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Stock Report: Lazard (LAZ)

Takeaway: We added LAZ to Investing Ideas on the short side on 3/1.

Stock Report: Lazard (LAZ) - HE LAZ table 3 4 16

THE HEDGEYE EDGE

Our main contention is that Wall Street is ignoring warnings signs of a high-water mark in M&A, including rising private equity participation levels and also all-time highs in consideration value.

 

Both metrics last peaked in 2007. In addition, the constant rise of corporate credit costs from mid-2015 to current day has widely referenced Moody's indices higher by over 100 basis points. Our research shows that a move of this magnitude has historically impacted M&A by -20% on an annual basis.

 

INTERMEDIATE TERM (TREND) 

Stock Report: Lazard (LAZ) - lazard

 

Lazard's asset management business is the crown jewel of emerging market (EM) and non-U.S. international investing and the company is riding the wave of successful new product introductions in strategic equity and infrastructure.

 

That being said the firm's EM exposure is understated and we estimate that 55% of assets-under-management, and not the stated 30%, is a more accurate picture of the company's absolute EM exposure (when going fund-by-fund and including products in Global and Multi-regional).

 

Lazard Asset Management has never sidestepped an EM melt-down, experiencing both negative growth and also market depreciation. In the '02-'05 EM cycle, the division experienced over -4% decay rates and market depreciation in various years of up to -10%. 

 

LONG TERM (TAIL)

Street estimates are unbelievably complacent in our view with numbers that completely ignore the hyper-cyclicality of the advisory and asset management businesses.

 

If you "give" the firm the best of all worlds, the 2015 M&A revenue environment; the record restructuring revenue environment of 2009; and the high-water mark in asset management in 2014, those revenues tally $2.68 billion creating EPS of $3.79. The Street currently is at $2.78 billion in top-line for 2017 on EPS of $4.01 with '18 at $2.82 billion and $4.40.

 

By way of contrast, for 2016, we think the company will earn under $3 in earnings, some -20% below the Street. Our base case estimate is the stock is worth $30 per share on 10x our $3 EPS estimate for '16. Meanwhile, our bear case if M&A activity rolls over by -20%, is a $22 stock at $2.20 in earnings at a 10x multiple.

ONE-YEAR TRAILING CHART

Stock Report: Lazard (LAZ) - HE LAZ chart 3 4 16


Top 7 Reasons Why the ECB Will Act on March 10th

Will the ECB issue “simulative” policy at its next meeting Thursday, March 10th?  Our opinion is a resounding YES!  Skip further down the page for our 7 supporting pieces of evidence.

 

What’s in the cards?  It’s anyone’s guess but we see a strong probability that the ECB’s QE program is increased (up from monthly allotments of €60 Billion) and we could see further points shaved off the Deposit Rate (currently at -0.30%). 

 

Will it move the economic needle?  No!  As we’ve called for time and time again, we do not see Draghi (nor other global central bankers) arresting Economic Gravity.  For example, Eurozone CPI has held below +0.5% for the last 20 months (and is currently negative at -0.2%), this all in a period in which Draghi’s has purchased €780 billion in sovereign paper as a “simulative” and “inflationary” policy.  How about that 2.0% inflation target?  A pipe dream!

 

EUR/USD.  What is different this time around is our call that the ECB’s Extend & Pretend “simulative measures” will strengthen the EUR/USD rather than weaken the common currency.  Specifically, we expect the EUR/USD to bounce on March 10th if more QE is announced.

 

How’s that?  As Keith explains in his Big Bang Theory, after 600 rate cuts globally, there’s a new regime of investors that has given up on the belief that central bankers can artificially produce stimulus and weaken their currency for economic benefit.  This policy hasn’t worked in Japan, and it isn’t going to work in the Eurozone.

 

In the chart directly below we outline that our Big Bang Theory could get the EUR/USD up to our TREND ($1.12) and TAIL ($1.13) resistance levels, or a monster gain of 1% to 2.7% from current levels. We'd also expect associated selling of European equities. 

 

Top 7 Reasons Why the ECB Will Act on March 10th - a. EUR USD

 

Our Top 7:  The Forces Starring Draghi Straight in the Face… and Suggesting Policy “Action”:

  1. It’s All About Inflation!  Or lack thereof… Not only is the ECB nowhere near its 2.0% inflation target, CPI is negative!  In the initial February reading, Eurozone CPI fell to -0.20% Y/Y vs Expectations for 0.00% and Prior +0.30%. This is the first time inflation went into negative territory since September 2015. #GravityHurts
  2. Producer Price Index, like CPI, mirrors the deflationary forces, most currently at -2.9% JAN Y/Y, and has been in negative territory since July 2013!  (see Super Mario chart below)
  3. Growth is Anemic.  See our proprietary Eurozone GIP (growth, inflation, policy) for the coming quarters (ugly Quad 4 = growth slowing as inflation decelerates); declining Eurozone Confidence figures; and recent trends in PMIs = down!   (See charts below)
  4. The ECB Council is overwhelmed with Doves (see Bloomberg Industries chart below) and has telegraphed policy Action!
    • In a letter to a European MEP, ECB President Draghi reiterated that the policy review in March should be seen against a background of increased downside risks to the earlier outlook. The letter confirms that the technical preparations are being made in order to ensure that the full range of policy options are available.
    • ECB’s VP Constancio recently said that while no decisions have been made, a lack of confidence in getting inflationary pressures higher could cause his central bank to deliver more stimulous next month.
    • ECB’s Liikanen said the central bank is ready to use additional monetary policy measures, if needed, to reach its targets.

5. A Year Later… Draghi last cut the Deposit Rate in December 2015 (by 10bps to -0.30%) and issued the QE “Drugs” (monthly asset purchases set at €60 Billion/month) in January 2015. With investors wanting results yesterday, one year into this program is a long time. Delivering more “non-conventional” policy “sauce” is a great way to CYA after a year in which Draghi failed to arrest declines in growth and inflation.

6. ECB Minutes called for downward pressure on inflation outlook from the decline in oil prices and oil futures curve.

7. ECB External Projections Down.  In January, the ECB published its updated economic projections by external analysts (not the ECB staff who announces updates at the March meeting) and the forecast for inflation expectations were lowered.  

    • Professional forecasters cut inflation forecast to 0.7% in 2016 vs prior 1%, 2017 at 1.4% vs 1.5% and 2018 at 1.6%. 

Mr Draghi, we'll be tuned in this coming Thursday!

 

Top 7 Reasons Why the ECB Will Act on March 10th - a. Eurozone cpi and ppi

Top 7 Reasons Why the ECB Will Act on March 10th - EUROZONE

Top 7 Reasons Why the ECB Will Act on March 10th - a. Eurozone Conf. Econo

Top 7 Reasons Why the ECB Will Act on March 10th - a  Eurozone Business Climate

Top 7 Reasons Why the ECB Will Act on March 10th - A. Eurozone PMI

Top 7 Reasons Why the ECB Will Act on March 10th - a. PMI Charts

Top 7 Reasons Why the ECB Will Act on March 10th - ECB Council

Top 7 Reasons Why the ECB Will Act on March 10th - a. Main interest rates


What The Media Missed About Today's Jobs Report

Takeaway: February's jobs report isn't as rosy as many people think.

What The Media Missed About Today's Jobs Report - jobslatecycle

 

NEWSFLASH: Today's jobs report, with payroll employment increasing by 242,000 in February and the unemployment rate steady at 4.9%, isn't as rosy as the media or Wall Street is painting it.

 

"Anything sub-270K in February = further slowing in employment growth (Feb = hardest comp of the cycle)," Hedgeye US Macro analyst Christian Drake wrote this morning. And, as Hedgeye CEO Keith McCullough points out, the rate of change peak in non-farm payroll growth peaked in February of last year at 2.34% year-over-year.

 

Today's print? 1.9% 

 

Here's the key chart (click to enlarge)

What The Media Missed About Today's Jobs Report - Employment Growth

 

... And a more granular breakdown (click to enlarge):

What The Media Missed About Today's Jobs Report - employment summary

 

Why is this bad for the stock market? "This will keep the Fed hawkish and make it more likely that they continue to hike into an economic slowdown," McCullough reiterated on The Macro Show this morning. 

 

 

Bottom line: If the Fed continues to hike rates into an economic slowdown, it's going to get ugly. That's the real risk right now.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Euro, Italy and Gold

Client Talking Points

EURO

Newsflows are pointing to a potential ECB wavering into next week’s Draghi-walk-on-water-central-planning-event. That would be bullish (on the margin) for EUR/USD, which is up this morning +0.3% after holding the low-end of our $1.08-1.12 risk range.

ITALY

Italy no likey Up Euro (hasn’t the entire time and this is important to watch as Italian stocks led the European Equity crash with the draw-down from last year’s peak reaching -33% at one point); #EuropeSlowing data remains obvious from 2015 cycle peak.

GOLD

If you ask Gold (Dollar Down, Gold Up) today’s jobs report is going to be precisely what it’s going to be (#LateCycle); don’t forget that NFP rate of changed peaked in FEB of 2015 at +2.34% year-over-year growth (toughest comp of the cycle).

 

*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 28% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
XLU

Our preferred growth slowing vehicle remains Utilities (XLU) in equites. 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
GIS

General Mills (GIS) hit an all-time high last 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.

TLT

Our preferred growth slowing vehicle remains (Long-Term Treasuries) TLT in fixed income. A flattening in the yield spread (10YR Treasury Yield – 2YR Treasury Yield) continued last week into double digit basis point territory (currently at 96 basis points). Year-to-date the yield spread has declined 44 basis points while the 10YR Treasury Yield has dropped 47 basis points. As a reminder 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. 

Three for the Road

TWEET OF THE DAY

A Few Thoughts On Permabulls, Volatility & Bear Market Bounces https://app.hedgeye.com/insights/49535-a-few-thoughts-on-permabulls-volatility-bear-market-bounces… @KeithMcCullough #Fed $IWM

@Hedgeye

QUOTE OF THE DAY

The only person you are destined to become is the person you decide to be.

Ralph Waldo Emerson

STAT OF THE DAY

After 340 days, watching 5,400 earth orbits and nearly 11,000 sunsets American astronaut Scott Kelly returns to earth 2 inches taller. He has spent almost a full year on the International Space Station floating 250 miles above the earth — setting a record for an American astronaut.


CHART OF THE DAY: 148 Reasons Why U.S. Growth Is Slowing

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more.

 

"... Even assuming recent signals from “the market” are right about #Quad2 here in 1Q16, we still think it’s important to pound the table on the undeniable fact that growth continues to slow on a trending basis across every major category of high-frequency economic data, as highlighted by the Chart of the Day and below. This keeps our #USRecession theme firmly intact; see the “transitory” GDP growth accelerations of 2Q00 and 2Q08 for more details."

 

CHART OF THE DAY: 148 Reasons Why U.S. Growth Is Slowing - 3 4 16 Chart of the Day


Bull Market Marketing

“They are who we thought they were.”

-Dennis Green

 

If you haven’t seen then Arizona Cardinals Head Coach Dennis Green’s ~30 second rant following a disappointing blown victory over the Chicago Bears back in 2006, do yourself a favor and watch it: http://ftw.usatoday.com/2014/10/dennis-green-rant-they-are-who-we-thought-they-were-press-conference-cardinals-video.

 

Lately, I’ve been feeling some moderated version of how Coach Green felt then. In short-term-performance-chasing terms, we are definitely in the process of blowing what had been a clear lead over the bulls – or at least that’s what the general tone of questions in my inbox has been implying.

 

In that vein, I haven’t seen our competition attempt to catch falling knives across the spectrum of economic data since the last time they claimed “global growth had bottomed” back in early-November. I’ve had a fair amount of Bull Market Marketing Material forwarded to me in recent weeks – you know, the perpetually evolving list of reasons why you should be buying stocks (especially “for the long run”) – and most of it was what I thought it would be.

 

Bull Market Marketing - bubble cartoon 11.02.2015

 

Back to the Global Macro Grind

 

Unlike its cousin “Bear Market Marketing” (e.g. Zerohedge) which only exists to drive advertising revenues for its proprietors, Bull Market Marketing is an important part of our industry and our economy. If your investment horizon is long enough, you will most assuredly make money being long of stocks. There is also a lot of money to be made in the marketing of said bull markets.

 

Not to mention, the ingenuity of U.S. capitalism has been and continues to be a perpetual source of value creation over longer time frames. The economy would be much smaller and far less efficient if institutional investors did not generally remain fully invested, which itself effectively perpetuates the capital markets machine that helps to extend and lower the cost of credit across the economy.

 

All that being said, there have historically been periods where it has paid to be out of the market and we continue to think this is one of those instances. If all you did was buy cycle troughs and remain fully invested until you sold the ensuing cycle peak, you’d be the best investor in world history – irrespective of how good your stock picking or credit analysis skills are. While I can assure you that anyone expecting us to perfectly thread the needle on that goal will be as disappointed as they would be learning that I – a 6’4” black guy – cannot dunk, we will continue to work tirelessly towards it nonetheless.

 

As alluded to at the onset of this note, I think it’s important to revisit the debate about the state of and outlook for the U.S. economy. But before we do that, let’s just pretend for a few moments that the domestic credit cycle hasn’t inflected beyond the point of no return in recession terms. According to Reuters

 

U.S. small business borrowing fell 13 percent in January to the lowest level in more than a year… a fresh sign that economic growth could weaken in the coming months.”

 

Let’s also pretend that we’re not smack dab in the middle of a corporate profit recession and that those have not been consistent harbingers of stock market crashes domestically. If that’s not enough, I’m even willing to accept that corporate profits “are who we thought they were” – which would require a rather dubious eschewing of several important facts:

 

  • On a non-GAAP basis, S&P 500 EPS climbed a mere +0.4% in 2015 – which represents the slowest growth rate since 2009 (Factset).
  • On a GAAP basis, S&P 500 EPS plunged -12.7% last year – which represents the sharpest decline since 2008 (S&P/Dow Jones).
  • GAAP EPS in 2015 was 25% lower than the non-GAAP figure – which represents the widest spread since 2008.
  • Outside of 2008, the only other times the “GAAP gap” was as wide as it was last year was in 2001 and 2002. Recall that the domestic credit and corporate profit cycles had rolled over in each of those years as well.
  • Much to the chagrin of the “ex-energy” bulls, the aforementioned 2015 “GAAP gap” was broad-based. In fact, Energy only accounted for $93B (36%) of the $256B aggregate spread across S&P 500 constituents. Healthcare and Tech accounted for $53B (21%) and $42 (16%), respectively.

Source: WSJ

 

While we’re in the process of ignoring bad information, we might as well omit the potential for the FOMC to make another egregious policy error at its meeting in a couple of weeks.

 

On that note, Fed funds futures currently peg the probability of a hike at only 8%; we’d be willing to bet that the probability of the FOMC opting to further “normalize policy” in 12 days is actually in excess of the +10.1% rally off the February 11th intra-day lows in the SPY.

 

We know the bull thesis for stocks and high-yield credit is ever-changing, but common sense would seem to suggest bulls can’t have their cake and eat it too. At this stage in the cycle, asset price inflation has direct policy consequences

 

There. We’ve reset the macro debate to purely high-frequency economic data terms. With respect to the data, it’s been a fair fight between bulls and bears in recent weeks. On balance, domestic economic data has continued to surprise to the downside (per the Bloomberg U.S. Economic Surprise Index), but it has done so at the slowest rate since February ’15, breaking out above its ~8 month-long holding pattern in the process.

 

Aiding the aforementioned breakout were very solid Retail Sales, Real PCE and Durable Goods reports for the month of January, as well as the ISM Manufacturing PMI’s sequential uptick to 49.5 in February. As we discussed in section III of our 2/26 note titled, “We’re Wrong On U.S. Growth (Well, Kind Of)”, these data points, among others, nudged up our predictive tracking algorithm’s estimate for Real GDP growth in 1Q16 to +2.0% YoY and +1.0% QoQ  SAAR.

 

To the extent those estimates – which are well below the Street, including the Atlanta Fed – hold firm, we are looking at a very marginal delta into the hawkish #Quad2 (i.e. growth and inflation accelerating concomitantly) for the first quarter of 2016. Recall that we had previously been tracking in the stagflationary #Quad3 (i.e. growth slowing as inflation accelerates).

 

More importantly, in recent weeks asset markets have been pricing in the material change in implied performance between these two GIP Model quadrants (i.e. expectations shifting from #Quad3 to #Quad2):

 

  • Equities: The SPX has historically appreciated +1.1% on average per quarter with a 77% positive hit rate in #Quad2 vs. -0.2% with a positive hit rate of 48% in #Quad3 [INSERT massive short squeeze HERE]. REITS, Tech, Industrials and Healthcare have historically led the way in #Quad2 vs. Utes and REITS in #Quad3.
  • Fixed Income: The performance of factor exposures in #Quad2 is almost the complete opposite of that in #Quad3. Specifically, yields and spreads tighten across the corporate credit spectrum in #Quad2 vs. widening across the board in #Quad3. The opposite is true for Treasury bond yields. The 10Y Treasury yield has backed up +17bps since its February 11th YTD low while the Bloomberg HY Index has rallied +5.4% over that same time frame.
  • Commodities: The performance divergence in Gold between the two quadrants is not immaterial. Specifically, Gold has historically returned +1.6% on average per quarter in #Quad2 vs. only +0.6% in #Quad3. Gold is up +9.4% MoM.
  • Currencies: The most important performance divergence between the two quadrants is that of the U.S. Dollar Index. Specifically, the DXY has historically returned +0.4% on average per quarter with a 62% positive hit rate in #Quad2 vs. only +0.1% with a 48% positive hit rate in #Quad3. The DXY is up +2.1% since its February 11th YTD low.

 

Even assuming recent signals from “the market” are right about #Quad2 here in 1Q16, we still think it’s important to pound the table on the undeniable fact that growth continues to slow on a trending basis across every major category of high-frequency economic data, as highlighted by the Chart of the Day and below. This keeps our #USRecession theme firmly intact; see the “transitory” GDP growth accelerations of 2Q00 and 2Q08 for more details.

 

 

And by the way, it turns out “the market” actually does agree with our assessment of the data – the bond market that is. The U.S. Treasury 10s-2s spread has actually compressed -4bps over the past three weeks and by -14bps over the past month. At 100bps wide, it’s the narrowest it’s been since late-2007.

 

We all know what happened after that.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.66-1.87% (bearish)

SPX 1 (bearish)

R2K (bearish)

DXY 96.58-98.72 (bullish)
Oil (WTI) 29.25-35.46 (bearish)

Gold 1 (bullish)

 

DD

 

Darius Dale

Director

 

Bull Market Marketing - 3 4 16 Chart of the Day


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