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$25 or $50 Oil? Here’s What McMonigle Says

 

In this brief excerpt from The Macro Show this morning, Hedgeye Energy Policy Analyst Joe McMonigle explains why he believes oil prices are going lower in the short term, and where he sees it heading in the months to come. 


BUILDER CONFIDENCE | Suspended Animation

Takeaway: Builder sentiment held at 10-month lows in April. Forward expectations bounced +1pt, but remain well below their Oct 2015 highs.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

BUILDER CONFIDENCE | Suspended Animation - Compendium 041816
 

Today's Focus: March NAHB HMI (Builder Confidence Survey)

Builder Confidence in April was static at 58 against unrevised March estimates, holding at 11-month lows for the third straight month and marking a 6-month past the cycle peak of 65 recorded in October.

 

Across the Survey Indicators, Current Sales moved lower from 65 to 63, putting in their lowest reading since May of last year. Meanwhile, there was a +1pt gain in Forward Expectations and also a +1pt gain in Buyer Traffic, but both those surveys remain below their LTM averages.

 

Regionally, all four US regions posted sequential declines. The Northeast and West both fell -2pts, while the Midwest and South each registered -1pt declines. 

 

Commentary was largely generic, referencing jobs and rates as broadly positive for the fundamental backdrop:

 

NAHB CEO Robert Dietz:  “Builders remain cautiously optimistic about construction growth in 2016. Solid job creation and low mortgage interest rates will sustain continued gains in the single-family housing market in the months ahead.”

 

In short, nothing particularly remarkable in the April release as Builder Confidence remains past peak and the larger demand trend across both the new and existing markets remains one of deceleration. 

 

Looking to March Housing Starts data tomorrow, we expect the number to remain strong from a rate-of-change perspective as we lap the depressed, severe weather comps from last February/March.  

 

Looking more broadly at both US Housing and the US Economy, they could best be summarized as a whole lotta “not much” going on at present.  

 

 

 

BUILDER CONFIDENCE | Suspended Animation - NAHB TTM

 

BUILDER CONFIDENCE | Suspended Animation - NAHB LT

 

BUILDER CONFIDENCE | Suspended Animation - NAHB Regional

 

BUILDER CONFIDENCE | Suspended Animation - NAHB Survery Indicators 

 

 

 

 

About the NAHB HMI:

The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


Europe, Oil and Corporate Profits

Client Talking Points

#EUROPESLOWING

Spain’s economy Minister De Guindos lowered the country’s 2016 GDP forecast o 2.7% vs 3.0% and the 2017 forecast to 2.4% vs 2.7%.  This follows last week’s reduced growth forecast by the IMF for Spain for the first time since 2013, to 2.6% from 2.7% for 2016. Yet the forecasts pale to our own, which according to our GIP (growth, inflation, policy) model, show the Spanish economy tracking into Quad 3 (equating to growth slowing as inflation accelerates) in the back half of the year with a mere 1.0% GDP forecast for 2016.

#CRUDESTORY

Our view throughout the deflationary backside of the cheap-debt fueled, commodity sector capital spending boom has been that producers will produce until they can’t anymore – bankruptcy or per unit cash loss. The resiliency of U.S. shale production throughout the commodity downturn surprised most. WTI is down over 4% this morning as the Doha meeting over the weekend was a disappointment for the bulls. We continue to take the stance that collective production cuts from ex. U.S. producers will be nothing more than a newsy topic, including at OPEC’s June 2nd meeting.

CORPORATE PROFITS

With 39 S&P 500 companies having reported Q1 earnings to-date, sales growth is down -1.1% YoY and earnings growth has slowed to -11.8% YoY – which would be the worst annual growth rate of the cycle if it holds through the rest of reporting season. Declines are being led by Materials (-34%), Tech (-20%) and Financials (-17%). Compounding matters is the 25-30% spread between pro forma and GAAP, which continues to be reflected in a rising economy-wide debt-to-free-cash-flow ratio. Specifically, that ratio just reached 4x in 4Q15, which is the threshold it breached in 3Q07 on its way to peaking at 4.6x in mid-2008. We reiterate our view that neither the corporate profit nor credit cycles have seen their respective depths.

 

*Catch the replay to The Macro Show with Potomac Research Group Senior Energy analyst Joe McMonigle - CLICK HERE

Asset Allocation

CASH 64% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 26% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's (MCD) is reporting 1Q16 results on Friday, and we will have a more thorough update following the release. Current consensus estimates are projecting system-wide same-store sales (SSS) growth to be +4.6%, and +4.6% in the United States. Given another full quarter of All Day Breakfast, and ever evolving value proposition that MCD is providing, we feel confident in their ability to perform at or above expectations.

 

MCD continues to be a great LONG stock to hold during turbulent times in the market given their attributes of being large-cap, low beta, and aligns with our macro teams view of going LONG lower to middle income food providers.

CME

With the largest Capital Markets operation reporting results last week, JP Morgan's numbers continue to relay the business-to-business (B2B) shift in both bond and equity markets. With capital hamstrung by Financial Crisis era regulation, and fixed income desks running tight as a drum, brokerage activity continues to shift over into the exchange traded derivative markets. JPM's FICC, or fixed income trading, results hit $3.5 billion in revenue in 1Q16, down 13% year-over-year.

 

Conversely, the daily reporting of CME Group's (CME) bond volumes finished at 8.2 million contracts per day in 1Q, up +9% from last year. On a revenue basis, CME's results are actually a little stronger, with fixed income rate per contract up +2% year-over-year. The shift in equities is more balanced, with JPM's equity trading revenues up +6% y-o-y according to their latest report.

 

CME's stock volumes, however, still outflank the big brokerage desk with futures and options volume up +9% y-o-y for the forthcoming quarterly report on April 28th. This activity shift is secular in our view and CME Group has a strong upward bias in earnings power which makes its stock one of the few to own in Financial Services.

TLT

We remain the bears on the U.S. economy and the corporate profit and credit cycles - we’re long growth slowing via Long Bonds (TLT) and Pimco 25+ Year Zero Coupon U.S. Treasury ETF (ZROZ) and short risky corporate credit via Junk Bonds (JNK) as the profit cycle rolls over.

 

High yield bonds have experienced meaningful relief in price terms with the move in reflationary assets. Again, we reiterate that once credit spreads move off their cycle lows, they don’t typically revert in the same cycle, which is why we are sticking with our sell recommendation on junk bonds (JNK).

 

Any time corporate profits decline for two consecutive quarters, the S&P drawdown has had a peak to trough decline of at least 20%. Dissecting the likely direction of earnings in Q1 and Q2 of this year, we could be facing 4 consecutive quarters of declining corporate profits, and we question the market's ability to slap higher earnings multiples on the S&P 500.

Three for the Road

TWEET OF THE DAY

The current short squeeze in EM stocks is right within the +20% gain which has happened 8 times since '11

@HedgeyeJC

QUOTE OF THE DAY

You’ll never get ahead of anyone as long as you try to get even with them.

Lou Holtz                    

STAT OF THE DAY

There are 1.17 billion unique Google searches each month, over 50% of searches come from mobile devices.


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An Earnings Season Scorecard Update

Takeaway: When corporate profits decline for two consecutive quarters or more the S&P 500 declines by at least 20%.

An Earnings Season Scorecard Update - corp profits cartoon 03.28.2016

 

Its that time of year again.

 

Earnings season is upon us and, by just about every estimation, companies are due to report lackluster results on the top and bottom line.

 

Here's what you need to know via our Macro team in a note sent to subscribers earlier this morning:

 

"With 39 S&P 500 companies having reported Q1 earnings to date, sales growth is down -1.1% year-over-year and earnings growth has slowed to -11.8% year-over-year -- which would be the worst annual growth rate of the cycle if it holds through the rest of reporting season. Declines are being led by Materials (-34%), Tech (-20%) and Financials (-17%).

 

Compounding matters is the 25-30% spread between pro forma and GAAP, which continues to be reflected in a rising economy-wide debt-to-free-cash-flow ratio. Specifically, that ratio just reached 4x in 4Q15, which is the threshold it breached in 3Q07 on its way to peaking at 4.6x in mid-2008. We reiterate our view that neither the corporate profit nor credit cycles have seen their respective depths."

 

REMINDER

If the current earnings data holds, this would be the third quarter of contracting corporate profits.

 

WHY IT MATTERS

Our Macro team continues to highlight that when corporate profits decline for two consecutive quarters or more the S&P 500 declines by at least 20%. 

 

Click chart below to enlarge

An Earnings Season Scorecard Update - EL profits

 

Performance? Where We're at...

 

In spite of truly ugly S&P 500 earnings in the last couple quarters, equities have rallied significantly off the February lows. However, this doesn't change our market views. We remain steadfastly bearish. Even with the recent pop, our favorite sector longs (Utilities, XLU) & shorts (Financials, XLF) continue to outperform. Here's the year-to-date scorecard:

 

An Earnings Season Scorecard Update - sector performance ytd

 


MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM

Takeaway: Even with poor U.S. economic data and profits sliding at domestic moneycenter banks, investors remained an optimistic bunch last week.

 MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM11

 

Key Takeaway:

The reflationary bounce that took hold February 12th persists, in spite of generally weak economic data from the U.S. and profit pressures at J.P. Morgan, Bank of America, and Wells. Bank CDS tightened globally, while the YTM on high yield fell -33 bps to 7.60%.

 

Our heatmap below is positive on the short term, negative on the intermediate, and mixed on long-term readings.

Current Ideas:


MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - Best Ideas Table 2

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 5 of 13 improved / 1 out of 13 worsened / 7 of 13 unchanged
• Intermediate-term(WoW): Negative / 4 of 13 improved / 5 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM15

 

1. U.S. Financial CDS – Swaps tightened for 12 out of 27 domestic financial institutions. Even with JPM, BAC, and WFC reporting sliding profits last week, their CDS tightened by -7 bps to 69, -8 bps to 98, and -5 bps to 58 respectively.

Tightened the most WoW: MS, MTG, JPM
Widened the most WoW: PRU, MET, LNC
Tightened the most WoW: LNC, JPM, GS
Widened the most MoM: MET, PRU, AIG

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM1

 

2. European Financial CDS – Swaps mostly tightened in Europe as investors clung to optimism last week. The median spread tightened by -14 bps to 121.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM2

 

3. Asian Financial CDS – Swaps tightened nearly across the board in Asia last week. IDB Bank of India was the only one to widen, by 4 bps to 229. Even Chinese swaps tightened, where data released last week showed 1Q16 economic growth slowing to 6.7%, the slowest quarterly growth since 2009.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Italian and Spanish swaps tightened the most, by -7 bps to 129 and by -7 bps to 93 respectively.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM18

 

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM3


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. In Brazil, where a congressional committee recommended that President Dilma Rousseff be impeached, swaps tightened by -48 bps to 342.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM16

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 33 bps last week, ending the week at 7.60% versus 7.93% the prior week.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 13.0 points last week, ending at 1871.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM6

8. TED Spread Monitor  – The TED spread rose 1 basis points last week, ending the week at 41 bps this week versus last week’s print of 40 bps.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM7

9. CRB Commodity Price Index – The CRB index rose 3.6%, ending the week at 174 versus 168 the prior week. As compared with the prior month, commodity prices have decreased -1.5%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 10 bps.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 2 basis points last week, ending the week at 2.00% versus last week’s print of 1.98%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM10

12. Chinese Steel – Steel prices in China rose 8.7% last week, or 229 yuan/ton, to 2,852 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM12

13. Chinese Non-Performing Loans Chinese non-performing loans amount to 1,274 billion Yuan as of Dec 31, 2015, 51.2% higher year-over-year.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM4

14. 2-10 Spread – Last week the 2-10 spread was unchanged at 102 bps. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM13

15. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread was unchanged at 41 bps.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


CHART OF THE DAY: A Look At U.S. Oil Production Since 1861

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more.

 

"... In the Chart of the Day today, we look at U.S. oil production going back to 1861. As the chart shows, 1970 has been, so far, the peak in domestic oil production at ~9.6 million barrels per day. Interestingly, 2015 was a close second with a production rate of some ~9.4 million barrels per day. Clearly, if prices had not started to decline in 2015, drilling and investment would have stayed at high levels and production grown beyond Hubbert’s peak in 2016."

 

CHART OF THE DAY: A Look At U.S. Oil Production Since 1861 - 04.18.16 chart


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