Cartoon of the Day: Bubble?

Cartoon of the Day: Bubble? - 8 ball bubble 12.11.2015


"Forget what people who are in the business of marketing 'the market is flat' are telling you," Hedgeye CEO Keith McCullough wrote in today's Early Look. "Across asset classes we are in the midst of the 3rd major crash I’ve seen in my Wall Street career." 

Hedgeye Guest Contributor | Cliggott: 'Bad, Bad Data This Week'

Editor's Note: We are pleased to present this brief Hedgeye Contributor View written by Doug Cliggott. Cliggott is a former U.S. equity strategist at Credit Suisse and chief investment strategist at J.P. Morgan. He is currently a lecturer in the Economics Department at UMass Amherst. Incidentally, he recently sat down with us here at Hedgeye for a Real Conversations interview. Click here to watch.


Hedgeye Guest Contributor | Cliggott: 'Bad, Bad Data This Week' - z doug cliggott normal


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By Doug Cliggott


The Fed released the Q3 2015 flow of funds data yesterday. Now we have a good picture of the third quarter.  


Profits of non-financial corporations were down 5% vs. Q3.2014, and their debt was up 7% vs. Q3.2014. This 1200 bps gap between debt growth and profit growth is the widest we have seen since 2007. As we talked about in September — watch "An Uncomfortably High Probability of a Significant Correction" — bad things tend to happen when debt growth a lot faster than earnings.


The Fed data also show a violent (75%) slowdown in Q3 net share buybacks.  That no doubt played a central role in the equity downdraft during Q3 ... a huge buyer went away.  


My guess is this is a central theme for 2016 — contracting corporate profits and much weaker cash flows mean very low share buyback volumes compared with the past four or five years. So U.S. equities will be "missing" a big buyer with no obvious, or less-than-obvious, cast of characters standing in the wings to step in and take their place.


And, on the earnings front, the OECD released new LEI data on December 8th. This data — VERY WEAK — plus wages & salaries growing at 5% point to further weakness in profits.


On that cheery note ... Have a good weekend!

McCullough: The Most Important Thing Going On Right Now


In this brief excerpt from The Macro Show Friday morning, Hedgeye CEO Keith McCullough spells out the biggest global market risk right now and why we are on the "pedestrian path to perdition."


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


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FHQ (Friday Housing Quant)

Takeaway: Rate fears and oil patch concerns have pushed the builders lower in the short term.

Our FHQ (Friday Housing Quant) tables present the state of the publicly traded homebuilders in a visually-friendly, quantitative format that takes about 60 seconds to consume. 



  • Performance Roundup: Housing has become a bit of a bifucated beast in the last week or two. Interestingly, ITB is +5.3% QTD, trailing only slightly the S&P 500 at +6.9%, but this is a bit of cherry pick as ITB contains only 10 stocks and its largest 3 holdings: DHI, LEN and NVR happen to be the three best performing builders. XHB is +2.3% for the QTD and the average builder we track is -1.6% with the median builder down -2.9% QTD. We think the weakness is a confluence of rate-driven concerns ahead of the Fed meeting next week, ongoing jitters around the Houston market and residual profitability angst following TOL's 4Q. Our preferred four horsemen of 4Q among builders are NVR, LEN, BZH & KBH, which are +8.9%, +3.4%, -6.9%, and -4.1%, respectively. The three best performing builders thus far this quarter are DHI (+10.2%), NVR (+8.9%) and LEN (+3.4%), while the three worst performing builders are TMHC (-13.8%), BZH (-6.9%), and MTH (-5.8%).
  • Insider Buying: Other than the Director at Hovnanian (HOV) who purchased 20k shares (~$45k) in late October, there's been no recent insider buying in the sector.
  • Beta: The highest beta names (1YR) remain HOV (1.55), KBH and BZH which are at 1.32 and 1.35, respectively. At the other end of the spectrum, the lowest beta plays are NVR (0.65), MDC (0.97) and TOL (1.00).
  • Short Interest: CAA, HOVand DHI have seen SI creep higher, rising by the most in the group in the last 2 wks. TMHC, KBH & BZH have seen SI fall by the most.
  • Sell Side Sentiment: Brokers have become marginally more bullish on TOL (+2.4%) and less bullish on NVR (-0.8%) in the latest month.
  • Valuation: The cheapest names in the group currently are BZH (6.9x), MTH (9.4x) and TMHC (8.9x), while the most expensive are NVR (15.3x), LEN (13.1x), and DHI (12.3x). Incidentally, NVR, at 5.3x TBV, is currently at 97% of its peak 5-year valuation. DHI and LEN, both at 2.0x P/TB are at 85% and 81% of their 5-year peak multiples.



FHQ (Friday Housing Quant) - BQ 1


FHQ (Friday Housing Quant) - BQ 2


FHQ (Friday Housing Quant) - BQ 3


FHQ (Friday Housing Quant) - BQ 4 


Joshua Steiner, CFA


Christian B. Drake

Hemorrhaging: America's Energy Economy

Takeaway: Jobless claims in energy-dependent states are rising much faster than the broader U.S. economy.

Hemorrhaging: America's Energy Economy - z oil


The main takeaway on the labor front this week is that while the US more broadly muddles further along, the energy economy is hemorrhaging.


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.


Hemorrhaging: America's Energy Economy - Claims18


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[Unlocked Early Look] Conviction Sells

Editor's Note: The Early Look below was originally written on 12/9 by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more about the Early Look and to subscribe.

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“We are all so wrong so often that it amazes me that we can have any conviction at all over the direction of things to come. But we must.”

-Jim Cramer


Amen to that, Jim. The scientific art of investing is a very humbling exercise indeed. From setting asset allocations to factor exposure selection all the way down to security section on the long and short side, there’s a lot that can go awry at various intervals of that process.


As such, we investors are forced to constantly ask ourselves a series of risk management questions including, but not limited to:


  • Is my fundamental research view becoming more or less accurate, at the margins?
  • Is said view at risk of becoming fully priced in?
  • Am I big enough or too big in this position?


As you are already well aware, the risk management checklist list goes on and on – effectively leading to a never-ending exercise of fact-checking and aggregating consensus. Indeed, it’s a strenuous task that can leave even the most thoughtful of investors feeling insecure and restless – not unlike how I feel about my waistline two weeks after Thanksgiving…


Back to the Global Macro Grind


In spite of the aforementioned insecurity – which Keith has affectionately and jokingly termed “Hedgie Performance Anxiety Disorder” (or #HPAD for short) – we agree with Cramer’s assertion that we mustn’t let such insecurities detract from our level of conviction. Most of you will note that it can be extremely hard to run money, raise capital or sell research without a high degree of conviction.


Take Hedgeye Energy Sector Head Kevin Kaiser for example. Last night, Kinder Morgan (KMI) – the bellwether of MLPs and dividend-paying energy companies – cut its dividend by -74% to 12.5 cents/share. If you’re reading this note, you’re probably already familiar with Kevin’s singlehanded destruction of the levered upstream MLP space – see the unit prices of LINN, BBEP, VNR, ARP, LGCY – as well as his consistent criticisms about the business models and valuations in the broader MLP sector. His work is now paying off, with the Alerian MLP Index down -40.4% YTD; KMI itself is down -55.5% from 9/4/13 (when Kevin introduced his short thesis) through yesterday’s close.


Ranging from analytical critiques that at least attempted to poke holes in his analysis to thoughtless ad hominem attacks, the amount of pushback Kevin has received over the past 2+ years regarding his bearish research in the MLP space has been nothing shy of legendary. Maintaining conviction in his analysis was the only thing that allowed him to overcome the rash of criticism that accompanied being the lone bear on a few of the most beloved stocks and management teams in modern U.S. equity market history.


Click to enlarge

[Unlocked Early Look] Conviction Sells - kaiser reuters


Among the most high-profile of such criticism was, in fact, Jim Cramer’s consistently scathing, ad hominem attacks on Kevin and our firm. Quick to defend the compensation schemes of his “friends” (i.e. Rich Kinder of KMI and Mark Ellis of LINN) and slow to actually do the work on the actual business models, Cramer and everyone else who chirped Kaiser for being [only] a “26-year-old analyst” – including a very high-profile hedge fund that fired him for being right – deserves to feel shame today. We all win and lose in this industry and I, for one, won’t tolerate those who do either without class and humility.


While Kevin’s work on KMI has been and continues to be as detailed and thoughtful as any equity analysis you’ll come across, the core fundamental conclusion was actually quite simple:


The company doesn’t generate enough cash flow to pay its dividend and its dividend is the #1, #2 and #3 reason why most investors own the stock.


While we have plenty of other examples of the Hedgeye research team helping clients profit from high-conviction, non-consensus long and short ideas throughout the YTD (e.g. KSS, YELP, MCD), I specifically want to highlight Hedgeye Healthcare Sector Head Tom Tobin’s recent win on the short side of Valeant (VRX) – which is down -22.1% since he introduced his short thesis last July 11th – as another example of maintaining conviction amid elevated criticism.


The -64.3% plunge in the stock from its 8/5/15 all-time high to yesterday’s closing price probably felt very rewarding for someone like Tom who is sure to avoid the grey area of what’s legally and/or morally acceptable – unlike some of Valeant’s high-profile shareholders.


Perhaps more than any Sector Head at our firm, Tom’s process is extremely differentiated from the herd and quantitatively oriented to a significant degree – two qualities that allowed him to maintain conviction in his thesis despite what must’ve felt like the entire hedge fund community rooting against him. To the extent you’d like additional color on Tom’s current bench of long and short ideas, please email


For what it’s worth, I recently had a client tell me that Tom’s #ACATaper and Healthcare #Deflation themes were unlike anything he’d seen from the sell-side. I couldn’t think of a more deserving duo than Tom and his analyst Andrew Freedman as it relates to their winning their first ever “Pucks” at the Hedgeye holiday party last week, which is akin to sharing our firm’s MVP honors for 2015.


Sticking with the theme of conviction, it’s important to conclude this note with an update of the non-consensus thesis that our macro team currently has the largest degree of conviction in:


“The U.S. economy is #LateCycle and the probability of a recession commencing by mid-2016 is extremely elevated – both in absolute terms and relative to the belief held by the overwhelming majority of investors and policymakers. Moreover, the risk of a global recession is also great in this scenario.”


Fortuitously, we haven’t had to endure the rash of criticism levied upon our colleagues Kevin Kaiser and Tom Tobin. This is probably because we’ve been right as rain on the slope of domestic and global economic data since introducing our #LateCycle theme in 2Q15 or since introducing our #Quad4, Global #Deflation view back in early August of last year.


While we certainly haven’t gotten every market move right (far from it, in fact), the factor exposure biases we’ve adopted as a result of our fundamental views have been far better than bad throughout the duration of the aforementioned [and associated] calls:


  • Within U.S. Equities: LONG Mega Caps, Low Beta and Low Debt vs. SHORT Small Caps, High Beta and High Debt (KMI? VRX?) at the style factor level. LONG Healthcare (now defunct), Utilities and REITS vs. SHORT Energy, Materials, Industrials, Financials and Retailers at the sector level.
  • Within F.I.C.C.: LONG Long-term Treasuries and Muni Bonds vs. SHORT High-Yield Credit within U.S. fixed income. LONG the U.S. Dollar vs. SHORT basically everything else including the Euro, Japanese Yen, Commodity Currencies (e.g. CAD, AUD and BRL) and EM FX (e.g. KRW, TRY and KRW) within foreign exchange. We’ve occasionally held a LONG bias on Gold (now defunct) vs. SHORT everything else – Energy and Base Metals in particular – within the commodity complex.
  • Within Global Equities: LONG Japan vs. SHORT Europe and Emerging Markets – LatAm in particular – at the regional level.


In terms of addressing the first of the risk management questions introduced at the onset of this note, we continue to thoroughly review what has generally been a fair amount of incrementally confirming evidence in support of our bearish outlook for the domestic and global economies:


  • Ongoing deterioration in the Chinese economy: “The Real Reason You Should Be Concerned By China’s Recessionary Trade Data” (12/8/15);
  • Ongoing deterioration in the global economy: “Are You Paying Enough Attention to the Global Economy?” (12/5/15);
  • A negative inflection in U.S. consumer demand: “Can’t Sneak #GrowthSlowing Past the Goalie” (11/25/15); and
  • A refutation of our competitor’s “global growth has bottomed” view: “What's Driving Our Bearish Forecasts for Domestic and Global Growth?” (11/9/15)


Proceed accordingly from here – with conviction, of course.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.13-2.31% (neutral)

SPX 2049-2109 (bearish)
RUT 1152--1177 (bearish)

VIX 15.91-19.21 (bullish)
USD 97.36-99.33 (bullish)
EUR/USD 1.05-1.09 (bearish)
YEN 122.08-123.46 (bearish)
Oil (WTI) 37.03-40.84 (bearish)

Gold 1049-1089 (bearish)
Copper 1.99-2.10 (bearish)


Keep your head on a swivel,



Darius Dale



[Unlocked Early Look] Conviction Sells - Chart of the Day Darius

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