“If you’re just reading blogs and going with your ‘gut,’ that will eventually catch up to you,” Hedgeye CEO Keith McCullough recently wrote. “Do you have an independent (and accurate) research team? Most don't - so outsource to us.”
During this brief exchange on The Macro Show earlier this week, Hedgeye Healthcare analyst Tom Tobin and CEO Keith McCullough discussed why investors should consider being “short everything” in healthcare.
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On The Macro Show earlier this morning, Hedgeye Financials analyst Josh Steiner joined CEO Keith McCullough to discuss key market developments, including a granular look at the weak quarter JPMorgan (JPM) just put up.
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The conversation shifted gears when McCullough responded to a subscriber’s question during the interactive Q&A portion of the show regarding how far along the U.S. is in the current economic cycle.
“[The U.S. expansion] is long-in-the-tooth and slowing,” Keith said. “It’s already showing up in the cyclical and industrial sectors…You don’t have a consumption recession, yet, but the employment and consumption pieces [of the economy] are clearly rolling over as they do at the end of every cycle.”
To prove his point, Keith pulled up a thought-provoking slide from our macro team’s recent 73-page presentation of our top 3 Q4 2015 Macro Themes.
As you can see in the slide below, it shows the past 85 years of economic cycles. Our current expansion stands at 77-months. To put that in perspective, the median expansion typically lasts around 50-months.
Click image to enlarge.
In other words, we’re in the twilight of U.S. economic expansion. Hence, our new macro theme #SuperLateCycle. (Please ping firstname.lastname@example.org if you’re interested in getting access to our macro presentation.)
“What comes after the SuperLateCycle?” Keith asked rhetorically.
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Client Talking Points
Two bad days back-to-back for the Nikkei, so if you are looking for follow through on the reflation trade or otherwise, the Nikkei certainly didn’t deliver it neither have other Asian equities. Japan is down 1.9% overnight, down 3% in last two days. Honk Kong was down again last night, down 1.7% for the week and China closed down .9%. Overall it was a very weak session in Asia. The down dollar is obviously not good for Japanese stocks because this is bullish for the Yen.
The DAX had its dead cat bounce #Boom and straight back down in crash mode. Germany cut its GDP forecast this morning. Believe them! It’s a good idea to listen to these governments and central planners when they are getting bearish…it must be really bearish. Europe is going to be in a recession next year, this is the call and why you should stay away from a lot of these European equities.
While the hedge fund community continues to use S&P futures as their short selling mechanism, the Russell 2000 does not seem to have that same short interest and therefore goes down faster, currently down 11.4% from its summer highs. The Russell is more anchored to a U.S. growth slowdown as well, making it a pure play on domestic growth expectations falling. Domestic growth shorts continue to work due to an implosion in the data – PPI and Retail Sales down (which sets up a nasty-looking Holiday season).
**Watch a replay of The Macro Show with Financials Sector Head Josh Steiner giving an update on earnings - CLICK HERE.
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Top Long Ideas
We think that the catalyst calendar is just starting to pick up, and should be the best that Restoration Hardware has seen – perhaps ever. There are two new and significant merchandising initiatives, which are solid on their own. But to pair them with the square footage growth acceleration seems almost like a fantastic coincidence. But it’s not. This has been in the plan all along. There’ll be many more new concepts and classifications – though we’d argue that the company can go deep and add $2bn in revenue with what it has.
To be clear, there’s much more to this story than just square footage growth – like the ability to consistently merchandise product people want in quantities they need. Without the ability to deliver on that requirement, a retailer could have the greatest store in the hottest location with the best demographics, and it will still be nothing but a liability (regardless of how low the rent might be). That’s why square footage growth is grinding to a halt for other U.S. retailers. That’s also why the growth profile at RH is so powerful, and unmatchable by anyone we see in Retail today.
As we predicted, a rise in September regional revenues would serve as a catalyst for regional gaming stocks, and in particular, Penn National Gaming. For the record, PENN is up +12% since we added it to Investing Ideas back in May, outperforming the S&P 500 which has fallen -5% since then.
We believe shares of PENN have a lot more room to run, given its strong performance in key markets like Ohio and its successful opening in Massachusetts. A handful of states still need to report their September revenue figures, but numbers have been in line with our expectations thus far.
PENN will be reporting Q3 earnings on October 22nd.
Bottom Line: We remain 50% below Bloomberg Consensus on GDP growth. Wall Street, the IMF, World Bank and OECD are all still forecasting global growth of around 3% for 2015. We reiterate our call for growth to come in at or below half that rate.
While most #LateCycle growth expectations in macro markets peaked in April, the US stock market peaked in July as bond yields hit the market with their last head-fake of a “breakout.” That makes this bear market in growth expectations relatively young. With that considered, sit back and relax with your TLT and EDV.
Three for the Road
TWEET OF THE DAY
Is Recession Setting Sail For #Europe? https://app.hedgeye.com/insights/46851-recession-setting-sail-for-europe… via @KeithMcCullough #ECB #Draghi #economy #FX #euro
QUOTE OF THE DAY
Never hate your enemies, it affects your judgement.
STAT OF THE DAY
The American worker took an average of 16 vacation days last year, a 35-year low and down from 21.1 days in 1996.
Takeaway: Last week's Mortgage moonshot proved short-lived as TRID hangover replaced TRID pullforward. Expect more data choppiness in the weeks ahead.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Today's Focus: MBA Mortgage Applications
After jumping +27.4% ahead of the impending TRID implementation, post-implementation Purchase activity more than retraced the gain, declining -34% in the latest week. On a year-over-year basis, purchase demand declined -1.2%, marking the first YoY decline since the start of the year.
As we highlighted last week (Purchase Demand is Good, But Not That Good), it’s likely we continue to see excessive chop in the high frequency data over the next few weeks as lenders go live with implementation and purchase agents attempt to risk manage any early bottle-necks. Moreover, the demand pull-forward will likely serve to juice both the New and Pending Home Sales figures for September as the bolus of pre-TRID demand flows through the reported volume figures. However, similar to the party-hangover dynamic observed across the Purchase application data the last two weeks, the illusory gain in September is likely to decrement reported October demand by a similar magnitude (late November releases).
Handicapping the precise impact of the regulatory changes to transaction volume in the nearer-term is a largely quixotic pursuit – we’re content to let the data breath for another few weeks before taking a directional view on the underlying level of demand.
Rates, meanwhile, held below 4% for a second consecutive week as our Macro call for slower-and-lower-for-longer (globally) continues to manifest. At current levels, rates remain a modest tailwind to both HPI and affordability.
About MBA Mortgage Applications:
The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis.
The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.
Joshua Steiner, CFA
Christian B. Drake
Editor's Note: Below is a chart and brief excerpt from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here for more information on how you can subscribe.
"...Are Trump’s best polling days behind him? It does seem likely (although the same can probably be said for Clinton).
Trump is still leading the Republican nomination race, but as the Chart of the Day highlights, the polling aggregates are clearly showing waning enthusiasm for his nomination in the way of lower highs of support. In particular, Ben Carson is now within 4 points of Trump. In fact, in the most recent poll from Fox, Carson is within 1 point."