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Why Old Wall's Credibility Is Crashing Faster Than The Russell 2000

Takeaway: The Russell 2000 is down -22% since its all-time bubble high in July. Wall Street Consensus credibility is down considerably more.

Why Old Wall's Credibility Is Crashing Faster Than The Russell 2000 - RussHELL cartoon 01.13.2016

 

REALITY CHECK: Old Wall perma-bulls flat-out missed the crash in the Russell 2000. We didn't. We warned you about this precarious setup back in July. 

 

Why Old Wall's Credibility Is Crashing Faster Than The Russell 2000 - rut index

 

"Isn’t it ironic, but not surprising, that the “U.S. is the best house in a bad hood” thesis has crashed too," Hedgeye CEO Keith McCullough wrote in a note to subscribers this morning. "The Russell 2000 is now down -22% (crash mode) from its July 2015 #Bubble high as U.S. domestic growth expectations move toward a #Recession."

 

You won't hear most people on Old Wall talking about the DAX this morning. Probably because that's crashing too.

 

 

Here's McCullough on the evolving Old Wall storytelling on Europe:

 

"Right back into crash mode goes the over-owned “this time is different” in Europe theme. The DAX is down -2% this morning and down -21.1% since the April 2015 top. ECB President Mario Draghi is going to have to defend this with Down Euro = Up Dollar = #Deflation."

 

As for us (and our subscribers) we'll stick with our repeatable risk management process. If you're interested in joining us click here to learn more. 


7 Key Economic Talking Points For Serious Contenders at Tonight's #GOPDebate

Takeaway: Obama argues anyone saying the US economy is in decline is "peddling fiction." We take the other side of that trade. Truth is on our side.

7 Key Economic Talking Points For Serious Contenders at Tonight's #GOPDebate - z fbn gop debate

 

In his final State of the Union address, President Barack Obama told the nation that anyone "claiming that America's economy is in decline is peddling fiction."

 

Huh?

 

We're not in the business of "peddling fiction" here at Hedgeye. On the contrary. Our non-consensus macro team's granular 73-page slide deck released earlier this month shines the spotlight of truth on the current economic reality and outlines our current U.S. Recession call.

 

Let's be clear. Obama's rosy economic picture is false. This isn't a partisan, Republican or Democrat perspective, it's simply an honest appraisal of what's going on out there right now.

 

On a related note, GOP contenders have plenty of "non-fiction" to refute Obama's clams at tonight's Fox Business GOP Debate. Here are some key talking points any serious contender should consider ahead of the debate courtesy of our outspoken, reality-based CEO Keith McCullough.

 

point #1

point #2

point #3

point #4 

point #5

point #6

point #7

Fiction? More like reality...


The Macro Show Replay | January 14, 2015

 


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LNKD | Closing Long Position

Takeaway: Our tracker is flagging a deteriorating selling environment. Light 2016 guidance now more likely, and macro could become a growing concern.

KEY POINTS

  1. TRACKER DETERIORATING: Our LNKD JOLTS tracker declined sequentially into the second month of 4Q15, which is expected given seasonality in LNKD's selling environment.  But as we mentioned in our last note, we're keying in on magnitude, which has gotten worse than seasonality alone would suggest.  As a reminder, our LNKD Talent Solutions TAM analysis suggests that the bulk of that TAM is in the upsell opportunity (ARPA) vs. new account volume (see note below for detail).  
  2. GUIDANCE TO DISSAPOINT? We already had reservations about staying long into LNKD's 2016 guidance release since this mgmt team is notoriously conservative with guidance.  We suspect it's even less likely now that mgmt guides to street expectations if our tracker is correctly flagging a deteriorating selling environment.  Further, Fx pressure is continuing early in 2016, which we expect to be top of mind for this mgmt team since Fx was LNKD's largest source of pressure last year, and the primary source of its guidance cut.
  3. CLOSING LONG POSITION: Our original thesis on LNKD was that it can't be played as a sleepy long.  First, we have to be mindful of ever-rising consenus estimates and a mgmt team that doesn't want to box itself into them.  Second, we're late cycle, and we don't want to be there for the eventual turn.  Our macro team is now calling for a potential recession as early as 2Q16, which LNKD will not be immune to since its Talent Solution TAM is tethered to macro (see note below).  We still view LNKD as one of the better run companies in our space, but when we put good company up against bad macro, macro wins. 

 

See the note below for supporting detail/analysis on our LNKD.  Let us know if you would like to disucss.  

 

Hesham Shaaban, CFA


@HedgeyeInternet 

 

 

LNKD | Closing Long Position - LNKD   ARPA vs. Tracker 4Q15 2

 

LNKD: New Best Idea (Long)
07/14/15 08:00 AM EDT
[click here]


CHART OF THE DAY: Got Risk? We've Never Seen A Credit Cycle Like This

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... As you can see in the Chart of The Day, the volatility of levered investments is starting to move up and into the right of this 3-factor SPREAD RISK chart:

 

  1. High Yield Spread (over 10yr Treasury) = y-axis
  2. Bond Market Volatility (MOVE Index) = x-axis
  3. Total Corporate Credit Outstanding = Bubble Size

 

History shows that once High Yield Spreads have widened meaningfully off the cycle-lows (as they have for the last 7 months), they do not tighten again in the same economic cycle."

 

CHART OF THE DAY: Got Risk? We've Never Seen A Credit Cycle Like This - pg 43 macro deck HY spreads


Powerball Believers

“A leader must be a true believer in the mission.”

-Jocko Willink

 

I didn’t win Powerball last night, so I’m back at it, peddling non-fiction to Obama’s “folks” at the Fed this morning.

 

In all seriousness, like many of you, Laura and I had a Powerball discussion with our kids at the dinner table last night. Laura told them that “if we won”, we’d keep it anonymous and donate a large part of it to charity. The kids liked that.

 

Yes, I know. A certain type on the Old Wall is all about the money. And a mother’s moral lessons to her children can sound idealistic. But the reality is that a lucky ticket wouldn’t have changed the mission we’re on this morning. As parents, we’re already winning.

 

Back to the Global Macro Grind

 

As a parent, coach, or professional (or anyone in any position of leadership) our goal should always be to be on a mission – one that we can feel in our bones – one that we truly believe in. As Navy SEAL Jocko Willink went on to write in Extreme Ownership:

 

“Leaders must always operate with the understanding that they are part of something greater than themselves and their own personal interests. They must impart this understanding to their teams.” (pg 76)

 

I realize I am as flawed and fragile as any other human being. Without the blessing of good health, everything I’ve ever “wanted” can be disrupted. That’s why, every day, I re-commit to being part of something that’s a lot bigger than I’ll ever be.

 

Back to the belief system of a Powerballer…

 

Powerball Believers - Bubble bear cartoon 09.26.2014  1

 

A lot of people played who have never played. Why? If you’re not in it, you can’t win it. But it was also a cultural craze that transcends the bubble in “wealth.” From “internet stocks” to housing, we’ve had plenty of bubbles pop in the last two decades. This one will too.

 

Some people play Powerball because they want a short-cut. They’ll gamble their kids meal money away for the hope of a better life. I don’t judge that. People have wants and needs. But we also have a culture that is fixated on cheap leverage.

 

“Cheap” leverage has a ton of downside if the principal investment goes to zero. When I think about all the mistakes I could have made in the last 6 months, the biggest one would have been getting sucked into “missing the move” in a lottery stock.

 

Fortunately, saying no to gambling, drugs, and leverage is a choice. Together, many of us made that choice.

 

To review the biggest catalyst for a US stock market crash:

 

  1. The perception that “0% rates” = 0% risk is a centrally planned fraud
  2. Real risk is measured in terms of both volatility and credit spreads
  3. As #Deflation becomes pervasive instead of “transitory”, both volatility and credit spreads breakout

 

As you can see in the Chart of The Day, the volatility of levered investments is starting to move up and into the right of this 3-factor SPREAD RISK chart:

 

  1. High Yield Spread (over 10yr Treasury) = y-axis
  2. Bond Market Volatility (MOVE Index) = x-axis
  3. Total Corporate Credit Outstanding = Bubble Size

 

History shows that once High Yield Spreads have widened meaningfully off the cycle-lows (as they have for the last 7 months), they do not tighten again in the same economic cycle.

 

Moreover, we’ve never seen a Credit Cycle with this much debt outstanding. This is the biggest corporate credit bubble in human history and leverage, as we all very well know, can amplify returns in both directions.

 

So, if you’re looking for reasons why the German stock market (DAX) and Russell 2000 (IWM) are in crash mode (down -21-22% from their cycle peaks in April-July of 2015), the combination of:

 

A)     LEVERAGE (most equity hedge funds run 150-250% gross invested to lever up low nominal returns)

B)      LIQUIDITY (lots of hedgies own the same small-mid cap stocks; when they go down fast, they can’t get out)

 

I’ve never been a fan of levered-long strategies – especially at economic cycle peaks. Personally, I don’t believe in levering myself up with assets I can’t afford either. But that’s just me – the guy who spent $5 on Powerball, just for fun.

 

It’ll be fun putting those tickets in the garbage this morning. My mission is not to have you chase charts, buy high, and hope that stocks never go down. Like bonds, they go up and they go down. I’m a big believer in a risk management process that goes both ways.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.04-2.18%

SPX 1
RUT

VIX 21.19-29.21
Oil (WTI) 28.61-33.52

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Powerball Believers - pg 43 macro deck HY spreads


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