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JT Taylor: Trump Trounces, Kasich & Bush Surge & Clinton Flounders

Takeaway: Key takeaways from the New Hampshire primary.

Editor's Note: Below is a brief excerpt from Potomac Research Group Senior Analyst JT Taylor's Morning Bullets sent to institutional clients each morning. 


JT Taylor: Trump Trounces, Kasich & Bush Surge & Clinton Flounders - trump 55


On the heels of criticism that his lack of campaign infrastructure in Iowa led to his loss to Ted Cruz, Donald Trump didn't take any chances in NH. He ramped up his organization in just a 10-day stretch to augment his strong polling numbers -- with volunteers making over 30,000 calls a day and maximizing GOTV efforts. Just think if he'd had all this in place before Iowa... Expect Trump to bring in more ground forces into South Carolina where he faces a well-organized Jeb Bush and an electorate that's partial to Cruz.  


JT Taylor: Trump Trounces, Kasich & Bush Surge & Clinton Flounders - jeb


Seems like just yesterday (ahem) that media pundits were speculating that some of the top-tier candidates would have to consider dropping out after NH. Not so fast. John Kasich's strong second place finish will infuse badly needed resources into his campaign, and Bush's resurgence will inject much-needed confidence into his. Kasich will need to quickly capitalize on his momentum and improve his 1% standing in SC, but we don't see a path forward for him.  Bush needs to place big in both SC and Nevada in his renewed fight to win the establishment lane.


JT Taylor: Trump Trounces, Kasich & Bush Surge & Clinton Flounders - sanders


There was never a doubt that the Bern would win NH, he's been leading Hillary Clinton by 15-20 points since last fall. We're not even that surprised by the margin, but by the fact that she couldn't close the gap despite winning the state in 2008, a full court press this past week, and inability to make inroads in any of the key demographics. Sanders' numbers across the board were stunning and one stands out more than the others -- he won over women by 11% and commanded 83% of 18-29 years olds.


Clinton will do what stumbling campaigns almost always do -- call for an overhaul.  But we don't think her campaign needs to hit the reset button. She does. It's her lack of a clear message and conviction -- and as a result Sanders is tapping into the constituencies that should naturally be hers. The demographics in the next two states and Super Tuesday favor her with a more diverse electorate and a ground game that has been in the place since early 2015. But Sanders isn't going away any time soon. More money will flow his way and he will look to dent her March strategy, where 56% of delegates are up for grabs.


Takeaway: Today we're flagging Toll Brothers (TOL) on the short side due its extremely bullish sentiment (Score: 90).

Our top-down view on the US Housing market changed from bullish to bearish at the start of the year and we think the high end is likely to soften materially in 1H16. At the other end of the housing spectrum is KB Home (KBH) at a bombed out sentiment score of 10. Though left for dead, we think the news will continue to get worse over the intermediate term so we'd hold off for now. That said, given the score, it's not a name where we'd be pressing the short right here. 


We are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.


The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  


We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.


Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.


The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 








The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”


Let us know if you would like to receive a copy of our black book, which explains this system and its applications.


BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   


SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 






Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

VIDEO FLASHBACK (11/6/15) | McCullough: Fed Rate Hikes & Why Recession Is A 'Live Possibility'

Takeaway: In this video from last November, Hedgeye CEO Keith McCullough explains why a U.S. recession is a "live possibility."

Last November, Fed head Janet Yellen called a December rate hike a "live possibilty." In the video below, Hedgeye CEO Keith McCullough countered that a U.S. economic recession was a "live possibility" too, especially if the Fed raised rates.


Well, they did. We called the ensuing stock market turmoil.


The likelihood of a U.S. #Recession is still firmly intact no matter what Janet Yellen said in her Congressional testimony today. Here's the video that explains why.



BREAKING: Yellen Says Deflation Is "Transitory" & Growth Isn't Slowing. We Disagree

Takeaway: The key takeaways from Fed head Janet Yellen's testimony.

BREAKING: Yellen Says Deflation Is "Transitory" & Growth Isn't Slowing. We Disagree - Fed grasping cartoon 01.14.2015


Today, in testimony before Congress, Fed head Janet Yellen was asked about the possibility of a U.S. economic recession. She admitted that financial markets are increasingly worried about a recession but, “we’ve not yet seen a sharp drop-off in growth either globally or in the United States,” she says.


Still, global financial developments “bear close watching,” she continued, and “may have implications for the outlook.”


Yellen said that she doesn’t expect the Fed to “soon” be in the situation where it must cut rates. She added, there's “always some risk of a recession.” 


Here is a key excerpt from yellen's prepared remarks:


BREAKING: Yellen Says Deflation Is "Transitory" & Growth Isn't Slowing. We Disagree - yellen testimony


Yellen also doubled down on her #Deflation is "transitory" message.




Below is a chart of the CRB Commodity Index in the past year. What's so transitory about this?


BREAKING: Yellen Says Deflation Is "Transitory" & Growth Isn't Slowing. We Disagree - crb commod index



Did Yellen forget about 0.7% Q4 GDP growth?


On the economic cycle, our US GDP forecast (predictive tracking algo that has nailed GDP for 5 quarters, in a row) is at 0.2% GDP growth for Q1 (the Atlanta Fed is still 10x higher than that and our friends are still at “it feels like 3% GDP”).


And yet the stock market is up on Yellen's remarks. As Hedgeye CEO Keith McCullough continues to reiterate, "The biggest risk in financial markets today is believing the Fed's economic forecast."


Watch out...

What Is The Probability Of ’87-Style Stock Market Crash?

In this brief excerpt of The Macro Show this morning, Hedgeye Financials analyst Jonathan Casteleyn discusses three likely scenarios for the stock market this year.  


Subscribe to The Macro Show today for access to this and all other episodes. 


Subscribe to Hedgeye on YouTube for all of our free video content.

A Quick Update On (Ugly) S&P Earnings & (Nasty) YTD Sector Performance

Takeaway: Financials are getting shellacked this year. Utilities are up. Meanwhile, all but 3 of 10 S&P sectors reported negative earnings growth.

A Quick Update On (Ugly) S&P Earnings & (Nasty) YTD Sector Performance - Earnings cartoon 11.03.2015


Below are charts and analysis from Hedgeye CEO Keith McCullough on sector performance and quarterly earnings. It's not pretty.


Year-to-date sector performance...

 A Quick Update On (Ugly) S&P Earnings & (Nasty) YTD Sector Performance - sector performance 1


"Get the macro call on growth right, you get rates and sector styles right – Financials (XLF) down to -14.4% YTD vs. Utes (XLU) up (again) on the day yesterday to +7.6% YTD – overbought, yes – but we’re staying w/ this TREND long/short call."


S&P 500 Quarterly Earnings... 

 A Quick Update On (Ugly) S&P Earnings & (Nasty) YTD Sector Performance - S P Rev   Earnings Comps


"Get corporate profits (slowing to negative y/y) and credit spreads right, you’ve gotten a lot of other things right - with 335/500 companies reporting SP500 Revs -4.4% y/y and EPS -6.2% y/y (only 3 of 10 sectors have + EPS growth y/y)"


Keep your head up and stick with us. Macro markets are getting ugly.

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