OPEC Insight | McMonigle: Saudis May Seek Oil Policy Change In 2017

Hedgeye Potomac Senior Energy Policy Analyst Joe McMonigle is on the ground in Vienna ahead of tomorrow's OPEC meeting. In the interview below with Leslie Hayward from Energy Fuse, McMonigle provides key insights ahead of the meeting and discusses why Saudi Arabia may seek an OPEC oil policy change in 2017.


Click below to watch.

ZROZ: We Are Removing Pimco 25+ Year Zero Coupon US Treasury ETF From Investing Ideas

Takeaway: Please note we are removing Pimco 25+ Year Zero Coupon US Treasury ETF from Investing Ideas (long side) today.

ZROZ: We Are Removing Pimco 25+ Year Zero Coupon US Treasury ETF From Investing Ideas - Growth cartoon 0624.2014


In Real-Time Alerts today, Hedgeye CEO Keith McCullough explained why investors should be selling long exposure to Pimco 25+ Year Zero Coupon US Treasury ETF (ZROZ):


"Yep, with your #GrowthSlowing investment exposures having a great absolute and relative day, it's time to book some more gains and raise cash.


On Bond Yields, this is what I wrote to our Institutional Subscribers this morning – 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? I say it’s time to book some gains and enjoy the summer – we can always buy them back.


No one ever went broke booking gains,


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.'"





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:


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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 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


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


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.



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 



Andrew Freedman



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