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Takeaway: We are flagging JPMorgan (JPM - Score: 93) (short) and Federated Investors (FII - Score: 15) (long) on sentiment and short interest.

This morning we are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.


The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  


We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.


Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.


The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 








The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”


Let us know if you would like to receive a copy of our black book, which explains this system and its applications.


BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   


SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 






Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

The Macro Show Replay | November 25, 2015


CHART OF THE DAY: This Economic Indicator Always Peaks Before Recession


CHART OF THE DAY: This Economic Indicator Always Peaks Before Recession - 11.25.15 EL chart


Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe. 


"... Unless you think it’s the 1990s (newsflash: it’s not), US Consumer Confidence always puts in a cycle peak in the 100-110 range, right before a US recession. Yesterday’s reading of 90.4 for November dropped almost 10% from 99.1 in October."



Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Where The Winds Blow

“One ship drives East and another drives West

With the self-same winds that blow.

‘Tis the set of sails

And not the gales

Which tells us the way to go.”

-Ella Wheeler Wilcox


That’s how David McCullough introduces Chapter 3 of The Wright Brothers as he tells the story of the boys moving East (from Ohio) toward the Outer Banks of the Carolinas. We should all be thankful that they took the risk and made that trip.


Whether you’re headed toward Kitty Hawk, North Carolina this week or just staying close to home, the Hedgeye team and I want to wish you a very peaceful and happy Thanksgiving.


With a record 94 million Americans not in the US labor force and approximately 46 million people on food-stamps, I’m quite humbled by the blessed life my family and firm is living. I can never say thank you enough. Our collective responsibility remains being the change we all want to see in this world.


Where The Winds Blow - turkey


Back to the Global Macro Grind


While I’d like nothing more than to write about the prospects of US #GrowthAccelerating (like I did around this time in 2012), I don’t like to write fiction on economic matters. While hope often gives us the wonderful gift of life, it is not a risk management process.


Sadly, going into this Thanksgiving break, the US economy was dealt two of the Top 3 leading indicators for a US Recession yesterday:


  1. US Corporate Profits breaking down below their 12-month trailing average
  2. US Consumer Confidence rolling off its multi-year cycle peak


As you can see in the Chart of The Day, Consumer Confidence peaked in Q1 of 2015 in conjunction with:


  1. US Consumption Growth (Real PCE Growth) peaking at 3.3% year-over-year in Q1 of 2015
  2. Non-Farm Payroll Growth peaking at +2.3% year-over-year in Q1 of 2015


Unless you think it’s the 1990s (newsflash: it’s not), US Consumer Confidence always puts in a cycle peak in the 100-110 range, right before a US recession. Yesterday’s reading of 90.4 for November dropped almost 10% from 99.1 in October.


On the corporate profit cycle side, yesterday’s year-over-year #GrowthSlowing US GDP report had the following two realities:


  1. US GDP slowed to 2.2% year-over-year growth (that’s the lowest of the year)
  2. US Corporate Profits slowed to -3.2% year-over-year growth (that’s the lowest of the year)


Yep. Simply following the rate of change in a sine curve, it is. Don’t let someone who is in the business of writing reasons to always be bullish obfuscate the simple reality that US GDP growth went from 1 to 2 to 3% year-over-year into the cycle peak (Q1)…


And is in the midst of slowing from 3 to 2 to 1% here in Q4 of 2015.

*sine curve math wizards note: after 1% comes 0%


Unless, of course, “it’s different this time”, profits slowing to negative year-over-year growth is a leading indicator for people losing their jobs and becoming less confident. Of the 500 companies in the S&P, 490 have now reported an aggregate Q3 earnings decline of -4.4%.


Now if you’re still not aware of the #LateCycle call on both US employment and consumption growth – but still data mining for a 9-month lag chart of a PMI to bottom, the US Market PMI reading of 52.6 in NOV slowed vs. the head-fake-counter-TREND-bounce to 54.1 in OCT.


In other reality-check news:


  1. Last night, Argentina told the world that its central bank has “no Dollars left…”
  2. Chinese (and American) Corporate Bond Spreads continue to widen here in November
  3. Copper continues to crash (-30% YTD)
  4. US Treasury Yield Spread continues to compress (-6 basis points this week to +129bps 10s/2s)
  5. Japan announced they’re going to hand out 30,000 Yen to 100 million low-income people


To put the latest Japanese social plan in context, since a Yen isn’t what it used to be, 30,000 Yens = $245 US Dollars. So it will take roughly 300 billion Burning Yens to fund that.


If the US Federal Reserve didn’t do QE and just wrote checks to impoverished Americans like Japan has resorted to doing (post QE failing), at least we’d have a better conscience about the fact that it was QE’s asset price inflation that hurt the many, in lieu of paying the few.


Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):


UST 10yr Yield 2.18-2.30% (neutral)

SPX 2020-2109 (neutral)
RUT 1139--1193 (bearish)

NASDAQ 4 (bullish)

Nikkei 199 (bullish)

DAX 101 (bullish)

VIX 14.66-20.47 (bullish)
USD 98.81-100.19 (bullish)
EUR/USD 1.05-1.08 (bearish)
YEN 122.04-123.73 (bearish)
Oil (WTI) 40.05-43.56 (bearish)

Nat Gas 2.15-2.35 (bearish)

Gold 1060-1085 (bearish)
Copper 1.98-2.09 (bearish)


Best of luck out there today and Happy Thanksgiving,



Keith R. McCullough
Chief Executive Officer


Where The Winds Blow - 11.25.15 EL chart

USD, Europe and Yield Curve

Client Talking Points


Another strong bounce-back morning for the greenback (+0.4% vs. the Euro) is taking the commodity crash right back to the woodshed. Oil is down -1.5% post yesterday’s +2.8% bounce (which helped Energy stocks lead the U.S. equity rally off the lows intraday) - #Deflation Risk = ON.


European stocks closed weak yesterday, so you’re seeing the EuroStoxx play catchup with the U.S. intraday geo-risk bounce this morning – although Spain and Greece -0.6% vs. France +1.3%, so there are divergences as Spanish PPI (producer price) #Deflation was -3.5% OCT (and will be worse in NOV).


The yield curve continues to compress as the U.S. economic data slows (Corporate profits -3.2% Q3 and Consumer Confidence tanked to 90.4). This week the 10s/2s spread has compressed another 6 basis points to +129 basis points as credit trades like 1,000 pounds of stale pumpkin in a 100lb bag.


**Tune into The Macro Show with Hedgeye CEO Keith McCullough in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

MCD is reducing G&A by $500 billion compared to the $300 million target announced in May the vast majority of which they expect to realize by the end of 2017.


Expectations going forward are for system sales to grow faster than G&A. The incremental savings are primarily derived from savings coming from a more heavily franchised and less G&A intensive structure; streamlining of corporate and former Area of the World organizations and realizing greater efficiencies through the global business services platform. The G&A savings represent roughly a 20% reduction off of the G&A 2015 base of $2.6 billion.


Another big shift is that MCD is now aiming to refranchise 4,000 restaurants by the end of 2018, with mostly all of them to take place in the high-growth and foundational segments.


Below are two callouts from this Thursday's Willams-Sonoma (WSM) third quarter earnings print as it relates to Restoration Hardware (RH). RH will report earnings in early December.


West Elm – i.e. the only concept within the WSM family of brands that is growing square footage put up a 15.7% comp in the quarter which equated to a 40bps acceleration on a 2yr basis sequentially. The concept has always been a good bellwether for RH from a directional standpoint. The consumer/concept are much different. West Elm productivity is in the $800/sq.ft. range compared to RH at $3,300 (inclusive of e-comm) in the same size box. But it’s the only concept growing square footage. We are modeling a divergence in 3Q15 as RH pushed its growth into 2H from 1H with the release of two new concepts this Fall (Modern and Teen).

GM – was down 110bps in the quarter, with merch margins relatively flat offset by dilution from International franchise growth and increased shipping expense as WSM continues to iron out its inventory position from the West Coast port contract dispute. It's important to mention the contract dispute because it was resolved nine months ago (and yet the company still talks about it). On the shipping front, new rate hikes at FedEx and UPS haven’t hit the P&L, so this was all self-inflicted. Each of the negative drivers on the GM line appear to be unique to WSM and shouldn’t be contagious to a name like RH. 


The long bond position is taking some heat with the rate hike fears, but that’s why you’re short JNK on the other side of it. Deflation and increasing rate hike expectations are the nemesis of poor credit. As mentioned last week, it’s called spread risk, and this leverage is fueled by low rate policy.


Since the Fed turned hawkish, bonds are down, rates have risen, and deflation has re-commenced. Admittedly, long-term treasuries haven’t worked. TLT is down -2.0% over the last month; BUT, if you’ve followed us with our short JNK call, that’s down -3.4%.

Three for the Road


**NEW VIDEO (1:46 min)

The Bearish Case Against Healthcare https://app.hedgeye.com/insights/47686-the-bearish-case-against-healthcare?type=video… via @KeithMcCullough $XLV



Thoughts rule the world.

Ralph Waldo Emerson


51% of Americans believe it is the responsibility of the federal government to ensure all Americans have health insurance coverage, this is the first time in 7 years that a majority of Americans say the government is responsible for making sure all citizens have health insurance.

November 24, 2015


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.30 2.18 2.24
S&P 500
2,020 2,109 2,089
Russell 2000
1,139 1,193 1,188
NASDAQ Composite
4,955 5,165 5,102
Nikkei 225 Index
19,489 20,019 19,924
German DAX Composite
10,768 11,241 10,933
Volatility Index
14.66 20.47 15.93
U.S. Dollar Index
98.81 100.19 99.59
1.05 1.08 1.06
Japanese Yen
122.04 123.73 122.56
Light Crude Oil Spot Price
40.05 43.56 42.65
Natural Gas Spot Price
2.15 2.35 2.31
Gold Spot Price
1,060 1,085 1,074
Copper Spot Price
1.98 2.09 2.03
Apple Inc.
112 120 118
Amazon.com Inc
635 685 671
Priceline.com Inc.
1,224 1,302 1,240
Valeant Pharmaceuticals International, Inc.
65.60 94.39 87.45
Alibaba Group Holding Ltd.
75.43 81.99 80.86
Hewlett-Packard Co.
12.55 14.69 14.64