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Client Talking Points

CHINA

Apparently the year-end markups on no volume lost their luster – China had already devalued Yuan to a 5 year low as the economy continued to slow – today the casino in Shanghai is halted (again) at -7% on the day – the “EM/China Growth” story reminds us of Ned Stark in Game of Thrones (it died early in this cycle call and it not coming back).

COPPER

Copper was tagged for another -2.7% drop to kick off 2016 - friendly reminder that PMIs have not “bottomed” and the bearish credit cycle is still early relative to some of the crashes we’ve seen in commodity linked currencies, countries, and equities.

UST 10YR

Our Best Idea in Macro for Day 1 of 2016 is the Long Bond, and it’s going to do its job this morning ahead of another bad ISM report this morning; immediate-term risk range for the 10YR = 2.16%-2.32%.

 

*Tune into The Macro Show at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 65% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
FII

With the Fed's 25 basis point hike in interest rates, in the financial sector, FII stands to benefit most from even this marginal change.

 

In essence, Federated Investors (FII) has a stable business for what we think will be a volatile 2016. 2015 finished with slight positive inflows into the firm's main business line, money market or cash products. This is reminiscent of the start of cash builds in 1999 and 2006 ahead of the negative returns in risk assets in 2000 and 2007.

RH

RH is our top long idea in all of retail, and we view the recent weakness in the stock as a buying opportunity. All in we think the company will build to $5bn in sales at mid-teens operating margin which equates to $11 in earnings power. This growth and profitability comes from...

  •  ~30% Square footage growth with new full line design galleries.
  • New businesses, like Modern and Teen, that can be easily layered over its low cost infrastructure.
  • Leveraging occupancy from the "sweet heart" real estate deals the company is getting as a high end traffic driving tenant willing to take anchor size leases. 
TLT

The yield spread (10Y’s -2Y’s) compressed to a 52-week low of 120 basis points last week.  AGAIN, that’s a 52-week low in growth expectations right after “lift-off”. Into year-end, the bond market continues to price in what it has all year long: #Slower-and-lower-for-longer.

 

We continue to believe deflation will pressure the policy-fueled leverage embedded in junk and high yield bond markets. The cheap money, corporate credit boom inflated asset prices and it has more room to deflate. This deflationary run started in the second half of 2014, with the introduction of our #Deflation theme. Back then, was also the low in cross-asset volatility and the high in outstanding corporate credit (commodity producers chasing inflation expectations were the largest contributor).

Three for the Road

TWEET OF THE DAY

NEW VIDEO | Hedgeye @RutgersU: Howard Penney’s Bear Case on Chipotle $CMG https://app.hedgeye.com/insights/48339-hedgeye-rutgers-howard-penney-s-bear-case-on-chipotle-cmg?type=video… via @HedgeyeHWP

@Hedgeye

QUOTE OF THE DAY

Impossible is just a big word thrown around by small men who find it easier to live in the world they’ve been given.

Muhammad Ali                   

STAT OF THE DAY

Corn, hogs and wheat ended 2015 down -16.1%, down -18.5% and down -24.1% respectively.