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Investing Ideas Newsletter

Takeaway: Current Investing Ideas: TIF, JNK, DRI, NUS, W, FL, WAB, MDRX, ZBH, XLU, MCD, RH, GIS & TLT

Investing Ideas Newsletter - recession cartoon 02.22.2016

 

Below are our analysts’ new updates on our fourteen current high conviction long and short ideas. As a reminder, if nothing material has changed in the past week which would affect a particular idea, our analyst has noted this. Hedgeye CEO Keith McCullough’s updated levels for each ticker are below.

LEVELS

Investing Ideas Newsletter - levels 2 26

 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

IDEAS UPDATES

TLT | XLU | JNK

To view our analyst's original report on Junk Bonds click here and here for Utilities

 

To quote Hedgeye Macro Analyst Christian Drake from Thursday’s Early Look:

 

“The yield curve flattens as the economy slows with policy and/or liquidity management driving the short-end higher and defensive positioning and/or discounting of lower future growth/inflation driving the long end lower. Lower lows in the yield spread ≠ the bond market pricing in ‘escape velocity’.”

 

A flattening in the yield spread (10yr Treasury yield – 2yr Treasury yield) continued this week into double digit basis point territory (currently at 96bps). YTD the yield spread has declined 44 bps while the 10yr Treasury yield has dropped 47bps.

 

Investing Ideas Newsletter - 02.26.16 Yield Spread

 

On the other side of our Long-Term Treasuries (TLT) call, what should be concerning to junk bond bulls is that Junk Bond ETF (JNK) is down -2.6% YTD DESPITE the huge move in Treasuries. Bonds typically move higher when interest rates decline (present value effect of discounted cash flows – a cash flow in 3 years is worth more in today’s terms if the risk free alternative offers a lower return), unless of course poor growth and a dour outlook for the economy brings up the question of creditworthiness. That’s where we are now, and we expect our credit spread call to continue to play out.

  

As for growth, the Markit Service Sector PMI reading for February fell into contraction for the 1st time since the recession this week. Here's the why that is highly relevant:

  • Services Consumption represents ~65% of household spending
  • Services sector makes up ~45% of GDP
  • The ISM Services Index has shown a similar trend – slowing in each of the last 3 months and, at the current index reading of 53.5, sits at its lowest level since the “polar vortex” lows of February 2014   

Hitting on Friday’s revised GDP report (Q/Q SAAR Q4 GDP revised to +1.0% from +0.7%), a deep-dive into the number doesn’t support an incrementally stronger economy:

  • Consumption was revised down marginally but net exports were up with the negative revision to imports outweighing the negative revision to exports. That’s good for the number but lower global trade activity is not a good sign for global growth;
  • Much of the actual change in the revision was due to inventories, which contributed +0.31pts to the headline number

Find your preferred growth slowing vehicle wherever you can. Our's remains TLT in fixed income and Utilities (XLU) in equites.

MDRX

To view our analyst's original report on Allscripts click here

 

We spoke with Northwell Health (Allscripts #1 Customer) and got some great detail around where Allscripts fits into their future plans. The discussion also further confirmation of our short thesis. Two big takeaways from our conversation were:

  1. The main reason why they are still with Allscripts is due to the high switching costs and;
  2. Limited cross sell potential as their IT budget is capped out and already committed to other vendors. 

Here is some additional color:

  • No plans to move away from Allscripts due to the enormous amount of capital invested in the system and high switching costs; happy with their products.
  • IT Budget $250 million and capped out in terms of growth.
  • Concerned about the future of Allscripts as there is a big slowdown in spending coming.
  • Limited additional cross-sell potential. Already committed to Soarian for Enterprise Rev Cycle and InterSystems for population health; don't see efficiency in remote hosting.
  • Touchworks and Sunrise NOT integrated on the back end, requires the purchase of dbMotion, which is expensive to implement.
  • Added 3 hospitals over last 18 months on Sunrise through acquisitions for an incremental $3-4 mill in maintenance revenue to Allscripts.
  • IT outsourcing agreement for $80 million a year, $10-20 million a year in software related subscription and maintenance revenue.

Investing Ideas Newsletter - 2 24 2016 8 11 09 AM 

 

Bottom line: The MDRX risk/reward is less favorable since we first added it as a Best Idea Short in the mid-$14s, but we still see downside below $10 on slowing bookings growth. 

 

Click here to watch a video of Healthcare analysts Tom Tobin and Andrew Freedman covering MDRX and updates on other companies they cover, including:

  • MEDNAX (MD) is the acquisition model broken
  • Hologic (HOLX) 3D update
  • Allscripts Healthcare Solutions (MDRX) field notes
  • Recession tracker

NUS

To view our analyst's original report on Nu Skin click here

 

On February 22, 2016, Nu Skin (NUS) entered into a settlement term sheet in the potential settlement of a previously reported putative securities class action consolidated lawsuit. This litigation was brought against the company and certain of the company’s officers on behalf of the class consisting of persons or entities that publicly traded the company’s common stock during the period from May 4, 2011 through January 17, 2014 and were allegedly damaged thereby.

 

Additionally, NUS received notification that on February 25, 2016 the Tokyo District Court issued its ruling on a dispute between the company and the customers authority in Japan. As a result of the District Court’s decision, the company plans to take a non-cash charge of approximately $32 million or approximately $0.36 per share, in Q1 2016, which was not reflected in the company’s previous guidance.

WAB

To view our analyst's original report on Wabtec click here

 

Wabtec's (WAB) expectations for its Freight segment, its highest margin business, is unrealistic in our view. The expectation of flat revenue in the Freight segment is also not particularly reasonable given a book-to-bill at around 0.80, peaking PTC sales, weak international markets, and sizeable expected declines in rail car & locomotive deliveries.

 

While it is possible that further draws on backlogged orders, large share repurchases, and incremental acquisitions might get WAB to guidance, markets are unlikely to care. In our view, the freight rail market is entering a long downcycle and WAB’s changed behavior serves as confirmation.

 

Investing Ideas Newsletter - wab image

TIF

To view our analyst's original report on Tiffany click here.

 

There have been some recent news articles and reports about how millennial trends and preferences are going to hurt or help Tiffany's (TIF) sales in the coming years. Some state increased online options will take people away from Tiffany, others think later marriages means more dollars spent on Tiffany rings. We're not sure either is correct, and neither is relevant over the near term.

 

Below you can see how Tiffany's visitation demographics compare to those of the internet as a whole. The breakdown: female, well educated, mid-20s to mid-30s, and skews higher in income. 

 

Investing Ideas Newsletter - 2 26 TIF demographics

 

Our call on the stock in not centered around generational trends, though, if we had to weigh in on the subject we’d argue that TIF has far less cultural relevance than it did 20 years ago. The facts are -- TIF is highly exposed to the economic cycle with a working capital intensive model and operational leverage that leads to the type of earnings volatility we’ve seen in a weak consumer environment. We still think earnings expectations remain too high.

W

To view our analyst's original report on Wayfair click here.

 

Three key points on Wayfair's earnings:

 

Real Growth Slowed

At face value the revenue growth at Wayfair is astounding.  However, excluding the impact of increased holiday promotions, 4Q direct revenue grew at about 91%, which is a tick down on the 2-year average growth rate.

 

No Profitability

The question is not can Wayfair take share and grow revenue, but rather can they do it profitably? Wayfair added $339mm in revenue year-over-year, but only $9mm in incremental EBIT. A 2.6% incremental margin, down from last quarter. Despite growing direct revenue 98%, the company still lost money.

 

Losing Advertising Efficiency

One main issue was the reduced efficacy of advertising dollars. Revenue dollars generated per advertising dollar grew 13%, much lower than 3Q at 24%.

 

Investing Ideas Newsletter - 2 25 W chart5

 

Takeaway: W continues to spend and build an infrastructure for a $90bn total addressable market that does not exist. We continue to believe that this company will never run a profitable business.

 

Click here to watch, "Under 60 Seconds: Wayfair's Earnings Report | $W"

Investing Ideas Newsletter - wayfair thumb

RH 

To view our analyst's original report on Restoration Hardware click here

 

In light of the recent blow to Restoration Hardware (RH) shareholders, Hedgeye Retail Sector Head Brian McGough sent a detailed update on the company ahead of this weekend's newsletter. Click here to read that research note.

ZBH

To view our analyst's original report on Zimmer Biomet click here. Below is an update from Healthcare analyst Tom Tobin.

 

Zimmer Biomet (ZBH) increased their dividend this week to $0.24 for the quarter. At this rate, ZBH’s dividend yield stands at just under 1%. So, as a short seller pays the dividend, it adds a wrinkle into the calculus of the remaining short call here. If we check in on our time series data, the answer of whether to stay short remains yes. The BIG RISK is a US Recession, which according to the Hedgeye Macro Team is creeping closer by the week.

 

Unemployment Claims, Consumer Confidence, and S&P 500 company earnings, all appear to not just be in the final stages of expansion, but also the beginning stages of contraction. For the US Knee market, this is a negative, as close to half of all knee replacement surgeries are performed on people under the age of 65. 

 

Investing Ideas Newsletter - 20160226 KneeVolume HCASurgeries

 

A US Recession would exacerbate our negative view of the contraction coming for the US Medical Economy, as the benefits of the ACA wane and we enter the #ACATaper. We’ve seen good evidence that the newly-insured consumed above average levels of medical care and, in one study, 6X the number of knee replacement surgeries per capita as matched against a cohort that was continuously insured. 

 

The #ACATaper may be slow to develop, but we are seeing the signs so far in 2016. It appears the first data series to break our way has been Medicaid per enrollee spending, which is now declining year-over-year for the first time since the start of the ACA. Note: At the same time, enrollment is flat.

 

Investing Ideas Newsletter - 20160226 JOLTS Slowing

 

JOLTS has flattened sequentially and gone negative in rate of change terms, but we expect numbers to contract sequentially, which has not yet happened, but I think we’re close.

 

Investing Ideas Newsletter - 20160226 JOLTS YoY

 

 

Lastly, the PPI for Artificial Joints, which we believe is driven by the mix of knees and commercially insured patients, has flatlined as well. Since this leads ZBH’s volume/mix by 2 quarters, we’re watching the monthly trend closely for evidence of a 2H16 deceleration and decline.

 

Investing Ideas Newsletter - 20160226 ZBHJointPPI

 

Keith re-shorted ZBH in Real-Time Alerts this week. I like that call.

MCD

To view our analyst's original report on McDonald's click here

 

McDonald's (MCD) McPick 2 is no longer $2, it is $5. The new menu will include the Big Mac, Quarter Pounder, Filet-O-Fish, chicken nuggets and fries. Although the total dollar value is higher than most value meals versus competitors, it is arguably a better value because of the premium items you are getting. Only time will tell whether this value menu works out for them, but they are truly in testing mode, as they work to figure out a long-term national value menu.

FL 

To view our analyst's original report on Foot Locker click here.

 

Three key points on Foot Locker earnings:

 

Comparable Sales Weakening

Q4 saw a great 7.9% comp. But Feb comparable sales are trending to low-single digit growth against an easy compare all while Management is guiding to mid-single digit comp growth for the year. That wipes away the leverage in the model.

 

Profitability

Incremental EBIT margin is down to 36% from the mid-70s rate seen in the first half of 2015. Now FL is working against those tough compares as top-line is likely slowing.

 

Investing Ideas Newsletter - 2 26 2016 FL chart3

 

Growth Levers Limited

FL grew out of the recession by closing underperforming stores, and selling more Nike product (~78% of sales) in those remaining. This was in the middle of the biggest multi-year surge in Volume and ASP-boosting Nike product since the early 1980s. Now that is ending.

 

Takeaway: As good as 4Q was, most metrics look sequentially worse to us. This is a multi-year short call, and we think it’s starting to play out.

 

Click here to watch, "Under 60 Seconds: Foot Locker's Earnings Report | $FL"

Investing Ideas Newsletter - footlocker thumb

GIS

General Mills (GIS) hit an all-time high this week when it reached $60.18 on Thursday. Although this would not be a great entry point, it is also not a reason to get out if you have a long-term view. Nothing has changed in our fundamental story and we have no reason to lose faith in our thinking to date.

 

Over the course of the past few years, GIS has made strategic acquisitions within the natural & organic / wellness space (we call it the string of pearls approach). Although they are not largely meaningful to top or bottom-line right now, they are changing the way the company thinks about its broader portfolio.

 

We continue to believe GIS is one of the best positioned consumer packaged foods companies due to its strong brands and best-in-class people and organization. 

DRI

To view our analyst's original report on Darden Restaurants click here.

 

No update on Darden Restaurants (DRI) this week but Managing Director Howard Penney reiterates his short call. Remember the broader thesis:

  • "Having pulled all the levers to create shareholder value, it’s now down to the facts about how Darden's core business is performing. There are cracks in the Olive Garden story (which makes up 56% of sales) and the brand is not as healthy as consensus believes."
  • "To date, Olive Garden has done 32 remodels (out of 400), and is far behind schedule on a massive remodel project. Clearly, no one wants to remodel the Olive Garden concept because it would be disastrous for earnings."
  • "What we know now is that Olive Garden is not fixed and management does not currently have a plan to rectify the situation."

HEDGEYE Exchange Tracker | Futures Lead the Week

Takeaway: Futures ramped W/W while cash equities and options contracted. 1Q16TD ADVs remain well above their year-ago levels in all three categories.

Weekly Activity Wrap Up

Futures put up healthy activity this week, rising week over week and coming in just below the already elevated 1Q16TD average daily volume (ADV). Meanwhile, cash equity and options volumes eased week over week, decreasing 1Q16TD ADVs. 1Q16TD ADVs remain well above their year-ago levels in all three categories. Cash equity volume for the week came in at 7.5 billion shares traded per day, bringing the 1Q16TD ADV to 9.1 billion, up +31% Y/Y. Futures activity at CME and ICE came in at 24.0 million contracts traded per day this week, bringing the 1Q16TD ADV to 24.4 million, up +22% Y/Y. Additionally, CME's open interest currently tallies 110.9 million contracts, 21% higher than the 91.3 million pending at the end of 2015, which will drag trading volume higher going forward. Options came in at 15.0 million contracts traded per day this week, bringing the 1Q16TD ADV to 18.0 million, up +16% Y/Y. 

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon1

  

U.S. Cash Equity Detail

U.S. cash equities trading came in at 7.5 billion shares per day this week, bringing the 1Q16TD average to 9.1 billion shares per day. That marks +31% Y/Y and +29% Q/Q growth. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of first-quarter volume, which is consistent with the prior quarter and year-ago quarter, while NASDAQ is taking an 18% share, +27 bps higher Q/Q but -122 bps lower than one year ago.

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon2

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon3

 

U.S. Options Detail

U.S. options activity came in at a 15.0 million ADV this week, bringing the 1Q16TD average to 18.0 million, a +16% Y/Y and +13% Q/Q expansion. In the market share battle amongst venues, NYSE/ICE has been trending downward at a moderate pace, but at an 18% share it is +56 bps higher than the year-ago quarter. Meanwhile, NASDAQ's recent declines bring it -392 bps lower than 1Q15. CBOE's market share is down -135 bps Y/Y but has improved recently; its 27% share of 1Q16TD volume is up +143 bps from 4Q15. BATS and ISE/Deutsche have been taking share from the competing exchanges, with BATS up to a 10% share from 9% a year ago and ISE/Deutsche taking 16%, up from 13% a year ago.

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon4

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon5

 

U.S. Futures Detail

18.4 million futures contracts traded through CME Group this week, bringing the 1Q16TD average to 18.5 million, a +24% Y/Y and +41% Q/Q expansion. Additionally, CME open interest, the most important beacon of forward activity, currently sits at 110.9 million CME contracts pending, good for +21% growth over the 91.3 million pending at the end of 4Q15, although that is lower than last week's +25%.

 

Contracts traded through ICE came in at 5.7 million per day this week, bringing the 1Q16TD ADV to 5.9 million, +17% Y/Y and +23% Q/Q growth. ICE open interest this week tallied 69.3 million contracts, a +9% expansion versus the 63.7 million contracts open at the end of 4Q15, consistent with last week.

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon6

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon8

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon7

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon9 

 

Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon10

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon11

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon12

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon13

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon14

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon15

 

 

Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

  

  

 

 Joshua Steiner, CFA

 

 

 

 


Cartoon of the Day: Bear Facts

Cartoon of the Day: Bear Facts - bear chart 02.26.2016

 

Hedgeye CEO Keith McCullough is arguably the most bearish guy on Wall Street.


Attention Students...

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We’re Wrong On U.S. Growth (Well, Kind Of)

Key Takeaway: We don’t want to be trite by offering a token golf clap to the U.S. economy bulls in response to the strong JAN PCE data and positive revision to Q4 GDP. It’s more appropriate to offer a standing ovation instead. But what happens after standing ovations? Hint: the audience sits back down... All told, our views on the likely progression of the domestic economic and financial market cycles remain unchanged (see section #3 below for more details).

 

Section I: January Personal Income & Spending Recap

Both income and spending accelerated to start 2016 as the combination of accelerating aggregate wage income and a small decline in the savings rate, off of multi-year highs, combined to drive sequential improvement in household spending. The January NFP data signaled as much (see: yesterday’s Early Look: Number 2 for details) so we got largely what we were expecting with the official release this morning. 

 

An annotated visual tour of the underlying data is below but here are a few key points:

 

  • The January data was solid but the Trend remains one of deceleration.  Income growth, employment growth, consumption growth, consumer confidence and corporate profits all peaked in 4Q14/1Q15 and have been slowing since. Income growth drives the capacity for consumption growth and with weekly hours flat and employment growth slowing, we’ll need to see an ongoing acceleration in wage inflation to maintain the pace of aggregate income growth near current levels. Unless one believes wages will accelerate towards +3.5% in fairly short order, the Trend slope of aggregate income growth (and consumption growth by extension) should remain negative. 
  • Core PCE marked its 45th month below target in January but accelerated for a 3rd consecutive month to +1.67% YoY.  From a policy perspective, the gain bolsters the argument for continued interest rate normalization.  It also, however, bolsters the risk that further policy divergence out of the Fed serves to perpetuate the deflationary and growth slowing trends that have characterized most of the last eight months.  The probability that positive seasonality and easy comps optically boost reported fundamentals in 1Q (see: Early Look: Optical Mischief) also raises the risk of a potential policy blunder. 
  • The dynamics underlying the rise in inflation are also not inconsequential. The benefit of lower energy prices for consumers is being absorbed by higher savings and services consumption (which is why it hasn’t really shown up in the Retail Sales data). Inside of services consumption, much if it is going towards housing (rent/housing inflation is running at a wide premium to income growth & broader price trends) and healthcare consumption.  The rise in healthcare consumption is largely attributable to Obamacare and the influx of newly-insured seeking care. Rising housing costs, while supportive of the Fed’s inflation target, largely represent excess growth in a key consumer cost center and a drag on other discretionary and housing related consumption. Rising inflation driven by disproportionate growth in major consumer cost lines is different than demand-pull inflation driven by (persistent) wage inflation and rising discretionary consumption.

 

We’re Wrong On U.S. Growth (Well, Kind Of) - Income   Consumption Growth

 

We’re Wrong On U.S. Growth (Well, Kind Of) - Core PCE YoY

 

We’re Wrong On U.S. Growth (Well, Kind Of) - CPI Shelter vs Ex Shelter

 

We’re Wrong On U.S. Growth (Well, Kind Of) - Income Spending Summary Table

 

-Christian Drake, Senior U.S. Macro Analyst

 

Section II: Q4 GDP Revision Recap

The headline number beat on flimsy-at-best internals:

 

  • Consumption was revised down by a small amount.
  • Net Exports were revised up as the negative revision to Imports outpaced the negative revision to Exports. That setup is good from a GDP accounting perspective but lower Import and Export activity calls attention to waning aggregate demand trends – both domestically and externally.
  • Almost all of the +30bps revision to the headline growth figure was due to the positive revision to Inventories, which was revised higher by 31bps.

 

We’re Wrong On U.S. Growth (Well, Kind Of) - U.S. GDP Summary Table

 

-Christian Drake, Senior U.S. Macro Analyst

 

Section III: Revising Our Outlook for U.S. Economic Growth

With the advent of this 1-2 punch of generally positive economic data, we are revising up our outlook for domestic economic growth:

 

  • Our GIP Model has U.S. Real GDP growth tracking at +2.0% YoY in 1Q16. This figure represents a +20bps revision to our previous forecast. This moves us ever-so-slightly into #Quad2, which is what had been and still is being implied by the comparative base effect for Q1. Our initial #Quad3 forecast was a function of extrapolating the trending deterioration in growth momentum into the first quarter, but that looks to be less appropriate with the advent of some JAN data including this morning’s Real PCE print.  
  • The aforementioned +2.0% YoY growth rate translates to +1.0% on a QoQ SAAR basis. This figure represents a +40bps revision to our previous forecast. For comparison’s sake, the Atlanta Fed’s forecast for Q1 was just revised down to +2.1%. We expect their model to continue heading towards our [much-lower] estimate as the quarter progresses. Refer to the 2nd half of our 2/17 note titled, “What’s More Important: the Short Squeeze in the Market or the Data?” for details on why.
  • On a full-year basis, we now see U.S. Real GDP coming in at +1.4%, which is up small from a previous estimate of +1.3%. This would still mark the slowest annual growth rate since 2009. Our 2016 GDP estimate implies Nominal GDP growth of +2.8%, which would also represent the slowest rate of annual change since 2009. Please note this as a meaningful headwind to the current Bloomberg consensus forecast of 119.58 for S&P 500 NTM EPS.

 

We’re Wrong On U.S. Growth (Well, Kind Of) - UNITED STATES

 

We’re Wrong On U.S. Growth (Well, Kind Of) - GDP COMPS

 

We’re Wrong On U.S. Growth (Well, Kind Of) - Atlanta Fed vs. Hedgeye Macro GDP Estimate Tracker

 

Moving along, the conspiracy theorist in me doesn’t want to believe the strength in this morning’s JAN Real PCE data. Having consumed enough @Zerohedge tweets about seasonal-adjustment shenanigans over the past two weeks, I came away somewhat surprised to learn of no holes in today’s print. This was a good number and represents a healthier U.S. consumer than we anticipated when we published, “50 Charts On Why Consensus Macro Is Dead Wrong On the U.S. Consumer” back on January 19th.

 

In fact, further analysis would seem to suggest that U.S. economy bears such as ourselves were perhaps reading too much into the SA vs. NSA debate that’s emerged in recent weeks with the advent of the Retail Sales, Durable Goods and Capital Goods releases for the month of January. Specifically, the Z-Scores for the basis point spread between the SA and NSA YoY growth rates for each reading were 1.6, 0.7 and 1.0, respectively; each is on the high side of historical readings, but not high enough to suggest a not-yet-reported material leg down in the underlying health of the U.S. economy.

 

We’re Wrong On U.S. Growth (Well, Kind Of) - RS SA

 

We’re Wrong On U.S. Growth (Well, Kind Of) - DG SA

 

We’re Wrong On U.S. Growth (Well, Kind Of) - CG SA

 

So what does this all mean for markets? We believe the three most important takeaways are as follows:

 

  1. Growth is still slowing on a trending basis across a variety of key high-frequency indicators. And outside of personal consumption data, the preponderance of indicators that are showing sequential and/or trending accelerations in recorded growth rates are still contracting from a YoY perspective and remain sensitive to incremental commodity price deflation from here.
  2. On an inline-or-better FEB Jobs Report next Friday, the Federal Reserve may read into the positive JAN PCE report – specifically the Core PCE Deflator within – and/or Q4 GDP as justification for another rate hike at its 3/16 meeting. At +4bps and +7bps DoD, respectively, both 1Y OIS spreads and 2Y Treasury note yields support this conclusion, on the margin. The implied probability of a rate hike at the FOMC’s 3/16 and 4/27 meetings are up +200bps (to 12%) and +540bps (to 20.8%), respectively, on the day. It goes without saying that incremental tightening of domestic (and global) financial conditions from here remains a key risk to asset markets.
  3. As highlighted in our 2/24 Early Look titled, “Relatively Insignificant”, the probability of a U.S. recession over the next 2-3 quarters continues to rise on a trending basis. Additionally, both the credit and corporate profit cycles continue to have extremely dour implications for asset markets on a forward-looking basis from here. As such, investors would do well not to read too much into January’s solid Real PCE print.

 

We’re Wrong On U.S. Growth (Well, Kind Of) - U.S. Economic Summary Table

 

We’re Wrong On U.S. Growth (Well, Kind Of) - U.S. Economic Summary

 

We’re Wrong On U.S. Growth (Well, Kind Of) - U.S. Household Wealth as a   of Disposable Personal Income vs. Shadow FFR

 

We’re Wrong On U.S. Growth (Well, Kind Of) - U.S.  CreditCycle Bubble Chart

 

We’re Wrong On U.S. Growth (Well, Kind Of) - CORPORATE PROFITS VS. SPX

 

All told, we were wrong on the pace of economic degradation thus far in 2016 and hope you appreciate our objectivity and intellectual honesty here. We aren’t perma-bears insomuch as we aren’t perma-bulls. We have no horse in this race other than preserving our analytical reputations.

 

We simply want to be continue being right on forecasting the data and financial market returns from a trending perspective and our intermediate-term TREND calls on both remain unchanged.

 

-Darius Dale, Senior Global Macro Analyst


Under 60 Seconds: Foot Locker's Earnings Report | $FL

Hedgeye Retail analyst Brian McGough highlights three key points from Foot Locker's latest earnings report. If you like this excerpt, you’ll love our research.


NEM, ABX, GG: Charts that Matter

Of the major North American miners, Goldcorp finished off Q4 Earnings season last night with an awful print which included a net loss of -$4.3Bn when you include impairment charges of -$3.9Bn (-$128MM without charge).

 

In addition to the impairment charges, Goldcorp wrote-down the carrying value of heap leach inventory and stockpiles at two mines to the total of $104MM. The impairment and write-down charges assumed a long-term gold price of $1,100/Oz. While by no means apples-to-apples, the carrying value of Newmont’s stockpile and ore on leach pads is multiples of Goldcorp, and both companies previously assumed $1,300/oz.

 

These charges are a reality of a cyclical downturn, one that Newmont may be trying to push out as long as possible (or avoid). ABX and GG have taken impairment charges and downwardly revised for lower gold price expectations and Newmont has not. Rather, they’ve kept aggressive gold ($1,300/oz.) and copper ($3.00/lb.) price assumptions for capitalizing their much larger inventories and stockpiles.

 

We believe Newmont’s higher cost profile and aggressive capitalizations will matter in a lower gold price environment. However, we’ll be the first to say that these names are trading vehicles with leverage to gold prices, and being long of gold with leverage which has worked YTD.

 

With the release our monthly sector sentiment deck on Tuesday morning, we’ll outline some of the behavioral factors behind the move YTD as well as to outline what is becoming more of a consensus trade in gold ahead of policy catalysts in the coming weeks.

 

Behavioral factors along with Newmont’s failure to address aggressive accounting practices pushed us to add NEM to our Best Ideas on the short-side last week (link to the 02/18 note).   

 

Below we use 4 charts to highlight what we view as two of Newmont’s biggest long-term headwinds:

  1. High Cost of Production (Adjusted AISC has trended higher since Q3 2014)
  2. Stockpiles and Inventories:
    • Large quantity of stockpiles and inventories (relative to other producers)
    • Aggressive long-term price assumptions for the capitalization of these inventories (meaning they have not yet realized the impairment and write-down charges normally taken by producers in a lower gold and copper price environment) 

 

NEM, ABX, GG: Charts that Matter - Stockp iles   Gold Sales

 

NEM, ABX, GG: Charts that Matter - AISC Adj. For stockpiles

 

NEM, ABX, GG: Charts that Matter - NEM Write downs vs. stockpiles

 

NEM, ABX, GG: Charts that Matter - AISC Table adjusted for stockpiles and sustaining capital

 

 

 

 

 


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