Workingest Boys

“It wasn’t luck that made them fly – it was hard work and common sense.”

-John T. Daniels


One of the most recognizable pictures in the history of American innovation (“First In Flight”) is the Wright Brother’s original “Flyer.” John T. Daniels “was the amateur photographer who took the photograph of their first flight on December 17th, 1903.” (Wikipedia)


He was also one of the men who spent a lot of time with the Wrights in their workplace. He said “they put their whole heart and soul and all their energy into an idea and they had the faith.” (The Wright Brothers, pg 108)


While we don’t just have boys working here @Hedgeye, if there’s one thing I’m most proud of it’s how hard everyone works. I know - on Wall Street everyone thinks they work hard. Build a culture where you actually work harder than most, and your business will fly.


Workingest Boys - wright bro


Back to the Global Macro Grind


With the beloved “the market is flat” quote of the year (SP500) hovering below where it started the year (2058), many other components of the Global Macro market (Credit, Currencies, Commodities, EM, etc.) continue to crash into week’s end.


Not to cherry pick the composite performance of 2000 stocks instead of 30 or 500, but the Russell 2000 is down -5% for 2015 YTD. More importantly, it’s down -11.3% from the all-time #bubble high for US stocks that we called in July. The 2nd half of 2015 draw-down has been nasty.


What is a draw-down? You don’t need the Wright Brothers to build you a draw-down table:


If you lose this amount…              you have to return this to break even:   


-10.0%                                             11.1%

-11.0%                                             12.4%

-12.0%                                             13.6%

-13.0%                                             14.9%

-14.0%                                             16.3%

-15.0%                                             17.6%

-20.0%                                             25.0%

-25.0%                                             33.3%

-30.0%                                             42.9%


This is very basic math that most in the mainstream (who haven’t run client portfolios) don’t think about when they talk about what “the market” is doing vs. what it would need to do to get people who got plugged chasing charts back to break-even.


In other words, what is the catalyst to get:


  1. The Russell (2015) Bubble +12-13%, from here, to break even?
  2. The CRB Index (2011-2012 Bernanke Bubble) +33%, from here, to break even?
  3. Kinder Morgan (the Yield Chasing Inflation Expectation Bubble) +163%, from here, to break even?


That’s right. If you chased the Kinder Morgan’s (KMI) chart and bought it at $44.57, on April 23rd, 2015, your client’s account is First In Crashing to a level they’ll never be able to recover from. That’s why Kevin Kaiser putting all his energy into a SELL idea mattered.


I get why innovation in Wall Street Research hasn’t included many independent research firms that have literally 0% conflicts of interest. If you don’t have a bank, broker dealer, or asset manager on your platform, it’s really hard to “get paid.”


What you may not see is that when I started Hedgeye, I wasn’t looking to get paid. I was simply burnt out by the compromised and constrained ways of the Old Wall and wanted to build a better way. I really wanted to help the average person not crash again.


Forget what people who are in the business of marketing “the market is flat” are telling you, across asset classes we are in the midst of the 3rd major crash I’ve seen in my Wall Street career. All 3 coincided with a major economic cycle top:


  1. 1
  2. 2007-2008
  3. 2015-2016


Every one of these economic cycle tops had different asset bubbles underpinning their hopes that it was “different this time.” Not one of these cycle tops was different in terms of classic rate of change slowdowns in major economic factors.


As you can see in today’s Chart of The Day (one of my favorite 20 year cycle charts in all of macro), the Commodity Super-Cycle crash we are witnessing today is largely a function of both Greenspan and Bernanke devaluing the US Dollar to a 40-year low from 2001-2011.


That’s a decade of devaluing the purchasing power of hard working Americans (their currency) every time the US economy started to slow from its cycle peak. While the early 20th century had The Wright Brothers, the early 21st had The Central Planners.


No, that’s not to say that there wasn’t American innovation all the while (newsflash: most innovation is born out of necessity, not economic expansions). It’s simply to say what the mother of all economics risks remains the unwind of a centrally planned bubble.


I’m obviously not alone in defining history this way (they’re just time series charts). Most of the money managers who are having a fantastic year understand that The Deflation Risk is real and not “transitory.”


If you want to have a big-gravity-bending economist tell me that the Federal Reserve wasn’t the causal factor in USD Devaluation, that’s fine. I’ll smile and move along. I have too much work to do to argue with these people anymore.


It’s hard work and common sense that will preserve and build wealth during this slow-down. That’s not different this time either.


Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):


UST 10yr Yield 2.13-2.32% (neutral)

SPX 2033-2072 (bearish)
RUT 1131--1172 (bearish)

NASDAQ 4 (bullish)

Nikkei 19010-19447 (bullish)

DAX 106 (bearish)

VIX 16.85-20.47 (bullish)
USD 96.70-98.73 (bullish)
EUR/USD 1.05-1.10 (bearish)
YEN 121.24-122.69 (bearish)
Oil (WTI) 35.41-39.25 (bearish)

Nat Gas 1.95-2.13 (bearish)

Gold 1049-1084 (bearish)
Copper 2.01-2.12 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Workingest Boys - 12 11 Chart of the Day

VIX, Natural Gas and the Russell

Client Talking Points


Nothing crushes returns like bullish breakouts in volatility – OVX (Oil Volatility) has ramped from 38 to 51 since early NOV (38 is an epic level of volatility to begin with) and now front-month U.S. Equity VIX has an immediate-term risk range of 15-22; that’s why “up days” in DEC have been fleeting.


Natural gas us crashing to new lows, -1.2% through $2.00 this morning – that’s a lower-low and while last year they blamed the “cold winter” for slowing Q1 GDP, now they can blame the warm one for slowing Q4 GDP – you just can’t have cold or warm weather.


The Russell 2000 continues to lag the Dow and S&P 500 and is mentioned the least by the mainstream as a result. It is down -5% for the year-to-date and down -11.3% from the all-time #Bubble high in July, the deterioration under “the market’s” surface is very obvious at this point.


*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."


This RH quarter is going to draw a Mason Dixon line between the Bulls and the Bears. The key factors that the Bulls (including us) need to see were profoundly present – giving us confidence that revenue will double, that we’ll see a 16% operating margin, and $11 in earnings power. In addition, RH beat the quarter, delivered 33% EPS growth in what should be the slowest growth quarter of the year, and it took up 4Q revenue guidance based on what it’s seeing so far this quarter (to 20%+).


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


Peak M&A Is A Classic Late Cycle Indicator | $DD $DOW @MariaBartiromo



If you don't know where you are going, you'll end up someplace else.

Yogi Berra


It's estimated that 70-80 million dogs and 74-96 million cats are owned in the United States. Approximately 37-47% of all households in the United States have a dog, and 30-37% have a cat (APPA).

The Macro Show Replay | December 11, 2015


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.

December 11, 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
2.32 2.13 2.24
S&P 500
2,033 2,072 2,052
Russell 2000
1,131 1,172 1,149
NASDAQ Composite
4,987 5,092 5,045
Nikkei 225 Index
19,010 19,447 19,046
German DAX Composite
10,308 10,856 10,598
Volatility Index
16.85 20.47 19.34
U.S. Dollar Index
96.70 98.73 97.93
1.05 1.10 1.10
Japanese Yen
121.24 122.69 121.61
Light Crude Oil Spot Price
35.41 39.25 36.58
Natural Gas Spot Price
1.95 2.13 2.00
Gold Spot Price
1,049 1,084 1,071
Copper Spot Price
2.01 2.12 2.06
Apple Inc.
113 119 116
653 682 662
Alphabet Inc.
754 772 760
Netflix, Inc.
120 127 124
Kinder Morgan Inc.
13.23 18.64 16.81
Restorwation Hardware
85 93 87



RH | Lost in Translation

Takeaway: What should be a victory lap is now an oppty to buy RH on sale. Ultimately, the outsized earnings trajectory will make Longs lots of coin.

Conclusion: This RH quarter is going to draw a Mason Dixon line between the Bulls and the Bears. On one hand, the key factors that the Bulls (including us) need to see were profoundly present – giving us confidence that revenue will double, that we’ll see a 16% operating margin, and $11 in earnings power. In addition, RH beat the quarter, delivered 33% EPS growth in what should be the slowest growth quarter of the year, and it took up 4Q revenue guidance based on what it’s seeing so far this quarter (to 20%+). On the flip side, the Bears got a nice little gift in the form of weaker Gross Margins due to promotional activity, and renewed concerns about management. The reality is that this is a transformational growth story that will change on the margin more often than it doesn’t. Even though the 30% short interest already captures a whole lot of bad news, this print won’t make people cover – and probably validates the pressure the stock came under earlier this week. We’ll respect it for what it is, but based on our confidence in the earnings power at play here, we’d use any weakness as an opportunity to buy. The market combined with noise around the evolution of this story gives you a shot at buying it on the cheap every six months or so. We’re thinking that this is one of those times.



This is a pretty good timeline of how we viewed the RH 3Q print.

4:05pm – Press Release: Solid print. Beats the consensus by $0.02 (4%), and takes UP 4Q revenue by $10mm. It’s pretty tough to find anyone who takes up revenue expectations, most companies would simply keep estimates in-line, and upside in their back pocket.  Overall, total revenue guidance and implied EPS of 20-23%, and 40%, respectively. That comes on the heels of an impressive 33% earnings growth in what is widely viewed to be the lightest revenue quarter of the year.


Stock up 5% after hours as the EPS beat and top line guide trump the fear that people had headed into the print earlier this week.


4:30pm – RH Video: Now we’re feeling really good about this event. The video was targeted, on point, and Gary Friedman appeared to be more focused and grounded than in any other earnings video presentation.  Furthermore, there are basically two things you need to believe to own this story long term. 1) That the large format stores are both working and are scalable, and 2) that RH can successfully scale the brand into new categories and brand-relevant concepts.


Well, both of those were answered, with Atlanta continuing to accelerate from the Nov 2014 launch, and 2) RH Modern blowing the doors off expectations just one month after launch. Consider this, the Beverly RH Modern store is already doing $1,800/foot after just one month. This is unheard of. The store was previously a traditional RH Gallery, and over the course of two years it climbed from about $1,000 to $2,300/foot, making it one of the most productive stores in the entire chain until it moved to Melrose (larger format) a year ago. And yet Modern got all the way up to a $1,800 per sq. ft. run rate in 30 days? That’s surreal.


The bottom line…we were looking to check two major boxes that the long-term story is on track, and both got a major stamp of approval.



5:30pm -- Q&A With Management: Recall the comment above about how focused and grounded Friedman was on the video? Yeah…about that…

This was definitely not Gary’s best Q&A. In fact – let’s keep it real -- it was probably his worst from the perspective of the average investor. Unfortunately, it’s that average investor who is probably driving the incremental demand for the stock.


What happened? Knowing that the market clipped $300mm in equity value out of RH over the past three days due to an otherwise unplanned Friends & Family sale, we think that IR probably went on offense and asked Gary to make a 3-5 minute statement mitigating concern about promotional activity, and keeping people focused on long-term value drivers. Unfortunately he answered the first question in a 14 minute 20 second monologue which included some statements that prompted a $9 reversal in the stock, flat-out scared the market, and even concerned us (until we got clarity on what’s really going on).


These Are Some Soundbytes That Came From The Q&A:  1) “When we look at the data internally, it is the most promotional environment we've seen, meaningfully so.” 2) “You can't ignore someone like Wayfair today. They're doing big volume.” 3) “The last thing you want to do is you want to let yourself get Amazoned by somebody.” 4) “It makes me think, hey, you know, should we be calling Yellen and saying ‘let us tell you what we're seeing’, because, you know, those things, from my point of view — and I don't mean to make anybody panic, but it's important how we look at those.” 5) “RH, you know, ran a big promotion. Got it. We weren't trying to be shy about that, by the way.” 6) “At holiday time, if you've got stores in retail districts or retail malls and there's thousands of people in those malls and you're not doing something to maximize share, then you're a spectator.” 7) “Taking share is important. There's a reason why Amazon launched Black Friday before everybody else in the world, right? There's a reason why we launched the promotion we did last weekend. You know, it was to take share.“


We’re Pretty Darn Sure That The Intended Message Sounded Like This: “We’re exceptionally pumped about the success of our key initiatives, such as the new large-format Design Galleries, RH Teen, and especially RH Modern – all of which set us up for a breakout 2016 (after a breakout 2015). While we’re winning with our core initiatives, it pisses us off quite frankly, to see fringe competitors go so aggressively after market share. Wayfair put up a 130% comp around Black Friday, and though we don’t compete with them directly, I see the promotional activity in the rest of retail, and don’t want to be the loser when the holiday season ends. Our brand and our business is so strong such that I made the call to pull forward a sale from January to be sure that if anyone is gaining share out there, it is RH. The plan is, that the plan will change. That’s who we are, it’s makes us great, and we’re not going to apologize for it. We’ve never felt better about where we are, and where we’re headed.”  


What’s done is done, and the people out there that don’t like Gary now have 14 minutes of ammo. But they’d better hope that will make the stock go down…because the sheer earnings growth story here should make this one of the top performing stocks in Consumer in 2016.

Cartoon of the Day: Over The Cliff?

Cartoon of the Day: Over The Cliff? - rate hike cartoon 12.10.2015


The Fed is fighting economic gravity with Janet Yellen hell-bent on raising rates into a slowdown.

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