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This Chart Shows Why The Stock Market Selloff Isn't Over

Takeaway: Ignore this morning's stock market bounce.

This Chart Shows Why The Stock Market Selloff Isn't Over - bounce cartoon 01.12.2016

 

We know that consensus S&P 500 earnings estimates have come down markedly. However, what equity perma-bulls don't know is just how poorly this bodes for stocks.   

 

According to FactSet:

 

"For Q4 2015, the blended [estimated] earnings decline is -5.7%. If the index reports a decline in earnings for Q4, it will mark the first time the index has seen three consecutive quarters of year-over-year declines in earnings since Q1 2009 through Q3 2009."

 

so Why does this matter?

 

Check out the chart below. It shows what happens to U.S. equities when S&P earnings contract for more than two consecutive quarters. In short, the S&P 500 declines 20% or more.

 

This Chart Shows Why The Stock Market Selloff Isn't Over - EL profits

 

in other words, watch out.



TIF | Staying Short

Takeaway: TIF miss blows up bull case that this is a great company at a defendable valuation. Hardly financial management befitting a 'Best-in-Breed'

TIF missed yet again, blowing up the bull case that this is a great company at a defendable valuation. The forecastability of this cash flow stream is the worst we've ever seen outside of the Great Recession. If you did not think we were headed for a recession yesterday, you've got to give it serious credence today. Unfortunately, in a recession TIF earnings could still go meaningfully lower (I.e. $3.00).

 

We acknowledge that TIF is a very good (once great) brand and company. But let's be honest...this company guided down more in the past year than it had it the preceding decade. That's hardly financial management befitting a Best-in-Breed company.

 

Barring a complete reset in Street numbers (down to the $3.50 range) we'll stay short.

 

If the stock holds in there (~$65), then it will still be worth shorting due to lack of valuation support.

 

Additional details...

 

Stating the obvious this was a really bad number out of TIF this morning, reporting -5% constant currency comps for the months of November and December vs. consensus at 2.7% for all of 4Q. All regions of the globe, except for Japan, reported negative comps over the Holiday selling period. Earnings expectations for the quarter now sit at the bottom end of the previously announced range.

 

The key questions we were asking as we headed into this sales release was why earnings NEED to grow next year.  TIF answered that in its preliminary guidance for 2016 calling for minimal growth in both sales and earnings. That translates to $3.90 vs. the Street at $4.30.

 

The reality is that there are no obvious margin levers to offset the declining growth profile in the business, especially amidst increased late cycle risks. The price has come off (down another 5% at the open), but so have earnings. It is trading near a peak multiple on our numbers (17x) on peakish margins (19%-20%) on an earnings number that is not likely to grow for 2-3 years absent financial engineering. 


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Shellacked: A Recap of Last Week's Market Action

Takeaway: Once again, it pays to listen to Hedgeye.

Shellacked: A Recap of Last Week's Market Action  - stocks. bear in the woods 01.06.2016

 

In terms of both economic data and macro market read-throughs, last week was really ugly. The reality is that it was the worst start in history for U.S. stocks. Ever. 

 

Well, for equity investors at least, not Hedgeye subscribers.

 

Our subscribers were spared the August equity market drubbing and the most recent market rout as our contrarian Macro team has been way ahead of consensus warning about ongloing risks including #Deflation and #GrowthSlowing

 

In other words, we made the call.

 

Hedgeye CEO Keith McCullough dissected last week's data and the resulting financial market reverberations in a note sent to subscribers this morning:  

 

"Let’s not forget we had a trifecta of “misses” on Friday with Industrial Production and Producer Prices (PPI) in recessions at -1.8% and -1.0% year-over-year, respectively (and control group for Retail Sales only +1.5%). The U.S. 10YR Yield broke 2.0% intraday (and should have on that data) and GDP is a lot slower than consensus (our favorite Macro Long idea remains the Long Bond)."

 

Shellacked: A Recap of Last Week's Market Action  - 10yr yield

 

Meanwhile, equity markets ripped to the downside, in all but one sector, Utilities (XLU) (which just so happens to be the one sector that we like.) Here's additional analysis from McCullough: 

 

"U.S. Equity Sector Styles continue to reflect #Recessionary expectations accelerating, with Utilities (our favorite sector currently) +0.7% last week (+0.3% year-to-date) and Basic Materials -4.5% on the week (-11.9% year-to-date) and Financials -3.1% on the week (-10.1% year-to-date) underperforming what’s an already -8.0% year-to-date S&P 500."

 

Shellacked: A Recap of Last Week's Market Action  - sector performance

 

The fizzling in U.S. equities doesn't surprise us at all. Here's an inside peak at our proprietary asset allocation model which has been largely devoid of U.S. equities since last July.

 

Shellacked: A Recap of Last Week's Market Action  - asset allocation

 

Bottom line: We're going to ignore consensus and stick with our process. It's working.

 

Shellacked: A Recap of Last Week's Market Action  - z consensus


TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL

Takeaway: Slowing growth and falling oil prices continued to erode investor confidence last week. Our heatmap is negative across all durations.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM11

 

Key Takeaway:
Slowing growth, both domestically and in China, cascading oil prices and rising concerns over default in the energy arena continue to sound the alarm for investors. Default swaps widened globally last week, especially in emerging markets and most notably in Russia where Sberbank swaps widened by +50 bps to 413 bps and Russian sovereign CDS widened by +50 bps to 385 bps as oil prices continued their slump. Additionally, the high yield YTM blew out by +53 bps last week to 8.97%.

Our heatmap below is more negative than positive across all durations.

 

Current Ideas:

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 12 improved / 6 out of 12 worsened / 4 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 7 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 4 out of 12 worsened / 7 of 12 unchanged

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM15

 

1. U.S. Financial CDS – Swaps widened for 12 out of 27 domestic financial institutions with the median spread expanding by another 6 bps week over week. At the bottom of our U.S. CDS table below, we have added indices on investment grade and high yield CDS, which widened last week by 11 bps to 110 and by 33 bps to 555, respectively.

Tightened the most WoW: CB, ACE, MMC
Widened the most WoW: AIG, AXP, MET
Widened the least/ tightened the most WoW: CB, MMC, ACE
Widened the most MoM: AXP, ALL, MET

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM1

 

2. European Financial CDS – Swaps mostly widened among European banks last week. CDS on Portugal's Banco Espirito Santo were an exception, tightening by -490 bps to 1,229 on deliberations at ISDA'S Credit Determinations Committee. Last week, the committee failed to reach a super-majority decision on whether the transfer of Novo Banco senior bonds into Banco Espirito Santo constituted a governmental intervention. Additionally, it has set January 22 as its decision deadline on whether a portion of Novo Banco CDS would be transferred to Banco Espirito Santo.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM2

 

3. Asian Financial CDS – Swaps among Asian financials mostly widened last week. Chinese bank CDS widened between +8 and +12 bps as investors continued to worry about the country's decelerating economy. In India, although IDB Bank of India CDS tightened by -12 bps to 228, ICICI Bank and State Bank of India widened by 4 bps to 184 and by 10 bps to 171, respectively.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM17

 

4. Sovereign CDS – Sovereign swaps mostly widened over last week as growth concerns mounted. Portuguese sovereign swaps widened the most, rising by +12 bps to 194.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM18

 

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM3

 

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps were hit especially hard by concerns over slowing growth in China and low oil prices. Russian sovereign swaps widened by +50 bps to 385 bps. Meanwhile, Brazilian sovereign CDS are once again knocking on the door of 500 (496 bps), +9 bps on the week.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM16

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 53 bps last week, ending the week at 8.97% versus 8.45% the prior week.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 6.0 points last week, ending at 1802.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM6

8. TED Spread Monitor  – The TED spread fell 3 basis points last week, ending the week at 39 bps this week versus last week’s print of 42 bps.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM7

9. CRB Commodity Price Index – The CRB index fell -5.6%, ending the week at 160 versus 169 the prior week. As compared with the prior month, commodity prices have decreased -7.1%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 12 bps.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was unchanged, ending the week at 1.96%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM10

12. Chinese Steel – Steel prices in China fell 1.6% last week, or 33 yuan/ton, to 2009 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM12

13. 2-10 Spread – Last week the 2-10 spread was unchanged at 118 bps. We track the 2-10 spread as an indicator of bank margin pressure.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 5.6% upside to TRADE resistance and 1.8% downside to TRADE support.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


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