6 Macro Market 'Reality Check' Charts

Takeaway: Ignore what's going on around you at your own peril.

6 Macro Market 'Reality Check' Charts - bubble cartoon 11.02.2015


QUESTION FOR YOU ... What's changed?


That may be the most important question to ask yourself right now. Here's the answer. Nothing. Nothing has changed. And that's why we're holding the line on our bearish thesis. 


It was our non-consensus call heading into 2016 ... and we continue to flag the risk that U.S. economic growth continues its slide from 3% to 2% to 1%. Meanwhile, corporate profits continue to contract and are on pace for the third consecutive quarter of declines. (Click here for an update on Q1 earnings.)


More on macro markets this morning via Hedgeye CEO Keith McCullough in a note sent to subscribers. Take a look at Copper:


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



meanwhile, over to Europe...


After a reading of German business sentiment failed to meet expectations, Euro-zone permabulls continue to be battered by these ugly economic realities: 



That's why countries like Italy remain in crash mode. 



heading over to Asia...


Here's the Shanghai Comp Casino today:



... And Japan:



So, what should you own? As McCullough noted on The Macro Show today, Long Bonds (TLT, ZROZ, EDV) are "the most obvious position you should have" on U.S. growth slowing. Here's McCullough's incremental Monday morning update: 


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



Back to reality this Monday morning.

LB | Adding to Top of Retail Vetting List

Takeaway: We’re adding LB to the top of our Vetting List. Weighing the puts and takes.

We’re adding LB to our Vetting List. We think that it’s very likely to turn out to be a solid idea – it’s just not clear to us at this point if it will be a long or a short.  As the company comes off a year with virtually no earnings growth, there’s far too much speculation that FY2017 will be yet another.  It’s at peak productivity, peak margins, cycle-peak multiples on almost every metric, with only 3.7% of the float held short.  Add on questions surrounding changes in distribution of the Victoria’s Secret catalog – which is potentially disruptive – and we may very well see numbers come down again when LB reports earnings on May 18th.  On the flip side, brands matter in this space, and VS is arguably one of the top 3 brands in all of retail. Its product is extremely stable, steady, and almost always relevant to any consumer (in every gender) globally. Management has also earned the benefit of the doubt given its track record. 


But with all that said, in order to make a real call on LB, we need a real edge on some of the key value drivers, which we think will come in part with a detailed consumer survey of brand perception, and consumer buying patterns.  We plan to have this complete by the time we come out with our LB Vetting Book in the days before earnings. This book will, as the name suggests, Vet all the relevant puts and takes of the LB investment case. If we come away with a particularly strong opinion, what starts as a Vetting Book may evolve into a Black Book.  Stay tuned.


Details to come.


LB | Adding to Top of Retail Vetting List - 4 25 2016 Idea List

P | Thoughts into the Print (1Q16)

Takeaway: P is either dead money or a call option depending on where mgmt steers the model. We're on the sidelines; below is what we're keying in on.


  1. LOCAL TRAJECTORY? 4Q15 Local Adverting revenue growth decelerated from 52% y/y to 34%, which is more than just a red flag since that's lower than the rate that P onboarded Local sales reps in any of the last 5 quarters (as far back as we can calculate).  Maybe that was just a hiccup, but if not, the Local Radio Ad opportunity may be concentrated in the major markets that P has already entered, and the runway is likely a lot shorter than P believes.  That said, the Ad-Supported model may be fizzling out since P’s growth will become even more dependent on sell-through (i.e. ad load), which we estimate has historically pushed its users away (see second note below).
  2. INTERACTIVE TIMING? P expects to finalize interactive agreements with the labels by 4Q16 and go to market by 1Q17.  However, P is trying to negotiate additional terms beyond the interactive agreements.  That will ultimately slow negotiations down since both sides have to be careful not to set dangerous precedent for the Webcaster proceedings, which is very tough to achieve, and why there is a dearth of direct license agreements in the field today.  The above timing may prove ambitious; we’ll be keying in on any updates.
  3. NON-INTERACTIVE PRODUCT(S)? P suggested that it’s expecting “maybe 5% y/y” in sub revenue growth in 2016, which basically means the sub product is an afterthought until it hammers out new terms with the labels.  But P has the ability to create a new market overnight if it started tiering its non-interactive subscription offering today.  It's a considerable opportunity (first note below), but more importantly, would be a strategic defensive move (retention) that could actually help drive conversion for the pending interactive product (up-sell).  But the longer P waits to try and lock its users into some form of a subscription contract, the more potential subs it will cede to its competition, which are currently deploying aggressive promotional tactics (e.g. discounting).  We’re hoping for some indication that P plans to aggressively pursue the sub market today vs. whenever it's done jockeying over terms with the labels (see point 2).  For now, we remain on the sidelines.


Let us know if you have any questions or would like to discuss in more detail.


Hesham Shaaban, CFA
Managing Director



P | Fixing the Story
04/06/16 08:47 AM EDT
[click here]


P: New Best Idea (Short)
12/22/14 03:56 PM EST
[click here]

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

The Macro Show with Keith McCullough Replay | April 25, 2016

CLICK HERE to access the associated slides.

An audio-only replay of today's show is available here.

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

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