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Client Talking Points

#EARNINGSRECESSION

Are we entering an earnings recession? After a Q2 where S&P 500 earnings declined -2.1% in aggregate, earnings growth thus far in Q3 is down -9% after 15% of companies have reported. Consumer Discretionary is the only sector that has registered positive earnings growth thus far. It’s early, but don’t get roped in from the bull-market storytelling. As we outline in our Q4 macro deck, earnings recessions have preceded  economic recessions in the last 3 cycles.   

EURO

The ECB meets this Thursday for an interest rate decision. The cross is down 11% year-over-year…look for it to dive lower if ECB President Mario Draghi issues incremental QE (easing), a real prospect as inflation at -0.1% is ways away from its 2.0% target. The immediate-term risk range for the EUR/USD is 1.11-1.14. 

HOUSING

This morning’s Housing Starts & Permits data for Sept. is likely to reflect continued crawling improvement as we hold near post-crisis highs in new, single-family residential construction activity.  Looking forward, the Implementation of TRID  (TILA-RESPA INTEGRATED DISCLOSURE) regulations on Oct. 3rd is likely to continue to drive excessive chop in the high frequency data (weekly Purchase Applications) over the next few weeks as lenders go live with implementation and purchase agents attempt to risk manage any early bottle-necks.  Moreover, the demand pull-forward we saw to close out September will likely serve to juice both the New and Pending Home Sales figures for September as the bolus of pre-TRID demand flows through the reported volume figures. We’ll get the New and Pending Homes Sales data on 10/26 and 10/29, respectively.  

 

**Tune into The Macro Show at 9:00AM ET - CLICK HERE

 

Asset Allocation

CASH 63% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 31% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald’s reports 3Q15 earnings Thursday, October 22nd before the market opens, with a conference call at 11:00am ET. We are expecting strong sequential improvement in performance globally. We look forward to giving you an update on the company’s performance next week, but this week we wanted to focus on the ‘Looming Crash in Beef.'

 

On Thursday, October 15th, we held a thought-leader call regarding the declining price of beef and how long it will continue. Prices have sky rocketed in recent years and are now standing at more than two standard deviations above the 30 year average. We believe a 50% decline down to historical averages is well within the realm of possibilities. Declining beef prices will be a major tailwind for McDonald’s as they navigate their turnaround.

RH

Restoration Hardware opened its new Full Line Design Gallery at the Cherry Creek Shopping Center in Denver this week.  This is another anchor property -- using 53,000 feet of the 90,000 left vacant by Saks at Cherry Creek.

 

RH is taking up the size of its stores from an average of 8,000 square feet to about 40,000+ for its new stores – and productivity rates on these new assets are headed higher. In the old stores, RH could only show 10% of its assortment, while in the newer format stores, the company is showcasing better than 75%. Consumers can’t (and don’t) buy what they don’t see.

TLT

The #SlowerForLonger theme from Hedgeye Macro has been consistent and straightforward. Our pivot in advance of the most recent jobs report to get long of gold and stay out of the way short-side on commodities turned out to be a good position.

 

Growth expectations have been correctly revised, but there’s still a good amount of room between Hedgeye estimates and consensus. We are expecting GDP in a range of 0.1%-1.5% for Q3 and another 1-handle in Q4. If that proves accurate, flatter goes the Treasury curve (TLT, EDV), wider goes high yield spreads (bad for JNK), and down goes the USD (GLD).

Three for the Road

TWEET OF THE DAY

VIDEO (2mins) The Most Important Thing I Learned In California Last Week https://app.hedgeye.com/insights/46978-the-most-important-thing-i-learned-in-california-last-week?type=video… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Along with success comes a reputation for wisdom.

Euripides

STAT OF THE DAY

75% of the world’s supply of maple syrup that comes from Quebec.