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Cartoon of the Day: Recession Risk Rising

Cartoon of the Day: Recession Risk Rising - recession cartoon 12.22.2015

 

"We’re likely to see sub 2% growth in Q4 (ends in a few weeks and the #GrowthSlowing data in NOV/DEC has been obvious)," Hedgeye CEO Keith McCullough wrote in a note to subscribers today. "That means that the probability of a US recession by Q2 of 2016 continues to rise."


A Year Of Epic Face-Plants On Wall Street

A Year Of Epic Face-Plants On Wall Street - faceplant

 

Make no mistake. Wall Street had a terrible 2015. This year's consensus playbook was an absolute mess. 

 

A sampling of some recent headlines that caught our eye:

To be sure, the laundry list of Wall Street misses would be quite the Mea culpa. (But don't expect them to fess up.)

 

Let's take a quick run through some of this year's scorecard:

  • Year-end S&P targets have come up well short of consensus' 2208 figure.
  • Energy and financial stocks — supposed "must own" sectors — got train wrecked and are down 26%.
  • Stratospheric U.S. economic growth estimates of around 3%-plus have been consistently confounded by economic reality.
  • Meanwhile, Wall Street completely missed commodity-price deflation, (which has also run contrary to the Fed's prediction that it would all be "transitory"). The CRB index of commodities is down more than 20% this year.

No worries.

 

Hedgeye CEO Keith McCullough reviews the worst calls

  

For good measure, here's one last example of the old Wall Street swing-and-miss. Oil has tumbled another 42% year-to-date. And yet, most 2015 storytelling began with the idea that lower "prices at the pump" would be a shot in the arm for consumer spending. That didn't work out so well. Consumption is slowing. (See the slide below from our October Q3 Macro Themes presentation.) 

 

A Year Of Epic Face-Plants On Wall Street - consumption past peak

 

The list of Wall Street dogs goes on and on. We digress...

 

Luckily (for Hedgeye subscribers who stuck with our process) we tip-toed away from the consensus' face-plant and nailed investable ideas around #Deflation, #LateCycle / #GrowthSlowing and #LowerForLonger (rates). These are just a few of our non-consensus calls that proved correct, but confounded Wall Street throughout the year.

 

To be sure, our 30-some-odd analysts are also having a great year.

 

These are just a few of the many highlights.

 

Another prescient warning came from Hedgeye Senior Macro analyst Darius Dale back in late July, right before the death knell drop in the S&P 500. The S&P 500 had just made fresh all-time highs and, as Dale wrote, we were seeing a breakdown in a number of key market signals.

 

A Year Of Epic Face-Plants On Wall Street - darius dangers

 

That raised this simple question:

 

"... Sell everything? As predicted in our previous refresh, the recent bullish-to-bearish reversals in Emerging Market Equities, Foreign Exchange and Commodities were, in fact, a harbinger for similar breakdowns across the Domestic and International Equities asset classes. Our recent decision to add SPY to the short side of our thematic investment conclusions confirm how we are thinking about this risk in real time. At the bare minimum, it implies investors would do well to reduce their gross exposure and/or tighten up their net exposure to global asset markets."  

 

It was another big call Wall Street missed. The S&P fell off a cliff, dropping 12% before it bottomed in late August.   

 

Where do we go from here?

 

If you're sticking with the one Wall Street firm that nailed 2015, then watch next year. Our Macro team has been sounding the alarm on a coming recession that we think may take hold around the end of the first half of 2016. (Click here for our latest recap of the recessionary data stream.) 

 

A Year Of Epic Face-Plants On Wall Street - dale recession

 

You'd think that after such a bad year, Wall Street would shape up and ratchet back their rosy forecasts.

 

Nope...

 

So-called market prognosticators are back to predicting "Santa Claus rallies" and "Rip Your Face Off Rallies" into year end.

 

Anything to justify buying stocks yet again... 

 

Time will tell whether we're right about a coming U.S. recession. We're sure, however, that you won't hear anything nearly as bold out of Wall Street.   


EHS | "Transitory"

Takeaway: A negative factor cocktail made for a Perfect Storm in November Existing Home Sales. Importantly, December should see the weakness reverse.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 

 

EHS | "Transitory" - Compendium 122215 

 

Today's Focus: November Existing Home Sales 

We knew the risk was to the downside for Existing Sales in November (see:  They Are Who We Thought They Were) as Purchase Application demand was relatively soft in October, the 1st TRID related impacts would be manifest and some modest downside still existed to full re-convergence with Pending Home Sales.  In short, we knew it would be disappointing but the extent of TRID related delays and thus the magnitude of decline remained a wild-card. 

 

With Existing Sales down -10.5% MoM and -3.8% YoY, the decline was, indeed, remarkable.  It should also, however, be (to quote Team Janet) “transitory”.  

 

Looking to next month, the negative trinity of factors highlighted above reverses as Purchase Applications saw a notable uptick in Nov/Dec, TRID related delays resolve and recoupling to PHS should all conspire to drive a reversal in this month’s reported weakness. 

 

As Lawrence Yun, NAR chief economist, noted:

 

"As long as closing timeframes don't rise even further, it's likely more sales will register to this month's total, and November's large dip will be more of an outlier."

 

We infrequently side with stakeholders with an embedded panglossian bias but, in this instance, we’d agree with that expectation.   

 

What has not been transitory is the tight inventory environment.  Units of inventory declined for a 4th straight month, retreating -3.3% MoM and -1.9% YoY to 2.04MM Units (note – inventory is not seasonally adjusted so the YoY change is relevant, particularly around seasonal shifts in activity).  On a months-supply basis, the noisy decline in sales more than offset the inventory retreat, driving months-supply +8.1% MoM to 5.14-months – marking the 39th consecutive month below the traditional balanced market level of 6-months.  Ongoing supply tightness in the 90% of the market that is EHS remains supportive of stable-to-improving HPI trends in the nearer-term.

 

As always, we’re more interested in the Pending Home Sales data (Nov release = next Wednesday, 12/30) as a cleaner, more real-time read on the underlying trend in purchase demand in the existing market. 

 

 

 

EHS | "Transitory" - EHS vs PHS

 

EHS | "Transitory" - EHS Units and YoY TTM

 

EHS | "Transitory" - EHS months supply

 

EHS | "Transitory" - EHS Inventory units

 

EHS | "Transitory" - EHS LT

 

EHS | "Transitory" - EHS Price Regional YoY

 

EHS | "Transitory" - EHS Regional YoY 

 

 

 

 

About Existing Home Sales:

The National Association of Realtors’ Existing Home Sales index measures the number of closed resales of homes, townhomes, condominiums, and co-ops. Existing home sales do not take into account the sale of newly constructed homes. Existing home sales account for 85-95% of all home sales (new home sales account for the remainder). Therefore, increases in existing home sales tend to signify increasing consumer confidence in the market. Additionally, Existing Home Sales is a lagging series, as it measures the closing of homes that were pending home sales between 1 and 2 months earlier.

 

Frequency:

The NAR’s Existing Home Sales index is published between the 20th and the 22nd of each month. The index covers data from the prior month.

 

 

  

Joshua Steiner, CFA

 

Christian B. Drake


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CALL TODAY (NEM) | HAPPY ASSUMPTIONS VS. SAD REALITIES

Please join us TODAY (Tuesday, December 22, 2015 at 11AM EST) for a review of the bear case on Newmont Mining.

 

Dial-in

  • Toll Free:
  • Toll:
  • Confirmation Number: 13627484 

For the corresponding slides please reply to the reminder email, and we will send them along. 

 

CALL TODAY (NEM) | HAPPY ASSUMPTIONS VS. SAD REALITIES - Marketing Image

 

Overview

 

NEM is typically perceived as a ‘premium’ gold miner, but, for one, we aren’t sure there really is such a thing.  Long-term, NEM has been a secular underperformer; we expect that underperformance to continue.  NEM may struggle with comparatively high costs in a declining gold price environment.  We are not convinced that NEM’s 2015 cost reductions reflect the underlying production economics and expect the shares to be further derated by the market in 2016.

 

 

Highlights

  • Assumption vs. Reality:  A look at key assumptions behind NEM’s costs and those of competitors
  • Charges Coming:  NEM may need to again adjust asset values lower, potentially with broader implications
  • Likely Value Trap:  Cyclicals in a downswing typically look cheap as conditions deteriorate
  • No Gold Cure:  With mine production likely to exceed estimates and gold continuing to move out of favor with investors, we expect gold prices to decline in most major currencies. 

Hedgeye Materials

 


CALL TODAY (NEM) | Happy Assumptions vs. Sad Realities

Please join us TODAY (Tuesday, December 22, 2015 at 11AM EST) for a review of the bear case on Newmont Mining.

 

Dial-in

  • Toll Free:
  • Toll:
  • Confirmation Number: 13627484 

For the corresponding slides please reply to the reminder email, and we will send them along. 

 

CALL TODAY (NEM) | Happy Assumptions vs. Sad Realities - Marketing Image

 

Overview

 

NEM is typically perceived as a ‘premium’ gold miner, but, for one, we aren’t sure there really is such a thing.  Long-term, NEM has been a secular underperformer; we expect that underperformance to continue.  NEM may struggle with comparatively high costs in a declining gold price environment.  We are not convinced that NEM’s 2015 cost reductions reflect the underlying production economics and expect the shares to be further derated by the market in 2016.

 

 

Highlights

  • Assumption vs. Reality:  A look at key assumptions behind NEM’s costs and those of competitors
  • Charges Coming:  NEM may need to again adjust asset values lower, potentially with broader implications
  • Likely Value Trap:  Cyclicals in a downswing typically look cheap as conditions deteriorate
  • No Gold Cure:  With mine production likely to exceed estimates and gold continuing to move out of favor with investors, we expect gold prices to decline in most major currencies. 

RTA Live: December 22, 2015

 


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