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Less Good is Bad - 2016 Outlook | Call Invite

Takeaway: We will be hosting a conference call on Wednesday, January 13th at 11:00am EST to update our outlook for Housing in 2016.

Less Good is Bad - 2016 Outlook | Call Invite - housing theme cartoon 01.05.2016 FIX


The Hedgeye Housing Team, led by Joshua Steiner and Christian Drake, will be hosting a conference call on Wednesday, January 13th at 11:00am EST to update their outlook for Housing in 2016.  



  • 2016: A Wall of Worry or Slope of Hope? Will housing return to stall speed growth after a solid year of acceleration? The same model that underpinned our long thesis in housing in 2012/13/15 and short position in 2014 is signaling another inflection as we head into 2016.
  • What if? – Navigating Recession Risk: What happens to housing and housing stocks when the economy stalls? Not all cycles are the same and the nature of the cycle matters for housing related equity performance.
  • Houston, We Have a Problem: The energy collapse has been a millstone around the neck of certain homebuilders. That situation looks poised to get worse. 
  • What’s the catalyst?  Domestic growth is decelerating, the energy market, labor/lot supply and interest rate volatility issues won’t resolve in the next quarter and, from a rate-of-change perspective, 2016 will be less good.
  • What's Priced In? What's priced into consensus and how do those expectations compare with the outlook for growth? Is valuation a catalyst after the recent correction in multiples?
  • Rates 180: Rates have been a primary boogeyman stalking housing for the better part of 2015.  We’ll contextualize housing’s sensitivity to rates during variant tightening cycles and discuss the implications of our outlook for the current cycle.
  • HPI Inflection: 2nd derivative HPI trends matter in housing and the slope of price growth is likely to stall. We'll detail the HPI outlook and what it means for housing related equities. 
  • Top Ideas: We'll run through the names and groups that we think are best (and worst) positioned for yet another reversal in housing.



  • Toll Free Number:
  • Toll Number:
  • Conference Code: 13626823
  • Materials: CLICK HERE



Joshua Steiner, CFA


Christian B. Drake


The Macro Show Replay | January 6, 2016


January 6, 2016

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 2.16 2.25
S&P 500
1,998 2,047 2,016
Russell 2000
1,094 1,140 1,110
NASDAQ Composite
4,870 4,990 4,891
Nikkei 225 Index
18,099 18,811 18,374
German DAX Composite
10,126 10,584 10,310
Volatility Index
17.28 22.65 19.34
U.S. Dollar Index
98.01 99.77 99.45
1.07 1.10 1.08
Japanese Yen
118.11 120.30 119.05
Light Crude Oil Spot Price
35.04 38.11 36.14
Natural Gas Spot Price
1.89 2.52 2.34
Gold Spot Price
1,059 1,085 1,077
Copper Spot Price
2.04 2.14 2.09
Apple Inc.
101 106 102
Amazon.com Inc.
618 660 633
Alphabet Inc.
749 791 761
Walt Disney Company, Inc.
99 105 100
Netflix Inc.
105 113 107.66
Valeant Pharmaceuticals, Inc.
92.07 105.65 100.86

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.

Japan, Spain and Oil

Client Talking Points


A big short squeeze in the Yen to kick off 2016 has the Nikkei down every day in 2016 – and this is on the heels of Kuroda saying he’ll do “whatever it takes” twice in the last 2 weeks! The Nikkei is down -1.0% overnight and down -6.7% in the last month.


Spain is still our favorite European short idea as the lefties are going to meet their maker economically. The IBEX is breaking down to new lows this morning and is down -7.9% in the last month now that most of Spain’s economic cycle data (including PMI) has peaked/rolled (bearish Euro).


Oil is down another -1.3% this morning has to be the darndest looking “transitory” thing we’ve seen in our macro lifetimes – it’s not transitory, it’s called #Deflation – and this will continue to perpetuate a credit cycle that is about to break out (credit spreads) to new cycle highs.


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

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

With the Fed's 25 basis point hike in interest rates, in the financial sector, FII stands to benefit most from even this marginal change.


In essence, Federated Investors (FII) has a stable business for what we think will be a volatile 2016. 2015 finished with slight positive inflows into the firm's main business line, money market or cash products. This is reminiscent of the start of cash builds in 1999 and 2006 ahead of the negative returns in risk assets in 2000 and 2007.


RH is our top long idea in all of retail, and we view the recent weakness in the stock as a buying opportunity. All in we think the company will build to $5bn in sales at mid-teens operating margin which equates to $11 in earnings power. This growth and profitability comes from...

  •  ~30% Square footage growth with new full line design galleries.
  • New businesses, like Modern and Teen, that can be easily layered over its low cost infrastructure.
  • Leveraging occupancy from the "sweet heart" real estate deals the company is getting as a high end traffic driving tenant willing to take anchor size leases. 

The yield spread (10Y’s -2Y’s) compressed to a 52-week low of 120 basis points last week.  AGAIN, that’s a 52-week low in growth expectations right after “lift-off”. Into year-end, the bond market continues to price in what it has all year long: #Slower-and-lower-for-longer.


We continue to believe deflation will pressure the policy-fueled leverage embedded in junk and high yield bond markets. The cheap money, corporate credit boom inflated asset prices and it has more room to deflate. This deflationary run started in the second half of 2014, with the introduction of our #Deflation theme. Back then, was also the low in cross-asset volatility and the high in outstanding corporate credit (commodity producers chasing inflation expectations were the largest contributor).

Three for the Road


5 Must-See Cartoons That Sum Up The Macro Environment https://app.hedgeye.com/insights/48383-5-must-see-cartoons-for-the-current-macro-environment



A stumbling block to a pessimist is a stepping stone to an optimist.

Eleanor Roosevelt              


General Motors said it will invest $500 million in Lyft Inc and laid out plans to develop an on-demand network of self-driving cars with the ride-sharing service. GM’s investment accounts for half of Lyft's latest $1 billion fundraising round.


Yesterday the Hedgeye Macro Team, led by CEO Keith McCullough, hosted its quarterly Macro Themes conference call in which it detailed the THREE MOST IMPORTANT MACRO TRENDS it has identified for 1Q16 and the associated investment implications.


We encourage you to check out the Video Replay (below); the Audio Replay and Presentation Materials can be accessed via the links underneath.


For the audio replay CLICK HERE 

To access the presentation materials CLICK HERE





  • U.S. #Recession?: Industrial activity and corporate profitability are already trending at recessionary levels. Meanwhile, domestic employment, consumption and income growth are all past peak and policy-driven deflationary pressures should persist in perpetuating soft external demand, EM distress, weak import pricing, HY credit risk and further flagging in corporate capex. We’ll contextualize the current macro data and handicap the probability of recession as the late-cycle U.S. economy traverses its steepest GDP base effects of the cycle.
  • #CreditCycle: An extended breakout in corporate credit spreads has preceded recessionary periods in prior cycles, and since we introduced our deflation theme in 2H14, both high yield and investment grade spreads have marched higher off all-time lows in cross-asset volatility and all-time highs in corporate credit outstanding. In effect, we are loudly reiterating our call that the unwind of ZIRP and QE will continue to deflate the easy money credit boom it fabricated in the form of continued recessionary earnings growth as the business cycle gets dangerously long in the tooth.
  • #CurrencyWar: Historically, Fed tightening cycles, #LateCycle slowdowns and #Quad3 outcomes have all been independently been bearish for the USD. As such, our expectation for a continuation of #StrongDollar commodity and asset price deflation appears misguided in the context of our dour fundamental outlook for the U.S. economy. That said, however, currencies cannot be analyzed in isolation and our proprietary analysis of the world’s top-10 economies renders the [dollar-bullish] global monetary policy divergence theme we authored well intact. 

-The Hedgeye Macro Team

RH | It’s Us vs Them

Takeaway: Here’s a detailed overview of where we’re different from the Street, by line item, in each quarter in 2016. RH needs to deliver. It will.

More than any other company/issue we've had questions on since 2016 kicked into high gear,  RH takes the cake – and more specifically, its near-term earnings trajectory. We’d peg it at roughly a dozen queries in just two days, which is very big for us. We’re not surprised, and we agree 100% with the impetus for the concern. We believe fully in the long-term call, and believe now as much as ever that there’s $11 in earnings power, and that people will actually start to believe it within a year.  But the cold hard fact remains that the tactical game changed in December due to promotional activity, perceived economic sensitivity, and timing issues around concept and new store launches.


We can talk all day about the 2-3 year economics of new categories ramping up sales into bigger stores at lower rents. But the fact is that if RH misses revenue and/or earnings in either of the upcoming two quarters, $11/ps in future earnings won’t mean squat, and this multiple will deflate faster than a game ball in Foxboro (sorry Patriots fans).


As such, in the tables and charts below, we compare where we shake out in each of the next four quarters versus consensus, with particular focus on Sales, Gross Margins, SG&A, and EPS in 1H16.  The punchline is that we’re ahead of the Street every quarter on EPS, and are coming in at $4.48 for the year vs the Street at $3.94. The good news is that this is almost entirely top line driven throughout the year, with SG&A leverage to go with it. The downside is that we’re more conservative in both 1Q and 2Q than the Street on Gross Margin.  When all is said and done, however, we think that a better comp and higher EPS will trump lower GM, given that weakness in the latter is so well telegraphed.


[As a point of reference, we’re going to vet every single part of the RH Bear Case across durations in a Black Book to be released on January 25th (1pm EST presentation). We won’t necessarily disprove all of it, but we will fully analyze it. Stay tuned for details.]


EXHIBIT 1: Hedgeye P&L Variance vs Consensus

RH | It’s Us vs Them - RH Trend 1   Summary Table



EXHIBIT 2: RH Revenue, Hedgeye vs Consensus

4Q15: To get to the streets #’s for 4Q (mid-point of guidance) need to assume a big ramp in the 2yr trend from 16% to 23%. That reacceleration = $79mm in sales. If we attribute all of that to Modern/Teen we have to make modest assumption that M/Teen books run a productivity rate of just 45% of Spring mailings. That would be what we’d consider an obscenely low performance. Plus RH guided down margins appropriately to win market share. It appears to be working. Top line should not be an issue.

1Q16: Modern/Teen not a 1-quarter event – this builds sequentially. Look at big Source Book revamp in 2Q/3Q14 for proof. Plus, vendor network is the M/T revenue bottleneck, not consumer demand. That’s not a bad position to be in.

2Q16: Continued benefit from Modern & Teen, plus newest design galleries (Chicago, Denver, Tampa, Austin + LA Modern) will have more material impact to topline. Increased marketing spend in the form of source book pages.

RH | It’s Us vs Them - RH Trend 2   Rev Chart



EXHIBIT 3: RH EBIT Margins, Hedgeye vs Consensus

4Q15: Promotional environment pressure takes margins down in 4Q. Guide for -100bps on GM likely overshot to the downside. SG&A leverage from Source Book savings and scale in the model.

1Q16: Assume that promotional pressure persists, coupled with DC occupancy deleverage, and higher shipping cost – offset by one more quarter of SG&A leverage as Source Books savings amortized over 12 month window. Strong top line flows through.

2Q16: Promotional pressure eases, product flow normalizes and retail occupancy starts to kick in. Take spending up on marketing to drive top line.

RH | It’s Us vs Them - RH Trend 3   GM Chart



EXHIBIT 4: RH EPS, Hedgeye vs Consensus

4Q15: Expectations in check for 4th quarter, and RH has to deliver. Sales expectations assume a big acceleration, but product pipe, new galleries, and market share efforts will drive 35% earnings growth even with GM pressure.

1Q16: Street underestimating how long tail is on Modern/Teen product. RH will push envelope to take market share. Enough SG&A levers left to offset any GM pressure.

2Q16: New galleries + Modern/Teen + increased marketing dollars = strong top line. Modest EBIT margin leverage. Street too low by $0.10.

RH | It’s Us vs Them - RH Trend 4   EPS Chart



EXHIBIT 5: RH Peak, Mid, Trough Valuation and Sentiment Summary

Any way you cut it, RH is sitting near a trough valuation on all metrics, and within 200bps of peak short interest (currently 29%). In fairness, RH has trading history for only half of the current economic cycle – but for the stock to be anything other than egregiously cheap at $78, we need to be more wrong on the fundamentals than we’ve been on any name in a very long time.

RH | It’s Us vs Them - RH Trend 5   Valuation 2

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