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Special Edition of The Macro Show Unlocked

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On this morning's edition of The Macro Show Hedgeye CEO Keith McCullough discussed the slowing jobs market and the U.S. economy remaining in a #LateCycle slowdown.


In addition to our economic commentary and analysis Keith and Director of Research Daryl Jones wade in on last night's Republican presidential debates winners and losers. 



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


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Encore Capital (ECPG) | Speedbumps on the Short Highway

Takeaway: Increased probability of large issuers returning to debt sales and of Encore's CFPB settlement materializing are short-term headwinds.

Encore Capital remains one of our favorite ideas on the short side as debt collection companies have historically been the worst performing subsector in all of Financials in the late cycle period. Beyond this, the company has been using what we would characterize as a loophole in GAAP (it's legal, but we think it's sketchy) to inflate its earnings over the last two years by buying companies and allocating a large share of the purchase price to goodwill. Under interest method accounting, this has had the effect of boosting revenues and earnings. It's our view that the late cycle dynamics are a strong riptide against which longs are swimming and the artificial pull forward of earnings through these acquisitions over the last few years will turn into a RoC headwind in the NTM.


For these reasons, we still think Encore is a great idea on the short side over the intermediate to long term. However, in the short term, it's possible that some good news could cause the stock to go up.  Two potential catalysts are the return of select large issuers (JPM / C) who've been on the sidelines due to regulatory issues of their own and Encore getting out from under its own regulatory investigation by the CFPB.


It looks like one or both of those positives is getting more likely based on a flurry of recent CFPB settlement activity.


Encore reports earnings on Monday and we think they'll likely talk positively on both of these fronts.



Encore Capital (ECPG) | Speedbumps on the Short Highway - relative subsector performance chart v2



There have been three recent CFPB enforcement actions in the debt collection space. 


Recent CFPB Enforcement Actions

  • On July 8, the CFPB announced a $216 million enforcement action against JP Morgan Chase for selling debt that was not legally collectible to third-party buyers and for robo-signing affidavits to sue consumers for unverified debt.
  • On July 21, the CFPB announced a $700 million action against Citi, $23.8 million of which was related to an expedited payment fee that Citi charged and failed to properly disclose to customers when collecting overdue debts.
  • On July 22, the Bureau announced an $18.5 million action against Discover for overstating minimum payments, misrepresenting interest paid, making early morning and late night collection calls, and failing to provide adequate notice to debtors whose debt it had acquired from Citibank.

Possible Effect on the Debt Collection Industry

As the CFPB concludes more investigations, the go-forward environment will become more defined, and issuers like JPM and Citi may become more comfortable developing plans to return to consumer debt sales. If those issuers do return to selling charged-off consumer debt, it would increase the debt supply available to Encore and decrease some of the upward pricing pressure on that supply.


Upcoming Settlement

As mentioned by management on recent conference calls, Encore is in ongoing discussions with the CFPB regarding past practices that could result in a settlement and one-time pretax charge in excess of $35 million. Given the recent high frequency of CFPB settlements with major institutions involved in debt collection, a resolution with Encore seems likely to materialize sooner than later. Most likely, a settlement would be a positive, as it would dissipate one of the clouds hanging over Encore. 


Maintaining the Short Call

In spite of these possible developments, we are maintaining our short recommendation. Although the return of large suppliers and/or the resolution of CFPB negotiations may be speedbumps for the short case, the credit cycle remains late cycle. Jobless claims hitting their lowest level since 1973 a few weeks ago is further evidence of the credit cycle at/near its peak. As the cycle heads in the other direction, we expect Encore’s ability to collect on its purchased debt to suffer. Additionally, some regulatory uncertainty will remain even after the slew of CFPB settlements slows down. The Bureau has yet to complete its broad debt collection rulemaking and currently has pre-rule activities scheduled for December 2015.


These observations are not a waiver from the short thesis but a “heads up” in regards to a few speedbumps that may materialize in the short to intermediate term.




Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


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Aggressive Enough?

“I wasn’t aggressive enough, and the match turned completely.”

-Justine Henin


That’s how Belgian tennis great, Justine Henin, explained losing in the 2006 Wimbledon final to France’s Amelie Mauresmo. This came after Henin won the 1st set 6-2 hitting “twice as many winners as unforced errors.” (Top Dog, pg 131)


Henin has never won at Wimbledon, but she’s won 7 Grand Slam titles. She won the Olympic Gold medal in 2004 too. At the highest level of competition, she gets #winning and what happens when you don’t play to win.  That’s where the best players beat themselves.


Aggressive Enough? - Justine


While I wouldn’t characterize last night’s competitors in the #GOPDebate as the best leaders in the world, however mediocre the bar for American politics has become, you could clearly see who was playing to win (Fiorina) vs. who was playing not to lose (Bush).


Back to the Global Macro Grind


Since I support neither the Republican nor Democrat party (because, much like during the Nixon/Carter decade, under Bush/Obama both parties have had the same currency, debt, and monetary policies), I guess I’m not your US political party fan boy.


Political partisans can consider me whatever they’d like as a result of that. In case you haven’t noticed, I don’t particularly care what people think about me. On free-markets and economic matters, I’m happy to continue to think for myself.


On that front, I haven’t heard much of anything that is in the area code of aggressive enough from either party’s candidates, yet. Yeah, Trump is Mr. Big Time – great for him, personally. But he’s a protectionist – and that defensive posture is never going to win, globally.


Moving along…


Even though it’s an un-elected body of bureaucrats (that no one in the debate addressed last night), after being wrong 65-75% of the time, one office of the US Federal Reserve has evolved their forecasting process in the last few years.


The Atlanta Fed uses a “GDP Now” tracker (i.e. they update their model in real-time as opposed to plugging in an outcome they’d like to see and retrofitting the model to those 3-4% GDP assumptions). And it’s been better than bad, directionally, as of late.


We have a tracker too (short-form for predictive tracking algorithm) and the Atlanta Fed now has one of the few widely followed forecasts that is tracking in the area code of ours:


  1. Hedgeye Risk Management Q3 GDP +1.4% q/q SAAR, +1.6% y/y
  2. Atlanta Fed Q3 GDP +1.0% q/q SAAR (no y/y forecast)


“No y/y” means that they don’t model either growth or inflation like we do (on a year-over-year basis). The most bullish estimates I’ve seen on Q3 GDP come from the likes of Nancy Lazar at Cornerstone Macro. She just cut her forecast to 3.5% (from 4.0%) q/q SAAR.


Never mind being aggressive enough (i.e. changing your forecasts as the readily available data does), America deserves a President who understands why Washington’s “blue chip” economic forecasting and risk management hasn’t evolved, at all.  


If consensus economists aren’t forced to debate the most accurate pros on the most important rates of change, we’re really not having a free-market debate about anything tangible anyway.


This morning we’re going to get latest #LateCycle slowing update on the US jobs market. Here’s what I’m set up for ahead of that:


  1. Slower-for-Longer (so I’m long Long-term bonds and stocks that look like bonds = TLT, XLU)
  2. US Dollar immediate-term TRADE overbought within a developing bullish TREND
  3. Oil, Gold, etc. immediate-term TRADE oversold within nasty #deflation TAIL risks


In other words, another rate-of-change slowing in the US labor cycle (which we’ve already seen this week from both the ADP and Challenger Jobs Cuts reports), would be short-term bearish for the USD and reflate some of the deflations.


But where does that put the US economy? It’s still in a #LateCycle slowdown (if your perma bull strategist doesn’t get that, show them the negative returns you have being levered long cyclicals, including media stocks who have this thing called the advertising cycle).


And it still has me asking when 1 of the 17 people from last night’s grand-stage of political life is going to get aggressive enough on a #StrongDollar policy that would require us all to accept more asset deflation in the short-term, for long-term All-American gain.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.15-2.29%

SPX 2068-2098
USD 96.50-98.44
Oil (WTI) 43.89-46.77

Gold 1080-1098


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Aggressive Enough? - NFP Jul

USD, Oil and UST 10YR

Client Talking Points


On anything less than a 230,000 NFP we’d expect the Dollar Down, Rates Down and for Oil and Gold to go Up – that happened yesterday and it’s seeing some follow through this morning – stay tuned.


+0.7% WTI here after making a higher-low (vs. the March low) and don’t forget that the March bottom in oil came alongside the 1st big U.S. Jobs Report “miss” (March) vs. peak cycle expectations (labor peaked in FEB) – it’s not all about this, but this matters.


2.23% this morning with immediate-term downside to 2.15% and intermediate-term downside to 1.77% - the Atlanta Fed tracker is one of the few GDP estimates close to ours for Q3 at 1.0% GDP (we’re at 1.4% quarter-over-quarter SAAR, +1.6% year-over-year).


**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET with Hedgeye CEO Keith McCullough.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.  


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.


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


Coo Coo https://youtu.be/kJN9L3rRW40  via @YouTube



Life is like a combination lock; your job is to find the right numbers, in the right order, so you can have anything you want.

Brian Tracy


North Korea is creating its own timezone by dropping clocks back 30 minutes in what will be called “Pyongyang time,” effective August 15.

The Macro Show Replay | August 7, 2015


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