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Cartoon of the Day: Over The Cliff?

Cartoon of the Day: Over The Cliff? - rate hike cartoon 12.10.2015

 

The Fed is fighting economic gravity with Janet Yellen hell-bent on raising rates into a slowdown.


Peak M&A Is A Classic Late Cycle Indicator | $DD $DOW

Takeaway: We've been highlighting the late cycle nature of M&A for a while now.

Peak M&A Is A Classic Late Cycle Indicator | $DD $DOW - late cycle

Need more evidence that the U.S. is in a late cycle slowdown?

 

Look no further than the proposed merger of Dow Chemical (DOW) and DuPont (DD). If the deal goes through, it would create a massive $130 billion behemoth. Management would ultimately divvy it up into three separate businesses.

 

Why does that matter? Here's our analysis from a note sent to subscribers this morning: 

 

"... A multi-quarter acceleration into peak capital markets activity has historically been a harbinger of an economic downturn. Yesterday, multiple reports claimed DD and DOW are in advanced talks to merge, with the combination to then split into three separate companies; both stocks finished ~12% higher on the day.

 

The WSJ recently noted that worldwide M&A, excluding buyouts, has totaled $3.7T this year, beating the previous record set in 2007. This is exactly the kind of frothy, head-scratching headline you’d expect to see to confirm the forward outlook that global economic growth is as bad as we think it is. 

 

M&A usually peaks when company insiders agree to sell and that’s exactly what you’re seeing in insider transaction reports. At $7.6B, November 2015 was the fourth-highest month of insider selling on record.

 

This comes amid record share buyback activity, which has averaged $3.9B/day since the beginning of earnings season in October. Data firm Trim Tabs observes that this is the highest pace since the bull market began in March 2009.

 

Companies are doing everything they can to arrest the gravity weighing on peak margins. It has become increasingly difficult to protect earnings amid #GlobalDeflation which has perpetuated the ongoing global industrial recession – including right here in the U.S. All told, there is a ton of risk to forward estimates for GDP and EPS growth if we’re right on the economic cycle."

 

We've been talking about the late cycle nature of M&A for a while now. This is a slide from our 73-page Q4 Macro Themes presentation released in October:

 

Peak M&A Is A Classic Late Cycle Indicator | $DD $DOW - macro themes manda 

 

Say it with us now, the U.S. economy is "Super Late Cycle."

 


Macro Meets Micro: Will Gaming Stocks Get Hit In An Economic Slowdown?

 

On The Macro Show this morning, Hedgeye Gaming Lodging & Leisure analyst Todd Jordan explains why he is bullish on Boyd Gaming (BYD) and responds to a subscriber's question about how our Macro team's #GrowthSlowing theme might impact gaming stocks.

 

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.


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 80.65%
  • SHORT SIGNALS 78.64%

Style Factors, #LateCycle and Europe

Client Talking Points

STYLE FACTORS

Low Debt, Low SI, Low Beta, Large Cap, Growth has been the winning style factor constellation across every duration YTD.  While yesterday saw the opposite factor cocktail outperform alongside the -1.15% retreat in the $USD, 1-day does not a trend make and we continue to like larger cap liquidity with relative growth (& a catalyst) in a growth slowing, rising credit risk environment.  

#LATECYCLE

A multi-quarter acceleration into peak capital markets activity has historically been a harbinger of economic downturn. Yesterday, multiple reports claimed DD and DOW are in advanced talks to merge, with the combination to then split into three separate companies; both stocks finished ~12% higher on the day. This is exactly the kind of frothy, head-scratching headline you’d like to see to confirm the forward outlook for global economic growth is as bad as we think it is. The WSJ recently noted that worldwide M&A, excluding buyouts, has totaled $3.7T this year, beating the previous record set in 2007. M&A peaks when sellers agree to sell and that’s exactly what you’re seeing amid insider transaction reports. At $7.6B, November 2015 was the fourth-highest month of insider selling on record. This comes amid record share buyback activity, which has averaged $3.9B/day since the beginning of earnings season in October. Data firm Trim Tabs observes that this is the highest pace since the bull market began in March 2009. Companies are doing everything they can to arrest the gravity weighing on peak margins and protect earnings amid #GlobalDeflation which has perpetuated the ongoing global industrial recession – including right here in the U.S. All told, there is a ton of risk to forward estimates for GDP and EPS growth if we’re right on the economic cycle.

EUROPE

The Bank of England and Swiss National Bank both kept their interest rates on hold today, a noteworthy decision given the great easing pressure expected from the ECB. The BOE’s main rate was held steady at 0.50% while the SNB’s 3-Month Libor lower target remained anchored at -0.25% and the deposit rate was unchanged at -0.75%.  We continue to expect Currency Wars (a term coined by our good friend Jim Rickards) to heat up – we’re waiting for the Fed decision next week and expect the ECB to go dovish in 1Q 2016 in response to growth and inflation data the missing expectations. 

Asset Allocation

CASH 70% US EQUITIES 3%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 15% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MCD

Restaurants Sector Head Howard Penney had no material update on McDonald's (MCD) this week. However, here is what Penney wrote around when we added MCD to Investing Ideas. It's worth reiterating our high conviction in the stock:

 

"We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. We are going to be looking at a much different company 1-3 years from now." 

 

"Urgency has been instilled from the top down by new CEO Steve Easterbrook," according to Penney. "This ship is in gear and headed north. 2015 will be the last time this stock is below $100."

RH

A lot has happened in 13 weeks... not the least of which is that Restoration Hardware (RH) is underperforming not only the market by 16%, but Retail as well (by 7%) – despite RH being more insulated from some of the issues that are clipping earnings today for retailers more broadly.

 

Over this time period, however, RH meaningfully accelerated square footage growth, launched two new concepts. Some say it’s bad timing. We disagree. RH is our favorite name in the retail space, and we like it across all three durations. Trade, Trend, and Tail.

TLT

On went the game of slowing last week with a little central planning un-secretive sauce. Despite the ECB’s move to cut the deposit rate to -0.30%, Draghi didn’t ring the cowbell loud enough. Meanwhile, Friday’s jobs report might have been just enough for Janet to hike rates into a late cycle slowdown. The consensus long USD crowd was crushed on the ECB news. The dollar lost over 2% on Thursday and rates were pushed higher.

 

If growth is going to continue to slow, with a rate hike on the horizon, a relative fixed income spread play (long TLT, short JNK) is exactly what you want on.

Three for the Road

TWEET OF THE DAY

NEW VIDEO: Disconcerting Global Macro Developments https://app.hedgeye.com/insights/47987-new-video-disconcerting-global-macro-developments… cc @KeithMcCullough #Deflation $USD

@Hedgeye

QUOTE OF THE DAY

Things won are done; joy's soul lies in the doing.

William Shakespeare

STAT OF THE DAY

Gallup's November update of Americans' 2015 holiday spending intentions finds U.S. adults planning to spend $830 on Christmas gifts this year, on average.


INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK

Takeaway: Energy state labor conditions are decoupling further from the trends in the broader US in the latest week's data. We expect this to persist.

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - oil cartoon

 

The main takeaway on the labor front this week is that while the US more broadly muddles further along, the energy economy is hemmorhaging. The chart below shows the spread continuing to widen between our energy state basket and the rest of the US. For reference, we use 8 states: AK, LA, NM, ND, OK, TX, WV & WY to derive our energy state basket. The gap between our two indexed series widened another 4 points to 46 for the week ended November 28th. The most recent dip in energy prices has yet to be reflected in the numbers.

Company's with material exposures to energy hubs such as Houston and Calgary will see headwinds grow for some time. This is why we remain short the Canadian Banking complex. Western Canadian companies with outsized exposure to this phenomenon include Canadian Western Bank (CWB-TSE), Genworth MI Canada (MIC-TSE), CIBC (CM) and Royal Bank of Canada (RY). For reference, initial claims trends in Alberta are similar to those in our 8-State US energy basket.

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - Claims18

 

The Data

Initial jobless claims rose 13k to 282k from 269k WoW. The prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 1.5k WoW to 270.75k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -8.3% lower YoY, which is a sequential slow down versus the previous week's -9.9% rate of change.

 

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - Claims2

 

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - Claims3

 

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - Claims4

 

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - Claims5

 

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - Claims6

 

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - Claims7

 

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - Claims8

 

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - Claims9

 

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - Claims10

 

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - Claims11

 

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - Claims19

 

Yield Spreads

The 2-10 spread rose 6 basis points WoW to 130 bps. 4Q15TD, the 2-10 spread is averaging 139 bps, which is lower by -14 bps relative to 3Q15.

 

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - Claims15

 

INITIAL JOBLESS CLAIMS | ENERGY LABOR CONTINUES TO TANK - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Five Charts That May Make You Feel Uneasy About 2016

Takeaway: Various capital markets indicators confirm the U.S. economy is undoubtedly mired in a #LateCycle slowdown. Recession pending…

Most of you are aware that a multi-quarter acceleration into peak capital markets activity has historically been a harbinger of economic downturn. In light of that, we found yesterday’s headline news on that front quite interesting: multiple reports claimed DD and DOW are in advanced talks to merge, with the combination to then split into three separate companies; both stocks finished ~12% higher on the day. This is exactly the kind of frothy, head-scratching headline you’d like to see to confirm the forward outlook for global economic growth is as bad as we think it is.

 

The WSJ recently noted that worldwide M&A, excluding buyouts, has totaled $3.7T this year, beating the previous record set in 2007. M&A peaks when sellers agree to sell and that’s exactly what you’re seeing amid insider transaction reports. At $7.6B, November 2015 was the fourth-highest month of insider selling on record. This comes amid record share buyback activity, which has averaged $3.9B/day since the beginning of earnings season in October. Data firm Trim Tabs notes that this is the highest pace since the current bull market began in March 2009 (coincidentally when we turned bullish). Hooray for Santa Claus!

 

Five Charts That May Make You Feel Uneasy About 2016 - M A Recession Indicator

 

Companies both domestic and global are doing everything they can to arrest the gravity weighing on peak margins in order to protect earnings amid #GlobalDeflation – which has perpetuated the ongoing global industrial recession, including right here in the U.S. All told, there is a ton of risk to forward estimates for GDP and EPS growth if we’re right on the economic cycle.

 

With respect to the U.S. equity market itself, we continue to highlight the dour signal for the S&P 500 and U.S. economy that is the current trending deterioration in market breadth.

 

Specifically, market breath as measured by the percentage of stocks that are technically broken is almost as bad now as it was in early November 2007, which is when the broad U.S. equity market (i.e. Russell 3000 Index which accounts for ~98% of investable market cap) had declined a commensurate level from its then all-time high as it has now (roughly -5%). Currently 60.2% and 62.4% of Russell 3000 constituent stocks below their 50-day and 2000-day moving averages, respectively. This compares to 68.2% and 64%, respectively, on 11/7/07.

 

Five Charts That May Make You Feel Uneasy About 2016 - BMBI Current

 

Looking to the S&P 500 – which is essentially flat for the YTD and off a mere -4% from its all-time high – one could make the case that Hedgeye has been wrong for being so bearish. That would certainly be the case if our clients were allowed to charge 2&20 simply to invest in the SPY on behalf of their investors. That’s obviously not the case, which is why I’m not aware of a single client that has chosen to cite the performance of the S&P 500 as proof that we are off base or as a reason to be bullish.

 

If anything, the fact that so many investors are forced to use the S&P 500 as their bogey actually amplifies our point: irrespective of what the SPX does, the carnage out there is real and it’s incredibly hard to post good return numbers when so many stocks are crashing in accordance with the bearish fundamental narratives Hedgeye has authored while “the market” itself won’t go down.

 

Five Charts That May Make You Feel Uneasy About 2016 - R3k Constituent Draw down Analysis

 

All told, we continue to see exceptional risk in searching for an investable bottom in equities at this stage in the economic cycle. Perhaps the ongoing deterioration within the high-yield credit market is as much of a warning signal about the business cycle as it was back in 2007 – and this has occurred prior to any rate hikes out of the FOMC.

 

Five Charts That May Make You Feel Uneasy About 2016 - HY Spread Risk

 

Our competition continues to be surprised to the downside by key high-frequency economic data and we expect that to continue. It’s not unlike 1H07 in that regard. The same cast of characters who failed to help you proactively prepare for the 2008-09 downturn are likely to fail you this time around too.

 

Five Charts That May Make You Feel Uneasy About 2016 - Econ Surprise Index

 

Best of luck out there as you continue to “high-grade” your portfolios in order to shield your investors from incremental economic weakness.

 

DD

 

Darius Dale

Director


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