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A #LateCycle Reality Check Hits Disney, Macy's, China, Italy, etc...

Takeaway: Recent stumbles in Disney shares, Italy's bank-heavy FTSE MIB index, and China's Hang Seng index are prime examples of #GrowthSlowing.

A #LateCycle Reality Check Hits Disney, Macy's, China, Italy, etc... - late cycle cartoon 10.08.2015


It's getting tougher each day for deniers of #LateCycle reality.


"I wonder if Disney missing for the 1st time in 5yrs has anything to do with #TheCycle (it continues to slow)," Hedgeye CEO Keith McCullough wrote in a note to subscribers this morning.


Even chart chasers can digest the massive rally in Disney (DIS) shares followed by the abrupt flatlining. Note: DIS is down more than -10% from it's August 2015 peak.



By the way...


It's going to be a rough #LateCycle reality check for Macy's (M) investors this morning. The retailer printed lackluster earnings eerily reminiscent of the last cycle's rollover. (It has also already nosedived from its July 2015 peak – it's down almost -50% since then.)



It's happening around the world...


Check out European economic data:



And Italy's banking-heavy FTSE MIB leads the losers today. 


Thanks NIRP!



(For more, read the FT's piece about the German regulator who called NIRP a "seeping poison." Or Spain's 50-year Long Bond issuance as growth continues to slow.)



Rouding out the morning's #GrowthSlowing flops is China's Hang Seng:



Meanwhile, there's always a bull market somewhere...



Client Talking Points


On the other side of making a call to short SPY and Japanese Equities yesterday, we signaled buy Japanese Yen again. This is purely a flow idea on the central-market-planning #BeliefSystem breaking down; we have Yen going back to at least 105-106.


Gold signaled overbought on the NFP #Slowing print last week, corrected to @Hedgeye $1,255 TRADE support, and bounced; no resistance to $1306. With the UST 10YR at 1.75% and falling, all-time lows in long-term yields remains our long Gold catalyst.


Italy did the 1-day bounce thing then straight back down this morning, leading losers in Europe -1.9% taking the MIB Index crash to -27% since Global Equities peaked in July 2015. The MIB is an important proxy for NIRP crushing the banks.


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

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

As our Growth, Inflation, Policy model is oscillating between tracking in quad 3 and 4 for the second quarter, we’re sticking to core positions that perform well when growth is slowing and the yield curve is flattening:

  • QUAD3: Growth Slowing, Inflation Accelerating
  • QUAD4: Growth Slowing, Inflation Decelerating


The model signals that growth is slowing either way, and we expect a continuation of bond market discounting late cycle, growth-slowing. An allocation to Long Bonds (TLT, ZROZ) and Utilities (XLU) keeps investors out of the way of guessing which way assets levered to inflation will move next. The yield spread 10s-2s moved this week like it is headed toward taking out YTD lows. To be clear, this is NOT an indication that growth is back.


McDonald's (MCD) reported 1Q16 earnings on April 22nd that beat consensus estimates. The quarter serves as continued proof that the comeback story is in full swing.


The big question is where MCD is headed in terms of their national value platform. They had the McPick 2 for $2, then 2 for $5, now they have shifted to the monopoly promotion. McDonalds regaining a consistent value message is key to their success, and they know this. Additionally, we have another two quarters of tailwind from All Day Breakfast before we begin to lap it.


McDonalds’ recovery has been nothing short of extraordinary and has been a great source of alpha for all of its holders. We continue to like the name on the LONG side given the strong fundamental turnaround and the style factors that we love, big cap, low beta and liquidity.


#GrowthSlowing remains our call here in Q2. How do we know growth is slowing (ex. being validated by Treasury bond market and XLU outperformance)?


We look at every relevant data series on a rate-of-change basis to analyze a sine curve. Taking a look at our analysis of Y/Y Non-Farm Payroll growth, a clear cyclical picture develops. Mainstream media and other sell-side sources who talk about guessing the sequential NFP number are pursuing a fool’s errand (a confidence interval that is very wide) in terms of positioning into a number. We call this “open the envelope risk."


Rather, constructing a sine curve of the rate of change in NFP growth gives us a clear visual that employment growth peaked (in Feb. 2015), and it’s not recapturing that growth rate in this cycle. So whatever the sequential number is M/M, we know where this series is headed. And, when considered with every other relevant data series, we have a clear empirical view on where the U.S. economy is positioned in the economic cycle.

Three for the Road



REPLAY | About Everything: Does Cable Have a Future? https://app.hedgeye.com/insights/50829-about-everything-does-cable-have-a-future via @HoweGeneration



It ain't over 'til it's over.

Yogi Berra


The year-to-date count of retail bankruptcy in the U.S. is ahead of the full-year Chapter 11 tally for each of the past six years.

Morning Bullets 5/11/16

Clinton - Is it June 7th Yet? Cruz's Cornhusker Comeback? Digging Out of Debt 


IS IT JUNE 7 YET?:  With Bernie Sanders' victory in WVA last night, Hillary Clinton is looking to run the clock out this month - without attracting further damage to her general election chances.  We've said before that the May primary calendar favors Sanders, but with the Republican field cleared and Donald Trump the presumptive nominee Clinton is unexpectedly (and unpreparedly?) finding herself under attack by him as well as Sanders - precisely at the time when she needs to unite the Democrats. Sanders is poised to win in OR next Tuesday and Clinton is now refocusing her attention on KY (also next Tues) where the coal comments that cost her WVA - which she won in a landslide in 2008 -  are now cutting into her support there.


CRUZ'S CORNHUSKER COMEBACK? : Well that was close for a moment. Despite Washington's dissatisfaction with Trump as the presumptive nominee and Republican leadership torn on whether to publicly back him, the WV and NE primaries offered voters a chance to rebuke Trump as the standard-bearer - and they took a pass. Worse yet for Cruz, who offered up ahead of results that if he won he may return to the race, he's now a) lost and then b) lost again preemptively. Ouch.


CLINTON TALKS TYCOONS : The Clinton campaign floated a new attack on Trump, painting the billionaire as a heartless tycoon. No doubt this attack is an attempt to convince the "Never Hillary" Democrats, who feel Trump may provide the shakeup they so desperately want from Bernie, that Trump is less Bernie-like than Hillary. The jury is still out on whether this new approach will actually work to bring Bernie Democrats back into the fold (or backfire a-la-Goldman-speeches).


KING OF DEBT : Trump continued to blast past criticisms that his tax plan would raise the national debt by $45 trillion over 20 years and provide $3.2 trillion in tax breaks to millionaires, emphasizing that everyone would get tax breaks. He suggested he would increase taxes on the wealthy, but then said they would "pay less than they pay now" and then "On my plan they're going down. But by the time it's negotiated, they'll go up," which definitely cleared things up.  Ahem.  He also reiterated his title as "King of Debt," with comments suggesting a Trump Administration might not fully honor Treasury Department bonds. Never one to create confusion, Trump clarified to, "I understand debt better than probably anybody. I know how to deal with debt very well. I love debt -- but you know, debt is tricky and it's dangerous, and you have to be careful and you have to know what you're doing." We're sure global markets are breathing a sigh of relief for the clarification.


I'll TAKE 16 TONY'S AND A BAILOUT : Lin-Manuel Miranda may be able to convert a bunch of fuddy-duddies into theatre goers, but not even his talents can cajole Congress to rescue Puerto Rico from its free fall (if you have not seen his original song on the subject, it's worth a watch).  Legislation that would create an oversight board to help manage PR manage its debts remains delayed, though we expect introduction as early as today. You'll recall previous efforts were blocked by the House who've grown tired of taxpayer-funded bailouts. Version 2.0 is being drafted with those concerns in mind, and the sell job is in full throttle mode. As if Republicans' electoral problems were not enough, with nearly five million Puerto Ricans living in the U.S., inaction would seem to be as mortal as a shot from Aaron Burr's pistol... 


ALBERTA NOT AL-NAIMI:  The big news for oil markets is the ongoing Canadian fires that have temporarily shut down production in Alberta's oil sands and not the departure of Saudi oil minister Al-Naimi.  Halfway across the globe in Riyadh, King Salman reshuffled his cabinet resulting in the departure of long-time oil minister Ali Al-Naimi. He was replaced by former Aramco CEO Khalid Al-Falih who is highly respected and well-known in the global energy community. As our senior energy analyst Joe McMonigle wrote on Sunday, a change in oil ministers will not mean a change in oil policy. We expect the Saudi's to continue their market share policy at least through 2016 and do not foresee any big change at the upcoming June 2 OPEC meeting.



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The Macro Show with Keith McCullough Replay | May 11, 2016

CLICK HERE to access the associated slides.


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

CHART OF THE DAY: A Look At The Peak In S&P 500 P/E

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.


"... Unless we’re going to go all-in #bubble multiple speak (Bernstein slapped a $1000 price target on AMZN yesterday), as you can see here in our Chart of The Day, forward SP500 P/E multiples already peaked (right on time) last year too."


CHART OF THE DAY: A Look At The Peak In S&P 500 P/E - 05.11.16 EL Chart

Big Cycle Blowout!

“Hoo-hoo! Big summer blowout!”



That’s right Frozen fans – gettem while you can. Buy “expensive” Low Beta #GrowthSlowing exposures before everyone else bids them away from you! If you want the “cheap” stuff… it’s A) getting cheaper and B) in ample supply when earnings miss.


For those of you who don’t have 4 girls at home, you may not be familiar with my boy Oaken price gouging Anna when she went shopping for the bare winter/mountain necessities. Of my 4 girls, one is my wife, and that scene completely cracks her up, every time.


If your bro-ker or hedgie levered you up long in stocks in July of 2015 (all-time #bubble high was a beauty), this is no laughing matter. You could have bought all the “cheap” Apple (AAPL) and “expensive” Disney (DIS) you wanted at $132 and $121/share, respectively.


Big Cycle Blowout! - Bubble bath 9.9.14


Back to the Global Macro Grind


You know, that’s the thing about #TheCycle – it can suck you right into doing things that just look silly, in hindsight.


Now that you know that we’re on the back side of both the US economic and profit cycle, should it surprise you that Disney (DIS) “missed” for the 1st time in 5 years? The time to buy Disney, Apple, and Starbucks was on the last US cycle’s lows (2009).


I’m going to pick on DIS this morning just because it’s a great company that Wall Street has had great issues explaining ever since the US cycle peaked in July of 2015 (don’t worry, I’ll keep reminding you of that date):


  1. From #TheCycle peak of 2007 to #TheCycle trough of 2009 the stock went from $27 to $12 (-56%)
  2. From #TheCycle trough of 2009 to 2015 the stock went from $12 to $132 (#crusher long idea)
  3. From #TheCycle peak of 2015 to the FEB 2016 low the stock went from $132 to $88 (-33%)


Oh, and that FEB 2016 low must have been the trough, right? Generational buying opportunity, for sure, eh?


Let’s stop talking to one another like children and get real here. Like Olaf, when #TheCycle (sun rising in the East) starts slowing, profits and multiples start melting. So, unless you have a central-market-plan to ban that, I’m sticking with our forecast.


Unless we’re going to go all-in #bubble multiple speak (Bernstein slapped a $1000 price target on AMZN yesterday), as you can see here in our Chart of The Day, forward SP500 P/E multiples already peaked (right on time) last year too.


In other words, while the March bear market bounce in cyclicals was nailed by everyone on Twitter, forward earnings estimates are still near their YTD lows … so a mini-multiple expansion drove part of that bounce… but to lower-cycle-highs.


With non-GAAP SP500 Earnings -8.9% year-over-year in Q1, what gets the stock market’s multiple back to peak? How do we get big Dow Bro components like AAPL and DIS back to the all-time highs?


Qs: Is it melting earnings (math: melt the E and the P/E goes up)? And/or helicopter money?

A: As I’ll tell Institutional Clients all day long (again) today in NYC, anything can happen!


Perma Bull marketing firms have a whole Disneyworld of ‘it’s different this time’ ideas that I’m happy to entertain:


  1. The Fed can go to Qe4
  2. With negative rates everyone can buy everyone (ex-SPLS/ODP this am)
  3. GDP “feels” like 2.5%


While I’m pretty sure everyone understands this, it’s worth stating plainly. For the Fed to move to ideas 1 and/or 2, Hedgeye has to be really right on our US #Recession Risk call. Entertaining those measures comes from 1 on the SP500, not 2084.


Option #3 though is probably what people who bought APPL, DIS, MSFT, GOOGL, etc. at #TheCycle highs of 2015 (don’t forget July!) were thinking though. Heck they may have been thinking GDP was feeling like 3-4%, in perpetuity, AFTER 78 months of GDP expansion.


This is what I expect to have to debate on the road today: “Keith, the Atlanta Fed just went to 2.2% GDP and Nancy is at 2.5%.” To be clear, Darius Dale and I cannot wait to respond (again) with our Street low GDP forecast and call that #TheCycle continues to slow.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.71-1.82%

SPX 2040-2090


VIX 13.11-17.61
USD 92.42-94.69
Oil (WTI) 42.55-46.19


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Big Cycle Blowout! - 05.11.16 EL Chart

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