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‘The Year Nothing Worked’ Says Bloomberg. We Disagree.

Takeaway: Contrary to what some would like you to believe, there were plenty of investable ideas that "worked" out rather well this year.

‘The Year Nothing Worked’ Says Bloomberg. We Disagree. - bloomberg nothing worked

 

It was the year that nothing worked according to Bloomberg.

 

Huh?

 

Our non-consensus team here at Hedgeye begs to differ. We alerted our subscribers to myriad market opportunities on both the long and short side throughout 2015. Here's a sampling of some of our top calls.

 

Energy:

What a difference a year or two can make. One of our firm's top contrarian calls included shorting MLPs like Kinder Morgan (KMI) which Fox Business’ Charlie Gasparino named one of the best calls of the year. Since maverick Hedgeye analyst Kevin Kaiser sounded the alarm back in August 2013, shares of KMI have plunged 60%.

 

‘The Year Nothing Worked’ Says Bloomberg. We Disagree. - Kinder Morgan lump of coal 12.18.2015

 

To be clear, Kaiser was the lone bear on the stock and bore the brunt of exceedingly harsh criticism and personal attacks from Wall Street analysts and supposed market prognosticators only to be vindicated recently when KMI cut its dividend earlier this month. 

 

Macro:

Another big win (which Wall Street missed) came courtesy of our non-consensus Macro team and their repeated warnings on #Deflation and #GrowthSlowing.

 

‘The Year Nothing Worked’ Says Bloomberg. We Disagree. - z Deflation cartoon 08.03.2015

 

For the record, commodities have collectively fallen over 20% this year with broader deflation consistently confounding the Fed's bullish economic narrative. Watch Hedgeye CEO Keith McCullough laying out the thesis in the video below. (Note the #timestamp: 9/18/2014)

Healthcare:

Our Healthcare team led by Tom Tobin issued a number of prescient calls in battleground stocks like long Athenahealth (ATHN) and short AMN Healthcare Services (AHS). Check out Tobin's recent write-up in Investopedia, titled "Why a Perfect Storm Is Brewing in Healthcare" which lays out his #ACATaper theme which will continue to rock healthcare stocks well into 2016.

 

Internet & media:

Sector Head Hesham Shaaban had quite a year. In addition to nailing his short calls on Twitter (TWTR) and Pandora (P), his sole long call in the sector, LinkedIn (LNKD), has ripped ever higher even during a tough year for the broader market.

 

‘The Year Nothing Worked’ Says Bloomberg. We Disagree. - twitter cartoon 04.29.2015

 

Industrials:

It's been a tough year for the sector and analyst Jay Van Sciver called it. His shorts on Caterpillar (CAT) and Wabtec (WAB) are down -25% and -17% respectively year-to-date.  

 

‘The Year Nothing Worked’ Says Bloomberg. We Disagree. - z cat cartoon

 

Restaurants:  

Hedgeye Managing Director Howard Penney penned a piece for Fortune back in October "Why McDonald’s stock will never trade below $100 again." What a call. Since then MCD is up 13.5% versus the S&P's 0.6% gain. His research on shorting Shake Shack (SHAK) and Chipotle (CMG) have also worked out rather nicely.

 

‘The Year Nothing Worked’ Says Bloomberg. We Disagree. - z chipotle cartoon

 

Gaming, lodging and leisure:

After calling the year-to-date bottom in Macau casino stocks Hedgeye Gaming, Lodging and Leisure head Todd Jordan appropriately advised clients to sit on the sidelines before the stocks ultimately tumbled 10% in November. Meanwhile, the long call on Boyd Gaming (BYD) has been a consistent winner for our team.   

 

For more see on the outlook for Gaming stocks, click the video below.

Financials:

Sector co-heads Jonathan Casteleyn and Josh Steiner nailed the short thesis on Encore Capital Group (ECPG), which is down 33% this year.  

 

Retail:

All year long, Retail Sector Head Brian McGough has been appropriately suspect about the outlook for the sector, even amidst all the Black Friday chest-thumping. Short calls on Tiffany (TIF) have worked out well. The stock is down 30% year-to-date. In the video below, McGough talks about the two stocks he does like in retail.

 

Contrary to Bloomberg's reporting, there were plenty of investable ideas that "worked" this year, just not on the books that Wall Street was talking up. 

 

* * *  

 

Editor's Note: To learn more about how you can access our institutional research please email sales@hedgeye.com.


FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII)

Takeaway: We are flagging JPMorgan (JPM - Score: 95) (short) and Federated Investors (FII - Score: 18) (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. 

 

FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII) - SI1

 

FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII) - SI2

 

FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII) - SI3

 

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. 

 

 

FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII) - Absolute 12 mo

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


The U.S. Economic Outlook In 2016? Not Good

 

In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale discuss U.S. third quarter GDP and why our non-consensus 2016 growth outlook is looking grim.

 

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

 

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Retail Callouts (12/28): Nike E-comm, Retail Wages, AMZN

Takeaway: Nike e-comm push hurts traditional wholesale. An interesting look at WMT wage moves. Amazon holiday.

NKE - E-comm push hurts traditional wholesale

(http://www.wsj.com/articles/sportswear-stores-struggle-in-race-to-reach-consumers-1451258541)

 

This story discusses the impact of the athletic brand (particularly NKE) push into the direct segment. Because of the way that consumers shop today, it makes it very hard for the little guy to compete with not only the traditional wholesale competitors like DKS, FL, FINL, Sports Authority, Academy, HIBB, etc. but also the brands which have emphasized direct growth. For starters, it's almost impossible for an independent retailer to establish an online presence because of the economics associated with the small scale and limited allocations. It's like Hibbett Sporting Goods (which we think will lose 300-500bps of margin as it builds its e-comm business), but worse. Maybe the technical running shops still have a place in the market, as they can offer a level of service and expertise not available on the internet today. But, a) that type of store only caters to small portion of the population, and b) those sales can easily be moved to the internet once the knowledge is transferred and performance attributes are found.

This isn't an issue just affecting the bottom of the competitive marketplace. As NKE adds $10bil in e-comm revenue over the next 5 years it will send shockwaves around the rest of the traditional supply chain. Look no further than the most recent quarter from NKE when it was the first time EVER that wholesale accounted for less than 50% of incremental profit. This means that Nike itself is now a more important profit driver than all of its traditional customers combined.

-Alec Richards

 

Retail Callouts (12/28): Nike E-comm, Retail Wages, AMZN - 12 28 2015 chart1

 

WMT - Wages With Minimal Wiggle Room

http://www.wsj.com/articles/wages-with-minimal-wiggle-room-1451259371)

 

This is an interesting way to look at the minimum wage decisions at WMT written by the Andrew Pudzer, CEO of CKE Restaurants. Here is a quick summary of his math. The 20 retail companies that land in the Fortune 500 recognize an average of $6,300 in annual profit per employee. On an average retail work week of 31.5 hours the raise to $9 and $10.10 from the current $7.25 minimum wage would equate to an increase in annual wages per employee of $2,370 and $4,446, respectively. That would take annual profit per employee down by 38% for a hike to $9 and 71% for a hike to $10.10. Of course there are companies that already pay over the federal minimum wage, but it's all about the pay gap needed in order to attract the right type of talent which will cause wage inflation across the industry. The bottom line is, this isn't a positive development for retail especially when companies can't pass along the added cost pressures through to the consumer. Which will ultimately result in less employees as costs go up.

-Alec Richards

 

AMZN -  Amazon Celebrates a Record-Setting Holiday

(http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2125057)

 

AMZN put out a press release this am talking about Prime, hardware, and TV stats. Not a lot of concrete detail in the release on Prime other than a brief mention that more than 3mm Prime members were added in the 3rd week of December.  At first glance this number is impressive, however we suspect a large portion of the additions are late holiday shoppers leveraging a 1 month free trial to get the free two-day shipping. 

December to date ChannelAdvisor comp numbers, suggest a sequential slowdown in comps for the 4th quarter to the 20% range in line with current consensus estimates.

-Alec Richards

 

Retail Callouts (12/28): Nike E-comm, Retail Wages, AMZN - 12 28 2015 chart2

 

ICON - Iconix Brand Group Announces SEC has Issued a Formal Order of Investigation

(http://phx.corporate-ir.net/phoenix.zhtml?c=62075&p=irol-newsArticle&ID=2125085)

 

CONN - Conn’s CEO eyes 500 store opportunity, recently opened its 100th store in Las Vegas

(http://www.retailingtoday.com/article/conns-ceo-eyes-00-store-opportunity)

 

ETSY - Etsy Temporarily Suspends Google Shopping Ads

(http://www.ecommercebytes.com/cab/abn/y15/m12/i28/s02)

 

FIT - Fitbit topped Apple’s app chart on Christmas Day

This marks the first time it topped Apple’s rankings of free iOS apps, jumping 20 spots from Christmas Eve.

(http://qz.com/581789/fitbit-topped-apples-app-chart-on-christmas-day/)

 

British Stores Notch Record Sales on Boxing Day

(http://wwd.com/retail-news/retail-features/boxing-day-sales-2015-london-uk-10302776/)

 


INSTANT INSIGHT | The Market Returns To Reality

Editor's Note: This is an abridged excerpt from research sent to subscribers earlier this morning by CEO Keith McCullough. Click here for more information on how you can subscribe to our industry leading non-consensus research.

 

INSTANT INSIGHT | The Market Returns To Reality - reality

Last week’s equity/commodity rally came on:

 

A) The lowest volume of the year and...

B) In everything that’s crashed.

 

Here's another way of looking at last week's no-volume squeeze. The smaller cap Russell 2000 outperformed the large cap Dow at +3.0% week-over-week vs. 2.5%. But heading into the final week of the year, the Dow and Russell are down -1.5% and -4.1%, respectively.

 

As pointed out in today's Chart of the Day Energy (XLE) and MLP stocks (AMLP) led the counter-trend bounce, up 4.7% and 14.4% respectively. But nothing short of a post-Christmas miracle could jettison them back to break-even territory for the year. XLE and AMLP are still down -22.2% and -31.8% year-to-date.

 

What did Mr. Market have to say about the rally early this morning? Hedgeye CEO Keith McCullough reviewed what's in store for Oil and the Russell 2000 in a note to subscribers this morning:

 

"WTI was up +5.7% week-over-week, but is straight back down -1.7% this morning after tapping the top-end of our immediate-term $34.97-38.33 risk range. MLPs were up +14.4% last week, but still down -32% year-to-date."

 

INSTANT INSIGHT | The Market Returns To Reality - oil reality

 

"Small cap, debt leverage, and big beta were the best Style Factors in the U.S. stock market last week (and have been the worst all year), so plenty of selling opportunities in small caps this morning with the RUT down -4.1% year-to-date and downside to 1109."

INSTANT INSIGHT | The Market Returns To Reality - russell RUT cartoon

 

Welcome back.


MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF

Takeaway: The high yield carnage continues while commodities catch a momentary reprieve.

 

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM11

 

Key Takeaway:

The sole takeaway from last week was the ongoing deterioration in the high yield markets. YTM widened another +37 bps on the week, pushing yields to 9.09%. That brings the M/M change to +115 bps.

 

Our heatmap below is decidely negative across all durations.


Current Ideas:


MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 7 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM15

 

 

1. U.S. Financial CDS – Swaps were generally tighter among US Financials on the week with the median spread falling from 56 bps to 54.

Tightened the most WoW: COF, MMC, ACE
Widened the most/ tightened the least WoW: ALL, SLM, SLM
Tightened the most WoW: ACE, AIG, MMC
Widened the most/ tightened the least MoM: COF, SLM, SLM

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM1

 

2. European Financial CDS – Swaps were little changed among European banks last week.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM2

 

3. Asian Financial CDS – Swaps mostly widened among Asian banks last week with the Export-Import Bank of China and the State Bank of India leading the way, the former widening by 7 bps to 127, the latter by 7 bps to 166.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM17

 

4. Sovereign CDS – Sovereign swaps were flat to wider over last week. Spanish sovereign swaps showed the most movement, widening by 5 bps to 91.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM18

 

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM3

 

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Indonesian swaps tightened the most, by -5 bps to 235.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM16

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 37 bps last week, ending the week at 9.09% versus 8.72% the prior week.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 4 points last week, ending at 1800.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM6

8. TED Spread Monitor  – The TED spread fell 1 basis point last week, ending the week at 40 bps this week versus last week’s print of 41 bps.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM7

9. CRB Commodity Price Index – The CRB index rose 2.5%, ending the week at 176 versus 172 the prior week. As compared with the prior month, commodity prices have decreased -3.9%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 11 bps.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 12 basis points last week, ending the week at 1.93% versus last week’s print of 1.82%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM10

12. Chinese Steel – Steel prices in China rose 1.6% last week, or 31 yuan/ton, to 1958 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 124 bps, -1 bp tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM13



Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


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