CHART OF THE DAY: Earnings Season Reality Check

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.


"... Do (or did) you believe that growth would slow this fast, from 3% to 2% to 1%?


Or did you believe in it so clearly that you knew that the Financials (XLF) would start Earnings Season with the following reality:

  1. 32 of 90 “Financials” in the SP500 have reported their respective quarter
  2. Aggregate Earnings (non-GAAP!) are currently -17.0% year-over-year
  3. Financials (XLF) had their “reflation” rally now too (back to -1.2% YTD)"


CHART OF THE DAY: Earnings Season Reality Check - 04.25.16 chart

Ask Me To Believe

“Whereas religion asks us to believe in something, money asks us to believe that other people believe in something.”

-Yuval Noah Harari


I’m back in the saddle this morning and I have to make a confession. I did a dangerous thing for the past 10 days. I shut off my screens and did a lot of reading and thinking. Dangerous if you want me to believe the consensus that growth has “bottomed”, that is…


Update: it hasn’t.


If the economic (GDP falling to 1%) and profit cycle (SP500 Earnings currently -8.1% year-over-year with 130/500 companies reporting) data wasn’t so bad, those begging for Dovish (Fed) Dollar Devaluation wouldn’t believe in buying commodities/stocks here either.


Ask Me To Believe - central bank cartoon 04.22.2016


Back to the Global Macro Grind


For those of you who haven’t had large positions in #GrowthSlowing since the 1st of the year, last week Mr. Macro Market provided you what might be the last big buying opportunity before US GDP goes from 1% to something negative:


  1. US 2yr Treasury Yield bounced +8 basis points last week to 0.82% = down -23 basis points YTD
  2. US 10yr Treasury Yield bounced +14 bps last week to 1.89% = down -38 bps YTD
  3. Utilities (XLU) dropped -3.2% (worst week of the year) to +9.4% YTD


So, in the Hedgeye Asset Allocation Model, I’m taking our Fixed Income (long term bonds and safe/liquid equity yields that look like bonds) exposure up to 91% of my max allocation this morning.


Do (or did) you believe that growth would slow this fast, from 3% to 2% to 1%?


Or did you believe in it so clearly that you knew that the Financials (XLF) would start Earnings Season with the following reality:


  1. 32 of 90 “Financials” in the SP500 have reported their respective quarter
  2. Aggregate Earnings (non-GAAP!) are currently -17.0% year-over-year
  3. Financials (XLF) had their “reflation” rally now too (back to -1.2% YTD)


Since permanently bullish US stock market storytellers want to go “Ex-Energy” on the profit story (but not on the contribution of Energy Stocks to the “reflation” rally), to believe the bulls from this price you:


  1. Have to look at corporate profits “Ex-Financials” (90 Financials in the SP500 vs. 40 Energy companies)
  2. Have to start begging the Fed for another “rate hike” (like they did when they bought the Financials in December)


Rate hike? Man, wouldn’t that mess up the Dovish (Fed) Dollar Devaluation story consensus is rolling with right now!


Here are the current TRENDING (90-day inverse correlations) of a Down Dollar (USD Index) of -3.6% YTD:


  1. SP500 -0.53
  2. CRB Commodities Index -0.88
  3. Oil -0.70


In other words, with:


  1. SP500 +0.5% last week to +2.3% YTD
  2. CRB Index +3.5% last week to +2.0% YTD
  3. Oil (WTI) +4.8% last week to +7.4% YTD


The Hedgeye case for #GrowthSlowing has to be really right to get the Fed even moarrr dovish from here and power the components for the “reflation” squeeze higher. Squeeze? What are you, an idiot? You aren’t long a ton of illiquid and levered MLPs?


Forget being long Energy stocks (but maintaining “Ex-Energy” as a narrative) that was +5.5% (XLE) last week, MLPs were +10.9%, baby! Yeah, you have to forget that these stocks put a lot of people out of business in the last year to get with the program and just believe.


Some other things (that we don’t like) that really ramped while I was out last week were:


  1. Japanese Stocks (Nikkei) +4.3% on the week to -7.7% YTD
  2. Italian Stocks (MIB Index) +2.4% on the week to -12.4% YTD
  3. Greek Stocks +5.4% on the week to -4.0% YTD


So, in the Hedgeye Asset Allocation Model, I’ll also reiterate a net 0% asset allocation to International Equities this morning. Being out of European and Japanese stocks in this year has been as important a call as our call to short the Nasdaq (QQQ) on March 31, 2016.


Ah, man. Did you have to go there dude and remind people that the Nasdaq closing down -0.6% last week (down -2.0% YTD) was second only to Chinese stocks (down another -3.9% on the week to -16.4% YTD) of the major indexes in the losing money column?


Chinese demand hasn’t “bottomed” inasmuch as #LateCycle Big Cap “Tech” hasn’t stopped slowing from last year’s cycle peak. Tech does not look good. Ask the chart chasers what they believe after last week’s move in Google (GOOGL) and Microsoft (MSFT) on that.


Don’t ask me. I’m just the macro guy reiterating #TheCycle call and asking you to believe what I have for the past 9-10 months.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.70-1.90%

SPX 2055-2110


Nikkei 151

VIX 12.82-18.22
USD 93.90-95.37
YEN 107.89-111.91
Oil (WTI) 40.35-44.39


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Ask Me To Believe - 04.25.16 chart

Yen, Copper and UST 10YR

Client Talking Points


The Yen signaled immediate-term TRADE oversold within its bullish intermediate-term TREND (Friday’s Real-Time Alert signal); up +0.5% to start the week has the Nikkei fail @Hedgeye TREND resistance, -0.8% overnight ahead of Fed and BOJ meetings.


One of the many proxies to pay attention to right now on the “reflation” hope vs. the #Deflation TREND  -0.25% this morning after failing to breakout above its MAR high. $2.31/lb Copper and $46 WTI are big resistance levels for us.


It was a bad week for Long Bond Bulls or the last big buying opportunity of Q2? We say buyem (again) – and buy anything that looks like a safe yield (XLU, EDV, ZROZ) with the UST 10YR tapping the top-end of a 1.70-1.90% immediate-term risk range.


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

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

McDonald's (MCD) released earnings Friday reporting strong numbers across every important metric. Consider, for example, Q1 EPS $1.23 versus FactSet's consensus estimate of $1.16. Same-store sales in the U.S. were +5.4% vs consensus +4.4%. Revenue in the U.S. was $2.02B vs consensus $1.98B. Company-operating margin was 15.4% vs consensus 14.9% and year-ago 14.3%. We are sticking with our $150 target and believe that $7.00 in EPS for 2017 is not out of the question.


CME Group (CME) which reports on April 28th still has the opportunity for an earnings beat with the +13% year-over-year volume increase coinciding with a +2% increase in pricing power. We have a 1Q16 estimate at $1.18, +3% ahead of consensus. CME stock has positively reacted on earnings the past 5 announcements, rising between +1.5-3.7%.


The market is currently pricing in a rate hike but not until … late 2017. So if you’re looking for reasons to buy the market at all-time highs, don't expect a boost from incremental Fed policy. To be clear, the dovish Fed commentary of late is a direct result of U.S. growth slowing. Friday’s manufacturing PMI continued its downward trend (it peaked in rate of change terms in August 2014). Clearly, the market gets decelerating growth, which is why Utilities (XLU) are leading equity sector divergences YTD (+9.3%) and the U.S. Treasury 10-year yield down 0.35% over that same period. (That translates into TLT +6.5% and ZROZ +10.2% year-to-date.)


With that being said, the alpha on our long utilities and Long Bonds (TLT & ZROZ) vs. short Junk Bonds (JNK) position has gone against us in the last two months. Notably, we have no direct exposure to commodities or commodity-related sectors, but being short of JNK amidst a huge rally in commodities has not been a good position. Much of the beaten down resource-leveraged credit has rallied.

Three for the Road


In today's Early Look "Ask Me To Believe" I review the bear case on #TheCycle and Nasdaq $QQQ



Build your own dreams, or someone else will hire you to build theirs.

Farrah Gray


77.6 million Americans live in ZIP codes where Amazon has begun to offer Prime free same-day delivery.

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 80.45%
  • SHORT SIGNALS 78.38%

REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.


Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)





1. About Everything | The Golden Age of Home Improvement (4/23/2016)



In this complimentary edition of About Everything, renowned demographer and Hedgeye Sector Head Neil Howe explores why consumer spending on home improvement is outstripping GDP growth and the key demographic trends behind this shift. (Click here to read the associated About Everything writeup.)


2. Under 60 Seconds: Starbucks Earnings Report | $SBUX (4/22/2016)



Hedgeye Restaurants analyst Howard Penney highlights three key points from Starbucks’ lackluster earnings report. Earlier this month, Penney advised our subscribers to short the stock.


3. Dale: ‘Brexit Is The #1 Risk In The U.K.’ (4/22/2016)



With the U.K. divided over whether to stay or leave the European Union, Hedgeye Senior Macro analyst Darius Dale discussed the potential impact on the pound, equities and consumer/business confidence on The Macro Show this morning.


4. REPLAY | Healthcare Earnings Preview of Top Ideas and Q&A - $ZBH $ATHN $MDRX $MD $HOLX $ILMN (4/21/2016)



In this HedgeyeTV live Q&A from earlier this week, our Healthcare analysts Tom Tobin and Andrew Freedman provide key earnings previews ahead of healthcare earnings season.


Topics included:

  • ZBH: Read-through from SYK and JNJ earnings
  • ATHN: Tracker Update, will they miss the doc count?
  • MDRX: latest thoughts on attrition
  • MD: Maternity Tracker Update
  • HOLX: Facility Penetration by MSA
  • ILMN: Opportunity or is the end just beginning?

Click here to access the associated slides.


5. U.S. Economy Enters Most Difficult Part of Cycle (4/20/2016)



In this brief excerpt from The Macro Show, Hedgeye Senior Macro analyst Darius Dale discusses how the U.S. economy has entered the toughest part of the cycle and why our growth estimate remains so bearish.


6. Eye on Earnings: Brinker International $EAT (4/19/2016)



Hedgeye's Restaurants team shares their three conclusions from Brinker's earnings report.


7. Cruise Liner Earnings: What We’re Most Focused On (4/19/2016)



In this brief excerpt from The Macro Show this morning, Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan highlights the key issues his team is most focused on right now as we enter earnings season. 


8. $25 or $50 Oil? Here’s What McMonigle Says (4/18/2016)



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. 

This Week In Hedgeye Cartoons

Our cartoonist Bob Rich captures the tenor on Wall Street every weekday in Hedgeye's widely-acclaimed Cartoon of the Day. Below are his five latest cartoons. We hope you enjoy his humor and wit as filtered through Hedgeye's market insights. (Click here to receive our daily cartoon for free.)




1. Just Believe (4/22/2016)

This Week In Hedgeye Cartoons - central bank cartoon 04.22.2016


Central banker credibility is slowly waning.


2. A Closer Look At NIRP (4/21/2016)

This Week In Hedgeye Cartoons - negative interest rate cartoon 04.21.2016


BOJ governor Haruhiko Kuroda has been defending the central bank's negative interest rate policy recently, even stressing his readiness to expand monetary policy still further. "Good luck with that," Hedgeye CEO Keith McCullough wrote recently. "These guys just don't get it. The #BeliefSystem is breaking down."


3. Painting Themselves Into A Corner (4/20/2016)

This Week In Hedgeye Cartoons - Central bankers in corner cartoon 04.20.2016


The #BeliefSystem that central planners can arrest economic gravity is breaking down.


4. A Holy Mess (4/19/2016)

This Week In Hedgeye Cartoons - Brazil cartoon 04.19.2016


Amid the impeachment process of Brazilian President Rouseff, Brazil's Bovespa Index is up +39.4% over the past 3 months. Setting aside widespread corruption in the country, Hedgeye Senior Macro analyst Darius Dale had this to say about Brazil in this morning's Early Look, "We think Brazilian capital and currency markets are priced to perfection and anticipate another flush down alongside other reflation assets over the intermediate term."


5. No Oil Freeze (4/18/2016)

This Week In Hedgeye Cartoons - OPEC cartoon 04.18.2016


On Friday, Hedgeye colleague and Potomac Research Group Senior Energy analyst Joe McMonigle wrote, "We believe there is no chance Saudi Arabia reverses its position and agrees to freeze production on Sunday," after Iran announced it would skip the much-hyped oil "freeze" meeting in Doha. That proved prescient. Over the weekend, OPEC members, including Saudi Arabia, and non-OPEC countries, like Russia, failed to reach an agreement to freeze oil production.

The Week Ahead

The Economic Data calendar for the week of the 25th of April through the 29th of April is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - 04.22.16 Week Ahead

Early Look

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