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Client Talking Points

FED

We’ve only seen 8 alleged “breakout rallies” in rates the last 10 months (and every one of them has been quashed by that damn “data” that the Fed continues to say they are dependent on) – the U.S. labor cycle peaked in FEB and should slow well into the middle of next year.

COMMODITIES

Apparently the “reflation” bulls who are suggesting global demand has “bottomed” aren’t looking at the entire commodity complex. The CRB Index was down -1.7% yesterday, an indication which ensures the #Deflation Risk remains. Copper appears to be a Red Shoot this morning down another -2% to $2.27/lb.

EMERGING MARKETS

Emerging crashes continue via #StrongDollar – no worries on that front – raise rates into a slow-down and you’ll see plenty more of this. India and Australia are down another -1.1% and -0.9% overnight, respectively vs. the Nikkei (which enjoys Strong Dollar, Down Yen) +1.0%.

 

**Tune into The Macro Show with Hedgeye CEO Keith McCullough in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 61% US EQUITIES 5%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 32% 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

The Stock Market Is Out of Breadth and Overstretched https://app.hedgeye.com/insights/47342-the-stock-market-is-out-of-breadth-and-overstretched… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Try not to become a man of success but a man of value.

Albert Einstein

STAT OF THE DAY

According to Volkswagen, the estimated cost of the economic risks inherent in the Volkswagen recall and diesel emissions scandal is roughly $2.19 billion.