5 Not So Insignificant Markets In Full-Blown Crash Mode

5 Not So Insignificant Markets In Full-Blown Crash Mode - Stocks crash test dummies cartoon 02.18.2016 


Around the world, equity markets are teaching investors some subtle risk management lessons. Namely, blindly buying cheap stocks is not always a recipe for success. When economic fundamentals deteriorate, cheap stocks get cheaper.


Case in point, this morning, the European Commission warned of slower Euro-zone growth, while inflation will remain subdued. That put a healthy handicap on European equity markets, many of which remain in crash mode.


Like Spain:






... And Italy:



Meanwhile, over in Asia...


While you were sleeping, the often overlooked reality playing out in Chinese equities just got worse.



By the way...



The Nikkei is still in crash mode.


5 Not So Insignificant Markets In Full-Blown Crash Mode - japan down

PCLN | Beta Test

Takeaway: We believe we’ve isolated the main drivers of the story. Tracker beta test suggests accelerating 2Q bookings, but no call on the stock, yet


The Hedgeye Internet & Media and  Gaming, Lodging, Leisure teams are teaming up to jointly cover the OTAs.  We’re beginning with PCLN, which is a complicated story given its scale and broad geographic exposure.  Below, we break down the story into what we believe really matters, i.e. what’s really driving the business amidst all the noise, and what’s moving the story on the margin.  Within that construct (Points 1-4), we have built our first tracker to forecast PCLN’s quarterly bookings and hopefully get ahead of bookings guidance.  Our tracker is currently calling 1Q bookings to exceed guidance/consensus, andfor 2Q bookings guidance (ex Fx) to accelerate off 1Q levels, ahead of current consensus expectations.  This would normally translate into a positive stock move, but we would caution that the stock has performed well in April and expectations are likely higher post EXPE earnings.  Since we’re only in the formative stages of actively following PCLN, we’re uncertain as to sentiment – that is, how much upside is already baked into the stock.   Going forward, we hope to introduce our PCLN tracker results on a more formal basis as we refine/build upon our first tracker, and hopefully introduce an additional one.  We believe we’re on to something, both from a theoretical and pragmatic perspective, and look forward to augmenting your OTA investment process.


  1. PCLN = TOP-DOWN STORY: PCLN is effectively the largest public hotel company; its 432M room nights in 2015 are more than 2X that of any public hotel operator.  That said, PCLN is too large to evade macro/industrial trends.  PCLN will remain a secular growth story, but it’s the collective travel economy that will move the story on the margin (i.e. accelerating vs. decelerating bookings growth).  We’re not suggesting that factors such as ad spend and property counts are trivial, but believe they take a backset to the travel economy.
  2. IS AIRBNB A THREAT? If it was a material threat, we should have seen it by now, and maybe we have.  PCLN is highly exposed to the EU – the region was an early Airbnb adopter - but to date we haven’t seen any material correlation between Airbnb density and EU Hotel RevPAR per our proprietary Airbnb real time dataset.  We suspect the big difference b/w the EU and US markets is that there already was an established alternative accommodation market in the EU; Airbnb may just be facilitating that market vs. the US where it is essentially creating it.  That said, we do not suspect Airbnb will have a further material long-term impact on PCLN, but we will be monitoring our dataset on an ongoing basis.
  3. SWING FACTOR = DESTINATION: PCLN’s MD&A and gross profit seasonality suggests that the EU and US drive the bulk of its bookings.  While the overwhelming majority of total travel expenditures in both markets favor domestic travel, those consumers are far more likely to book a hotel, and for an extended period, when traveling abroad.  In short, we believe the travel destinations of PCLN’s users carry the most weight.  Put another way, we believe ARPU drives this story.
  4. TRADING STOCK: While we currently prefer PCLN longer-term as the public OTA that is probably most insulated from both branded hotel & Airbnb headwinds, the volatility around its earnings releases suggest it is more of a trading stock, which is how we’ll be looking to play this moving forward.  On that front, it’s really all about booking guidance vs. consensus, which has driven the stock action in 4 of the last 5 quarters (as far back as we can pull historical consensus bookings estimates).
  5. BETA TESTING OUR FIRST PCLN BOOKINGS TRACKER: The problem with the default tracking metrics that the street is using (i.e STR/flight metrics) is that they track the stay, not the booking; the former is basically pointless.  We’ve built our first in what will hope will be a series of a proprietary trackers to get ahead of room-nights bookings and guidance (see chart below).  Our tracker is based primarily on points 1 & 3 above, and is currently calling for 1Q bookings to eclipse guidance by 2%-4%, and for 2Q16 bookings growth (ex Fx) to accelerate off of 1Q levels.  We’re expecting the midpoint of PCLN’s 2Q bookings guidance range (ex FX) to be in the mid 20s%.  In turn, we believe consensus bookings estimates are light for 1H16.  Note that our tracker applies to PCLN only (not EXPE, TRIP, etc.) 
  6. GOING FORWARD? Even though the tracker is statistically significant and has been successfully back-tested, we’re using the 1Q16 release on Wednesday as a beta test as we work to refine and build upon our tracker moving forward.  To be clear and up front, we believe our tracker will be highly value add and is proprietary, so we will not be divulging the “special sauce” for obvious competitive reasons. We understand the tracker is a prove-it-to-me product at this point; we’re looking at it the same way.  For those reasons, we’re not making a call on PCLN at this point.


PCLN | Beta Test - PCLN   Room Nights Slide

PCLN | Beta Test - PCLN   Airbnb Slide

PCLN | Beta Test - PCLN   Outbound Slide v2

PCLN | Beta Test - PCLN   Tracker 1Q16 slide v1


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


Hesham Shaaban, CFA
Managing Director



Todd Jordan
Managing Director




Leading Healthcare Policy Authority Emily Evans Joins Hedgeye



STAMFORD, Conn., May 3, 2016 -- Hedgeye Risk Management, a leading independent provider of investment research and online financial media firm, announced today that healthcare policy authority Emily Evans has joined Hedgeye Potomac Research as a Managing Director to lead its Health Policy sector. Evans has over three decades of professional experience working both in and around government and is regarded as a leading authority in the area.


“We’re very excited to welcome Emily to our growing Washington policy team following our acquisition of Potomac in January,” said Hedgeye CEO Keith McCullough. “She brings an impressive foundation of knowledge and real-world public policy experience. Her insight will augment our existing fundamental Healthcare research led by Tom Tobin. The big winner here is our clients who gain greater visibility into investing developments and implications in one of the most significant U.S. sectors.”


Prior to joining Hedgeye, Evans was a partner at Obsidian Research, a healthcare research boutique that she founded.


Throughout most of her career, she worked in public finance at J.C. Bradford & Co. until its sale to UBS/PaineWebber in 2000. As the Investment Limited Partner in charge of municipal bond underwriting, Evans helped to bring over $10 billion in securities to market – including hundreds of healthcare-related projects such as skilled nursing facilities, continuing care retirement communities and acute care hospitals.


Leading Healthcare Policy Authority Emily Evans Joins Hedgeye - z emily evans   pr picture


“Emily brings deep healthcare policy, regulatory and legislative acumen to the table,” said J.T. Taylor, Managing Director at Hedgeye Potomac Research. “Her addition rounds out our robust Washington to Wall Street research.”


In recent years, Evans has also provided consulting services to the government and finance communities. She served for nine years on the Nashville City Council and is a graduate of Mount Holyoke College.


“I am thrilled to be adding deep healthcare policy, regulatory and legislative research to the robust Hedgeye platform,” said Evans. “This firm is uniquely positioned to deliver high-quality, actionable research to investors interested in that 17 percent of the U.S. economy dedicated to the delivery of healthcare services.”




Hedgeye Risk Management is an independent investment research and online financial media firm. Focused exclusively on generating and delivering investment ideas in a proven buy-side process, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts, all with buy-side experience, covering Macro, Financials, Energy, Healthcare, Retail, Gaming, Lodging & Leisure (GLL), Restaurants, Industrials, Consumer Staples, Internet & Media, Housing, and Materials.



Dan Holland


2Q16 Senior Loan Officer Survey | Battleship Hit

Takeaway: Last quarter's data was a shot across the bow. This quarter's is a direct hit.

A Growing Share of Banks Are Tightening C&I and CRE Credit

The Fed released its 2Q16 Senior Loan Officer Survey yesterday afternoon. The survey was conducted between March 29 and April 12 and covers lending standards and loan demand across business and consumer loan categories.


In the previous survey (1Q16), we flagged that two of three C&I measures and CRE standards were tightening, on balance. Not only are those measures still tightening, an even higher percentage of banks are now tightening C&I and CRE standards.


A small silver lining is that consumer lending remains largely benign; a net positive percentage of banks continued to report easing of consumer lending standards.



The primary takeaway this quarter:

1. A net percentage of banks tightened C&I lending standards for the third quarter in a row, and that percentage was even higher than in 2Q16 than in 1Q16. Moreover, demand for C&I loans was net negative for the second quarter in a row. 12% of banks tightened C&I standards for large and medium firms (6% for small firms), up from 8% (4%) in 1Q16. Additionally, 9% of banks reported less demand for C&I loans from large and medium firms (3% from small firms) in 2Q16.


Why this matters: We've gone back historically and looked at the Senior Loan Officer Survey many different ways in an effort to discern its usefulness as a forward indicator. After much trial and error, our biggest takeaway is that when two of the three C&I questions have turned negative historically, it has portended a recession in the near future. This isn't coincident; it's causal. Banks tightening the screws, increasing the price of money or reporting reduced demand for money all portend a slowing of economic activity. The problem is that the cyclical activity tends to autocorrelate, or self-reinforce. In other words, banks tighten credit => consumption/investment decline => workers are laid off => delinquencies rise => banks further tighten credit => and so on and so forth. Below is a chart showing the three questions in the C&I survey back to 1990. To be clear, we've inverted the primary y-axis and we've also reversed the demand question so that all three categories are directionally consistent, i.e. when credit is constricting/price is rising/demand is falling, the survey measures on this chart fall, and vice versa.  


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS15


Perhaps of equal interest is the fact that the Fed has historically had an enormous policy cushion in response to recessions. The table below shows that since 1969, the Fed has eased by an average of 750 bps in response to every recession. The last two cycles have seen the Fed ease by 560 bps and 520 bps. The challenge this time around is that the Fed's current policy cushion is 36 bps.


To summarize, credit conditions are tightening, which has historically ushered in a recession, and the Fed is short by around 5 percentage points on its ability to soften the blow. 


2Q16 Senior Loan Officer Survey | Battleship Hit - Fed Funds


The Data: As the chart below illustrates, the percentage of banks tightening C&I lending standards for large and medium firms increased to 11.6% in 2Q16, up from 8.2% in 1Q16 and 7.4% in 4Q15.  


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS12



The secondary takeaway this quarter:

2. More banks are tightening CRE standards. Commercial real estate lending also saw continued and heightened tightening this quarter across all three categories: Construction & Development (C&D), Nonfarm Nonresidential, and Multifamily. Unfortunately, the survey format changed with the 4Q13 survey when the Fed replaced the single category of CRE loans with the three aforementioned subcategories. As such, it's not possible to compare apples to apples historically. That said, in the 11 quarters since the new format began, this marks the fourth (and fourth consecutive) quarter in which standards have tightened on C&D loans. It marks the third (and third consecutive) quarter in which Nonfarm Nonresidential loans have seen standards tighten. The Multifamily category has been bouncing between easing and tightening over the last two years, but it has never reached as high as the 36.2% of banks tightening this quarter.


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS17


The tertiary takeaway this quarter:

3. More banks expect pain from O&G loans than they did in 1Q15. One year after asking survey participants what they expect in the O&G space, the survey again included this line of questioning, and, not suprisingly, sentiment is worse this time around. As the first chart below shows, a net 63% of banks now expect delinquencies and charge-offs to deteriorate for their existing loans to firms in the oil and natural gas drilling/extraction sector over the remainder of 2016. That is up from 57% in 2015.


The one positive here is that banks are decreasing their O&G exposure. The second chart below shows that 87% of banks are now keeping their O&G loans under 10% of their book, up from 82% in 2Q15.


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS13


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS14



Given the persistence of and increasingly negative responses in the C&I and CRE lending categories, we appear to have reached the inflection point signaling that credit expansion is past peak. The chart below looks at the historical C&I lending standards (LHS) juxtaposed against the S&P 500 Financials Index (RHS). C&I lending standards have historically begun tightening coincident with or ahead of peaks in Financial equity prices. We've highlighted in green the periods during which Financials stocks have risen. In the 1990s it was clear that lending standards were tightening by late 1999, suggesting the roll was near. In the 2003-2007 period standards began to tighten in 2007.


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS1 





A Review of the Senior Loan Officer Survey by Category:


C&I: Canary Carcasses Everywhere

C&I loans have signaled the credit cycle peak with standards tightening for three quarters in a row now. The net percentage of banks tightening standards for loans to large firms moved from +8.2% in 1Q16 to 11.6% in 2Q16. Additionally, +5.8% of banks tightened standards for C&I loans to small firms. 


* Standards are tightening

* Demand is falling

* Spreads are not yet increasing, but the net percentage of banks easing is converging towards zero as the third chart below shows


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS3


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS4


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS2



CRE: Tightening Across the Board

Banks tightened standards for all three CRE categories in 2Q16. Additionally, the percentage tightening standards for multifamily loans, which had previously swung back and forth from negative (good) to positive (bad), saw a marked tightening (+36.2%) in 2Q16. 


Meanwhile, although demand for CRE loans again increased in the second quarter, the rate of change is clearly decelerating, as the second chart below shows.



2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS5


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS6 2



Residential Mortgage: Mostly Easing

Starting in 1Q15, the Federal Reserve broke the survey's residential Prime and Nontraditional categories into six new categories and kept the Subprime category for a total of seven different categories. The six new categories include: (GSE-Eligible, Government, QM non-jumbo/non-GSE eligible, QM jumbo, Non-QM jumbo, and Non-QM/non-jumbo).


The categories we're most interested in are the GSE-Eligible (Fannie/Freddie) and Government categories (FHA/VA) since these two categories account for ~90% of all origination volume. The GSE-Eligible category showed 11.3% of banks, net, eased standards Q/Q in 2Q16. Government standards were unchanged. While subprime responses were too few to be shown, all four other categories eased.


We pay little attention to the demand component of the Fed's Survey because it reflects shifting refi demand and isn't a good barometer for purchase activity. Nevertheless, we include both charts below.


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS7


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS8


Consumer Loans: Easing

Standards for credit cards, auto loans, and consumer loans ex-cards and autos all eased in the second quarter.


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS9


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS10


2Q16 Senior Loan Officer Survey | Battleship Hit - SLOOS11




Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT





CHART OF THE DAY: The Latest Of #LateCycle Economic Indicators

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.


"... The latest of #LateCycle economic indicators is obviously employment. That component of the USA’s ISM report remained < 50 (at 49.2) for the 5th consecutive month. Not ironically, NFP (non-farm payrolls) peak, on average, 4-6 months AFTER #TheCycle (GDP) does."


CHART OF THE DAY: The Latest Of #LateCycle Economic Indicators - 05.03.16 Chart

Transparently Slowing

“China is not doing this transparently.”

-Jim Rickards


While my friend, analyst, and author Jim Rickards could have obviously been talking about Chinese PMI and/or GDP data, in his latest book (The New Case For Gold), he was alluding to Chinese stockpiling of a precious currency that’s currently up over +22% YTD.


“China, Russia, Iran, and other countries’ central banks are stockpiling gold as quickly as they can. In July 2015, it updated its official gold reserves for the first time since 2009 to show 1,658 tons, up from the previous reserve of 1,054 tons… China’s figures are deceptively low because it holds huge reserves, perhaps 3,000 additional tons or more in an agency called the State Administration of Foreign Exchange, or SAFE.” (pg 92)


I don’t know about you, but I put my physical Gold in a safe. So, maybe these Chinese dudes deserve some “clever” points for hiding theirs in a place where only a macro moron wouldn’t consider searching for it.


Back to the Global Macro Grind


You don’t have to search very far to see that Global #GrowthSlowing remains reality inasmuch as that intermediate-term macro TREND “bottoming” remains a hope.


The Australians cut rates another 25 basis points overnight and the European Commission cut their growth forecasts (again) this morning. Consensus still isn’t in the area code of our Street low 0.2% GDP estimate for the Eurozone in Q4 of 2016.


Transparently Slowing - Japan cartoon 05.02.2016


As Japan’s grand central-market-planning experiment blows up in their unaccountable face (and Japanese growth slows, again), both the American and Chinese macro data continues to TREND bearish as well:


  1. China reported a made-up PMI of 49.4 for APR vs. 49.8 in MAR
  2. USA reported an ISM for APR of 50.8 vs. 51.8 in MAR


I know. Lots of people have been calling for ISMs and PMIs to bottom this year. And in anchoring on that, they completely missed that the later cycle sectors of the US economy (Consumer, Financials, Healthcare, and Tech) #slowing.


The latest of #LateCycle economic indicators is obviously employment. That component of the USA’s ISM report remained < 50 (at 49.2) for the 5th consecutive month. Not ironically, NFP (non-farm payrolls) peak, on average, 4-6 months AFTER #TheCycle (GDP) does.


But that US #EmploymentSlowing surprise is something you Long Bond (TLT), Utilities (XLU), and Gold (GLD) bulls can look forward to by the end of this week. In the meantime, we have this other big thing going on called Earnings Season.


For Q1 Earnings Season to-date, 315 of the 500 companies in the S&P 500 have reported results:


  1. Aggregate SALES growth is down -2.6% year-over-year = worst level of the season so far
  2. Aggregate EPS growth is down -8.9% year-over-year = worst level of the season so far
  3. Industrials and Financials have EPS down -7.6% and -13.4% year-over-year, respectively


But if you back all of that out and just look at Energy, earnings for that sector are down -96.5% year-over-year. So, what you really want to do to in perma-bull storytelling on SPY is “Ex-Energy” earnings from the picture, but be overweight Energy (XLE) stocks.


The Top 3 Losing Sectors in the SP500 YTD are:


  1. Healthcare (XLV) -2.6% YTD
  2. Financials (XLF) -1.3% YTD
  3. Technology (XLK) -0.9% YTD


You can probably get that Tech (XLK) component “up” YTD if you go Ex-AAPL. Heck, who has owned Apple or European stocks since #TheCycle peaked in Q2 of 2015 anyway? Probably no one, eh.


To be fair to those who deal with “relative” returns… German, Italian, and Spanish stocks are down -20%, -25%, and -25%, respectively, from their 2015 #Bubble highs, so “cheap” (getting cheaper) European stocks are still “outperforming” a you-gely cheap AAPL!


Admittedly, you can get lost in the mess that is the narrative on why the US stock market should be at all-time highs right now. Perversely that narrative should be grounded in the US economic data being so bad that the US Dollar gets torched to all-time lows.


But, for now, with last year’s biggest losers (Energy and Industrials) placing 2nd and 3rd in the Sector leaderboard to our Utilities (XLU +12.8% YTD), the storytelling is still trying to hang onto a hope that cyclical demand has “bottomed”, however transparently inaccurate that is.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.72-1.92%

SPX 2065-2090
RUT 1120-1156


DAX 95
USD 92.03-94.57
EUR/USD 1.13-1.16
Oil (WTI) 41.96-46.37

Gold 1255--1302


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Transparently Slowing - 05.03.16 Chart

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