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#LateCycle

Client Talking Points

UST 10YR

UST 10YR Yield of 2.16% reminds Bond Bears that they need more of a catalyst than a chart – with both growth and inflation slowing (at the same time) again, the fundamental catalyst for a big asset allocation to the Long Bond remains as intact as #LateCycle data is.

OIL

Capitulation yesterday on the down -4% daily drop for WTI, taking its 3 month #deflation/crash to -23.4% - then the bounce off the oversold line this morning +1.3% to $45.77 with a risk range of $45.32-47.90 – “cheap” getting cheaper.  

RUSSELL 2000

The Russell 2000 is down -4.9% from its all-time high and continues to be bearish on both our TRADE and TREND durations  as the Russell “Value” side of the equation is getting thumped (relative to Russell Growth) like it did when growth slowed in the summer of 2011.

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET, with Macro Analyst Darius Dale and Ben Ryan.

Asset Allocation

CASH 52% US EQUITIES 4%
INTL EQUITIES 9% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
HOLX

HOLX’s earnings release were as good as we expected, and in some spots, much better than our optimistic view. Given the move in the price, we did begin to do some work on Hologic’s Diagnostic segment. We touched base with a lab Director who currently does his testing on Hologic/Gen-Probe’s Panther system. During the call management made some positive comments about uptake of the systems and rising utilization per box. Our contact suggested the benefit from the Affordable Care Act was substantial  over the last 12 months, pushing volume up to a mid-teens growth rate, but that trends were flattening. But on the positive side Qiagen continues to cede share with an out of date test and the alternatives are primarily Roche and Hologic, but not Cepheid’s system. The bottom line is that we may be too conservative with our estimates for Diagnostics, which we’ve been assuming treads water from here.  However, we’re starting to think there is some incremental acceleration that’s possible, which would be welcome news indeed.  

PENN

After attending PENN’s analyst day at the Plainridge Casino in Massachusetts our Gaming, Lodging & Leisure Team struggled to find any negative takeaways. The property opened very strong in late June, and the strength continued in July. We are now raising our win per day per slot assumption to $500 from $400. Terrific highway access, a lower gaming tax rate and garage parking provide a competitive advantage in what seems to be a deeper market than the consensus view. Our 2015 and 2016 estimates are materially above the Street for EBITDA and EPS. Most importantly, we think PENN should generate an ROI of 28% on Plainridge, much higher than the Street anticipates.

TLT

As largely expected a sequential acceleration in GDP from Q1 to Q2 on a seasonally adjusted annual basis pulled forward the market’s expectation for a rate hike which = USD strength. The USD finished positive on the week (+0.50% on Thursday’s print alone).

  • U.S. GDP reported Thursday for Q2 came in at +2.3% on a Q/Q seasonally-adjusted annual rate and the market took it as a positive print à rate hike expectations pulled forward.
  •  Remember that 1) Consensus focuses on this SAAR number and 2) The GDP acceleration came off of an awful Q1 print (Q1 revised to a measly +0.60% for Q1 vs. initially reported -0.20%)
  • On a Y/Y basis (crazy Hedgeye speak) GDP for Q2 actually decelerated to +2.3% YY vs. 2.9% prior
  • With very difficult base effects in our model for 2H 2015 GDP we expect Q2 data (especially the GDP print) to provide support for the USD
  • Our expectation for Y/Y GDP in Q3/Q4 are +1.6% Y/Y (+1.4% Q/Q SAAR) and +1.5% Y/Y (+1.7% Q/Q SAAR) respectively; These prints (Q3 will come in October) will stoke a relatively more dovish FED for a short time (USD headwind) but until then we’ll ride the Q2 data train.   

 

Three for the Road

TWEET OF THE DAY

VIDEO: Got Gold History? #NewLows $GLD https://app.hedgeye.com/insights/45354-got-gold-history … via @Hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Most people do not really want freedom, because freedom involves responsibility, and most people are frightened of responsibility.

Sigmund Freud

STAT OF THE DAY

Spam accounted for 49.7% of email in June, which is actually the lowest it’s been since before 2003.


August 4, 2015

August 4, 2015 - Slide1

BULLISH TRENDS

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August 4, 2015 - Slide4 

BEARISH TRENDS

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August 4, 2015 - Slide13



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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Are You Confident?

“I believe you’re confident; I know I’m not.”

-Wallace Stegner

 

I was walking down the fairway last month with a thoughtful and respected Founder/Portfolio Manager from the South who has struggled in 2015 because some of this “value” stocks (Metals & Mning, Oil & Gas, etc.) haven’t been valuable.

 

Since he runs the firm, he effectively told another PM that he had to sell those losers because they really had no confidence in where the underlying commodity price (and subsequent cash flow implied in the company’s valuation) was going. #GoodCall

 

On #Deflation, are you confident? I used the aforementioned quote from The Angle of Repose as it was the point an American Frontier-Era wife made to her mining husband. These are cyclicals. And her husband was dead-wrong on the commodity cycle too.

 

Are You Confident? - 08.04.15 chart2

 

Back to the Global Macro Grind

 

Some people are so confident that they can wake up every morning and ignore not only the “data”, but how Mr. Macro Market (Bonds and Utilities up yesterday) is moving in reaction to that data. Are you that confident? I know I’m not.

 

Friday’s data on wage growth (the US Employment Cost Index) was not only a “miss” versus consensus macro expectations, but it confirmed that both inflation and growth are what they always are – #LateCycle economic indicators that are now rolling over.

 

Contrary to the humble-pies one might be eating this summer if forced to ignore the data, we also took note of yesterday’s US economic data as it was one of the 1st big readings on the US economy for Q3. Here’s how that looked:

 

  1. ISM headline slowed to 52.7 in July vs. 53.5 in June
  2. ISM Prices Paid deflated to 44.0 in July vs. 49.4 in June
  3. ISM Employment Index slowed to 52.7 in July vs. 55.5 in June

 

In other words, with both #Deflation and a slowing US Labor Market readily apparent in both real-time market prices and the data, we’re more confident in our non-consensus GDP #slowing view for Q3 than we were before we got the data.

 

To review where we’re at on GDP:

 

  1. For Q3 our predictive tracking algo is looking for a 1.6% y/y GDP number
  2. For consensus headline readers that implies +1.4% headline q/q SAAR

 

And to remind you of the #process that drives our confidence intervals – it’s called a Bayesian Inference process – and it’s very useful in dynamically updating the probability of our best forecast being more wrong or right, given the most recent data.

 

Using Bayes Theorem doesn’t really work unless you have a long-term cycle overlay of historical data. This is where what they call the “Frequentist” approach to weighing probability comes into play and is also critical in providing context.

 

As you can see in today’s Chart of The Day, once you’re more confident that the US economy is #LateCycle, you can see that the profit-cycle (for corporations) isn’t far behind. Revenues and earnings (SP500) are down -4.6% and -2.4% so far, respectively.

 

Then, of course, we have a quantitative risk management signal that helps me be more or less confident. Here’s what that’s telling me, across everything that should matter to a modern-day macro risk manager:

 

  1. TREASURY BOND YIELDS: down hard, across the board, after failing @Hedgeye TREND resistance
  2. FX: #StrongDollar remains firmly intact and has no headwinds until the Fed folds and moves “hikes” to 2016
  3. RUSSELL2000: down -4.9% from its YTD high and continues to signal bearish TRADE and TREND @Hedgeye

 

Dollar Up, Bond Yields Down. Are Bond Bears confident that’s not a #Deflation Risk signal? How about the relative performance of “growth” (as a Style Factor) vs. “value” in the Russell itself? This performance spread looks very 2011 to me.

 

As market/economy history fans will recall, from Q1 to Q3 of 2011 most consensus economists (i.e. the ones who missed calling both the 2000 and 2007 cycles rolling over) had to keep cutting their GDP growth estimates until Bernanke bailed the market out.

 

I’m not confident in “calling” for QE4 (yet) because A) the data has to keep “surprising” those who are actually focused on it to the downside and B) the Fed then needs to pivot from when they “raise rates” to what they can do next to “ease.”

 

Our immediate-term Global Macro Risk Ranges (within intermediate-term TREND views in brackets) are now:

 

UST 10yr Yield 2.14-2.25% (bearish)

SPX 2067-2124 (bearish)
RUT 1 (bearish)
Nikkei 205 (bullish)
VIX 11.89-15.23 (bullish)
USD 96.81-98.21 (bullish)
EUR/USD 1.08-1.10 (bearish)
YEN 123.24-124.95 (bearish)
Oil (WTI) 45.32-47.90 (bearish)

Nat Gas 2.68-2.82 (bearish)

Gold 1074-1100 (bearish)
Copper 2.32-2.44 (bearish)

 

Best of luck out there today,

KM

 

Are You Confident? - 08.04.15 chart1

 


Stock Report: LinkedIn Corporation (LNKD)

Stock Report: LinkedIn Corporation  (LNKD) - HE LNKD table 8 3 15

THE HEDGEYE EDGE

LinkedIn (LNKD) is a company that has carved out its own identity within the social media space.  LNKD’s value comes from its database of member profiles, which it has a virtual moat around it since we don’t believe another player could replicate that database at comparable scale. LNKD’s product portfolio is primarily paywalls: varying degrees of access to these profiles, for which LNKD charges premium pricing. LNKD’s average annual revenue per customer in its largest Talent Solution segment is roughly $45K.

 

The opportunity for LNKD currently is that it is investing in its salesforce into an improving selling environment.  This investment created a near-term hiccup in the 1Q15 results, but the company is already showing improving trends in 2Q15, which we expect to continue into 2H15.  Meanwhile, LNKD has bought themselves some breathing room on its overly conservative guidance on its last two earnings releases, which has come at the expense of its stock price; hence a good entry point.

TIMESPAN

INTERMEDIATE TERM (TREND) (the next 3 months or more)

We see upside to LNKD share price of $240-$270 by year end.  We suspect the relatively soft guidance LNKD provided on each of its earnings releases have spooked the street, and we believe LNKD should rebound once the street realizes that management was being overly conservative - something it is infamous for.

 

The good thing about the soft guidance is the low expectations that accompany it.  We suspect LNKD has found a near-term floor, and the fundamental upside we see in the name should be reflected in the 3Q15 earnings release.

 

LONG-TERM (TAIL) (the next 3 years or less)

LNKD’s core segment is Talent Solutions, with its flagship product being its Recruiter product.  We have broken down LNKD’s U.S. Total Addressable Market (TAM) for this product alone, which is multiples of what it is producing currently today.  That said, LNKD has a long runway for future revenue growth.

 

However, LNKD’s selling environment is highly dependent on the macro environment, particularly around higher trends.  While the long-term opportunity is substantial, LNKD could very see some fundamental pressure in a recession.  That said we remain long on a quarter-to-quarter basis, and once we see a turn in the macro, we’re getting out of the way.

ONE-YEAR TRAILING CHART

Stock Report: LinkedIn Corporation  (LNKD) - HE LNKD chart 8 3 15



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