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China, Commodities and Russell 2000

Client Talking Points

CHINA

Our man Xi was being way too honest overnight admitting the Chinese economy has “relatively large downward pressure” right now – they didn’t like that in Shanghai, closing the index down -1% as EM Asia continues to trade terribly (Thailand -1.1%).

COMMODITIES

We realize our competition is still calling for “reflation” (they have been since July) and “green shoots”, but the CRB Index breaking down through lower-lows vs. the AUG low yesterday, and Copper crashing to new lows again this morning (-0.3% to $2.09) appear to be red shoots alongside the aforementioned Chinese confirmation.

RUSSELL 2000

The Russell 2000 continues to flash a bearish divergence vs the SPX, closing down -0.4% yesterday, taking it’s draw-down from the all-time #bubble high in July to -11.0%; reiterating the U.S. economic slow-down as the Russell is a purer domestic play on #GrowthSlowing.

 

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

Asset Allocation

CASH 61% US EQUITIES 4%
INTL EQUITIES 3% COMMODITIES 0%
FIXED INCOME 28% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
MCD

Restaurants Sector Head Howard Penney attended MCD's investor meeting in New York City early last week. His takeaway from the meeting was that it was "very very bullish" for investors. Expectations were high, but CEO Steve Easterbrook came to NYC with big changes which have ultimately exceeded those expectations. "The big smile on Steve Easterbrook's face when talking about the current quarter was very telling," Penney writes. "He could not hide the enthusiasm." MCD increased the dollar value returned to shareholders by $10 billion. Penney and his team still see +30% upside from here.

RH

Restoration Hardware (RH) shares got caught up in the tumultuous selloff of other high-end retailers. But we're still bullish on RH. Here's why. RH Tampa has just opened. That makes 4 new Full Line Design Galleries in 90 days. And all will be open before the start of holiday shopping season and just in time to house the new product lines RH Modern and Teen. Add up the four stores and we’re looking at about 210k square feet. That alone represents about 25% growth in square footage.

 

When all is said and done, we still think this company has $11 in earnings power 4-years out, which is nearly double the consensus. We remain convinced that the debate should not be ‘if or when’ the stock hits $115, but rather is it going to $200 or $300? We’ll be looking at an earnings CAGR of 40-50% over five years. What kind of multiple does that deserve? 20x? 25x? 30x? We’d argue the higher end.

TLT

It was a nasty end to the week for the “growth is back” bulls. It was an equally nasty end to the week in equity markets. The S&P 500 was “going to all-time highs” Tuesday before retreating over 3% from Wednesday to Friday.

 

With continued data-driven confirmation that growth is slowing:

  • PPI (producer price index) printed -1.6% Y/Y for October
  • On a m/m basis, PPI declined -0.4% 
  • Declines in the energy component certainly bring the index lower, but PPI ex. Food and energy only printed +0.1% Y/Y which is ugly

Three for the Road

TWEET OF THE DAY

VIDEO (3mins): Ignore Volume and Volatility At Your Peril https://app.hedgeye.com/insights/47599-mccullough-ignore-volume-and-volatility-at-your-peril

@KeithMcCullough

QUOTE OF THE DAY

You're happiest while you're making the greatest contribution.

Robert F. Kennedy

STAT OF THE DAY

Builder Confidence slipped -3 points in November, dropping for the 1st time in 6-months and retreating off the cycle high of 65 (revised +1 point) recorded in September. Across the sub-indices, Current Sales and 6M Expectations declined -3 points and -5 points, respectively, while Current Traffic rose +1 point sequentially.


The Macro Show Replay | November 18, 2015

 


November 18, 2015

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.30 2.17 2.25
SPX
S&P 500
2,016 2,068 2,050
RUT
Russell 2000
1,134 1,172 1,153
COMPQ
NASDAQ Composite
4,907 4,991 4,986
NIKK
Nikkei 225 Index
19,015 19,933 19,630
DAX
German DAX Composite
10,663 11,002 10,971
VIX
Volatility Index
16.77 20.98 18.84
DXY
U.S. Dollar Index
98.20 100.13 99.70
EURUSD
Euro
1.05 1.07 1.06
USDJPY
Japanese Yen
121.83 123.92 123.42
WTIC
Light Crude Oil Spot Price
39.75 42.96 41.12
NATGAS
Natural Gas Spot Price
2.23 2.42 2.37
GOLD
Gold Spot Price
1,065 1,088 1,069
COPPER
Copper Spot Price
2.07 2.18 2.09
AAPL
Apple Inc.
110 116 113
PCLN
Priceline.com Inc.
1,195 1,306 1,258
VRX
Valeant Pharmaceuticals International, Inc.
68.01 78.91 70.32
FB
Facebook, Inc.
102 110 105
ATHN
Athenahealth Inc.
150 163 153
BABA
Alibaba Group Holding Ltd.
73.82 80.41 78.13

 

 


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Cartoon of the Day: Loves Me... Loves Me Not

Cartoon of the Day: Loves Me... Loves Me Not - rate hike cartoon 11.17.2015

 

"... Remember that if/when the Fed pivots back to dovish from pretend-hawkish, they have to tell the American People why they are doing that," wrote Hedgeye CEO Keith McCullough in today's Early Look. "Say it with me now – Super #LateCycle Growth Slowing…"

 

 


CALL REPLAY - PRA GROUP (PRAA): NEW BEST IDEA SHORT

Takeaway: We hosted a one hour call this morning introducing our bearish thesis on PRA Group (PRAA). Links to the deck and replay are below.

Slides: HERE

Call: HERE

 

CALL REPLAY - PRA GROUP (PRAA): NEW BEST IDEA SHORT - PRA roller coaster 

 

KEY POINTS 

  • Supply/Demand Headwinds: The market for buying defaulted receivables is especially unfavorable. Demand for paper has exceeded supply for a few years now, mirroring the environment last seen from 2005-2007 when shares of PRAA tumbled ~70%.
  • Growing Debt: Leverage at the company has risen quickly in the wake of the Activ deal.  
  • Insiders Dumping: Widespread insider selling suggests that insiders see similar intermediate/longer-term headwinds.
  • History's Guide: Our analysis of the interplay between labor markets, terminal IRRs and pre-tax margins will shed light on what to expect fundamentally from a timing standpoint.
  • Regulatory Pressure: The CFPB is expected to set new rules for debt collectors in 2016.
  • Current Value Unsustainable: The ERC less cost to collect and taxes is currently ~$400mn below the net debt of the company.

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


BREAKING: Wall Street Consenseless Has No Clue About Fed Rate Hike

Takeaway: We don’t put much stock in Old Wall’s Fed predictions.

BREAKING: Wall Street Consenseless Has No Clue About Fed Rate Hike - consenseless  2

 

More data. More bad news for Fed-hike prognosticators.

 

Today, U.S. industrial production year-over-year slowed again to the lowest reading of 2015. Here’s analysis and a chart from Hedgeye CEO Keith McCullough:

 

“With Industrial Production only 0.3% y/y now (lowest reading of 2015 - see red circles) we’re entering the next leg down of the cycle = Industrial/Cyclical Recession. Don’t forget that growth is reported y/y and the toughest compares were in NOV/DEC of 2014 (see green circle). Things should slow faster in the coming months.”

 

click image to enlarge.

BREAKING: Wall Street Consenseless Has No Clue About Fed Rate Hike - industrial production

 

That’s just the latest underwhelming economic reading. Don't forget New York Fed president Bill Dudley's recent concern that inflation is running “well below our 2 percent objective.”

 

Below are a few more recent economic misses (for those of you keeping score):

 

BREAKING: Wall Street Consenseless Has No Clue About Fed Rate Hike - miss

 

So a December rate hike isn’t necessarily such a sure thing. The Fed is 'data dependent.' Remember?

 

BREAKING: Wall Street Consenseless Has No Clue About Fed Rate Hike - wsj econ survey

 

And yet, the latest headscratcher from Old Wall is the overwhelming expectation of a December rate hike. If you think their predictive track record matters, think again. Here’s a Wall Street Journal survey of economists:

 

“There is near-unanimous agreement among private forecasters surveyed that the Federal Reserve will begin raising short-term interest rates next month after holding them near zero for seven years.

 

About 92% of the business and academic economists polled by The Wall Street Journal in recent days said they expected the Fed to raise its benchmark federal-funds rate at its Dec. 15-16 policy meeting…

 

In the latest survey, the economists on average estimated the probability of a rate increase next month at 71%, up from 48% a month earlier.”

 

Right...

 

Now take a second to look at how “well” these same folks have done forecasting the next Fed rate hike. Below is a recap also from WSJ. (Notice the overwhelming consensus, in July and August, that the Fed would hike in September):

 

BREAKING: Wall Street Consenseless Has No Clue About Fed Rate Hike - econ consensus

 

No, we don’t put much stock in Old Wall’s predictions.

 

BREAKING: Wall Street Consenseless Has No Clue About Fed Rate Hike - ex economy


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