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Implications Of 2016 Presidential Election On Defense Industry

 

How will defense companies be impacted by either a Democratic or GOP president? PRG’s Lt Gen Emerson “Emo” Gardner USMC Ret. discusses the Defense budget and what investors should expect out of Congress with Hedgeye Industrials analyst Jay Van Sciver.


Retail | The Next Chapter… 11

Takeaway: Three months into 2016 and we're already rivaling Great Recession bankruptcy rates. What say you, Sears?

It's so easy to succumb to the 'water torture' of Chapter 11 press releases in retail coming from the likes of Sports Authority, Vestis Retail Group (Eastern Mountain Sports, Bob's, and Sports Chalet), and Pacific Sunwear. But it's important to take a step back. Then another. And another. Then and only then does the big picture come into focus about the broader economic cycle.

 

Consider this...over the average economic cycle, we see on average 15-25 retail chains go under. Those represent roughly 1% of Retail Sales. Naturally, the filings are not even by year. Sometimes (like when the economy is ripping) there are none. Plenty of profits to go around for even the worst retailers. But some years there's upwards of 15 (Great Recession).

 

In just a little more than three months, we've already seen 4 parent bankruptcies (6 chains) in US Retail. Annualized, that's about 16, or 0.5% of retail. 

 

After an extremely tough winter selling season for shoes and apparel, it's only natural that we'd see this year push the 2016 tallies to a level close to what we saw in the Great Recession.

 

Sears, anyone?

 

Retail | The Next Chapter… 11 - 4 8 2016 Retail Bankruptcies


A Brief Appraisal Of Fed False Narratives

Takeaway: Recent macro market moves in the Long Bond contradict the Fed's "all is good" narrative.

A Brief Appraisal Of Fed False Narratives - Fed ducks in a row

 

Hurray! No recession, no bubbles and the Fed's December rate hike went exactly as planned.

 

That's the latest delusional takeaway from Fed head Janet Yellen. Last night, Yellen joined her predecessors Ben Bernanke, Alan Greenspan and Paul Volcker in NYC for a panel discussion to parade the U.S. economy's "tremendous progress" since the '07-'09 financial crisis.  

 

Where do we begin?

 

We've been steadfast in our criticism of the Fed's and Wall Street's serial overoptimism on U.S. economic growth. Here's Hedgeye CEO Keith McCullough, in the video below, explaining what we really think about Fed "data dependence."

 

 

Last night, Yellen's storytelling hit an all-time low. Here's analysis from McCullough in a note sent to subscribers earlier this morning: 

 

"Yellen has had quite the year of storytelling so far, but last night’s USD comment took the cake: “higher currency was a drag on the economy and consumer spending.” Wow. #StrongDollar (rising purchasing power, falling gas prices, etc.) perpetuated a 6yr cycle high in Real Consumer Spending in 2015; in Q1 Consumer Spending slowed alongside a weakening USD."

 

 

Another issue for the Yellen "all is good" narrative is the continually falling Long Bond (i.e. U.S. growth is slowing):

 

"Another great day for the Long Bond yesterday (best way to be long #GrowthSlowing); 10yr Yield of 1.71% is re-testing the FEB lows as Yellen tries to keep Oil/Commodities/Inflation higher. The Cycle call remains firmly intact; US Equity Beta (like at OCT and DEC end) is behind the curve pricing in what should be the worst quarter of the slow-down (Q2)."

 

 

Fading the Fed's false narratives has been a winning strategy all year.

 

Stick with it.


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 80.28%
  • SHORT SIGNALS 78.51%

TROUBLE on the FARM – Key Call-Outs (MON, AGU, CF, MOS, POT)

Momentum in tighter credit standards for cash strapped farmers should continue to weigh on crop input expenditures. What we would call-out with respect to margins is that despite the consensus dour view on the sector, fertilizer companies still have a lot of margin to lose, something we will continue to highlight:

  • The divergence in the Chicago Fed Farm Loan Repayment Index and the Fed Farm Loan Demand Index continues its years-long divergence.
  • Farm Incomes (nominal and real) continue to decline against the increasing demand for loans. Lower incomes = credit needed. After last week’s quarterly WASDE report, the USDA’s Commodity Credit Corporation (CCC) tightened its borrowing rate-based charge for April to 0.625% vs. 0.50% in March. It also raised the interest rate for crop year commodity loans to 1.625%, up from 1.5% in March: LINK
  • Using the example of nitrogen, the multi-year divergence in nitrogen prices paid by farmers vs. prices received by farmers for crops remains pinned at the highs. The ammonia to nat. gas price ratio also remains near the most favorable level for producers – Margin to lose to a supply-side “price floor” argument.
  • How inelastic is the demand story in nitrogen? We’ll find out in 2016: “Randy Thompson plans to apply 30% less nitrogen fertilizer to his corn this year to save money in the face of crashing crop prices”: LINK

 

TROUBLE on the FARM – Key Call-Outs (MON, AGU, CF, MOS, POT) - Chicago Fed Farm Credit Indices

 

TROUBLE on the FARM – Key Call-Outs (MON, AGU, CF, MOS, POT) - Kansas City Farm Loan Demand Index

 

TROUBLE on the FARM – Key Call-Outs (MON, AGU, CF, MOS, POT) - Farmer Producer Price Index

 

TROUBLE on the FARM – Key Call-Outs (MON, AGU, CF, MOS, POT) - Ammonia Nat Gas Price Ratio

 

 


Yellen, UST 10YR and Europe

Client Talking Points

YELLEN

She’s had quite the year of storytelling so far, but last night’s USD comment took the cake: “higher currency was a drag on the economy and consumer spending.” Wow. #StrongDollar (rising purchasing power, falling gas prices, etc.) perpetuated a 6 year cycle high in Real Consumer Spending in 2015; in Q1 Consumer Spending slowed alongside a weakening USD.

UST 10YR

Another great day for the Long Bond yesterday, it continues to be the best way to be long #GrowthSlowing. The UST 10YR Yield of 1.71% is re-testing the FEB lows as Yellen tries to keep Oil/Commodities/Inflation higher. The Cycle call remains firmly intact; U.S. Equity Beta (like at OCT and DEC end) is behind the curve pricing in what should be the worst quarter of the slow-down (Q2).

EUROPE

Europe was just a train wreck this week, but they’re trying to bounce them again this morning (Spain +1.3% on the bounce but fully loaded with that still -29.1% from last year’s European economic cycle highs); we reviewed our European GDP forecast of 0.2% by Q4 on our Q2 Macro Themes Call yesterday in case you want to review the non-consensus view.

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 7%
FIXED INCOME 24% INTL CURRENCIES 3%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's (MCD) hit an all-time highs last week. "They can't chase Energy Charts today, so they're just dog-piling into our long calls on GIS and MCD," wrote Hedgeye CEO Keith McCullough on Friday.

 

We've said it before, McDonald's has all the style factors that we like during these turbulent macro market times; high market cap, low beta and liquidity. The stock is up 7.5% this year beating the S&P 500 by more than 600 bps. In August 2015, Restaurants analyst Howard Penney wrote that "2015 will be the last time this stock is below $100."

CME

CME Group (CME) stock is among the small cohort of financial companies that benefit from volatile markets. With the exchange's open interest continuing to expand, which will drag trading volume higher, CME Group is one of the few lower beta longs that will hold up relatively better in the current environment.

 

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.

TLT

Non-Farm payroll additions came in over +200 again (+215K to be exact) and private sector wage growth was also “good,” increasing +4.2% year-over-year on Friday. We’re most concerned with "better" or "worse" from a rate of change perspective. The non-farm payroll number is "less good" (i.e. "worse") from a year-over-year rate-of-change perspective. Growth in non-farm payrolls peaked in February 2015 at +2.3% year-over-year and the trend since then has been one of decline (+2.0% Y/Y for March 2016). And private sector salary and wage growth peaked on a year-over-year percent change basis in December of 2014.

 

We remain bullish on Long Bonds (TLT and ZROZ), Utilities (XLU) and short Junk Bonds (JNK). We expect more alpha after what was a great Q1, as the back-end of the Treasury curve continues to get flatter regardless of Fed rate hikes. We were alone in that camp, in December, when we first told you that a rate hike was in fact good for long-duration Treasury bonds. Stick with what's worked.

 

Here's the Q1 2016 Scorecard (data through 3/31):

  • TLT +8.3%
  • XLU +14.7%
  • JNK +1.0%
  • versus S&P 500 +0.7%

Three for the Road

TWEET OF THE DAY

A Brief Warning On Q1 #Earnings https://app.hedgeye.com/insights/50141-a-brief-note-on-q1-earnings-from-hedgeye-s-macro-team … cc @KeithMcCullough @HedgeyeDDale $SPY #Stocks

@Hedgeye

QUOTE OF THE DAY

If you could say it in words, there'd be no reason to paint.

Edward Hopper

STAT OF THE DAY

According to the World Health Organization, 422 million adults have diabetes, which makes the worldwide rate 8.5% (that is up from 4.7%).


CHART OF THE DAY: Dear Janet, The Cycle Is Not Complicated

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. 

 

"... As Yellen and her colleagues who now read @Hedgeye Macro can see in today’s Chart of The Day (slide 12 of the Q2 Macro Themes deck), #TheCycle is not a mystery. This one has been both obvious and pedestrian in its sequence:

  1. Q2 2014 = Income Growth, Corporate Profits, and S&P 500 Margins #peaked (in rate of change terms)
  2. 1H 2015 = Employment & Consumption Growth, Confidence, Domestic Investment, and Multiples #peaked
  3. Q2/Q3 2015 = US Equities Peaked
  4. Q4 2015 = M&A #Peaked and the #CreditCycle (and market dislocations) began
  5. 1H 2016 = #GrowthSlowing from #TheCycle peak (in rate of change terms) continues"

 

CHART OF THE DAY: Dear Janet, The Cycle Is Not Complicated - 04.08.16 chart


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