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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.)

 

Enjoy!   

 

1. McCullough: What If Amazon & Facebook Can’t Go Higher? (4/29/2016)

 

 

In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough and Retail analyst Alec Richards respond to a subscriber’s question about whether companies like Amazon and Facebook can continue to prop up equity markets.

 

2. REPLAY | Healthcare Earnings Takeaways: $ATHN $HOLX $MD $ZBH (4/29/2016)

 

 

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

 

3. About Everything | The Surge in Mental Health Services (4/28/2016)

 

 

In this complimentary edition of About Everything, renowned demographer and Hedgeye Sector Head Neil Howe discusses why "mental health services spending is riding a long-term attitudinal shift that has brought mental health issues out into the open." Howe explains why it's happening and explores the broader societal and investing implications.

 

Click here to read Howe’s associated About Everything piece.

 

4. Washington On Wall Street: Handicapping the ‘Acela Primary’ (4/26/2016)

 

 

Potomac Research Group Chief Political Strategist JT Taylor joins Hedgeye Director of Research Daryl Jones to discuss today’s so-called "Acela primary" bringing voters to the polls in Pennsylvania, Connecticut, Rhode Island, Maryland and Delaware.

 

5. Can Fed Stop Recessionary Selloff? (4/26/2016)

 

 

In this animated excerpt from The Macro Show, Hedgeye’s Keith McCullough, Darius Dale and Neil Howe respond to a subscriber’s question about whether the Fed can continue propping up the stock market as economic conditions deteriorate and a recession knocks on the door.

 

6. McCullough: You’re ‘Crazy’ Buying Stocks Now (4/25/2016)

 

  

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why he’s not going to be the “crazy one” buying U.S. stocks at this point.


Investing Ideas - Levels

Takeaway: Current Investing Ideas: DE, HBI, LAZ, MDRX, FL, NUS, JNK, TIF, WAB, ZBH, ZROZ, XLU, MCD, GIS, TLT

Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction Investing Ideas.

 

Enjoy the rest of the weekend.

LEVELS

Investing Ideas - Levels - levels 4 29

 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

Retail | Late Cycle Lease Activity

Takeaway: Chgs in retail lease duration clearly supports a Late Cycle view. Lease terms are getting stretched to find otherwise scant margin dollars.

With 10k season largely over for the retailers, we can see how the underlying lease profile is changing for retail (we don’t get this disclosure in Qs or 8ks – only annually). The punchline is the we’re seeing lease terms stretch to a level we have not seen since the end of the last economic cycle. While not toxic, this is definitely a level that suggests to us that the group is either a) unit growth starved, or b) in search of margin – by stretching out the duration of its lease portfolio.

 

What does it mean to ‘stretch out the duration’?

First off, let’s calculate said ‘duration’. It really comes down to the ratio of rent minimums carried off balance sheet that are required to be paid over the next 1-2 years compared to what a company is obligated to be pay 5+ years out. Let’s not get too focused on the periods used, as the trajectory will be roughly the same for a given company regardless of the period in question.

For the retail industry as a whole – which is made up of 84 companies – we have a weighted average duration of 7.6 years. That’s meaningless on its own. We have to look at this relative to itself, which was only 7.0 years as we exited the Great Recession. It might not sound like much, but look at the chart below. 

Retail | Late Cycle Lease Activity - 4 20 2016 chart1

 

What Does It Mean When The Duration is Headed Higher?

Basically, it means a company is signing leases it really cannot afford. To avoid losing the property to a competitor, it is either…

a) Buying Into Escalating Rent Trajectory.  This means signing leases with low initial payments, but high (usually dd) rent escalators in the outer years. That way it can book revenue, low rent costs, and worry about paying ‘real’ market rents sometime down the road. This is akin to a family that makes $90,000 a year, and takes out an interest-only 5-yr arm in order to buy that $2mm ‘dream home’ (that probably needs work) in Summit NJ.

b) Buying Time. This basically means signing a lease years before the competition would even consider it. Usually a company will sign about 2-years out from the property open date. 3-years max. But sometimes we’ll see ‘growth’ retailers without the cash flow to compete for premium properties sign up for a property that’s not available for another 4-5 years. It’s pretty arrogant that any company – even the best retailer around – can predict which plot will be relevant more than one Presidential term down the road. Importantly, there’s no way of knowing who the co-tenants will be. So while you think you’re moving next to a Restoration Hardware or Tiffany, you end up next to Olli’s Bargain Basement or Hibbett Sports. This ‘risk’ manifests itself in a growing duration – and while it is a hypothetical number, it represents margin risk that is very real sometime in the not-too distant future.

 

What Happens For Those Companies Where The Lease Duration is Headed Lower?

Simply put, reverse all the negatives I just called out. A lower lease portfolio duration means that…

a) Pay More Today, Owe Less Tomorrow. That means long term liabilities come down, and current payments go up. Most would call this bearish as it relates to hitting estimates. But when a management team opts to pay more over the near-term instead of being up against a wall in 3-5 years, we call that proactive risk management. That’s akin to paying off high interest debt, or taking a 30-year fixed mortgage to a 15-year loan – higher payments, but lower interest cost, and lower long-term risk.

b) One point worth noting is that this would also happen to a company that has just run out of growth or is closing stores with longer-dated durations. Acquisitions can just as easily skew these numbers one way or another.

 

COMPANY CALLOUTS

 

Here’s an overview of the implied duration by retailer. One obvious pattern is that the specialty mall-based retailers hover between 5-6 years, while the department stores are almost all twice that level. Of particular note is Target at 20 years, and Kohl’s is 23 years! Let’s be clear about this…KSS is managing its liability profile in a way that assumes it is still actually selling product in its stores in another 20 years. We’d take the ‘under’ on that one.

 Retail | Late Cycle Lease Activity - 4 20 2016 LD CHART2

 

 Retail | Late Cycle Lease Activity - 4 20 2016 LD CHART3

 

 Retail | Late Cycle Lease Activity - 4 27 2016 Scatter chart4


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

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.)

 

Enjoy!

 

1. A Look At U.S. Economic Growth (4/29/2016)

This Week In Hedgeye Cartoons - growth escalator cartoon 04.29.2016

 

We don't believe the permabull's "all is good" narrative about the U.S. economy. Our forecast for the 1st half of 2016 represents the slowest pace of US domestic economic growth since the back half of 2012. 

 

2. High Finance (4/28/2016)

This Week In Hedgeye Cartoons - Easy money cartoon 04.28.2016

 

This one speaks for itself.

 

3. Choppy Waters (4/27/2016)

This Week In Hedgeye Cartoons - Dollar cartoon 04.27.2016

 

Permabulls are desperately hoping and praying that a dovish Janet Yellen will continue devaluing the U.S. Dollar to keep propping up stocks.

 

4. The Elephant In The Room (4/26/2016)

This Week In Hedgeye Cartoons - GDP cartoon 04.26.2016

 

We think U.S. GDP will come in significantly worse than even downwardly-revised macro consensus or the Fed is currently forecasting.

 

5. Earnings Jack-In-The-Box (4/25/2016)

This Week In Hedgeye Cartoons - earnings cartoon 04.25.2016

 

"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," Hedgeye CEO Keith McCullough wrote in today's Early Look.


About Everything: The Great Productivity Slowdown

Believe It When You See It: Productivity Growth is Slipping.

 

Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe explains why the much-debated productivity shortfall – amounting to $3 trillion – is "simply far too vast to pin on mismeasurement." Howe suggests, "It’s time to take the productivity slowdown seriously" and explains the broader implications for investors.

 

About Everything: The Great Productivity Slowdown - stop watch

WHAT’S HAPPENING?

 

For years now, Silicon Valley techno-optimists have been telling us that our dismal productivity numbers are wrong. They’ve said that technological gains are enriching our lives in ways that are simply impossible to measure.

 

On the surface, they appear to have a point. After all, how could innovations like robotics, AI, and the sharing economy not boost productivity? Plus, as tech heavyweight Erik Brynjolfsson likes to point out, Americans have access to ever-more free web services that aren’t counted by GDP. I’ll be the first to admit it: I’m blown away by Wikipedia.

 

About Everything: The Great Productivity Slowdown - neil howe callout

 

Well, the latest in a series of Brookings Institution reports (see especially the paper by economist David Byrne et al.) blows these arguments out of the water. It turns out that the vast shortfall in recent real GDP growth due to falling productivity—amounting to $3 trillion—is simply far too vast to pin on mismeasurement.

 

So yes, those dolorous productivity numbers you see in the media should be taken seriously. With the single exception of the dot-com revival (1995-2004), real worker output per hour has been decelerating ever since the end of the post-WWII American High. 

 

About Everything: The Great Productivity Slowdown - neil howe 4

 

The past few years have been particularly dour. After peaking at over 3% per year in the early ‘00s, productivity growth over the last decade has been closer to 1%, with plenty of quarters of negative productivity growth mixed in.

 

About Everything: The Great Productivity Slowdown - neil howe 5

 

Brookings thoroughly debunks Silicon Valley’s mismeasurement hypothesis. First, the productivity decline has taken place across all industries, not just IT. Additionally, IT employs too small a share of our workforce for mismeasurement to have a large positive impact on real GDP. Further, if the mismeasurement of high-tech creativity were the main story, we wouldn’t be seeing a global productivity slowdown spanning countries at vastly different stages of technological advancement. 

 

About Everything: The Great Productivity Slowdown - neil howe 6

 

The techno-optimists believe that we’ve been wildly overestimating inflation, and that—correctly measured—the “real” living standard of the typical American has actually been rising swiftly in recent years. Really? Try selling that celebratory news to Bernie and Trump supporters. (Personally, I’ve never met a techno-optimist whose income is anywhere near that of the median American adult who never completed college. And these comprise roughly three-quarters of all adults.)

WHY IT’S HAPPENING: DRIVERS

 

It’s time to take the productivity slowdown seriously. Here are some possible explanations.

 

Declining investment. Companies aren’t spending on capex like they used to—and it shows. A quick look at BLS aggregate hours and BEA capital stock data shows that, since 2010, capital intensity (the ratio of capital to hours worked) has actually declined.

 

About Everything: The Great Productivity Slowdown - neil howe 7

 

Former Fed Vice Chairman Alan Blinder attributes a whopping 70 percent of the productivity slowdown since 2010 to weak investment.

 

Baumol’s cost disease. Industries with slow productivity growth are making up an ever-greater share of employment. Health care, education, and retail have together ballooned to roughly a third of total U.S. worker hours—roughly five times greater than the manufacturing share, which continues to shrink.

 

A lack of true innovation. Prominent analysts like Tyler Cowan and Robert Gordon (check out the latter’s new best-seller, The Rise and Fall of American Growth) say that the technological innovations we’re seeing today are much less impactful than the foundational discoveries of the late-19th and early-20th centuries. After all, what’s Facebook, Twitter, or Tinder compared to electricity, automobiles, hydraulics, or refrigeration?

 

If you think your kids pout when you take away their mobile phone, try taking away any processed foods, any hot water, any illumination after dark, and any motorized help getting to school. They may yet come around to Robert Gordon’s point of view.

 

About Everything: The Great Productivity Slowdown - neil howe callout 2

 

Waning business dynamism. Many economists suspect that the American economy is also suffering from declining “dynamism,” as measured by a variety of risk-taking and mobility indices.

 

For example, startup activity is down. The U.S. firm entry rate is barely half of what it was in 1978, and over the last decade, for the first time ever recorded, more firms disappeared than were created. 

 

About Everything: The Great Productivity Slowdown - neil howe 8

 

We’re also seeing a stagnant job market. The job reallocation rate (job creation plus job destruction) has fallen steadily since 1990.

 

About Everything: The Great Productivity Slowdown - neil howe 9

 

Workers of all ages are also moving between jobs a lot less than they used to.

 

Some economists suggest that declining dynamism may be symptomatic of a deeper problem—declining competitiveness. Indices of market concentration by industry have risen substantially over the past 15 years.

 

About Everything: The Great Productivity Slowdown - neil howe 10

 

Exhibit A: The total number of listed companies has dropped by half over the past 20 years, while the Fortune 500 (or the Fortune 100) account for an ever-growing share of total U.S. corporate revenues.

 

Demographic aging. An aging society is inherently less dynamic, since older adults work less—and aren’t as entrepreneurial—compared to their younger counterparts. What’s more, the youth generation that should be starting its own businesses, Millennials, simply aren’t. For better or worse, Millennials are risk-averse. Most would rather take a secure, benefit-laden “position” at a large firm than go it alone and risk abject failure.

BROADER IMPLICATIONS

 

Silicon Valley is waiting for productivity gains to “kick in”—but that’s no sure thing. Techno-optimists cite a “lag” between the time when a new technology arrives and the moment it starts boosting productivity. It took 40 years for electricity to result in productivity gains, after all.

 

So is it just a matter of time? Not if you believe the markets. The real yield-to-maturity on a 30-year Treasury bond sits under 1 percent today, meaning that the outlook of long-term investors on productivity is every bit as bearish as the economists.

 

Work culture is growing ever-more inclusive. American corporations don’t hire outsiders like they used to, instead preferring to send their own to corporate universities and promote from within. The business world’s new emphasis on “cultural fit” may help explain why worker churn is lagging.

 

Declining dynamism may reflect declining competitiveness—and explain a central paradox of today’s ZIRP/NIRP era. When you consider that businesses and workers are stuck in place, it suddenly makes some sense why we’re seeing the unprecedented combination of near-zero interest rates, soaring valuations, high ROR on book-value assets, and tepid investment. It doesn’t pay to fight your way into a market where only a few privileged incumbents dominate—no matter how little it costs to borrow.

TAKEAWAYS

  • Recent research vindicates the nerdy economists over the “next big thing” techno-optimists in the productivity debate. The slowdown is happening. It’s a serious threat to our economic future.
  • Long-term market expectations: The real yield on 30-year bonds (nominal minus expected inflation) may be a rational long-term assessment—not just a spasmodic and temporary reaction to global QE. Feeling lucky, kid? Go ahead, short those bonds.

  • Investors should assess how weak productivity growth may depress the long-term return on their portfolios—and elevate the popularity of radical political programs among voters who have lost patience with stagnant living standards.

The Week Ahead

The Economic Data calendar for the week of the 2nd of May through the 6th of May is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.

 

CLICK IMAGE TO ENLARGE.

The Week Ahead - 04.29.16 Week Ahead


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