THE HEDGEYE EDGE
Our edge right now with High Yield Fixed Income is our macro team's continuing dissection of the cycle. Look no further than corporate activity YTD…
With a phase transition in volatility that has crushed buy-side performance and sent U.S. equities on a roller coaster ride over the last couple months, confidence in what has been a 6-year bull market is waning. Just 37% and 43% of S&P 500 companies recorded sequential acceleration in sales and earnings growth, respectively, in the latest quarter. Operating margins have already peaked.
That sounds like a slowdown.
Rather than experiencing organic growth, large companies are attempting to manufacture growth by buying back shares, sidelining capital investment projects, and acquiring other companies. 2015 will be a record year for M&A activity. The previous record? 2007...
From our perch, debt-financed buybacks at peak valuations, peak margins and new highs in corporate leverage does not equal long-term shareholder value creation. Buyback trends are a classic contra-indicator with activity peaking at the end of the cycle.
Bottom line: This kind of corporate activity in aggregate is just another late-cycle indicator.
INTERMEDIATE TERM (TREND) (the next 3 months or more)
Our proprietary Growth, Inflation, Policy (GIP) model is signaling that Q3 GDP, on a year-over-year basis, faces very difficult comparisons (this year vs. last year) in Q3 and Q4 of this year. Our estimated range for GDP for Q3 is 0.1-1.5% which is still below consensus despite estimates that have been taken down by Central Bankers and consensus Wall Street.
If GDP prints in that range, forward-looking growth expectations will be downwardly revised as evidenced in bond yields going lower and credit spreads widening.
LONG-TERM (TAIL) (the next 3 years or less)
When the economic cycle begins to roll-over, a drawdown in the equity market manifests, volatility ensues, and credit spreads widen. There is a rotation into what is considered safer fixed income (TLT and EDV for example) at the expense of riskier borrowers (worse credits). The commonalities of a cyclical slowdown and secular headwinds are matching up to give us visibility into our #superlatecycle call which happens to be one of our top Q4 2015 Macro themes.