The Antarctic

“Better a live donkey than a dead lion.”

-Sir Ernest Shackleton


Over the years, I’ve read a number of books about the life of Sir Ernest Shackleton. The most recent, “Shackleton’s Way,”is a “study of the leadership lessons of the great Antarctic explorer.” 


There are many key lessons to learn from Shackleton. In particular, his ability to manage a small group of disparate characters in the most challenging of environments. From my perch, the most significant lesson is how Shackleton “always put the well-being of his crew first”. In terms of morale and minimizing turnover, this is a lesson leaders across the spectrums of business, sports, politics, and the military can take to heart.


Put another way: generals should eat last.


Inasmuch as the book tends to idolize Shackleton, he ultimately died heavily in debt and on the short end of many failed business ventures. His true Antarctic ultimately wasn’t the one he conquered, but, rather, the one back in England that ultimately conquered him.


These days, no doubt, the stock market seems like the Antarctic to many of us – depressing, dark, and endless. Year-to-date, the SP500 is down -6.8%. If we annualize that return to the end of the year, the SP500 will be close to zero. Lucky for us, that’s not going to happen. 


There will be an end to The Antarctic that is the U.S. and global equity markets this year. Ultimately, equities won’t bottom on some arbitrary call on valuation in which the denominator of the multiple is likely wrong, but as they usually do when a recession has hit and the economic news is as dark as an Antarctic winter night.  


On that front, clearly some economic news is getting increasingly bleak. As we highlighted in our Q1 Themes presentation a few weeks back, a whole slew of economic data including manufacturing, PMIs, exports, capital investment, durable goods, and corporate profits are showing are showing y-o-y declines. 


That said, one of the most focused on lagging indicators -- employment -- still appears strong. But as the Chart of the Day highlights, employment is very long in the tooth. Not only have jobless claims bottomed (meaning employment is worsening on the margin) the current length of time at/below the critical threshold of 300K jobless claims would imply only six more months of economic expansion.


So... has the stock market bottomed yet? Probably not. But it certainly will in time, as it always does. But be forewarned, it took Sir Ernest Shackleton three attempts before he was able to cross the Antarctic.


The Antarctic  - bear cartoon 01.26.2016


Back to the Global Macro Grind


In what has become the new standard for "good" stock market news, China closed well off its lows. At one point during the trading day, the Shanghai Composite was, well, getting Shanghai-ed down almost 4%. Finishing down only 50 basis points on the day and avoiding the another two day -10% loss? Well, it's a victory, of sorts.


This “victory” was catalyzed by rumors of an increased crackdown on short sellers. As conjecture goes, the PBOC is giving guidance to some offshore banks in Hong Kong to suspend offshore Yuan lending. In addition, the PBOC supposedly asked both the banks and various companies to collect information about short sellers in the offshore Yuan market.


If this all sounds familiar, it should. In the 2008-2009 time frame, the crackdown on dastardly short sellers was rampant globally. When all else fails, blame the shorts! That all works fine in some central planning "La-La Land" of economics, but back in the real world blaming short selling doesn’t suspend economic gravity. In fact, if anything, it makes markets less efficient. (Note to Chineses policy makers: the $1 trillion in capital that exited your economy last year wasn’t due to short sellers!)


Back in the U.S., the central planners aren’t yet intervening, but the news over the last 24 hours certainly isn’t all that encouraging. In fact, the all-knowing indicator of U.S. economic health, iPhone sales, grew at its slowest pace since 2007. 


We will be receiving more information from the Fed today, but since they just raised rates, it is unlikely they will be getting dovish anytime soon.  In the world of globally connected markets, this means the U.S. dollar is likely to strengthen even more from here.


A strong dollar is fine, to a point. But it's also detrimental when it's crushing the U.S. energy, industrial and export sectors. It is great that gasoline is cheaper in Houston than Saudi Arabia, but the derivative impact on the high levered energy industry and debt markets is not going to be pretty. In the short run, it looks like the Fed is tightening into deflationary headwinds and a potential recession. No doubt we know how that ends.


In lighter news, I wanted to highlight this interesting excerpt from my colleague JT Taylor’s "Morning Bullets" at Potomac Research Group relating to Donald Trump:


What Does The Fox Say? – In a campaign that’s been defined by redefining conventional wisdom, this new twist takes the cake. Donald Trump announced last night that he will not participate in Thursday’s debate. As part of the ongoing, sophomoric feud between the front runner and Fox, the network put out a press release essentially taunting Trump (itself unprecedented), who then called Roger Ailes' bluff . . . we can be almost certain that Trump will dominate the news cycle from now until the caucus in Iowa on Monday.


Meanwhile, according to the most recent Washington Post poll, Trump’s lead is as strong as ever. 60% of Republicans see him as the eventual nominee. The Antarctica of politics? It is just beginning.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.96-2.09%


Nikkei 159

DAX 9 (bearish)

VIX 19.94-28.90
USD 98.64-99.73


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Antarctic  - 01.27.16 EL Chart

MTW, TEX | Zoomlion, Debt Ratings

Takeaway:  The MTW crane business has positive value, we think, and the Zoomlion bid for TEX – a new high comp – should highlight that potential.  Other Chinese companies may look to diversify away from domestic markets suffering from sagging fixed asset investment and fear of currency devaluation.  While we like the idiosyncratic value-unlock character of an MTW long position, the macro and credit environment are increasing inhospitable.  That argues for a shorter leash.  We are curious to see how the shares trade around the actual spin, as trading in break-ups typically improves just before or somewhat after actual separation.  We would also keep an eye on the (now less levered) MTW crane business, which may get severely oversold as portfolios dump this “too small” potential acquisition target. Ping us for our MTW Black Book and EQM/data sets for additional background.




Zoomlion Bid:  We don’t doubt that Zoomlion is serious in its bid for TEX.  Zoomlion’s home market is fragmented, ultra-competitive, and in a likely structural decline. There is also widespread concern about a substantial currency devaluation.  If Zoomlion waits too long, diversification away from domestic markets may become too expensive.  Others Chinese manufacturers may try to follow Zoomlion’s lead, and companies like Sany may do more deals along the lines of its early 2012 purchase of Putzmeister.  If that’s an accurate take, Goldman’s Asia bankers will have an even happier 2016 than Australian mining insolvency lawyers.

MTW, TEX | Zoomlion, Debt Ratings - MTW TEX 1 27 2016



Zoomlion As Comp:  The value of a business is the present value of future free cash flows, liquidation value, or what someone will pay for it.  The $30 cash offer for Terex, a ~100% premium to mid-January trading, could be construed as a necessary move by a company in a tough domestic market.  It could also be viewed as reshaping the competitive landscape in the industry.  Zoomlion will gain Terex’s distribution, residual value history, installed base, and brand.  That may make a similar transaction attractive to a Sumitomo or Sany.  If TEX rebuffs the Zoomlion offer, it could shift the focus to Manitowoc’s crane segment.  We don’t know exactly which TEX businesses Zoomlion is most interested in, but it’s a fair bet that cranes are a key attraction.



MTW Cranes Valued @ TEX Bid:  It is our contention that the MTW crane segment is given a negative valuation by the market, to the extent that one can guess how the market apportions value.  On a sales basis and depending on how the final debt allocations get settled, we would estimate that it would equate to $8-$9 per current MTW share.  Assuming the market even roughly prices in this new comp, MTW shares should respond well.  We do think that the crane business at MTW is a good sale candidate that fits with several deep pocketed buyers.



S&P Doesn’t Like It, So It’s Probably Good: The analysts at S&P took a break from their after-the-action downgrading energy-related debt to give an opinion on the new issues from Manitowoc and MFS.  Our read is that the ratings are not entirely positive, although the pricing on the larger MFS $975 mil 7 yr debt at a Libor +475 would appear an improvement vs. the current costs.  It seems that MFS will have somewhat more debt than initially anticipated, consistent with elevated concern about crane cyclicality.  We will get more details on the debt allocations on Thursday and readers can peruse the S&P ‘analysis’, but the recent weakness in high yield markets is going to take some value away from equity holders.  Most people we have spoken with will just be happy that they are getting the issues off at a reasonable price to complete the separation on time. 



Upshot:  The MTW crane business has positive value, we think, and the Zoomlion bid for TEX – a new high comp – should highlight that potential.  While we like the idiosyncratic value-unlock character of an MTW long position, the macro and credit environment are increasing unhospitable.  That argues for a shorter leash.  We are curious to see how the shares trade around the actual spin, as trading typically improves just before or somewhat after actual separation.  We would also keep an eye on the (now less levered) MTW crane business, which may get severely oversold as portfolios dump this “too small” potential acquisition target. 


FLASHBACK | McCullough: Apple Is the Most Over-Owned Stock In Human History

Hedgeye CEO Keith McCullough didn't mince any words discussing Apple (AAPL) this past summer on Fox Business' Mornings with Maria. The following day McCullough told the London-based City A.M.:


"Apple is the most over-owned stock in human history." 


Here's a snippet from the conversation:


Do you think Apple and tech stocks in general are overvalued?


A) Apple isn’t a value stock – it’s the most over-owned stock in human historywhere “valuation” comes into the debate on down days. It’s actually a product-cycle stock, and all cycle stocks should look relatively “cheap” at the peak of a cycle


B) What Morgan Stanley calls “New Tech” trades at an average P/E of 149.5x forward earnings. Overvalued is an understatement. It’s obviously a bubble.


Is this another tech bubble? Does this look like the dotcom bubble?


Yes (see above).


Across market histories, from tulips to dot.bombs, every bubble is unique. Instead of the internet, I think we’ll call this one the cloud of expectations.

*  *  *  *  *

Here's a look at what's happened to Apple since.

FLASHBACK | McCullough: Apple Is the Most Over-Owned Stock In Human History  - apple


***On a related note, each morning in our Daily Trading Ranges product, Keith sends subscribers his updated risk ranges on myriad tickers including Apple. Here's a look at a handful today, including AAPL.


FLASHBACK | McCullough: Apple Is the Most Over-Owned Stock In Human History  - z aapl


Early Look

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Europe, Oil and China

Client Talking Points


Got growth slowing?  Europe’s economic heavyweight does.  Today the German economic ministry cut Germany’s 2016 growth forecast to 1.7% from 1.8% previously forecast. It also cut the 2016 export growth outlook to 3.2% vs prior 4.2% and lowered its outlook for import growth to 4.8% vs 5.3%. #EuropeSlowing


When an asset class that big moves that much that fast it leaves a mark on markets.  Equities correlation to oil has been building over the last year and has been ~0.97 over the last month.  Yesterday’s rally in equities followed the bounce in crude (& rumors of production cuts) only to be reversed after hours when API reported an 11.4 mm barrel build in inventory – the largest since 1996.  Demand is slowing, supply is building and as deflation continues to define the Trend despite manic, one-day countertrend price moves. 


Chinese industrial profits declined -4.9% Y/Y in December which is a sharp deceleration from -1.4% Y/Y in December. Whispers of fresh stimulus might be the only fading hope to delaying the flush of global overcapacity hanging on the “Chinese Demand” story.   

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Utilities (XLU) continue to be the bright spot in the equity markets for 2016. XLU is up 1% this year, having edged out all other S&P 500 subsectors by a wide margin. Last week, XLU was down marginally but was still second best among the subsectors, beating all but Healthcare (XLV). Essentially, it's paying off to own low-beta XLU in a crashing market.


General Mills (GIS) has turned on its advertising for no artificial colors and flavors in its cereal, as well as an increased effort for its gluten free campaign. Click here to view the 30 second spot TV commercial.


These steps taken on cereal, coupled with improved merchandise planning across their portfolio in the second half should bode well for the company’s future performance. Additionally, General Mills fits neatly into the style factors that we like from a macro point of view, large cap, low beta and liquidity.


Rating agency S&P disclosed on Thursday three concerning stats as it relates to the wellness of credit oustanding:

  • More companies were at risk of having their credit ratings cut at the end of December than at the close of any other year since 2009
  • The number of potential downgrades was at 655, compared with 824 reported by the finish of 2009
  • The year-end total for 2015 was "exceptionally" higher than a yearly average of 613


Then on Friday, S&P followed with additional action:

  • Disclosure that oil-exporting countries face fresh downgrades as crude prices fall further and that it could repeat last year's move when it made a big group of cuts all at once
  • S&P currently has Azerbaijan, Bahrain, Kazakhstan, Oman, Russia, and Saudi Arabia on negative outlook in its Europe, Middle East and Africa region, as well as Brazil and Venezuela in Latin America

Moody’s echoed the shaky state of credit markets by announcing it was putting the ratings of 120 oil and gas companies on watch Friday.


Strap on your seatbelts as we expect that credit spreads will continue to widen. If the Fed pivots on its “4 rate hikes” in 2016 as the data continues to slow, Treasury bond yields get pushed lower and high-yield spreads widen into a late cycle deleveraging. This should continue to generate alpha in a Short JNK, Long TLT trade.

Three for the Road


NEW VIDEO | Under 60 Seconds: #McDonalds Earnings Report… @HedgeyeHWP $MCD @KeithMcCullough



We learn wisdom from failure much more than success. We often discover what we will do, by finding out what we will not do.

Samuel Smiles


In 2015 U.S. Universities raised a record $40.3 billion.

Casteleyn: M&A Has Peaked – ‘The Last Bastion Of Capital Is Gone’

In this brief excerpt from The Macro Show, Hedgeye Financials analyst Jonathan Casteleyn explains the precarious setup for any investor banking on M&A hitting another all-time high this year.

The Macro Show Replay | January 27, 2016



Here is today's asset allocation:

The Macro Show Replay | January 27, 2016 - Slide2

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