Durable Goods, Reflation and China

Client Talking Points

DURABLE GOODS

The sequential gain in June was largely a function of wholesale negative revisions to the May data.  Headline New Orders were down -2.8% year-over-year, marking a 5th consecutive month of negative growth, and growth across the various sub-aggregates were not much better. Indeed, Durables Goods Orders Ex-Defense & Aircraft (i.e. the stuff the average Household buys) declined -2.0% year-over-year (vs. -0.7% prior) while core Capital Goods orders declined a notable -6.6% year-over-year.  In short, the 13% of Household Consumption and 9% of GDP that is Durable Goods remains in anti-escape velocity mode. 

REFLATION TRADE UNWIND

The “reflation-trade”, “global growth is back” crowd is getting smoked again as everything levered to inflation expectations underperforms. The Energy (XLE), Materials (XLB), and Industrials (ITB) sectors are down -9%, -8%, and -3% in July vs. a flat S&P 500 as widening risk ranges and heightened volatility premiums manifest in commodities markets. These markets may look oversold, but given the awful Q1 Q/Q SAAR GDP print, Q2 may look like a notable acceleration on Thursday for the Q/Q SAAR navel-gazers. If rate hike expectations are pulled forward, strap your seatbelts and look out below (again) in the short-term for commodities and their related sectors.  

CHINA

Following yesterday’s -8.5% plunge, the Shanghai Composite failed to take advantage of several pledges of continued support out of the Chinese brass to close down -1.7% on the day. After rallying +17.6% off the lows on the back of heavy-handed policy intervention, the mainland’s benchmark equity bourse has dropped -11.2% over the past three days. Looking eerily similar to the chart of the NASDAQ in 2000, we continue to think the A-Shares have a healthy degree of downside from here amid margin calls and asset class re-rotation risk.

Asset Allocation

CASH 48% US EQUITIES 7%
INTL EQUITIES 9% COMMODITIES 0%
FIXED INCOME 22% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
GIS

General Mills (GIS) remains on the Hedgeye Consumer Staples Best Ideas list as a LONG. Key segments across the company are turning the corner and improving performance. Specifically GIS has figured out the yogurt category, after 3 years of struggling with Greek and losing on the core business, management has turned the Yogurt division into a growth segment. Cereal has obviously been a struggle for all companies participating. Although still down, the trend is looking better, in FY16 we hope to see the switch to Gluten Free Cheerios and other improvement, turn performance around.

PENN

Penn National Gaming reported Q2 profit of $16.9 million on Thursday. The company's profit of 19 cents per share beat analysts' expectations.  PENN posted revenue of $701 million in the period, which also beat forecasts.  Shares have climbed 40% since the beginning of the year and 58% over the last 12 months, obviously much higher than the S&P 500. Gaming, Lodging and Leisure Sector Head Todd Jordan was at Penn National Gaming's investor day on July 24th. He will provide a detailed update this week.

TLT

Those long of #LowerforLonger enjoyed another solid week of 2%+ gains for TLT and EDV. VNQ followed up last week’s gains with a pullback of equal size, but we received a positive sloth of data this week that confirms our long housing theme. A positive housing outlook within a bearish rate environment should be positive for VNQ.

Three for the Road

TWEET OF THE DAY

The @AtlantaFed model has 2Q growth coming in at +2.4% QoQ SAAR -- 10bps below our est. Will @Hedgeye be closest to the pin 2qtrs in a row?

@HedgeyeDDale

QUOTE OF THE DAY

The word [because] is one of the most dangerous in the world of finance.

Benoit Mandelbrot

STAT OF THE DAY

The most beer-drinking country in the world is the Czech Republic with a per capita beer consumption of almost 40 gallons a year.