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




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 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. 

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 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


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.


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.


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


Top Long Ideas

Company Ticker Sector Duration

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.


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.


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


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



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

Lou Holtz                    


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