The Last Commodity Bubble Still Standing

Takeaway: Commodities investor Jim Rogers once famously remarked farmers would soon be the ones driving Lamborghinis. Maybe not on second thought.

In this new, must-see market discussion, Blue Pacific Partners founder Chris Sommers sits down with Hedgeye CEO Keith McCullough to discuss the huge risk embedded in agricultural commodities. According to Sommers, excessive investment has caused overcapacity, while global demand growth projections have been reduced. Meanwhile, major agricultural commodities are still trading 50-75% higher than their long-term average levels … before the commodity boom.


In part two of their conversation, Sommers lays out his high-conviction bear case in granular detail with emphasis on Deere and Monsanto.



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


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.



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%. 



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.


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.

Euro, Italy and Gold

Client Talking Points


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 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.


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


Top Long Ideas

Company Ticker Sector Duration

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

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.


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


A Few Thoughts On Permabulls, Volatility & Bear Market Bounces… @KeithMcCullough #Fed $IWM



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

Ralph Waldo Emerson


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

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Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.