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Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EDV, GLD, HCA, MUB, 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 we added HCA on Friday. We will be sending out a brief report outlining our bullish rationale in the upcoming week.

 

*We also feature two pieces of content from our research team at the bottom.

 

Investing Ideas Newsletter      - image001 

 

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

#BurningCurrency

Investing Ideas Newsletter      - Burning money cartoon 10.31.2014 3

This central planning currency burning party is going to get really ugly.

IDEAS UPDATES

TLT | EDV | XLP | MUB

 

Bonds Finish a Tough Week Like Champs

Thank goodness the midterm election came and went; fortuitously for bond investors, this allowed the government to finally stop fudging the growth data. Today was the most important day in that regard, with the OCT Jobs Report being the key economic release:

 

  • Net payroll gains slowed sequentially to +214k MoM from an upwardly revised +256k in SEP… Good number, but has the trend of improvement inflected?
  • The YoY growth rate was essentially flat at +1.9% and holding at the peak level seen in the last cycle… Is this as good as it gets? Is the economic cycle cresting?
  • Private payrolls slowed sequentially to +209k MoM from an upwardly revised +244k in SEP... Much like the headline number, growth in private payrolls slowed on a 3MMA and 6MMA basis as well.

 

Investing Ideas Newsletter      - dd1

 

As it relates to the timing of an interest rate hike out of the FOMC – which we all know may never actually occur – the only thing that spooks the Fed into pushing out its “dots” more quickly than a -10% draw-down in the SPY is a deteriorating labor market. It’s important to contextualize the labor market properly in this regard (per Christian Drake, our senior U.S. economist):

 

  • The unemployment rate ticked down to 5.8% and the U-6 rate declined to 11.5%, dropping the most in 7-months.
  • Alongside the decline in the U-6 rate, the share of ST unemployed continues to rise, the trend in NFIB’s Jobs Hard to Fill and Compensation Indices remain positive, and available workers per job opening is back to pre-recession averages.
  • The employment-to-population ratio for 25-34 year olds ticked up again as employment growth for the cohort accelerated +70bps to +3.2% YoY – the fastest rate of growth since well before the start of the Great Recession.
  • Does a sequential slowdown in NFP signal a negative inflection in the domestic labor market – particularly given a negative birth-death drag, squirrely seasonals, a hard comp, declining slack and improving household survey metrics? I don’t know, but that feels like a stretched read-through on a single month of data.

 

Conclusion: The labor market, which is the most lagging of all economic indicators is pretty darn strong.

 

If for no other reason than the combination of duration (65 months into expansion) and slowing consumption growth, our work says we’re nearing the peak of the economic cycle and the Fed Funds Rate could be stuck at ZERO percent by the time the next recession rolls around.

 

So what do you do with that?

 

You buy bonds (TLT, EDV, MUB) and stocks that resemble bonds (XLP). All year, the bond market has sniffed this out and today was a continuation of that trend – after a difficult week performance-wise, nonetheless:

 

  • TLT: +1.2% DoD; -1% WoW
  • EDV: +1.3% DoD; -0.7% WoW
  • MUB: +0.2% DoD; -0.4% WoW
  • XLP: +0.4% DoD; +2.5% WoW

 

And, oh yeah, crashing oil prices aren’t exactly helping the Fed achieve its +2% “price stability” mandate either:

 

Investing Ideas Newsletter      - dd2

GLD  

 

The follow-through from Friday’s jobs report is evidence of the market’s expectation with each growth slowing data point (Bad # = Bullish because there may be more monetary "cowbell." Everybody is doing it.)

 

  • October Non-Farm Payrolls miss: +214K vs. +248K prior (+235K expected)
  • 10-Yr -7bps back down to 2.31%
  • Gold +2%
  • Energy +1.3%

 

Real-time prices moved in a short-sighted manner with one data point moving prices in QUAD#3 fashion (GROWTH SLOWING, INFLATION ACCELERATING) manner like the first half of 2014.

 

As Hedgeye's U.S. macro analyst Christian Drake pointed out in his note post-report, one data point does not make a trend, and we are still positioned in a #QUAD4 deflationary set-up despite the pop in yield chasing asset classes on Friday (bonds, energy, gold):

 

“Does a sequential slowdown in NFP signal a negative inflection in the domestic labor market – particularly given a negative birth-death drag, squirrely seasonals, a hard comp, declining slack and improving household survey metrics?

 

I don’t know, but that feels like a stretched read-through on a single month of data.”

 

With the labor market showing continued signs of modest improvement as a whole, we expect a continuation in similar trends to support the Fed’s current policy path.

 

We look at activity in every market over multiple durations, and Gold is no different. The intermediate-term deflationary environment domestically is certainly bad for commodities and bullish for the U.S. dollar, but we have no question monetary policy could turn right back down devaluation road over the intermediate and long-term if it was data-supported.

 

From a quantitative perspective gold looks exhausted to the downside and found support at the low-end of the risk range Friday. We’ll watch the follow-through into next week.

RH 

 

Restoration Hardware is on track to open the first Full Line Design Gallery in Atlanta on November 21st. At 45,000 selling sq. ft. (with an additional 20,000 sq. ft.) of outdoor selling space, it will be the biggest RH store to date. The new 6 story store will have an increased SKU count across it’s traditional categories and two dedicated floors, one to Small Spaces and the other to Baby and Child.

 

Product diversification is key to the RH story, as new categories generally experience a 50%-150% lift in sales across channels (both in stores and online) when displayed within a company’s retail locations.

 

But this isn’t just about the top line. One of the key components of the real estate transformation is the occupancy leverage the company realizes as it moves into spaces 6x-8x the size of its legacy stores at rent terms just 25% of the current rate per square foot. This is the big driver behind the Gross Margin expansion we should see over the next 5 years.

 

Investing Ideas Newsletter      - RH atlanta

 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

CAT: 5 Reasons to Stay Bearish into 2015

"There are more than five reasons (on Caterpillar)," writes Hedgeye Industrials analyst Jay Van Sciver. "But we will start with these."

Investing Ideas Newsletter      - c2

Putin on the brink? Top Russia Insider Discusses developments, what may occur next in moscow

Our Macro Team hosted a special “Behind the Curtain” conference call with Michael McFaul, one of the world’s foremost experts on Russia and Vladimir Putin. Until earlier this year, McFaul was the U.S. Ambassador to Russia and held closed-door meetings with Putin and his top lieutenants before finally stepping down out of concern for his family and his own safety. 

Investing Ideas Newsletter      - 5


Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 divergences

Commodities: Weekly Quant - chart2 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 correlws

Commodities: Weekly Quant - chart 10 6 mth correls

Commodities: Weekly Quant - chart11 1 yr correls

Commodities: Weekly Quant - chart12 3 yr correls

 

Ben Ryan 

Analyst


The Week Ahead

The Economic Data calendar for the week of the 10th of November through the 14th of November 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 - 11.07.14 Week Ahead


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

HCA: Adding Hospital Corporation of America to Investing Ideas

Takeaway: We are adding HCA to Investing Ideas.

Please note that we are adding HCA (Hospital Corporation of America) to Investing Ideas today.

 

We will send out a report explaining our position next week.


The Best of This Week From Hedgeye

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

HEDGEYE TV

Hedgeye’s Brian McGough Explains Why $KATE Is a Winner

Hedgeye’s Retail Team added KATE to our Best Ideas List as a long in early October. Sector Head Brian McGough hosted an institutional conference call yesterday ahead of earnings, detailing his bullish thesis and highlighting why KATE’s growth story is widely misunderstood. In the excerpt below, McGough outlines his 3 key points. 

For access to the video in its entirety, contact sales@hedgeye.com.

 

Friday's Morning Macro Call


This is a free sneak peek at Hedgeye's Morning Macro Call for institutional subscribers.

CARTOON

#CurrencyBurning

The Best of This Week From Hedgeye - Currency burning 11.3.14

This is going to get really ugly.


Whinne the Putin

The Best of This Week From Hedgeye - Russia whinnie oil 11.5.14

Deflation is pulverizing Vladimir Putin (and oil bulls). On Tuesday WTI crude was down another -2% to $77/barrel.

CHART

Not Even Putin the Great Can Stop Gravity | $RSX #Oil

The Best of This Week From Hedgeye - chart2

On Wednesday the Russian stock market is down -25% year-to-date. Coincidentally, or not, the price of Brent crude is down right around -25% year-to-date as well.

 

How Good Is Employment Really?

The Best of This Week From Hedgeye - COD 11.6.14

POLL OF THE DAY

 $70 Oil? 

As oil prices plunge to a three-year low, we wanted to know what you thought lies ahead.

 


INVITE | Are Global Central Banks Out of Bullets?

INVITE | Are Global Central Banks Out of Bullets? - HE M centralbanks

 

The Hedgeye Macro Team, led by CEO Keith McCullough, will be hosting a conference call on Tuesday November 11th  at 11:00am EST featuring Professor John B. Taylor of Stanford University.

 

Professor Taylor is a highly regarded scholar known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. In the call entitled, Are Global Central Banks Out of Bullets?, Professor Taylor will discuss his view of global monetary policy and where it goes from here.

 

KEY TOPICS WILL FOCUS ON

  • Assessment of monetary policy over the last five years.  What has worked and what hasn’t?
  • In light of recent moves by the ECB and BOJ, what will the Fed do next? And what can any of the central banks do if current policies remain ineffective?
  • While the Presidential election is two years away, will the nature of the Fed and its policy change under Republican leadership?
  • Where is the U.S. economy now and how will that impact Fed decision making?
  • An update on emerging market policy based on Professor Taylor’s recent visits to various emerging markets
  • Looking forward, what can the Fed due to regain its credibility over the long run?

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 855296#
  • Materials: CLICK HERE (The slides will be available approximately one hour prior to the start of the call)

Email for more information

 

 

ABOUT JOHN TAYLOR

  • Currently a Professor of Economics at Stanford University and a Senior Fellow in Economics at the Hoover Institution
  • Formerly served on the President's Council of Economic Advisers and as a member of the Congressional Budget Office's Panel of Economic Advisers
  • Served as Under Secretary of Treasury for International Affairs from 2001- 2005
  • Oversight of the International Monetary Fund and the World Bank
  • Responsible for coordinating financial policy with the G-7 countries
  • Accredited author, his latest the winner of the 2012 Hayek Prize, entitled: "First Principles: Five Keys to Restoring Americas' Prosperity"
  • Received numerous awards for his work as a researcher, public servant, and teacher
    • Awarded the Alexander Hamilton Award for his overall leadership at the U.S. Treasury, the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis   

Early Look

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