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Dovish Fed Meeting?

Client Talking Points

USD

The U.S. Dollar Index closed on its low for the week (-1.1% on the week) and is seeing follow through selling this morning vs. both Euros and Yens. What’s most interesting about this to us is that on 30-day correlation, SPX has a POSITIVE correlation to USD of +0.8 (meaning a Dovish Fed could be bad for stocks).

JAPAN

Down Dollar is definitely bad for Japanese Stocks – that INVERSE correlation has not changed; Yen +0.3% took another -1.6% out of the Nikkei overnight – it’s -12.5% in the last month with the U.S. Dollar -2.7% (and Yen +3.8%).

UST 2YR

Yield tested a “breakout” above 0.75% for the 6th time in 6 months last week… and failed; back down to 0.71% on Dovish Fed spec this morning and, with Fed Fund Futures this low, we still think the Fed could train wreck macro markets if they tighten.

 

 

**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 24% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

MCD is one of Sector Head Howard Penney's favorite names. He thinks McDonald's is finally emerging from the doldrums and is doing everything they need to do to fix the company domestically.

 

Penney believes there is not only a huge inflection point coming for the profitability of the company, but also for their sales. He thinks this means Wendy’s, Jack In the Box, Sonic will suffer a bit as MCD begins to take its market share back.

PENN

Bottom Line here? September regional gaming revenue growth should accelerate meaningfully from August and provide a catalyst for the stock. Our bull thesis on PENN appears very much intact.

TLT

In a higher volatility, growth-slowing environment, you want low-beta exposure (stocks that move less than the market) and a larger allocation to long-term Treasuries.

 

In the recent Macro Overlay video series exclusively for Investing Ideas subscribers, Keith rank-orders our top investing ideas positions from a fundamental macro and style factor perspective (low-beta, big cap liquidity, slower growth):

  1. Treasuries (TLT)
  2. “Something that looks like Treasuries” (EDV)
  3. Gold (GLD)
  4. Low-Beta, Big-Cap liquidity: McDonalds
  5. Low-Beta, Big Cap Liquidity: General Mills

Three for the Road

TWEET OF THE DAY

McGough: Why Restoration Hardware Shares Are Headed Even Higher | $RH https://app.hedgeye.com/insights/46315-mcgough-why-restoration-hardware-shares-are-headed-even-higher-rh… via @HedgeyeRetail cc @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

Creativity is thinking up new things. Innovation is doing new things.

Theodore Levitt

STAT OF THE DAY

According to the American Pet Products Association Americans spent $58.04 billion on their pets last year.


The Macro Show Replay | September 14, 2015

 


September 14, 2015

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BULLISH TRENDS

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BEARISH TRENDS

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investing ideas

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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.

McGough: Why Restoration Hardware Shares Are Headed Even Higher | $RH

In a special guest appearance on The Macro Show on Friday, Hedgeye’s Retail Sector Head Brian McGough discusses why Restoration Hardware’s stock has worked (and why this is just the beginning of the RH growth story).


The Week Ahead

The Economic Data calendar for the week of the 14th of September through the 18th of September is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.

 

CLICK IMAGE TO ENLARGE.

 

The Week Ahead  - zz 09.11.15 Week Ahead


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: WAB, ZBH, GLD, MCD, RH, LNKD, ZOES, FNGN, FL, PENN, GIS, EDV & TLT

Investing Ideas Newsletter       - central bankers cartoon 09.08.2015 large

 

Below are our analysts’ updates on our thirteen current high conviction long and short investing ideas. Please note that we added Wabtec (WAB) to the short bench this week. In addition, we removed Utilities (XLU) from the long side. We feature CEO Keith McCullough’s updated levels for each ticker below.  

LEVELS

Investing Ideas Newsletter       - z levs

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 les

IDEAS UPDATES

RH

To view our analyst's original note on Restoration Hardware: CLICK HERE

 

This was a textbook print from Restoration Hardware – or for any company, for that matter. In case you missed it, shares finished Friday's trading up over +9%.

 

RH put up the best comp in all of US retail this quarter with 16% brand comp and 19% store comp. That drove 26% EBIT growth and 27% EPS growth.  RH beat by a penny, but took up the lower end of the year by $0.03 more than the 2Q beat. That upside is coming entirely in the fourth quarter, and as we suspected this all allowed RH to set the bar low for 3Q as revenue from new businesses will not be booked until 3Q closes in October.

 

We think all of this sets up for a beat in another 90 days, at the same time square footage growth is accelerating to 29% vs 7% in 2Q, new concepts (RH Modern/RH Teen) are in full swing, and EPS is growing 40%+. This is going to be a rough time for the bears – especially with 25% of the float short.

 

Transformational stories like Restoration Hardware are not linear, and this one certainly has not been. The stock chart over three years certainly proves that. But it also proves that the people who bought on quarterly noise have made money almost without fail.

 

If the market decides to sell off based on lower guidance in 3Q (i.e. if the after-market gains reverse), then consider it a gift.  Fundamentally and financially, we’re about to see growth at RH go on a multi-year tear. We think this stock is headed to $300 over the next 2-3 years. We’ve been patient for the catalyst calendar to begin, and the waiting is finally over.

ZBH

Our Healthcare Sector Head Tom Tobin published a stock report on Zimmer Biomet for Investing Ideas subscribers on Friday. Click here to access.

wab

We added Wabtec to the short bench on Friday. Our Industrials Sector Head Jay Van Sciver will send out a full stock report in the upcoming week.

FNGN

The report below was written by Financials Co-Sector Head Jonathan Casteleyn.

 

Financial Engines' fundamentals are solid as we expect strong 3Q15 net fund raising, a continuation from solid 2Q results, sourced by ongoing marketing campaigns in the quarter.

 

While market depreciation will be a drag (depending on exactly where beta returns shake out), we remind investors that the company is still in the seasonally strongest part of the year for AUM wins as marketing campaigns are most active in the middle two quarters historically.

 

Our research shows that the stock's return has been positive every 4th quarter calendar period since coming public with an average return of 22.6%. This stronger performance should carry through to the beginning of 2016 as the company prepares for the Wells Fargo catalyst (we calculate a $0.11 per share earnings opportunity as WFC starts to provide the firm's advisory services).

 

With a recent 2 standard deviation move in the company's valuation, but no fundamental change in our estimated $1.3 trillion in assets-under-contract (AUC) opportunity, we highlight mean reversion providing a rebound in the stock price.

 

Investing Ideas Newsletter       - z jc

LNKD

To view our analyst Hesham Shaaban's original note on LinkedIn: CLICK HERE

 

We just received our first 3Q15 update to our LinkedIn tracker. This tool gauges the strength of the selling environment for LNKD’s salesforce.  Our tracker is suggesting that the selling environment is not only improving, but doing so at an accelerating rate into 3Q15; suggesting that the organic guidance cut on LNKD’s last earnings release was not the result of any negative inflection in LNKD’s fundamental prospects.

 

We remain long LNKD into its next earnings release. 

 

We’re expecting a clean beat and raise, which we expect will be a positive catalyst for the stock, especially given the current dearth of good Internet longs. 

PENN

The update below was written by our Gaming, Lodging & Leisure team.

 

 Investing Ideas Newsletter       - z sena

 

Bottom Line here?

 

September regional gaming revenue growth should accelerate meaningfully from August and provide a catalyst for the stock. Our bull thesis on PENN appears very much intact.

GIS

Our Consumer Staples team has no material update on General Mills this week. They reiterate their bullish long-term thesis on GIS shares.

ZOES

Shares of Zoës Kitchen were up +5.4% this week, compared to a +1.7% rise for the S&P 500.

 

Our Restaurants team has no material update on ZOES. The company remains on their Best Ideas list as a long. In our team's eyes, ZOES represents the best growth story in the restaurants sector.

 

Sector Head Howard Penney believes the recent downturn in the stock represents an excellent buying opportunity for longer term investors. 

MCD 

To view our original note on McDonald's: CLICK HERE

 

McDonald’s remains on the Hedgeye Restaurants Best Ideas list as a long.

 

The company is one of Sector Head Howard Penney's favorite names. He thinks McDonald's is finally emerging from the doldrums and is doing everything they need to do to fix the company domestically.

 

Penney believes there is not only a huge inflection point coming for the profitability of the company, but also for their sales. He thinks this means Wendy’s, Jack In the Box, Sonic will suffer a bit as MCD begins to take its market share back. 

FL

The best characterization of our short Foot Locker call is that the company has done everything right over this economic cycle, such that it took net margins from -2% to +7%, and drove RNOA from 5% to 28%. As such, FL is sitting today at a peak multiple on what we believe to be peak earnings (and almost certainly peak earnings growth).

 

The problem is the lack of runway in key earnings drivers, like  changing up store banners, closing underperforming assets, and taking Nike up to 80% (from 60%). They were all tremendous profitability and margin enhancers. Unfortunately, they are irreplicable.

 

There are almost no more stores left to close outside of the normal course of business, asset swapping opportunities between banners (Locker, Lady, Champs…) are few and far between, and Nike shifting above 80% of sales – already an exceedingly unhealthy level – is very slim. In fact, one could argue that FL is Nike’s best off-balance sheet asset.

TLT | EDV | GLD

This week we rolled out our new Macro Overlay video series. This new addition is exclusively for Investing Ideas subscribers. When conditions warrant, Hedgeye CEO Keith McCullough will distill and contextualize current global macro and market developments and the key takeaways you can apply to the names on our Investing Ideas list.  If you didn’t have a chance to view it, please click here.

 

In a higher volatility, growth-slowing environment, you want low-beta exposure (stocks that move less than the market) and a larger allocation to long-term Treasuries.

 

In the video above, Keith rank-orders our top investing ideas positions from a fundamental macro and style factor perspective (low-beta, big cap liquidity, slower growth):

 

  1. Treasuries (TLT)
  2. “Something that looks like Treasuries” (EDV)
  3. Gold (GLD)
  4. Low-Beta, Big-Cap liquidity: McDonalds
  5. Low-Beta, Big Cap Liquidity: General Mills

 

To be clear, we have no idea what the Fed will say or do next week.

 

We do know that:

 

  1. They should have started raising rates in September 2013
  2. Tightening into a slowdown isn’t within the framework of modern day central policy

 

We can only stick to what the top-down market signals and ebb and flow of economic data suggests. We have a high amount of conviction that global growth continues to slow. We like long-duration bonds (TLT, EDV), and Gold (GLD) exposure if the Fed takes a dovish policy turn next week.

 

That said, our net exposure to any asset class would be next to nothing until the event is digested. For longer term investors, we remain long of the three aforementioned tickers (TLT, EDV, GLD).

 

If you are a shorter-term investor, please see here for the Real-Time Alert in TLT that we sent to subscribers on Friday (which precipitated our removal of Utilities (XLU) from Investing Ideas). We hope that it helps to bridge the gap between the two products (Real-Time Alerts being shorter-term and more tactical vs. Investing Ideas which caters to the intermediate or longer-term investor).

 

We recognize and appreciate that our current allocation may put some people to sleep. But, as we have mentioned repeatedly, our job in this tumultuous environment is to not lose money.

 

Our macro team circulated some content over different airwaves this week to highlight just how extended stock market valuations currently sit, even with the recent drawdown. Please note that we don’t anchor on valuation to manage everyday risk, but the interpretation of this data points to one of our key macro themes: #LATECYCLE

 

  • Shiller PE:  Remains above 24x (price to avg. trailing 10-year earnings ratio for S&P 500 stocks as a whole) and sits just south of the top decile of its historical range.  Mapping the Shiller PE by decile vs subsequent market performance suggests return expectations should move systematically lower alongside incremental increases in valuation
  • Tobin’s Q:  Historically, at extremes, Tobin’s Q has served as a solid lead signal for subsequent market performance.  Currently, the q-ratio sits at ~1.06 which is greater than 1.3 standard deviations above the long-term mean value – a level that has generally not been a harbinger of positive forward returns historically.
  • S&P 500 Market Cap-to-GDP:  Assuming the collective output of SPX constituents credibly reflects aggregate national production (or serves as a credible proxy for it), the Market Capitalization-to-GDP ratio effectively represents a price-to-sales multiple for the economy.  At current levels we are well above both the LT average and the 2007 highs.  

Please see the chart below which is an aggregation of Shiller P/E, Tobin’s Q, and S&P 500 Market Cap-to-GDP.

 

Investing Ideas Newsletter       - z m m

 

 


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