Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
McCullough: Move Into 'Quad Four' May Mean Market Pain
Hedgeye CEO Keith McCullough discusses the move into Quadrant 4 of Hedgeye's proprietary Growth/Inflation/Policy (GIP) model and what it means for the markets in this excerpt fromThursday's Morning Macro Call for institutional subscribers. Quadrant 4 is where both growth and inflation slow.
Two Chip Stocks to Key In On as Skittish Investors Rotate Into Large Cap Liquidity
In a macro environment where skittish investors are rotating into the largest capitalization stocks, Hedgeye Semiconductors sector head Craig Berger discusses why he like Texas Instruments (TXN) and Qualcomm (QCOM) as the top mega-cap stocks in his sector.
An Epic Bubble in Small Caps (And Why Market Illiquidity Remains One of Our Biggest Concerns)
In this excerpt from Tuesday's Morning Macro Call, Hedgeye CEO Keith McCullough discusses the recent trend we’ve been highlighting of down moves in U.S. stocks on greater-than-usual volume, and why investors need to be particularly careful right now with respect to the bubble in small cap stocks.
Hedgeye Raises More Than $56,000 for Bridgeport Youth Program in Inaugural Charity Golf Tournament
STAMFORD, Conn – September 25, 2014 – Hedgeye Risk Management, today announced that it has raised over $56,000 to support Bridgeport Caribe Youth Leaders (BCYL) a 501(c)(3) youth organization in Bridgeport, CT committed to engaging young people in athletic, educational and community programs. The money was raised via Hedgeye Cares 1st Annual Charity Golf Challenge, which was held September 16th at the Great River Golf Course in Milford, CT.
In its inaugural year, the Hedgeye tournament attracted 91 golfers. It included a full day of lunch, golf, dinner and a silent auction later in the evening. The Lincoln Motor Company was the event’s Platinum Sponsor and offered participants test drives in their newest models. Other major Sponsors included Bloomberg, Salesforce, MBIA Foundation and Firefly Space Systems.
“I am deeply grateful to [Hedgeye CEO] Keith McCullough and the entire Hedgeye Cares team for their generous support to the Bridgeport Caribe Youth Leaders. Their contribution will help us to continue to provide Bridgeport youth; the environment, resources and inspiration that foster leadership skills and values. I admire Hedgeye’s commitment to the community and BCYL and look forward to a long lasting relationship together,” said BCYL President John Torres.
Some of the silent auction items donated included a Martha’s Vineyard vacation, a signed jersey and hockey stick from New York Ranger forward Martin St. Louis and a round of golf at the exclusive Sebonack Golf Club in Southhampton.
”We’ve been enormously blessed and are just trying to give a little something back to our community here in Connecticut. John Torres and his team at Caribe are working tirelessly to give kids in Bridgeport the tools they need to become tomorrow’s leaders and success stories,” said Hedgeye CEO Keith McCullough.
Click below to watch video highlights.
McCullough on Fox Business: ‘Fade Like a Flower’ Fed Has a Surprise in Store for Market
Magic Carpet Ride
"One of the most epic US stock market days I’ve witnessed in my career," Hedgeye CEO Keith McCullough wrote about BABA's Friday IPO.
We’re one more bad jobs (and/or GDP) report away from Janet sounding like Mario.
Be Long Mega Cap Liquidity Vs. Short Small Cap Illiquidity
At 55x trailing earnings, and 42% of the names in the Russell 2000 crashing (-20% or more from their 12 month peak), the US stock market is “cheap.” Right.
An Effective -3% Fed Funds Rate For An Economy That's Allegedly "Humming Along"?
"We’re one more bad jobs (and/or GDP) report away from Janet Yellen sounding like Mario Draghi," Hedgeye CEO Keith McCullough wrote Wednesday. "We're reiterating our call for a lower 10-year yield."
"Remember when The Facebook (FB), Apple (AAPL), and BABA had a projected $1 TRILLION in combined cap?" Hedgeye CEO Keith McCullough wrote in Monday's Morning Newsletter. "I do. That may have been the top."
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.
Takeaway: Current Investing Ideas: EDV, FXB, GLD, HCA, LM, OC, OZM, RH, TLT and XLP.
Below are Hedgeye analysts’ latest updates on our ten current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.
*Please note that we added Legg Mason (LM) and Consumer Staples (XLP) to Investing Ideas earlier this week. We have removed Utilities (XLU).
We also feature two institutional research notes, as well as Keith McCullough's Friday morning macro call, all of which offer valuable insight into the markets and economy.
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.
A Big Week For TLT and EDV; Rotating Out of XLU into XLP
Deterioration is the key takeaway from this week’s US economic data. We have placed investors in Quad #4 on our GIP model, which suggests that both economic growth and reported inflation are slowing domestically. As you can see, recent surveys and high frequency economic indicators support this hypothesis:
Given last week’s slowing rate of improvement in rolling NSA Initial Jobless Claims at -4.6% YoY from -9.7% in the prior week, we expect Q3 to continually reflect a deteriorating labor market, which should perpetuate expectations for a marginally dovish Fed among investors. Moreover, housing data remains unsupportive of further policy tightening. Total existing home sales fell for the first time in five months as sales declined -1.8% MoM against downwardly revised July figures, and down further to -5.3% YoY in AUG from -4.5% YoY in JUL.
Add that to severely declining economic production factors – such as Durable Goods slowing to 8.9% YoY in AUG from 33.7% in JUL, as well as Capital Goods (non-defense, ex-aircrafts) slowing to +7.5% YoY from 8.5% in JUL – and it’s easy to see why we think investors are decidedly better off in safe, long duration assets.
Our intermediate-term downside risk for the US Treasury 10Y is 2.42%, and after peaking at 2.61% last Wednesday, bond yields have fallen to 2.53%. Our backtest studies show long-duration Treasuries rally strongest when domestic economic growth slows. As far as the eye can see in a falling interest rate environment, we think here is a great spot to increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples – which work decidedly better than Utilities in Quad #4.
Simply put, stay long TLT, EDV, and rotate into XLP.
With the Scottish vote on independence now officially in the rear-view mirror, the GBP/USD was relatively flat on the week.
Over the medium term, we continue to like the cross based on what we see as relatively healthy underlying fundamentals for the country in 2H (to propel strong UK = strong Pound), versus our forecast for decelerating growth trends in the U.S. and Eurozone, combined with dovish policy expectations from central bank heads Mario Draghi and Janet Yellen.
Bank of England (BOE) Minutes continue to show 2 votes (out of 9) to increase interest rates (by 25bps) from the Governing Council. We expect this marginally more hawkish tone taken together with the outperformance of UK growth over the US and Eurozone in 2014 to push the GBP/USD higher.
Has the largest FX move since 1997 in the USD over the summer manifest?
With our internal GIP model (Growth/Inflation/Policy) signaling a deceleration in both growth and inflation in the Eurozone and the U.S., central planners will have the stage to talk down their currencies (which they will do – people like the limelight). We concede to the difficulty in front-running the policy response when Draghi and Yellen are confronted with similar situations, but we have no reason not to expect relative dovishness from the Fed when GDP estimates are too high and inflation is tracking below the Fed’s target.
The negative correlation risk embedded in the USD vs. the commodities complex as a whole means that the downward move in gold and the USD appreciation can reverse quickly, and in lockstep. The bond market and equity divergences continue to confirm the #GrowthSlowing theme in the U.S.
In the depths of the last recession, hospital debt was a yoke for the equity as tight credit markets and leveraged balance sheets (3-4x EBITDA) prevented hospitals from refinancing or rolling over their debt. As a result, and like many other companies during this time, their stocks were priced to go out of business. Since then, the relationship between high yield debt and hospital equity prices has been positive, and reasonably strong despite the occasional intra-quarter decline.
However, since HCA preannounced positive 2Q14 guidance in mid-July, we have seen a multi-standard deviation breakdown in this correlation. High yield spreads have widened on the back of increased equity market volatility, yet HCA stock continued to power higher on momentum fueled by a series of brokerage upgrades. So now we must ask ourselves… is this divergence a warning sign or an indication of a permanent change in trend?
We have reinserted shares of Legg Mason back onto our Investing Ideas list as the stock is again fulfilling our quantitative requirements as well as still screening positively on a fundamental basis. We recently spent some time with LM management during their investor day and came away with a few positive take aways that augur for further upside.
Firstly, despite two recent acquisitions, we were reassured that the company will continue on its robust buyback program which is an important exercise as it has the potential to reduce the largest percentage of shares outstanding in the group. By our calculations, LM can reduce 6% of its shares outstanding, well above the industry average of 2%, which takes some of the risk out of volatile investment flows driving the stock.
On the topic of flows however, Legg is putting up much improved results, just reporting its best monthly result in 7 years which signals that the improved performance at the manager is translating into net new client wins.
With the stock still under owned and still under marketed (only 5 Buy recommendations from 18 analysts) we continue to view the stock as a good long position and calculate far value at $57-58 for Legg stock currently.
While no actionable news this week, we did collect several data points that concern Owens Corning:
In summary, while we do not get overly excited or nervous about one data point, we reaffirm our stance on Owens Corning expanding its margin in both its insulation and composites businesses as residential and nonresidential constructions spending moves to normalized levels.
We have no update on shares of Och-Ziff this week but have plans to meet with their senior management over the next few weeks that should give us a solid understanding of what to expect for the rest of the year.
Restoration Hardware CEO Gary Friedman disclosed this week that he had purchased nearly $2 million in stock. It’s not often that you see a CEO of a mid-cycle growth company buy back into a company 2 years after cashing out on an IPO. We think this is more than just a strategic play by the CEO to allay market fears after a $0.03 beat in the quarter and a miss on the top line. Instead, we think it shows a commitment to the long term plan.
In our model that equates to the addition of 1.2mm square feet of new selling space over the next 5 years, a 25% CAGR on the top line, while taking EBIT margins from 8% up to the mid-teens. Added all up that equates to a 50% earnings CAGR.
We fully acknowledge that the slope of a multi-year earnings growth story is not linear – especially for an early-cycle transformational story like this. There will definitely be some bumps in the road along the way as the company transforms its retail footprint and expands its product assortment across new categories. But we feel comfortable with the set up headed into the 2nd half of 2014. RH continues to be our favorite name in Retail.
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Moving into the seasonally weakest part of the year, U.S. equity fund flows continue to create a slippery slope.
Hedgeye CEO Keith McCullough takes a deep, granular dive into what's going on in the markets and economy following Thursday's steep stock market selloff.
Starbucks announced that it will acquire the remaining 60.5% share of Starbucks Japan in a two-step tender offer process that should be fully completed in the first half of calendar 2015. There are two ways to view this transaction.
Hedgeye’s senior macro analyst Darius Dale says both the fundamentals and quantitative setup are deteriorating for emerging markets.