CLIENT TALKING POINTS
China
China got smoked for a -5.4% drop in Shanghai (-1.9% in Hong Kong) after reporting that Industrial Profits slowed to -4.6% y/y (vs. -0.1% prior) and that they have sketchy brokers – reminder: Chinese demand is not bouncing.
Oil
Black Friday sales in WTI and Gold, deflating another -1.7% and -0.7%, respectively – don’t forget that with the Fed hell bent on raising into a slow-down that USD Up (rates down this week) #Deflation Risk remains as obvious in late November as it was in late July.
Yields
That wasn’t a typo – rates are down -5bps this week on the 10yr to 2.21% and the Yield Spread continues to compress as every major #LateCycle consumer data point slows (see consumer confidence and personal consumption data for details); Swiss 10yr new lows at -0.39% this morning too.
TOP LONG IDEAS
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.
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).
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%.
Asset Allocation
| CASH | 68% | US EQUITIES | 3% | |
| INTL EQUITIES | 5% | COMMODITIES | 0% | |
| FIXED INCOME | 18% | INTL CURRENCIES | 6% |
THREE FOR THE ROAD
TWEET OF THE DAY
This has been one of the busiest weeks of US and Global economic data in Q3
@KeithMcCullough
QUOTE OF THE DAY
"To be the man, you have to beat the man!"
-Ric Flair
STAT OF THE DAY
Brett Farve threw for 71,838 yards during his NFL career.