Purchase Apps | November Reign

Takeaway: Housing demand in November was the strongest month YTD and the first week of December continues that trend.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


Purchase Apps | November Reign - Compendium


Today’s Focus: MBA Purchase Applications

The momo in purchase demand continued in the latest week with seasonally adjusted weekly activity holding at 5-year highs and average monthly activity in November finishing at its highest level since mid-2013.


Purchase applications were flat sequentially (+0.05% WoW) at the 228.2-level on the Index with growth decelerating modestly to +28.4% YoY.  On a quarterly basis, 4Q is tracking +2.8% QoQ and +24.2% YoY. 


The read-through on this weeks data remains largely unchanged relative to the week prior (see: Purchase Apps | New Highs ...& Salt Grains): 


Conclusion - The high-frequency data remains hostage to seasonal noise associated with imperfect peri-holiday statistical adjustments and we’re probably observing some measure of demand pull-forward associated with the impending policy rate increase.  But, on balance, the 5-week streak of above trend demand suggests the uptick in purchase activity aptly characterizes the underlying reality– if not in magnitude, at least directionally. 




Purchase Apps | November Reign - Purchase Monthly Ave YTD


Purchase Apps | November Reign - Purchase YoY


Purchase Apps | November Reign - Purchase 2013v14v15


Purchase Apps | November Reign - Purchase Index   YoY Qtrly


Purchase Apps | November Reign - Purchase LT


Purchase Apps | November Reign - 30Y FRM





About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


Christian B. Drake


LULU | EPS Expectations a Buck Too High

Takeaway: It perplexes us how enamored the street is with this name. But it doesn’t have the talent or plan to succeed. No buyer here.

We’re not surprised in the least by this LULU print. We remain convinced that this is a management team that is utterly clueless about what factors will create value for its shareholders. Consider the following points…

  1. This was the first EPS miss for LULU in 21 quarters. It won’t be the last.
  2. It was the first time the company failed to produce Cash From Operations since the First Quarter of 2008 – that’s 30 quarters.
  3. We had the pleasure of listening to a bunch of men talk about cost management, efficiencies, occupancy and air freight as a means to get the company’s Gross Margin back up to the low/mid 50s. Why does this matter? It is a womens apparel company that should be all about growth. Instead it’s run by men who are all about margin – something the street won’t pay for – at least we won’t. This has got to change (and the new female Head of Culture doesn’t count).
  4. Pushback we get here is that the Yoga category is getting saturated, which LULU has to battle. Ok fair enough. But UnderArmour got saturated in Football, and then proceeded to add another $15bn in market cap as it executed on the mother of all growth plans in the aftermath.
  5. Nike – which is 15x bigger than LULU is growing consistently and rapidly. Over the past 12 months, Nike added $2.25bn in revenue, while LULU added only $243mm, and grew at a slower rate than Nike. In other words, LULU’s top competitor is adding the equivalent of a LULU ever year. Under Armour’s growth rate is dwarfing LULU’s.  Shouldn’t we be hearing about a tight plan to regain market share and rapidly accelerate market growth. We don’t think one exists.


Ultimately, we think LULU will miss again, and again.  And then the ‘new’ CEO will likely be fired. Kills us to say that – he’s a nice guy. But just not right for that job in that culture.


Until then, LULU is marching towards $2.50 in EPS with the Street at $3.40. We still think it’s a short.


Prior Note on LULU from 9/10/15

LULU | In Search of TAIL

Takeaway: This qtr (2Q15) was a mess due to factors far beyond financials. LULU isn’t articulating a cogent plan – bc it probably doesn’t have one.


There’s one major reason why we think this LULU quarter was a huge let down -- and it’s not that inventories were up 23 days while Gross Margins missed by 200bps. Nor is it that LULU added $62mm in revenue year over year, but generated $1mm less in EBIT.  It’s the reality that this company does not know what it wants to be. Virtually every statement out of management on the call had to do with near-term tactical branding, marketing and product plans. All that is fine. It matters on some level – and definitely matters to small scale moves in the stock in the coming quarters. But that’s what we call TREND (in HedgeyeSpeak that translates to 2-3 quarters out – the near-term modeling horizon). This is where LULU lives, unfortunately.


But LULU needs a change of address. This is an extremely powerful brand in a solid, yet increasingly competitive, space. LULU needs to not only be a great brand, but a great company. Then and only then will it be a great stock. We think management is coasting on the power of the brand, by tweaking a legacy operating plan, blindly opening stores, and hoping that nothing else goes wrong. Hope, however, is not a profitable growth process.


LULU needs to live in the TAIL (which we define as 1-3 years). What we need for real wealth creation with this stock is for a clear, concise strategy that insiders rally around and are paid handsomely to implement. People need to look to $4.00 in earnings power, and believe in it. It’s that same strategy that would result in its CEO standing up and saying things that will make Nike, UnderArmour and Athleta quake in their boots (which used to be the case) – not that they are using ‘Sports Psychology on the Pant wall’.  Unfortunately, we truly think that LULU does not have a proactive process to grow its business.


Does The Company Have A Long Term Plan?

Somebody, please, ask virtually anyone in the company if they know their market share in stores and online within an hour’s drive of each store. [Note: our math shows it ranges from 2.5% (Long Island) to 26.7% (Burlington Vt) -- ping us if you want the data]. We don’t think they’ll tell you – because they probably don’t know.


How can a CEO stand up and give credible growth and profitability targets without knowing these basic building blocks?  How can they articulate why they don’t have a wholesale model – something that could be a home run for LULU (i.e. sell where the consumer shops)?  Even the CFO, who we have/had high hopes for, hasn’t created his own identity with the Street – as he’s following the same script of his predecessor who was pushed out.


All we get from the company as it relates to strategic initiatives are 1) Brand, 2) Community, 3) Innovation, and 4) Guest Experience.  The only quantified metric is that LULU will return to a 55% gross margin – something that we don’t think is realistic without meaningful backing by the balance sheet (i.e. more capex to boost profitability). But more importantly, the market is highly unlikely to pay for a passive goal to return to peak profitability when LULU is in a different stage of its growth cycle.


This is a great Brand, for the time being. We really want to get behind this story due to the potential that can be unlocked. But without the backing of a great company – we think this stock is going anywhere but up. We’re glad we pulled the plug in March.


NEW VIDEO: Disconcerting Global Macro Developments


On Fox Business' Mornings with Maria today, Hedgeye CEO Keith McCullough discussed the developing industrial recession, commodity price deflation and the strengthening U.S. dollar, with CLS Holdings CEO David Puth and Fox Business’ Dagen McDowell.


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LNKD: We Are Removing LinkedIn From Investing Ideas

Takeaway: Please note we are removing LinkedIn (LNKD) from Investing Ideas

We've have had a rather nice run with LinkedIn (LNKD) on the long side, but we're booking the gain today. LNKD shares are up over 20% since we added the stock to Investing Ideas in August. For comparison's sake, the S&P 500 was down -1.4%. 


As readers are aware, our Internet & Media analyst Hesham Shaaban has been cautious about staying long into the 2016 guidance release. Here is what he had to say in a note sent to institutional subscribers earlier this morning:


"... Our concern is not LNKD's fundamentals, but rather a conservative management team that probably isn't willing to box itself into guidance that is can't confidently raise throughout the year."  


LNKD: We Are Removing LinkedIn From Investing Ideas - linkedin

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.”


Click Image To Enlarge

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.


Click to enlarge

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

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