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Fact vs. Fiction

Client Talking Points

USD

Another #StrongDollar week in the bag (+0.6% USD Index to +10.3% year-to-date) after Draghi Devaluation sent the Euro -1.2% on the week to -12% year-to-date – this is as deflationary a force as it was in the summer-time – FICC markets get that – Equities, not so much.

COMMODITIES

Crash in Copper (-1.8% this morning to $2.02) continues and Oil is down another -3%, testing $40 WTI (again) – hardly the green shoots a supply/demand bull is looking for, but we’re probably being too bearish looking at fact vs fiction.

UST 2YR

UST 2YR spike continues to 0.93% this morning as the Fed abandons the “data dependence” thing and goes with whatever the S&P 500 is doing instead. USD and short-term rates say DEC hike – so does the Yield Spread, compressing 9 basis points last week, which reads as a hike perpetuating both #Deflation and #GrowthSlowing.

 

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

Asset Allocation

CASH 68% US EQUITIES 4%
INTL EQUITIES 3% COMMODITIES 0%
FIXED INCOME 20% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
MCD

MCD is reducing G&A by $500 billion compared to the $300 million target announced in May the vast majority of which they expect to realize by the end of 2017.

 

Expectations going forward are for system sales to grow faster than G&A. The incremental savings are primarily derived from savings coming from a more heavily franchised and less G&A intensive structure; streamlining of corporate and former Area of the World organizations and realizing greater efficiencies through the global business services platform. The G&A savings represent roughly a 20% reduction off of the G&A 2015 base of $2.6 billion.

 

Another big shift is that MCD is now aiming to refranchise 4,000 restaurants by the end of 2018, with mostly all of them to take place in the high-growth and foundational segments.

RH

Below are two callouts from this Thursday's Willams-Sonoma (WSM) third quarter earnings print as it relates to Restoration Hardware (RH). RH will report earnings in early December.

 

  1. West Elm – i.e. the only concept within the WSM family of brands that is growing square footage put up a 15.7% comp in the quarter which equated to a 40bps acceleration on a 2yr basis sequentially. The concept has always been a good bellwether for RH from a directional standpoint. The consumer/concept are much different. West Elm productivity is in the $800/sq.ft. range compared to RH at $3,300 (inclusive of e-comm) in the same size box. But it’s the only concept growing square footage. We are modeling a divergence in 3Q15 as RH pushed its growth into 2H from 1H with the release of two new concepts this Fall (Modern and Teen).
  2. GM – was down 110bps in the quarter, with merch margins relatively flat offset by dilution from International franchise growth and increased shipping expense as WSM continues to iron out its inventory position from the West Coast port contract dispute. It's important to mention the contract dispute because it was resolved nine months ago (and yet the company still talks about it). On the shipping front, new rate hikes at FedEx and UPS haven’t hit the P&L, so this was all self-inflicted. Each of the negative drivers on the GM line appear to be unique to WSM and shouldn’t be contagious to a name like RH. 
TLT

The long bond position is taking some heat with the rate hike fears, but that’s why you’re short JNK on the other side of it. Deflation and increasing rate hike expectations are the nemesis of poor credit. As mentioned last week, it’s called spread risk, and this leverage is fueled by low rate policy.

 

Since the Fed turned hawkish, bonds are down, rates have risen, and deflation has re-commenced. Admittedly, long-term treasuries haven’t worked. TLT is down -2.0% over the last month; BUT, if you’ve followed us with our short JNK call, that’s down -3.4%.

Three for the Road

TWEET OF THE DAY

NEW VIDEO Chipotle Will Lose in Court of Public Opinion https://app.hedgeye.com/insights/47682-penney-chipotle-will-lose-in-the-court-of-public-opinion… via @HedgeyeHWP cc @KeithMcCullough @Hedgeye

QUOTE OF THE DAY

The man of wisdom is never of two minds; the man of benevolence never worries; the man of courage is never afraid.

Confucius

STAT OF THE DAY

Oil (WTI) closed down another -1.2% week-over-week at -30.9% year-to-date and copper crashed another -6.1% last week, taking its 2015 #Deflation to -27.8% year-to-date.