The [Unvarnished] Market Year In Review

The [Unvarnished] Market Year In Review - market rip


While Wall Street's bullish storytelling was creative, December looks like another down month for the S&P 500.  Here's Hedgeye CEO Keith McCullough's analysis, from a note sent to subscribers earlier today, reviewing 2015:


"What a year it was! Worst year for US stocks since 2008; worst year for FX funds since 2011; worst year for Commodity funds ever – and no, it wasn’t “transitory,” as Fed head Janet Yellen is fond of saying – I think it’s all just pricing in the end of what was a mediocre economic cycle."


Here are the numbers, as of yesterday's close:



While we're at it, here's a sampling of the rest of equity markets around the world:



So what does 2016 hold in store for equity investors? In a word, volatility. Here's more analysis from McCullough:


"There’s a big difference between a regime of 10-14 VIX and 15-30; provided that the latter prevails, I think we’re going to see equity markets continue to trade choppy at best and continuing to crash at worst to start 2016."


You won't hear that kind of honesty from Wall Street. Remember, there were plenty of Old Wall equity strategists looking for "Santa Claus rallies" and "Rip-your-face-off rallies" into year-end. 


That didn't happen...


Backing up a bit, to our original question about Wall Street storytelling, how did the supposed "blue chip" forecasters do this year? Well, not to belabor the point but MarketWatch has an excellent story assessing the "usefulness" of Wall Street's year-end forecasts.


After completely missing 2015 – calling for 2,201 on the S&P versus yesterday's 2,063 close – Wall Street did revise its forecast. Down, down, down... Now, 2016 estimates are below the number projected for the 2015 year-end. Hello flip-flop.


The [Unvarnished] Market Year In Review - marketwatch


That's why we called 2015 "A Year Of Epic Face-Plants on Wall Street." Meanwhile, our non-consensus analysts made some particularly prescient calls. Here's a look back at some of our choicest picks from 2015


Finally, heading into 2016, our outspoken CEO offers up his Best Idea in the video below. 

As far as Wall Street is concerned, while it was a good year for storytelling, ultimately reality, and the pull of economic gravity, won out, as it always does. The perma-bull narrative has been flat-out wrong. Don't let Wall Street blow you up again. That's no way to build wealth. 


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Initial Jobless Claims | Raise Shields!

Takeaway: Emergent cracks in the US economic armor raise serious questions around the now two month upward trend in initial claims.

Initial Jobless Claims | Raise Shields! - Claims1


The holiday period is rife with seasonality-related adjustments that may or may not paint an accurate picture of underlying labor market conditions. This is the disclaimer to keep in mind when interpreting the latest week's initial claims data. On its face, however, the recent trend in the data isn't particularly auspicious. 


Initial claims on a single week basis jumped 20k to 287k, but, more importantly, the 4-wk rolling average rose another 4.5k to 277k. While 277k is still very low on an absolute basis, it's the highest reading since mid-July. It's also worth noting that rolling intial claims have been moving steadily higher for the last two months. 


Amid various other macro data series showing signs of weakening (see Chicago PMI 42.9 this morning), we've been focused more intently than usual on the claims data for any signs of flow through on the labor front. This most recent trend isn't reassuring. That said, it is the holidays so we'll have to wait a few weeks to see whether January confirms.


If this were Stark Trek, we'd offer something along the lines of Raise Shields!


Meanwhile, employment in the oil patch continues to reflect the price of crude. In the week ended December 19, energy state claims continued their trajectory of deterioration versus the country as a whole. As energy companies continue cuts into YE2015 hedge expiration, the spread between energy state claims and total US claims rose from 59 to 62.



Initial Jobless Claims | Raise Shields! - Claims18

The Data

Initial jobless claims rose 20k to 287k from 267k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.5k WoW to 277k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -5.8% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.3%


Initial Jobless Claims | Raise Shields! - Claims2


Initial Jobless Claims | Raise Shields! - Claims3


Initial Jobless Claims | Raise Shields! - Claims4


Initial Jobless Claims | Raise Shields! - Claims5


Initial Jobless Claims | Raise Shields! - Claims6


Initial Jobless Claims | Raise Shields! - Claims7


Initial Jobless Claims | Raise Shields! - Claims8


Initial Jobless Claims | Raise Shields! - Claims9


Initial Jobless Claims | Raise Shields! - Claims10


Initial Jobless Claims | Raise Shields! - Claims11


Initial Jobless Claims | Raise Shields! - Claims19

Yield Spreads

The 2-10 spread fell -5 basis points WoW to 122 bps. 4Q15TD, the 2-10 spread is averaging 136 bps, which is lower by -17 bps relative to 3Q15.


Initial Jobless Claims | Raise Shields! - Claims15


Initial Jobless Claims | Raise Shields! - Claims16



Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


CHART OF THE DAY | Year-End Review: Why 2015 Was A Great Year For Stock Pickers

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more.


"... There has been much to celebrate indeed – especially if your portfolio is over-indexed to the right side of the Chart of the Day below. No, 2015 was not a “flat-to-up” year for stocks as many strategists and pundits would have you believe. In fact, there was plenty enough dispersion of returns at the sector and style factor levels for some market participants to win big and take share in terms of AUM and/or relevance."


CHART OF THE DAY | Year-End Review: Why 2015 Was A Great Year For Stock Pickers - ZZZ EL Chart of the Day

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More Questions Than Answers

“It’s a history from one policymaker’s perspective of the events leading to the crisis, the key choices we made during the crisis, the aftershocks of the crisis, and the fight to reform the system. I hope this book can add to the historical record, help correct some misperceptions that have been entered into that record, and give a sense of what it was like in the fire.”

-Timothy Geithner


I recently started reading Stress Test, an allegedly gripping 2014 memoir of the 2008-09 Global Financial Crisis (GFC) that was authored by former Secretary of the Treasury Timothy Geithner. I say “allegedly” because I’m only partway through the [lengthy] book. And much like a number of Americans on Main Street, I don’t necessarily hold Mr. Geithner in the highest of esteems. In fact, I pretty much find him wholly intolerable, but I’m hoping this book helps alter that interpretation – on the margin, at least.


With “The Big Short” having recently debuted in movie theaters, it might appear as if I’m looking to capture any residual interest in the GFC for a few extra reads this morning. If we were desperate for readership, perhaps I’d entertain that strategy – if only for a few seconds. On the contrary, the reason I’m interested in reading and citing another book on the GFC at the current juncture is actually not because we anticipate the occurrence of a similar event over the intermediate-term; relax, we are not that bearish.


Rather, I’m interested in evaluating an insider’s take on the matter – specifically regarding the events leading up to the crisis and the countercyclical measures enacted during and after the crisis. Specifically, I am hoping to find answers to the following three questions:


  1. Given that “hindsight is 20-20”, was it at all possible for the preponderance of investors and [to a lesser extent] policymakers to see the crisis coming with enough clarity and timeliness to respond with far more effective investment strategies and policies than they did?
  2. Some of the world’s greatest investors have a view that a financial crisis cannot occur until a fundamental and widely-accepted belief underpinning asset prices has been disproven. Assuming this framework is consistently appropriate, what clues can we glean from the GFC in hopes of identifying such false beliefs in the current economic cycle?
  3. Were the policies enacted during and in the wake of the GFC risky enough to contribute to the relative weakness of the subsequent recovery and/or perverse enough to sow the seeds of future crises?


Wish me luck in discovering the truths I seek.

More Questions Than Answers - cartoon gdp


Back to the Global Macro Grind


We’ve produced a lot of thoughtful research and made our fair share of outstanding calls since our conception in 2008 – and 2015 has certainly been no exception. That being said, I don’t know if our team is collectively smart enough to truly know the answers to the aforementioned questions ex ante. I certainly am not smart enough on my own.


We have, however, produced enough thoughtful research and been on the right side of enough major market moves to be in a position to offer up relevant conjecture. Often times the best answer to any question is, in fact, a question in and of itself:


  • With respect to question #1: The preponderance of investors we meet with that push back on our #LateCycle theme cite the lack of “speculative excesses” in the real economy and/or financial markets. Are they looking in the right place? Did their process prospectively uncover “speculative excesses” in time to book gains by early-2000 or mid-2007, or are they risk managing prior crises – effectively driving forward while peering into the rear-view mirror?
  • With respect to question #2: One such belief is just that – the lack of “speculative excesses”. Just how much speculation in both the real economy and financial markets was predicated on Bernanke burning the buck to its all-time low in 2011? With the USD up +31% on a broad trade-weighted basis since then, how much of that speculation has already unwound and how much more unwinding is left to be done? Another widely-held belief is that the U.S. economy is experiencing a run-of-the-mill #MidCycle slowdown. What if it isn’t? What if Hedgeye is right in concluding that 2015 was just a classic #LateCycle slowdown that everyone missed?
  • With respect to question #3: I’m not even sure how to show this visually (suggestions welcome), but we can all agree that the post-crisis recovery has been generally disappointing and quite muted relative to previous cycles, yet equity and credit markets arguably priced in the best recovery we’ve had to date. Just how distorting has the “Greenspan/Bernanke/Yellen Put” become and what happens to asset prices if/when that factor is [perhaps forcibly] removed from the collective psyche of investors? The spread between asset prices and the economy has rarely – if ever – been this wide.


By now, I’m guessing you’ll have noticed that I haven’t been as overwhelmingly quantitative throughout this research note as most of you have come to expect from me. That was actually my intention – mostly because I want this to be the kind of thought piece you click and drag into a specially-earmarked folder to return to for review at a later date.


While I could’ve certainly been far more analytical and/or chosen a far more cheery topic altogether, I did not think that was appropriate given our team’s dour outlook for 2016. Indeed, there is actually a lot to celebrate as we conclude 2015 and welcome in the New Year.


This year was far and away the best year of my 29-year life in terms of personal growth, my personal well-being, the well-being of my family, as well as the progression of my career. Having learned what it takes to be a true team player, it’s no coincidence that this was also the best year of our 8-year-old firm in terms of revenue and earnings growth, as well as the accuracy of our research views.


But, as we often say on and around the gridiron, “forget about it; next play”. But before we evoke the “next play” clause, I do want to send a special shout-out to Coach Keith McCullough, his son Jack McCullough, Chloe Cleaves (daughter of Hedgeye Director of Sales Gene Cleaves) and their Mid-Fairfield Rangers teammates for winning their statewide youth hockey holiday tournament yesterday in Simsbury, CT.


There has been much to celebrate indeed – especially if your portfolio is over-indexed to the right side of the Chart of the Day below. No, 2015 was not a “flat-to-up” year for stocks as many strategists and pundits would have you believe. In fact, there was plenty enough dispersion of returns at the sector and style factor levels for some market participants to win big and take share in terms of AUM and/or relevance.


Please accept our sincere congrats if you’ve had a good year as well; this was not an easy year to get right. And if we continue to be right on the economic and financial market cycles, 2016 could be even tougher to risk manage.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.16-2.33% (bearish)

SPX 2003-2090 (bearish)
VIX 14.25-21.64 (bullish)
USD 97.41-99.51 (bullish)
Oil (WTI) 34.71-38.27 (bearish)

Gold 1049-1081 (bearish)


Keep your head on a swivel,



Darius Dale



More Questions Than Answers - ZZZ EL Chart of the Day

The Macro Show Replay | December 31, 2015


Bullish Storytelling

Client Talking Points


What a year it was! Worst year for U.S. stocks since 2008; worst year for FX funds since 2011; worst year for Commodity funds ever – and no, it wasn’t “transitory” – we think it’s all just pricing in the end of what was a mediocre economic cycle.


There’s a big difference between a regime of 10-14 VIX and 15-30; provided that the latter prevails, we think we’re going to see equity markets continue to trade choppy at best and continuing to crash at worst to start 2016.


Now that the rate hike is out of the way,  our “best idea” in Global Macro right now is the Long Bond – if we’re right on the economic cycle call, the Fed is going to have to back off the rhetoric and acknowledge the super #LateCycle slowing data.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Federated Investors (FII) profitability got a boost as the Fed boosted short term rates for the first time in 7 years. Even the slight 25 basis point hike improves profitability in the firm’s leading money fund business by +30% into the New Year.


In essence, the firm rolls 30-day paper throughout the short term fixed income curves and the new higher yields forthcoming into 2016 will allow the company to claw back some of the waived fees it has extended to its client base in money funds. Year-to-date the company has waived over $300 million in fees. With that firmly in the rearview, it becomes an opportunity set as FII gets higher yield from cash products next year.


In the financial sector, FII is the most asset sensitive name we cover, meaning it benefits most from even marginal interest rate hikes.


We have to give Restoration Hardware Chairman and CEO Gary Friedman props for his approximately nine minute segment on Cramer 2 weeks. Let's face it, him going on what's arguably the most volatile and biased financial media platform, unscripted, is not what we wanted to see. The risk of fireworks was high.


But he capped off a successful day RH (CFO and IR) had on the investor conference circuit by focusing on the real value drivers at Restoration Hardware (RH) -- growth in product concepts, and RH's real estate transformation. The appearance was planned well before the earnings release, by the way, coinciding with a business-focused trip to NYC. All-in, it was a positive event for the stock.


In case you were looking for Style Factors that crushed it last week – the Top 3 gainers were the Top 3 #Deflations of 2015!

High Beta Stocks were +3.5% last week to -12.0% YTD

High Debt (to EV) Stocks were +2.9% last week to -10.9% YTD

Small Cap Stocks were +3.2% last week to -12.4% YTD

*Mean performance of Top Quartile vs. Bottom Quartile (SP500 Companies)


In other words, the no-volume squeeze had the smaller cap Russell 2000 outperform the large cap Dow at +3.0% week-over-week vs. 2.5%. Heading into the final week of the year, the Dow and Russell are down -1.5% and -4.1%, respectively.


In a slower-for-longer secular growth world, you should pay more for the organic growth that you can find. But, more importantly, you should realize that “cheap” has the illusion of “cheap” because the U.S. economic cycle is slowing alongside the secular. 

Three for the Road


VIDEO (2mins) Our Best Idea Right Now… via @hedgeye



We must use time as a tool, not as a couch.

John F. Kennedy


The peak in non-farm U.S. payroll growth was FEB of 2015 at 2.34% year-over-year, the most recent jobs print was 1.9% year-over-year.  

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