Cartoon of the Day: Pervasive Weakness

Cartoon of the Day: Pervasive Weakness - weak over weak cartoon 01.19.2016


"In terms of both economic data and macro market read-throughs, last week was ugly," Hedgeye CEO Keith McCullough wrote in a note to subscribers earlier this morning. "Let’s not forget we had the 'misses' Friday with Industrial Production and Producer Prices (PPI) in recessions."

Welcome Aboard! Atlanta Fed And IMF Cut Their GDP Estimates

Welcome Aboard! Atlanta Fed And IMF Cut Their GDP Estimates - consensus cartoon 07.29.2015


For the record:

  • Today, the IMF cut its growth outlook for the global economy by 0.2 percentage points to 3.4%.
  • Over the weekend, the Atlanta Fed (once again) cut its forecast for 4Q U.S. GDP to 0.6%. 


For those of you keeping score at home, we called it well ahead of them.


Our non-consensus macro team's #GrowthSlowing theme is 18 months old now, which we continue to reiterate. Our most recent 73-page Macro themes deck highlights the increasing probability of a U.S. #Recession in the 2Q or 3Q of this year. (To read more about our Macro team's non-consensus themes deck ping


Clearly, we've been front-running economic reality.


A few questions: Does anyone actually believe these central planning bureaucrats anymore? And do their often rosy economic forecasts have any credibility? 


We'll let you make up your own mind.


Here's Reuters:


"Twenty-eight out of the 30 initial calendar year forecasts by the IMF and World Bank for global, developed market and emerging market GDP growth for 2011-2015 proved too optimistic, in many cases wildly so."



Similarly, over the past few weeks, the Atlanta Fed has taken the hatchet to its own 4Q U.S. GDP estimate. As of Friday, that forecast is 0.6% versus 2.2% in late November. 


Welcome Aboard! Atlanta Fed And IMF Cut Their GDP Estimates - atl fed forecast




We're scratching our heads. Incidentally, Atlanta Fed head Dennis Lockhart doesn't seem to believe his own economic forecasts. Just last week, Lockhart said he was "mildly optimistic" that strong domestic consumption will help U.S. GDP growth in 2016.


Hang on. Where's the evidence of that? Below is a chart from our macro team showing the year-over-year slowing in personal consumption expenditure...


Welcome Aboard! Atlanta Fed And IMF Cut Their GDP Estimates - PCE


... And here's Lockhart's own Atlanta Fed GDP revision from Friday:


"The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 0.6 percent on January 15, down from 0.8 percent on January 8. The forecast for fourth quarter real consumer spending growth fell from 2.0 percent to 1.7 percent after this morning's retail sales report from the U.S. Census Bureau and the industrial production release from the Federal Reserve." (Emphasis added)


This disconnect between economic reality and the Fed's forecast isn't surprising if you've been listening to us. We've long chronicled the Fed's "serial over-optimism." By our tally, the Federal Reserve’s GDP forecasts, the "dot plot," have consistently overestimated growth, every year over the past 5 years, to the tune of 100 basis points.


So remember, as Hedgeye CEO Keith McCullough is fond of saying "One of the biggest risks to financial markets right now is believing the Fed's [or the IMF's] economic forecast."

Welcome Aboard! Atlanta Fed And IMF Cut Their GDP Estimates - Fed forecast cartoon 03.02.2015

All You Need To Know About The (Crashing) Russell 3000 In One Chart

Hedgeye Senior Macro analyst Darius Dale sent a note to institutional subscribers Friday outlining the bearish reality behind the Russell 3000's crash. It's not pretty. As you can see below, the average stock in the Russell 3000 has plummeted a monster -34% from its 52-week high.  


Click the image below to enlarge. 


All You Need To Know About The (Crashing) Russell 3000 In One Chart - russell 3000



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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 large


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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