Bullish Storytelling

Client Talking Points

YEAR END

What a year it was! Worst year for U.S. stocks since 2008; worst year for FX funds since 2011; worst year for Commodity funds ever – and no, it wasn’t “transitory” – we think it’s all just pricing in the end of what was a mediocre economic cycle.

VIX

There’s a big difference between a regime of 10-14 VIX and 15-30; provided that the latter prevails, we think we’re going to see equity markets continue to trade choppy at best and continuing to crash at worst to start 2016.

UST 10YR

Now that the rate hike is out of the way,  our “best idea” in Global Macro right now is the Long Bond – if we’re right on the economic cycle call, the Fed is going to have to back off the rhetoric and acknowledge the super #LateCycle slowing data.

Asset Allocation

CASH 63% US EQUITIES 2%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
FII

Federated Investors (FII) profitability got a boost as the Fed boosted short term rates for the first time in 7 years. Even the slight 25 basis point hike improves profitability in the firm’s leading money fund business by +30% into the New Year.

 

In essence, the firm rolls 30-day paper throughout the short term fixed income curves and the new higher yields forthcoming into 2016 will allow the company to claw back some of the waived fees it has extended to its client base in money funds. Year-to-date the company has waived over $300 million in fees. With that firmly in the rearview, it becomes an opportunity set as FII gets higher yield from cash products next year.

 

In the financial sector, FII is the most asset sensitive name we cover, meaning it benefits most from even marginal interest rate hikes.

RH

We have to give Restoration Hardware Chairman and CEO Gary Friedman props for his approximately nine minute segment on Cramer 2 weeks. Let's face it, him going on what's arguably the most volatile and biased financial media platform, unscripted, is not what we wanted to see. The risk of fireworks was high.

 

But he capped off a successful day RH (CFO and IR) had on the investor conference circuit by focusing on the real value drivers at Restoration Hardware (RH) -- growth in product concepts, and RH's real estate transformation. The appearance was planned well before the earnings release, by the way, coinciding with a business-focused trip to NYC. All-in, it was a positive event for the stock.

TLT

In case you were looking for Style Factors that crushed it last week – the Top 3 gainers were the Top 3 #Deflations of 2015!

High Beta Stocks were +3.5% last week to -12.0% YTD

High Debt (to EV) Stocks were +2.9% last week to -10.9% YTD

Small Cap Stocks were +3.2% last week to -12.4% YTD

*Mean performance of Top Quartile vs. Bottom Quartile (SP500 Companies)

 

In other words, the no-volume squeeze had the smaller cap Russell 2000 outperform the large cap Dow at +3.0% week-over-week vs. 2.5%. Heading into the final week of the year, the Dow and Russell are down -1.5% and -4.1%, respectively.

 

In a slower-for-longer secular growth world, you should pay more for the organic growth that you can find. But, more importantly, you should realize that “cheap” has the illusion of “cheap” because the U.S. economic cycle is slowing alongside the secular. 

Three for the Road

TWEET OF THE DAY

VIDEO (2mins) Our Best Idea Right Now https://app.hedgeye.com/insights/48313-mccullough-this-is-our-best-idea-right-now?type=video… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

We must use time as a tool, not as a couch.

John F. Kennedy

STAT OF THE DAY

The peak in non-farm U.S. payroll growth was FEB of 2015 at 2.34% year-over-year, the most recent jobs print was 1.9% year-over-year.  


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