[Unlocked Early Look] Conviction Sells

Editor's Note: The Early Look below was originally written on 12/9 by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more about the Early Look and to subscribe.

* * *

“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

[Unlocked Early Look] 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. 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:


  • Ongoing deterioration in the Chinese economy: “The Real Reason You Should Be Concerned By China’s Recessionary Trade Data” (12/8/15);
  • Ongoing deterioration in the global economy: “Are You Paying Enough Attention to the Global Economy?” (12/5/15);
  • A negative inflection in U.S. consumer demand: “Can’t Sneak #GrowthSlowing Past the Goalie” (11/25/15); and
  • A refutation of our competitor’s “global growth has bottomed” view: “What's Driving Our Bearish Forecasts for Domestic and Global Growth?” (11/9/15)


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



[Unlocked Early Look] Conviction Sells - Chart of the Day Darius

RTA Live: December 11, 2015


[UNLOCKED] Keith's Daily Trading Ranges

Editor's Note: We've made some new enhancements to Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. Click here to view a brief video of McCullough explaining how to use it most effectively.


Subscribers now receive risk ranges for 20 tickers each day -  the last five are determined by what's flashing on Keith's radar screen and what tickers subscribers are asking about. Click here to subscribe.


  • 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
Restoration Hardware
85 93 87



Retail Callouts (12/11): Online #contentwins. RH | Lost in Translation, KSS

Takeaway: UPS, FedEx, Online Sales #contentwins. RH Lost In Translation, KSS lowering shipping threshold for rest of Holiday.


UPS Struggles to Keep Up With Surge in Web Orders -- Bearish For Retail Pricing Power



On the heels of 9 consecutive days of over $1bn+ in online sales (for the first time in history according to comScore), it's no wonder that UPS and FedEx are at capacity. It'll be interesting to see if the rest of the Holiday plays out like 2013 when packages promised on the 24th showed up well after Boxing Day or the understaffed shippers can somehow find a way to handle the volume -- or just flat out shut down the spigot.


What this means for retail...We think it's becoming abundantly clear that Brick & Mortar retailers who don’t have a REALLY profound value proposition to draw people into their stores are likely in the early stages of going away. Consumers can now go directly to the brands -- we all know that, or the best overall shopping experience (like Costco, where content does not matter, but assortment and price do).


Specifically, our strong sense is that if UPS and FDX came to the retailers or brands and demanded another price increase to secure capacity for on-time delivery, the retailers would pay it in a heartbeat, and they would have close to zero leverage in passing that through to you and me in the form of higher prices.


RH - Lost in Translation

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.

For our full note CLICK HERE


KSS - Kohl's Shipping Threshold


KSS is running a Free Shipping promotion under $50 through the rest of the Holiday down from the $75 norm, and this is the second time we've seen the company go to the Free Shipping well this Holiday season. For a company where the only part of the top line that is growing is and competitors (Target) have gone completely free, this makes sense. But it's important to keep in mind that KSS sales come at a margin 1000bps below a Brick and Mortar sale, not to mention that management previously said that a $25 threshold wouldn't work economically over the longer term. If $25 threshold does not work long-term, then $0 definitely doesn't work short-term. 

Retail Callouts (12/11): Online #contentwins. RH | Lost in Translation, KSS - 12 11 2015 chart1


WMT - Wal-Mart Marketing Chief to Step Down. Company hiring Michael Francis one of the architects of Target’s cheap-chic image.



DKS - Dick’s Sporting Goods Agrees To Pay $10mm Settle Overtime Pay Lawsuit



LOW - Lowe’s is including a “Santa Tracker” feature on its Iris by Lowe’s app that connects to the retailer’s Iris automated smart home system.



VRA - Vera Bradley Adds Mary Lou Kelley, Best Buy VP of e-Commerce, to Board of Directors



KR - Former Disney executive joins Kroger board



Belk - Sycamore Partners has completed its acquisition of Belk Inc.


CHART OF THE DAY: The Great Unwinding of the Commodity Super-Cycle

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


"... 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 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."


CHART OF THE DAY: The Great Unwinding of the Commodity Super-Cycle - 12 11 Chart of the Day

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

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.