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Young Guns | A Deep Dive Into Earnings

Young Guns is a new HedgeyeTV show showcasing our millennial-aged analysts’ insights into how they approach their research.

 

 

In this inaugural edition of Young Guns, Hedgeye analysts Andrew Freedman (Healthcare), Alec Richards (Retail), and Shayne Laidlaw (Restaurants/Consumer Staples) discuss earnings season – the metrics that matter in their sectors, disruptive macro trends and what has surprised them so far from company reports.

 

CLICK HERE to see some of Hedgeye’s takeaways from earnings season thus far.


Losing “Control”

Client Talking Points

FX

Both the BOJ and ECB are doing everything they can to not have their respective currencies appreciate, but in spite of 1-day bounces on newsy days (that they create), they appear to be in the initial phase of losing control of the transmission mechanism.

DAX

1-day bounce (yesterday) does not an arrest of the stock market crash make. Draghi’s Euro is actually up vs. USD this morning as Italian stocks continue to crash and the DAX falls back to -26% since the 2015 peak – should he jawbone daily?

OIL

Context is critical here – after another -4.7% week for WTI, they bounced it +3-4% on the OPEC headline this morning and have since lost most of that. The risk range remains intact at $26.02-31.39 (don’t chase bounces, sell them!).

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 64% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 2%
FIXED INCOME 23% INTL CURRENCIES 11%

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities worked against us for a -2% loss on the week, but remain an outperforming sector YTD. New scares in the form of increased risk from the financial sector emerged last week. Deutsche Bank made headlines over liquidity concerns that tied into CEO Keith McCullough's favorite S&P Sector short, the Financials. Financials are the most over-owned group relative to its rate risk – XLF is now -14% vs. Utilities (XLU) +5.3% YTD.

GIS

Walmart is still having an effect on General Mills, but it isn’t any more or less severe than previously guided by management. They will begin to lap some of the effects caused by the retailer at the beginning of their 4Q16 (starting in March). Five years ago they dealt with a similar clean store policy implemented by Walmart. Coming out of that they seemed to have gotten more than their fair share of upside, specifically in cereal and fruit snacks, now they are seeing a little more than their fair share on the downside.

TLT

Investors continue to be confronted with our signal of #GrowthSlowing in the U.S. and globally. Even the White House came out to reduce 2016 U.S. inflation assumption to 1.5% from prior expectations of 1.9%!  We’ve called for yield compression alongside our signal of growth slowing and our expectation that global investors will continue to pile into US Treasuries as a “safe haven” liquid play. Last week, the US 10 year fell 13bps to 1.736%.Continue with our go-to macro market calls of long TLT and short JNK, and things don’t have to be so doom and gloom.

Three for the Road

TWEET OF THE DAY

What @Hedgeye is watching in The Week Ahead https://app.hedgeye.com/insights/49110-the-week-ahead… cc @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

Honesty is a very expensive gift. Don’t expect if from cheap people.

Warren Buffett                                            

STAT OF THE DAY

An estimated 44 million people are unemployed in developed countries, about 12 million more than in 2007.


CHART OF THE DAY: A Look At Style Factors & What Isn't Working In 2016

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. 

 

"... Other than Oil deflating another -4.7% last week (-22.9% for the YTD alone) and Bond Yields continuing to crash (UST 10yr Yield down another -9 basis points on the week to 1.75%) what other US Equity Style Factor messages were in the market last week?

  1. LEVERAGE: High Debt (to EV) Stocks led losers down another -4.1% on the week to -9.4% YTD
  2. SIZE: Small Cap Stocks were down another -3.5% on the week to -13.4% YTD
  3. BETA: High Beta Stocks underperformed beta (SP500) again, -2.9% on the week to -17.5% YTD

*Mean performance of Top Quintile vs. Bottom Quintile (SP500 Companies)"

 

CHART OF THE DAY: A Look At Style Factors & What Isn't Working In 2016 - 02.16.16 chart


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Soothing The Beast

“They say music has the charm to soothe a savage beast, but I’d try a baseball bat first.”

-Unknown

 

That’s somewhat of a blunt quote. But I like it. Welcome back from your long weekend.

 

In the last 48 hours, we’ve seen some of the biggest ideological rock-stars of the central-market-planning bubble come out singing. At one point, the BOJ (Bank of Japan) said they’d really like to have a hymn at the G7 meetings to “soothe markets.”

 

Then came the ensemble of Eurocrats, led by Draghi, who said the “ECB is ready to do its part.” Then the Russians, the Qataris, etc. on “freezing production”… But now what? What happens when the market no longer believes them? What happens when the music stops?

 

Soothing The Beast - central bankers cartoon 09.08.2015

 

Back to the Global Macro Grind

 

By definition, bulls begging for more central-market-planning cowbell (not the most soothing music btw) validates most of my concerns on both #Deflation and #GrowthSlowing. The funniest mainstream market headline yesterday had to be “Japanese stocks rocket on stimulus rumors” (after a government report that Japan’s GDP slowed another -0.4% in Q4).

 

Sure, both Japan and Europe had 1-day bounces within their respective stock market crashes yesterday, but neither of them were able to show follow through this morning on either the FX Burning Experiment or equity “reflation.” They are losing control.

 

Day trades are fun to watch, but the savages of this bear market know that it’s all about nailing the intermediate-term TRENDs that’s getting us fed. So don’t be afraid of “rallies”; take a deep breath and contextualize them.

 

Here’s how FX (foreign exchange) vs. Equity markets looked last week:

 

  1. US Dollar Index down for the 2nd week in a row, -1.1% to -2.7% YTD
  2. Euro (vs. USD) up for the 2nd week in a row, +0.9% to +3.6% YTD
  3. Japanese Yen (vs. USD) up (again, despite BOJ begging) +3.2% on the week to +6.2% YTD
  4. SP500 and Russell 2000 -0.8% and -1.4% to -8.8% and -14.4%, respectively, YTD
  5. EuroStoxx 600 and Spain -4.1% and -6.8% to -14.6% and -17.0%, respectively, YTD
  6. Nikkei (Japan) smoked -11.1% on the week to -21.4% YTD

 

In other words, the transmission mechanism (or belief system) that either the Europeans or Japanese can devalue their currencies and reflate their stock markets is crashing. Moreover, the hope that “Down Dollar” will reflate US stocks was dead wrong too.

 

While the inverse correlation between the US Dollar and commodities, junk bonds, and emerging markets remains consistent, what’s actually happened in the last 15-30 days is that the SP500 has developed a POSITIVE correlation to USD of +0.5-0.7.

 

Since that’s super short-term, I would simply monitor that (as I do with all things “new” issued by Mr. Macro Market himself). What it might be signaling is that the only way out for the USA is via a #StrongDollar, Strong America policy.

 

The problem with that, of course, is that we need to continue down perdition’s path of #Deflation first. If you isolate US Equity signals alone last week, there was plenty of asset #Deflation despite “Down Dollar”:

 

  1. MLPs (the epicenter of inflation expectation oriented “assets”) down -14.4% on the week to -29.2% YTD
  2. REITS (MSCI Index) -4.3% on the week to -9.6% YTD (diverging big time from Utilities being +5.2% YTD)
  3. Financials (XLF) down another -2.2% on the week, leading US Sector Style losers at -14.0% YTD

 

Sorry, Jamie (JPM) – the market is well aware that you have massive cyclical exposures to levered Energy companies, Real-Estate, and Yield Spread compression. You’re a smart guy, but you can’t centrally plan a “market bottom” inasmuch as Draghi and Kuroda can’t.

 

Dimon would do well to remember Richard Whitney’s famous “walk across the NYSE floor” on Thursday October 24th 1929 to very loudly and very publicly buy huge quantities of US Steel and other stocks at prices above the market.  Those who don’t know what happened next should Google “Tuesday, October 29, 1929.”

 

Ignorance never ends bear markets; it perpetuates them.

 

Other than Oil deflating another -4.7% last week (-22.9% for the YTD alone) and Bond Yields continuing to crash (UST 10yr Yield down another -9 basis points on the week to 1.75%) what other US Equity Style Factor messages were in the market last week?

 

  1. LEVERAGE: High Debt (to EV) Stocks led losers down another -4.1% on the week to -9.4% YTD
  2. SIZE: Small Cap Stocks were down another -3.5% on the week to -13.4% YTD
  3. BETA: High Beta Stocks underperformed beta (SP500) again, -2.9% on the week to -17.5% YTD

*Mean performance of Top Quintile vs. Bottom Quintile (SP500 Companies)

 

Imagine being long a bunch of levered small caps that are trading with super high betas? No wonder why these people are begging to give up more of their free-market liberties for a little more (perceived) central-market-planning “security.”

 

#Deflation is economic gravity’s beast. If you want to try to “soothe” it, you’re going to need a lot more than the BOJ, ECB, PBOC, OPEC, and Fed’s baseball bats.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.60-1.79%

SPX 1
RUT

Nikkei 149

DAX 8
USD 94.75-97.93
EUR/USD 1.09-1.14
YEN 111.06-115.21
Oil (WTI) 26.03-31.39

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Soothing The Beast - 02.16.16 chart


The Macro Show Replay | February 16, 2016

 


Who Is The Best GOP Candidate For The Economy?

 

Potomac Research Group Senior analyst JT Taylor discusses with Hedgeye CEO Keith McCullough which Republican presidential candidates would be best for the economy. He also weighs in on the brouhaha between Bernie and Hillary. 


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

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