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CHART OF THE DAY | Recession Watch: Earnings Breaking Down

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more. 

 

"... 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."

 

CHART OF THE DAY | Recession Watch: Earnings Breaking Down - eps inflecting DJ


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:

 

https://www.youtube.com/watch?v=4i-e-JktOpM&feature=youtu.be

 

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

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.30 2.15 2.24
SPX
S&P 500
2,005 2,085 2,056
RUT
Russell 2000
1,107 1,163 1,148
COMPQ
NASDAQ Composite
4,913 5,099 5,040
NIKK
Nikkei 225 Index
18,504 19,312 18,764
DAX
German DAX Composite
10,174 10,876 10,653
VIX
Volatility Index
14.35 22.74 16.91
DXY
U.S. Dollar Index
97.42 99.35 98.00
EURUSD
Euro
1.07 1.10 1.09
USDJPY
Japanese Yen
120.02 121.69 120.37
WTIC
Light Crude Oil Spot Price
34.83 38.29 36.69
NATGAS
Natural Gas Spot Price
1.69 2.30 2.27
GOLD
Gold Spot Price
1,051 1,081 1,068
COPPER
Copper Spot Price
2.02 2.14 2.08
AAPL
Apple Inc.
104 110 106
AMZN
Amazon.com Inc.
650 680 675
GOOGL
Alphabet Inc.
750 784 782
DIS
Walt Disney Company, Inc.
102 110 105
KMI
Kinder Morgan Inc.
13.83 16.49 15.26
VRX
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.

 


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The Macro Show Replay | December 29, 2015

 

 


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.

 

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 large

 

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 large

 

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 large

 

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.


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