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Client Talking Points

INFLATION EXPECTATIONS

As Janet Yellen jawboned the dollar higher yesterday, all things inflation expectations and dollar settled commodities headed south: Oil = -4.4%, XLE = -3.1%, Gold = -1.5%, Copper = -1.8%, 5YR Breakevens = -1.7 bps, etc.  While energy price comps will ease beginning in late 1Q16, a sustained attempt at domestic policy “normalization” will only perpetuate strong dollar disinflationary pressure at home and continue to pressure currencies and growth expectations abroad, particularly across EM, developing and commodity economies.   

OPEC

OPEC members with the highest production costs and fiscal break-evens are creating quite a bit of noise around production cuts ahead of tomorrow’s meeting. Saudi Arabia has changed its tone in a sense from last year after oil has been cut 45% from the last meeting in saying that it would consider a cut if those within OPEC (namely Iraq), and those outside of OPEC (namely Russia) are willing to cut production. Russia has already said it has no interest in complying or attending the meeting. Stick with the relative monetary catalysts (ECB today) and Jobs Report tomorrow for direction on the USD and commodities. 1 and 3-month correlations between the USD and WTI are tightening up again at -.68 and .79 for WTI (r-squared).  

CHINA

Mainland Chinese markets strengthened on Thursday with the Shanghai rising +1.35% and the Shenzhen adding +2.50% with banks and property developers were among the leading gainers amid expectations of more stimulus following a spate of November PMI data that confirmed an ongoing contraction in China’s manufacturing industry – most notably with the official National Federation of Logistics and Purchasing Managers index falling to 49.6 (the lowest since August 2012). On the stimulus front, the PBoC injected CNY30B in liquidity during regular open market operations today, bringing the net liquidity injection in the week-to-date to CNY50B. This marked the largest weekly injection since early September. With key structural headwinds intact and various high-frequency indicators continuing to slow on a trending basis across a variety of key metrics, we continue to caution against anticipating a recovery in Chinese economic growth over the intermediate-term TREND or long-term TAIL.

 

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

Asset Allocation

CASH 69% US EQUITIES 3%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 14% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
MCD

We added McDonald's to Investing Ideas on August 11th. Since then shares of McDonald's have risen over 16% compared to a 0.2% return for the S&P 500.

 

As Restaurants Sector Head Howard Penney wrote right around the time we added McDonald's (MCD), "We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. We are going to be looking at a much different company 1-3 years from now. Urgency has been instilled from the top down by new CEO Steve Easterbrook," according to Penney. "This ship is in gear and headed north. 2015 will be the last time this stock is below $100."

RH

We believe that RH is to Home Furnishings what Ralph Lauren is to Apparel and what Nike is to Athletic Shoes. That’s a meaningful statement given that RH has only 3% share of a $140 billion relevant market.

 

RH is the preeminent brand in the space. We think that RH is in second inning of a game that may ultimately prove to be a double header. We believe 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 see a stock in excess of $300.

TLT

The consumption side of the economy is arguably the most important, as its 69% of U.S. GDP. From a rate-of-change perspective, consumption growth decelerated in October, and consumer confidence is waning along-side it. That's why we would like to reiterate our Growth Slowing=Long TLT call.

 

To be clear, the consumption side of the economy had been a point of strength over the last several months. We’re not calling for a crash in household consumption, but the comps (comparison vs. prior reporting period) are important in rate-of-change analysis. The next four quarters of comps for Real PCE growth are the most difficult since Q3 2008 while the next four quarters of comps for CPI are the easiest since the four quarters ended in 4Q11. Simply put, both are headwinds for the consumer and we expect that the consumption component of the economic equation will continue to decelerate.

Three for the Road

TWEET OF THE DAY

NEW VIDEO (3 mins) | The Astonishing Audacity of Central Planners https://app.hedgeye.com/insights/47850-mccullough-the-astonishing-audacity-of-central-planners… via @KeithMcCullough #ECB #Draghi #Fed $FX #Yellen

@Hedgeye

QUOTE OF THE DAY

Obvious thinking commonly leads to wrong judgments and wrong conclusions.

Humphrey B. Neil

STAT OF THE DAY

Drake was the most-streamed artist of 2015 on Spotify, according to the company, with 1.8 billion streams. Justin Bieber (another fellow Canadian) took the record for the most streams in a single day, with 36 million on November 13.