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CHART OF THE DAY: The Data Doesn't Lie, U.S. Growth Is Slowing

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director Darius Dale. Click here to subscribe. 


“The U.S. economy is #LateCycle and the probability of a recession commencing by mid-2016 is extremely elevated – both in absolute terms and relative to the belief held by the overwhelming majority of investors and policymakers. Moreover, the risk of a global recession is also great in this scenario.”


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CHART OF THE DAY: The Data Doesn't Lie, U.S. Growth Is Slowing - Chart of the Day Darius

Conviction Sells

“We are all so wrong so often that it amazes me that we can have any conviction at all over the direction of things to come. But we must.”

-Jim Cramer


Amen to that, Jim. The scientific art of investing is a very humbling exercise indeed. From setting asset allocations to factor exposure selection all the way down to security section on the long and short side, there’s a lot that can go awry at various intervals of that process.


As such, we investors are forced to constantly ask ourselves a series of risk management questions including, but not limited to:


  • Is my fundamental research view becoming more or less accurate, at the margins?
  • Is said view at risk of becoming fully priced in?
  • Am I big enough or too big in this position?


As you are already well aware, the risk management checklist list goes on and on – effectively leading to a never-ending exercise of fact-checking and aggregating consensus. Indeed, it’s a strenuous task that can leave even the most thoughtful of investors feeling insecure and restless – not unlike how I feel about my waistline two weeks after Thanksgiving…


Back to the Global Macro Grind


In spite of the aforementioned insecurity – which Keith has affectionately and jokingly termed “Hedgie Performance Anxiety Disorder” (or #HPAD for short) – we agree with Cramer’s assertion that we mustn’t let such insecurities detract from our level of conviction. Most of you will note that it can be extremely hard to run money, raise capital or sell research without a high degree of conviction.


Take Hedgeye Energy Sector Head Kevin Kaiser for example. Last night, Kinder Morgan (KMI) – the bellwether of MLPs and dividend-paying energy companies – cut its dividend by -74% to 12.5 cents/share. If you’re reading this note, you’re probably already familiar with Kevin’s singlehanded destruction of the levered upstream MLP space – see the unit prices of LINN, BBEP, VNR, ARP, LGCY – as well as his consistent criticisms about the business models and valuations in the broader MLP sector. His work is now paying off, with the Alerian MLP Index down -40.4% YTD; KMI itself is down -55.5% from 9/4/13 (when Kevin introduced his short thesis) through yesterday’s close.


Ranging from analytical critiques that at least attempted to poke holes in his analysis to thoughtless ad hominem attacks, the amount of pushback Kevin has received over the past 2+ years regarding his bearish research in the MLP space has been nothing shy of legendary. Maintaining conviction in his analysis was the only thing that allowed him to overcome the rash of criticism that accompanied being the lone bear on a few of the most beloved stocks and management teams in modern U.S. equity market history.


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Conviction Sells - kaiser reuters


Among the most high-profile of such criticism was, in fact, Jim Cramer’s consistently scathing, ad hominem attacks on Kevin and our firm. Quick to defend the compensation schemes of his “friends” (i.e. Rich Kinder of KMI and Mark Ellis of LINN) and slow to actually do the work on the actual business models, Cramer and everyone else who chirped Kaiser for being [only] a “26-year-old analyst” – including a very high-profile hedge fund that fired him for being right – deserves to feel shame today. We all win and lose in this industry and I, for one, won’t tolerate those who do either without class and humility.


While Kevin’s work on KMI has been and continues to be as detailed and thoughtful as any equity analysis you’ll come across, the core fundamental conclusion was actually quite simple:


The company doesn’t generate enough cash flow to pay its dividend and its dividend is the #1, #2 and #3 reason why most investors own the stock.


While we have plenty of other examples of the Hedgeye research team helping clients profit from high-conviction, non-consensus long and short ideas throughout the YTD (e.g. KSS, YELP, MCD), I specifically want to highlight Hedgeye Healthcare Sector Head Tom Tobin’s recent win on the short side of Valeant (VRX) – which is down -22.1% since he introduced his short thesis last July 11th – as another example of maintaining conviction amid elevated criticism.


The -64.3% plunge in the stock from its 8/5/15 all-time high to yesterday’s closing price probably felt very rewarding for someone like Tom who is sure to avoid the grey area of what’s legally and/or morally acceptable – unlike some of Valeant’s high-profile shareholders.


Perhaps more than any Sector Head at our firm, Tom’s process is extremely differentiated from the herd and quantitatively oriented to a significant degree – two qualities that allowed him to maintain conviction in his thesis despite what must’ve felt like the entire hedge fund community rooting against him. To the extent you’d like additional color on Tom’s current bench of long and short ideas, please email .


For what it’s worth, I recently had a client tell me that Tom’s #ACATaper and Healthcare #Deflation themes were unlike anything he’d seen from the sell-side (CLICK HERE for a brief review). I couldn’t think of a more deserving duo than Tom and his analyst Andrew Freedman as it relates to their winning their first ever “Pucks” at the Hedgeye holiday party last week, which is akin to sharing our firm’s MVP honors for 2015.


Sticking with the theme of conviction, it’s important to conclude this note with an update of the non-consensus thesis that our macro team currently has the largest degree of conviction in:


“The U.S. economy is #LateCycle and the probability of a recession commencing by mid-2016 is extremely elevated – both in absolute terms and relative to the belief held by the overwhelming majority of investors and policymakers. Moreover, the risk of a global recession is also great in this scenario.”


Fortuitously, we haven’t had to endure the rash of criticism levied upon our colleagues Kevin Kaiser and Tom Tobin. This is probably because we’ve been right as rain on the slope of domestic and global economic data since introducing our #LateCycle theme in 2Q15 or since introducing our #Quad4, Global #Deflation view back in early August of last year.


While we certainly haven’t gotten every market move right (far from it, in fact), the factor exposure biases we’ve adopted as a result of our fundamental views have been far better than bad throughout the duration of the aforementioned [and associated] calls:


  • Within U.S. Equities: LONG Mega Caps, Low Beta and Low Debt vs. SHORT Small Caps, High Beta and High Debt (KMI? VRX?) at the style factor level. LONG Healthcare (now defunct), Utilities and REITS vs. SHORT Energy, Materials, Industrials, Financials and Retailers at the sector level.
  • Within F.I.C.C.: LONG Long-term Treasuries and Muni Bonds vs. SHORT High-Yield Credit within U.S. fixed income. LONG the U.S. Dollar vs. SHORT basically everything else including the Euro, Japanese Yen, Commodity Currencies (e.g. CAD, AUD and BRL) and EM FX (e.g. KRW, TRY and KRW) within foreign exchange. We’ve occasionally held a LONG bias on Gold (now defunct) vs. SHORT everything else – Energy and Base Metals in particular – within the commodity complex.
  • Within Global Equities: LONG Japan vs. SHORT Europe and Emerging Markets – LatAm in particular – at the regional level.


In terms of addressing the first of the risk management questions introduced at the onset of this note, we continue to thoroughly review what has generally been a fair amount of incrementally confirming evidence in support of our bearish outlook for the domestic and global economies:



Proceed accordingly from here – with conviction, of course.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.13-2.31% (neutral)

SPX 2049-2109 (bearish)
RUT 1152--1177 (bearish)

VIX 15.91-19.21 (bullish)
USD 97.36-99.33 (bullish)
EUR/USD 1.05-1.09 (bearish)
YEN 122.08-123.46 (bearish)
Oil (WTI) 37.03-40.84 (bearish)

Gold 1049-1089 (bearish)
Copper 1.99-2.10 (bearish)


Keep your head on a swivel,



Darius Dale



Conviction Sells - Chart of the Day Darius

LNKD | Tracker Update (Talent Solutions)

Takeaway: Our tracker is seasonally declining, but not a concern yet. However, we're still cautious about staying long into the 2016 guidance release


  1. SEASONAL BUT MUTED DECLINE: Our LNKD JOLTS tracker declined sequentially into the first month of 4Q15, which is expected given seasonality in LNKD's selling environment.  That said, our focus on our tracker over the next two quarters is more about magnitude than direction; the former is fairly muted QTD.  As a reminder, our LNKD Talent Solutions TAM analysis suggests that the bulk of that TAM is in the upsell opportunity (ARPA) vs. new account volume (see 2nd note below for detail).  
  2. STILL MULLING THE 2016 GUIDANCE RELEASE: Our concern is not LNKD's fundamentals, but rather a conservative mgmt team that probably isn't willing to box itself into guidance that is can't confidently raise throughout the year.  From here, we'll be monitoring our tracker (1-2 update prior to guidance), and keeping an eye on the EUR/USD since Fx was LNKD's single largest headwind this year (despite all the noise around Display).  We may stay long into the guidance release if Fx pressure abates early into 1Q16.


See the notes below for supporting detail/analysis on our LNKD Long thesis and post-print thoughts.  Let us know if you would like to disucss.  


Hesham Shaaban, CFA




LNKD | Tracker Update (Talent Solutions) - LNKD   ARPA vs. JOLTS 4Q15 1


LNKD: Thank You Santa (3Q15)
10/30/15 09:26 AM EDT
[click here]


LNKD: New Best Idea (Long)
07/14/15 08:00 AM EDT
[click here]

investing ideas

Risk Managed Long Term Investing for Pros

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.

The Macro Show Replay | December 9, 2015



December 9, 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
2.31 2.13 2.24
S&P 500
2,049 2,109 2,063
Russell 2000
1,152 1,177 1,159
NASDAQ Composite
5,038 5,175 5,098
Nikkei 225 Index
19,229 19,848 19,492
German DAX Composite
10,431 10,901 10,673
Volatility Index
15.91 19.21 17.60
U.S. Dollar Index
97.36 99.33 98.47
1.05 1.09 1.08
Japanese Yen
122.08 123.46 122.96
Light Crude Oil Spot Price
37.03 40.84 39.25
Natural Gas Spot Price
2.01 2.21 2.08
Gold Spot Price
1,049 1,089 1,074
Copper Spot Price
1.99 2.10 2.06
Apple Inc.
115 119 118
Amazon.com Inc.
653 682 677
Priceline.com Inc.
1,229 1,316 1,303
Costco Wholesale Corp.
161 170 168
Netflix, Inc.
119 131 127
Kinder Morgan Inc.
13.03 19.32 15.72



Correlation Risk

Client Talking Points


The most important move in macro this morning is the EUR/USD retesting of $1.09 on the upside. It’s not only a Pain Trade in FX but it gives both a bid to bombed out Oil/Commodities and an offer to Japanese/European stocks – correlation risk very high.


Both the spot and reference rate for the Yuan are testing 4 year lows making this FX/Correlation Risk all the more relevant. The -$87B draw-down in Chinese FX Reserves was the 3rd largest in 10 years; no bounce for stocks in Shanghai or Hong Kong overnight.


“Ex-Energy”, the S&P 500 was down more than it looked yesterday – Oil & Gas (XOP) was up +0.6% on the day vs. the Transports (IYT) down a big -2.8% - fully loaded with COST inventories +16.5% last night (vs. Sales +1.3%). The U.S. economy is very obviously slowing here in Q4 – the Fed is cutting its GDP forecast as they raise rates.


*Tune into The Macro Show with Macro & Housing Analyst Christian Drake 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


$KMI cuts dividend by 74%.  Ahhh this is so bittersweet it hurts



No man was ever wise by chance.



China’s FX reserve balance plunged -$87.2B in NOV (the third-largest decline in at least 10 years) to the lowest absolute level since FEB ‘13.

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