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November 2, 2015

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BULLISH TRENDS

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BEARISH TRENDS

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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%.


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

10/30/15 SBUX | WHAT WILL SLOW THEM DOWN? | CONFERENCE CALL NOTES

10/30/15 RUTH | #BEEFDEFLATION

10/29/15 EAT | TIME FOR A RESET

10/29/15 BURRITO TRACKER | CMG, QDOBA (JACK)

10/29/15 BWLD | BWLD TRACKERS | CONFERENCE CALL NOTES

10/28/15 PNRA | NO “CHOPPY” OCTOBER HERE

10/26/15 BLMN | HOW BAD IS BAD? | ASK THE STEAK TRACKER

10/23/15 DNKN | THE DONUT TRACKER

10/22/15 MCD | THE ROAD TO $150

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow widely underperformed the XLY last week. The XLY was up +1.7%, top performers on a relative basis from casual dining were BOBE and BBRG posting a decrease of -1.4% and -1.6%, respectively, while NDLS and WEN led the quick service group this week up +5.8% and +1.8%, respectively.

Monday Mashup - CHART 2

Monday Mashup - CHART 3

 

XLY VERSUS THE MARKET

Monday Mashup - CHART 4

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLY looks BULLISH from a TRADE and TREND perspective, TREND support is 76.98.

Monday Mashup - CHART 5

 

CASUAL DINING RESTAURANTS

Monday Mashup - CHART 6

Monday Mashup - CHART 7

Monday Mashup - CHART 8

 

QUICK SERVICE RESTAURANTS

Monday Mashup - CHART 9

Monday Mashup - CHART 10

Monday Mashup - CHART 11

 

Keith’s Three Morning Bullets

341 of 500 S&P companies have reported – sales are -5.5% and earnings -3.9% and USD #Deflation Risk hasn’t gone away:

 

  1. 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
  2. RUSSELL – but “stocks are up” if you back out the 2000 stocks in the Russell which dropped another -0.4% last week to -3.6% YTD (in the Russell 3000, 62% of stocks are still -20-25% from their #bubble peaks) – reminds me of OCT 2007
  3. JOBS – I keep hearing that the jobs report this week could “surprise to the upside” but haven’t had 1 email that suggests it could be another slowing one… weird. Since FEB all the rate of change in the US jobs market has done is slow from its peak

 

SPX immediate-term risk range = 2015-2096; UST 10yr Yield 1.99-2.19%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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Investing Ideas - Levels

Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction investing ideas.

 

Have a great weekend.

 

Investing Ideas - Levels - z levels 1

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 less

Anything longer than 3 years is unpredictable.


In case you missed it..."Fed Day Live" with Keith McCullough

Hedgeye CEO Keith McCullough and macro analyst Darius Dale hosted a LIVE + INTERACTIVE online event offering market commentary following the latest FOMC statement. McCullough also distilled the biggest global economic risks and explained how to position your portfolio going forward.

 

 


The Week Ahead

The Economic Data calendar for the week of the 2nd of November through the 6th of November 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 - 10.30.15 Week Ahead


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