2015...Was It All Good?

Client Talking Points

RUSSELL 2000

If you Ex-Russell (2000 stocks), Ex-Energy, and Ex-Credit, 2015 was all good! The Russell 2000 is down -7.5% year-to-date and, more importantly, down -13.9% since July – the internals of the U.S. stock market were as clear a signal as credit was.

CRB INDEX

The 19 Commodities Index hit a fresh 2015 low of 174 (-24.3% year-to-date) yesterday, so you’re going to see one of the many dead-cats that have bounced this morning. WTI oil led that, +1.8% yesterday and +0.5% this morning with a risk range of $34.05-38.15.

UST 10YR

The UST 10YR had a 10 basis point bounce to 2.24% ahead of the Fed tightening into a slow-down (1st time they’ll hike into a corporate profit slow-down since 1967) and now all we are receiving emails about is how it’s a “one and done” and “they’ll raise but then cut”… at least we all know now what any tightening does (even 1 beep) to macro market expectations.

 

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

Asset Allocation

CASH 76% US EQUITIES 2%
INTL EQUITIES 4% COMMODITIES 0%
FIXED INCOME 12% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MCD

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.

RH

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.

TLT

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

Why Raising Rates (Even One Basis Point) Right Now Is a Really Bad Idea https://app.hedgeye.com/insights/48071-why-raising-rates-even-one-basis-point-right-now-is-a-really-bad-ide… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Who aims at excellence will be above mediocrity; who aims at mediocrity will be far short of it.

Burmese Saying

STAT OF THE DAY

196 nations participated in climate talks on Saturday and agreed to a deal that hopes to limit the warming of our world to 2 degrees Celsius over pre-industrial levels. According to the deal the developed world will provide $100 billion a year to help developing countries switch from fossil fuels to greener sources of energy and adapt to the effects of climate change. 


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