“The breath of an aristocrat is the death rattle of freedom.”

-Goerg Buchner


While the 2016 Presidential election is still over a year away, it's fair to say the Republican and Democratic establishments are rattled right now. Completely rattled.   The candidates responsible for the rattling are none other than Donald Trump and Senator Bernie Sanders.  While we have misgivings about both candidates, frankly, shaking up the disfunctional two party system with its embedded interests is a very good thing for America.


On the left, we have Vermont's self-avowed socialist Senator Bernie Sanders. Technically speaking, he is an independent who caucuses with Democrats.  He is also probably the poorest candidate in the race.  In fact, last year Hillary Clinton made more than the Sanders’ entire household net worth.


So, how is Sanders actually doing?  Overall, he has gained massive ground on Hillary, but according to poll aggregates he still trails her by almost 28 points for the Democratic nomination.   Interestingly, though, in New Hampshire primary polls Sanders is up more than 9 points on Hillary.  So, while he remains a true long shot, Sanders is narrowing the gap every day.


On the right, of course, is the omni-present Donald Trump.  At times, Trump has identified himself as a Democrat, but recently pledged that he would support the Republican nominee. For all practical purposes he represents the "Party of Trump."  Or, as David Brooks accurately wrote in the New York Times this morning, “He is a lone individual whose main cause and argument is Himself.”


Regardless of his intentions, so far The Donald is polling very well in the race for the Republican nomination.   This is highlighted in the attached graphic.  Since early July he has been the clear leader and is now more than 14 points ahead of second place Ben Carson.   Trump’s poll chart looks eerily similar to a chart of the Chinese stock market from earlier this year.


 Rattled - z middle chart


If the history of recent elections is any guide, it's unlikely that Trump or Sanders will prevail.  But the current state of affairs is certainly a valuable lesson for both parties. The electorate is signaling they are tired of Washington insiders and petty partisan politics.   As a result, non-traditional candidates with limited party alignment are receiving serious consideration (even those with combovers!)


French historian Alexis de Tocqueville summed up the challenges with the two party system more than 180 years ago when he wrote:


“There are many men of principle in both parties in America, but there is no party of principle.”




Back to the Global Macro Grind...


On a related market and political note, our housing research team is currently doing work analyzing housing stock returns in and around an election year.  They’ve found that the general cycle, not surprisingly, goes something like this:

  • Year 4 (Election year) -> candidates promise the world / stocks price in great expectations
  • Year 1 (New President) -> honeymoon / talk of big ideas / do no harm
  • Year 2 -> Unleash hell
  • Year 3 -> Comping the comp
  • Rinse and repeat

Our team looked at housing stock returns going back to 1991. Their overwhelming conclusion was that election years are the most favorable for housing stock returns. In fact, the median return for housing stocks in an election year was an incredible 30% (with the average just a hair behind at 29%.)  If you’d like to view their research in its entirety or discuss the results of the analysis, please ping our sales team at .


Supporting this idea that housing stocks have the potential to outperform in the coming year is the reality that the Fed is likely to push out raising rates longer than most expect.   We penned a piece for Fortune recently highlighting five key reasons why the Fed might push the date for interest rate increases.  Not the least of which is inflation expectations, which have become downright deflationary.


Speaking of "rattled," the short-duration Treasury market is completely rattled as it relates to digesting the Fed's intentions.  In the Chart of the Day below, we show a chart of the 2-year Treasury yield, which emphasizes the inability of the 2-year to break through the 0.74% yield level.  Certainly, it has made attempts to breakout, but alas, it continues to fail as the likelihood of the Fed increasing rates gets pushed out further and further.


As you may have heard, The World Bank has offically joined the chorus of global prognosticators urging the Fed to delay a hike.  According to the World Bank’s Chief Economist:


“I don’t think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence. It is the compounding effect of the last two weeks of bad news with that China devaluation. The world economy is looking so troubled that if the US goes in for a very quick move in the middle of this I feel it is going to affect countries quite badly.”


Less than a week ago, the IMF also urged the Fed to delay any rate hike.  So to the extent the Fed does decide to raise rates during its Sept. 16th and Sept 17th policy meetings, it would do so against the advice of both the IMF and World Bank . . . the two institutions that were created at Bretton Woods to manage global financial stability.


Bottom line? If Chair Yellen and her Fed colleagues ultimately decide to raise rates in mid-September, we will all be rattled.  As will equity markets across the globe.


Our immediate-term Global Macro Risk Ranges (with our intermediate-term TREND call in brackets) are now:


UST 10yr Yield 2.10-2.24% (bearish)

RUT 1120-1176 (bearish)

VIX 21.60-32.63 (bullish)
Oil (WTI) 39.66-49.45 (bearish)

Gold 1115-1145 (bullish)


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


 Rattled - z chart of day 09.09.15 chart

*UPDATED* September 9, 2015

Please note that the Daily Trading Ranges sent out earlier this morning were not up-to-date. Today's updated ranges are below. 

*UPDATED* September 9, 2015 - Screen Shot 2015 09 09 at 8.23.46 AM

The Macro Show Replay | September 9, 2015


September 9, 2015

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RH | What Could Go Wrong?

Takeaway: We’re confident in RH across durations. But when asked about the ‘worst that could [realistically] happen’ on Thurs, here’s our answer.

We think that the core long-term call on RH is as clear as ever, as is the catalyst calendar over the next six months. We outlined all of this in our two recent Black Books 1) Road to $300 (Link: CLICK HERE), 2) Home Furnishings Deep Dive (Link: CLICK HERE).We also think that the numbers RH will report on Thursday will be spot-on with the type of model we expect to see from RH going forward (comp 14%, Revenue 18%, EBIT growth 25%, Cash Flow 30%+).


But yesterday someone asked us…

Q: “What’s the worst we could hear from RH on Thursday”?


Our answer sounded something like this (actually it sounded exactly like this).

A: “We’re not worried about the print. RH has never missed a quarter and it’s not going to start now. This will be one of the lighter quarters of the year, and earnings should STILL grow 25-30%. If there’s any bad news, it will likely come in the 3Q comp guide – with earnings potentially shifting into 4Q. There are some legitimate factors that could cause a lull in the top line, and whether or not they materialize, our bet is that the company invokes them to keep expectations grounded.“  


Let’s put ‘light guidance’ into perspective. We think that a worst case comp guide is in the high-single digits (we think less than 30% probability). That would leverage to revenue growth in the low dd, and EBIT/EPS 30%+ (the consensus is at 37%). If the worst case scenario were to happen, we’d have to give the revenue/earnings to the fourth quarter.  In other words, the year really does not change materially. Also keep in mind that there is little upside baked into the guidance in 2H from the new categories which already calls for the underlying growth rate to accelerate by 350bps. It’s also worth noting that the company would have to guide 3Q comps as low as 5% in order for the 2-year trend to turn down. We put less than a 5% chance on that happening.


What would cause 3Q guidance be light? There are three meaningful business drivers in 2H that move the needle.


1) RH Teen -- launch on September 18, with subsequent mailing of 200-page sourcebook and dedicated space inside future design galleries.

2) RH Modern – launches within a week of RH Teen. This will have a 370-page sourcebook with a simultaneous opening of a stand-alone store on Beverly Blvd

3) Starting Late Sept/Early Oct, Successive Design Gallery Openings In

  • Chicago (62,000 feet in the most elite part of Chicago’s Gold Coast  -- but at a non-elite cost).
  • Denver (another anchor property -- using 53,000 feet of the 90,000 left vacant by Saks at Cherry Creek).
  • Tampa (47,000 feet, which is spot on with what our real estate analysis suggests is appropriate for 10% market share and $1,200/ft).
  • Austin (47,000 feet at The Domain – likely to replace one of the two small-format stores in the area, one is just 4-miles away. That makes sense given that our math suggests that Austin could support 50-60k feet for RH).

 Here’s why timing matters.

1) Delivery, Not Order = $. It will take a six months to build mass awareness for the new concepts, but RH should begin to take customer orders at a level that actually matters within 3-4 weeks of launch. Let’s say $50mm combined for both concepts right off the bat. We’re talking about roughly 8 to 9 points of comp in the quarter, which would be an extremely solid start.  But the problem is that even if the orders are placed for both concepts by October 1, then we need to count forward by at least six weeks for revenue recognition, as customers only pay for product upon final receipt. That puts the sales into mid-November, which is the first month of the fourth quarter.


2) Ditto for store openings. Chicago and Denver are likely the only stores to impact square footage count for 3Q, but only around 5% of revenue is ‘cash and carry’, meaning that the consumer walks out with the purchase on the same day. The rest of the revenue builds into the fourth quarter P&L.


3) RH Cleared The Deck. In anticipation of its new concepts and stores, RH explicitly noted on the last call and on the recent convert Roadshow that there would be a lull in the summer as it relates to new product. That has, in fact, shown up in the online data that we track for RH, as visits to the site seem to have fallen behind last year for the better part of eight weeks. This week’s reading shows that RH is back on par with last year, and we expect that to head meaningfully higher throughout the third quarter. But again, there’s a good 6-8 week lag between the pick-up in business that we see vs. when RH actually sees it on the P&L.   

RH | What Could Go Wrong? - rh internet traffic



One other reason why RH might guide lightly. Simply put, because it can. It has never had such a position of strength, yet the shorts are already betting against RH with 25% of the float held short.  It has two major initiatives that are stand-alone multi-year growth platforms, and we wouldn’t be surprised to see another announced by the time the year is done.  Add up the four stores being added this year and we’re looking at about 210k square feet. That alone represents about 25% growth in square footage (and that’s not counting Atlanta). Keep in mind that this company went from over 100 stores pre-recession (and before having a defendable merchandise, real estate strategy, and actual management team) to 67 in the latest quarter as it culled bad locations. Square footage grew on occasion over that period in a given quarter, but has settled in around 850k. Starting in 3Q, we should see square footage growth ramp from a mid-single digit rate in 2Q to a number ~20%, then steadily march towards 35%+ in FY16. Then we’ve got 20%+ square footage growth every year thereafter for at least five years based on our real estate analysis.

W | Wayfair Lightning Rod Black Book

Takeaway: Given the controversy around W, we’re releasing a stand-alone Black Book to stress test the increasingly divergent Bull vs Bear cases

Given the controversy around Wayfair, we’re releasing a stand-alone Black Book on Monday, September 14th to stress test the increasingly divergent Bull vs Bear cases. We’ll host a call and presentation at 1pm ET.


As background, we published a 90-page Black Book on the entire Home Furnishings industry last week and included our view that Wayfair probably does not need to exist, and is unlikely to turn a profit -- ever. To say that this view proved to be a lightning rod is probably an understatement, especially given the controversy inherent to the name.


As such, we’ve been peeling back the layers of this story, and will release a stand-alone Black Book that scrutinizes every line of the Wayfair financial model.

We’ll detail over TRADE, TREND and TAIL durations where we are coming out on items including the following…


1) Market size, by category

2) Revenue capacity and trajectory

3) Customer acquisition costs, customer profitability, and churn

4) Eventual landing place for Gross Margins

5) Operational infrastructure, and capital needed to break even

6) The difference in how this name is being viewed by Retail analysts vs Internet analysts

7) Plus much more…


Participating Dialing Instructions

Toll Free:


Confirmation Number: 13619412

Materials: CLICK HERE


Daily Trading Ranges

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