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Setting the Record Straight On Our Market Calls

Setting the Record Straight On Our Market Calls - bear winking

 

The trolls are back! 

 

Since equity markets bottomed in February, a growing chorus of market prognosticators -- from outright haters to permabulls and everyone in between -- have been chirping our calls from the cheap seats.

 

Let's set the record straight.

 

We still believe U.S. equities are headed for a crash. Myriad macro market risks loom ever larger over the U.S. economy (see corporate profits and flagging economic growth). These risks are as relevant today as they were earlier this year when the market sold off. They have not gone away.

 

Set aside for a moment that the permabulls most dismissive of our bearish market calls got run over by the selloffs we warned subscribers about in July and again in December. Let's take a look at some cold hard facts. In particular, how our top Long and Short ideas we recommended heading into 2016 have performed.

 

Long The Long Bond (TLT):

 

Setting the Record Straight On Our Market Calls - tlt v s p 4 18

 

LONG UTILITIES (XLU), SHORT FINANCIALS (XLF)

 

Setting the Record Straight On Our Market Calls - xlu v xlf 4 18

we'll stick with what's working.


Why We Think Agrium Has Substantial Downside | $AGU

Takeaway: We believe Agrium has substantial downside from here.

Our analysts Jay Van Sciver and Ben Ryan presented the bear case on Agrium (AGU) last Wednesday with a detailed 90-slide black book during an institutional conference call. To summarize, we believe the retail business is misunderstood and subject to short-termism from an analysis perspective.

 

In our view, operating margins in the retail business—which have been stable post-recession—will contract meaningfully as the sector continues its long cyclical downturn. We expect margin and top line pressure at Agrium's retail unit to expose the overvaluation of this business segment by the market.

 

Below are some relevant slides highlighting why we think Agrium has significant downside. 

 

**Email sales@hedgeye.com for the deck and/or related inquiry.

 

Click chart to enlarge

Why We Think Agrium Has Substantial Downside | $AGU - z jay 2

 

Why We Think Agrium Has Substantial Downside | $AGU - z jay 3

 

Why We Think Agrium Has Substantial Downside | $AGU - z jay 4

 

Why We Think Agrium Has Substantial Downside | $AGU - z jay5


The Latest Victim Of Europe's Nasty Economic Malaise

The Latest Victim Of Europe's Nasty Economic Malaise - Economic growth cartoon 10.20.215

 

Gone are the days of proclaiming a single ailing economy the "sick man of Europe." Across the Eurozone, countries are plagued by the same inexhaustible disease, #GrowthSlowing.

 

Don't expect that to change anytime soon. The latest news out of Spain simply confirms our thinking about lackluster European growth. Here's the update from our Macro team in a note sent to subscribers earlier today:

 

"Spain's Economy Minister Luis de Guindos lowered the country's 2016 GDP forecast to 2.7% versus 3.0% and the 2017 forecast to 2.4% versus 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."

 

We expect things in Europe to get a lot nastier as this evolving reality continues to play out.

 

 


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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. 


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 large

 

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

 


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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