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CHART OF THE DAY: Past Peak Income & Consumption Growth

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, a growth bull might say “but, the consumer and housing are still strong parts of the US economy”… but a gentlemanly rate of change person like me would correct them by reminding them that rates of change continue to slow from their respective cycle peaks.

 

On economic cycle matters, saying things are “good” or “bad” means absolutely nothing to us; measuring and mapping whether things are getting better or worse is what matters most. We’re very reasonable and tolerant about all 2nd derivative debates."

 

CHART OF THE DAY: Past Peak Income & Consumption Growth - 03.29.16 chart


Gentlemanly Bears

“It meant being reasonable, tolerant, honest, virtuous, and candid.”

-Gordon Wood

 

As I push into my early 40s, I’d like to think a Gentlemanly Bear can be thought of that way inasmuch as a Gentlemanly Bull can be. After all, sometimes (when GDP growth is slowing) gentlemen prefer being bullish on long-term bonds!

 

In the latest history book I’ve cracked open, Revolutionary Characters, Gordon Wood used the aforementioned characteristics to describe America’s Founding Fathers. How well do you think they describe your economic, profit, or credit cycle resources?

 

Or are we all partisan now? Rate of change isn’t partisan. It’s honest math. And I think being candid about it accelerating or decelerating is, as Wood wrote, “an important 18th century characteristic that connoted being unbiased and just as well frank.” (pg 15)

Gentlemanly Bears - GDP cartoon 10.29.2015

 

Back to the Global Macro Grind

 

Yesterday we received more intermediate-term TREND (not to be confused with monthly or sequential immediate-term TRADE head-fakes) confirmation that the US economy is indeed well past the peak of the cycle:

 

  1. Having peaked at +3.8% y/y in JAN 2015, Real Consumer Spending was revised down -30bps to +2.6% growth for JAN 2016
  2. Having peaked at +13.1% y/y in APR 2015, US Pending Home Sales slowed to 0.7% year-over-year (y/y) in FEB of 2016

 

Sure, a growth bull might say “but, the consumer and housing are still strong parts of the US economy”… but a gentlemanly rate of change person like me would correct them by reminding them that rates of change continue to slow from their respective cycle peaks.

 

On economic cycle matters, saying things are “good” or “bad” means absolutely nothing to us; measuring and mapping whether things are getting better or worse is what matters most. We’re very reasonable and tolerant about all 2nd derivative debates.

 

While Real Consumer Spending isn’t crashing into a #Recession (that was never our call), there are large components of the US economy already in a recession (no you can’t “back out” Energy, Industrials, Cyclicals, Financials, etc.). That’s why:

 

  1. US Long-term Treasury Yields have dropped from 2.27% at the start of 2016 to 1.87% this morning
  2. The Yield Spread (10yr minus 2yr Yield) is right around cycle lows at 100 basis points wide
  3. High Yield Spreads remain elevated and rising (above the recessionary signal of its historical mean)

 

Yes, the commercial and industrial (C&I) side of the economy matters inasmuch as the consumption and real estate cycle will if these rates of change in both consumer spending and housing demand continue to slow.

 

By the time it’s all slowed to cycle lows, you start buying again.

 

Let me say that differently. If you’ve been positioned properly for the last 3-6 months (instead of last 3-6 weeks), once the entire cycle has slowed to its slowest rate of change, you’ll actually start selling what you already own:

 

  1. Long-term Treasuries (TLT) = +7.8% YTD
  2. Utilities (XLU) = +12.6% YTD
  3. Gold (GLD) = +15.1% YTD

 

And then you’ll probably start buying the classic #LateCycle things (lower) that you shouldn’t have owned from last year’s cycle peak (note: all 3 of these US Equity Style Factors have underperformed Energy YTD – so you definitely don’t want to “back out” Energy):

 

  1. Consumer Discretionary (XLY) = -0.3% YTD
  2. Financials (XLF) = -6.1% YTD
  3. Healthcare (XLV) = -6.7% YTD

 

I know. I know. The YTD performance isn’t “as bad” as this Gentlemanly Bear sounds. But, as you know, staring at a month-end markup performance snapshot can be very risky. Remember “stocks” ramped +6% from the FEB low to MAR 2008 high too…

 

Again, not that things being “bad” matter as much as things getting better or worse do. But wow is this Atlanta Fed “GDP Now” model getting ugly. How a GDP “forecast” goes from +2.7% GDP only a month ago to +0.6% today is beyond me, to be quite frank!

 

We’re sticking with what was the Street’s low Q1 US GDP forecast of 1% (our predictive tracking algorithm and mapping/measurement #process has been accurate, within 25-50 basis points, on GDP for the last 5 quarters – without the 200bps intra-quarter swings!).

 

And, more importantly, we’re reiterating that the US economic and profit cycle won’t even have a chance of putting in a rate of change (cycle) bottom until Q2 which, candidly, won’t be reported until Q3.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.84-1.97%

SPX 1
RUT 1060-1107

NASDAQ 4
EUR/USD 1.10-1.13

Gold 1 (bullish)

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Gentlemanly Bears - 03.29.16 chart


Yen, Oil and Europe

Client Talking Points

YEN

The Yen is down -0.2% vs. USD this this morning at 113.72 and that registers an immediate-term TRADE oversold signal inasmuch as the Nikkei signaled immediate-term overbought late last week (buy Yen, short Japanese stocks remains our current view there as the #BeliefSystem in central-market-planning breaks down).

OIL

Dollar Up, Oil Down this morning – plenty of “reflation” trades are barely hanging on into month-end and now WTI is signaling its first series of short-term lower-highs (exhaustion signal) between 42-43. We imagine Janet Yellen will determine the next USD/Commodities trade with her commentary this week.

EUROPE

After an ugly last week, equities are trying to bounce but unimpressively so post the Easter break – Italian Stocks (MIB) were -2.4% last week and +0.6% early this morning, but -14.6% year-to-date and still in crash mode -24% vs. this time last year when many thought European growth was going to be just fine (its consistently slowing now).

 

*Tune into The Macro Show at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 5%
FIXED INCOME 21% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
CME

CME Group (CME) put up a decent fourth quarter earnings print with a slight revenue and earnings beat. Not that we put much weight on what happened last quarter but trends into the new operating period are looking even better. The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, at over 111 million contracts.

 

Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials.

GIS

We continue to like General Mills (GIS) as one of the best large cap names in the packaged food space. With that being said, the third quarter was not without its noise surrounding the numbers; Green Giant divestiture, Walmart clean store policies, foreign currency exchange, and grain merchandising just to name a few, muddied the waters. But digging through the noise, this is a business that is truly turning a corner. When they set sail on fiscal year 2016 back in June of 2015, we knew this was not going to be an easy ship to turn towards success. Now, with many key product platforms turning (through strong product innovation and renovation) in the right direction and operational improvements implemented through cost savings initiatives, GIS is on the cusp of success. We will be measuring this success by realization of sustained top line growth in the low single digit range.

TLT

In our model the second quarter is the toughest compare on both GDP and U.S. corporate profits so we want to be very careful going into that and be positioned defensively. Stay long Long-Term Treasuries (TLT).

 

While small/mid cap U.S. Equities reverted to their bear market mean last week (Russell 2000 down -2.0% on the week and -16.7% since US Corporate Profits peaked in Q2 of 2015), so did a few other US Equity Market Style Factors that had had a big 1-month bounce:

  1. High Beta stocks were -2.0% on the week
  2. High Leverage (Debt/EBITDA) stocks were -1.9% on the week
  3. High Short Interest stocks were -1.7% on the week

Three for the Road

TWEET OF THE DAY

*NEW VIDEO*

McCullough: Short Rich People? https://app.hedgeye.com/insights/49961-mccullough-short-rich-people… via @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

It meant being reasonable, tolerant, honest, virtuous, and candid.

Gordon Wood

STAT OF THE DAY

Over 10,000 bars have shut down in the past decade—with closures reaching a peak of six per day in 2014.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%

INVITATION AND AGENDA TO HEDGEYE-POTOMAC SPRING HEALTH POLICY CONFERENCE

INVITATION AND AGENDA TO HEDGEYE-POTOMAC SPRING HEALTH POLICY CONFERENCE - 20160321 Header

 

Hedgeye and the Potomac Research Group are proud to present our first annual Spring Health Policy Conference.  This special, invite-only event will be held at The Benjamin Hotel in New York City on Monday, April 4th, 2016 from 9:30am - 4:00pm.


~ CLICK HERE FOR THE FULL INVITE ~

 

Please note that space is limited.  RSVP to  to attend.

 

Our lineup of health policy experts will offer an insider's view on their policy outlook and how as practitioners policy is influencing their decision making process.

 

This exclusive event will be moderated by Hedgeye Healthcare sector head Tom Tobin and feature in-depth presentations and panel discussions.  There will be ample opportunity for interaction throughout the day.

 

INVITATION AND AGENDA TO HEDGEYE-POTOMAC SPRING HEALTH POLICY CONFERENCE - 20160321 Agenda

 

 

SPEAKERS AND TOPICS

 

CHIP KAHN - Hospital Industry Outlook

 

Chip Kahn, President and CEO of the Federation of American Hospitals, will shape the regulatory environment for hospitals heading into the Presidential election.  Mr. Kahn’s extensive health policy expertise and lengthy Capitol Hill experience make him one of Washington, D.C.’s most effect and accomplished trade association executives.

 

NEIL HOWE - Demographic Outlook & Healthcare Reform

 

A historian, economist, and demographer, Neil is also a recognized authority on global aging, long-term fiscal policy and migration.  He is a senior associate to the Center for Strategic and International Studies (CSIS) in Washington, D.C., where he helps direct the CSIS Global Aging Initiative.

 

ANDREW MCKECHNIE - Health Reform Under Republican Administration

 

Andrew McKechnie, former policy advisor to the Senate Finance Committee, will discuss Republican efforts to repeal the Affordable Care Act and what the law may look like under a Republican controlled White House.  Mr. McKechnie was a key negotiator in bipartisan efforts to pass health reform in 2009, with an area of expertise in Republican politics and strategy.

 

YVETTE FONTENOT - Health Reform Under Democratic Administration

 

Yvette Fontenot is a partner at Avenue Solutions, a democratic government affairs firm that offers strategicadvice, policy development, and counsel in federal legislative and executive areas. She previously held theposition of Deputy Director of the Office of Health reform at the Department of Health and Human Services(HHS) and has helped to draft and implement the Affordable Care Act (ACA).

 

ROBERT LASZEWSKI - Managing Transition to Value Based Payment Models

 

Robert Laszewski, president of Health Policy and Strategy Associates (HPSA), will address the issues facing key stakeholders (Hospitals, MCOs, Physicians and Pharma) as we the transition to value based payment models focused on delivering better quality at a lower cost.  HPSA is a policy and marketplace consulting firm specializing in assisting its clients through the significant health policy and market change afoot.

 

DR. BABER GHAURI - Policy in Practice

 

Dr. Ghauri, Interim East Division CMIO for Trinity Health, will discuss how policy influences the decision making process of the second largest nonprofit health system in the nation.  Dr. Ghauri’s has a deep background in medical informatics and will also discuss how Trinity is using technology to pursue quality and value initiatives.

 

DR. RICHARD IORIO - Bundled Payments (CCJR)

 

Richard Iorio, MD, is the William and Susan Jaffe Professor of Orthopaedic Surgery at New York University Langone Medical Center Hospital for Joint Diseases and Chief of Adult Reconstruction at NYU Langone HJD.  Dr. Iorio was involved in the Medicare pilot program that led to expansion of the of bundled payment initiative for total knee replacements.


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


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