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"... Remember that if/when the Fed pivots back to dovish from pretend-hawkish, they have to tell the American People why they are doing that," wrote Hedgeye CEO Keith McCullough in today's Early Look. "Say it with me now – Super #LateCycle Growth Slowing…"
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Takeaway: We hosted a one hour call this morning introducing our bearish thesis on PRA Group (PRAA). Links to the deck and replay are below.
- Supply/Demand Headwinds: The market for buying defaulted receivables is especially unfavorable. Demand for paper has exceeded supply for a few years now, mirroring the environment last seen from 2005-2007 when shares of PRAA tumbled ~70%.
- Growing Debt: Leverage at the company has risen quickly in the wake of the Activ deal.
- Insiders Dumping: Widespread insider selling suggests that insiders see similar intermediate/longer-term headwinds.
- History's Guide: Our analysis of the interplay between labor markets, terminal IRRs and pre-tax margins will shed light on what to expect fundamentally from a timing standpoint.
- Regulatory Pressure: The CFPB is expected to set new rules for debt collectors in 2016.
- Current Value Unsustainable: The ERC less cost to collect and taxes is currently ~$400mn below the net debt of the company.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Takeaway: We don’t put much stock in Old Wall’s Fed predictions.
More data. More bad news for Fed-hike prognosticators.
Today, U.S. industrial production year-over-year slowed again to the lowest reading of 2015. Here’s analysis and a chart from Hedgeye CEO Keith McCullough:
“With Industrial Production only 0.3% y/y now (lowest reading of 2015 - see red circles) we’re entering the next leg down of the cycle = Industrial/Cyclical Recession. Don’t forget that growth is reported y/y and the toughest compares were in NOV/DEC of 2014 (see green circle). Things should slow faster in the coming months.”
click image to enlarge.
That’s just the latest underwhelming economic reading. Don't forget New York Fed president Bill Dudley's recent concern that inflation is running “well below our 2 percent objective.”
Below are a few more recent economic misses (for those of you keeping score):
So a December rate hike isn’t necessarily such a sure thing. The Fed is 'data dependent.' Remember?
And yet, the latest headscratcher from Old Wall is the overwhelming expectation of a December rate hike. If you think their predictive track record matters, think again. Here’s a Wall Street Journal survey of economists:
“There is near-unanimous agreement among private forecasters surveyed that the Federal Reserve will begin raising short-term interest rates next month after holding them near zero for seven years.
About 92% of the business and academic economists polled by The Wall Street Journal in recent days said they expected the Fed to raise its benchmark federal-funds rate at its Dec. 15-16 policy meeting…
In the latest survey, the economists on average estimated the probability of a rate increase next month at 71%, up from 48% a month earlier.”
Now take a second to look at how “well” these same folks have done forecasting the next Fed rate hike. Below is a recap also from WSJ. (Notice the overwhelming consensus, in July and August, that the Fed would hike in September):
No, we don’t put much stock in Old Wall’s predictions.
In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why investors need to pay closer attention to volume and volatility.
Subscribe to The Macro Show today for access to this and all other episodes.
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