Squeeze Me!

“Who was the first guy that looked at a cow and said, I think that I’ll drink whatever comes out of those things?”

-Calvin & Hobbes


Well, if you want to believe that this 3-week squeeze off of the mid-February 2016 Global Equity #crash low is sustainable, drink up! High Leverage and Low Liquidity (Small Cap) is back, baby.


Of all the bad weeks I’ve had since the US profit cycle peaked (when US and Japanese stocks peaked in July of 2015), last week ranked right at the top of them.


And, to be clear, since I was telling you to buy the Long Bond at 2.53% on the 10yr (in July), I’ve had some really bad weeks. But you’ve had to be able to endure those to have been right for the last 8 months.


Squeeze Me! - Stocks crash test dummies cartoon 02.18.2016


Back to the Global Macro Grind


Actually, there was one move that was more impressive than this most recent 3-week squeeze: October 2015. Imagine you got sucked into owning those highs (and kept averaging down from November to February)?


No one said getting this big macro phase transition right (as the economic, profit, and credit cycles are moving from bullish to bearish) was going to be easy. But if you’re just chasing moving monkey charts, it’s going to be super hard.


Notwithstanding the newfound bull market narrative that rising gas prices are going to stimulate the consumer, here’s what you had to be long last week (in US Equity Style Factor terms) to have crushed my bearish view:


  1. High Beta Stocks were +8.4% on the week to -3.5% YTD
  2. High Debt (to Enterprise Value) Stocks were +7.2% on the week to +1.6% YTD
  3. Slow-Growth (EPS) Stocks were +6.7% on the week to +2.4% YTD
  4. High Short Interest Stocks were +6.7% on the week to +2.7% YTD
  5. Small Cap Stocks were +6.2% on the week to -0.9% YTD

*Mean performance of Top Quintile vs. Bottom Quintile (SP500 Companies)


Yep. Non-pasteurized. Straight from the cow’s nipple. Since most American farmers are in #Recession right now, you should be able to get some cows “cheap” and squeeze yourself as much “value” out of these exposures as you need.


Since the SP500 and Nasdaq were only +2.7% and +2.8%, respectively, last week (to -2.2% and -5.8% YTD), you’d have underpeformed the weekly chart chasers if you bought those exposures or, God forbid, Healthcare stocks.


Here’s how the US Equity Sector Styles did last week:


  1. Healthcare Stocks (XLV) only +0.2% on the week to -6.4% YTD
  2. Financials (XLF) +4.5% on the week to -6.5% YTD
  3. Energy Stocks (XLE) +6.5% on the week to +1.1% YTD


I know. Isn’t it odd that the “economy feels like it improved” while Consumer Confidence, Pending Home Sales, and ISM Services all slowed to multi-month lows? Healthcare: no bid in a “recovering” economy too? Totally weird.


Reality is that unless you have a bullish view on Oil and its related (and crashing) equity and fixed income exposures, you probably sucked wind like I did last week.


The real “reflation” bulls (who have lost 20-60% of their capital chasing headfake rallies for the last 18 months) had an awesome week last week – check this out:


  1. Brazilian Stocks (Bovespa Index) +18.0% on the week! to +13.2% YTD
  2. Russia (RTSI Index) +8.0% on the week to +8.1% YTD
  3. Emerging Markets (MSCI Equity Index) +6.9% on the week to -0.4% YTD


Yeah, I know. Lula (Brazil) went to jail (sort of). So you would have had to know that was coming (and see a +9.6% weekly ramp in crude oil coming too) to have nailed all of that – but everything is doable. Mooo!


While we’re ignoring anything that actually went down last week (Natural Gas prices dropped another -7% on the week, crashing to -30.2% YTD) we should definitely give some rant time to European Equities.


On some of the worst European Economic data we’ve seen all year:


  1. EuroStoxx600 closed +3.1% on the week to -6.6% YTD
  2. Spanish Stocks (IBEX Index) rallied +5.5% on the week to -7.7% YTD
  3. Greek Stocks (Athex Index) “reflated” +9.0% on the week to -12.4% YTD

*Note: negative YTD returns


But you don’t have a complicit US-style Establishment Financial Media that cheerleads European market moves with cherry picked economic data, so we’ll just have to call Greece and Spain rallying something that feels bullish.


It’s all about how the economy “feels”…


And while I did not enjoy the squeeze part, I’m not feeling too good about sucking on whatever came out of those things last week.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.67-1.90%



VIX 15.61-24.16
USD 96.48-98.72
Oil (WTI) 29.86-36.98


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Squeeze Me! - 03.07.16 Chart

REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.


Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)




1. Demographer Neil Howe On The “New Normal” In Housing (3/5/2016)



Hedgeye Demography Sector Head Neil Howe discusses how demographics impact the housing market and why the rise of multi-generational households isn’t a sign of pent-up demand in this excerpt from a recent institutional presentation.


2. The Last Commodity Bubble Still Standing (3/4/2016)



Blue Pacific Partners founder Chris Sommers sits down with Hedgeye CEO Keith McCullough to discuss the huge risk embedded in agricultural commodities. According to Sommers, excessive investment has caused overcapacity, while global demand growth projections have been reduced. Meanwhile, major agricultural commodities are still trading 50-75% higher than their long-term average levels … before the commodity boom.


3. The (Compelling) Short Case on Deere and Monsanto | $DE $MON (3/4/2016)



In this second installment of his conversation with Hedgeye CEO Keith McCullough, Blue Pacific Partners founder Chris Sommers lays out his high-conviction bear case in granular detail.


4. McCullough: Do Not Buy This Market (3/3/2016)



In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough cautions subscribers against buying stocks right now and offers a contrarian alternative which continues to reward investors. If you like this clip, you’ll love our research.


5. SPECIAL INSIGHT | Demographer Neil Howe Discusses Key 2016 Election Trends (3/3/2016)



Neil Howe, best-selling author of "The Fourth Turning" and Demography Sector Head at Hedgeye, discusses important generational shifts, the role of millennials and boomers at the polls and many more key developments to keep a close eye on during this heated election. He is joined by Director of Research Daryl Jones.


6. Washington on Wall Street: Super Tuesday Preview with JT Taylor and Daryl Jones (2/29/2016)



Potomac Research Group's Chief Political Strategist JT Taylor joins Hedgeye Director of Research Daryl Jones for a Super Tuesday preview. The Republican establishment hopes that Rubio or Cruz can capture some delegates in the face of Donald Trump's seemingly insurmountable leads in nearly every Super Tuesday state. Meanwhile, Hillary Clinton seeks to build on her momentum from a big South Carolina win to effectively seal the deal on the Democratic side.


7. McCullough: Listen Closely to the Bond Market’s Message (2/29/2016)



In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why we “remain right and contrarian” on the bond market and why investors should be buying Utilities (XLU), Gold (GLD) and Long Bonds (TLT). If you like this excerpt, you’ll love The Macro Show.


8. REPLAY: The Macro Show *SPECIAL FREE EDITION* (2/29/2016)



You don't want to miss this. Earlier this week we hosted a special *FREE* edition of The Macro Show with Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale. You'll get a front-row distillation of all the key global market and economic developments and how to position yourself accordingly. In addition ... Keith answers viewer questions during our interactive Q&A.

Demographer Neil Howe On The “New Normal” In Housing

Hedgeye Demography Sector Head Neil Howe discusses how demographics impact the housing market and why the rise of multigenerational households isn’t a sign of pent-up demand in this excerpt from a recent institutional presentation.


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This Week In Hedgeye Cartoons

Our cartoonist Bob Rich captures the tenor on Wall Street every weekday in Hedgeye's widely-acclaimed Cartoon of the Day. Below are his five latest cartoons. We hope you enjoy his humor and wit as filtered through Hedgeye's market insights. (Click here to receive our daily cartoon for free.)


1. A Wild Ride (3/4/2016)

This Week In Hedgeye Cartoons - The Cycle cartoon 03.04.2016


"While there have been plenty thesis drifts from pro-cyclical bulls (from lower gas prices were going to stimulate Q4 consumer spending to its this cycle is “different”), reality is that almost every US consumer time series of economic data peaked in 1H of 2015," Hedgeye CEO Keith McCullough wrote earlier this week. 


2. Sined, Sealed, Delivered (3/3/2016)

This Week In Hedgeye Cartoons - sine of the times cartoon 03.03.2016


Global macroeconomic conditions continue to deteriorate.


3. A Growth Fairy Tale (3/2/2016)

This Week In Hedgeye Cartoons - 4  growth cartoon 03.02.2016


The truth can be a tough pill to swallow.


4. Happy Hour? (3/1/2016)

This Week In Hedgeye Cartoons - China cartoon 03.01.2016


A battered bunch...


5. Blast Off! (2/29/2016)

This Week In Hedgeye Cartoons - GDP cartoon 02.29.2016


"If the Old Wall wants you to imagine that Friday’s 1% GDP report was a “beat” (when the expectation for the past 2 years has been +3-4% growth), that’s fine," Hedgeye CEO Keith McCullough wrote in this morning's Early Look. "Your 2016 portfolio returns, however, have sided within being long asset allocations that do well when GDP growth slows from 3 to 2 to 1. So start your March off right - short the Financials (XLF) – buy more Utilities (XLU)."

The Week Ahead

The Economic Data calendar for the week of the 7th of March through the 11th of March 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 - 03.04.16 Week Ahead

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: TIF, JNK, DRI, LAZ, NUS, W, FL, WAB, MDRX, ZBH, XLU, MCD, RH, GIS & TLT

Investing Ideas Newsletter - 4  growth cartoon 03.02.2016


Below are our analysts’ new updates on our fifteen 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. Hedgeye CEO Keith McCullough’s updated levels for each ticker are below.


Investing Ideas Newsletter - trading ranges


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 and here for Utilities


The short-term pain TRADE in the weaker U.S. dollar, and a relief rally in sectors that have gone down for 18-months dominated this week’s performance. For instance, Junk Bond ETF (JNK) +2.2% and Long-Term Treasuries (TLT) -1.5%.


As an Investing Ideas subscriber, you’re more concerned with the TREND and the TAIL. Whether it’s a counter-trend bounce in oil and heavily shorted energy stocks (and the credit tied to inflation expectations) or a sequential bounce in an economic data series with a deteriorating trend, one tick or data point does not make a trend. 


If you were long energy over utilities this week, nice trade! Still, we'd remind you that Utilities (XLU) are outperforming the S&P 500 by +10% year-to-date. And that’s with the bounce. By contrast, Energy (XLE) was up 6.5% on the week but is up only 1% year-to-date.


If you called another 53-print on the ISM services number which is technically in “expansionary” territory, that's another nice call! However, if you look at the trend in the series, it is one of clear deterioration. Changes on the margin are most important to our process:


Investing Ideas Newsletter - 03.04.16 Services PMI


In other words, we can’t emphasize enough the bigger picture from both a data and top-down market signaling perspective.


To contextualize these relief rallies and short squeezes in asset classes and instruments that are counter to our more longer-term view. Here’s what how we think the macro environment plays out from here:

  1. The market is positioned for more rate hikes into 2016
  2. The data continues to deteriorate, and market volatility ensues
  3. The expectation that “all is good” comes off the table and the market increasingly pivots to the view that, throughout 2016, the Fed is going to hike rates in methodical fashion straight into an economic slowdown
  4. The market takes in the growth slowing pivot in real-time (Treasury rates and the dollar both move lower, and inflation-leveraged assets like gold catch a bid)

Once the policy catalysts are out of the way in the next few weeks, our expectation is a return to outperformance in growth slowing asset classes (TLT and XLU). If you’re in for the TAIL and the TREND call, focus on the data, not the desperate attempts of central planners to arrest economic gravity. A brief reminder: ECB chief Draghi will attempt to walk on water next Thursday. 


To view our analyst's original report on Allscripts click here. Below is an update from our Healthcare analysts Tom Tobin and Andrew Freedman from Las Vegas: 


We are at the HIMSS conference this week in Las Vegas, where all of Healthcare IT gathers for the largest trade exhibit show of its kind. We will have a more detailed report with key takeaways next week.


For now, one item worth mentioning is that Epic and Cerner are saying that Allscripts (MDRX) has been "giving away" Sunrise (acute care EHR) in order to win business. Competing on price would explain why software delivery bookings only grew 12% YoY in 4Q15 on such an easy comp, despite what appeared to be strongest sales activity the company has seen in some time.


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


No material updated in Nu Skin (NUS) this week. We would like to note the stock has run up approximately 5% this week. We view any short term pop in the stock as a great time to get in short or increase your position. 


To view our analyst's original report on Wabtec click here


Wabtec (WAB) often talks up its aftermarket business as a stable source of income. However, as railroad equipment moves to storage, WAB’s aftermarket revenues fall as exhibited in the first chart below.



Investing Ideas Newsletter - wab


Railroad equipment moves into storage as speeds pick up. One can think of it as turning existing assets more quickly. NSC illustrates the relationship in the second chart. 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 - nsc chart


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


No new update on Tiffany (TIF) this week, but Hedgeye Retail analyst Brian McGough reiterates his short call. Here are the key takeaways from the original thesis:

  • "If you’re looking for a U.S. Equity to play our macro team’s #LateCycle #SlowerForLonger bearish themes, here’s a name wrapped in a "Little Blue Box" just for you."
  • "The reality is that there are no obvious margin levers to offset the declining growth profile in the business, especially amidst increased late cycle risks."


We added Lazard (LAZ) to the short side of Investing Ideas this past week. Click here to read our Financials analyst Jonathan Casteleyn's full stock report.


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


In this latest quarter, we started to see customer acquisition costs go up on the margin, and advertising efficacy go down. At the same time, Wayfair continues to build an enormous infrastructure of people (employee growth accelerated to +17% sequentially vs 14% in 3Q) for a Total Addressable Market that does not exist.


Our research contends that the TAM for W is $27bn today, compared to management’s assertion that it’s market is $90bn. That is absolutely unrealistic. We continue to believe that this company will never run a truly profitable business. All the signs are there.


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


No new update on Restoration Hardware this week. Hedgeye Retail analyst Brian McGough reiterated his long call last week in a detailed updated for Investing Ideas subscribers. Click here to read that research note.


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


We’ve been fielding many more questions than normal on our short calls in recent weeks as we spent time in the great cities of Boston, Chicago, and San Francisco meeting healthcare investors and PMs. It isn't very often that the questions and comments coming from the other side of the table fit a consistent pattern, and at times repeat verbatim the same thought.


In the case of Zimmer Biomet (ZBH) the question was on the CCJR and the possibility that the new bundled payment system may in fact slow procedure growth in 2016. Part of what made this interesting was that this was something we’ve been commenting on since last summer.


What made it interesting as well was that it was brought up so many times and so consistently phrased. Under a bundled payment system, hospitals receive a single payment for each patient. If the patient costs more, the hospital makes less money on that patient, and can even lose a considerable amount of money. However, these patients are only 10-15% of the total and can be reasonably identified by their co-morbidities like heart disease, obesity, and uncontrolled diabetes.


Now that the CCJR is in place and compels participation among hospitals covering 25% of all patients, there is a strong likelihood that surgeons under the new bundle payment will avoid sicker patients. This could be a big deal if the US Medical Economy slows in 2016, as we expect. So far, we see trends as stable but good in 2016.


The Labor Department released the monthly jobs report which showed employment at hospitals and other healthcare areas continues to grow at a high rate, although the pace appears to have reached its peak a few months ago. For hospitals, when they are busy, they are hiring. But as the tailwind from the ACA eases, we believe we’ll see a host of procedure types decelerate, including orthopedics, and the pace of hiring will decelerate as well.


Investing Ideas Newsletter - phys off



Thus far in 2016, we are seeing physician office employment slow faster, but that may be an early sign for things to come for hospitals and ZBH, with the CCJR merely making things worse.


Investing Ideas Newsletter - Hospital emp


To view our analyst's original report on McDonald's click here


Public prosecutors in Brazil have opened a criminal investigation into McDonald's (MCD) in response to complaints from the country’s largest unions. The prosecutors are claiming MCD violated tax and labor laws in the country. In addition to the probe on MCD, prosecutors have also opened an investigation looking into Arcos Dorados, MCD’s biggest franchisee in Brazil.


Although the allegations are serious, we do not expect this to have a meaningful impact on the business. When it does come to a conclusion that will be far down the road as the legal battle will assuredly be dragged out.


MCD remains a top idea long for us in the Restaurants sector. We see them having strong tailwinds behind them with all-day breakfast for the next three quarters. As they refine their value messaging, that will propel the next leg of growth. Additionally, MCD boasts the style factors that we love in tough markets; low beta, big cap, and liquidity.


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


After much speculation about the destiny of Sports Authority, this week's chapter 11 filing gives some clarity. Despite rumors of the possibility or closing of all stores, the company will be selling or closing 140 stores out of its current base of about 480. If we assume that these stores operate at a productivity discount to the whole of 80%, we are looking at ~$820mm of the company's $3.5bn in sales up for grabs. Stores closing are expected to take up to three months.


To quantify the upside to Foot Locker (FL), if we assume 35% of Sports Authority sales are in categories customers would purchase at FL (Footwear was 21% back in 2005) and use the customer overlap from our survey of 29%, we are looking at $85mm or just over 1% upside for FL. And that's with all 140 stores no longer selling sporting footwear/apparel.


Bottom line: The Sports Authority bankruptcy is not going to offset challenges facing Foot Locker as it sits at the operational peak of this economic cycle.


Investing Ideas Newsletter - FL 3 4 16


General Mills (GIS) faces some headwinds across their portfolio, and although the 1H of FY16 was a challenge, the company has robust merchandising and consumer plans in the 2H that should improve results.


GIS has embarked on a mission to drive their top 450 SKUs, which represent 75-85% of their volume. Calling it their ‘Power 450’, surprisingly these 450 SKUs aren’t even in all retail locations and formats, broadening the distribution footprint of these top SKUs is priority number one for GIS’s sales team. The organization is also looking at the bottom 450, representing 1-2% of volume and making critical decisions on what products can be discontinued.


We continue to believe GIS is one of the best positioned consumer packaged foods companies due to its strong brands and best-in-class people and organization. 


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


Management has not meaningfully invested in the business, to propel growth.


Olive Garden’s last remodel was completed at the end of fiscal year 2001, when Joe Lee held the CEO position and Clarence Otis was the CFO. Management defended the remodels during 2002, although they struggled to increase their alcohol sales, which were supposed to be a benefit of the remodels.


In fiscal 2011, management started early remodeling tests on Olive Garden. Olive Garden has about 400 older RevItalia restaurant models that are in dire need of remodeling. In 2011, they remodeled 35 to test the effectiveness of the prototype. Clarence Otis successfully kicked the remodel can down the road until he met his demise in 2014:

  • 2011 Annual Report: “Olive Garden will begin remodeling more than 400 early restaurants to be consistent with the Tuscan Farmhouse design of the restaurants opened in the past six years.”
  • 2012 Analyst Meeting 2/23/12: “Olive Garden now testing a remodel program for 430 pre-Tuscan Farmhouse restaurants that were built before March 2000.”
  • 3Q13 Earnings call transcript: “Olive Garden is preparing to implement their remodel program in the second half of this fiscal year.”

To date, Olive Garden has done 32 remodels, and is far behind schedule, on a massive remodel project. Clearly, no one wants to remodel the Olive Garden concept because it will be disastrous for earnings.


Management is adamant that an evolutionary approach to remodeling in which they do a smaller number in each stage, while carrying best practices forward is the best approach. We tend to disagree, especially as casual dining is experiencing a slowdown, Olive Garden needs to shock the system and customer perception to drive increased traffic. 

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.