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March 30, 2015

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BULLISH TRENDS

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BEARISH TRENDS

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Investing Ideas Newsletter

Takeaway: Current Investing Ideas: UUP, EDV, GS, ITB, TLT, MTW, MUB, RH

Below are Hedgeye analysts’ latest updates on our eight current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.

 

*Please note we added GS, EDV and UUP this week.

 

We also feature two additional pieces of content at the bottom.

Investing Ideas Newsletter      - m9 

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

Investing Ideas Newsletter      - Dove cartoon 0325.2015

IDEAS UPDATES

GS

We added Goldman Sachs to Investing Ideas this week.

 

This new position is a profitable way to invest in what will be incremental uncertainty about the U.S. economy and also a more active Federal Reserve into 2016. After six years of releasing credit into the banking system, the U.S. central bank on the margin will be looking for adjust its half decade long policy and slowly be more restrictive in monetary policy. These adjustments will finally spur trading volume in both credit and equities on the biggest trading desks on Wall Street.

 

The investment banks are a cheaper way to capitalize on this trend versus the more expensive exchange sector. Goldman firstly should put up its first year-over-year gain in Fixed Income trading in 1Q15 since 2009, marking an inflection point in trading activity. In addition, the firm is mentioning incremental dividend and share repurchase activity signaling that it finally has a handle on the new Financial regulatory regime instilled since the Financial Crisis and can again engage in shareholder friendly activities.

 

Only equity volatility remains stubbornly suppressed currently with FX, Bond, and Commodity volatility starting to percolate higher which will benefit the Goldman Sach trading desk throughout 2015 and beyond.

Investing Ideas Newsletter      - jc1

Investing Ideas Newsletter      - jc2

ITB

The Thaw

 

Housing was 3 for 3 in the latest week as Existing Home Sales improved sequentially, New Home Sales saw an epic acceleration and the high frequency purchase application data showed signs of thawing alongside the break in the weather.

 

To review the data:  Sales of Existing Homes, which account for ~90% of the total market, accelerated to +4.7% YoY in February, marking the fastest rate of growth in 17-months.  More impressively,  New Home Sales (~10% of the market) hit their highest level since February 2008 rising +7.8% MoM to 539K.  On a year-over-year basis, sales were up a remarkable +25% and should continue to look strong from a second derivative perspective as we traverse a 5-month period of (very) easy comparisons.  Meanwhile, weekly Purchase demand, as measured by the Mortgage Bankers Association, showed some emergent mojo as well, rising +4.9% sequentially and accelerating +200bps to +2.7% on a year-over-year basis.

 

As we’ve highlighted, we expect a modest backlog of deferred housing consumption in conjunction with healthy organic demand trends to manifest in accelerating improvement in reported activity over the next 6-8 weeks.   Indeed, the crux of our underlying thesis remains largely unchanged.   Labor market strength + credit box expansion + easy comps should continue to support improving rates of change in housing demand over the intermediate term.  

Investing Ideas Newsletter      - NHS YoY

TLT | MUB | UUP | EDV

We added the U.S. dollar (UUP) and Long-Duration Treasury Bonds (EDV) this week for two additional vehicles to play growth slowing and deflation over the intermediate to longer-term.

 

While day-to-day timing isn’t a focus for the longer-term investor, a big counter-TREND move in the U.S. dollar (pullback within a BULLISH TREND set-up) presents a buying opportunity.

 

After the Federal Reserve revised their growth and inflation expectations downward last week, a short-term rout in the USD has manifested as the market front-runs the currency-devaluing policy effects and discounts the expectation of an interest rate hike near-term.

 

Most importantly in contextualizing the market’s reaction, all of our key risk-management levels have confirmed our fundamental macro thesis: The dollar has more upside through the back half of this year as deflation remains a global reality moving forward:

  • TRADE Support (3 Weeks or Less): $96.29
  • TREND Support (3-Months or More): $93.20
  • TAIL Support (3-Years or Less): $88.12

Investing Ideas Newsletter      - z2

 

The long-end of the bond market has continued to prove its legitimacy as a proxy for forward-looking growth, and forward-looking growth can slow with inflation going both ways….

 

Look no further than the USD reversal over the last couple of weeks. The reactionary monetary policy from the Fed to “the data” last week succeeded at shifting global currency markets and the yield curve still moved lower. The forward-looking expectation for the dollar can shift, but the bond market continues to tell the same story: lower highs for long duration yields (higher lows for TLT, MUB, and EDV) with more pain for those levered to inflation expectations.

 

Investing Ideas Newsletter      - yellow

RH

Editor's Note: Shares of Restoration Hardware finished Friday's trading up 4%.

 

There was no shortage of moving parts in the Restoration Hardware print. Though the after-hours stock reaction immediately suggested otherwise, we think that the story is squarely on track. Actually, we know it is. We’re making slight changes to our quarterly estimates, but are not making any material changes to our annual numbers, which remain materially above consensus.

 

We would still take advantage of whatever weakness we see. Even though the stock closed up on the day, we’d still buy it here.

 

We think the road map to a $150 stock at the end of the year is intact. 

MTW

Improving public and residential construction activity amid continued private nonresidential construction spending growth has helped push the Dodge Index back toward peak 2005-2006 levels, while touching its highest growth rate since 1983.

 

It is worth noting that real nonresidential spending, excluding mining, oil & gas, has performed very poorly since the financial crisis, but still retains its cyclical rebound potential. So. as the Dodge Index and other construction indicators show signs of life, Manitowoc should receive a helpful tailwind. 

 

Investing Ideas Newsletter      - dt1

Investing Ideas Newsletter      - dt2

 

 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

china economic update: will the "beijing put" be enough to offset the slowdown?

Our updated, detailed thoughts on the Chinese economy and its financial markets.

Investing Ideas Newsletter      - y7

just charts: commodity unwind vs construction 

Improving public and residential construction activity amid continued private nonresidential construction spending growth has helped to push the Dodge Index back toward peak 2005-2006 levels.

Investing Ideas Newsletter      - z5


The Week Ahead

The Economic Data calendar for the week of the 30th of March through the 3rd of April is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.

Click to enlarge.

The Week Ahead - Week Ahead


Attention Students...

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INTERVIEW | McCullough: My Top 5 Ideas In This Slow Growth Environment

Hedgeye CEO Keith McCullough appeared on Fox Business’ “Opening Bell with Maria Bartiromo” this morning. In his first segment, he and Maria break down the Q4 GDP number. Keith reiterates that despite expectations of 4-5%, YoY growth in GDP is actually closer to 2. He discusses why numbers for Q1 will look weak comparatively and how Hedgeye front-runs the Fed with our growth and inflation estimates. Lastly, he reveals what he’s been recommending to customers in this deflationary environment. 

 *  *  *  *  *  *  *

 

In light of this slow-growth environment, Keith discusses where investors can find yield, how the current setup points to economic stagflation,  and why housing is gaining traction, despite consensus expectations. 


Cartoon of the Day: GDP Reality Bites

Cartoon of the Day: GDP Reality Bites - GDP cartoon 03.27.2015

 

"After it was all said and done," Hedgeye CEO Keith McCullough wrote earlier today, "US GDP Growth in 2014 was precisely what we thought it would be #SlowerThanOldWallConsensus. It's professionally embarrassing for those economic partisans who called it a 4-5% GDP environment."


**BABA: Our New Tracker (Revision)

Takeaway: Tmall GMV Mix Shift could make or break any quarter for BABA moving forward. Our new tracker suggests it's slowing even further into F4Q15.

Revision: we're correcting a grammatical error to clarify one of the Key Points.  We apologize for the confusion.

KEY POINTS

  1. WHY TMALL GMV MIX IS IMPORTANT: BABA only collects commissions on its Tmall platform, and growing Tmall GMV Mix has been propelling commission revenue growth well in excess of BABA's GMV growth throughout its reported history.  This has been masking the weakness in BABA's core Marketing segment (both reported in China Retail).  However, if this metric stalls, then all the weakness in its marketing segment bubbles to the top (similar to last quarter).
  2. OUR NEW TRACKER IS POINTING SOUTH: We have worked iResearch traffic metrics for BABA into an index, which has produced a .78 correlation with the y/y change in BABA's Tmall GMV Mix dating back to CY 1Q13.  Our index is pointing to a continued deceleration in Tmall GMV mix shift through February.  As it stands now, we're expecting Tmall GMV Mix will grow 1.5 percentage points y/y in F4Q15 (vs. 2.6 and 5.2 in F3Q15 and F2Q15, respectively).  In short, we expect the gap between the y/y growth in Commission Revenue and GMV will narrow further.

 

**BABA: Our New Tracker (Revision) - BABA   Tmall GMV Mix F3Q15

**BABA: Our New Tracker (Revision) - BABA   GMV vs. Commissions F3Q15

**BABA: Our New Tracker (Revision) - BABA   GMV Tracker solo

**BABA: Our New Tracker (Revision) - BABA   GMV tracker

 

 

Let us know if you have any questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


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