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The Week Ahead

The Economic Data calendar for the week of the 11th of January through the 15th of January is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - 01.08.16 Week Ahead

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: TIF, JNK, NUS, W, WAB, ZBH, FII, XLU, MCD, RH, ZOES, GIS & TLT

Investing Ideas Newsletter - Bull SCREAM 01.06.2015


Below are our analysts’ new updates on our thirteen current high conviction long and short ideas. As a reminder, if nothing material has changed in the past week which would affect a particular idea, our analyst has noted this.  


Please note that we added the Utilities Select Sector ETF (XLU) to Investing Ideas on Friday. We will send a full research report to subscribers early next week. Hedgeye CEO Keith McCullough’s updated levels for each ticker are below.


Investing Ideas Newsletter - levels 1 8 2016 4 27 10 PM


Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less




To view our analyst's original report on Junk Bonds click here. Since we added short Junk Bonds to Investing Ideas in October, JNK is down -7.8%, versus -4.5% for the S&P 500. Our long TLT position is up 7.7% since adding the position in August 2014, versus -0.2% for the S&P 500.  


After the worst start to a year literally EVER for U.S. equity markets, TLT caught a bid in the first week of trading as the centrally-planned Chinese stock markets traded limit down earlier in the week. It was the largest central bank liquidity injection from Beijing since Chinese markets crashed in September.


TLT remains one of our strongest long idea calls heading into 2016 as junk bond markets begin to crack.   


With the introduction of our Q1 2016 themes presentation this week we outlined the epic corporate credit risk in our #CreditCycle theme. The chart below presents a good picture on how epic this risk really is:

  • The size of the bubble corresponds with the total amount of corporate credit outstanding;
  • SIFMA reports that total corporate credit outstanding has increased 2.5x in 15 years;

Investing Ideas Newsletter - pg 43 macro deck HY spreads


The excessive amount of corporate credit outstanding today is concerning, as credit spreads have started to move off of their 2014 lows in yields and volatility. Once spreads break out above their long-term averages a recession typically follows. The table below shows both investment grade and high yield credit spreads: 


Investing Ideas Newsletter - Credit Spreads and Recessions


The third chart below may be most alarming of the bunch, as it relates to the excess financing that has taken place over the last 10 years, much of it in the commodity sector. Below we are showing interest expense over time for a sample of large commodity producers. The most important thing to consider when viewing this chart is that every interest rate cycle since the early 1980s has led to lower lows in interest rates. With cheaper financing, interest expense should be declining and not increasing rapidly. The leverage has been piled on, so stay out of the way as it unravels. Stay short of JNK and long of safety (TLT).


Investing Ideas Newsletter - Interest Expense vs. Commodity Credit


To view our analyst's original report on Nu Skin click here.


Nu Skin (NUS) is under investigation in Taiwan for illegal importation and sale of ageLOC Spa machines into the country. It is currently unclear which way the investigation will swing, but NUS has stated that potential penalties could include fines up to $3,000 USD and if applicable jail time for employees involved.


That's a small sum but this is just the latest in potential wrongdoing by Nu Skin globally. NUS remains on our best idea SHORT list, both on the fundamental business deterioration as well as the results stemming from certain government investigations.


Investing Ideas Newsletter - Taiwan


To view our analyst's original report on Federated Investors click here.


The slight $26 billion inflow into money funds for calendar 2015 masks the trend that money was moving to the sidelines for the bulk of last year. Outside of a 1Q15 drawdown of over $140 billion for cash products that sourced seasonal demand for stocks and bonds, investment capital then furiously moved to the sidelines from 2Q15 onwards.


Investing Ideas Newsletter - weekly flows



This move to cash is just beginning in our view, as the past 7 years have seen over $1 trillion redeemed in cash products which has chased returns in the stock and bond markets.


The annual inflow into money funds for 2015 looks a lot like the growing conservatism that marked 2005 and 2006 which lead into the Financial Crisis of ‘07/’08 (and banner years for the money fund industry with inflows of $654 and $637 billion respectively). As risk assets start to deflate, money will accelerate its move to the sidelines and leading cash managers including Federated Investors (FII), Legg Mason (LM), and BlackRock (BLK) will benefit. FII has the most leveraged to this trend which is the rationale for its long Investing Ideas placement.   


Investing Ideas Newsletter - annual flow


To view our analyst's original note on Wabtec click here. Since Wabtec was added to the short side of Investing Ideas, the stock is down -33.1% versus -1.6% for the S&P 500.


The data from Norfolk Southern (NSC) below illustrates the key relationship to consider for our short Wabtec (WAB) thesis. Slower speeds tend to pull equipment on to the track. Now that speeds are picking back up, we expect that equipment to be pushed back out. One can think of it as turning existing assets more quickly.


More speed results in less equipment in service. If speeds continue higher, freight railroads may find themselves with ample excess equipment and reduced aftermarket needs amid slow volume growth – a negative combination for WAB.


Investing Ideas Newsletter - wab image


To view our analyst's original report on Tiffany click here. Since Tiffany was added to the short side of Investing Ideas, the stock is down -12.4% versus -1.5% for the S&P 500. 


Macy's gave its holiday sales update this week, reporting comp sales down -4.9%. Of the major department stores Macy's has the most similarities to Tiffany (TIF). They have a relatively similar customer, they both have exposure to international tourist traffic, and they both have a notable NYC presence.


We think the Macy's report is a negative for TIF's underlying sales trends.  However we don’t think we will see as large of a slowdown from TIF, since warm weather likely impacted Macy's and the company attributed about 80% of the comp decline to the unseasonably mild November and December. We continue to think that 2016 expectations are too high and the market seems to agree. TIF hit new 52-week lows on Friday.


Investing Ideas Newsletter - TIF vs M comp


To view our analyst's original report on Wayfair click here.


This week Wayfair (W) announced the launch of Wayfair.ca, along with business and trade programs in Canada as well. This announcement does not have a material impact on the company for two main reasons.

  1. The company already serves the Canadian market and about 2% of web visitors come from Canada so the most interest parties are likely already customers;
  2. The market opportunity is much smaller as Furniture and Home Furnishings retail in Canada is about 14% of that of the US. 

Wayfair will continue to invest in an infrastructure that is built for a market much larger than it's true addressable market.  Either the sales will not be there in the future or gaining those sales will be too costly for W to make an real profits.


Investing Ideas Newsletter - W II canada chart


To view our analyst's original report on Restoration Hardware click here


More than any other company/issue we've had questions on since 2016 kicked into high gear,  Restoration Hardware (RH) takes the cake – and more specifically, its near-term earnings trajectory. We’re not surprised, and we agree 100% with the impetus for the concern.


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. However, 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.


To view our original note on McDonald's click here. Since adding McDonald's to the long side of Investing Ideas, in August, the stock is up +16.2% versus -8.7% for the S&P 500.


McDonald's (MCD) boasts style factors that are best in class for turbulent times in the market, big cap and low beta and it has handily been outperforming the market and its competitors as of late. One of the biggest aspects of competing in their space is value offering.


Wendy’s, Burger King, and McDonald’s, are the three big players duking it out. Each company offers a different value proposition, Wendy’s 4 for $4, Burger King’s newly introduced 5 for $4, $1.49 10 piece chicken nuggets, 2 for $4 croissan’wich, and McDonald’s recently launched a 2 for $2 menu called ‘McPick’, that will offer four items ― the McDouble, the McChicken, Small Fries and Mozzarella Sticks.


Investing Ideas Newsletter - CHART 6


Everyone has their favorite fast food joint to get a burger, but the company that provides the best value will entice the most crucial customer in the space, the value customer, or the person looking for a cheap good meal that will satisfy their stomach and their wallet.


Consumers have a choice when they eat, they can go out, or they can eat at home, and when a concept can bring the price point near or even below what it would cost to cook in, that’s when you win.


McDonald’s has ceded share in the value category primarily to Burger King over the last two years. Now that they are launching a national value platform with a full slate of media support, MCD will recover the value customer.


To view our analyst's original report on Zimmer Biomet click here. 


The JPM Healthcare Conference commences next week and Zimmer Biomet's (ZBH) and many hundreds of companies including their customers and peers will be sharing their initial views of 4Q15 just past. They will typically comment on their long term opportunity and the “aspirational” EPS growth target of 8% to 12%, which they have made at the last two JPM presentations. We’ll follow up next week with some comments on their presentation and the JOLTS update for November reported next Tuesday. 


We were fortunate to attend a dinner in Boston last night with executives from Partners Health. Partners is clearly preparing for population health and more bundled payment arrangements like the one going into place for knee replacement this year (CCJR) over the coming years. Their $1.2 billion IT system investments in Epic software is one major way they are adapting to a more challenging healthcare market. And while they don’t expect to see a big change to knee device prices in 2016, big changes are afoot that seem very likely to permanently alter the market.


General Mills' (GIS) business seems to be starting to pick up steam, as the company is working to improve merchandising and advertising on core business.


In addition they have executed a few small, but meaningful M&A deals showcasing the change in managements thinking. The divestiture of Green Giant to B&G Foods, for instance, although a profitable business, was a good move for them given their lack of focus/investment in the brand (they have more opportunities like this throughout their portfolio, in addition to SKU rationalization).


Most recently, they acquired a yogurt maker in Brazil named Carolina and a meat snack producer in the US called EPIC Provisions. Carolina represents their entry into the yogurt category within Brazil which is a $3 billion market which is growing double digits.


Secondly, the acquisition of EPIC Provisions (WEBSITE HERE), a roughly $25 million in net sales company, proves that management is changing the way they think. With the backing of John Foraker (President at Annie’s, now a GIS company) leading the charge both externally and internally to get this deal done. This was the smallest acquisition that GIS has performed in recent memory.


GIS continues to look for more sizeable acquisitions in emerging markets, but the string of pearls approach may remain most effective domestically.


Zoës Kitchen (ZOES) stock price continues to struggle due to style factors being far out of favor. If you have a long-term position in the name, continue to hold strong because the fundamental business continues to perform very well. 

Cartoon of the Day: Happy Hour?

Cartoon of the Day: Happy Hour? - bull drinking 01.08.2016


Wall Street perma-bulls got pretty beat up last week. The S&P 500 was down -6% in the first five days of 2016 trading. Make no mistake, the U.S. stock market is going to crash.

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HEDGEYE Exchange Tracker | Volatility = Opportunity

Takeaway: With global markets shuddering in the first week of 2016, volume was strong across all categories.

Weekly Activity Wrap Up

The first quarter of 2016 started off with a bang with high activity levels in all three exchange traded categories as global markets shuddered and volatility rose. Cash equity volume came in at 8.4 billion shares traded per day, which is +20% higher than 4Q15 and +22% higher than 1Q15. Futures activity (CME and ICE combined) came in at 21.0 million contracts per day, +17% higher than the previous quarter and +5% higher year-over-year. Options put up an average of 18.4 million contracts per day this week, +15% higher Y/Y and +19% higher Q/Q.


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon1 2


U.S. Cash Equity Detail

U.S. cash equities trading came in at 8.4 billion shares per day this week, a +22% Y/Y and +20% Q/Q expansion. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of first-quarter volume, -1% lower than 4Q15 but in line with 1Q15, while NASDAQ is taking a 19% share, a +3% Y/Y expansion but -5% lower than the year-ago quarter. 


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon2


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon3


U.S. Options Detail

U.S. options activity came in at an 18.4 million ADV this week, a +19% Y/Y and +15% Q/Q expansion. In the market share battle amongst venues, NYSE/ICE has been trending downward at a moderate pace, but at an 18% share it is +8% higher than the year-ago quarter. Meanwhile, NASDAQ's recent declines bring it -17% lower than 1Q15. CBOE's market share has also been falling and is down -7% Y/Y, but it's starting the quarter on a strong note, +4% higher than 4Q15. BATS and ISE/Deutsche have been taking share from the competing exchanges, with BATS up to a 10% share from 9% a year ago and ISE/Deutsche taking 16%, up from 13% a year ago.


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon4


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon5


U.S. Futures Detail

CME Group activity came in at 15.4 million contracts traded per day, a +3% Y/Y and +17% Q/Q expansion. Additionally, open interest at CME currently tallies 95.9 million contracts pending, +2% higher than the 93.7 million pending at the end of 2014.


ICE activity came in at 5.6 million contracts traded per day this week, +12% Y/Y and +17% Q/Q growth. Additionally, open interest at ICE currently tallies 64.2 million contracts pending, +8% higher than the 59.4 million pending at the end of 2014.


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon6


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon8


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon7


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon9 


Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon10


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon11


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon12


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon13


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon14

HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon15


Sector Revenue Exposure

The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:


HEDGEYE Exchange Tracker | Volatility = Opportunity - XMon19 3



Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA





XLU: Adding Utilities to Investing Ideas (Long Side)

Takeaway: We are adding Utilities to Investing Ideas today.

Stay tuned. We will send out a full analyst report outlining our high-conviction thesis early next week.


XLU: Adding Utilities to Investing Ideas (Long Side) - zz xlu

McCullough: The US Stock Market Is Going To Crash

"The US stock market has never NOT crashed (i.e. a 20% or more decline from peak – that would get you 1704 SPX from the 2130 #bubble high) when corporate profits go negative for 2 consecutive quarters," Hedgeye CEO Keith McCullough wrote earlier today in a note to clients.


Click to enlarge.

McCullough: The US Stock Market Is Going To Crash  - EL profits


Editor's Note: The chart above was featured in our recent 73-slide Q1 Macro Themes deck. If you would like more information on how you can subscribe to our non-consensus research please email sales@hedgeye.com.

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