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CHART OF THE DAY: Capitulation With The Pain | $SPY

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

 

CHART OF THE DAY: Capitulation With The Pain | $SPY - 11.02.15 EL chart

 

... From a sentiment perspective, CFTC non-commercial Futures & Options net positioning saw the YTD highs in NET SHORT SP500 Index + Eminis from September melt-down by 72,584 contracts (covered) week-over-week.

 

That’s nice, because it’s a lot easier to have confidence in maintaining a bearish small cap, beta, leverage, etc. view when a consensus that wasn’t Bearish Enough to begin with (in JUL) doesn’t trust the short positions they put on at the AUG-SEP lows!


Championship Confidence

“To be of championship caliber, a crew must have total confidence in each other.”

-George Pocock

 

That’s how Daniel James Brown brings home the final chapters of his epic championship story about 9 Americans winning Gold at the 1936 Olympics in Berlin (Boys In The Boat). And that’s how I’m going to start my week. I love excellence. Congrats to the Kansas City Royals for winning The World Series last night.

 

Back to the Global Macro Grind

 

Instead of a big European and/or Chinese central plan (that was the catalyst for “stocks” 2 weeks ago), last week was dominated by the one thing a mediocre consensus has had wrong in 2015 – that #LateCycle US Growth continues to slow.

Championship Confidence - GDP cartoon 10.29.2015

 

In addition to New Home Sales, Durable Goods, and Consumer Confidence #Slowing, the week was capped off by a big sequential slow-down in Q3 US GDP to 1.5%. The new bull case is that it ended up being “in line” with a consensus estimate that was cut in ½ in the 3 months prior.

 

But, no worries, everything is going to re-accelerate in Q4 (per consensus). And while we continue to have confidence that that’s dead wrong, it may take another bad jobs report at the end of this week to hammer home reality.

 

Pardon? I thought “everyone is bearish” so the jobs report could be bullish?

 

Yep. Keep on hoping for that, I guess. But there is absolutely nothing in our long-term cycle work that suggests the labor market stopped slowing in October. US layoff announcements actually hit new YTD highs.

 

Taking a step back, here’s what macro markets did last week:

 

  1. US Dollar Index traded sideways and finished the week -0.2% (after being +2.6% in the week prior) and is +7.4% YTD
  2. EUR/USD was flat week-over-week at $1.10, post the week prior’s Draghi Devaluation of -2.9% taking it to -9.0% YTD
  3. US 10yr Yield bounced 6 basis points on the week to 2.14% after re-testing the low-end of its 1.99-2.19% risk range
  4. CRB Commodities Index had a +1.0% bounce on the week (after deflating -2.9% in the week prior) and is -14.9% YTD
  5. Oil (WTI) bounced +4.5% on the week (after deflating -6.3% in the week prior) and is still in crash mode -21.6% YTD
  6. Gold deflated another -1.8% week-over-week and remains -3.8% for 2015 YTD
  7. Copper deflated another -1.4% week-over-week and continues along its recessionary path at -18.1% YTD
  8. SP500 closed the week +0.2% after having a big slow-volume bounce of +8.3% for OCT to +1.0% YTD
  9. Russell 2000 deflated another -0.4% week-over-week and remains -3.6% for 2015 YTD
  10. US Equity Volatility (VIX) rose as many asset classes fell, closing +4.2% week-over-week after correcting -38.5% in OCT

 

In other Global Equities “are back” news:

 

  1. European Stocks (EuroStoxx600) lost -0.5% on the week
  2. Emerging Market Stocks (MSCI Index) deflated another -2.4% week-over-week
  3. Latin American Stocks (MSCI) remained in #crash mode, dropping another -2.2% on the week

 

Yeah, Europe and Latin America (and maybe China?) is where all the new labor market “demand” is going to come from in Q4, eh? Cool. US Dollar denominated debt #Deflation Risk remains one of the most misunderstood for US equity market navel gazers.

 

Here’s another way to slice and dice last week’s performance - US Equity Style Factors (SP500 Companies) to continue to avoid:

 

  1. LEVERAGE – High Debt (EV/EBITDA) companies lost -1.0% last week and are -7.0% in the last 6 months
  2. BETA – High Beta Stocks lost another -0.6% last week and are -11.5% in the last 6 months
  3. SIZE – Small Cap Stocks were -0.2% vs. Large Cap +0.4% last week, taking Small Cap -10.8% in the last 6 months

 

Finally, from a sentiment perspective, CFTC non-commercial Futures & Options net positioning saw the YTD highs in NET SHORT SP500 Index + Eminis from September melt-down by 72,584 contracts (covered) week-over-week.

 

That’s nice, because it’s a lot easier to have confidence in maintaining a bearish small cap, beta, leverage, etc. view when a consensus that wasn’t Bearish Enough to begin with (in JUL) doesn’t trust the short positions they put on at the AUG-SEP lows!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.99-2.19%

SPX 2015-2096
RUT 1135--1175
VIX 13.76-19.40
EUR/USD 1.08-1.11
Oil (WTI) 43.31-47.09

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Championship Confidence - 11.02.15 EL chart


The Macro Show Replay | November 2, 2015

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

November 2, 2015

November 2, 2015 - Slide1

 

BULLISH TRENDS

November 2, 2015 - Slide2

November 2, 2015 - Slide3

November 2, 2015 - Slide4

 

BEARISH TRENDS

November 2, 2015 - Slide5

November 2, 2015 - Slide6

November 2, 2015 - Slide7

November 2, 2015 - Slide8

November 2, 2015 - Slide9

November 2, 2015 - Slide10

November 2, 2015 - Slide11

November 2, 2015 - Slide12


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.

 

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

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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