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Client Talking Points

INCOME GROWTH

We’ll get the aggregate household income & spending figures for SEPT this morning.  Decelerating growth in aggregate hours and flat wage growth in the Sept employment report should translate into a reported deceleration in aggregate income growth.  The 2nd derivative trend in income drives the capacity for consumption growth and the implication for a modern consumption economy is straightforward: lower income growth = lower consumption growth (holding savings rate & credit growth steady). Consumption growth peaked in 1Q15 and with payroll trends slowing and harder income & growth comps in the coming quarters, the probability of a material re-acceleration in household spending growth continues to trend lower.   

EUROZONE

Eurozone CPI jumped a whole 10 basis points to 0.0% in OCT year-over-year, yet remains at a far cry from the ECB’s 2.0% inflation target.  As ECB head Mario Draghi talks up the prospect of increasing the Bank’s QE purchasing program, expect the EUR/USD to fall in kind. Our GIP model continues to signal the Eurozone in QUAD 3, equating to growth slowing and inflation accelerating.  

INFLATION-LINKED CARNAGE

We’re 2/3rds of the way through S&P earnings season and the carnage in Energy, Materials, and Industrials continues. Energy, materials, and industrials Sales have comped -33%, -17%, and -6% respectively. Earnings growth is down -62%, -20%, and +0.70%. It’s not just the smaller, leveraged names getting hit. Royal Dutch Shell on Wednesday reported a Net Loss of -$7.4Bn vs +$4.5Bn Q3 2014. They took a $-7.9Bn write-down for a halted project in Alaska, but even backing that out they were barely profitable. Strong USD deflation feedback loop à lower commodity prices means lower cash flows, which equals more leverage, especially for those international names with USD denominated debt and weaker currencies. Remember that Debt due is nominal.

 

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

 

Asset Allocation

CASH 62% US EQUITIES 5%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 33% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

What week it was for MCD shareholders! Shares finished the week up 7.3%. We have been saying all along that the third quarter of 2015 would be the inflection point for the McDonald’s (MCD) turnaround. After this print, it appears that the heartache is finally over at McDonald’s, as this quarter marks the first good quarter the company has had in two years.

 

From here, the upside in the stock price lies with the growth of All Day Breakfast, additional G&A cuts, national value offering implementation, reimaging of restaurants, commodity deflation, especially in beef and increased operational efficiencies, among others. In addition, the REIT is a potential driver of incremental value but not crucial to the long-term success of this call. With Steve Easterbrook at the helm we are confident this company will be better managed than it has been in a long time.

RH

RH unveiled a full floor of Modern product in their New York Flatiron store this week. The new concept sits on the first floor of the 21k sq. ft. store and marks the 3rd property in RH’s fleet (along with Denver and Atlanta) to carry the new product line.

 

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.

TLT

As devaluation and global currency war jockeying from central bankers around the world continues, the acknowledgement of growth slowing continues to push yields lower. The long-bond was up on Thursday, after the ECB meeting, despite an easing-fueled rip in equities. The bond market doesn’t believe in the growth storytelling and we expect it to continue.

 

Remember that Down Euro Devaluation is a global TIGHTENING event because the world’s biggest asset price #deflation risk is that the world’s inflation expectations (commodities, debt, etc.) are DENOMINATED IN DOLLARS. That has implications for gold (risk to being long), but we want to get through the Fed meeting and GDP data next week before we pivot on a gold view. Stay tuned.

Three for the Road

TWEET OF THE DAY

REPLAY: An Inside Look at Healthcare Earnings with Hedgeye's Tom Tobin https://app.hedgeye.com/insights/47211-replay-an-inside-look-at-healthcare-earnings-with-hedgeye-s… @HedgeyeHC

@KeithMcCullough

QUOTE OF THE DAY

Happiness is not a state to arrive at, but a manner of traveling.

Margaret Lee Runbeck

STAT OF THE DAY

72% of all Halloween candy bought this year will be chocolate, according to CashNetUSA.