Sirens of the Old Wall

“We gain the strength of the temptation we resist.”

-Ralph Waldo Emerson


In Greek mythology, the Sirens were deadly yet beautiful creatures, who lured nearby sailors with their beautiful music to sail towards their island. According to mythology, the result of sailing towards the enchanting music and voices was inevitably ship wreck, since the island was surrounded by hidden rocks which were perilous to sail through.


Odysseus, the Greek King of Ithaca and the hero of Homer’s poem the Odyssey, was determined to experience the songs of the Sirens without crashing into the nearby rocks. On the advice of Circe, he had all of his sailors plug their ears with beeswax and tie him to the mast. Thus his sailors could sail the ship, without temptation, and since he was tied to the mast he was unable to steer the ship ever closer to the dangerous sirens.


No surprise, as the ship sailed closer to the Sirens, Odysseus reversed his orders and tried to get his men to untie him from the mast. Instead, as originally instructed, they tied him tighter, so his temptations would not overcome him and lead to a bad decision. Finally, when the ship had passed out of earshot, Odysseus signaled with his frowns that he be untied and released.


Like most Greek myths, there is a moral to this story. Simply put, it’s that our greatest temptations have the potential to be our greatest downfalls. As stock market operators, we are tempted daily by the magical songs of the Wall Street brokers.


If we are to follow the lead of Odysseus, it would be that we make sure our analysts have “bees wax” in their ears so that they remain are focused on the task in front of them and not be distracted.  Meanwhile, as portfolio managers our hands should be bound so we don’t make arbitrary buy and sell decision based on nicely packaged narratives from the Sirens of the Old Wall.


If only it were all that easy!


Sirens of the Old Wall - sirens


Back to the Global Macro Grind


One familiar common siren that sounds right about this time of year is the list of prognostications for the upcoming year. We don’t do these lists for two obvious reasons. First, markets and economies are never linear, so taking what we know today and predicting out over a year rarely makes sense. Second, the end or start of the year is simply an arbitrary time frame.


That said, we did do an update of our key themes and ideas headed into next year. There is nothing significant about the timing of these ideas as it relates to year-end, but on some level there is increased downtime headed into the end of the year, which gives us all a chance to review our investment perspectives.


Firstly, from our Macro team, the primary view, as it was for much for 2015, remains that growth will be slower than consensus is projecting for the U.S. There are a number of economic indicators which signal to us that the economy has, at best, peaked. The most notably of these are employment, consumer confidence, and corporate earnings.


We’ve highlighted the last point on corporate earnings in the Chart of the Day. As the chart shows, all recent recessions in the U.S. have been preceded by a flat lining, or declining, of corporate earnings.  This has already occurred in the U.S. with earnings breaking down below its trailing twelve month average in Q2 2015.


Secondly, our healthcare team is focused on the dramatic outperformance of healthcare company sales growth versus the broader SP500. Currently, healthcare sector sales growth is outperforming the rest of the field by almost 2.6x standard deviations. The obvious question is whether this is sustainable. According to our healthcare team this is unlikely.


Sales growth was pushed higher primarily because of the Affordable Care Act which produced more than 20 million healthcare users in a compressed period of time. This increase in healthcare users has been corroborated by an increase in job opening and hiring in the sector. Consistent with our #ACATaper theme, though, we think healthcare growth rates will be very challenged heading into the coming quarters, with one catalyst for this being lower than expected enrollees into the exchanges. (Click here to read Healthcare analyst Tom Tobin's summation of the #ACATaper on Investopedia.)


Finally, our financials team has been and continues to be very focused on the debt collectors. These companies historically have been the worst performing late cycle stocks in the financial sector, so they are poised to underperform cyclically. As well, the accounting for many of these companies is “challenging” at best, especially with the use of goodwill which tends to overstate the IRR of collection streams and the underlying flow through of net income. 


The other key theme that the financials team is focused on currently is shorting the Canadian banks. From a macro perspective, the drivers of this short call were related to two Canadian bubbles: energy and housing. As it relates to energy, the bubble has basically all but burst with oil trading in the $30s and no surprise the Canadian banks, just like the Canadian economy, is over-indexed to energy. 


On housing, simply put, the Canadian housing market on almost any metric remains wildly overvalued.  While much of this over-pricing is centered in key markets, such as Vancouver, Toronto, and Alberta, in aggregate these markets also comprise the vast majority of the mortgage exposure of the banks. Perhaps the most telling for the Canadian housing market is the long term view versus the United States.  Since 1970, the home price index in the U.S. has gone from 100 to about 900. While in Canada, home price appreciation is more than double the U.S. over that period.


Not sure we supplied you with any great buy ideas today, but hopefully we sounded the siren on a few to avoid. For our full update of ideas and themes, please take a look at the video below:


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.15-2.30%

SPX 2005-2085
RUT 1107--1163

VIX 14.35-22.74
USD 97.42-99.35
Oil (WTI) 34.83-38.29

Copper 2.02-2.14


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Sirens of the Old Wall - eps inflecting DJ

December 29, 2015

  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.30 2.15 2.24
S&P 500
2,005 2,085 2,056
Russell 2000
1,107 1,163 1,148
NASDAQ Composite
4,913 5,099 5,040
Nikkei 225 Index
18,504 19,312 18,764
German DAX Composite
10,174 10,876 10,653
Volatility Index
14.35 22.74 16.91
U.S. Dollar Index
97.42 99.35 98.00
1.07 1.10 1.09
Japanese Yen
120.02 121.69 120.37
Light Crude Oil Spot Price
34.83 38.29 36.69
Natural Gas Spot Price
1.69 2.30 2.27
Gold Spot Price
1,051 1,081 1,068
Copper Spot Price
2.02 2.14 2.08
Apple Inc.
104 110 106
650 680 675
Alphabet Inc.
750 784 782
Walt Disney Company, Inc.
102 110 105
Kinder Morgan Inc.
13.83 16.49 15.26
Valeant Pharmaceuticals Inc.
98.36 120.29 102.14


Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, with our intermediate-term (TREND) view and the previous day's closing price for each name.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


The Macro Show Replay | December 29, 2015



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Cartoon of the Day: Look Out Below!

Cartoon of the Day: Look Out Below! - Oil cartoon 12.28.2015


"Oil lead the no volume “reflation”/squeeze last week, with WTI up +5.7% week-over-week," Hedgeye CEO Keith McCullough wrote earlier today in a note to subscribers. "It is straight back down -3.5% today after tapping the top-end of our immediate-term $34.97-38.33 risk range (MLPs were +14.4% last wk, but still -32% YTD)."

‘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.




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.



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. 



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)


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



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



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.


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



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


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. 








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

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