RH: The Right Stuff

Restoration Hardware (RH) took a hit yesterday despite a solid quarter. The Street is not happy about the lack of guidance on the stock and short-term events that cause disruption a la Hurricane Sandy and the West Coast Port Strike. Nonetheless, we believe the company is executing well on its growth strategy and have confidence that the stock could be at $62 a share in two years, $51 in one-year out. We’ll be a buyer of RH on down days.


RH: The Right Stuff  - RHsetup

PODCAST: Upside Surprise

On today’s morning investment call held for Hedgeye subscribers, we discussed how markets are shifting to a bullish sentiment now that growth is beginning to stabilize. Commodities will continue to drop, as economic recovery doesn’t occur when oil is at $150 a barrel. More importantly, global markets are up across the board and the S&P 500 is holding its key line of support at 1419. That decision to hold at support signals that the market is keen to go higher. 


You can listen to Hedgeye CEO Keith McCullough address our Q&A session in the call in the audio we've posted below.


Run Of The Bulls

Client Talking Points

Stabilize and Economize

With global markets melting up this morning and the S&P 500 holding its key TRADE line of support (1419), markets are attracting the bulls like a red cape being waved in Barcelona. The overall theme is now switching from #GrowthSlowing to #StabilizingGrowth, which is a very positive catalyst for the markets. China saw the Shanghai Composite up +4.3% overnight and Germany saw the DAX make higher highs, blowing past September’s numbers. As for commodities, keep in mind that economic recoveries don’t occur when oil is at $150 a barrel and gold at $1900/oz. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.


Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.


Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road


“Commodity Deflation is bullish for consumers; bearish for commodities. Period.” -@KeithMcCullough


“A man may be so much of everything that he is nothing of anything.” -Samuel Johnson


US November Consumer Prices fall 0.3%, Core Rate Rises 0.1%.

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TODAY’S S&P 500 SET-UP – December 14, 2012


As we look at today's setup for the S&P 500, the range is 25 points or 0.67% downside to 1410 and 1.10% upside to 1435.     















  • YIELD CURVE: 1.49 from 1.48
  • VIX closed at 16.56 1 day percent change of 3.82%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Consumer Price Index M/m, Nov. est. -0.2% (prior 0.1%)
  • 8:30am: CPI ex-Food & Energy M/m, Nov. est. 0.2% (prior 0.2%)
  • 8:58am: Markit US PMI Preliminary, Dec. est. 51.8 (prior 52.4)
  • 9:15am: Industrial Production, Nov. est. 0.3% (prior -0.4%)
  • 9:15am: Capacity Utilization, Nov. est. 78.0% (prior 77.8%)
  • 11am: Fed to buy $1.5b-$2.25b notes due 2/15/36-11/15/42
  • 1pm: Baker Hughes rig count
  • 3pm: Fed holds open meeting in D.C. on foreign bank standards


    • Elisse Walter succeeds Mary Schapiro as chairman of SEC
    • Federal Reserve Board will hold open board meeting to discuss standards for foreign banks operating in the U.S., 3pm
    • Deadline for state governors to tell federal government whether they plan to build health exchanges, control sale of health insurance in their states after 2013
    • Deadline set by FERC for Barclays to respond to show-cause order in market manipulation case, $470m penalty


  • Obama meets with Boehner as pressure builds for U.S. budget deal
  • PPG buys Akzo’s U.S. household paints unit for $1.05b
  • Hostess said to attract first-round bids from Wal-Mart, Kroger
  • S&P ordered by Japanese regulator to improve ratings system
  • GE may boost its qtr dividend to 20c/shr from 17c/shr
  • Alcatel wins $2.1b loans from Goldman, Credit Suisse
  • UBS said to face fines of over $1b in Libor-fixing probes
  • Another Facebook lockup expires; FB shrs up 34% since Oct. 31
  • Schulze seen making bid for Best Buy; faces Dec. 16 deadline
  • FTC may rule on Google search in coming days: reports
  • Europe Nov. car sales fall as EU demand at 19-year low
  • Manufacturing in China may grow at faster pace in Dec., HSBC data show
  • Liberty Media contacts possible buyers for Starz: NY Post
  • ITC judge to issue findings in patent-infringement case against Intel brought by X2y Attenuators
  • Bank of America says MBIA defaulted on contested securities
  • Southwest Airlines, Illinois Tool Works host investor mtgs
  • Japan Elections, S. Korea, U.S. Housing: Week Ahead Dec. 15-22


    • North West (NWC CN) C$0.38


COMMODITIES – CRB Index down another -1% on the wk to 292 and Gold down again this morning is a very good thing for #GrowthStabilizing, globally, on the margin. Economic recoveries don’t occur w/ $150 Oil and $1900 Gold, fyi. Sets up great for our LONG Consumption vs SHORT Commodities theme.

  • Oil Heads for Weekly Gain on China, U.S. Manufacturing Outlook
  • Wheat Bulls Retreat as U.S. Estimates Roil Markets: Commodities
  • Copper Extends Fifth Weekly Gain After China Data Boost Outlook
  • Gold Swings Between Gains and Drops on Stimulus, Budget Concerns
  • SHFE Copper Stockpiles Climb as Lead Jumps to 14-Month High
  • Soybeans Advance to One-Week High as U.S. Export Sales Increase
  • OPEC Status Reduced to Sentiment Driver as Oil Share Wanes
  • Rebar Climbs to Five-Month High as China Data Boost Outlook
  • Sugar Exports From Pakistan May Miss Target on Global Surplus
  • Oil May Drop on Uncertainty in Budget Talks, Survey Shows
  • Ethanol’s Discount to Gasoline Narrows on U.S. Budget Stalemate
  • Air Cargo Slowdown Puts Squeeze on Specialist Carriers: Freight
  • China’s 2012-2013 Corn Imports to Decline, Sinograin Says
  • Rubber Jumps to Six-Month High on China’s Manufacturing Outlook







GERMANY – now the DAX (which is crushing the Dow) is A) making higher-highs vs the SEP highs (US stocks haven’t, yet) and B) the high-frequency economic data supports it (Germany’s Service PMI reading for early DEC 52.1 vs 49.7 NOV, finally signaling some expansion – the ZEW was solid earlier this wk as well). Both China and Germany going the right way at the same time – that’s new.




CHINA – massive melt-up in Chinese stocks overnight; +4.3% taking the Shanghai Comp to +9.6% in 2 weeks – that’ll get the machines’ attention; so will a breakout > 2095 TREND resistance (now support) for the Chinese A-shares Index. China has had its best moves in the last 5 years when commodity deflation starts to take hold – time for Bernanke to get out of the world’s way.








The Hedgeye Macro Team




Cat Tails

“A man who carries a cat by the tail learns something that he can learn in no other way.”

-Mark Twain


In money management, like many professions, the act of doing is probably the best training available.  There is nothing like a mistake to change your process or habits, and when you manage money professionally the mistakes come frequently.  The key, of course, is what you do with the mistakes and how you adjust to them.


This is certainly an interesting time in the money management business.  In the last few years, we’ve seen a number of long time and highly successful portfolio managers decide to get out of the game.  In fact, earlier this week Keith and I had coffee with a Hedgeye subscriber who will be converting his highly successful hedge fund into a family office at the end of the year.


This gentleman, like many of his peers, didn’t have one specific reason for returning outside capital, but rather was more generally concerned about the ability to generate returns that justified the fees.  On some level, that is a high class problem.  But the truth of it is, in our view, monetary policy and policy makers have taken us to a place where the risk / reward in many asset classes is simply not all that compelling.  Simply put, if you are going to carry the proverbial cat by the tail, you want to believe that the reward of that action equates to the risk.


Of course, this is not to say that all is necessarily negative.  In fact, this morning is one of the more bullish runs of economic factors that we’ve seen for some time. A few things to consider this morning:


1.   China – The Shanghai Composite was up +4.3% overnight to cap off a two week run of +9.6%.  As a consumer of commodities, China will have its best moves when input prices are deflating, so to see a breakout above our key resistance line of 2,905 on the Shanghai Composite, we will likely need to see Bernanke and Company get out of the way for this rally to be sustainable.  It also doesn’t hurt that the HSBC Flash PMI came in a little better than expected at a stable 50.9, which implies an economic recovery may be taking hold in China.


2.   Germany – As the old adage goes, there is always a bull market somewhere.  Going into yesterday, the DAX was up 29% in the year-to-date, which makes it one of the top ten performing equity markets globally.  This move in Germany equities is supported by the high frequency economic data, such as the services PMI from this morning which came in at 52.1 versus its 49.7 reading in November.


3.   Commodities – Many of the story tellers have suggested that commodity prices go up purely because of supply / demand or tight economies and while at times this is true, the reality remains that monetary policy is a big driver.  To the extent that global central bankers get even marginally more hawkish, it will negatively impact commodity prices.  As we all know, economic recoveries don’t occur at $150 per barrel crude oil and getting oil lower sustainably will be a key factor supporting any sustained economic recovery.


Collectively, this data and these real-time prices are signaling a shift from #SlowingGrowth to #StabilizingGrowth.  This is potentially very positive for equity markets.  The question from here is whether the government can stay out of the way of economic stability.


To dig into this last point in more detail, we are going to be hosting Stanford Economics Professor John Taylor this coming Tuesday at 1pm EST for a conference call (if you are not an institutional macro subscriber and would like information on attending please email ).  Bloomberg Markets recently named Professor Taylor to their 50 Most Influential List and he was on the short list to replace Chairman Bernanke under a Romney administration, but he is probably most known for the creation of the Taylor rule.


The Taylor rule is a monetary-policy rule that stipulates the degree to which central banks should change nominal interest rates in response to measures of economic output, specifically inflation.  The theory behind the Taylor rule is that it increases the credibility of the central bank by reducing uncertainty in monetary policy actions.  In effect, the rule reduces the need for arbitrary decisions by central banks.


Generally speaking, while Taylor believes that government has a role in managing the economy, the role should be limited and predictable.  As such, he has been highly critical of both Democratic economists like Paul Krugman and Republican economists like Alan Greenspan.  In fact, Professor Taylor wrote the following in the Wall Street Journal about the financial crisis in 2008:


“Government actions and interventions, not any inherent failure or instability of the private economy, caused, prolonged, and worsened the crisis."


That’s a statement we couldn’t agree with more.


The big topic we will be discussing with Taylor is the upcoming fiscal cliff and the potential outcomes.  Currently, it seems that a resolution between now and the end of the year is unlikely.   President Obama and Speaker Boehner met for an hour last night and, shockingly, there was apparent movement to a resolution.   So as things stand today, in just over two weeks taxes are set to increase dramatically and government spending is set to decline.


As we’ve stated, this will have an impact on economic growth in the short run, though the positive implication may well be dollar strength as the United States takes some fiscal medicine.  The other looming issue, which we highlight in the Chart of the Day, is that in Q1 2013 the federal government is likely to hit another debt ceiling.  


So, it seems our politicians have a few cats by their tails . . . it will be interesting to see what they learn.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $105.61-108.98, $3.63-3.71, $79.51-80.31, $1.29-1.31, 1.66-1.74%, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


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