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Unyielding Resolve

“We had to go ahead and discover everything ourselves.”

-Orville Wright


That’s the quote David McCullough opens with in one of the most inspiring chapters of The Wright Brothers – Chapter 4, Unyielding Resolve. “The pall of discouragement disappeared in a matter of days, replaced with a surge of characteristic resolve.” (pg 65)


Now that we have the latest super #LateCycle US jobs report out of the way, I’ve got it out of my system that the Fed is actually going to raise rates into this slow-down. That’s obviously a big problem for many asset classes. But the Fed only cares about the SP500.


At 1.88% year-over-year growth in Non-Farm Payrolls (with a standard error of 90,000 on the # itself so it will be revised), November was the slowest rate of change jobs report of the year. This US Labor Cycle peaked in Q1 with 2.34% NFP growth in February 2015.


Back to the Global Macro Grind


We’ve always measured macro markets (and their implied opportunities and risks) in rate of change terms. The Establishment not doing it that way had them miss both Global #Deflation and #GrowthSlowing in 2015.


Unyielding Resolve - deflation


Their missing it on the latest of late cycle indicators (employment) doesn’t matter to us inasmuch as most of the non-employment data doesn’t seem to concern them. Please don’t look at ISM or PMI data for details.


If all you did was think like a Fed Head and stare at the SPY last week, nothing happened – the SP500 was down then up, closing 0.1% week-over-week. Hooray. If you’re just a US Equities person and you dug 1-level (Sector Styles) deeper, here’s what else you saw:


  1. Tech (XLK) +1.5% on the week to +7.8% YTD
  2. Industrials (XLK) -1.0% on the week to -3.6% YTD
  3. Energy (XLE) -4.5% on the week to -18.3% YTD


So, if you “back out Energy” and MLP stocks (Alerian MLP Index down another -11.0% on the week, taking its 2015 crash to -37.7% YTD) … oh, and back out producer price #Deflation (Industrials) and bought big cap Tech charts that have gone parabolic, all good.


I think I’ve pointed this out weekly in 2015, but it’s worth repeating this morning – during a Global #GrowthSlowing phase, “cheap” cyclical and industrial equities get cheaper, and the expensive growth that you can find gets more expensive.


That happened in Q3/Q4 of 2007 (late cycle) and it’s happening right now. So I hope you’ve discovered what US Equity market Style Factors you should continue to avoid as the economic cycle slows and the credit cycle peaks and rolls:


  1. LEVERAGE: High Debt (EV/EBITDA) Stocks were down another -1.0% last week and are -9.9% YTD
  2. BETA: High Beta Stocks were down another -1.1% last week and are -7.3% YTD
  3. SIZE: Small Cap Stocks were down another -1.5% last week and are -12.0% YTD


And you might notice that while the Russell 2000 was down -1.6% last week (-1.8% YTD), it’s down less than the Style Factor exposure I am looking at within the SP500 as that’s a measure of the mean performance of the Top Quintile vs. Bottom Quintile of SP500 companies.


Regardless, you get the point – what’s worked during #Deflation and GDP slowing in 2015 is:


  1. Good Balance Sheets: Low Debt = +3.6% YTD
  2. Quality: Low Beta and Low Short Interest +1.7% and +3.0% YTD, respectively
  3. Organic Sales Growth: Top 25% Sales Growers in the SP500 = +7.3% YTD


That’s why that +7.8% YTD performance for the XLK (Tech) is so close to the Organic Sales Growth Style Factor (hint: they are largely the same stocks). And it’s also why the illusion of growth (levered companies like Kinder Morgan, KMI, and Valeant, VRX) crashed.


If you go all big picture on your colleagues and look at his non-linear yet interconnected world of growth and inflation expectations in cross-asset class terms, here’s what else you’d have noticed last week:


  1. Commodities (CRB Index) were unable to bounce on a Down USD week and remain in crash mode -20.3% YTD
  2. Oil (WTI) continued to crash, closing down another -3.8% last week at -33.1% YTD
  3. Natural Gas deflation of -1.4% on the week took its YTD below that of crude oil at -38.2% YTD
  4. Cattle prices deflated another -3.5% week-over-week to -16.2% YTD
  5. Namibia’s stock market dropped another -6.2% on the week to -18.4% YTD


Seriously – who the heck cares about Namibia? Probably as many Federal Reserve people who care about cattle ranchers in Nebraska or pig farmers in Iowa (Lean Hog prices have crashed -35% YTD). So let’s just call all of these “no-price-stability” things transitory.


Reality is that for companies with heavy foreign currency, commodity, and/or emerging market exposure, 2015 was not good. The MSCI Emerging Markets index (ex-Namibia) was -0.9% last week and is -14.3% YTD.


And then of course you have the Credit Market Signal within the long-term US Treasury Yield signal. This is only the 4th time “high yield” credit has generated a negative annual return going all the way back to 1994. So I say we start talking ex-Energy, ex-Credit now too.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.19-2.33%

SPX 2057-2112
RUT 1165--1191
EUR/USD 1.05-1.09
Oil (WTI) 39.28-41.91

Nat Gas 2.10-2.25

Gold 1049-1089
Copper 1.99-2.09


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Unyielding Resolve - 12.07.15 EL chart

The Macro Show Replay | December 7, 2015



Euro, Oil and Emerging Markets

Client Talking Points


In rate of change terms, at 1.88% year-over-year that was the slowest NFP print since the cycle peaked in Q1, but the Fed is going to hike on that. That’s why we signaled buy USD on last week’s Euro ramp of +2.7%. The Euro is back down -0.6% this morning to $1.08 and has no immediate-term support to $1.05; the data doesn’t matter to the Fed – the S&P 500 does.


#StrongDollar (rate hike catalyst DEC 16th) driven #Deflation Risk definitely matters to most asset classes – after a -3.8% decline last week, Oil is down another -1.1% this morning to $39.53 and the Commodities complex remains in crash mode.


Japanese Equities +1% on the Dollar Up move overnight – EM Asia continued lower (no likey Up Dollar); Thailand -0.7% (-6.4% in the last month is one of the ugliest); EM (MSCI Index) deflated another -0.9% last week to -14.3% year-to-date.


*Tune into The Macro Show with Hedgeye CEO Keith McCullough in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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."


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.


On went the game of slowing last 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.

Three for the Road


The Best of The Macro Show This Week https://app.hedgeye.com/insights/47911-risk-manage-the-process-the-best-of-the-macro-show-this-week… via @hedgeye



Obvious thinking commonly leads to wrong judgments and wrong conclusions.

Humphrey B. Neil


Only 5% of Twitter users have more than 100 followers.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

December 7, 2015

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, with our intermediate-term (TREND) view and the previous day's closing price for each name.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.33 2.19 2.28
S&P 500
2,057 2,112 2,091
Russell 2000
1,165 1,191 1,183
NASDAQ Composite
5,048 5,177 5,142
Nikkei 225 Index
19,495 20,145 19,504
German DAX Composite
10,703 11,122 10,752
Volatility Index
13.97 18.67 14.81
U.S. Dollar Index
97.83 99.59 98.34
1.05 1.09 1.09
Japanese Yen
122.36 123.86 123.16
Light Crude Oil Spot Price
39.28 41.91 40.14
Natural Gas Spot Price
2.10 2.25 2.18
Gold Spot Price
1,049 1,089 1,085
Copper Spot Price
1.99 2.09 2.08
Apple Inc.
115 120 119
Amazon.com Inc.
651 684 672
Priceline.com Inc.
1,226 1,306 1300
Valeant Pharmaceuticals International, Inc.
78.75 100.21 95.31
McDonald's Corp.
113 117 116
Kinder Morgan Inc.
16.13 21.09 16.82



Join Hedgeye For Holiday Cocktails & Appetizers

'Tis the Season…. We hope you can join us at La Biblioteca (622 3rd Avenue at 40th Street – located inside Zengo restaurant) on Wednesday December 9th, from 5-9pm for some holiday cheer!


Please RSVP to Kerrie at  if you can join.


We look forward to seeing you!


- Hesham Shaaban


Join Hedgeye For Holiday Cocktails & Appetizers - he client holiday party DEC2015


We are keeping Chipotle (CMG) on the Hedgeye Restaurants Best Idea list as a SHORT.


The 8-K CMG issued on Friday after the close was long on current details but short on what the company is going to do to fix the issues the company faces.  We expect the swift decline in same-store sales caught management off guard and they are unprepared to deal with the severity of the problem. 


Management’s knee jerk reaction to the bad news is a big buy back to make investors feel better.  In CMG’s case the $300 million repurchase announcement is staggeringly small given there is no funded debt and over $1.2 billion in cash and total investments.   


The company’s issues are just beginning and it will take time to recover from this debacle.  How management handles the process from this point forward will determine the pace of recovery.   



  • 4Q 2015 Comparable restaurant sales to be in a range of (8%) to (11%) vs FactSet +0.1%
  • Non-recurring expenses during Q4 of 2015 in the range of $6.0 to $8.0M
  • Restaurant level operating margins of 22% to 24%
  • Diluted EPS in the range of $2.45 to $2.85 versus consensus of $4.05
  • CMG has withdrawn previously-announced 2016 guidance for same-store sales.  The street consensus was +3%.



  • October same-store sales were positive in the low-single digit range (we are assuming traffic was flat to slightly negative).
  • Upon the announcement of the closure of 43 restaurants on November 3rd, company-wide same-store sales dropped “for the ensuing few days” to approximately (20%). 
  • After the announced re-opening of restaurants in Oregon and Washington on November 10, same-store sales “over the next several days quickly improved” to approximately -9%.
  • On November 20th, the U.S. Centers for Disease Control and Prevention (CDC) announced four additional cases linked to the same E. coli incident; “following this announcement and related negative publicity, daily comparable restaurant sales trended down to approximately (22%).”
  • Over the past five days, same-store sales “have gradually improved to an average of approximately (16%).”
  • For the full month of November, comparable restaurant sales were -16%.
  • If these sales trends continue, we believe comparable restaurant sales could be in a range of (8%) to (11%) for the three month period ending 31-Dec-15.



“Future sales trends may be significantly influenced by further developments, including potential additional announcements from federal and state health authorities.”



  • How long will the current issues cause a decline in same-store sales?
  • What is management’s plan to fix the company?
  • Are there other hidden issues we don’t know about?
  • What is the long-term damage to the Chipotle brand?  (Chipotle will be forever linked to any story about E. coli with negative implications.)
  • Can the company grow its units at the same rate and deliver on consumer and investor expectations?
  • How much incremental G&A cost will there be in 2016 to fix the supply chain?
  • What will the new margin structure of the company look like?
  • Will the company need to adjust its non-GMO claims?
  • Will the two class actions lawsuits gain steam because of the company’s problems hurting the brand image even further?



While we have seen many restaurant companies run into problems over the years, the fall of Chipotle is nothing short of spectacular.  The common denominator that most restaurant entrepreneurs have faced, comes down to one thing: hubris.  The lack of humility is a killer.  It’s almost guaranteed that life takes care of those issues over time!  


Howard Schultz, CEO of Starbucks figured it out in 2009, but only after it was too late!  How long will it take the management of CMG? 


Do the co-CEO’s of CMG see themselves or their lack of knowledge and experience as the problem?  The market and the investment community have put them on a pedestal so high they needed oxygen to breathe.  As soon as Mr. Moran and Mr. Ells learn that humility is the only thing that can save them we will get more positive on the stock. 


The direct impact of a more humble management team will be a company with a lower margin structure and a significantly slower unit growth rate.  CMG is just another restaurant company and the management team needs to realize that.


In the meantime, how this unfolds will be fun to watch.     


Over the next couple of days the street consensus for 2016 EPS will need to come down to $13.50 (+/- $0.50) and EBITDA will be around $820 million.  With the 2016 estimates in mind, fair value for the stock is between $350 and $400.    

CMG | STARTING TO COME CLEAN - CHART 1 E. Coli Update Note Management Guide down


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw



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