USD #Deflation Risk Hasn’t Gone Away

Client Talking Points

ASIA

Post their month-end markups for OCT, Japan and China dropped -2.1% and -1.7%, respectively, overnight – on any metric (never mind a cluster of metrics) we follow, that side of the world hasn’t stopped slowing in GDP terms.

RUSSELL 2000

But “stocks are up” if you back out the 2000 stocks in the Russell 2000 which dropped another -0.4% last week to -3.6% year-to-date (in the Russell 3000, 62% of stocks are still -20-25% from their #bubble peaks) – reminds us of OCT 2007.

JOBS

We keep hearing that the jobs report this week could “surprise to the upside” but we haven’t had 1 email that suggests it could be another slowing one… weird. Since FEB all the rate of change in the U.S. jobs market has done is slow from its peak.

 

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Asset Allocation

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

Top Long Ideas

Company Ticker Sector Duration
MCD

Last week was a big week for McDonald’s (MCD), as they reached the inflection point we were predicting. Post earnings, the next catalyst for the stock is going to be the November 10th analyst meeting.

 

The meeting will be an opportunity for management to shed more light on the progress of all day breakfast, additional G&A cuts and the potential of doing a REIT. Our Restaurants team remains bullish on the name, and they look forward to giving you some material updates after the meeting.

RH

Restoration Hardware (RH) shares gained 5.8% this past week. The margin story here is explosive. Margins were sitting below 10% on Friday, and we think they will be above 16% in 3 years. The key reason is that expense leverage on these new properties is like nothing we’ve ever seen (i.e. RH pays only 10% more for square footage that’s 300% larger).

 

In addition, the company does not have to proportionately grow its sourcing organization with the growth in its store base OR its category expansion.

 

Our estimate is that the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we’re getting to a stock in excess of $300.

TLT

Our forecasts for domestic economic growth continue to be more accurate than the consensus. We anticipate economic growth will get a lot worse from here. That is why you want to own long-term bonds (TLT, EDV).

  • Real GDP growth slowed to 1.5% on a quarter-over-quarter seasonally adjusted basis. That was actually right at the top end of our range going into it (remember that the mainstream Q/Q annualized number is unpredictable)
  • On the Y/Y numbers, growth decelerated for a 2nd straight quarter to 2.0% from +2.7%
  • Consumption growth was a huge contributor to the number vs. the manufacturing side of the economy which continues to slow. However, take a look at the important chart below. We’re already past peak consumption growth. Consumption growth was positive on an absolute basis but remained rate of change negative with Q3 representing the 2nd quarter of deceleration off of the Q1 2015 peak
  • Both residential and nonresidential Investment decelerated sequentially and inventories contributed almost -1.5% bps to the headline number
  • Personal Income decelerated to +0.1% for Sep vs. +0.3% in August. The expectation was for a +0.2% print
  • Personal spending decelerated to +0.1% from +0.4%. The expectation was also for +0.2% print.
  • Core PCE printed flat at +1.3% Y/Y for Sep. vs. Aug. on a Y/Y basis. That number missed expectations for a +1.4% print

Three for the Road

TWEET OF THE DAY

How to Be Positioned For a #LateCycle Slowdown https://app.hedgeye.com/insights/47243-how-to-be-positioned-for-a-latecycle-slowdown… cc @KeithMcCullough @HedgeyeDDale $XLF $XLU

@KeithMcCullough

QUOTE OF THE DAY

You're happiest while you're making the greatest contribution.

Robert F. Kennedy

STAT OF THE DAY

341 of 500 S&P 500 companies have reported so far this Earnings Season, sales are down -5.5% and EPS is down -3.9%.