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FINANCIALS SENTIMENT SCOREBOARD - LAZARD (LAZ)

Takeaway: Lazard (LAZ) remains a favorite short idea with (still) excessively bullish sentiment according to our quantitative screen of Financials.

This afternoon we're flagging Lazard (LAZ - 90) as a short on sentiment. It is the highest ranked stock in the broker/asset manager category. Additionally, we hosted a best ideas black book call back in mid-January on why the M&A environment and LAZ's exposure to emerging markets makes the stock an interesting short. For more on Lazard, see our call replay and presentation materials.

 

Our Hedgeye Financials Sentiment Scoreboard is released in conjunction with short interest data. Our Scoreboard now evaluates over 300 companies across the Financials complex.

 

The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  

 

We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.

 

Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.

 

The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 

 

FINANCIALS SENTIMENT SCOREBOARD - LAZARD (LAZ) - SI1

 

FINANCIALS SENTIMENT SCOREBOARD - LAZARD (LAZ) - SI2

 

FINANCIALS SENTIMENT SCOREBOARD - LAZARD (LAZ) - SI3

 

The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”

 

Let us know if you would like to receive a copy of our black book, which explains this system and its applications.

 

BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   

 

SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 

 

 

FINANCIALS SENTIMENT SCOREBOARD - LAZARD (LAZ) - Absolute 12 mo

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


Cartoon of the Day: Corporate Contraction

Cartoon of the Day: Corporate Contraction - corp profits cartoon 03.28.2016

 

While U.S. 4Q GDP was revised up to +1.4%, the corporate profit component showed a -10.5% Y/Y contraction. That marks the second consecutive quarter in which corporate profit growth was down Y/Y. Over the past 30 years, two consecutive quarters of shrinking corporate profits have always preceded a material stock market crash.


Small Caps Flirt With Full-Blown Crash Mode

Takeaway: The reality remains that small cap stocks are in rough shape.

Small Caps Flirt With Full-Blown Crash Mode - Russell cartoon 12.02.2014

 

As Hedgeye CEO Keith McCullough noted to subscribers this morning:

 

"The Russell 2000 lagged (again) last week, dropping -2.0% on the week (vs. -0.7% for the SP500); at -16.7% from its all-time high in July, RUT is back to within 330 bps of being in crash mode (> 20% decline from the July peak); Russell 2000 peaked when US corporate profits peaked (Q2 of 2015)." 

 

Small Caps Flirt With Full-Blown Crash Mode - russell 2000 high

 

Meanwhile, the average Russell 3000 stock (98% of the available U.S. equity universe) is down -29.2% from it's 52-week high.

Still feeling bullish?

 

Small Caps Flirt With Full-Blown Crash Mode - Small cap canaries 09.23.2014


This May Be The Most Important Market Chart Right Now

Takeaway: For the record, we've been warning about corporate profits since early January.

Hedgeye senior macro analyst Darius Dale wrote a compelling note this past Friday highlighting corporate profits which just posted their worst growth (Y/Y) since 4Q08.

 

While U.S. 4Q GDP was revised up to +1.4%, the corporate profit component showed a -10.5% Y/Y contraction. That marks the second consecutive quarter in which corporate profit growth was down Y/Y. Check out the chart below illustrating why that's such bad news.

 

Bottom line? In the 30 years since 1985, two consecutive quarters of shrinking corporate profits have preceded a material stock market downturn over the next twelve months in all five occurrences.

 

Click to enlarge

This May Be The Most Important Market Chart Right Now - z 77


McCullough: Short Rich People?

 

In this recent clip from The Macro Show Hedgeye Demography Sector Neil Howe and CEO Keith McCullough discuss the income gulf between America’s “haves” and “have-nots” and why that gap may narrow in the years to come.


Why Atlanta Fed's GDP Forecast Is Crashing

Why Atlanta Fed's GDP Forecast Is Crashing - Fed cartoon 02.01.2016

 

The latest Atlanta Fed forecast for Q1 2016 GDP is now (drumroll please)... 0.6%.

 

That's down from 2.7% in February. Yes, that means the Atlanta Fed has lopped off more than 200 bps from its GDP forecast in a month.

 

Nice.

 

 

Here's a chart of the Atlanta Fed's latest hatchet job:

 

 

According to the Atlanta Fed, the estimate's recent decline, from 1.4% to 0.6%, was the result of revised down consumer spending growth and the added drag of declining net exports:

 

"The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 0.6 percent on March 28, down from 1.4 percent on March 24. After this morning's personal income and outlays release from the U.S. Bureau of Economic Analysis, the forecast for first-quarter real consumer spending growth fell from 2.5 percent to 1.8 percent. The forecast for the contribution of net exports to first-quarter real GDP growth declined from –0.26 percentage points to –0.52 percentage points following this morning's advance report on international trade in goods from the U.S. Census Bureau."

 

As Hedgeye Senior Macro analyst Darius Dale points out, the tracking error of the Atlanta Fed's forecast is a shocking 252 bps.

 

 

Hedgeye U.S. Macro analyst Christian Drake offers some critical context on the methodology underpinning the Atlanta Fed's estimate:

 

 

 

How useful is that? Not very.

 

On a related note, Hedgeye's Macro team has nailed the last five U.S. GDP numbers. Our current estimate?

1.0%


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