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Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EDV, GLD, RH, TLT, XLP and MUB.

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 added  MUB (iShares Muni Bond ETF) to our Investing Ideas list this week.

 

We also feature two institutional research notes which offer valuable insight into the markets and economy.

 

Investing Ideas Newsletter     - II chart 

 

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.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

CARTOON OF THE WEEK

Absolute Zero

Investing Ideas Newsletter     - 0percent 10.21.14

You can thank your unelected central planners for zero interest rate policy for the foreseeable future.

IDEAS UPDATES

TLT | EDV | XLP | MUB

 

MOVE DOVISH DATA: STAY LONG OF TLT, EDV, MUB & XLP

 

The week ending October 24th, 2014 equities bounced slightly as investors fearing a year-end rally nervously jumped in to buy the pullback.

 

Mixed economic data continues to bolster our anticipation of a reactionary dovish policy response from the Federal Reserve in the coming months:

 

  • U.S. CPI came in flat at +1.7% YoY in SEP, which matched the below-target pace of Core CPI.
  • US Markit flash Manufacturing PMI numbers slowed to 56.2 in OCT compared to a final reading of 57.5 in SEP.

 

In addition to a mixed week of economic data in the U.S. (versus notable strength in the 2nd quarter), we continue to receive confirmation of middling growth abroad:

 

  • OCT flash PMI numbers showed optical strength for both the Eurozone and China. However expansive, Markit noted that new orders and inflows both slowed in the Eurozone, while “backlog of work” fell across both manufacturing and services.
  • France manufacturing numbers slowed posting 47.3 vs. a prior reading of 48.8 and a services number of 54.8 vs. a prior reading of 55.7.
  • In China, new orders, new export orders and output all slowed sequentially, calling into question the efficacy of the headline “beat”.

 

With growth in both Europe and China continuing to decelerate on a trend basis, we continue to expect slowing global growth to weigh on both business and investor confidence and reflexively perpetuate a negative feedback loop 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, MUB, and XLP.

GLD  

Gold has grinded higher on the back of Janet Yellen's summary of the minutes from the committee's September 16-17th meeting.

 

Since her commentary on October 8th that 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," gold is up +2.3% vs. a commodity complex getting beaten down with #QUAD4 deflation (CRB -2.1% over the same period).  

 

Gold will continue to trade in front of the USD, and a CPI print this week below the Fed’s target is bullish for gold, especially when real full year real domestic GDP growth is tracking near 0%:

 

CPI m/m +0.1% Sep. vs. -0.2% prior

CPI y/y +1.7% Sep. vs. +1.7% prior

 

As has been the case throughout the year, the major global economies are all slowing at the same time, and we expect the monetary policy members governing the major currencies to undertake similar measures.

 

With TLTRO underway, and loan growth underwhelming, the ECB reported Friday that 25 banks were set to fail the Asset Quality Review Stress Test with 10 of the 25 banks expected to face capital shortfalls that will “need to be addressed.”

 

The banks that failed will have a short time to make adjustments before the final results are released on October 26th, but the headlines will support the implementation of additional Euro-weakening measures from Mario Draghi. With the currency war heating up, we feel comfortable with the gold allocation for FX diversification. 

     

RH 

RH took two steps forward in redeveloping its real estate strategy this week.

 

1) Opening a new 33,000 sq. ft. (23,000 selling, 10,000 outdoor) store on Melrose Avenue in Los Angeles. The new store will replace the existing 17,200 square foot Design Gallery that opened in June of 2011. At nearly 2x the size, the company will show about 2.5x the assortment.

 

2) Substantiated rumors hit the wire this week reporting that RH had signed a new lease in the Meatpacking district of New York City. The new store will span over 70,000 square feet – time of opening TBD.

 

The company is still in phase 1 of its retail build out. Its Design Gallery count is now up 6 and that will grow at an accelerated pace over the next 5 years – adding an incremental 1.2mm square feet to the company’s footprint.

 

With the buildout comes additional exposure for the company’s newer categories. Since 2011, the company has added eight categories to the mix, and in 2015 we will see the first iteration of the Kitchen business.

 

Those categories have virtually zero presence in the company’s physical retail stores to date. Hence the larger stores. A legacy store can show about 10% of the existing SKUs, first generation Design galleries 20%/25%, and a Full Line Design Gallery closer to 70%.

 

The reason behind the additional presentation at retail is the fact that when a new item is introduced at retail in a marketplace it receives a 50%-150% lift in sales across channels (both in-stores and online). That helps explain the production levels we’ve seen from the company’s first 6 big stores to date.

 

Our math suggests that there are 85 markets in the United States that could support a Full Line Design Gallery. Will the company tap all of those markets, no probably not, but the runway is still wide open.

 

* * * * * * * * * * 

 

Click on each title below to unlock the content.

 

 

China Reiterates Our Call That Global Growth Is Slowing

 

China’s 3Q/SEP economic data confirms our view that global growth is slowing and will likely continue to slow through at least year-end.

 

Investing Ideas Newsletter     - China flag full

 

YELP: Only Gets Worse From Here (3Q14)

The model is broken. Moving forward, it’s going to get tougher for management and the sell-side to make up stories to the contrary.

Investing Ideas Newsletter     - YELP help 10.23.14

 

 


Commodities: Weekly Quant

Commodities: Weekly Quant - chart 1 deltas

Commodities: Weekly Quant - chart 2 deltas

Commodities: Weekly Quant - chart3 usd correls

Commodities: Weekly Quant - chart4 s p correls

Commodities: Weekly Quant - chart5 volume

Commodities: Weekly Quant - chart6 implied vol

Commodities: Weekly Quant - chart7 sentiment

Commodities: Weekly Quant - chart8 1 mth correls

Commodities: Weekly Quant - chart9 3 mth correls

Commodities: Weekly Quant - chart10 6 mth correls

Commodities: Weekly Quant - chart11 1YR correls

Commodities: Weekly Quant - chart12 3Yr correls

 

 

Ben Ryan 

Analyst


The Week Ahead

The Economic Data calendar for the week of the 27th of October through the 31st of October is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.

 

The Week Ahead - 10.24.14 Week Ahead

 


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The Best of This Week From Hedgeye

Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.

HEDGEYE TV

Contributor Call: Short Monsanto ($MON), 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, Monsanto. 

 

HEDGEYE IN THE MEDIA

 

Video | McCullough on Fox Business Talks Macro, Markets and More 


Here is a series of videos from Hedgeye CEO Keith McCullough’s appearance Monday on Opening Bell with Maria Bartiromo.

CARTOON

No Russell Muscle

The Best of This Week From Hedgeye - Russell nomuscle 10.20.14

Don’t forget that even though the Russell was up for the first week in seven last week, over 60% of stocks in the Russell 2000 are currently crashing (-20% from their 12-month highs).

 

#GROWTHSLOWING

The Best of This Week From Hedgeye - Growthslowing europe us 10.22.14

Economic growth is slowing around the world.

 

YELP

The Best of This Week From Hedgeye - YELP help 10.23.14

Yelp stock plunged Thursday following its earnings report when management guided revenues lower for the fourth quarter. Hedgeye Internet analyst Hesham Shaaban has been the bear on Yelp all year long.

CHART

Don't Be Intimidated 

The Best of This Week From Hedgeye - COD 10.23.14

 

Useless Sleep

The Best of This Week From Hedgeye - COD 10.21.14

 

POLL OF THE DAY

Holiday Shopping

As Target today announces free shipping for all online orders, we wanted to ask you about your shopping plans this holiday season.

 

 


COFFEE: FOLLOW THE SIGNALS AND DON’T BE FOOLED BY FAVORABLE WEATHER IN BRAZIL

The day-to-day speculation around the health of the Brazilian coffee crop has successfully driven market prices during the current harvest season. We added Coffee on the long-side in real-time alerts (ETF: JO) on Monday after an oversold signal.

 

From a quantitative standpoint, the ETF JO is currently sitting above both its TREND (intermediate-term) and TAIL (long-term) lines and we expect support at these levels:

  • TREND = $34.70
  • TAIL = $33.89

COFFEE: FOLLOW THE SIGNALS AND DON’T BE FOOLED BY FAVORABLE WEATHER IN BRAZIL - chart 1 levels chart

 

FOLLOW THE SIGNALS:

  • TRADE (3 weeks or less)
  • TREND (3 months or more)
  • TAIL (3 years or less)

 

When our internal quant signals (support and resistance levels over multiple durations) infer a bullish set-up over the intermediate and long-term, we look to market sentiment and overall positioning for confirmation on the immediate-term TRADE signals.

 

The price movement in coffee this week is not all that uncommon in the softs space (coffee in particular is the most volatile commodity in the CRB commodity index).

Based on the set-up of non-commercial players in coffee futures and options markets as disclosed weekly by the CFTC, capitulation in long positions likely added to the sell-off. We expect to see a marginally shorter market when this week’s “commitments of traders report” is released after the close:

 

The market was positioned 1.68x standard deviations longer vs. trailing 12-month averages while bullish market activity diverged from absolute prices.

 

COFFEE: FOLLOW THE SIGNALS AND DON’T BE FOOLED BY FAVORABLE WEATHER IN BRAZIL - CFTC Sentiment

 

We saw much higher relative volumes on the green days and lower relative volumes on the red days.

There is a difference between getting stopped out on a long-position, and consistent, healthy selling (getting this right is part of assessing real, inherent risk in any market):

  • Monday (BEARISH PRICE/VOLUME SIGNAL): Price Down, Volume Up
  • Tuesday (BULLISH PRICE/VOLUME SIGNAL): Price up, Volume UP
  • Wednesday (BULLISH PRICE/VOLUME SIGNAL): Price Down, Volume Down
  • Thursday (BULLISH PRICE/VOLUME SIGNAL): Price Up, Volume Up

There is a behavioral difference between a downward price move from large positions being stopped out on a long-position, and consistent, above average selling. We want to see consistent selling on above average volumes, with implied volatility bid-up to confirm market participants respect the move.

This week, we saw downside moves, on fewer trades, with implied volatility selling for -14.2%, -5.8%, and -2.8% below 1m/3m/6m averages. Implied volatility was selling for 53% last Friday and is now selling for 44%.      

At the money implied volatility is much lower on the week with a much flatter Dec. 14’ listed skew

 

COFFEE: FOLLOW THE SIGNALS AND DON’T BE FOOLED BY FAVORABLE WEATHER IN BRAZIL - Dec 14 implied skew 

 

With this set-up we’ll look to add to coffee on an oversold signal should nothing change from a fundamental standpoint.

 

We’re sitting on a loss but don’t believe the fundamental outlook for coffee has changed materially this week to support a -8.9% sell-off.

Coffee is the most volatile commodity in the CRB Index, and we expect these large price swings that often widely decouple from the fundamental story over the short-term. The higher ratio of open interest to average daily trading volume creates this set-up with fewer market making liquidity providers vs. grain or energy markets where realized price volatility and speculation embedded volatility leverage is lower.     

 

------ 

 

We hosted a call with renowned coffee specialist Judy Ganes, founder and CEO of J. Ganes Consulting service for agricultural softs. A link to the replay of that call is included below:

 

Coffee Outlook in 2015 and Beyond

 

The takeaway was that regardless of how the weather turns on the margin during the harvesting period in OCT-DEC, irreversible damage is much more threatening than consensus expectations:

  • For the first time we are looking at a two-year production deficit vs. a normalized year-on, year-off production cycle:
    • Late winter frost last year: Brazilian November-December mild frost lowered crop quality
    • Severe Drought: Drought and lack of moisture in tree root system from January-March during the vegetative period
    • Heavy Rainfall: Late timing of heavy rainfall knocked flowers off trees, reducing the available volume for harvest (CURRENT CATALYST)
    • Brazil WILL NOT produce enough volume in 2015-2016 to meet the global market demand for Arabica coffee
    • Aggregate demand next year is expected to be around 34 million bags. However due to a current stock deficit and severe crop damage, Brazil’s production yield will be just 27 million bags in 2015
    • Not enough capacity from other countries to cover the expected crop shortage of premium Arabica coffee in Brazil
    • How High Can Prices Go? $2.75-$4.00/LB. There will likely be a spike in prices for Arabica and a higher basis for other grades of coffee.

See the following links for our restaurants team’s bearish thesis on Starbuck’s which will be supported by a worse than expected Brazilian crop:

 

SBUX Best Ideas: Short Call

 

New Best Idea: Short SBUX   

 

 

Ben Ryan

Analyst

 


Cartoon of the Day: Over Fed

Cartoon of the Day: Over Fed - Fed cartoon 10.24.2014

 

Our unelected central planners just can’t seem to get enough quantitative easing (QE).

 

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