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Client Talking Points

DRAGHI

ECB President Mario Draghi, poor guy is “frustrated” now that neither the economic data (SEP Services PMIs slowing in Europe) nor the equity markets are cooperating with his “communication tools” – this may very well be how this epic central planning experiment ends – when people realize that 0 + moarrr 0 doesn’t = something greater than 0.

EUROPE

Germany’s stock market is closed today but got slammed -2% on the Draghi Drugs being impotent – inclusive of this morning’s no-volume bounce, now we have all of the major European Equity Indices (EuroStoxx600, DAX, FTSE, CAC, MIB Index) signaling bearish TREND @Hedgeye w/ #EuropeSlowing.

S&P 500

Maybe bad news would be good for spooz today, who knows – but what was intermediate-term TREND support of 1963 SPX is now resistance and there is no support to the 1910-1915 range if the market decides that bad is bad; employment reports are lagging indicators anyway.

Asset Allocation

CASH 60% US EQUITIES 2%
INTL EQUITIES 8% COMMODITIES 4%
FIXED INCOME 24% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

TREASURIES: 10yr 2.44% = down 9bps on the wk, -59bps for the YTD - crusher yr to be long the Long Bond $TLT

@KeithMcCullough

QUOTE OF THE DAY

Continuous effort -- not strength or intelligence -- is the key to unlocking our potential.

-Liane Cardes

STAT OF THE DAY

The UK Services PMI slows to 58.7 in SEP vs 60.5 in AUG and France's Services PMI slows to 48.4 SEP vs 49.4 AUG.