Client Talking Points
Both locally and globally 10YR Yields are higher into the event risk. The UST 10YR is at 2.27% with an immediate-term risk range of 2.13-2.36%; the Swiss 10YR is up +19 basis points month-over-month (off all-time lows) to -0.17%; Italian and German 10YR Yields are up +11 basis points month-over-month.
Italy is starting to diverge (bearishly) vs. DAX on a more consistent basis with the MIB index down -0.2% in a muted “green” European tape – keep this on your radar as Italy is a Top 10 GDP economy in the world and heading back into recession in 1H 2016.
Pre Fed hike = Dollar Up, Oil Down another -1.1% as raising rates into a slow-down is deflationary. Another important signal is that the top-end of my risk range for WTI is lower than the AUG closing lows; with the OVX at 50, that’s super bearish!
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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
VIDEO (2mins) Whoops! A Look Back At Some of Wall Street’s Worst Predictions This Year https://app.hedgeye.com/insights/48095-whoops-a-look-back-at-some-of-wall-street-s-worst-predictions-this-ye…
QUOTE OF THE DAY
Know the value of time. Snatch, seize, and enjoy every minute of it.
STAT OF THE DAY
Kohl’s will keep its doors open for more than 170 hours straight from 7am on Thursday, December 17 through 6pm on Christmas Eve, that is up from 100 hours last year.