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Earnings, Oil and UST 10YR

Client Talking Points

EARNINGS

86 of 500 companies have reported and this profit cycle recession we are entering is becoming broad based (i.e. not “ex-Energy”); Financials and Info Technology EPS -8% and -15%, respectively.

OIL

Oil is down another -1.5% this morning (after deflating -4.8% last week) and the most important callout here this morning is that the USD inverse correlation to everything WTI/Brent is burning off, i.e. not staying in the -0.7-0.9 zone anymore; this should confuse consensus.

UST 10YR

There is nothing confusing about buying LT bonds on every bounce to the top-end of our UST 10YR Yield risk range of 1.98-2.09%; post the bounce to 2.08% yesterday, back down to 2.04% this am, so at least top-down GDP growth and bottom-up earnings slowing is getting Bond Bulls paid.

 

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

Asset Allocation

CASH 62% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 32% 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) https://app.hedgeye.com/insights/47004-mccullough-short-euro-over-yen… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Life is like a dogsled team. If you aren’t the lead dog, the scenery never changes.

Lewis Grizzard        

STAT OF THE DAY

97% of Tesla owners said they would definitely buy their car again despite Consumer Reports forecasts that the Tesla Model S will have worse-than-average reliability.


CHART OF THE DAY: #Earnings #Crashing?

Editor's Note: Below is brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. 

 

Unarguably bullish... We're obviously kidding. 

 

CHART OF THE DAY: #Earnings #Crashing? - 10.21.15 chart EL

 

"...With Earning Season underway (86 S&P 500 companies have reported) sales “growth” is -3.6% and earnings “growth” is -7.9%, so the substitution on why everyone should be levered long stocks instead of Treasury Bonds is that “it’s all priced in.” #Cool

 

...But, if you “back out IBM” … and Industrials and Financials … and you don’t back out that Energy Stocks are the best performing S&P Sector Style to be long for Q4 (OCT) to-date at +11.2%, you should be making a ton of sense to your clients."


The Race

While that may be true for a regatta, that’s definitely not true for the Old Wall’s stock marketing game.

 

With Earning Season underway (86 S&P 500 companies have reported) sales “growth” is -3.6% and earnings “growth” is -7.9%, so the substitution on why everyone should be levered long stocks instead of Treasury Bonds is that “it’s all priced in.” #Cool

 

In other race to the bottom of 2015 “growth” thesis-drift news, Ferrari (not a new company) successfully priced its 17.2M share offering at the “high-end” of the $48-52/share range this morning. And yes, the ticker is RACE!

 

The Race - Earnings cartoon.spare

 

Back to the Global Macro Grind

 

While there was a race for Morgan Stanley to print summer-time US equity strategy notes that explained how the US profit cycle was not peaking (if you look at it “ex-Energy”), here’s the fact of the matter so far in the Q3 US Earnings season:

 

  1. Energy – Sales -33%, Earnings -56%
  2. Materials – Sales -8%, Earnings -30%
  3. Industrials – Sales -10%, Earnings -6%
  4. Information Technology – Sales -6%, Earnings -15%
  5. Financials – Sales -3%, Earnings -8%
  6. Consumer Staples – Sales -3%, Earnings -1%
  7. Healthcare – Sales +14%, Earnings -1%
  8. Consumer Discretionary – Sales +2%, Earnings +5%

 

But, if you “back out IBM” … and Industrials and Financials … and you don’t back out that Energy Stocks are the best performing S&P Sector Style to be long for Q4 (OCT) to-date at +11.2%, you should be making a ton of sense to your clients.

 

Lol

 

How can you not laugh out loud at the thesis-drift that’s out there versus the prior “GDP is going to be +3-4%, Earnings +8-10%, and 10yr Bond Yield > 3%” in 2015?

 

Yesterday’s stock market (SP500) return was -0.14%, but if you looked a foot beneath the surface:

 

  1. Biotech Stocks (IBB) were -3.2% on the day
  2. Healthcare (XLV) was -1.6% on the day
  3. Capital Markets (IPO) were -0.7% on the day

 

Meanwhile Oil & Gas Stocks (XOP) tacked on another +0.8% as the US Dollar continued to drip in the face of both #SuperLateCycle GDP and EPS Season #GrowthSlowing.

 

Once the race started in Q4 (October 1st), remember that most couldn’t have been long this “reflation” trade in Energy and Basic Materials stocks (and short Healthcare) without having had a horrendous time for the year-to-date.

 

“So”, as Wall Street likes to say, this makes this macro market much more like what Blackrock’s Chief Fixed Income Strategist, Jeff Rosenberg, told me it was on Fox yesterday - “paranormal.”

 

By “paranormal” Rosenberg accurately explained that bad news is good (for Stock Market Bulls) and good news is bad (for Long Bond Bulls)… all the while, the credit & growth quality side of this setup continues to punish the companies that miss numbers.

 

That’s also explains why “active” managers who are selecting:

 

  1. Contrarian Macro Exposures (Long Duration Bonds, Munis, Utilities, Gold, etc.)
  2. Organic Growth Longs (GOOGL) vs. GDP Slowing Shorts (CAT, WMT, IBM, etc.)
  3. Fortress Balance Sheet Credits (long) vs. Credit Spread Blowups (short)

 

Are absolutely crushing the field in 2015 and haven’t been forced to substitute a new narrative every 3-6 weeks to their investors in order to explain why their performance boat is taking on water.

 

This is not to suggest that organic growth stories (companies who can show Sales #GrowthAccelerating during a Top-Down #GrowthSlowing phase) won’t slow. Last night, high-flying multiple Chipotle (CMG) talked about October sales being choppy.

 

As we head into the final leg of the 2015 performance race, the leadership (in US Equities) is narrowing. That makes high expectation stocks like Amazon (AMZN) reporting earnings big bottom-up macro events. And there will be no time-outs.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.98-2.09%

SPX 1
VIX 14.74-20.41
EUR/USD 1.12-1.15
Oil (WTI) 44.64-47.49

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Race - 10.21.15 chart EL


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.

October 21, 2015

October 21, 2015 - Slide1

 

BULLISH TRENDS

October 21, 2015 - Slide2

October 21, 2015 - Slide3

October 21, 2015 - Slide4

 

BEARISH TRENDS

October 21, 2015 - Slide5

October 21, 2015 - Slide6

October 21, 2015 - Slide7

October 21, 2015 - Slide8

October 21, 2015 - Slide9

October 21, 2015 - Slide10


TODAY 11AM ET | SELL SPAIN CONFERENCE CALL

Special contributor Daniel Lacalle will join Hedgeye’s European analyst Matt Hedrick and DOR Daryl Jones TODAY, October 21st at 11:00am ET to discuss Spain’s economy and market outlook.

 

Lacalle is a renowned European economist, who previously worked at PIMCO and was a PM at Ecofin Global Oil & Gas Fund and Citadel.  He is the author of Life In The Financial Markets and The Energy World Is Flat and a lecturer for the IE Business School and Master MEMFI at UNED University.

 

TODAY 11AM ET | SELL SPAIN CONFERENCE CALL  - Spain pain

 

KEY TOPICS ON THE CALL WILL INCLUDE 

  • Is the IBEX in crash mode?
  • What are the key economic metrics telling us about the direction of Spain’s health?
  • Will Spain make the necessary fiscal reforms or revert back to its ‘old’ ways?
  • Who wins the general election on December 20th and what’s the impact on the sovereign?
  • What are the challenges for the Eurozone with habitual weak economic links like Spain?

CALL DETAILS

  • Toll Free:
  • Toll:
  • Confirmation Number: 13622670
  • Materials: CLICK HERE

Ping for more information.


IMPORTANT ASIA/EM PORTFOLIO STRATEGY UPDATE

***The roundup below is an example of our data-driven internal research process. Specifically, it helps our team contextualize the key economic releases and policy developments occurring across Developed Asia and Emerging Market economies on a daily basis. To the extent you'd like to be BCC'ed on such emails please shoot us a quick note and we'll add you to the list.***

 

 

In China, growth continues to slow on a trending basis across most key metrics except household consumption – which is becoming an increasingly large share of the Chinese economy. That means Chinese demand is unlikely to be as additive to global growth going forward. Elsewhere in China, sanguine talk regarding the near-term growth outlook is leading to reduced expectations of monetary stimulus – which is precisely what is being priced into the market (via the 3M deposit rate and 1Y OIS). Fiscal stimulus (spending up +27% YoY in SEP) is likely to do the overwhelming majority of the heavy lifting going forward – at through at least year-end.

 

IMPORTANT ASIA/EM PORTFOLIO STRATEGY UPDATE - CHINA KEY ECONOMIC INDICATORS

 

IMPORTANT ASIA/EM PORTFOLIO STRATEGY UPDATE - CHINA MARKET   POLICY INDICATORS

 

In Japan, the equity market continues to react poorly to reduced expectations of near-term QQE expansion – which is supported by Kuroda and Aso’s latest guidance as well as hawkish core CPI trends. Japanese growth has decidedly inflected to the downside across a variety of key metrics, so it’s a matter of “when”, not “if” for the BoJ. That said, however, acting in 1Q16 vs. 4Q15 could mean a fair amount more consolidation and squeezage for [consensus] USD longs and reflation shorts, respectively… 

 

IMPORTANT ASIA/EM PORTFOLIO STRATEGY UPDATE - JAPAN KEY ECONOMIC INDICATORS

 

IMPORTANT ASIA/EM PORTFOLIO STRATEGY UPDATE - JAPAN MARKET   POLICY INDICATORS

 

In Brazil, political consternation is heating up with last-year’s presidential runner-up Aecio Neves effectively passing on replacing President Rousseff to the extent she is fully impeached, which increases the probability of a subsequent election. Turkey is a great example of why that could be a really negative catalyst amid the growing rift between Brazil’s populous (favoring socialism) and Brazil’s cabinet (favoring austerity). Elsewhere in Brazil, the BRL is looking increasingly attractive on the short side with the currency up nearly a full percent vs. the USD MoM – especially given that it has diverged from the swaps market, which is aggressively pricing in the BCB’s marginally dovish policy shift by pledging to keep rates on hold after +325bps of tightening over the TTM. Brazil remains the disaster we called it out as last December and the data continues to support shorting it on rallies.

 

IMPORTANT ASIA/EM PORTFOLIO STRATEGY UPDATE - BRAZIL KEY ECONOMIC INDICATORS

 

IMPORTANT ASIA/EM PORTFOLIO STRATEGY UPDATE - BRAZIL MARKET   POLICY INDICATORS

 

In Russia, both the RTSI and the RUB are ripping shorts, each up +7% MoM and +1-2% WoW, respectively. With the YoY crashes in both markets still intact and domestic policy rate expectations continuing to collapse per 3M deposit rates and 1Y OIS, we have to ask ourselves if this move is driven by fundamentals or global reflation short-covering post the disaster that was the SEP NFP print in the U.S. It may sound surprising, but Russian growth has either positively inflected or is outright accelerating on a tending basis across a variety of key metrics, save for household consumption. Moreover, Russian inflation is trending lower across a variety of key metrics as well. With consensus expectations for Russian growth and inflation on the other sides of these developing trends, the recent rip higher in Russian capital and currency markets makes a lot of sense (given the sentiment). If Draghi and Kuroda don’t deliver the QE/QQE bacon on 10/22 and 10/30, respectively, Russia might be the best way to play a continued USD downdraft amid the [growing] ECB and BoJ policy vacuum. Irrespective of what happens with the USD, the data supports a long Russia/short Brazil investment strategy.

 

IMPORTANT ASIA/EM PORTFOLIO STRATEGY UPDATE - RUSSIA KEY ECONOMIC INDICATORS

 

IMPORTANT ASIA/EM PORTFOLIO STRATEGY UPDATE - RUSSIA MARKET   POLICY INDICATORS

 

Enjoy the rest of your respective evenings,

 

DD

 

Darius Dale

Director


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