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An Update On Global Growth Slowing & Wall Street's False Narratives

Takeaway: Recently reported PMIs and revisions to the OECD's growth outlook spell out what we've long know here at Hedgeye. Global growth is slowing.

An Update On Global Growth Slowing & Wall Street's False Narratives - wall st

 

Wall Street storytelling about the stock market is at an all-time high. And one of those tall tales completely unravelled this week, Hedgeye CEO Keith McCullough writes in a note sent to subscribers this morning: 

 

"One narrative (for almost a year now) has been that “PMIs have bottomed” – and, clearly, post yesterday’s Chicago PMI of 49.3, last night’s China PMI of 50.2, and this morning’s 3 month low Eurozone PMI of 51.5, they have not – neither has copper and/or 'Chinese demand.'"

 

 

MORE EVIDENCE OF GLOBAL #GROWTHSLOWING THIS MORNING

 

The OECD announced it is lowering its global growth forecasts yet again, while our Macro team has been steadfastly predicting global #GrowthSlowing for well over a year now.

 

 

Here's the breakdown of the OECD's revisions:

 

  • Forecast for combined economy of 34 OECD countries is 1.8% this year and 2.1% in 2017 versus 2.2% and 2.3% respectively in November;
  • Similarly, the U.S. economy is expected to grow 1.8% this year and 2.2% in 2017, versus 2.5% and 2.4% in November;
  • The Eurozone economy is forecast to grow 1.6% this year from 1.3% in February. For 2017, the eurozone forecast was held flat at 1.7%;
  • Japanese growth is expected to be 0.7% this year and 0.4% in 2017 versus the 0.8% and 0.6% predictions in February;

 

An Update On Global Growth Slowing & Wall Street's False Narratives - China cartoon 05.06.2016

 

Then there's this fabrication from China, relayed through state-owned media outlet the China Securities Journal.

 

 

All of this boils down to a simple reality.

 

Here's the key takeaway from our outspoken CEO Keith McCullough:

 


UA | Wood To Chop

Takeaway: UA is neck and neck with NKE on Branding. But is still playing JV in parts of ops/fin - as shown by this TSA event. That matters at 65x pe.

We think that this UA miss matters more than the market probably thinks it does. We don’t fault UA one bit for taking a financial hit from the TSA bankruptcy. It’s part of doing business. If this were a company like HBI, it would take a special charge. But it’s not. UA is taking its lumps. Golf Clap for that one (and we mean it).  But we definitely question the timing and magnitude. If nothing else, this has to raise an eybrow as it relates to the financial controls inside the company. We know that any mention of ‘financial controls’ sounds alarming. If this were just any company, we wouldn’t raise a stink. But UA just replaced its CFO, and its stock trades at nearly 65x earnings. Yeah, we know the company took up its sales guidance, and that the Brand is ‘white hot’. Some would argue that’s all that matters, and they might very well be right.

 

But for this kind of multiple, we think it’s fair for shareholders to demand a Great Brand, AND a Great Company – the two don’t necessarily go hand in hand. For all its consistency over the years, particularly during this economic expansion, its financial controls have never been meaningfully stress-tested. Well, here’s a stress test. And if it’s pass/fail, we think it’s safe to say that UA failed. Again, at 65x earnings, we HAVE TO demand excellence across the board. If anyone thinks otherwise, we simply think they’re not being intellectually honest.

 

Let’s Look At The Timeline Of Events:

  • 3/2/16: TSA filed for bankruptcy planning to close 140 stores.
  • 3/4/16: UA proceeded to update its guidance, saying that the TSA announcement ‘had no impact on its guidance’.
  • 4/21/16: UA then raised its guidance when it printed positive 1Q results.
  • 5/18/16: TSA announced it would be closing all 450 stores.
  • 5/31/16: (2 weeks later) UA updated guidance to reflect the loss of TSA as a distribution partner.

 

There’s A Few Things That We Find Interesting

1) There was ‘No impact’ when TSA planned to close 140 stores, or 1/3 of its fleet, but a 13% earnings hit to UA when it closed the other two-thirds. That makes little sense to us.

2) The Impairment Seems Reasonable. At the end of FY15, the balance of TSA receivables was $32.5mm.  UA was therefore able to recoup almost $10mm as TSA entered bankruptcy and now takes a $23mm impairment, putting TSA at 4% of DSO, in line with its percentage of UA sales.

3) But SHOULD it be in line with others as a percent of sales? We’d argue that any company worth its salt would have seen this bankruptcy coming from a mile away – at least a year or two out. Nike has about 2.5x the exposure at TSA than UA, and we’d bet that its claim in the bankruptcy courts will be around the size of UA’s. The difference is that Nike has likely been tightening its TSA receivables meaningfully over time to mitigate exposure to this kind of event. It does not appear that UA has been following suit.

 

Our point here is that UA has been closing the gap meaningfully with Nike over the past few years in the US, which is next to impossible to do. Most of us simply think that the same is happening operationally and financially. But that has yet to really happen. The good news for UA is that this can certainly be fixed, and we think it’s a priority. But when investors evaluate UA’s multiple today, this ‘room for improvement’ behind the scenes should be considered.  When the economic cycle ends it matters most.


The Canary In China's Coal Mine

Takeaway: A collapse in Chinese Steel remains our canary.

Editor's Note: This is a brief excerpt from a recent institutional research note written by Hedgeye analyst Josh Steiner. Email sales@hedgeye.com for more information.

The Canary In China's Coal Mine - China cartoon 07.07.2015

 

Chinese steel prices resumed their collapse last week. They fell 7.4% w/w and have now retraced approximately 2/3 of their rally since February. We continue to view China's reflationary credit push in 1Q as the proximate cause for much of the broader-based commodities/EM rebound.

 

So it's relevant that Steel prices are collapsing again.

Chinese Steel

Steel prices in China fell 7.4% last week, or 185 yuan/ton, to 2317 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy. 

 

Click to enlarge.

The Canary In China's Coal Mine - z chi steel

 

Bonus chart ... Chinese Non-Performing Loans

Chinese non-performing loans amount to 1,392 billion Yuan as of March 31, 2016, which is up +41.7% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly. 

 

Click to enlarge.

The Canary In China's Coal Mine - z chi loans

 

More insight from Steiner below on The Macro Show


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 80.32%
  • SHORT SIGNALS 78.48%

HOLX | 3D UPDATE | FALLING SHORT QTD

Takeaway: Facility conversion remains slow at 75 facilities QTD vs 360 expected for the full quarter

SUMMARY

The weekly updates of the 3D Tomo-Tracker have remained on a slow pace for the last several weeks, pulling away from the s-curve forecast.  As a reminder, the s-cuve forecast already drives our Breast Health revenue estimate below consensus, particulalry in 2017.   In order to minimize the variance between the actual and estimated adoption curves, we will at some point either see a significant pick up in placements, or change the s-curve inputs.  Changing the s-curve inputs will not just lower our 3D Product revenue estimate for F3Q16, but for the subsequent quarters through 2017.

HOLX | 3D UPDATE  | FALLING SHORT QTD - 3D M ay 2016

REVENUE SCHEDULE

By combining both Hologic's recent changes to their revenue reporting by segment and product line with data we have previously gathered from filings and transcripts, we built what we believe is a reasonable estimate of revenue for both 3D and 2D mammography.  The analysis provides a framework which we believe may more acturately reflect the 3D Tomo-Tracker facility data.  At 75 new facilities QTD, actual updates are falling well short of the s-curve derived 368 facilites expected which translates into 3D product revenue directly.  Assuming the slow 3D placement trend continues through the end of June, we would expect 3D product revenue to come under pressure, as well as gross margins.  

 

HOLX | 3D UPDATE  | FALLING SHORT QTD - 3D revenue schedule

 

Please call or e-mail with any questions.

 

Thomas Tobin
Managing Director 

@HedgeyeHC

 

Andrew Freedman

Analyst

@HedgeyeHIT 


[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust

Takeaway: Defensive bond flows continued to outpace equity by $8.3 B last week, although slightly less than $12.3 B in the prior week.

Editor's Note: Below is a complimentary research note originally published May 26, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

*  *  *  *

 

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Fund flows in the 5-day period ending May 18th were directionally the same as the prior week as investors continued to make defensive allocations, although the spread between bond and equity flows eased somewhat with bond flows outpacing equity by $8.3 billion, slightly less than $12.3 billion in the previous week. Leading this defensive trend over the past 15 weeks has been the price of Federated Investors stock (FII). As the leading public money fund manager in money funds and other short term fixed income instruments, Federated benefits from defensive allocatoins, and its stock price has risen +31% since February 1st and is up +13% year-to-date before a solid +3% dividend yield. Federated Investors has been a Best Ideas long since December 2014 and remains on our top ideas list in Financials.

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI1 2 normal 6 1

 

All domestic equity categories continued to bleed last week, losing -$2.0 billion. Equity ETFs also continued their string of losses with -$2.0 billion in outflows. Meanwhile international equity mutual funds took in +$844 million. In fixed income, investment grade, other, and tax-free bond funds all continued last week's inflows, taking in +$2.6 billion, +$1.6 billion, and +$2.2 billion respectively. Additionally, fixed income ETF flows accelerated to +$1.5 billion. Meanwhile, high yield and global bond funds lost -$695 million and -$2.0 billion respectively. Finally, investors shored up +$4 billion of cash in money funds last week.


[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI19

 

In the most recent 5-day period ending May 18th, total equity mutual funds put up net outflows of -$1.2 billion, outpacing the year-to-date weekly average outflow of -$2.1 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$3.7 billion, outpacing the year-to-date weekly average inflow of +$2.4 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net redemptions of -$2.0 billion, trailing the year-to-date weekly average outflow of -$1.4 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.5 billion, trailing the year-to-date weekly average inflow of +$1.6 billion but outpacing the 2015 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI2

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI3

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI4

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI5

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI12

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI13

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI14


Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI7

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors pulled -$568 million or -4% from the health care XLV ETF.

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI9


Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$8.3 billion spread for the week (-$3.1 billion of total equity outflow net of the +$5.2 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is -$1.7 billion (negative numbers imply more positive money flow to bonds for the week) with a 52-week high of +$20.2 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI11


PMI's, Yields, SP500

Client Talking Points

PMI's

One narrative (for almost a year now) has been that “PMIs have bottomed” – and, clearly, post yesterday’s Chicago PMI of 49.3, last night’s China PMI of 50.2, and this morning’s 3 month low Eurozone PMI of 51.5, they have not – neither has copper and/or “Chinese demand”.

Yields

Around the world (Swiss 10yr yield hitting new lows this am at -0.40%), long-term yields have had #TheCycle right from a GDP #GrowthSlowing perspective – question now is, with the Fed “probably” raising rates in June/July, what do we do with our league leading positions in Long-Term Bonds, Munis, Utes, etc? We say it’s time to book some gains and enjoy the summer – we can always buy them back.

SP500

It’s a good thing they ramped SPX +1.4% on May 24th on a down -16% volume day (vs. the 1 month avg) – that all but ensured that many aren’t “beating the market” YTD unless they were super long #GrowthSlowing (Utes, XLU +13.6% YTD) and/or Reflation (Energy +10.9% YTD) for the period (MAR/APR) when Janet was diving dovish… now back to hawkish, because all is well, eh?

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/31/16 77% 0% 0% 6% 11% 6%
6/1/16 77% 0% 0% 6% 11% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/31/16 77% 0% 0% 18% 33% 18%
6/1/16 77% 0% 0% 18% 33% 18%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
MCD

For some perspective on the Macro environment and why we favor companies like McDonald's (MCD), here's an excerpt from the Early Look written by Hedgeye CEO Keith McCullough:

 

Taking a step back, don’t forget where US Consumers (70% of GDP) were at this time last year:

 

  • US Employment Growth (NFP) was putting in a cycle peak
  • US Consumer Confidence was putting in a cycle peak
  • US Consumption Growth was putting in a cycle peak

 

Peak. Peak. #Peak!

 

And what happens when you start to lap the cycle peak? Well, instead of crappy Baby Boom capacity putting up mediocre (barely positive) same store sales at the peak, they look even crappier on the back side of the cycle."

 

That's why we like large-cap, low-beta, liquid companies like McDonald's in this tumultuous market environment. Case in point, earlier in the week, MCD hit an all-time high. Since we added the company to Investing Ideas, it is up almost 30%.

 

Stick with it. Restaurants analyst Howard Penney reiterates his "road to $150" call, implyling more than 15% upside from here.

TLT

Credit markets are one of the major beneficiaries (maybe the largest) of the reflation trade since February. While yield spread compression has been a positive for Long Bonds (TLT, ZROZ), a perceived monetary policy shift and a collapse in bond market volatility expectations have been a positive for Junk Bonds (JNK), but we don’t expect it to continue.

 

With growth continuing to slow alongside consensus positioning broadly, downside deflation risk is on the table. As we’ve highlighted on a daily basis, consumption growth and labor market growth peaked in Q1 2015 and both are slowing alongside a continued corporate profits slowdown. This mix:

  • Smells like incremental deflation on the margin;
  • Is a huge risk for high yield credit (JNK);

 

ZROZ

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. 

 

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), and especially Gold (GLD). 

 

Three for the Road

TWEET OF THE DAY

[NEW] About Everything: Department Stores = Endangered Species? https://app.hedgeye.com/insights/51291-about-everything-everything-must-go … via @HoweGeneration $JWN $TGT $WMT $M $JCP $DDS

@Hedgeye

QUOTE OF THE DAY

"If you're going to have to bed them to play, it's  not going to work."

-Chuck Daly

STAT OF THE DAY

Without the 3 point line, Jerry West scored 2,309 points and recorded 1,240 rebounds during his career at West Virginia University.


Early Look

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