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RTA Live: February 23, 2016

 


Beware The Coming Crash: An Earnings Season Reality Check

Takeaway: Fade the Wall Street storytelling.

Beware The Coming Crash: An Earnings Season Reality Check - Bubble bath 9.9.14

 

A lot of people out there still believe the old Wall Street storytelling that "the U.S. economy is fine" or "the stock market has bottomed."

 

We disagree.

 

Here's Hedgeye CEO Keith McCullough in a note to subscribers earlier this morning:

 

"With consensus staring (hoping) at oil, don’t forget that the most important relationship right now is that between profits and credits – w/ 435/500 S&P companies reporting total revs are -4.2% and EPS -6.5%; forget the “ex-Energy” thing – look at the best Sector Short (Financials) who now has EPS -8.8% y/y."

 

A few important things to note:

 

  1. Only 3 of 10 S&P Sectors have POSITIVE year-over-year EPS growth
  2. ENERGY (31 of 41 companies reported) has SALES -34%, EPS -74%
  3. FINANCIALS (85 of 89 companies reported) has SALES -1%, EPS -8.8%

 

"In other words, if your friends are still “backing out energy” and levered long US Equity beta, they’re a lot more exposed to rates crashing, Yield Spread compressing, and the Financials (XLF -11% YTD) than they’ve ever been," Hedgeye CEO Keith McCullough wrote in the Early Look this morning.

 

Here's the sector performance breakdown:

 

Beware The Coming Crash: An Earnings Season Reality Check - sector performance 2 23

 

Watch out for this precarious earnings setup. "Unless it’s different this time, US stocks always crash (greater than 20% decline from peak) once corporate profits go negative (on a year-over-year basis) for two consecutive quarters," McCullough writes.

 

Commit the chart below to memory.

 

Click to enlarge.

Beware The Coming Crash: An Earnings Season Reality Check - EL profits

 

... And get the heck out of stocks. 

 


Here's Why Now Is A 'Great Spot' To Short Oil

Takeaway: Oil prices are headed lower despite rumors of an OPEC production freeze.

Here's Why Now Is A 'Great Spot' To Short Oil - oil fallen and can t get up

 

"Great spot to get more aggressive on the short side of Energy (again)," Hedgeye CEO Keith McCullough wrote in a note to subscribers earlier this morning.

 

"Oil ripped to the top-end of my immediate-term risk range and failed (again); no immediate-term downside support in the risk range for WTIC to $25.77 as the upside in Oil’s Volatility (OVX) remains 81!"

 

 

Our Potomac Research Group colleagues Joe McMonigle and former Energy Secretary Spencer Abraham have nailed the call that oil prices are headed lower despite rumors of an OPEC production "freeze."

 

 

Here's what McMonigle wrote in a recent note to institutional subscribers:

 

"As the energy world gathers in Houston this week for IHS' CERA Week conference, Russia announced that talks with OPEC members on a production freeze will continue. The Russian energy minister said he expects an agreement by March 1. 

 

We are highly skeptical that an agreement will be reached or that it changes the outlook for oil markets. There is nothing new here."

 

Watch McMonigle in the 3-minute video below explaining why this will remain a 'painful' year for oil.

 


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

The Macro Show Replay | February 23, 2016

 


Yen, Oil and EPS

Client Talking Points

YEN

The epicenter of big bang risk resides in the #BeliefSystem breaking down – meaning that when central-market-planners tell you to short their FX and it goes up (and stocks go down). That is becoming Japan with the Yen +0.8% here testing new year-to-date highs vs. USD – this is becoming as important a live quote as U.S. High Yield Spreads.

OIL

Oil ripped to the top-end of our immediate-term risk range and failed (again). There is no immediate-term downside support in the risk range for WTIC to $25.77 as the upside in Oil’s Volatility (OVX) remains 81!

EPS

With consensus staring (hoping) at oil, don’t forget that the most important relationship right now is that between profits and credits. With 435 out of 500 S&P companies reporting total revenues are -4.2% and EPS -6.5%; forget the “ex-Energy” thing – look at the best Sector Short (Financials) who now has EPS -8.8% year-over-year.

 

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

Asset Allocation

CASH 63% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 25% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
XLU

Long-Term Treasuries (TLT) and Utilities (XLU) remain our two best fixed income and equity vehicles to play #Lower-For-Longer on growth and interest rates as the market gets more and more skeptical about the central bank dogma.

 

With market turmoil, the Junk Bond ETF (JNK) is down -4.5% vs. the defensive, growth slowing equity sector Utilities (XLU) which is up 6.7%, outperforming the S&P 500 by 12.9% on a relative basis. That’s yet more confirmation of our dour economic outlook economy (spreads widen in tumultuous market environments and Utilities are a defensive sector that outperforms when growth is slowing).

GIS

General Mills (GIS) is a large player in the Yogurt category with their Yoplait brand. Their competitors, Dannon, Chobani and Fage have been aggressive on merchandising and consumer spending, making it difficult to compete while maintaining internal margin objectives. GIS is turning on innovation with the growth of Annie’s yogurt and that should help the trajectory of the business. Yogurt being a roughly $1.4 billion business, turning it around is a top priority for management.

 

On the broader GIS long thesis, it's unlikely that the stock is going to go up 20% in the next year, but we do believe it will fare better than most in the consumer staples sector, especially as we head into an economic slowdown.

TLT

With the market losing faith in the central planning policy backstop, investors continue to yield to top-down market signals and the direction of the data. To be clear, the data continues to deteriorate and volatility continues to break-out.

 

The yield spread (10-year Treasury yield minus 2-year Treasury yield) has compressed 24 basis points this year, and TLT is up 8.6% vs. the S&P 500 which is down -5.2%. The December Federal Funds Futures contract has declined in a straight line since December’s rate hike.  

Three for the Road

TWEET OF THE DAY

WHO: You

WHAT: @HedgeyeCares Golf Challenge

WHEN: Tuesday, May 17

WHERE: Glenarbor Country Club in Bedford, NY

WHY: https://www.hedgeye.com/cares/golf

@HedgeyeDDale

QUOTE OF THE DAY

Don’t play for safety. It’s the most dangerous thing in the world.

Hugh Walpole                                                

STAT OF THE DAY

435 of 500 S&P 500 companies have reported their respective quarters and only 3 of 10 S&P Sectors have positive year-over-year EPS growth and energy (31 of 41 companies reported) has sales down -34% and EPS -74%.


CHART OF THE DAY: Stocks Always Crash When This Rolls Over. Is This Time Different? Probably Not

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.

 

"... Unless it’s different this time, US stocks always crash (greater than 20% decline from peak) once corporate profits go negative (on a year-over-year basis) for two consecutive quarters."

 

CHART OF THE DAY: Stocks Always Crash When This Rolls Over. Is This Time Different? Probably Not - 02.23.16 chart


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