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Counting Down to Recession?

Let’s play the riddle game.


Q: What happens when the preponderance of economic data is: A) slowing on both a sequential and trending basis, B) consistently and fervently missing expectations and C) just plain bad (like this morning’s 1Q GDP revision, for example)?


A: You double seasonally adjust it and make it better.


Q: What happens when the economy is: A) in the latter innings of an above-average length economic expansion (Z-Score = +0.4x vs. all cycles over the past century to be exact), B) slowing into extremely difficult base effects that should perpetuate the slowest annual rate of nominal GDP growth since 2009 and C) mired with a myriad of [horribly misunderstood] secular headwinds?


A: The Fed hikes rates on that.


LOL! (pardon the millennial in me)


Regarding the first question, the consistent and fervent missing of expectations for economic data is eerily reminiscent of the start of 2007 when it just continued and continued and continued until the cycle completely rolled over.


Counting Down to Recession? - Econ Summary Table


Counting Down to Recession? - Econ Surprise Index


Counting Down to Recession? - GDP Summary Table


Regarding the second question, trends across a variety of indicators put us roughly ~12 months away from recession.


Counting Down to Recession? - Recession Watch Jobless Claims


Counting Down to Recession? - Recession Watch Consumer Confidence


Counting Down to Recession? - Recession Watch LEI Ratio


Counting Down to Recession? - Recession Watch PMIs


Counting Down to Recession? - Recession Watch TTM EPS


That may sound like good news to investors, but our predictive tracking algorithm has YoY real GDP growth slowing throughout the balance of 2015. In lay terms, we believe the U.S. economy is past peak in rate-of-change terms and sliding down the slope to an eventual cliff (i.e. recession). That’s our call and we’re sticking to it.


Counting Down to Recession? - UNITED STATES


As detailed in the previous chart, today’s negative revision takes our full-year estimate for real GDP growth down to +2% (from +2.3% prior). Both the Fed and Street are up at +2.5%, both of which continue to careen down from perpetual expectations of rainbows-and-puppy dogs (i.e. 3-plus percent growth) earlier this year.


Counting Down to Recession? - Consensus GDP Estimates


All told, we reiterate our call to be long of long-duration in its many forms: TLT, EDV, VNQ and GLD (gold has historically performed well in down-dollar and down-interest rate environments and we think the June 17th FOMC statement has a high probability of being dovish and dollar-bearish).


We also think the current entropy of U.S. demographic trends (i.e. they’re getting worse at their fastest rate ever, like now) is likely to continue supporting our lower-for-longer thesis on interest rates.


Counting Down to Recession? -  DemographicYields GDP Surveys


Counting Down to Recession? -  DemographicYields Inflation Surveys


Counting Down to Recession? -  DemographicYields 65


Counting Down to Recession? -  DemographicYields Core Consumption Cohort


Counting Down to Recession? -  DemographicYields Life Cycle Economics


Going back to the data, the government might be able to double, triple or quadruple seasonally adjust the national accounts, but they can’t smooth corporate earnings.


Counting Down to Recession? - S P 500 Revenue and EPS Growth


The proverbial “they” better keep the buyback machine revved up! On that note, the $141B announced buybacks in April was the largest month on record per Birinyi Associates.


Moreover, buybacks are on pace to reach $1.2T in 2015, which would break the record of $863B from – you guessed it – 2007 (i.e. the last time Keith made the #LateCycle Slowdown call, which caused organic earnings growth to slow, which effectively forced companies to forgo investing in their businesses in order to keep the “game” alive with financial engineering).


As an aside, it’s worth noting that core capital goods orders and factory orders are declining on a YoY basis at -0.6% and -5.3%, respectively.


Jumping back to buybacks, the three weeks ended  7/24, 7/31 and 8/7 are the three busiest weeks for S&P 500 constituent earnings releases. In advance of those weeks, we would expect market liquidity to dry up on reduced buyback execution (blackout periods). It’s worth noting that whisper numbers put buyback execution at upwards of ~30% of total institutional volume at major sell-side desks.


Removing such a massive bid from the marketplace amid a decided slowing of growth and the Fed out to lunch in terms of teetering on making a major policy mistake by hiking interest rates, could make this summer feel as “interesting” as the summer 2011 was…


Counting Down to Recession? - MONETARY POLICY MODEL


Counting Down to Recession? - 2011 Analog


Happy month-end Friday and best of luck out there!


Darius Dale


McCullough: Companies "Moronic" About Stock Buybacks


In this brief excerpt from today's edition of The Macro Show, Hedgeye CEO Keith McCullough reveals how many companies mishandle stock buybacks and how that affects Joey Stockpicker.


Subscribe to The Macro Show today for access to this and all other episodes. 


Why #FIFA Allegations Could Hurt Nike and Help Under Armour | $NKE $UA

Editor's Note: This is an excerpt from recent research from our Retail team. For more information on our various product offerings please click here.

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In case you somehow missed it, seven FIFA officials were arrested in Switzerland earlier this week as part of a global bribery scheme centered around illegal cash payments and marketing/broadcasting rights.

Why #FIFA Allegations Could Hurt Nike and Help Under Armour | $NKE $UA - sosff


Nike appears to be caught in the fray, identified in the indictment as 'Sportswear Company A'. For starters, the relationship with the Traffic Group (NKE paid the company $30mm from 1996-99) looks questionable. The owner and founder plead guilty to racketeering and money laundering charges late last year and forfeited about $150mm.


The way the scheme worked, Traffic would acquire marketing rights for large soccer events and then auction them off the broadcasting and marketing rights to the highest bidder (or best connected bidder). The fact that the relationship with Traffic kicked off just days after Nike signed a deal with the Brazilian Soccer Federation adds a little fuel to the speculation fire.


We actually view this to be not entirely dissimilar to the zoning/real estate bribery scandal Wal-Mart battled in Mexico and the fraud Reebok 'allegedly' committed in India. We'd never in a million years say that this is 'part of doing business' overseas for any multinational. But it absolutely underscores the risk management procedures that are necessary once companies move beyond US borders.


As it relates to any financial impact, we're not too worried about Nike's exposure. We're more concerned about changes in regulation around FIFA and other leagues that deal with product and broadcasting licenses. In Nike's case, regulation is bad. It has a clear financial edge over any other sportswear company anywhere in the world, which is a major asset in a deregulated licensing environment. 


But if the field of play is more standardized, then we'd argue that it could accrue disproportionately to smaller brands like UnderArmour.

MUB: Removing Muni Bonds from Investing Ideas

Takeaway: We are removing Muni Bonds from Investing Ideas.

Please be advised that we are removing Muni Bonds (MUB) from Investing Ideas today. Below is a brief note from CEO Keith McCullough explaining our decision.

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MUB: Removing Muni Bonds from Investing Ideas - r 55


After seeing this morning's GDP report then a horrific Chicago PMI print of 46.2 in a month where the "weather" turned, I'm getting increasingly concerned that we might be too right on this #LateCycle slowdown.


Munis do have credit risks don't forget. The City of Chicago's bonds, for example, were downgraded to junk earlier this month by Moody's.


Oh, and MUB is at the top-end of its immediate-term risk range, so I'd rather signal buy lower, when they're at the low-end of the range anyway.


YELP: Perdition or Salvation?

Takeaway: Binary setup. Next print is likely a disaster, but we can’t explicitly rule out M&A before then. Best play is options if possible.


  1. 2Q15 PRINT = DISASTER: We expect YELP to miss 2Q consensus revenue estimates for Local Adverting and cut 2015 revenue guidance.  YELP will need a massive acceleration in new account growth to hit estimates, particularly in 2H15 (see first link below).  That will be a major challenge since YELP is now struggling to grow/retain its salesforce, the size of which drives its entire model. The fact that this is even remotely an issue means the model is unraveling, and is likely why YELP has decided to put itself up for sale.
  2. BUT IS THERE A BUYER? We don't believe so. There are very few who can afford, and much fewer (if any) who would be willing to look past YELP’s attrition issues and/or risk trying to fix the model.  The latter would require introducing lower-tiered products, which would ultimately result in declining revenue since YELP would essentially be replacing its account base at a lower ARPU.  Still, we can’t categorically rule out an acquisition since M&A can be illogical, even if we can't identify a likely buyer.
  3. PERDITION OR SALVATION: Basically, will YELP be saved before its model implodes?  We don't believe so, but if YELP is to be acquired, we believe it needs to happen before or during the 2Q15 release since a second consecutive guidance miss/cut would be a major red flag for any would-be suitor.  We want short exposure to the 2Q15 release, but we wouldn’t be naked short into the print since it is essentially a binary event than can go 20%-30% in either direction.  Best play here would be options if possible (e.g. buy puts or protect short w/ out-of-money calls).


We are planning on hosting an update call next week to address incremental developments to our short thesis and discuss the M&A landscape.  In the interim, see the below notes for supporting detail, and let us know if you have any questions.


YELP: The New Major Red Flag (1Q15)

04/30/15 08:53 AM EDT

[click here]


YELP: Salesforce Productivity?

03/16/15 08:10 AM EDT

[click here]


YELP: Debating TAM

06/30/14 01:10 PM EDT

[click here]


YELP: Death of a Business Model

04/04/14 10:05 AM EDT

[click here]



Hesham Shaaban, CFA



UST 10YR Yield, Italy and Oil

Client Talking Points


The UST 10YR Yield broke down through what the moving monkeys call support and has been doing what its been doing for the past 17 months which is making a series of lower highs. It has been a great week to be Long the Long Bond not only in the U.S. but in Germany, France and Italy as well. The immediate term risk range for the UST 10YR Yield is 1.98-2.20% (bearish).


Italian PPI was down 2.3% year-over-year vs down 2.4% the prior month, CPI was up 0.2% vs 0.1% the prior month. This is just terrible if you are a producer, and this is the problem with GDP for a lot of countries that sell inflation expectations in their top-line (when inflation starts to fall GDP starts falling). 10YR bond yields are reflecting slower growth in Italy and Europe as a whole.


Immediate term risk range for WTI Oil is 57.01-61.35 (bullish). We like the series of events that was going to be a bad GDP report, a potential bad jobs report next week and then a Dovish Fed on June 17th. Our signal says short the USD (for a short term trade) be long Oil, long gold and long those things that are yield chasing. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

One way to invest in Lower-For-Longer, from an equity perspective, is being long U.S. REITS (VNQ). Unless the Fed wants to show the world it has the power to go both ways on rates, we don’t think the Fed will ever be able to justify hiking interest rates. We expect an unarguable slowing of the current economic cycle by Q4 of this year. If you think domestic economic growth is slow now, just wait until the U.S. economy faces very difficult growth and inflation comps in the second half of 2015.


Housing got its mojo back in May, rebounding strongly over the last couple of weeks alongside the moderation in rates and ongoing strength in reported price/volume data. Below is a round-up of the data thus far in 2Q:

  • Housing Starts:  New 7-year high in the latest month
  • Purchase Applications (existing market):  2Q15 Tracking +14% QoQ and +13% YoY, on pace for best quarter in two years.
  • Pending Home Sales (existing market):  PHS are up an average of +11.8% year-over-year the last two months
  • New Home Sales (new market):  NHS are up an average of +22.5% year-over-year the last two months
  • HPI:  After a year of discrete deceleration in home price growth in 2014, 2nd derivative HPI has seen 3 consecutive months of acceleration through the latest March data.

The strength of the labor market continues to be a good indicator of our positioning in the current cycle:

  • Seasonally adjusted jobless claims came in at 274k last week vs. 270K est.

Despite the slight miss, the rolling 4-week SA figure dropped to 266.3k (lowest rolling SA figure since the week ending April 15th, 2000, which also came in at 266.3k) We all know what happened afterwards…..

Three for the Road


VIDEO (1min) The Biggest Threat to the Stock Market https://app.hedgeye.com/insights/44346-mccullough-this-is-the-biggest-threat-to-the-stock-market… via @hedgeye



Don’t be fooled by the calendar. There are only as many days in the year as you make use of.

Charles Richards


GDP print was -0.7% quarter-over-quarter with the year-over-year revised to +2.7% (from +3.0%). 


The Macro Show - CLICK HERE to watch today's replay.

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.