Client Talking Points
The Euro finally backs off -0.3% to $1.09 and European Equities are catching a bid on that. Don’t forget that the FTSE and EuroStoxx600 were down -4.6% and -4.0% last week vs. the S&P 500 -3.8% week-over-week.
After crashing another -11.6% to -41.1% year-to-date last week, Oil starts the week down -0.5%. Down Euro = Up Dollar, don’t forget – and if you think ECB President Mario Draghi is going to take the Euro back to $1.05 + Fed hikes, it’s #Deflation, in Dollars.
The S&P 500 has been down 18 of the last 26 trading days (top 3 up days came post terrorist attacks) and volume ripped (higher) +19% vs. Total U.S. Equity Volumes 1 month average on Friday; liquidity is there, on the down moves.
*Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE.
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Top Long Ideas
MCD remains one of our top LONG ideas in the restaurants space. All indications are that all day breakfast is working, bringing back old customers and driving growth of new customers. Customers are pairing both breakfast and lunch items together in the lunch and dinner day, part which is helping drive additional sales.
McDonald’s Canada opened its first standalone McCafe this month. The much simplified concept intends to appeal to customers by offering both speed of service and low cost. They intend to be faster than their main competitor Tim Hortons and cheaper than Starbucks, carving out their own niche in the market.
This RH quarter is going to draw a Mason Dixon line between the Bulls and the Bears. The key factors that the Bulls (including us) need to see were profoundly present – giving us confidence that revenue will double, that we’ll see a 16% operating margin, and $11 in earnings power. In addition, RH beat the quarter, delivered 33% EPS growth in what should be the slowest growth quarter of the year, and it took up 4Q revenue guidance based on what it’s seeing so far this quarter (to 20%+).
The Bears got a nice little gift in the form of weaker Gross Margins due to promotional activity, and renewed concerns about management. The reality is that this is a transformational growth story that will change on the margin more often than it doesn’t. Based on our confidence in the earnings power at play here, we’d use any weakness as an opportunity to buy.
Implicit in our long TLT/short JNK bias is an expectation for high-yield spreads to continue along their recent trend of widening throughout the YTD.
“The U.S. economy is #LateCycle and the probability of a recession commencing by mid-2016 is extremely elevated – both in absolute terms and relative to the belief held by the overwhelming majority of investors and policymakers. Moreover, the risk of a global recession is also great in this scenario.”
The economic cycle doing what it always does (i.e. decelerate into a recession before bottoming and then reaccelerating) is reason enough to be bullish on the long bond and bearish on junk bonds, which are accelerating into full-blown crisis mode (the JNK ETF declined another -2% on Friday and is down -4.1% WoW, -5.8% MoM and -12.7% YTD).
Three for the Road
TWEET OF THE DAY
Hedgeye Guest Contributor | Cliggott: 'Bad, Bad Data This Week' https://app.hedgeye.com/insights/48045-hedgeye-guest-contributor-cliggott-bad-bad-data-this-week… via @hedgeye
QUOTE OF THE DAY
A good archer is known not by his arrows but by his aim.
STAT OF THE DAY
61% of the U.S. public was middle class in 1971 now that figure has dropped to 50%.