My Thoughts On This Lousy GDP Report

Takeaway: We're the only firm to have called the slow-down from its 2015 cycle peak.

This morning's bad 0.5% US GDP report didn't surprise us. It didn't surprise the Long End of The Curve (Long Bond) either. We're the only firm to have called the slow-down from its 2015 cycle peak.

My Thoughts On This Lousy GDP Report  - GDP cartoon 10.29.2015


Macro markets have been discounting GDP #GrowthSlowing for months now. That's why the Fed has pivoted back to dovish, devaluing the Dollar, in a last gasp hope to "reflate" asset prices. 


In the next 3 months, we think the probability is at its highest point that US GDP goes negative sequentially (Hedgeye Predictive Tracking Algo is currently forecasting +0.3% QoQ SAAR for Q2). While many are trying to make the argument (Bloomberg, CNBC, etc.) that GDP "doesn't matter" like it used to ... we've never traveled with that conflict of interest crowd, and we won't this time either. (See Shame On You Mark Zandi for more on this).


Instead, we'll remind you that there is an epic amount of credit cycle risk associated with the profit cycle going to negative on a year-over-year basis. And tell you to short both Junk and High Yield (again).


As my colleague Darius Dale wrote in a note to institutional subscribers today,


Assuming Q1 isn’t revised in any material way, our forecast for 1H16E represents the slowest pace of domestic economic growth on a multi-quarter basis since 2H12. Any downside surprises from there will surely translate to renewed recession fears.


Stay long The Long Bond, Utilities, Gold, MCD, etc.

Cartoon of the Day: High Finance

Cartoon of the Day: High Finance - Easy money cartoon 04.28.2016


This one speaks for itself.

REPLAY: Healthcare Earnings Takeaways | $ATHN $HOLX $MD $ZBH

WAtch the replay below. click here to access the associated slides.



After a busy week of earnings, our Healthcare analysts Tom Tobin and Andrew Freedman provided a recap and takeaways of our top ideas athenahealth (ATHN), MEDNAX (MD), Hologic (HOLX) and Zimmer-Biomet (ZBH).



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A Look At Wall Street's Ex-Energy Earnings Fallacy

Takeaway: Well into earnings season, six of ten S&P 500 sectors have negative earnings growth.

A Look At Wall Street's Ex-Energy Earnings Fallacy - earnings cartoon 04.12.2016


It's earnings season.


Permabulls on Wall Street are terribly fond of the narrative that "Ex-Energy" earnings look great! We understand this proclivity, Energy earnings are terrible (down -132% so far). Just look at the chart below.


Click to enlarge

A Look At Wall Street's Ex-Energy Earnings Fallacy - earnings q1


But what this narrative lacks is cohesiveness. In fact, six of ten S&P 500 sectors have negative earnings growth so far, with Financials (-14.1%) and Materials (-14.8%) companies putting up double-digit earnings losses.


In other words, Energy has company.


Here's a thought... Since permabulls are more than happy to strip battered sectors out of earnings, why not (for the sake of consistency) just go ahead and strip out the performance of Energy, Financials and Materials companies from the recent market rally as well? Oh yea, because those sectors have led the pack. 


Bottom Line: Stripping out sectors of the S&P 500 to fit some permabull narrative is as nonsensical, as it is wrong. 

Do Earnings Matter?

We threw up a note for Materials subs earlier this week with a Q1 earnings update and feel it is important to continue pounding the table on earnings and current multiples from a broader market perspective.


Now that the S&P 500 is going on 3 consecutive quarters of negative Y/Y earnings growth, forward looking - earnings expectations have been taken down – no surprise…


Given the fact that the market is trading at peak forward multiples again, is an earnings beat a positive in a declining earnings, peak multiple environment? The degree of late-cycle corporate gamery (buybacks and M&A) and unprecedented earnings manufacturing is widely discussed and understood, and we assume it gets factored into analyst models.


So far this earnings season:

  • S&P 500 Earnings are down -5.6% Y/Y
  • 6/10 sectors have comped down bottom line
  • 7/10 have comped down top line

Looking at expectations, 6/10 sectors have missed top-line expectations, but every sector has blown out bottom line expectations (see chart below). Despite that fact that everyone knows earnings metrics are being manufactured aggressively, actual prints are far exceeding expectations. 


Do Earnings Matter? - Comps   Beat.Miss


We find it hard to entertain “forward expectations have undershot to the downside” arguments when earnings growth is down -5.6% Y/Y, 6/10 sectors have missed top line, and every sector has exceeded bottom-line expectations to get to that -5.6% number. S&P earnings have beat estimates by 4.2% in aggregate.


AND, with the shift in financial reporting leeway, we can assume that today’s current peak multiple could be higher than it already is from a normalized historical standpoint. So, the most important question to ask is Can you find a catalyst to buy at peak multiples into what could be a fourth consecutive quarter of negative Y/Y earnings growth in Q2?.


The broader market has been trending higher as of late, but as DD outlined in Reflation Reversal Risk , the policy catalyst will be less muted than it was in January/February if that's what you're looking for – It’s mostly a matter of psychology and positioning, outlined in the note. Below we show two slides from our macro deck that outline the easiness/difficulty of Q1 and Q2 comps. The takeaway is that easy comps won’t be in front of the market until Q3/Q4 if you're looking for a reason to buy on earnings:


Do Earnings Matter? - Q2 2016 Comps


Do Earnings Matter? - Corporate Profit Peak


To sum up the cycle view, corporate profits and operating margins peaked in 2H 14 are now poised for what could be 4 quarters of negative Y/Y earnings growth, so despite a psychological boost from a “beat” the rate of change in corporate profitability is meaningful (visual below) and continues to decelerate with the market buying at peak multiples.


Do Earnings Matter? - S P 500 NTM Multiples



CME: We Are Removing CME Group From Investing Ideas

Takeaway: Please note we are removing CME Group from Investing Ideas (long side) today.

"I thought there was going to be more upside to the numbers than there was," Hedgeye CEO Keith McCullough wrote today. "The market reaction looks right on that (companies that beat big go up big – see FB). So I’ll remove it today, as I think the U.S. stock market broadly has a ton of risk pending May-July." 


CME: We Are Removing CME Group From Investing Ideas - cme group


Earnings analysis via Financials analyst Jonathan Casteleyn:


"CME Group had solid earnings results this week with revenue up +11% and earnings up +18% year-over-year. Investors will be hard pressed to find similar growth in the Financials sector with interest rates that continue to compress and very low banking and trading activity. In contrast, the average result for Financial companies in the S&P 500 thus far in earnings season has been top line revenue declines of -3.3% with earnings decay of -14.5%. With 2Q16 trading volumes up +4% year-over-year to start the new quarter, CME will likely put up another solid quarter and out comp the rest of the sector again."


Click to enlarge

CME: We Are Removing CME Group From Investing Ideas - s p earnings

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