Cartoon of the Day: Pooh Bear Market

Cartoon of the Day: Pooh Bear Market - stocks. bear in the woods 01.06.2016


This one speaks for itself.

The #CurrencyWar Is a War On Your PnL; Engage Appropriately

Conclusion: China and Japan are the latest two economies to demonstrate how our #CurrencyWar theme continues to perpetuate global economic and financial market volatility. Specifically, our work shows the Chinese yuan depreciation narrative is likely to continue weighing on global financial stability, which, in turn, should continue weigh on Japanese equities amid misguided guidance out of the BoJ.


Over the past ~48 hours, Chinese policymakers have enacted various measures designed to stabilize mainland equity markets, with the latest bout of stabilization coming via rumors of pending regulation (read: restrictions) of large shareholders sales. Additionally, Beijing was out reassuring investors that there is minimal risk of a sharp yuan devaluation despite the persistent trend of almost-daily devaluations since early November.


Since its 11/2 post-devaluation low of 6.3154 per USD, the PBoC’s USD/CNY reference rate (which the spot rate is allowed to trade within +/- 2% of) has been devalued by -3.3%. That the CNY has declined by the exact same amount in the spot market speaks volumes to the PBoC’s early success in maintaining the illusion of control over its managed devaluation.


That said, however, one key risk we are picking up on in the spread between the spot rate and the reference rate widening to the largest gap since the August devaluation throughout the WTD. While the -0.4% to -0.5% spread is hardly in the area code of the -1.5% spread we saw prior to the sharp devaluation seen in early August, another [major] cause for concern for Chinese policymakers and investors broadly is the widening spread between the offshore yuan (CNH) and its onshore counterpart (CNY). That gap has widened to -2.2% in favor of the [manipulated] CNY and is the widest spread seen on record.


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - CNY

Source: Bloomberg L.P.


This confirms that persistent capital outflow pressures persist on the mainland, which should weigh incrementally on Chinese economic growth among a myriad of other structural headwinds. For more details regarding those headwinds, we encourage you to review our recent work on China:



The #CurrencyWar Is a War On Your PnL; Engage Appropriately - China Capital Flows TTM Sum


Investors would do well to disregard China’s trending economic and property market stabilization as something that is sustainable. Just because various measures of Chinese economic growth are no longer careening downhill doesn’t mean Chinese demand for the world’s raw materials and finished goods has reached an investable bottom.


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - China Economic Summary


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - China Real Estate Climate Index


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - G20 Exports


In fact, there remains real risk of cross-asset contagion and further global economic deceleration as a result of the aforementioned headwinds to growth and inflation on the mainland that are perpetuating China’s need to devalue the yuan in the first place. All told, we reiterate our bearish bias on China.


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - USDCNY vs. GFSI


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - CRB vs. MSCI World ex US EPS


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - CRB vs. World Gross Capital Formation


Meanwhile in Japan, that same cross-asset contagion is weighing on Japanese equities (the Nikkei 225 has dropped -6.7% MoM) via a stronger JPY (up +4% MoM vs. the USD). Recall that Japan’s net international investment position is a surplus that amounts to 75% of the country’s GDP (vs. a -40% deficit ratio in the U.S.); this implies that Japanese investors have considerable scope to repatriate capital from global asset markets during episodes of global economic turmoil.


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - GFSI vs. JPYUSD


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - Japan Net International Investment Position


Also a threat to consensus JPY shorts (us included) is BoJ Governor Haruhiko Kuroda’s recent guidance, which continues to be implicitly hawkish. Despite reiterating his “whatever it takes” comments and the BoJ’s willingness to ease policy further in the face of growing speculation that the BoJ may have limited scope to expand its QQE program – they are already the 2nd largest holder of JGBs at nearly 29% of the float, up from 13% prior to the April ’13 QQE launch – he continues to [foolishly] talk up Japanese inflation trends, suggesting that the board’s +2% target for core CPI can be reached without additional LSAP. Moreover, he confirmed that it may take longer to sustainably reach that target because of the ongoing deflation in crude oil prices.


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - JGB Ownership 12 31 15

Source: Japan Ministry of Finance


In short, market participants are effectively calling Kuroda’s bluff on incremental QQE because his sanguine and delayed outlook for achieving the BoJ’s inflation target implies less, not more, monetary easing over the intermediate term.


It’s important to note that our analysis suggests the BoJ’s bullish bias on Japanese inflation is quite misguided in the context of Japan’s demographic headwinds.


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - JAPAN 65  YEAR OLDS


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - JAPAN 35 54 YEAR OLD


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - Why Do 35 54 Year Olds Matter


***CLICK HERE for a full discussion of the global demographic headwinds underpinning our slower-and-lower-for-long theme with respect to the global economy and interest rates.***


As such, it is likely that we’ll need to see both Japanese stocks and market-based inflation expectations continue their respective declines before the BoJ’s hand is officially forced; 10Y breakeven rates have already declined -15bps MoM to 0.69%, which is the lowest level since the Abenomics agenda was introduced back in early 2013.


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - Japan Economic Summary


All told, we think there could be another ~8% of downside in the Nikkei 225 Index – specifically because that would represent a crash from the late-June highs – before the BoJ would be forced by the markets to temporarily arrest economic gravity once again. As such, we find it prudent to [temporarily] downgrade our TREND-duration fundamental investment outlook for Japanese shares to “neutral” from a formerly-bullish bias.


For longer-term investors, we think it’s safe to reiterate our long-term TAIL bullish bias on Japanese equities and long-term TAIL bearish bias on the Japanese yen given the aggressive monetary easing we’re likely to see amid the LDP’s efforts to reach a borderline-ridiculous nominal GDP target of ¥600T by FY20 (requiring a CAGR of +4.6% from here).


That target is certainly ridiculous in the context of Japan’s trailing economic momentum as well as the demographic headwinds highlighted above. The BoJ will be forced by the Japanese economy to do exactly what economist Paul Krugman wanted them to do nearly 15 years ago: “PRINT LOTS OF MONEY”.


The #CurrencyWar Is a War On Your PnL; Engage Appropriately - LDP 600T CAGR


Best of luck out there navigating these globally-interconnected risks. Feel free to email us with any questions, comments or concerns.




Darius Dale


Penney: Chipotle Has A Lot More Downside | $CMG

Takeaway: Hedgeye Restaurants analyst Howard Penney remains short Chipotle (CMG).

Penney: Chipotle Has A Lot More Downside | $CMG - chipotle cartoon  

Another day, another big down move for shares of Chipotle (CMG). The stock is off over -5% after the company reported the impact a recent norovirus outbreak had on its financials. Quick take: Not good. 


It gets worse.  


The beleaguered restaurant chain further disclosed that it was a served a Federal Grand Jury Subpoena from the U.S. District Court for the Central District of California, to be investigated by the U.S. Attorney's office for the Central District of California, in conjunction with the U.S. FDA.   


In Chipotle's own words:


"It is not possible at this time to determine whether we will incur, or to reasonably estimate the amount of, any fines, penalties or further liabilities in connection with the investigation pursuant to which the subpoena was issued."


***Editor's Note: Penney has been warning investors about the underappreciated risks of owning Chipotle shares since September. The stock is down 39% since he made his short call. To access his team's most recent institutional research ping  


 Penney: Chipotle Has A Lot More Downside | $CMG - chipotle chart


Outside the lawyerly realm, Penney argued that Chipotle's "food with integrity" motto was also under fire. Just before Christmas, he conducted a survey assessing the consumer hit the company would take in the wake of all the foodborne illness attention it has received. 


"... We conducted a survey of Chipotle consumers to get a read on how much this outbreak will affect future business performance. Specifically we screened participants by asking them: have you stopped going to Chipotle because of the E. coli outbreak? In which, 31.3% of respondents said “yes” they have stopped going.


Our first reaction was that this was lower than we were expecting, just given what we have seen with our own eyes at Chipotle restaurants here on the east coast. But people may have been thinking they are just waiting for the all-clear from the CDC and then they will return, which we have heard plenty of times from people we have talked to (these people may have registered as a “no”).


Subsequently, we took the people that answered “yes” and asked them if they would ever go back to eat at a Chipotle restaurant again. An astonishing 56.8% of respondents (out of 200 people polled) said they would never go back to a Chipotle. Now you can say what you will about the number of people polled, but over half of those people said they would never go back. That is an alarmingly high number, and implies a very rough road ahead for Chipotle."


Clearly, the damage to the brand is palpable.


in the video below, Penney lays out his broader thesis...


Another must read: Penney's scathing "open letter" to Chipotle CEO Steve Ells.


Bottom Line:


Watch out!

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A Monster Reality Check Is Careening Toward Wall Street

Takeaway: Current Wall Street and Fed forecasts remain way off the mark.

A Monster Reality Check Is Careening Toward Wall Street - z cons


It’s not 2008... the first week of the year might actually be worse. So called, "blue chip" Wall Street year-end forecasts aren’t even close to the developing reality in financial markets. Take JPMorgan, for instance. Economists at the bank just said there's a "76% chance of recession by 2019."


By 2019? LOL


And then there’s the Fed. “We have to react to incoming events and we will react to them,” Fed Vice Chairman Stanley Fischer told CNBC yesterday.


Right… Let's take a closer look at that statement. What about the second straight month of sub-50 (aka contractionary) ISM manufacturing numbers? How about the latest Chicago PMI reading of 42.9? Or how about the existing industrial and earnings recession? 


Make no mistake, the Fed is tightening into a slowdown. Period. End of story.


Financial markets appear to be coming around to our view. The leading indicator for #GrowthSlowing is the 10-year Treasury (2.20%) minus 2yr (1.01%) and it’s making new lows this morning. In fact, today is a great day for long-term #GrowthSlowing and #LowerForLonger (rates) investors. Long bonds (TLT) are +1.1%.


While everyone on Old Wall is positioned for "rate hikes," rates are actually falling. 



A breath of fresh air (honesty) from former Dallas Fed head Richard Fisher on CNBC yesterday.


"We front-loaded this tremendous rally in stocks since March of 2009... It's going to take a little while [for the market] to digest this. So, I wasn't surprised about last year and I wouldn't be surprised if we had a rather fallow performance this year."


Let's be crystal clear about this. There is only one Wall Street firm that has been making the non-consensus US #Deflation and #Recession call. That would be us. Meanwhile, the Fed and Wall Street want you to believe that everything they missed in the past year is “transitory.”




Oil, down another -1.3% this morning, has to be the darndest looking “transitory” thing I’ve seen in my macro life – 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.



Getting back to equity markets, after it crashed from its all-time July #Bubble highs, the Old Wall is "downgrading" Apple (AAPL).


Thanks for coming out.


Lying to people about the economy for your own compensation purposes is fundamentally un-American.



Takeaway: Maternity slowing is a negative for MD

MD | Maternity Tracker Update December 2015

Based on our data which allows us to track birth (primarily commercially insured and higher income) by state and month, we’ve built a state-weighted index based on MD’s practice exposure.  



Recession, Housing, Birth Recovery in Question

Births remain below potential based on the demographic growth of women of child-bearing age, however, our Maternity Tracker and Current Population Survey (CPS) point to declines in the recent periods.  By our oversimplified arithmetic based on the reported mix shift to government payors, commercially insured births fell by 1% during 3Q15 for MD.  In our Maternity Tracker , trends in Texas are turning negative on a year over year basis with Florida showing its first major deceleration in several months, two of the most critical states in MD’s portfolio.  As our Macro Team (Keith McCullough) detailed yesterday, the risks of a recession in the US during 2016 are increasing rapidly.  Additionally our Housing Team (Christian Drake, Josh Steiner) have an increasingly bearish view of housing market trends, which historically correlates well with birth trends.

Consensus Estimates and Guidance

With the updated Maternity Tracker data through December 2015, we feel more confident in our revenue estimate of $738.3M for 4Q15, marginally below current consensus of $748.0M.  Our estimate assumes same unit volume of -1.2%, flat core pricing, and -2.4% Parity contribution, and $47.5M in revenue from vRad.  Growth coming from other acquisitions should be down sequentially with MD failing to close any additional practice deals during 4Q15 and we are not modeling any contribution from Alegis Revenue Group given the lack of details disclosed. 


MD guided to same unit revenue growth of “flat to two percent higher” for 4Q15 net of a parity headwind of “two percent.”  More importantly, we expect it is more likely to hear disappointing guidance for 1Q16 and beyond relative to expectations given the different aspects of our short thesis accelerating from here. 

$750M Senior Notes, But No Deals Yet

MD placed $750M in long term senior notes on December 8th 2015, for “acquisitions and general corporate purposes.” In several conversations we’ve heard commentary regarding the risk to a short here in front of a major acquisition.  We agree with the assessment accepting that we believe the potential deal is already reflected in the current estimates, multiple, and price of MD shares.  We’d note as well that MD failed to close any practice acquisitions during 4Q15 and only recently added 9 physician anesthesiology group earlier this week.

Short Thesis

Our short thesis was first posted mid 2015 and revolved around several points.

#ACATaper – growth in anesthesiology and radiology will be impacted as incremental and pent-up demand from the ACA wanes to a negative contributor in 2016

Maternity Slowdown - as seen in the Maternity Tracker

Acquisition Stress - more competition for deals, higher multiples, lower long term accretion, vRad perhaps reflects more competitive acquisition environment, benefits cited by management are overstated based on industry interview

Multiple Compression - MD shares remain extended despite the risks to growth




Call or email if you have any questions our would like to see the supporting data detailed here.


Thomas Tobin
Managing Director 



Andrew Freedman




HedgeyeRetail (1/6) | Dumb Shoes -- NKE, UA, Jordan v. Yeezy

Takeaway: Crowded connected fitness arena looking for someone to up the ante. Jordan vs Yeezy fight heating up. M - 'Biggest Entertainment Retailer'

UA, NKE, AdiBok – "If Everything is Smart, Then Nothing Is"


Connected fitness is all the buzz at the CES conference. Every connected fitness device unveiled its new 2016 hardware, the announcement of the UA HealthBox /‘Smart Shoe’, the release of a NKE Smart Shoe patent drawing, and the New Balance Digital Sport division = a lot of buzz. What’s clear is that the brands have moved completely away from the hardware side of the business after each tried some iteration of a device. UA partnered with HTC, NKE is still working with Apple.


This has been a long time coming for UA who started consolidating the connected fitness app market when it bought MapMyFitness in Dec. of 2013. Adi has scooped up its own device maker by the name of Runtastic. The bottom line here is will it help the companies sell more shoes and t-shirts. By getting a better sense of customer’s fitness and diet routines/habits it can’t hurt when it comes to the product creation/marketing side of the business. But, the most important element is still product. It still remains to be seen if the $710mm UA invested in its suite of fitness products will translate to the topline.


In reality, if all the brands are launching 'me too' third party hardware with partially branded software product, one has to wonder if these are 'Smart' products at all. Seems to us like what was once Smart is now being dumbed down to 'Average Intelligence'. Nobody has a competitive advantage when the same innovations become the norm. The Brands will argue that there are indeed competitive advantages to their respective product. But we'd bet that 8 out of 10 consumers can't tell the difference from one to the other.


Sounds to us like someone has to materially up the ante chip in Connected Fitness in a way to stimulate a new multi-year growth spurt in the category. Our money is on Apple, which will disproportionately help Nike.

HedgeyeRetail (1/6) | Dumb Shoes -- NKE, UA, Jordan v. Yeezy - 1 6 2016 chart1

NKE - Smart Shoe: (

UA - Under Armour HealthBox: (



M – Interview With Terry Lundgren. Macy’s ‘biggest entertainment retailer in the world’.



“Department stores must be a place for customers to come and get away from the everyday challenges of their lives, and to be entertained when they shop,” Lundgren says. “But I would argue that Macy’s is the biggest entertainment retailer in the world” by virtue of the Macy’s Thanksgiving Day Parade, annual Flower Show and Fourth of July fireworks.


Biggest Entertainment Retailer in the World? Ask a dozen Millennials to list the top Entertainment Retailers. Maybe this is a play on words, but they'll say Cabellas, Disney, Gamestop, Jordan's, Stew Leonard's...etc...


NKE - Nike Trolls Kanye West With Yeezy Look-Alike

This fight is heating up. Let's face it, the Jordan Brand is over 100x the size of Yeezy, but it still has the most to lose here. The irony is that Michael Jordan has a pretty bad reputation in the business. You'd never know it by his sneaker sales. But the guy cares about no one but himself. That said, he looks like Betty White compared to Kanye West.

HedgeyeRetail (1/6) | Dumb Shoes -- NKE, UA, Jordan v. Yeezy - 1 6 2016 chart2





NKE - Nike Turns Flyknit Chukkas Into Golf Shoes - $230

This was inevitable. Foot Joy is probably laughing at this -- and the Nike Golf team across campus from Nike's innovation center is chuckling as well.  But the reality is that this sucker will likely sell out. White and Black colorways probably make the most commercial sense.

HedgeyeRetail (1/6) | Dumb Shoes -- NKE, UA, Jordan v. Yeezy - 1 6 2016 chart3



Smart Watches

FIT - Fitbit Blaze hopes to out-fancy your Apple Watch with $200 Blaze Tracker coming in March


Casio Aims to Outshine Apple With Planned Smartwatch Models



WMT - Wal-Mart Workers on Pistol Patrol as Managers at Wal-Mart Stores Inc. in Texas are instructed to ask customers if they have a permit to carry a handgun



NKE - Merchants selling Clemson gear struggle to keep pace with demand



ICON - Mike Ashley’s Sports Direct Buys In at Iconix



SPLS - Staples Launches New Next Day Guarantee Tech Services to Help Keep Small Businesses Running Smoothly



HD - Former Home Depot exec named CFO at Hancock Fabrics