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CHART OF THE DAY: Our High Conviction Call? The Cycle Slows

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.

 

"... Sure, we’ve seen some episodic hope that components of the most cyclical part of The Cycle (Energy, Commodities, Industrials, etc.) have slowed at a lesser rate.

 

But post last week’s Chinese and US Industrial Production (IP) data for FEB slowing again (US IP slowed to -1.03% year-over-year), hope is not an intermediate-to-long-term risk management #process."

 

CHART OF THE DAY: Our High Conviction Call? The Cycle Slows - 03.22.16 Chart


Are You Relaxed?

“Do I live a more relaxed life?”

-Harari

 

“Nowadays, I can dash off an email, send it half way around the globe, and receive a reply a minute later. I’ve saved all that trouble and time, but do I live a more relaxed life?”

 

That was an important question I started to think about the other day while I was reading Yuval Noah Harari’s Best Seller, Sapiens. “We have invented countless time-saving devices that are supposed to make life more relaxed…” (pg 87)

 

But do they? Maybe it’s just me, but there is absolutely nothing relaxing about watching people being blown up this morning in Brussels and, at the same time, watching others race to tweet and trade macro markets on it “being priced in.” #Sad

 

Back to the Global Macro Grind

 

I’m not going to ask you for your time this morning. I’m going to ask you to do this for yourself. Stop what you are racing to reply to via text. Stop being imprisoned by your inbox. And just take some time to breathe and think about what you are doing.

 

Are You Relaxed? - meditation

 

Thanks.

 

If you didn’t just shut everything off and start thinking about where the world’s rates of change is going next, I’ll keep you entertained for the next 5 minutes of your time. Let’s start with a very basic question:

 

Q: From an economic, profit, and credit cycle perspective, what’s really changed in the last month?

 

A: The Cycle

 

Yep. That’s it really. Since I didn’t ask what’s happened to “stocks” (I realize your monthly-reporting-period of manic return chasing matters but that wasn’t what I was asking about), the answer is very obvious. The Cycle continues to slow.

 

Sure, we’ve seen some episodic hope that components of the most cyclical part of The Cycle (Energy, Commodities, Industrials, etc.) have slowed at a lesser rate.

 

But post last week’s Chinese and US Industrial Production (IP) data for FEB slowing again (US IP slowed to -1.03% year-over-year), hope is not an intermediate-to-long-term risk management #process.

 

How about on the latest parts of the cycle?

 

  1. US CONSUMER – 2-year comp for US Retail Sales slowed (again as real consumption growth peaked in 1H of 2015 – and US Consumer Confidence (after peaking in Q1 of 2015) hit new #LateCycle lows too
  2. HOUSING – post the worst rate of change report for Pending US Home Sales (2 weeks ago), Existing Home Sales for FEB (reported yesterday) dropped -7.1% month-over-month (despite the weather) to -1.4% year-over-year
  3. HEALTHCARE – as pricing, capacity utilization, margins, and relative earnings growth all put in their 2015 peaks, Healthcare stocks (XLV -6.7% YTD) have turned out to be the worst performing sector in the SP500 in 2016

 

I know. I know. I shouldn’t have mentioned the “stocks.” Sorry about that. I was being too short-term there for a second. For intermediate-to-long-term investors, getting The Cycle (fully loaded – economic, profit, and credit) right is what matters most.

 

Isn’t it fascinating though that most consensus economists that missed the industrial/cyclical #Recession call altogether are now quite confident about the recovery?

 

Forget the consumer-cyclicals like Autos and Housing (both of those cycles peaked in OCT 2015) for a second and look at a 1 and 5 year chart of the Industrials (XLI):

 

  1. The Industrial Stocks (XLI) doubled (up +100%) from their 2011 lows
  2. Then put in a cycle peak (as rate of change of growth peaked) between Q4 2014 and Q1 2015
  3. And effectively crashed from there in expectations terms (XLI -18%) from Q115 to FEB 2016

 

Then a +15% v-bottom bounce in the last month and everything global demand, energy, charts, etc. is off to the races again? Talk about some super short-term #HPAD (hedgie performance anxiety disorder) there. Wow.

 

Since I don’t have to make excuses for being the short-term chart chaser (I made Industrials one of our favorite S&P Sector Shorts in Q1 of 2015 #timestamped) and I’ve preferred the Financials (XLF) as a favorite short in Q1 of 2016, I’m thinking:

 

A) I might need to make Industrials (XLI) a “fav short” again for Q2 2016…

B) Or should I be thinking it’s more obvious to short Housing (ITB) from here?

 

Since my highest conviction call is The Cycle (slowing), this is going to be a tough one for me. I really like the Financials (XLF) on the short side, so it’s going to be hard to take that off for Industrials or Housing (or Utilities and Gold off the long side).

 

But I do believe that my being less consensus-manic in the last 6-18 months has bought me some serious time to think this through. So I’ll relax and get back to you on that, maybe in a few weeks.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.80-1.98% (bearish)

SPX 1
RUT 1055-1109
EUR/USD 1.09-1.13
Oil (WTI) 36.08-42.53

Gold 1 (bullish)

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Are You Relaxed? - 03.22.16 Chart



investing ideas

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.

Volume, Housing and Europe

Client Talking Points

VOLUME

The relationship between volume and volatility (relative to price) remains core to how we model trending risks. As they chased the charts to another lower-high (price) yesterday (SPX), total U.S. Equity Volume (including dark pool) was -13% vs. its 1 month average as front month equity VIX held the 12-14 level it held during JUL and OCT.

HOUSING

Another bad U.S. #HousingSlowing data point yesterday (Existing Home Sales -7.1% month-over-month and -1.4% year-over-year) keeps what we liked most at this time last year (Housing, Healthcare, Consumer – all #LateCycle consumption + employment peaks) on the short side this year. Housing stocks (ITB) are +20% “off the lows” from FEB with the data only getting worse.

EUROPE

Disgusting act of terror aside, it’s important to contextualize where European Equities were ahead of this news – DAX, MIB Index, and IBEX all just failed @Hedgeye TREND resistance (again) yesterday. Italy was -2% last week to -13% year-to-date, tried the bounce yesterday and is down -1.6% this morning as the Draghi #BeliefSystem breaks down.

 

*Tune into The Macro Show with Housing and U.S. Macro analyst Christian Drake at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 61% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 27% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) hasn’t bounced as much as leveraged , high-beta resource names, but the outperformance is greatly divergent vs. both the market, and our preferred sector short in financials (XLU +12.3% YTD, S&P -0.3% YTD, XLF -4.6% YTD).

GIS

General Mills (GIS) remains one of analyst Howard Penney's top Long ideas in the Consumer Staples space. As we have continued to say, it boasts style factors ideal during turbulent times; high market cap, low beta and liquidity. Case in point, GIS is up 7% year-to-date, versus essentially flat for the S&P 500 in 2016. We'll have an update next week after GIS reports earnings.

TLT

Long-Term Treasuries (TLT) finished +1.9% on the week. Aside from Mr. Market, the Fed downwardly revised expectations (the common lag) on Wednesday:

  • The median 2016 GDP forecast revised to +2.2% vs. +2.4% in December
  • The median 2016 PCE Inflation forecast revised to +1.2% vs. +1.6% in December
  • Median Federal Funds end-2016 rate forecast revised to 0.9% vs. +1.4% in December

From a GROWTH, INFLATION, POLICY perspective, it’s lower for longer on growth and inflation and a more dovish Fed.

Three for the Road

TWEET OF THE DAY

VIDEO (2mins) Joke of the Year? Fed Data Dependence https://app.hedgeye.com/insights/49848-mccullough-joke-of-the-year-fed-data-dependence

@KeithMcCullough

QUOTE OF THE DAY

The difference between the impossible and the possible lies in a man's determination.

Tommy Lasorda

STAT OF THE DAY

Yesterday, Apple announced that 93% of its facilities run on renewable energy, including 100% of its facilities in the U.S., China, and 21 other countries.


LNKD | Tracker Update (Talent Solutions)

Takeaway: Our tracker suggests that LNKD isn't seeing the recession that its guidance is calling for. However, we remain on the sidelines for now

KEY POINTS

  1. SEASONAL BUT MARKED IMPROVEMENT: Our LNKD JOLTS tracker improved sequentially into the first month of 1Q16, which is expected given seasonality in LNKD's selling environment.  But as we've mentioned previously, 4Q15/1Q16 is more about magnitude than direction; the former is fairly strong QTD.  As a reminder, our LNKD Talent Solutions TAM analysis suggests that the bulk of that TAM is in the upsell opportunity (ARPA) vs. new account volume.  Note that LNKD will no longer be reporting its Talent Solution customer counts, so we will not be able to calculate ARPA anymore (but that doesn't mean we can't use the tracker).   
  2. BUT DEAD MONEY FOR NOW: LNKD's 2016 guidance is basically implying a recession since it essentially calls for declining ARPA and/or net new LCS account growth.  Our tracker update suggests LNKD wasn't seeing the recession that its guidance is calling for when it issued it.  We expect a beat/raise on the 1Q16 release is even more likely now, but we're not sure the street will chase the print.  We suspect it will take more than one positive earnings release to regain the trust of the street after mgmt tattooed its holders on the 4Q15 release (especially after deciding to pull its LCS account metric).  We remain on the sideline for now.   

See the note below for additional detail on LNKD's 4Q15 release.  Let us know if you would like to discuss further.  

 

Hesham Shaaban, CFA


@HedgeyeInternet 

 

 

LNKD | Tracker Update (Talent Solutions) - LNKD   ARPA vs. JOLTS 1Q16  Jan

LNKD | Tracker Update (Talent Solutions) - LNKD   TS 2016 Guid Scen 1

 

LNKD: Guidance = Recession
02/05/16 09:50 AM EST
[click here]

 


Cartoon of the Day: Nuclear Decay

Cartoon of the Day: Nuclear Decay - radio activist cartoon 03.21.2016

 

Shares of embattled Valeant Pharmaceuticals (VRX) are down 89% since July much to the chagrin of (radio)activist investor Bill Ackman, whose firm Pershing Square Capital owns a 9% stake.


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