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Client Talking Points

COMMODITIES

The CRB does NOT like rising rate hike expectations vs. Draghi who said “downside risks are now clearly visible … and inflation dynamics have weakened.” The CRB Index is down -6.5% on a 1-month window. The USD ended lower yesterday but the move from the mid-October Fed meeting and jobs report remains one of deflation. We re-iterate the slower for longer deflation view.    

EUROPE

Got #GrowthSlowing? Europe does! We reiterate our Q3 2015 macro theme of #EuropeSlowing (published on July 7, 2015). Today, Eurostat released Q3 2015 flash estimates:The Eurozone and Germany both slowed to 0.3% Q/Q (vs 0.4% Q/Q prior), while France surprisingly gained steam to 0.3% Q/Q vs 0.0% in the prior quarter. As a classic lagging indicator, the GDP data confirms our proprietary GIP (growth, inflation, policy) model that suggests the Eurozone sits squarely in Quad 3, equating to growth slowing as inflation accelerates, into the end of the year. 

RETAIL SALES

Headline Retail Sales and all the sub-aggregates missed consensus estimates with growth decelerating modestly year-over-year as the new cycle high in auto sales (18.12MM) in October failed to offset disappointing growth elsewhere.  The “control-group” - which feeds into the GDP calculation - was up +0.2% MoM (vs +0.4% est) while decelerating -30bps sequentially to +2.9% year-over-year.  In short, the #late-cycle consumer continues to disappoint as the data continues to confirm the dour commentary out of softline retail in 3Q EPS season.   

 

**Watch The Macro Show replay (special Gold edition) - CLICK HERE

Asset Allocation

CASH 59% US EQUITIES 7%
INTL EQUITIES 3% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

Post earnings, the next catalyst for McDonald’s (MCD) is going to be next week's 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) hit all-time highs this week, but this story is far from over. We think RH will earn close to $11 per share in 3 years, which compares to the consensus estimate of just over $6. We estimate that the stock is worth $300.

 

The square footage component is well known, but we think people are missing…

  1. The productivity and market share that we’re likely to see from each new store,
  2. How scalable this business model is without commensurate capital investment,
  3. The leverage we’re likely to see is below-market real-estate deals being struck today and that should begin to impact the P&L. 
TLT

Current policy makers remain fixated on the jobs market, and this Friday’s report was good on the surface. Here’s the rundown:

  • The U.S. added +271K to non-Farm payrolls in October which blew out the expectation for +185K additions (last month’s awful print was revised even lower to +137K additions). Remember that the estimates are useless as the number is near impossible to predict. Keep that in mind.
  • Unemployment Rate moved lower to 5.0% for October from 5.1% in September
  • Wage growth was a positive surprise as Avg. hourly earnings printed a +2.5% growth rate for October vs. an expectation of +2.3%. The growth rate in September was +2.2%

So, again, on the surface it was a positive report. However, as we’ve emphasized, consumption and labor market strength are staples of an economy that is late cycle.

Growth continues to slow, and a rate hike has the potential to pull-forward a recession and flatten the yield curve. In the event this happens, you’ll be happy you held onto your long-bond position. If you haven’t bought into the #slower-for-longer view, the market is giving you the chance to buy bonds at another lower high… For the 5th time this year.

Three for the Road

TWEET OF THE DAY

VIDEO: Ponzi Policy? The Incestuous Mechanics of Quantitative Easing https://app.hedgeye.com/insights/47508-ponzi-policy-the-incestuous-mechanics-of-quantitative-easing… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Great spirits have always encountered violent opposition from mediocre minds.

Albert Einstein

STAT OF THE DAY

Demand for Chinese steel is down 8.9% compared to a year ago and the country’s rail freight volume is down 10.1% compared to last year.