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The Consequences of Mario "Whatever It Takes" Draghi

The Consequences of Mario "Whatever It Takes" Draghi  - Draghi balloon cartoon 01.23.2015

Mario "Whatever It Takes" Draghi Full of Hot Air!

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So... ECB head honcho Mario Draghi (more than) hinted that additional monetary stimulus is on its way. Like his central-planning cousin Janet just across the pond, Mario loves that monetary cowbell. The ECB governing council apparently had a “rich discussion” about what accommodative monetary instruments might be used in the not-too-distant-future.

 

On The Macro Show this morning, Hedgeye CEO Keith McCullough explained the ramifications of what more monetary easing means. Here are some highlights:

U.S. Dollar

The Consequences of Mario "Whatever It Takes" Draghi  - Dollar cartoon 03.09.2015

“The euro crept up a little bit yesterday to 1.15 versus the dollar, with everyone questioning that Draghi may not bring the thunder. That changed today. If it breaks 1.11, there’s going to be a mad rush to 1.05. If it gets to 1.05 on the euro you’re going to get 100-something potentially on the U.S. Dollar index. That is going to wreak havoc. Then you get the deflation dominoes.”

Spain

The Consequences of Mario "Whatever It Takes" Draghi  - Spain pain

“Will Draghi be able to keep Spain from crashing? We doubt it. Cowbell does not create economic growth if it’s via currency depreciation. What it actually does is devalue the purchasing values of the people. That means you need more to buy that loaf of bread."

Oil

The Consequences of Mario "Whatever It Takes" Draghi  - Oil cartoon 08.27.2015

“This is very deflationary. It is perverse, but it is what it is. Draghi devalues the euro, that takes the euro down, the dollar up, and oil and energy stocks down.”

Fed Interest Rate Decision

The Consequences of Mario "Whatever It Takes" Draghi  - Fed lady cartoon 06.25.2016

“The Fed is absolutely scared of its own shadow. The minute the market went down, they got scared. But now, the economic data is going down and the market is up. What does the Fed do on that? Well, they see the market react to a stronger dollar, via Draghi, and say to themselves we don’t have to tighten Draghi did that for us.”

What does it all mean?

The Consequences of Mario "Whatever It Takes" Draghi  - Growth cartoon 06.03.2015

“The Japanese taught us this, when you’ve got nothing else going on, the best security is government bonds. This is what happens when people don’t have economic growth, or hope, or anything to invest in. The core feature of a Long Bond is growth slowing.”

 

In other words, recent global developments are further confirmation of our firm's non-consensus macro theme #LowerForLonger and our contrarian bet on the Long Bond


UA | $1.00 vs. $4.00

Takeaway: Returns are declining, and will for at least 1-2 yrs. But those who can look out to $4.00 in EPS probably won’t – and shouldn’t -- care.

When a stock trades at 70x an underlying earnings stream that’s only growing 15%-20%, the cold, hard truth is that the ratio of ‘awesomeness-to-mediocrity’ needs to be off the charts in a given quarter to appease the market. For a day, at least. On today’s menu there was a bit too much mediocrity in the mix. 

 

Is there anything we heard that makes us question the long term growth potential of UA? Absolutely not. We think that it ultimately has between $3.50-$4.00 in earnings ($10bn revs at 12% margin). Importantly we think that UA is making the investments required to complete its transition from being a Great US Brand, to a Great Global Company. We actually don’t think it cares nearly as much as other companies in hitting a quarter, and for that we commend Plank & Co. That’s why there are some investors who own this name and will absolutely not sell it. They see a company going from $3.9bn in sales to $10bn, and earnings from just over a buck this year to $4.00 in five years’ time. 

 

But for some investors that don’t have Kevin Plank’s duration, the quarter matters.  And unfortunately, when looked at holistically, this was not as stellar a print as one might think in listening to all 5 Analysts who asked questions on the call congratulate management for doing its job.  

 

Revenue was on fire – coming in +29% yy. But Gross Profit was +27%, EBIT +21%, and EPS +17%. On top of that, the cash conversion cycle eroded by 15 days, the most in seven quarters. That’s due in part to higher footwear inventories, as the company scales up a fundamentally more complex business (lower margin and more capital intensive).  Most companies in Consumer Discretionary would be thrilled with this growth algorithm – but not those that trade at 70x earnings.

 

The reality is that this is a generational growth story that is almost always in a state of flux. All great stories are. We’re seeing rapid growth in businesses like footwear, that we would argue are responsible for arguably half of the company’s enterprise value – but just 15% of revenue. This is the most positive trend in the quarter full-stop. We’re looking at 61% growth in footwear, which is the fastest rate of growth since 3Q11, when the business was less than $200mm. In other words, it’s growing faster as it’s getting bigger, which goes against common logic. 

 

UA  |  $1.00 vs. $4.00 - UA 10 22 chart1

UA  |  $1.00 vs. $4.00 - UA 10 22 chart2

UA  |  $1.00 vs. $4.00 - UA 10 22 chart3

UA  |  $1.00 vs. $4.00 - UA 10 22 chart4


VRX | HARD TO SEE A WAY OUT FROM HERE

VRX | HARD TO SEE A WAY OUT FROM HERE - VRX CDS

OVERVIEW

The title of our short presentation on VRX back in July 2014 was "Something New Under The Sun?".  It seems like a good title in retrospect. 

Click Here for the original deck

 

its hard to see a way out from here...

  • Claim edits likely go to "deny all" for anything come out of a pharmacy named in the media or associate with VRX
  • Extreme RX price inflation practices put a fast halt to prescription growth
  • Regulatory scrutiny does not end quickly
  • Yields are blowing out, debt and equity capital raises look out of reach, limiting buy-back potential and end to a debt-fueled acquisition binge and the "new pharmaceutical" model.
  • How quickly does anyone really think VRX can restart the R&D engines?

 

VRX | HARD TO SEE A WAY OUT FROM HERE - VRX LEV LOAN

VRX | HARD TO SEE A WAY OUT FROM HERE - VRX 7

VRX | HARD TO SEE A WAY OUT FROM HERE - VRX 558

 

Please call or e-mail with any questions.

 

Thomas Tobin
Managing Director 

@HedgeyeHC  

 

Andrew Freedman

Analyst

@HedgeyeHIT 

 


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ECB Kicks QE Decision to December!

ECB head Mario Draghi, in what has become an all too familiar song and dance, reiterated his extend & pretend mantra in today’s ECB presser, namely stating that country level structural reforms combined with accommodative ECB policy (low interest rates and continuous QE program) is the recipe to achieve Eurozone growth and an inflation rate near its target of 2.0%.

 

We’ll take the other side of the “hope” embedded in that positing!  And it’s one we’ve long espoused and expressed as our 3Q15 Macro theme of #EuropeSlowing (published on July 7, 2015).

 

What was new in today’s presser?  Very little:  Draghi kept main interest rates on hold (as expected) but did clearly signal that the ECB is in fact in wait and “monitor” mode until its December 3rd meeting when the ECB’s staff releases a new growth and inflation outlook for the region.  Expect forecast revisions to go one way – down!

 

The EUR/USD is down -1.4% since Draghi’s remarks this morning, indicating that investors are already baking in the cake an extension to the QE program come December.

 

We continue to suggest that you trade the risk range in the EUR/USD based on our quantitative multi-factor risk signals, and risk weight what our good friend Jim Rickards has penned the Currency Wars.

 

This morning the EUR/USD broke its immediate term TRADE/TREND level of $1.12, a bearish signal for further downside support if it can hold for at least 3 trading days.

 

Stay tuned!

 

ECB Kicks QE Decision to December! - aaa. euro 22


CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE

Takeaway: The argument that the cycle won't roll over until the Fed raises rates seems to miss an important point: the Fed began raising 22mos ago.

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - rate hike cartoon 10.15.2015

 

The Fed Has Been Tightening For 22 Months, Which is Why the Next Cycle Downturn Is Now Just Around the Corner

This week we thought we'd do something a little different and look at the relationship between claims and Fed funds. The chart below looks at Fed Funds (inverted) on the left hand side and initial claims on the secondary y-axis. What's interesting is how different this cycle appears to be versus prior cycles. First, let's establish a reference point for measuring where we are in the cycle based on the number of months elapsed at a sub-330k level of initial claims. As the chart below shows, by this point in previous cycles (we're now 20 months into sub-330k) the Fed was already well underway raising rates.  

 

While everyone knows that rates have been low for a long time, it's not obvious just how long until you look at the chart and compare it with the last four cycles. 

 

A bull might look at this chart and argue that it was the increase in rates that was the proximate cause of the downturns in the last four cycles and without that spark this cycle could live on for a while yet, especially with no emergent signs of inflation. 

 

A bear could argue that the cycle is already long in the tooth and the fact that the Fed hasn't yet raised rates is indicative of just how weak the underlying fundamentals of the current cycle are. 

 

A further argument (and the one we think is the most apt description of what's really going on) would be something along the lines of this: The Fed has already hiked simply by removing QE. As a reminder, the Fed began slowing its $85bn/month asset purchases by $10bn/month back in December 2013 and ceased those purchases altogether by October, 2014. In other words, the Fed began tightening policy ~22 months ago, which is about in-line with the start of previous cycle rate hikes when benchmarked against the 330k claims index level. Translation: this cycle actually looks very similar to recent cycles when viewed through this lens - it just appears different because most investors don't treat the slowing and cessation of QE as the equivalent to rising Fed Funds.

 

Our framework for thinking about the Fed is this latter scenario, and this is why we keep emphasizing the relevance of the the last three cycles duration within the context of initial claims. The last 3 cycles saw claims stay below 330k for 24, 45 and 31 months before the economy entered recession. The average duration of those three cycles was 33 months (max: 45, min: 24). With claims having just started their 20th month of strong, sub-330k claims, we are now 4 months from the min, 13 months from the average and 25 months from the max. 

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims1

 

By the Way, Dont' Forget about Energy

Separately, claims in energy states rose faster than claims in the U.S. as a whole during the week ending October 10. The spread between the two series in the chart below widened week over week from 19 to 20. What's interesting here is that energy companies are largely hedged through ~YE15. As such, we expect to see energy claims rise steadily over the next 6 months as those hedged roll off and energy employers begin to find other ways to right size the P&L. The chart below suggests that this theme is beginning to play out.

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims18

 

The Data

Prior to revision, initial jobless claims rose 4k to 259k from 255k WoW, as the prior week's number was revised up by 1k to 256k.

 

The headline (unrevised) number shows claims were higher by 3k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2k WoW to 263.25k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -8.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -8.1%

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims2

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims3

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims4

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims5

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims6

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims7

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims8

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims9

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims10

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims11

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims19

 

Yield Spreads

The 2-10 spread fell -1 basis points WoW to 140 bps. 4Q15TD, the 2-10 spread is averaging 143 bps, which is lower by -10 bps relative to 3Q15.

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims15

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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