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We Were Wrong On Jobs

Why? Because the U.S. labor market is even later cycle than we thought.

 

With the advent of today’s gangbusters jobs report – specifically the sharp accelerations in the growth rates of nonfarm payrolls and wages (see: summary table below) – this U.S. economic expansion is now closer than ever to its termination.

 

  • The balance of the seven proprietary indicators we track to pinpoint our location in the domestic economic cycle suggests a recession has the highest probability of commencing in 10 months-time (i.e. in 3Q16).
  • With a slight majority of those indicators signaling a recession perhaps sooner than that, we continue to point out the risk to the economy and the financial markets that underpin it that are the Fed’s forecasts.
  • The FOMC dot plot and recent hawkish guidance from various Fed heads suggests policymakers are in line with macro consensus that the domestic earnings and industrial recessions are transitory and not a harbinger of a broader economic downturn. We remain on the other side of this view.

 

Click on the following link to download the presentation (13 slides): http://docs3.hedgeye.com/macroria/Hedgeye_U.S._Economic_Cycle_Indicators.pdf

 

From an asset allocation perspective:

 

  • We continue to raise cash.
  • We are buyers of Treasury bonds Muni bonds, Utilities and REITS on weakness. From a style factor perspective, we anticipate large-cap liquidity will continue to outperform over the intermediate-term.
  • We remain short sellers of Financials, Retailers and High-Yield Credit on strength. From a style factor perspective, we anticipate small-cap illiquidity and highly leveraged companies will continue to underperform over the intermediate-term.
  • Our ongoing G4 policy divergence theme lends us the confidence to remain bullish on the U.S. dollar in spite of our dour outlook for the U.S. economy – especially given that the Fed appears set to embark on a grave policy error by tightening monetary policy into the teeth of a #LateCycle Slowdown.
  • As a result, we remain the bears on reflation assets broadly – including commodities, commodity-linked equities, commodity currencies and EM.

 

Deflation’s Dominoes are coming home to roost.

 

Have a great weekend,

 

DD

 

Darius Dale

Director

 

We Were Wrong On Jobs - Employment Summary


VRX | MORE QUESTIONS...

OVERVIEW

It was announced this morning that Goldman Sachs sold 1.3 million shares of Valeant stock that was pledged by CEO, J. Michael Pearson in exchange for a $100 mill loan.  Pearson owns ~10 mill shares, of which ~2 mill are pledged as collateral in exchange for loans "to fund tax and other equity incentive awards and purchases of Company shares".  There are also 1.2 million shares in addition to the 10 million that belong to Pearson's grantor retained trust (GRAT), but are not included in the total as Pearson has "no pecuniary interest".  The proxy filing does not explicitly state whether the 1.2 million GRAT shares were used as collateral for the loan.

 

VRX | MORE QUESTIONS... - 2015 11 06 2015

 

According to Valeant's press release, the $100 mill in loan proceeds was used for "among other things, financing charitable contributions, including to Duke University, and helping to fund a community swimming pool, purchasing Valeant shares, and meeting certain tax obligations related to the vesting and payment of Valeant compensatory equity awards".  

 

VRX | MORE QUESTIONS... - Valeant Issues Statement

 

This is a problem if the 1.3 million in pledged shares were unrelated to Pearson's GRAT, because the proxy filing explicitly states that the proceeds of those loans were used only "to fund tax and other equity incentive awards and purchases of Company shares".  There is no mention of charitable donations, and brings into question what else Pearson may have used the proceeds of the loan for? 

 

VRX | MORE QUESTIONS... - 2015 11 06 Tax

 

Michael Pearson's large stake in the company and compensation tied to TSR has been a cornerstone of the bull thesis, providing assurance that incentives are properly aligned.  Therefore, it is clearly a problem if Michael Pearson used the loan proceeds for anything other than what is stated in the proxy filing.... even if it is for "charitable" purposes.  It is possible that the charitable contributions were made through the GRAT, although a GRAT is usually established as a way to transfer wealth to relatives to avoid paying a gift tax.

 

We have no problem with the practice of pledging stock as collateral in exchange for a loan.  What we do have a problem with is if Pearson used the proceeds of the loan for purposes other than what was disclosed to shareholders.  Given the falling stock price and heightened scrutiny, we would welcome an audit of the loan proceeds.

pearson allowed to sell stock

The 2014 proxy filing states that Michael Pearson is not permitted to sell "net shares until 2017".  However, the proxy filing in 2015 "permits Mr. Pearson to sell 3,000,000 net shares.... plus transfer an additional 1,000,000 net shares in charitable contributions".  This represents 50% of his stake (net of the 2 mill shares pledged as collateral), compared to 0% in 2014.  

 

"Valeant has adopted a policy generally disallowing future pledges and is permitting Mr. Pearson to sell shares, which may reduce the level of pledging"

 

VRX | MORE QUESTIONS... - 2015 11 06 VRX

 

This is a big change from the policy of prior years.  Pearson has touted that he has "not sold any shares provided to [him] as compensation" since joining Valeant.  However, we don't see any difference between selling stock and pledging shares as collateral for a loan, and based on the commentary in the latest proxy filing, neither does the board.

 

Please call or e-mail with any questions.

 

Thomas Tobin
Managing Director 

@HedgeyeHC   

 

Andrew Freedman

Analyst

@HedgeyeHIT  

 

 

 


The 'Where’s Waldo' Jobs Report: Head Fake Before Slowdown?

On Fox Business’ Mornings With Maria, Hedgeye CEO Keith McCullough, Barrons.com Editor Jack Otter and FBN’s Trish Regan analyze the October jobs report.

Click The Image Below to watch.

The 'Where’s Waldo' Jobs Report: Head Fake Before Slowdown? - fox bus  jobs

 

 


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 80.64%
  • SHORT SIGNALS 78.57%

RTA LIVE: November 6, 2015

 

 


Jobs, USD and Rates

Client Talking Points

JOBS

Something in the 90% range of questions we’re receiving on this jobs report have to do with the “upside” surprise in the numbers, so we’ll stay with the #LateCycle Employment call and remind you there’s a lot of downside. If you look at a chart of the 10-Year U.S. Treasury Yield you can see long-term investors have understood this for almost 2 years now.

USD

This is the most obvious live quote signaling that expectations are for a “bullish” jobs print – so anything that’s not bullish would be USD bearish with immediate-term downside in the USD Index to 96.52 and upside in EUR/USD to $1.11.

RATES

We’re not so interested in nailing the number today as we are getting the 3-6 month rate of change in NFP slowing – the absolute peak was in DEC of 2014 (tough pending comp!) and the rate of change peaked at 2.34% NFP ear-over growth in FEB of 2015 – these cycles are long.

 

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

Asset Allocation

CASH 61% US EQUITIES 5%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 32% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

Last week was a big week for McDonald’s (MCD), as they reached the inflection point we were predicting. Post earnings, the next catalyst for the stock is going to be the November 10th analyst meeting.

 

The meeting will be an opportunity for management to shed more light on the progress of all day breakfast, additional G&A cuts and the potential of doing a REIT. Our Restaurants team remains bullish on the name, and they look forward to giving you some material updates after the meeting.

RH

Restoration Hardware (RH) shares gained 5.8% this past week. The margin story here is explosive. Margins were sitting below 10% on Friday, and we think they will be above 16% in 3 years. The key reason is that expense leverage on these new properties is like nothing we’ve ever seen (i.e. RH pays only 10% more for square footage that’s 300% larger).

 

In addition, the company does not have to proportionately grow its sourcing organization with the growth in its store base OR its category expansion.

 

Our estimate is that the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we’re getting to a stock in excess of $300.

TLT

Our forecasts for domestic economic growth continue to be more accurate than the consensus. We anticipate economic growth will get a lot worse from here. That is why you want to own long-term bonds (TLT, EDV).

  • Real GDP growth slowed to 1.5% on a quarter-over-quarter seasonally adjusted basis. That was actually right at the top end of our range going into it (remember that the mainstream Q/Q annualized number is unpredictable)
  • On the Y/Y numbers, growth decelerated for a 2nd straight quarter to 2.0% from +2.7%
  • Consumption growth was a huge contributor to the number vs. the manufacturing side of the economy which continues to slow. However, take a look at the important chart below. We’re already past peak consumption growth. Consumption growth was positive on an absolute basis but remained rate of change negative with Q3 representing the 2nd quarter of deceleration off of the Q1 2015 peak
  • Both residential and nonresidential Investment decelerated sequentially and inventories contributed almost -1.5% bps to the headline number
  • Personal Income decelerated to +0.1% for Sep vs. +0.3% in August. The expectation was for a +0.2% print
  • Personal spending decelerated to +0.1% from +0.4%. The expectation was also for +0.2% print.
  • Core PCE printed flat at +1.3% Y/Y for Sep. vs. Aug. on a Y/Y basis. That number missed expectations for a +1.4% print

Three for the Road

TWEET OF THE DAY

Penney: $MCD could trade at a premium to $CMG and why Chipotle Could Easily Fall Another 25%  https://app.hedgeye.com/insights/47366-penney-why-chipotle-could-easily-fall-another-25-cmg… via @hedgeye

@HedgeyeHWP

QUOTE OF THE DAY

Do not wait; the time will never be "just right." Start where you stand.

Napoleon Hill

STAT OF THE DAY

Toyota Motor Corp. said it would spend at least $1 billion on a Silicon Valley research center to study autonomous driving and robotics.


CHART OF THE DAY: Twilight Before Recession?

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake.

CHART OF THE DAY: Twilight Before Recession? - EL Income   Consumption Growth

 

"... In reality, any number of statistics can be trotted out to support a given narrative.  It should not be a secret that our late-cycle narrative expects further deceleration.

 

Is a recession immediately imminent? …  the balance of lead labor market data doesn’t suggest that, but we are in the twilight of the current expansionary cycle and the slope of the line across a growing number of indicators has gone negative.  Today’s employment report for October won’t change the trend in payrolls."   


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