Takeaway: The new HOT: asset sales, share repurchase, strong RevPAR and earnings beat – the perfect set-up
St. Regis Rome sale announcement an important signal
Please see our note: http://docs.hedgeye.com/HE_HOT_10.21.14.pdf
Takeaway: Our Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and proprietary quantitative market context.
CLICK HERE to view the document. In today’s edition, we highlight:
- Why the ever-evolving consensus bull case of "I'm bullish because everyone else is bearish" is unlikely to perpetuate new highs in DM Equities
- How accelerating risk in the HY/junk bond market has the potential to be broadly disastrous for equity investors
Best of luck out there,
Associate: Macro Team
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Client Talking Points
After a 15% draw-down, the Russell 2000 bounces +4.2% and consensus (that didn’t call for the decline) calls it a bottom. Roger that. Fade it up to our 1st line of immediate-term TRADE resistance at 1106; there’s 6% of immediate-term downside from there to 1040.
Between Ebola and IBM many are forgetting why the UST 10YR flushed to begin with last week (the cycle - Retail Sales slowed); 2.17% for the UST 10YR this morning couldn’t care less about the U.S./Europe equity bounce to lower-highs. Catalyst = early cycle slowdown.
And oil bounced too, but our immediate-term risk range as $79.97 WTI crude indicated as probable on the downside next. We still think we’re in #Quad4 deflation – at $83.42 this morning, don’t forget Oil is still in crash mode (down more than 22% since June).
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Top Long Ideas
The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.
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. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).
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
Chipotle co-CEO rips into fast-food chains for "short-sighted" mistakes $MCD $WEN $YUM $JACK http://fortune.com/2014/10/20/chipotle-co-ceo-rips-into-fast-food-rivals-slams-their-short-sighted-strategies/
QUOTE OF THE DAY
The extent of and continuing increase in inequality in the United States greatly concern me. The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression.
STAT OF THE DAY
China’s economy in 3Q grew at its slowest pace in 5 years, at 7.3%.
“There is something in the New York air that makes sleep useless.”
-Simone De Beauvoir
I’m not known as a big sleeper. I’ve been krolled (not to be confused with being trolled on Twitter) a few times during the due diligence process for different ownership/partnership stakes and positions, and “irregular hours” always comes up as a “flag.”
Back when we started the firm in 2008, that’s why I called this morning rant the Early Look. And so my amateur writing career began… with the promise of only one repeatable competitive differentiator: getting up early and writing to you at the top of the risk management morning.
Last night we hosted a small group dinner in NYC to talk about how everything has “bottomed.” While the feedback (and fear) is that most don’t want to “miss” the next move up, I couldn’t sleep last night thinking that fear itself might just be the biggest #Bubble of them all.
Back to the Global Macro Grind…
When someone uses the word “fear”, it tends to have negative connotations. And, to be clear, I am thinking very negative things could happen if I am correct in calibrating that many got longer of #bubble exposures on the equity and junk bond market’s most recent bounce.
Sure, they may have sold short indices and overpaid for volatility, protection, etc. in the heat of last week’s melt-down, but they A) didn’t sell all of their crashing small/mid cap equity exposures and/or B) their junkie “high-yield” positions either.
In risk management speak, in bear markets we call this cardinal sin “selling what you can, not what you should”… and while my calibration might be wrong, I can’t see that in the market’s futures/options positioning (which is getting longer of beta, not shorter).
To review where some of the hardest core #Bubbles are in this interconnected world:
- Central Planning
- Carry Trading
- Small Cap Illiquidity
- Fixed Income Junk
- Hedge Fund Levered Long Beta
To me, a lot of this is one and the same thing. And it really starts with the 1st #Bubble (Central Planning) because that’s what drove macro markets to inheriting the mother of all interconnected risks (see exhibit 52 in the Q4 Macro Themes Deck) – the #Bubble in Spread Risk (see Chart of The Day):
- All-time Low in Spreads (Investment Grade over Treasuries)
- All-time low in Volatility (across asset classes)
- All-time high in Debt Outstanding (globally)
What’s fascinating about this 3D risk picture is that almost every equity only PM we meet with agrees with it much more adamantly than any of my US stock market centric #bubble charts (like the one that has Russell 2000 at 55x earnings with low liquidity).
There’s obviously confirmation bias in that, but reality is that unless you think it’s different this time (almost every “the bottom is in” thesis has something to do with markets not being able to go down anymore), this is how The Waterfall of Spread Risk works:
- Global Growth continues to surprise to the downside
- US Long Bond Yields continue to fall in kind (mean reverting to what Japan and Germany’s did)
- Both volatility and spread risk continue to break-out from their all-time lows
You see, the core differentiator in our call this year has always been fundamental – that growth slows and starts to get priced into expectations.
“So”, instead of living in fear of your own performance and/or what the “other funds” did last week when the Russell was -15% from its July #bubble high, why don’t I hear most people focusing on what was causal to the gap down in bond yields and equity markets to begin with?
You can lose sleep over what everyone else is doing, or you can focus on what you need to do to get the fundamental research right. And this early riser humbly submits that if you get the rate of change in growth and inflation right, you’re going to get both bond yields and your exposures right.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.09-2.25%
WTI Oil 79.97-83.95
Best of luck out there,
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