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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 9, 2014


As we look at today's setup for the S&P 500, the range is 25 points or 0.98% downside to 1982 and 0.27% upside to 2007.                         

                                                                                                      

SECTOR PERFORMANCE

 

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EQUITY SENTIMENT:

 

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CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.95 from 1.94
  • VIX closed at 12.66 1 day percent change of 4.71%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business Optimism, Aug., est. 96.0 (pr 95.7)
  • 7:45am: ICSC weekly sales
  • 8:55am: Redbook weekly sales
  • 10am: JOLTs Job Openings, July, est. 4.7m (prior 4.671m)
  • 10am: Fed’s Tarullo testifies to Senate Banking Cmte
  • 11:30am: U.S. to sell $35b 4W bills
  • 1pm: U.S. to sell $27b 3Y notes
  • 4:30pm: API weekly oil inventories

 

GOVERNMENT:

    • Primaries in states including Del., Mass., N.H., R.I.
    • President Obama, congressional leaders meet on foreign policy
    • Sec. of State Kerry travels to Jordan, Saudi Arabia
    • 8am: Blackstone President James speaks at Politico breakfast
    • Confirmation hearings:
    • 10am: NRLB nominee Sharon Block  at Senate Health, Education and Labor Cmte
    • 10am: NRC nominees Jeffrey Baran, Stephen Burns at Senate Environment and Public Works Cmte
    • 10am: Fed Gov. Tarullo, FDIC Chair Gruenberg, Comptroller of Currency Curry, CFPB Dir. Cordray, SEC Chairwoman  White, CFTC Chairman Massad at Sen. Banking Cmte on Wall St. reg. system
    • 10am: VA Sec. McDonald testifies before Senate Veterans’ Affairs Cmte on investigation findings from Phoenix medical ctr
    • 10am: IRS Commissioner Koskinen, CMS’s Slavitt at House Ways and Means Cmte on Affordable Care Act implementation status
    • 10:30am: Senate Homeland Security Cmte hearing on federal programs for equipping state and local law enforcement
    • 2pm: House Science panels hold hearing on oversight of Bakken petroleum
    • U.S. ELECTION WRAP: Primaries Tomorrow; Brown, Lessig Battle

 

WHAT TO WATCH:

  • Apple Event: Focus on Payments, Sapphire, Smartwatch
  • McDonald’s Aug. comps seen declining for third month
  • CFTC Said to Alert Justice Department of Criminal Rate Rigging
  • U.S. Planning Tougher-Than-Basel Capital Rules, Tarullo Says
  • U.K. industrial output exceeds forecast with 0.5% increase
  • EU slows new Russia sanctions as Ukraine cease-fire gauged
  • Rakuten to acquire Ebates in Japan’s biggest e-commerce deal
  • JAB’s Jimmy Choo said near IPO to value shoemaker at $1b
  • Telefonica Germany to raise $4.7b in stock for E-Plus
  • America Movil to weigh joint bid for Telecom Italia unit
  • ABB plans $4b buyback to return cash from disposals
  • FX traders said to be surprised by narrow scope of BOE probe
  • Trump Casinos plan bankruptcy in new blow to Atlantic City
  • Home Depot confirms computer data systems have been breached

 

AM EARNS:

    • Barnes & Noble (BKS) 8:30am, ($0.68)
    • Burlington Stores (BURL) 7am, ($0.08)
    • Francesca’s (FRAN) 7:30am, $0.26
    • HD Supply (HDS) 6am, $0.47 - Preview
    • John Wiley & Sons (JW/A) 8am, $0.53
    • Leidos (LDOS) 6am, $0.62

 

PM EARNS:

    • Krispy Kreme Doughnuts (KKD) 4:05pm, $0.16
    • Oxford Industries (OXM) 4pm, $0.90
    • Palo Alto Networks (PANW) 4:04pm, $0.11
    • Peregrine Pharmaceuticals (PPHM) 4:01pm, ($0.06)
    • Science Applications Intl (SAIC) 4:01pm, $0.68

               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Hedge Fund Merchant Advances 16% as Crude Declines With Iron Ore
  • Wheat Harvest Forecast Cut by Australia as Farms Need More Rain
  • Commodities Drop to Lowest Since January as Dollar Cuts Demand
  • Soy Yields Set for U.S. Record as Rains Fatten Pods: Commodities
  • Brent Crude Near 16-Month Low as Ukraine Truce Holds; WTI Rises
  • Lingering Ice This Year Delays Opening of Northern Sea Route
  • OIL DAYBOOK: Crude Inventory Draw Fcast; Buzzard Said Shut Again
  • Cold to Grip Northern U.S. Offers a Preview of Chills to Come
  • Corn Extends Decline as U.S. Yields Seen Topping USDA Forecast
  • Indonesia Palm Exports May Become Tax-Free as Prices Drop: Gapki
  • Chinese Hot-Pots Stir Imports of Beef, Mutton: Chart of the Day
  • Gold Is Little Changed Near Three-Month Low on Dollar to Ukraine
  • India July Coal Imports Rise 9% Y/Y to 17.95 Mln Mt: Interocean
  • Rubber Falls to 5-Year Low as China Supplies Compound Thai Glut

 

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CURRENCIES


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GLOBAL PERFORMANCE

 

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EUROPEAN MARKETS

 

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ASIAN MARKETS

 

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MIDDLE EAST

 

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The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


September 9, 2014

September 9, 2014 - Slide1

 

BULLISH TRENDS

September 9, 2014 - Slide2

September 9, 2014 - Slide3

September 9, 2014 - Slide4

September 9, 2014 - Slide5

 

 

BEARISH TRENDS

September 9, 2014 - Slide6

September 9, 2014 - Slide7

September 9, 2014 - Slide8

September 9, 2014 - 9

September 9, 2014 - 10


FIVE-FECTA: Consumer Credit Growth Accelerates (Again) in July

Takeaway: Consumer revolving credit accelerated to +3.2% YoY in July, marking a 5th consecutive month of positive growth.

FIVE-FECTA:  REVOLVING CREDIT GROWTH ACCELERATES FURTHER IN JULY AS THE BREAKOUT IN CONSUMER CREDIT HITS 5-MONTHS

Consumer Revolving Credit rose at a 7.3% annualized rate in july, the 2nd largest increase in 6.5 years behind the 13.2% rise reported for April. 

 

Inclusive of July, this marks the 5th consecutive month of positive MoM loan growth – the longest such streak since April of 2008.    

 

The monthly revolving consumer credit data continues to accord with the broader cross-category trends in the weekly Fed H.8 release where the slope of growth across total loans, C&I, CRE, and residential real estate all remain positive.   

 

FIVE-FECTA: Consumer Credit Growth Accelerates (Again) in July - Revolving Credit MoM July

 

FIVE-FECTA: Consumer Credit Growth Accelerates (Again) in July - Consumer Credit 090814

 

FIVE-FECTA: Consumer Credit Growth Accelerates (Again) in July - Commercial Bank Loan Growth

 

SO, WHERE’S THE SPENDING?

Aggregate personal and disposable income growth is currently accelerating alongside an emergent breakout in salary and wage income growth. 

 

Indeed, aggregate private sector salary and wages grew +6% in July, the fastest rate of growth in over 3 years excluding the peri-fiscal cliff period (although wage income growth will likely slow in august given flat growth in hourly earnings and a modest deceleration in growth in the employment base).

 

FIVE-FECTA: Consumer Credit Growth Accelerates (Again) in July - Salary   Wage Income

 

However, while capacity for consumption is rising, actual consumption is not.  Real consumer spending declined -0.2% MoM in July and decelerated on both a 1Y and 2Y basis as the savings rate hit an 18-month high at 5.7%.

 

FIVE-FECTA: Consumer Credit Growth Accelerates (Again) in July - Real Spending July

 

The collective motivation underpinning the concomitant acceleration in both savings and revolving credit isn’t completely clear – it may be some combination of liquidity preference and income distributional effects, but we don’t have a clean explanation (yet).

 

Irrespective of the somewhat incongruous income-credit-saving dynamics, the reality of a modern, consumption economy, is that it's total spending that matters and accelerating credit growth + accelerating income growth is certainly supportive of consumption growth.

 

Whether the conflation of positive labor and credit market trends, the fledgling breakout in the dollar and the fledgling breakdown in commodity inflation can drive a sustainable, late-cycle acceleration in domestic consumerism in the face of negative real wage growth, a slowdown in housing, a discrete EU/Japan/ROW growth deceleration, and a nascent proclivity for saving remains to be seen, however.

 

We continue to like defensive yield and late-cycle exposure vs. consumer/housing/early-cycle leverage.   

 

FIVE-FECTA: Consumer Credit Growth Accelerates (Again) in July - Eco Summary

 

 

Christian B. Drake

@HedgeyeUSA

 


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European Banking Monitor: European Sovereign Swaps Tighter Out of QE-Lite From ECB

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email 

 

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European Financial CDS - Swaps were mixed, though, on average, tighter across Europe's banking complex. Apparently, much of the QE-lite move was already priced in. Sberbank widened on the week by 12 bps to 321 bps.

 

European Banking Monitor: European Sovereign Swaps Tighter Out of QE-Lite From ECB - chart 1 euro financials CDS

 

Sovereign CDS – Sovereign swaps mostly tightened over last week. The US was the exception, widening by 1 bp to 17 bps. European sovereign swaps were tighter across the board on the heels of the ECB's QE-Lite. Portuguese swaps tightened 17 bps to 145 bps while Spanish sovereign swaps tightened by -10.7% (-7 bps to 57 ).

 

European Banking Monitor: European Sovereign Swaps Tighter Out of QE-Lite From ECB - chart 2 sovereign CDS

European Banking Monitor: European Sovereign Swaps Tighter Out of QE-Lite From ECB - chart 3 sovereign CDS

European Banking Monitor: European Sovereign Swaps Tighter Out of QE-Lite From ECB - chart 4 sovereign CDS

 

Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 1 bps to 17 bps.

 

European Banking Monitor: European Sovereign Swaps Tighter Out of QE-Lite From ECB - chart 5 euribor OIS Spread

 

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 

 


The Real Question Isn't $100/Share for Restoration Hardware, It's Whether We See $200 or $300 | $RH

Takeaway: We think that people are missing the boat on Restoration Hardware.

Editor's note: This is an excerpt from our retail sector team led by Brian McGough.

The Real Question Isn't $100/Share for Restoration Hardware, It's Whether We See $200 or $300 | $RH - 45

Restoration Hardware - 2Q14 Earnings Preview

 

Takeaway: We think that people are missing the magnitude of earnings growth at RH, the sustainability of that trajectory over a long period of time, and ultimately the degree to which that will accrue to equity holders.

 

The question is not whether the stock will go to $90 vs $100 (where we see most price targets), but whether it will get to $200 vs $300.

 

Even the best stories, however, are not linear. There will be bumps along the road. But this print should not be one of them.  We’re well above the Street in Sales, Margins and EPS, and we flush out in this note where we could be wrong. 

HEDGEYETV Flashback | 10.17.13


SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS?

Takeaway: We expect EM assets to continue outperforming their DM counterparts over the intermediate term.

Not much has changed with respect to our thematic views on emerging market assets. After having been the bears throughout 2013 and into 2014, we’ve been extremely bullish on the EM space since MAR of this year and see no reason to alter that stance.

 

Specifically, both our top-down quantitative signals and bottom-up GIP fundamentals augur for continued outperformance of EM assets over the intermediate term.

 

TACRM Quant Signals (CLICK HERE to download the expository white paper):

 

  • The 29% Optimal Asset Allocation to EM Equities is +6ppts and +12ppts above its trailing 3M and TTM averages, respectively. These deltas suggest the presence of rotation based capital flows (i.e. marginal investor interest). Moreover, 29% is as high a Optimal Asset Allocation to EM Equities we’ve seen on both a TTM and trailing 5Y basis. This effectively means global equity investors with flexible mandates that aren’t overweight EM have likely underperformed and are likely to continue to underperform.
  • Across the six primary liquid asset classes (Fixed Income & Yield Chasing Instruments, DM Equities, EM Equities, FX, Commodities and Cash), EM Equities is currently the only asset class with a “high-conviction BUY” rating according to TACRM.
  • 14 of the top 20 most bullish ETFs (roughly ~200 in aggregate) from the perspective of TACRM’s Volatility-Adjusted Multi-Duration Momentum Indicator readings are EM Equity exposures.

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - TACRM Summary Table

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - TACRM Heat Map

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - TACRM ACRM Delta

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - TACRM ACRM Percentile

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - TACRM 20 20

 

GIP Fundamentals: Core to our bullish bias on EM assets is an deep understanding of the role DM monetary conditions has historically played in determining valuations for EM assets. Specifically, as those conditions ease – especially US dollar liquidity – EM assets tend to benefit from a tailwind of marginal investor interest. We’ve discussed this carry trade at length over the course of our thematic work on emerging markets (CLICK HERE for the most recent example… refer to slides 17, 19 and 20).

 

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - UNITED STATES

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - EUROZONE

 

Looking to the scoreboard, EM has certainly been the place to be since we introduced the thesis (performance since 3/26):

 

  • MSCI EM Index: +13.3%
  • MSCI US Index: +8.4%, or -490bps  of underperformance
  • MSCI Europe Index: +5.4%, or -790bps of underperformance

 

This outperformance makes perfect sense in the context of the outperformance of the slow-growth, yield-chasing style factor domestically. Specifically, the performance of REITs, MBS and stocks with high dividend yields have explained anywhere from 60-78% of the MSCI EM Index’s price movements across the trailing intermediate-term duration, per the table below which shows the average of trailing 1M, 3M, 6M and 1Y correlations.

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - 9 8 2014 11 35 13 AM

 

All told, until the outlook for domestic and European economic growth ticks up (it won’t in our models through at least year-end), we think investors will have adequate fundamental cover to remain overweight EM. That call is certainly not without risk in the context of #VolatilityAsymmetry across every major asset class, but that remains a bridge we’re happy to cross when we get to it. Calling stock market tops on a prospective basis tends to amount to little more than a fool’s errand.

 

Our current best ideas across the EM space are highlighted in the table below. A couple of changes to note:

 

  • We are swapping out the iShares MSCI Emerging Markets ETF (EEM) for the Vanguard FTSE Emerging Markets ETF (VWO) to maximize our exposure to China (17.4% VWO vs. 14.7% of EEM) and India (10.8% of VWO vs. 6.7% of EEM) and to minimize our exposure to South Korea (0% of VWO vs. 14.7% of EEM), which is suffering from both deteriorating GIP fundamentals and idiosyncratic risks (Samsung lawsuit and ownership transfer). The +14.1% advance for the EEM since MAR 26 compares to a +6.2% advance for the MSCI All-Country World Index, effectively generating +789bps of research alpha.
  • We are booking the gain in both the WisdomTree Emerging Currency Fund (CEW) and the Market Vectors Emerging Markets Local Currency Bond ETF (EMLC). While a net +141bps of alpha between the two exposures is nothing to scoff at, both ideas have become stale in light of the recent quantitative breakout in the US Dollar Index.

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - Idea Flow Monitor

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - DXY

 

Best of luck out there and feel free to email us with any questions.

 

DD

 

Darius Dale

Associate: Macro Team


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