CLIENT TALKING POINTS
ASIAN CONTAGION
Finally the collapse in Chinese shares spills over into the rest of the region. The Shanghai Composite ended down -5.9% after opening down -7% despite frantic efforts from policymakers to stem the tide including mass trading halts with ~50% of mainland stocks not trading. Bloomberg estimated that the 1,301 companies locked up $2.6T in shares, or ~40% of mainland public equity market cap. The Hang Seng plunged -5.8% – the most in seven years – led lower by a sharp decline in H-shares. The concerns sparked a flight to safety, which pushed up the yen nearly ~1% vs the USD and perpetuated a -3.1% decline in the Nikkei. Taiwan finished down -3% while both Australia and India finished down nearly -2%. We don’t have a view on when and how the contagion will be contained, but we’re not inclined to rush in given that the Chinese equity bubble was perpetuated by unprecedented levels of margin finance.
HOUSING DEMAND
Perhaps its peri-holiday related noise in the data, maybe it’s resurgent 1st-time buyer demand or simply interest rate catalyzed demand pull-forward, probably its some combination ….but, in any case, mortgage purchase demand in the latest week finally eclipsed the post-crisis highs recorded in 2013. Purchase Activity rose +6.6% sequentially with year-over-year growth accelerating to +16.9% to start 3Q. There are some emerging headwinds to performance in 3Q but, for now, the momo in the high-frequency housing data remains in tact.
BASE METALS
Spillover effects from Grexit Fears and drawdowns in the Shanghai Stock Exchange have supported the USD and hammered commodity prices this week with the base metals taking the brunt of the beating. Big volumes took both silver and nickel limit down on the Shanghai Futures Exchange overnight as traders and investors rush to raise cash and cover margin calls. With the USD back in a BULLISH TREND set-up, and the cyclical and secular trends gripping the U.S. economy, we continue to like early cycle materials on the short-side at a the right time.
TOP LONG IDEAS
KATE
We’re all-in on Kate Spade at current levels. The Hedgeye Retail team believes that comps are accelerating into the double digits in 2H, and we think that KATE’s margin guidance for this year will prove conservative. Ultimately, we think that numbers this year are 10% too low – a delta that widens to 20%+ next year, and to 50%+ by 2018 when we think KATE has $2.50 to $3.00 in earnings power. Using decelerating multiples as growth accelerates and the P&L matures gets us 50%+ upside in a year and a 2-3-bagger by 2018.
PENN
Our Gaming, Lodging and Leisure team reiterates its high-conviction thesis on Penn National Gaming. PENN remains one of our favorite names on the long side. It maintains the best new unit growth story in domestic gaming. PENN's property in Massachusetts has had an excellent start. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.
TLT
The Hedgeye Growth, Inflation, Policy (GIP) model is signaling a move into QUAD 3 for the second half of 2015. This is a set-up for the domestic economy where growth is slowing and inflation is accelerating. We reiterate our intermediate to long-term bullish bias on long-duration Fixed Income and gold. Our back-testing results cast a favorable outlook for Long-Term Treasuries, REITs, and Gold with a favorable set-up as seen in the first three charts below. When growth is slowing (QUAD 3 and QUAD 4), long term rates tend to move lower. The logic is simple:
- #GrowthSlowing: As growth slows, a revision in forward-looking growth expectations manifest in lower yields
- #InflationAccelerating: Commodity prices have made a significant move off of the 2015 lows as seen in the last chart below, and we expect the follow-through to play out in Q3 inflation readings. CPI readings track the commodity price sample used in chart #4 below very closely and CPI compares are easy in 2H 2015 vs. more difficult GDP comps (QUAD 3)
Asset Allocation
| CASH | 52% | US EQUITIES | 3% | |
| INTL EQUITIES | 8% | COMMODITIES | 2% | |
| FIXED INCOME | 31% | INTL CURRENCIES | 4% |
THREE FOR THE ROAD
TWEET OF THE DAY
If you didn't know #SecularStagnation was going to be a big theme for investors and policymakers in 2H15 (and beyond), now you know.
@HedgeyeDDale
QUOTE OF THE DAY
Mountaintops inspire leaders but valleys mature them."
Winston Churchill
STAT OF THE DAY
Currently in the U.S. nearly one out of every five dollars spent on cookies is spent on an Oreo, in 2014 Oreo had sales of $3.28 billion globally.