Takeaway: Current Investing Ideas: EDV, GLD, LM, OC, RH, TLT and XLP.
Below are Hedgeye analysts’ latest updates on our seven current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.
*Please note that we removed the British Pound (via the etf FXB) and Och-Ziff Capital Management Group (OZM) this week from our Investing Ideas list.
We also feature two institutional research notes 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.
Small caps. Tech stocks. IPOs. And more. There are bubbles everywhere, and it’s why #Bubbles is one of Hedgeye’s three core Macro Themes this quarter.
Per Google Translate, the title of this note means, “show me the money!” in French. Why French? Because it is the language of love. And we love helping you make money…
Indeed, the week ended October 10th, 2014 was another great week for the slow-growth, yield-chasing trade we’ve been ardently advocating all year. To recap weekly performance:
Those performance figures represent material outperformance when benchmarked against traditional equity exposures like the S&P 500 (SPY) or Russell 2000 (IWM), which were down -3.04% WoW and -4.48% WoW, respectively.
Moreover, the widening spread of relative performance over the past month is supported by our view that both domestic and global economic growth is slowing.
There wasn’t really any meaningful domestic economic data to anchor on this week. In spite of this lack of data, global financial markets managed to go completely haywire on the Fed reminding everyone exactly what we’ve been forewarning all year:
US real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent.
To recap the decidedly dovish minutes from the FOMC’s September 16-17th meeting:
It is clear to us that market participants – many of whom have been anchoring on the Fed (which itself has a terrible track record at forecasting the economy) to guide their asset allocation all year – are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. They should.
All told, we continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond.
Stick with the playbook. The USD-monetary policy hedge that is gold loves surprisingly dovish statements from FOMC members. We continue to lean on our internal model for predicting the change in the slope of 1) growth and 2) inflation, and the third part of the model is a policy input.
We’ve hammered this point all year with regard to our gold position, but the policy response from today’s central bankers has been one of the most predictable inputs into the model.
When growth and inflation are decelerating and consensus positioning suggests that growth will surprise to the downside, the monetary response will take a relatively dovish turn.
While Draghi was successful in taking down the Euro over Q2/Q3, the Federal Reserve will be dovish at the same time. Gold remains neutral from an intermediate-term TREND duration and will catch a bid on each incrementally dovish statement pressuring the outlook for the dollar.
Yellen’s commentary Wednesday on the minutes from the September 16th-17th Fed meeting indicated the global economy was weaker than expected and that policy members were worried that “FURTHER GAINS IN THE DOLLAR COULD HURT EXPORTS AND DAMP INFLATION.”
Legg Mason (LM) continues to surprise to the upside with results above Street expectations. During the most recent week, the company posted its monthly assets-under-management report with the strongest results in six months. In aggregate LM posted net new asset growth of $11.4 billion in September with all 3 of its major segments posting gains. While the company posted net new inflow of $800 million within its leading bond franchise and $8.8 billion within its money fund business, most impressive was the $1.8 billion inflow within its equity franchise.
While we continue to recommend a long position in Legg Mason on its underappreciated bond business, if the high margin equity franchise starts to generate above average results, our estimates could be too conservative leading to further upside. We currently estimate fair value on LM stock at $57-58 per share but if the Legg equity segment continues its recent trend line our estimates will prove too conservative.
Earlier this week we hosted a follow-up call on the roofing market’s pricing and the current environment with Bill Carlin. Bill has over 36 years experience in the industry and previously held executive positions in OC’s roofing business.
Bill noted a more stable pricing environment for asphalt roof shingles, a significant improvement from year-on-year price declines in 2Q and most of 3Q 2014. Following OC’s poorly explained lack of pricing discipline in late 2013, prices and margins suffered.
The industry offers little fixed cost leverage, limiting the competitive benefits of seeking volume and market share over price (>80% non-variable cost). As long as competitors respect the value of oligopolistic pricing over market share, the industry should remain reasonably profitable.
The September 2014 price increase appears to be holding so far, transferring some pain to distributors. Unfortunately, high inventories across the channel may limit the 4Q benefit of better pricing. The survival of the price increase is a key issue for OC investors to track.
Sentiment around RH ticked up slightly over the last month, which is largely due to an 8% reduction in short interest for the month. That’s not a major surprise in light of CEO Gary Friedman’s $2mm open market stock purchase, which sent a powerful signal to the market.
All that said, 28.6% of the RH float is currently held short. To put that into context, JC Penney, which one might think sets the standard for ‘investor hatred’ is sitting right at 29%. By comparison, Williams-Sonoma is at 6.8%, Macy’s is 3.1%, and Nike is 0.9%.
We think the fundamental story will play out in a way that will prove today’s short interest levels to never be retested.
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The most recent ICI fund flow survey rounded out the worst quarter for equity funds since 4Q 2012 and also reflected the dislocation at PIMCO.
Semiconductor Downcycle Confirmed by MCHP; All Chip Firms to be Impacted over the course of a couple quarters.
Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
McCullough: Russell 2000 Is "Definitive Bubble"
In this brief excerpt from Friday's Morning Macro Call, Hedgeye CEO Keith McCullough reiterates his opinion that small cap stocks are in a bubble.
Semi Stocks Facing Risks?
Hedgeye semiconductor analyst Craig Berger discusses a weak pre-announcement from one company in the sector and looks at growing risks for other names in the chip space.
We caught up with Hedgeye CEO Keith McCullough in between investor meetings in London. Keith tells us what’s on the minds of those investors.
Hedgeye + $TLT = LOVE
As the 10-year yield drops back below 2.40%, we reiterate our non-consensus, best macro long idea of the year: Long the Long Bond.
Beware of #QUAD4
Hedgeye's Macro Team, led by CEO Keith McCullough recently hosted its quarterly Macro Themes conference call in which it detailed the THREE MOST IMPORTANT MACRO TRENDS it has identified for 4Q14 and the associated investment implications. At the top of the list is #Quad4. Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.
Deflating #BUBBLES in #QUAD4
Exorbitant Privilege (Fed Remittances to the U.S. Treasury)
Energy Price Sensitivity (Wildcatters Energy E&P Index)
As you can see in today’s chart, the Thomson Reuters Wildcatter’s Index (small and mid-cap E&Ps) has retreated -33% from its June YTD highs. If you top-ticked that move, it was the same day you shorted oil at the 2014 highs.
With WTI crude oil prices trading around $90/barrel, we wanted to know what’s the likeliest next stop?
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
Black Box numbers indicate same-store sales increased +2.2% in September, in what was yet another bullish release for the restaurant industry. This same-store sales gain represents a 10 bps sequential improvement over a strong August. Traffic declined -0.2%, representing a 30 bps improvement over August. All told, these are the best monthly, and quarterly, numbers we've seen since 1Q12.
Although we're not insinuating this is the defining turning point in the industry, particularly in regards to casual diners, we'd be remiss not to respect the data. Easy comparisons in 4Q14 set the industry up for continued momentum heading into what looks to be a strong finish to the year. Importantly, this recovery is not geographically constrained. Black Box reported September sales improved in 159 markets, while only declining in 29. This is the best up/down ratio we have seen since we started tracking the data back in 2011.
With that being said, we're confident that a vast majority of restaurant companies will have same-store sales estimates revised upward in the coming months. As it stands, estimates for both 3Q and 4Q appear conservative. Below, we take a look back at what consensus same-store sales estimates were at the beginning of 3Q and compare them to current estimates.
As you can see, despite three months of sequential improvements in industry sales numbers, the majority of estimates have been revised down since the nascent days of July. This signals to us that there is currently a disconnect between estimates and reality. We expect this gap to close over the coming weeks, but all indications suggest we will see a fair amount of upside surprises as earnings season progresses. We covered our two remaining casual dining shorts (DFRG, EAT) for this reason in a note yesterday.
Current estimates across many sub-sectors of the restaurant industry suggest a sequential decelerations in two-year trends in 3Q14, clearly inconsistent with recent data points. Lower gas prices, lower food away from home prices, increasing disposable income, strong employment trends and improving consumer confidence are all current tailwinds to the industry. Stocks should rise simultaneously with increasing estimates. We've been very active on the short side throughout 2014, but believe it is prudent to cover and look for better entry opportunities in a month or two. We continue to have a healthy short bench that we will begin picking from when we feel the time is right.
3Q and 4Q numbers must, and will, be revised upward. Current estimates are too low across nearly all sub-sectors.
Call with questions.
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