presented in our Best Ideas Black Book call above.  The rejection of CP’s low bid should come as little surprise, but the reply incorporated a list of hurdles that would need to be overcome in a new and higher bid.  NSC’s rapidly improving performance metrics create the potential for a favorable cost surprise along the lines of the 3Q 2015 beat.



NSC/Rail Black Book (9/16/2015):




NSC/CP | Maybe But…

NSC | Revision Inflection




NSC Is Worth Far More Than Discarded Bid:  Holders of NSC have been in a tough spot, we think, with risks to an improbable deal in the way of a longer-term performance opportunity.  The CP offer premium was always too low, especially given the regulatory risks and process duration.  Pursuing a merger would attract regulatory attention, the last thing an industry making use of a strong pricing leverage needs.  The offer was too low, awkwardly presented, and incompletely planned – NSC is just making that clear with its thoughtful and well-presented rejection.  For a modestly patient investor we think there is a good deal more upside for NSC.  For deal optimists (not us) the potential for a higher bid remains.


NSC | Working Independently - NSC 1 12 4 15



Management Is Confident For A Reason:  The longer-term outlook put forth by NSC’s newish management team was favorable and ahead the multiyear consensus estimates by our calculations.  NSC’s cost and capital improvements are in process, and performance metrics are improving markedly.  That matters.  Higher speeds and lower dwell should push cost out of the network, a key factor in NSC’s beat last quarter.  As long at NSC’s results continue to track with our long thesis (linked above), we expect to stick with the shares until at least the triple digits, all else equal.  In a weak equity market, we would expect shares of NSC to be defensive, sector relative outperformer.


NSC | Working Independently - NSC 2 12 4 15



For Deal Optimists:  NSC provided a transparent, thoughtful, and detailed response to the CP bid.  Management took the low bid seriously, respecting shareholder interests.  NSC’s Board also gave CP a clear roadmap of the objections that would need to be overcome to strike an agreement.  CP can now work on constructing a higher bid (perhaps >$140, stock heavy) overcoming NSC’s straightforward concerns….if CP’s management is serious about completing the transaction.



Sentiment & Weather:  4Q weather in the Northeastern U.S. has been unusually warm, hurting coal volumes for NSC and other rails.  Weather varies, and is not of the same relevance as MATS regulations and sustained lower natural gas prices.  NSC’s coal franchise has been in secular decline for pretty much the entire “rail renaissance”, with pricing helping to offset the impact on revenue.  NSC is not very popular on any side of the Street, as we see it.  The vaguely hostile Q&A on this morning’s deal rejection call made that reasonably clear.  


NSC | Working Independently - NSC 3 12 4 15



Upshot:  We continue to think that NSC offers relative upside, and would look to initiate a position in the mid-70s to low 80s as presented in our Best Ideas Black Book call above.  The rejection of CP’s low bid should come as little surprise, but the reply incorporated a list of hurdles that would need to be overcome in a new and higher bid.  NSC’s rapidly improving performance metrics create the potential for a cost surprise while the Street fixates on volume pressures.

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