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[UNLOCKED] Early Look: Workingest Boys

Editor's Note: It's been a tumultuous start to the New Year for the stock market. Below is a particularly prescient Early Look written by Hedgeye CEO Keith McCullough on December 11, 2015. In it, he explains why "we are in the midst of the 3rd major crash I've seen in my Wall Street career." You can still take advantage of our special New Year 66% off deal on this product and more here.




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 [UNLOCKED] Early Look: Workingest Boys - z el


“It wasn’t luck that made them fly – it was hard work and common sense.”

-John T. Daniels

The big picture

One of the most recognizable pictures in the history of American innovation (“First In Flight”) is the Wright Brother’s original “Flyer.” John T. Daniels “was the amateur photographer who took the photograph of their first flight on December 17th, 1903.” (Wikipedia)


He was also one of the men who spent a lot of time with the Wrights in their workplace. He said “they put their whole heart and soul and all their energy into an idea and they had the faith.” (The Wright Brothers, pg 108)


While we don’t just have boys working here @Hedgeye, if there’s one thing I’m most proud of it’s how hard everyone works. I know - on Wall Street everyone thinks they work hard. Build a culture where you actually work harder than most, and your business will fly.


[UNLOCKED] Early Look: Workingest Boys - wright bro

Macro grind

With the beloved “the market is flat” quote of the year (SP500) hovering below where it started the year (2058), many other components of the Global Macro market (Credit, Currencies, Commodities, EM, etc.) continue to crash into week’s end.


Not to cherry pick the composite performance of 2000 stocks instead of 30 or 500, but the Russell 2000 is down -5% for 2015 YTD. More importantly, it’s down -11.3% from the all-time #bubble high for US stocks that we called in July. The 2nd half of 2015 draw-down has been nasty.


What is a draw-down? You don’t need the Wright Brothers to build you a draw-down table:


If you lose this amount…      you have to return this to break even:   


-10.0%                                     11.1%

-11.0%                                     12.4%

-12.0%                                     13.6%

-13.0%                                     14.9%

-14.0%                                     16.3%

-15.0%                                     17.6%

-20.0%                                     25.0%

-25.0%                                     33.3%

-30.0%                                     42.9%


This is very basic math that most in the mainstream (who haven’t run client portfolios) don’t think about when they talk about what “the market” is doing vs. what it would need to do to get people who got plugged chasing charts back to break-even.


In other words, what is the catalyst to get:


  1. The Russell (2015) Bubble +12-13%, from here, to break even?
  2. The CRB Index (2011-2012 Bernanke Bubble) +33%, from here, to break even?
  3. Kinder Morgan (the Yield Chasing Inflation Expectation Bubble) +163%, from here, to break even?


That’s right. If you chased the Kinder Morgan’s (KMI) chart and bought it at $44.57, on April 23rd, 2015, your client’s account is First In Crashing to a level they’ll never be able to recover from. That’s why Kevin Kaiser putting all his energy into a SELL idea mattered.


I get why innovation in Wall Street Research hasn’t included many independent research firms that have literally 0% conflicts of interest. If you don’t have a bank, broker dealer, or asset manager on your platform, it’s really hard to “get paid.”


What you may not see is that when I started Hedgeye, I wasn’t looking to get paid. I was simply burnt out by the compromised and constrained ways of the Old Wall and wanted to build a better way. I really wanted to help the average person not crash again.


Forget what people who are in the business of marketing “the market is flat” are telling you, across asset classes we are in the midst of the 3rd major crash I’ve seen in my Wall Street career. All 3 coincided with a major economic cycle top:


  1. 1999-2000
  2. 2007-2008
  3. 2015-2016


Every one of these economic cycle tops had different asset bubbles underpinning their hopes that it was “different this time.” Not one of these cycle tops was different in terms of classic rate of change slowdowns in major economic factors.


As you can see in today’s Chart of The Day (one of my favorite 20 year cycle charts in all of macro), the Commodity Super-Cycle crash we are witnessing today is largely a function of both Greenspan and Bernanke devaluing the US Dollar to a 40-year low from 2001-2011.


That’s a decade of devaluing the purchasing power of hard working Americans (their currency) every time the US economy started to slow from its cycle peak. While the early 20th century had The Wright Brothers, the early 21st had The Central Planners.


No, that’s not to say that there wasn’t American innovation all the while (newsflash: most innovation is born out of necessity, not economic expansions). It’s simply to say what the mother of all economics risks remains the unwind of a centrally planned bubble.


I’m obviously not alone in defining history this way (they’re just time series charts). Most of the money managers who are having a fantastic year understand that The Deflation Risk is real and not “transitory.”


If you want to have a big-gravity-bending economist tell me that the Federal Reserve wasn’t the causal factor in USD Devaluation, that’s fine. I’ll smile and move along. I have too much work to do to argue with these people anymore.


It’s hard work and common sense that will preserve and build wealth during this slow-down. That’s not different this time either.


[UNLOCKED] Early Look: Workingest Boys - asset alloc

Our levels

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):


UST 10yr Yield 2.13-2.32% (neutral)

SPX 2033-2072 (bearish)
RUT 1131--1172 (bearish)

NASDAQ 4987-5092 (bullish)

Nikkei 19010-19447 (bullish)

DAX 10308-10856 (bearish)

VIX 16.85-20.47 (bullish)
USD 96.70-98.73 (bullish)
EUR/USD 1.05-1.10 (bearish)
YEN 121.24-122.69 (bearish)
Oil (WTI) 35.41-39.25 (bearish)

Nat Gas 1.95-2.13 (bearish)

Gold 1049-1084 (bearish)
Copper 2.01-2.12 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


[UNLOCKED] Early Look: Workingest Boys - 12 11 Chart of the Day

Another Good Day To Be Short Junk Bonds | $JNK

Editor's Note: Below is a brief excerpt from a research note sent to subscribers earlier this morning on our short Junk Bonds (JNK) call. With the stock market tanking, junk bonds are also down -0.5%.


(To be clear, short JNK made its first appearance in Real-Time Alerts in Q4 2014 and has been on our high-conviction Investing Ideas list since October. Since then, JNK is down -15.8% and -7.5% respectively.)


Another Good Day To Be Short Junk Bonds | $JNK - jnk note


"... The latest Dealogic data shows that speculative-grade U.S. companies have not issued new bonds since the middle of December, the longest stretch without a new junk offering since the depths of the last credit cycle in 2009.


As we highlighted on our Q1 Macro Themes presentation on Tuesday, this particular credit cycle is just getting started. Delinquencies on all C&I loans having accelerated from down -8.9% at this time last year to up +26.8% yoy as of 3Q 2015; that’s the highest growth rate of souring loans since 2009 and calls into question Standard & Poor’s projected default rate of 3.3% by September.


While we’re not expecting anything in the area code of 12.4% which is the peak default rate reached in the financial crisis, we’ll take the over on the S&P figures all day. With the JNK ETF having dropped -16.5% since we turned bearish in August we again find it appropriate to reiterate our explicitly bearish bias on high yield credit."


Click here to read a recent post by McCullough outlining our Junk Bond call. Below is a video of McCullough discussing it on Fox Business.


Lazard (LAZ) | Value Trap - Best Idea Short Call Invite

Takeaway: We are hosting a conference call next Tuesday, January 12th at 11 am to review our ongoing short recommendation on Lazard (LAZ).

Lazard (LAZ) | Value Trap - Best Idea Short Call Invite - Lazard invite


We are hosting a short black book presentation next Tuesday, January 12th at 11 am EDT on M&A advisor Lazard (LAZ). Our presentation will outline the still unrecognized risks and complacency in this highly cyclical company:


  • M&A Set to Fall: After a new high water mark in global mergers and acquisitions in 2015, the Street is still unrealistic about the opportunity for activity into '16. Estimates are still 20% too high based on "flat to up" activity levels for the New Year which ignore various warnings in the data. Our research shows with corporate funding costs on the rise, that every 100 bps rise in credit costs has historically impacted M&A activity by -20%. Thus the backup in credit spreads that started in 1Q15 all but guarantees a negative comp for mergers in '16. In addition, rising private equity percentages in global announcements and also record highs in consideration values signal an exhausted M&A marketplace.
  • Restructuring Won't Bail Them Out: Complacency is also being sourced by "hopeful" insulation that the firm's restructuring business can plug any gap as the revenue opportunity in M&A slows. Historically, the restructuring business has had a 4 quarter lag after M&A peaks before contributing to results but restructuring cycles have just half the duration of M&A cycles and never fully cover the lost revenue. At just under 20% of total advisory revenues across cycle, restructuring is a mild insulation at best.
  • EM/Non U.S. Asset Mgmt Exposure: The firm's most profitable business, asset management, has unfavorable Emerging Market exposure and total non-US exposure sits at over 50% of AUM. The ongoing elevated levels of the U.S. dollar and investments in petro-oriented economies has historically weighed on demand for institutional exposure to non-developed domiciles. We will flesh out what a reasonable yield on Lazard's AUM business is.


CALL DETAILS - Tuesday, January 12th at 11 am EST

  • Toll Free Number:
  • Toll Number:
  • Conference Code: 13627924
  • To Automatically add to your Outlook Calendar Click HERE
  • For Associated Materials Click HERE


Private Equity Historically Marks the Peak

LAZ - As Good As It Gets...Modeled For Perfection


Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA

investing ideas

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4 Charts Laying Out Our Recession Call

We've been warning for a while now about the coming recession which we anticipate may arrive in the second quarter of this year. Below are three charts laying out our thesis and a fourth explaining why, even if we're wrong on that recession, the US stock market is probably going to crash anyway...  


4 Charts Laying Out Our Recession Call - recession cartoon 12.22.2015

1. A past peak profit cycle... 

"Once a peak in the S&P 500 breaks below its twelve month trailing average, look what happens. It rolls off and it goes down really fast," Hedgeye CEO Keith McCullough said on The Macro Show.


4 Charts Laying Out Our Recession Call - eps


2. Consumer Confidence breaking off its cycle high...

"People aren't confident right now. As you can see, in the cycle, it's an elevator on the way up and windows on the way down," McCullough said.


4 Charts Laying Out Our Recession Call - conf


3. the end of declining jobless claims... 

"Jobless claims always peak at 600,000 and bottom at 300,000 at the end of the cycle. In the next six months you're right where you're at in the prior three recessions," McCullough said.


4 Charts Laying Out Our Recession Call - layoffs


For good measure, here's one of McCullough's favorite slides from this week's 73-page Q1 Macro Themes presentation explaining why U.S. stocks are headed for a crash regardless of what happens with our recession call. (To get access to our Macro team's entire presentation ping sales@hedgeye.com.)



HedgeyeRetail (1/7) | M/JCP Bad For KSS, FL/FINL

Takeaway: KSS - M/JCP Holiday Numbers...Why this is bad for KSS. A wounded FINL is not good for FL.

M, JCP, KSS - Why This Is Bad For Kohl's


This -5.2% comp number and additional 15% guide down to the 4Q earnings number is just icing on the cake for FY15 which can be characterized by a series of late cycle moves. Blue Mercury acquisition, off-price concept, entering the China market, etc. Do malls have a traffic problem? We think the answer is unequivocally yes, based on the 25% e-comm growth commentary that means B&M comps were down in the 10-12% range.


JCP on the other hand put up a relatively good number at 3.9%, held its EBITDA dollar guidance for the year and was more positive on its outlook for FCF generation.


SO, what does this mean for KSS. Based on the conversations we've had on the name the general consensus is that sales trends look ok based on credit card data. We should point out that KSS has 60%+ of its sales accounted for on it's own Private Label credit card (that's a black box), and non-credit has outperformed credit in 1Q and 2Q (no commentary given on the 3Q call). As KSS pushes it's Y2Y loyalty program it naturally inflates its national credit card data, which might explain the big shortfall we saw earlier in the year when the whisper was for a 4-5% and the company reported a 1.4%. Plus, it puts 25% of its EBIT at risk.


Bigger picture we've seen KSS out comp M in each of the past 4 quarters by an average of 2.6% that accelerated to a spread of 5% in 3Q. On the flip side, JCP has out comped KSS for the past two years by an average of 4.4% as it recaptures some of the $1bil in sales it ceded in market share to KSS. That suggests a flat to down comp for KSS. We don't typically call out weather, but as we lap two exceptionally cold ones with 70 degree weather in December here in the Northeast, it's hard to see how KSS runs from the same issues hurting M who attributed 80% of the comp decline to above average temperatures.


We want to be as clear as day on our positioning here – we would absolutely bet against the ‘it’s a great cash flow’ story, and would short it today into strength.  We think that earnings will fall by $1.50 from here, which will threaten management’s ability to buy back stock and ultimately, threaten the dividend. Once cash flow support goes away, then we’re left with KSS trading at 7-8x $2.50 in EPS, which leaves us with a stock in the high teens. Yes, it will take a number of years for this to play out. But if you’re tempted to chase this ‘cheap’ stock in the $50s – don’t.


FINL, FL  - Wounded FINL not good for FL

HedgeyeRetail (1/7)  |  M/JCP Bad For KSS, FL/FINL - 1 7 2016 chart1


Most of these wounds at FINL were self-inflicted with the supply chain issues causing $0.42 of the $0.45 miss, and costing eight percentage points of revenue. Unlike FL which, has executed exceptionally well since Ken Hicks took the reins in 2009, FINL has had its fair share of hiccups.


But, a wounded FINL is not good for FL. Especially as inventories across the industry remain elevated, and NKE, UA, and AdiBok push direct to consumer agendas. It's a bit tough to make an industry read-through because of the supply chain execution issues, but basketball underperformed running for the 4th straight quarter. If there is a positive for FL, it would be that inventory was down 14% during the quarter, meaning that anybody frustrated by out of stocks at FINL during the month of November could have transferred spending over to the other mall based footwear retailer. Though to be fair, apparel was more affected than footwear. Comps to date at FINL are up 6.2%, as the company gets desperate.


We remain confident that Foot Locker will prove to be one of the best multi-year shorts in retail. The company is likely to earn about $4.20 this year, which we think will prove to be the high water mark in this economic cycle. We think that emerging competition from its top vendor, Nike (=80% of sales), will stifle growth, and leave the company with an earnings annuity somewhere around $3.50-$3.75 per share. Is that worth $61? Not a chance. Not for a company that is Nike’s best off-balance sheet asset. And definitely not when the Street is in the stratosphere approaching $6.00 in EPS (#NoWay).


MKS - M&S boss Marc Bolland steps down amid falling clothing sales



HBC - Hudson's Bay Company to Acquire Gilt



WMT - Former Walmart exec named head merchant at The Fresh Market



AMZN - Amazon Enters Semiconductor Business With Its Own Branded Chips


Initial Claims | TX & LA Are Feeling The Pain

Takeaway: Texas and Louisiana are reporting initial claims have grown by 36% and 53% Y/Y, respectively, as of the most recent week.

Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims20


This week's headline claims number offered a brief intermission from the data's upward trend. Seasonally adjusted claims fell 10k to 277k, and the 4-week rolling average backed off by a nominal 1k from its 5-month high of 277k to 276k.


The three charts below illustrate the challenges/pain in the energy sector. The first chart shows the Y/Y RoC in initial claims across the eight energy-heavy states, the US, the US excluding these eight states and the average change for those eight states. Of the eight states highlited, six are showing initial claims growing Y/Y. The fastest growth is in Louisiana, where claims are higher by 53% Y/Y. The second fastest growth is in Texas, where claims are higher by 36% Y/Y. Interestingly, all eight energy states are performing worse the country as a whole.


The second chart shows Y/Y RoC in initial claims since May 2014 for the US ex-Energy States and for the Energy State basket. The breakout in energy state claims began at the start of 2015 and has remained steadily decoupled since.



Initial Claims | TX & LA Are Feeling The Pain - Claims   New Energy Chart 1


Initial Claims | TX & LA Are Feeling The Pain - Claims   New Energy Chart 2


Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims18

The Data

Initial jobless claims fell 10k to 277k from 287k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -1.25k WoW to 275.75k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -7.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.8%.


Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims2


Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims3


Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims4


Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims5


Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims6


Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims7


Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims8


Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims9


Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims10


Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims11


Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims19

Yield Spreads

The 2-10 spread fell -3 basis points WoW to 119 bps. 1Q16TD, the 2-10 spread is averaging 121 bps, which is lower by -15 bps relative to 4Q15.


Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims15


Initial Claims | TX & LA Are Feeling The Pain - 1.7.16Claims16



Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


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