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Style Factors, #LateCycle and Europe

Client Talking Points

STYLE FACTORS

Low Debt, Low SI, Low Beta, Large Cap, Growth has been the winning style factor constellation across every duration YTD.  While yesterday saw the opposite factor cocktail outperform alongside the -1.15% retreat in the $USD, 1-day does not a trend make and we continue to like larger cap liquidity with relative growth (& a catalyst) in a growth slowing, rising credit risk environment.  

#LATECYCLE

A multi-quarter acceleration into peak capital markets activity has historically been a harbinger of economic downturn. Yesterday, multiple reports claimed DD and DOW are in advanced talks to merge, with the combination to then split into three separate companies; both stocks finished ~12% higher on the day. This is exactly the kind of frothy, head-scratching headline you’d like to see to confirm the forward outlook for global economic growth is as bad as we think it is. The WSJ recently noted that worldwide M&A, excluding buyouts, has totaled $3.7T this year, beating the previous record set in 2007. M&A peaks when sellers agree to sell and that’s exactly what you’re seeing amid insider transaction reports. At $7.6B, November 2015 was the fourth-highest month of insider selling on record. This comes amid record share buyback activity, which has averaged $3.9B/day since the beginning of earnings season in October. Data firm Trim Tabs observes that this is the highest pace since the bull market began in March 2009. Companies are doing everything they can to arrest the gravity weighing on peak margins and protect earnings amid #GlobalDeflation which has perpetuated the ongoing global industrial recession – including right here in the U.S. All told, there is a ton of risk to forward estimates for GDP and EPS growth if we’re right on the economic cycle.

EUROPE

The Bank of England and Swiss National Bank both kept their interest rates on hold today, a noteworthy decision given the great easing pressure expected from the ECB. The BOE’s main rate was held steady at 0.50% while the SNB’s 3-Month Libor lower target remained anchored at -0.25% and the deposit rate was unchanged at -0.75%.  We continue to expect Currency Wars (a term coined by our good friend Jim Rickards) to heat up – we’re waiting for the Fed decision next week and expect the ECB to go dovish in 1Q 2016 in response to growth and inflation data the missing expectations. 

Asset Allocation

CASH 70% US EQUITIES 3%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 15% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MCD

Restaurants Sector Head Howard Penney had no material update on McDonald's (MCD) this week. However, here is what Penney wrote around when we added MCD to Investing Ideas. It's worth reiterating our high conviction in the stock:

 

"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

A lot has happened in 13 weeks... not the least of which is that Restoration Hardware (RH) is underperforming not only the market by 16%, but Retail as well (by 7%) – despite RH being more insulated from some of the issues that are clipping earnings today for retailers more broadly.

 

Over this time period, however, RH meaningfully accelerated square footage growth, launched two new concepts. Some say it’s bad timing. We disagree. RH is our favorite name in the retail space, and we like it across all three durations. Trade, Trend, and Tail.

TLT

On went the game of slowing last week with a little central planning un-secretive sauce. Despite the ECB’s move to cut the deposit rate to -0.30%, Draghi didn’t ring the cowbell loud enough. Meanwhile, Friday’s jobs report might have been just enough for Janet to hike rates into a late cycle slowdown. The consensus long USD crowd was crushed on the ECB news. The dollar lost over 2% on Thursday and rates were pushed higher.

 

If growth is going to continue to slow, with a rate hike on the horizon, a relative fixed income spread play (long TLT, short JNK) is exactly what you want on.

Three for the Road

TWEET OF THE DAY

NEW VIDEO: Disconcerting Global Macro Developments https://app.hedgeye.com/insights/47987-new-video-disconcerting-global-macro-developments… cc @KeithMcCullough #Deflation $USD

@Hedgeye

QUOTE OF THE DAY

Things won are done; joy's soul lies in the doing.

William Shakespeare

STAT OF THE DAY

Gallup's November update of Americans' 2015 holiday spending intentions finds U.S. adults planning to spend $830 on Christmas gifts this year, on average.