Charts of the Day: Two Piece(s) & A Biscuit

Conclusion: In the three charts below, we highlight key risks to hopeful expectations of a sustained recovery in earnings growth and a tranquil global investing environment over the long-term TAIL. In fact, when analyzed with a wide enough lens, the data suggests that equity market headwinds are significantly less “transient” than is currently anticipated by consensus.

 

Position: Short US Equities (SPY).

 

We get called out a lot for coming off as short-term in nature. While there is certainly some merit to that claim (our style of managing risk acutely focuses on timing), we don’t necessarily agree with it in its entirety. In fact, we focus a great deal of our research on the longest of long-term trends (refer to our firm’s Sovereign Debt Dichotomy and Housing Headwinds presentations for key examples of our longer-term work), and, within the context of these bigger picture themes, we manage risk around the Duration Mismatch that’s typically ever-present in the world of investing.

 

Timing is everything. I believe a famous investor once said:

 

“It ain’t what you buy, but rather when you buy it that matters.”

 

To that tune, we think by the end of 2Q11 we will be able to confirm that the peak in corporate earnings for this cycle was actually in 1Q11. Including our own, many charts have been circulated around the street about peak corporate profits, but that hasn’t actually mattered until, well, now. To quickly rehash our out-of-consensus view, we think the stench of Jobless Stagflation starts to show up in the 2Q11 earnings season in the form of sequentially deteriorating corporate earnings growth on a go-forward basis. For more color on this topic, refer to the following reports: 

  • 5/18/11: “Eye on Earnings: Growth Slows as Inflation Accelerates”
  • 5/22/11: “Early Look: The Last Stand of the Equity Bulls” 

This stance is strongly supported by the fact that corporate profits are what we’d consider extremely stretched on a historic basis. Using BEA data, we were able to back our way into corporate EBITDA margins on a national level, as well as corporate EBITDA as a share of the overall economy. From a standard deviation perspective, both metrics are currently residing in rarefied air (2.3x and 2x, respectively). From a more quantified stance, 95% of observations fall within 2x standard deviations of the mean; thus, mean reversion in both series is likely over the longer-term. That’s not a bullish data point for long-term investors. It is, however, a “game on” challenge to risk managers. Be it boom/bust, bubble/burst, or expansion/contraction – alpha is always there to be captured.

 

Charts of the Day: Two Piece(s) & A Biscuit - 1

 

Charts of the Day: Two Piece(s) & A Biscuit - 2

 

The final chart we’d like to show you is borrowed from Carmen Reinhart and Kenneth Rogoff’s oft-cited, long-term work on sovereign debt. The illustration lucidly expounds upon a simple concept that we’ve been beating the drum on since late 2009: we are in the early stages of the global sovereign debt default cycle. As the chart repeatedly shows throughout the last 200-plus years, the sovereign debt woes of fiscally imprudent countries like Greece rarely (if ever) get better without first getting a lot worse. Moreover, when the cycle peaks, it’s typically a global phenomenon with 35-50% of countries in some form of default or restructuring.

 

Charts of the Day: Two Piece(s) & A Biscuit - 3

 

While global financial markets will more than likely cheer on and celebrate any/all attempts to kick the proverbial “can” down the road, we continue to remind investors of a simple point we began making over 18 months ago: be very afraid of Europe’s periphery – especially if you are a long-term investor.

 

Darius Dale

Analyst 


Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more