CLIENT TALKING POINTS
FX
Post another nasty #Deflation print out of the Eurozone (PPI -3.1% year-over-year vs. -2.6% last), the EUR/USD is down -0.4% and is finally signaling immediate-term TRADE oversold vs. an overbought U.S. Dollar Index into the U.S. jobs report.
OIL
WTI went squirrel yesterday vs. the correlation machines (up with the USD up), but it is also signaling immediate-term TRADE overbought alongside Energy Equity Beta (XOP and XLE).
RATES
For the umpteenth time this year, the UST 2YR Yield is in this 0.75-0.80 zone and signals overbought on “they’re gonna raise rates” – you’re one more bad jobs report away from 0.59% 2YR and 1.98% 10YR. FYI – we are staying with that call.
**Tune into The Macro Show at 9:00AM ET - CLICK HERE.
TOP LONG IDEAS
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
Asset Allocation
| CASH | 61% | US EQUITIES | 6% | |
| INTL EQUITIES | 0% | COMMODITIES | 0% | |
| FIXED INCOME | 33% | INTL CURRENCIES | 0% |
THREE FOR THE ROAD
TWEET OF THE DAY
Bad food sells. I get it. Bad food layered with years of price increases doesn’t, kind of like....... (fill in the blank)
@HedgeyeHWP
QUOTE OF THE DAY
There is more to life than increasing its speed.
Mahatma Gandhi
STAT OF THE DAY
The national average for a gallon of gasoline dropped 1.1 cents during the past week to $2.18 a gallon, according to GasBuddy. That’s about 11 cents lower than one month ago and 79 cents less than one year ago. AAA puts the national average at $2.19.
