Takeaway: Current Investing Ideas: EDV, GLD, RH, TLT and XLP.
Below are Hedgeye analysts’ latest updates on our five current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.
*Please note that we removed Legg Mason (LM) and Owens Corning (OC) 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.
Beware the Bounce
Be wary of Friday's bounce in the stock market.
THE DATA KEEPS ON COMING OUR WAY
The week ending October 17th, 2014 was another supportive week for the slow-growth, yield-chasing trade we continue to recommend.
Domestically speaking, the data continues to come our way as we continue to anticipate a reactionary dovish policy response out of the Federal Reserve – particularly amid collapsing inflation expectations and a breakdown in commodity prices.
Internationally speaking, in our 10/15 note titled, “Macro Medley: 0 for (Quad#4)” we highlighted how our global macro monitor is currently showcasing a near-universal negative trend of estimate revisions for both growth and inflation over the last quarter across both developed and EM markets.
With #EuropeSlowing, Japan slowing and China slowing simultaneously, we continue to expect slowing global growth to weigh on both business and investor confidence and reflexively perpetuate a negative feedback look in the domestic economy over the intermediate term.
In brief, you want to be long/overweight the asset classes and style factors that have weathered recent financial market volatility (i.e. Treasuries, munis, cash, and large-cap/high-yield/liquid equities), while remaining short/underweight its inverse (high beta, small cap illiquidity and early cycle leverage). That means remaining long of TLT, EDV, and XLP.
We added gold (GLD) to investing ideas on the long-side back in May when the outlook for U.S. economic growth was in what we call a QUAD#3 set-up in our GROWTH, INLFATION, POLICY model. The extensive swath of economic data input was collectively signaling that growth was slowing with inflation accelerating. Commodities (and any commodity-linked asset classes), treasuries, and fixed assets inflate in this set-up.
With the turn now into QUAD#4, growth is still slowing and the slope of inflation is now DECELERATING. A QUAD#4 set-up does not (and will not) bode well for commodities, but we’re safe to say gold markets are driven by additional factors given its currency-like negative correlation to the dollar and U.S. treasury bonds.
With growth slowing in Europe as well, we have to keep an eye on further devaluation from ECB President Mario Draghi, but with the current set-up in the domestic economy, we would like to front-run the next Federal Reserve Policy move, and stick with our gold position.
To exemplify the importance of front-running the Federal Reserve policy chatter, observe to the follow-through market moves after Janet Yellen’s commentary last Wednesday on the minutes release from the September 16-17th meeting:
“FURTHER GAINS IN THE DOLLAR COULD HURT EXPORTS AND DAMP INFLATION.”
a.k.a “we are not hawkish, and we’re not reverting on engrained beliefs on how monetary policy should intervene in the marketplace.”
Since her commentary, the market moves, and thus our reason for staying long of gold are self-explanatory:
Earlier this week, we were reviewing a true comparable for Restoration Hardware. It's so hard to find a comp for RH. People look at West Elm, or Williams-Sonoma, but they're really different customers looking for a different aesthetic at a different price point.
But take a look at Arhaus (pronounced Our-House). It is by far and away the closest we've ever come to seeing the “Resto look” in a place that's not Resto.
Granted, the prices are higher, the quality is lower, and the design is a 7 to RH's 10. It also lacks the size and scale to compete with RH's prices. But this is one to watch.
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The expectation for a supply/demand floor is not a catalyst for volatility-induced real-time market moves.
Dislocation at PIMCO continued last week with BlackRock signaling weak retail and institutional equity trends in yesterday's earnings.
Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
Contributor Call: Short John Deere ($DE), Says BluePac's Chris Sommers
Hedgeye CEO Keith McCullough talks to Seeking Alpha Contributor and BluePac managing partner Chris Sommers about Sommers' high conviction short idea, John Deere. It's the latest from Hedgeye's video partnership with Seeking Alpha.
Video | McCullough: Why Volume Matters
In this excerpt from Tuesday's Morning Macro Call for institutional subscribers, Hedgeye CEO Keith McCullough explains why accelerating volume in a down move is a clear risk signal. He also has more details about volume in our Early Look and Morning Newsletter products.
Real Conversations: Hanke, McCullough Talk Macro, Money Supply and More
Video | Daryl Jones Talks Market Peak on Fox Business
Hedgeye Director of Research Daryl Jones comments on investors reassessing growth forecasts after the market peak and struggles the consumer will face with Sandra Smith on Fox Business Network. Jones' remarks begin at 2:05 in the video above.
Crank It Up
As markets are melting down, volume is going up. Take Monday’s sell-off, for example. Total exchange volume soared 44% compared to its three-month average.
In this market selloff, investors should ride with Treasuries.
As West Texas Intermediate crude drops to nearly a five-year low just above $80 a barrel Thursday morning, we wanted to know...
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
In this edition of Real Conversations, Hedgeye CEO Keith McCullough has a wide-ranging conversation with Steve Hanke, a Professor of Applied Economics at Johns Hopkins University and a Senior Fellow at the Cato Institute.
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