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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. Steiner: ‘China Is An Enormous Systemic Risk’ (5/26/16)

 

 

 

In this brief excerpt from The Macro Show, Hedgeye Financials analyst Josh Steiner discusses why the “unbelievable rate of credit growth” in China is now slowing and why it could pose risks for investors long the stock market.

 

2. McGough: 10 Reasons Why I Don’t Like Hanesbrands | $HBI (5/25/16)

 

 

Retail analyst Brian McGough hosted a Black Book presentation earlier this week to update his short call on Hanesbrands (HBI). In this brief video excerpt, McGough lays out the ten reasons HBI shares are headed lower.

 

3. McCullough: Stop Whining, Stick With The Process (5/25/2016)

 

 

During the live Q&A section of The Macro Show earlier today, Hedgeye CEO Keith McCullough provides a “stick with the process” pep talk for a subscriber worried about his short positions.

 

4. Why We Remain Bearish On Junk Bonds (5/24/2016)

 

 

In this brief excerpt from The Macro Show earlier today, Hedgeye Macro analysts Darius Dale and Ben Ryan respond to a subscriber’s question about our views on the credit cycle and high-yield debt.

 

5. What The Yield Spread Reveals About Growth (5/23/2016)

 

 

In this brief excerpt from The Macro Show this morning, Hedgeye Senior Macro analyst Darius Dale provides an in-depth, granular look at why investors should pay close attention to the yield curve and what it says about growth.


Investing Ideas - Levels

Takeaway: Current Investing Ideas: HOLX, DE, HBI, LAZ, MDRX, FL, NUS, JNK, TIF, WAB, ZBH, GLD, ZROZ, XLU, MCD, 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 5 27

 

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

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. The Writing On The Wall (5/27/2016)

This Week In Hedgeye Cartoons - Bull case cartoon May 2016

 

With a "0" in front of GDP and S&P 500 earnings growth -8.5% year-over-year, the writing is on the wall for investors.

 

2. Piggy Banks (5/26/2016)

This Week In Hedgeye Cartoons - Financials cartoon May 2016

 

Our Macro team's favorite sector short, Financials (XLF), is the second worst performing S&P sector year-to-date at down -0.7%.

 

3. Incredulity (5/25/2016)

This Week In Hedgeye Cartoons - Long incredulity cartoon 05.25.2016

 

A sign of the times.

 

4. Atlas (5/24/2016)

This Week In Hedgeye Cartoons - growth cartoon 05.24.2016

 

Global growth continues to surprise Macro consensus to the downside.

 

5. The Hourglass (5/23/2016)

This Week In Hedgeye Cartoons - hour glass cartoon

 

The central planning #BeliefSystem is breaking down. 


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.

Investing Ideas Newsletter

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

Investing Ideas Newsletter - Bull case cartoon May 2016

 

Below are our analysts’ new updates on our sixteen current high conviction long and short ideas. As a reminder, if nothing material has changed in the past week which would affect a particular idea, our analyst has noted this.

 

Please note that we added Hologic (HOLX) to the short side of Investing Ideas. Hedgeye Healthcare analyst Tom Tobin will send out a full stock report on HOLX next week. We will send CEO Keith McCullough’s updated levels for each ticker in a separate email.

IDEAS UPDATES

TLT | GLD | XLU | ZROZ | JNK

To view our analyst's original report on Junk Bonds click herehere for Gold, here for Utilities and here for Pimco 25+ Year Zero Coupon US Treasury ETF.

 

After a busy week of data and macro meetings with institutional investors in California, typical discussions turned into a debate about whether or not Janet would hike rates in June. As Keith outlined in Friday’s Early Look, here is how the line of questioning went down:

 

  1. “I hear you on #TheCycle, but could they raise anyway?”
  2. “What happens if they don’t raise? Do we rip?”
  3. “If they raise, then when is the earliest they can start cutting again?”

 

On Friday, Seasonally adjusted annualized GDP was revised to +0.8% QoQ from the +0.5% print for the first revision with construction spending, trade balance and factory order data driving the positive revision.

 

So, is that grounds for a hike?

 

Sure, +0.8% is better than +0.5% on the margin, but what does GDP look like on a trending Y/Y basis. As you can see in the highlight line of our GDP summary table below, Y/Y GDP has trended lower for 4 consecutive quarters, and we expect this to continue:

 

Investing Ideas Newsletter - 05.27.16 GDP Summary Table

 

Shifting to important labor market data. In our view, the probability that the Federal Reserve continues on a tightening course is next to nil if #LateCycle employment data continues to deteriorate, and there are signs that is happening. For example, one of the slides in our Q2 macro themes deck provides a long history of one of Janet’s favorite indicators, the “Change in Labor Market Conditions Index.”

 

This index has trended positive for the balance of the cycle until 2016. The index has now dipped into negative territory for four consecutive months to the lowest readings since June of 2009. You can see in the chart below that the probable outcome (from here) is for the 4 red bars just reported to go really red sometime soon:

 

Investing Ideas Newsletter - 05.27.16 Chg in Lab Mkt Conditions Index

 

Does Janet want to be the catalyst in expediting that? When the bars in the chart above start to dip deep into red territory, she has to be dovish – it’s part of her playbook, and the dovish pivot will continue to be supportive of #GrowthSlowing allocations on the margin (like Long Bonds (TLT, ZROZ), Utilities (XLU), and especially Gold (GLD). 

 

On Junk Bonds (JNK), in the brief excerpt from The Macro Show below, Hedgeye Macro analysts Darius Dale and Ben Ryan respond to a subscriber’s question about our views on the credit cycle and high-yield debt. Spoiler alert: We're still bearish.

 

Click the image to watch

 

Investing Ideas Newsletter - HETV macroshow thumb

MCD

To view our analyst's original report on McDonald's click here

 

Aside from the rumors flying around about McDonald's (MCD) potentially moving out of it's Oak Brook, Illinois headquarters and the minimum-wage related protests going on just outside those doors, it was a relatively quiet week for the fast-food giant. No update this week but Hedgeye Restaurants analyst Howard Penney reiterates his long call on McDonald's.

HOLX

We’ve written volumes both on the long and short side with Hologic (HOLX). When we publish the Tomo-Tracker next week we'll include a revenue schedule that is our best estimate of the 3D revenue impact over the last few years by quarter. After combing through the filings and transcripts, we were able to jigsaw our way to a reasonable estimate and forecast.

 

Following discussions with a number of buysiders this week, we are hearing more concrete chatter that Hologic is talking down 2017 growth in meetings, and is perhaps gearing up to make an acquisition, likely in Surgical, in the near term. A deal, depending on the quality and size of what they buy is a potential positive and could fix their growth profile. However, recent transactions at big multiples have us interested in looking more closely at what they need to spend to fix the 2017 growth declines in front of them.

 

Healthcare analyst Tom Tobin will send out a full stock report on HOLX next week.

WAB

To view our analyst's original report on Wabtec click here.

 

We have met with several larger longs in Wabtech (WAB) that place significant faith in this management team, and we wonder if those holders have noticed the many missing pieces in their rosy narrative, especially as the bull case for WAB steadily evaporates. Here are a few recent highlights that strengthen our short thesis:

 

  • When a bull story hinges on the acquisition of a French manufacturing company, we think investors should recognize a problem. Especially since that acquisition has been postponed to at least the fourth quarter due to further requests from the EU regulators. 
  • To make matters worse, the DOJ has not formally weighed in on the proposed acquisition. We think the Faiveley deal is unlikely to be completed in its current form.
  • It is now increasingly clear that divestitures may be needed for LEY FP & WAB US to close.  Faiveley’s Braking & Safety Systems – the area most likely to generate overlap concern as we understand it – is about a quarter of LEY sales.  Divestitures would almost certainly undermine at least part of the strategic rationale for the transaction.
  • WAB's 1Q 16 earnings release and call were notable because of what they did not contain: a clear explanation the favorable decremental margin (materials are likely to prove mean reverting). A failure to be forthcoming is deceptive, in our view.

 

Add in weak rail volumes, poor railcar and locomotive orders and we continue to expect 2016 EPS ex-Faiveley below $4/share as the company’s core freight market enters a multi-year downturn.  

HBI

To view our analyst's original report on Hanesbrands click here. Below is a review of our short thesis on Hanesbrands (HBI) following this week's Black Book call with institutional clients.

 

Margins are at peak

 

HBI’s own manufacturing plants account for roughly 65%. While the company guards these numbers closely, our sense is that utilization is likely running close to 90%. That’s actually to management’s credit, as they’ve got this engine running like a 911 Turbo. But where’s it going to go from here?

 

Most retail analysts don’t cover companies that actually own manufacturing assets. They all have offshore/outsourced models that lock in price, limit volatility, and make it such that the company has to worry only about design, sales and marketing. The point is that margins for these ‘other’ brands might move by 1-2 points in a year. But for a company like HBI that owns its own assets, we could see 4-5 point swings with no problem as demand shifts and factory utilization drops. 

 

In the end, we ask the question…why should HBI have higher margins (15%) than VF Corp, PVH, Ralph Lauren, and even Nike? We should note that it’s about on par with Gildan, which interestingly is the only other major company that buys cotton directly in such quantities for use in company-owned plants.   

 

These deals are getting more expensive

 

HBI bought DB Apparel for 7.5x in 2014, Knights Apparel for 8x in 2015, and now both Champion Europe and Pacific Brands cost 10x EBITDA. Basically, HBI is trading at a 20% lower multiple (tho still expensive) than it was, but it’s deal multiples are 20% higher. Why?

 

For more, watch the video below, from our HBI Black Book call, for a quick primer on Hedgeye Retail analyst Brian McGough's ten reasons why HBI shares are headed lower. 

 

Investing Ideas Newsletter - hbi vid

 

Bottom line: We see 40% downside from here.

NUS

To view our analyst's original report on Nu Skin click here

 

It’s no secret that Nu Skin's (NUS) revenue is heavily impacted by foreign exchange rates given that roughly 85% of its revenue is captured outside of their Americas region. In 1Q16, their revenue was negatively impact -5% by FX. With 34% of their revenue coming from Greater China, the Yuan represents their highest foreign currency exposure.

 

The chart below displays YoY change in USD/YUAN exchange rate versus NUS adj. EPS growth YoY. The relationship has a negative correlation of -0.74, meaning as the USD gets stronger versus the Yuan EPS tends to trend down. Fluctuations in currency seem to explain how NUS is trading intra-quarter while the success of LTO’s and distributor growth will still be key factors to look at on a quarterly basis.

 

Investing Ideas Newsletter - nus

ZBH

To view our analyst's original report on Zimmer Biomet click here. Below is an update on ZBH from Healthcare analyst Tom Tobin.

 

Over the next 2 weeks we'll see how far we've gone off course hanging in with the Zimmer-Biomet (ZBH)  short as the stock looks as strong as ever. It blew past our $115 entry price from March, 2015 when I first began writing negatively on ZBH.

 

I hear a lot of "hiding out in Med Tech" from the buyside these days, but the bottom line is that staying short ZBH after 1Q16 metrics looked pretty good has been a mistake. With monthly updates to Healthcare employment, JOLTS, Medicaid enrollment, and Medicaid spending, we'll hold on for a few more days to get the updates.

 

I don't think we are seeing a fundamental acceleration in orthopedic volume excluding the ACA, but it has been a mistake not to entertain the alternative since the market is disagreeing with us. 

MDRX

To view our analyst's original report on Allscripts click here

 

No update on Allscripts (MDRX) this week but Hedgeye Healthcare analysts Tom Tobin and Andrew Freedman reiterate their short call.

TIF

To view our analyst's original report on Tiffany click here

  

Earlier this week, we sent Investing Ideas subscribers an institutional research note on Tiffany (TIF) written by Hedgeye Retail analysts Brian McGough and Alec Richards following the company's earnings this week. In it, they outline why a combination of horrible results and arrogance caused the stock to decline over -3% last week. Click here to read the note.

LAZ

To view our analyst's original report on Lazard click here

 

Below is an update on Lazard (LAZ) from Hedgeye CEO Keith McCullough in which he reviews why the company remains one of his favorite shorts:

 

"One of our highest quality shorts (since #TheCycle peaked in 2015) has been Lazard (LAZ). JC (Jonathan Casteleyn) is the analyst on this one too. 

 

Our main contention is that the Old Wall is ignoring warnings signs of a high-water mark in M&A, including rising private equity participation levels and also all-time highs in consideration value.

 

Both metrics last peaked in 2007. In addition, the constant rise of corporate credit costs from mid-2015 to current day has widely referenced Moody's indices higher by over 100 basis points. Our research shows that a move of this magnitude has historically impacted M&A by -20% on an annual basis.

 

LAZ looks "cheap" if you use the wrong numbers (i.e. peak of the cycle numbers). Being long it has been an expensive mistake in 2016.

 

Be mindful of the immediate-term risk ranges and don't sell at the low-end of the range. 

 

Wait on SELL signals in core short ideas when they bounce to the top-end of the range.

 

KM"

 

While we're on LAZ and Past-Peak M&A...

 

Here's a key chart from our 2Q16 Macro Themes slide deck.

 

Investing Ideas Newsletter - laz manda

FL 

To view our analyst's original report on Foot Locker click here.

 

No update on Foot Locker (FL) this week but Hedgeye Retail analysts Brian McGough and Alec Richards reiterate their short call.

DE 

To view our analyst's original report on Deere & Company click here.

 

This quarter saw a sizeable decrease in profit from Deere Financial, partly on lower residual values. Much of the build in farm equity has been an inflation in land values, which is now reversing, and credit is deteriorating across many metrics.

 

Contrary to the point on the call, lower rents and land values are because of cost pressures, and not alleviation from them. Tight credit is often causal in a downturn, as much as easy credit fuels excessive sales. We expect DE Financial’s profitability to continue to move lower, and would hesitate to value DE Financial at even book value, let alone apply a multiple to its current elevated earnings.

 

Investing Ideas Newsletter - deere2


The Week Ahead

The Economic Data calendar for the week of the 30th of May through the 3rd of June 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 - 05.27.16 Week Ahead


A Few Brief Thoughts On Janet Yellen's Speech Today

Takeaway: The probability is rising that Janet makes her 2nd policy mistake (raising into a slow-down) in 8 months.

A Few Brief Thoughts On Janet Yellen's Speech Today - rate hike cartoon 12.04.2015

 

I just spent the last 30 minutes in the car listening to maybe the most complacent recap of Fed forecasting risk yet. Today Janet sounded as hawkish as she's been (mainly because her assessment of the economy is as off as it's been). Here's what she said:

 

“It’s appropriate, and I’ve said this in the past I think, for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate."

 

In other words, the probability is rising that Janet makes her 2nd policy mistake (raising into a slow-down) in 8 months. 

 

You go rate hike pro – you go.

 

A Few Brief Thoughts On Janet Yellen's Speech Today - Rate hike cartoon 11.30.2015

 

The biggest risk to both markets and the country remains the Fed's forecast. With a "0" in front of GDP and S&P earnings growth down -8.5% y/y, should the Federal Reserve raise rates in June? 

 

I'll let you be the judge of that but consider this: If the US Government used the Fed's prefered measure of inflation, US GDP would have been NEGATIVE in Q1.

  

If you didn't listen to Hedgeye and sold on the last policy (hike) mistake in December, you're being advised to listen now.

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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