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Earnings Season Update: Recession On Tap?

We’re still in the early days of earnings season. Here’s a quick update on where we stand. As you can see below, it's not looking good.

 

Earnings Season Update: Recession On Tap? - earnings season

 

U.S. industrial firms are continuing to warn of a pullback in spending. Why? Because we're in a global industrial recession.

 

Click headline below to read full story.

 

Earnings Season Update: Recession On Tap? - wsj recession

 

Make no mistake. This year has been the best year for short selling since 2008 - every hedge fund should have capitalized on it. There is plenty of alpha out there for hedge funds to be capturing in 2015. Here are a few recent long/short ideas we've highlighted to our customers (see Pandora, Athenahealth and Boyd Gaming in respective order herehere and here.)

 

Hedgeye Macro analyst Darius Dale chimed in on these developments:

 

Earnings Season Update: Recession On Tap? - darius

 

Earnings Season Update: Recession On Tap? - darius 2

 

On a related note, I think hedgies shorting the lows and then chasing these highs will be one major reason why stocks crash again.


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

10/23/15 DMND | WHO WILL BE PICKING UP THE PIECES? LOOKS LIKE K

10/16/15 PEP | EXPANDING INTO SNACKS AND BREAKFAST?

10/16/15 REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF

10/01/15 CAG | IN THE BEGINNING

 

SECTOR PERFORMANCE

Food and organic stocks that we follow underperformed the XLP last week. The XLP was up +2.2% last week, the top performers on a relative basis from our list were Mead Johnson Nutrition (MJN) and Diamond Foods (DMND) posting increases of +5.8% and +5.2%, respectively. The worst performing company on a relative basis on our list was WhiteWave Foods (WWAV), which was down -8.6%.

Monday Mashup - CHART 2

 

XLP VERSUS THE MARKET

The XLP has fared better than most other sectors in the YTD time period. In the last five trading days, while the SPX was up +2.1%, the XLP was up +2.2%.

Monday Mashup - CHART 3

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLP is BULLISH on a TRADE and TREND duration.

Monday Mashup - CHART 4

 

Food and Organic Companies

Monday Mashup - CHART 5

Monday Mashup - CHART 6

Monday Mashup - CHART 7

 

Keith’s Three Morning Bullets

If only Europe and China could ease every night before AMZN, GOOGL, and MSFT beat …

 

  1. EM – Emerging Markets didn’t like the Euro Devaluation last week, w/ EM MSCI Index closing -0.8% on the wk – reminder that there’s a $9T USD denominated debt #bubble that deflates on these tightening events (see our Q4 Macro Themes deck) – yes, Draghi ramping USD is deflationary – ask Oil -6.3% last week, or Energy Stocks (XLE -1.4%)
  2. EURO – oversold to the low-end of my $1.10-1.13 immediate-term risk range vs USD into week’s end. European Equities had their Viagra move (+6.8% week for the DAX, crushing all US indices with the Russell only +0.3%) and are showing no follow through this morning as Spain’s PPI deflates (again) to -3.6% y/y vs -2.2% last print
  3. 10YR – German 10yr = 0.51% and UST 10yr pulls right back to 2.07% this morning as the world wakes up to more deflation and #GrowthSlowing news – don’t forget that we get US GDP for Q3 this week and most of the sell side is still in la la land there

 

SPX immediate-term risk range = 1; UST 10yr Yield 1.98-2.09%

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

10/23/2015 DNKN | THE DONUT TRACKER

10/22/2015 MCD | THE ROAD TO $150

10/21/2015 CMG | THE NEW WORLD ORDER

10/21/2015 YUM | SO MANY LEVERS TO PULL

10/20/2015 SONC | NOT INSPIRING BUT COVERING

10/20/2015 MCD | TURNING THE CORNER

10/19/2015 CMG | MOVING IT TO THE SHORT BENCH

 

UPCOMING EVENTS

Monday Mashup - CHART 12

 

RECENT NEWS FLOW

Friday, October 23

DAVE | Welcomes back founder, Famous Dave Anderson as part of a reorganization of the C-suite and Board. Anderson previously left the company in 2004 following an appointment by George W. Bush to serve as Assistant Secretary of the U.S. Department of the Interior, Indian Affairs (ARTICLE HERE)

CBRL | Cracker Barrel holder Biglari Capital filed amended 13D; issues presentation arguing against company’s need for poison pill. Biglari reports a 19.7% stake in the filing (FILING HERE)

MCD | Upgraded to overweight from neutral at Piper Jaffray, target increased to $130 from $95. View our road to $150 in the link above.

 

Wednesday, October 21

DRI | Announced that its Board has approved the tax-free spin-off of select real estate assets into Four Corners Property Trust (FCPT). Shares are expected to be distributed to Darden shareholders on November 9, 2015 (ARTICLE HERE)

DPZ | Launches purpose-built pizza delivery vehicle (ARTICLE HERE)

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow widely underperformed the XLY last week. The XLY was up +1.7%, top performers on a relative basis from casual dining were BJRI and BBRG posting an increase of +10% and +0.4%, respectively, while ARCO and GMCR led the quick service group this week up +15.1% and +6.6%, respectively.

Monday Mashup - CHART 2

Monday Mashup - CHART 3

 

XLY VERSUS THE MARKET

The XLY has fared better than most other sectors in the YTD time period but as of late has been lagging slightly. In the last five trading days the SPX was up +2.1% and the XLY was up just +1.7%.

Monday Mashup - CHART 4

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLY looks BULLISH from a TRADE and TREND perspective, TREND support is 76.57.

Monday Mashup - CHART 5

 

CASUAL DINING RESTAURANTS

Monday Mashup - CHART 6

Monday Mashup - CHART 7

Monday Mashup - CHART 8

 

QUICK SERVICE RESTAURANTS

Monday Mashup - CHART 9

Monday Mashup - CHART 10

Monday Mashup - CHART 11

 

Keith’s Three Morning Bullets

If only Europe and China could ease every night before AMZN, GOOGL, and MSFT beat …

 

  1. EM – Emerging Markets didn’t like the Euro Devaluation last week, w/ EM MSCI Index closing -0.8% on the wk – reminder that there’s a $9T USD denominated debt #bubble that deflates on these tightening events (see our Q4 Macro Themes deck) – yes, Draghi ramping USD is deflationary – ask Oil -6.3% last week, or Energy Stocks (XLE -1.4%)
  2. EURO – oversold to the low-end of my $1.10-1.13 immediate-term risk range vs USD into week’s end. European Equities had their Viagra move (+6.8% week for the DAX, crushing all US indices with the Russell only +0.3%) and are showing no follow through this morning as Spain’s PPI deflates (again) to -3.6% y/y vs -2.2% last print
  3. 10YR – German 10yr = 0.51% and UST 10yr pulls right back to 2.07% this morning as the world wakes up to more deflation and #GrowthSlowing news – don’t forget that we get US GDP for Q3 this week and most of the sell side is still in la la land there

 

SPX immediate-term risk range = 1; UST 10yr Yield 1.98-2.09%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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CHART OF THE DAY: 6 Market Consequences of #Draghi's Devaluation

 

CHART OF THE DAY: 6 Market Consequences of #Draghi's Devaluation  - 10.26.15 EL chart

 

Editor's note: This is an excerpt from today's Early Look written by Hedgeye CEO Keith McCullough, in which he recaps last week's market gyrations after ECB President Mario Draghi effectively devalued the euro.

 

On a week-over-week basis, with Draghi Devaluing the Euro -2.9% (vs. USD) here’s what happened in Global Macro markets:

 

  1. US Dollar Index ripped at +2.6% weekly gain, taking it to +7.5% YTD and +13.1% year-over-year
  2. Canadian Dollars deflated another -1.9% week-over-week to -11.7% YTD and -14.7% year-over-year
  3. Commodities (CRB Index) got tagged for a -2.9% #deflation on the week, -15.8% YTD, and -28.9% year-over-year
  4. Oil (WTIC) deflated another -6.3% week-over-week, crashing -24.8% YTD, and -44.1% year-over-year
  5. Copper deflated -2.3% on the week, taking it to -17.0% YTD, and still in crash mode -22.5% year-over-year

A Frantic Scramble

“Rowing a race is an art, not a frantic scramble.”

-George Pocock 

 

I think that’s a fair metaphor for annual returns.

 

Frantically scrambling together a year-end narrative on why the market got back to “flat” is disingenuous, at best. Beating your competition (or market beta) requires rowing a precise race.

A Frantic Scramble - The Thinker.Markets cartoon 05.08.2015

 

Back to the Global Macro Grind

 

Sure, it took both Sales/Earnings Slowing (-3-4% in Q3 to-date) and both Europe/China easing last week to keep US and European stocks from going down, but that’s not all that happened.

 

On a week-over-week basis, with Draghi Devaluing the Euro -2.9% (vs. USD) here’s what happened in Global Macro markets:

 

  1. US Dollar Index ripped at +2.6% weekly gain, taking it to +7.5% YTD and +13.1% year-over-year
  2. Canadian Dollars deflated another -1.9% week-over-week to -11.7% YTD and -14.7% year-over-year
  3. Commodities (CRB Index) got tagged for a -2.9% #deflation on the week, -15.8% YTD, and -28.9% year-over-year
  4. Oil (WTIC) deflated another -6.3% week-over-week, crashing -24.8% YTD, and -44.1% year-over-year
  5. Copper deflated -2.3% on the week, taking it to -17.0% YTD, and still in crash mode -22.5% year-over-year

 

Oh, right. If you put it in those terms, it wasn’t a great week.

 

The Russian Ruble and Norwegian Kroner dropped another -1.7% and -3.3% last week and are still in crash mode -33.1% and -21.6% year-over-year, respectively.

 

But, bro – the Dow Bro – it ripped +2.5% on the week to -1.0% for 2015. #Sweet

 

In other news:

 

  1. US Energy Stocks (XLE) didn’t like the Up Dollar news and deflated another -1.4% on the week
  2. MLP (Alerian Index) Energy stocks got pounded for another -6.1% weekly decline
  3. Emerging Market Stocks (MSCI Index) deflated -0.8% on the Down Euro #StrongDollar news
  4. Latin American Stocks (MSCI) deflated -0.9% week-over-week on the same
  5. Russian Stocks (RTSI Index) deflated -0.9% week-over-week

 

Man, what a bummer.

 

My narrative isn’t the manic one that went from saying this was a “global bottom” in demand led by “reflation” signals that lasted 3 weeks, when it was actually the #Deflation Risk that has been crushing consensus for a year now that ruled the week.

 

Sure, US Equity Beta loved not going down on that – but it was really only the big liquid Tech Stuff that dominated:

 

  1. US Tech Stocks (XLK) were +4.4% on the week vs. Healthcare Stocks (XLV) DOWN -0.6%
  2. Large Cap (as a US Equity Style Factor) was +2.1% on the week vs. Small Cap only +0.5%

*note: that’s what happens when Amazon, Google, and Microsoft all beat, on the same day!

 

 

Inasmuch as the market was “flat” in 1987, these Tech titans of the 2015 US stock market #bubble are up “in size” here in October.

 

But can they do that every day?

 

Moreover, can the Fed remain Dovish on every week that both the Europeans and Chinese opt for more easing?

 

I always try my best to answer these questions in real-time (in both Real-Time Alerts and in our Hedgeye Asset Allocation model) as I’m a big believer in being held accountable to the timing of it all. On that front, here are some of the bigger moves I made last week:

 

  1. Took our net asset allocation (longs minus shorts) to Commodities to 0%
  2. Took up our net asset allocation to Fixed Income close to its max at 32%
  3. Shorted the SP500 (SPY) in Real-Time Alerts on Friday

 

While I started shorting SPY in July, I’ve been on the sidelines for the last month with no position in RTA.

 

The main reason for that was that consensus hedge funds shorted the AUG lows at VIX 40. Now VIX is at 14 and I foresee most of the frantic scramble to cover higher as yesterday’s news.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.98-2.09%

SPX 1
RUT 1135--1176
EUR/USD 1.10-1.13
Oil (WTI) 44.24-46.31

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

A Frantic Scramble - 10.26.15 EL chart


EM, Euro and UST 10YR

Client Talking Points

EM

Emerging Markets didn’t like the Euro Devaluation last week, the EM MSCI Index closed -0.8% on the week. Reminder: there’s a $9T USD denominated debt #bubble that deflates on these tightening events (see our Q4 Macro Themes deck). Yes, ECB President Mario Draghi ramping USD is deflationary – ask Oil down -6.3% last week, or Energy Stocks (XLE -1.4%).

EURO

The Euro oversold to the low-end of our $1.10-1.13 immediate-term risk range vs USD into week’s end. European Equities had their Viagra move (+6.8% week for the DAX, crushing all U.S. indices with the Russell only +0.3%) and are showing no follow through this morning as Spain’s PPI deflates (again) to -3.6% year-over-year vs -2.2% last print.

UST 10YR

The German 10YR is at 0.51% and the UST 10YR pulls right back to 2.07% this morning as the world wakes up to more deflation and #GrowthSlowing news. Don’t forget that we get U.S. GDP for Q3 this week and most of the sell side is still in la la land.

 

**Tune into The Macro Show at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 68% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 32% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

What week it was for MCD shareholders! Shares finished the week up 7.3%. We have been saying all along that the third quarter of 2015 would be the inflection point for the McDonald’s (MCD) turnaround. After this print, it appears that the heartache is finally over at McDonald’s, as this quarter marks the first good quarter the company has had in two years.

 

From here, the upside in the stock price lies with the growth of All Day Breakfast, additional G&A cuts, national value offering implementation, reimaging of restaurants, commodity deflation, especially in beef and increased operational efficiencies, among others. In addition, the REIT is a potential driver of incremental value but not crucial to the long-term success of this call. With Steve Easterbrook at the helm we are confident this company will be better managed than it has been in a long time.

RH

RH unveiled a full floor of Modern product in their New York Flatiron store this week. The new concept sits on the first floor of the 21k sq. ft. store and marks the 3rd property in RH’s fleet (along with Denver and Atlanta) to carry the new product line.

 

Fundamentally and financially, we’re about to see growth at RH go on a multi-year tear. We think this stock is headed to $300 over the next 2-3 years. We’ve been patient for the catalyst calendar to begin, and the waiting is finally over.

TLT

As devaluation and global currency war jockeying from central bankers around the world continues, the acknowledgement of growth slowing continues to push yields lower. The long-bond was up on Thursday, after the ECB meeting, despite an easing-fueled rip in equities. The bond market doesn’t believe in the growth storytelling and we expect it to continue.

 

Remember that Down Euro Devaluation is a global TIGHTENING event because the world’s biggest asset price #deflation risk is that the world’s inflation expectations (commodities, debt, etc.) are DENOMINATED IN DOLLARS. That has implications for gold (risk to being long), but we want to get through the Fed meeting and GDP data next week before we pivot on a gold view. Stay tuned.

Three for the Road

TWEET OF THE DAY

‘Do It If You Love It’: Doug Cliggott’s Career https://app.hedgeye.com/insights/47109-do-it-if-you-love-it-doug-cliggott-s-career-reflections… via @hedgeye

@Hedgeye

QUOTE OF THE DAY

Success is more a function of consistent common sense than it is of genius.

An Wang

STAT OF THE DAY

According to researchers with an American office furniture company, the average office worker gets interrupted every 11 minutes. And after a break of flow, employees take an average of 23 minutes to get back on task.


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