CLIENT TALKING POINTS
JOBS
Something in the 90% range of questions we’re receiving on this jobs report have to do with the “upside” surprise in the numbers, so we’ll stay with the #LateCycle Employment call and remind you there’s a lot of downside. If you look at a chart of the 10-Year U.S. Treasury Yield you can see long-term investors have understood this for almost 2 years now.
USD
This is the most obvious live quote signaling that expectations are for a “bullish” jobs print – so anything that’s not bullish would be USD bearish with immediate-term downside in the USD Index to 96.52 and upside in EUR/USD to $1.11.
RATES
We’re not so interested in nailing the number today as we are getting the 3-6 month rate of change in NFP slowing – the absolute peak was in DEC of 2014 (tough pending comp!) and the rate of change peaked at 2.34% NFP ear-over growth in FEB of 2015 – these cycles are long.
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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 | 5% | |
| INTL EQUITIES | 2% | COMMODITIES | 0% | |
| FIXED INCOME | 32% | INTL CURRENCIES | 0% |
THREE FOR THE ROAD
TWEET OF THE DAY
Penney: $MCD could trade at a premium to $CMG and why Chipotle Could Easily Fall Another 25% https://app.hedgeye.com/insights/47366-penney-why-chipotle-could-easily-fall-another-25-cmg… via @hedgeye
@HedgeyeHWP
QUOTE OF THE DAY
Do not wait; the time will never be "just right." Start where you stand.
Napoleon Hill
STAT OF THE DAY
Toyota Motor Corp. said it would spend at least $1 billion on a Silicon Valley research center to study autonomous driving and robotics.