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Capital Brief: No Money, Mo' Problems For Trump?

Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email sales@hedgeye.com.


Capital Brief: No Money, Mo' Problems For Trump? - capital brief


Donald Trump’s finance team held its first official meeting amid concerns over the campaign’s lack of a finance team, infrastructure and coordination with the RNC with less than five months left to prepare for the general election. In most election cycles, fundraising for presidential campaigns starts 18 to 24 months out - and Trump will be at a disadvantage out of the gate given his continued controversies and general lack of enthusiasm among the Republican donor class leading many to question whether Trump can achieve his previously stated goal of raising $1 billion.


Donors are disturbed with the threadbare nature of his campaign which continues to struggle in carrying out even the most basic of functions. He lacks pollsters, data and field expertise, a policy-writing shop, and a communications apparatus - and will soon find that the general election is a different animal than the primary.


On the other hand, when it comes to fundraising, Hillary Clinton and the Democrats are running like a well-oiled machine. She’s spent well over $200 million, has a large campaign staff with seasoned veterans, and continues to pad her war chest every day. Additionally - with Clinton, well, being a Clinton - she enjoys a deep bench of supporters ready to fundraise, cut ads, hit the campaign trail, and utilize social media. When Bernie Sanders finally exits the race, she’ll look to tap into a deep reservoir of new (and smaller) donors padding her fundraising lead.


In what may be an audition for the prototypical running mate, Elizabeth Warren launched another blistering attack on Donald Trump, the Republican party, and calls for Wall Street reform. Warren has been suggested as  Clinton’s veep choice by none other than Minority Leader Harry Reid, despite his warning on choosing a senator from a state with a Republican governor. The case for Warren is clear - she’s an outspoken populist-progressive leader who would rally the supporters of Bernie Sanders to Clinton’s cause.

Stock Report: Hologic (HOLX)

Takeaway: We added HOLX to Investing Ideas on the short side on 5/27.

Stock Report: Hologic (HOLX) - hologic image chart


We have a long history with Hologic (HOLX). Our first major call on the stock was being long and “looking for a double” in April 2014 when the stock was in the low-$20s.  At that time, our proprietary dataset that tracks the number of U.S. Facilities with a Hologic 3D Tomography machine and S-Curve adoption forecast model suggested a large acceleration in growth through 2015.


While there are other elements of Hologic’s business, historical regression analysis shows that forward multiple is most dependent on the growth rate in the Breast Health (42% of sales) business or 3D Tomography sales. Simply put, get Breast Health growth right and get the stock right.


Fortunately, our initial long calls was correct, but now we are on the other side and the same forecast methodology suggests growth has peaked, and new facility placements will likely turn negative into 2H17.


We will continue to provide updates to our proprietary #TOMOTRACKER that will inform us where we are on the adoption curve and act as a benchmark to test our thesis against.


Stock Report: Hologic (HOLX) - 20160608 HOLX 3D SCurve




Over the intermediate term, we see little that can drive further upside to the stock, outside of an acquisition (which is a risk to our thesis). While we expect growth to continue to come under pressure, our call for -30% downside is likely to play out over the next 12-18 months. 


There are two key drivers that we expect will drive shares of Hologic (HOLX) back into the low-$20s.


1. Slowing 3D Tomo Adoption – Hologic stopped disclosing penetration for 3D mammography, providing the last unit counts and market share in September 2015. For the September 2015 period, the company disclosed 28% penetration into their installed base. Our s-curve for 3D indicates share was 32.4% as of 9/27/2015, which agrees with HOLX management statements.


However, based on our Tomo Tracker data, we believe HOLX has added to their 3D installed base and now sits at 40%. While the rapid pace of 3D conversion led to upside relative to consensus estimates and company guidance for much of 2014 and 2015, we expect facility conversion to turn negative now that we have passed 40%. The arithmetic of s-curves is straight forward and has precedent in the 2D adoption curve. 


It is also worth noting that the gross margin on the 3D system is materially higher (65-70%) than the 2D system (50%) and the corporate average, which prior to the 3D ramp averaged around 52%. Accelerated adoption of 3D systems has driven corporate gross margin up an impressive 1,000 bps to 60% in 2Q16. As 3D growth slows, and eventually goes negative, we expect to see the opposite effect take hold.


Stock Report: Hologic (HOLX) - 20160608  TOMOCLIFF


2. #ACATaper While more difficult to quantify, we believe the Affordable Care Act was a tailwind to HOLX’s diagnostic business.  After years of being uninsured, new enrollees were top consumers of diagnostic tests that Hologic offers, such as HPV and PAP. This segment had been in decline prior to 2014, as a result of lengthening of the recommended interval for PAP testing, but reverted back to mid-single digit growth just as the newly insured under ACA hit the market.  We are looking to several data series to track the utilization impact of the ACA, including Healthcare Employment Job Openings (JOLTS), which we will update on a monthly basis.


Stock Report: Hologic (HOLX) - 20160608 ACAPAP




We expect most of our downside to be realized over a 12-18 month time period, as the gap between our Breast Health estimates and consensus widens over the course of 2017. Specifically, consensus is calling for mid-single digit Breast Health growth in 2H17 compared to our estimate for mid-to-high single digit declines.  Based on the correlation with Breast Health Product Sales growth and our forecast, we can comfortably model a return back to 6-8x EV/EBITDA multiple and a stock in the low-$20s (~12x EV/EBITDA Currently).


Stock Report: Hologic (HOLX) - 20160608 HOLX BreastHealthSalesYoY


Stock Report: Hologic (HOLX) - 20160608 MultipleLeadsGrowth


Stock Report: Hologic (HOLX) - 20160608 EVEBITDA


Stock Report: Hologic (HOLX) - hologic image

Remember The Fed's December Rate Hike? What Happened Again?

Takeaway: Following the Fed's December rate hike, Long Bonds (our favorite macro call) rallied to up 12% year-to-date versus 2.6% for the S&P 500.

Remember The Fed's December Rate Hike? What Happened Again? - Hawk dove cartoon 06.06.2016


As the Fed flounders from rate hike rhetoric to cautious soothsaying, Treasuries have rallied. Take a look at the flattening of the yield curve since the Fed decided to "raise interest rates" in December 2015. The yellow line is the yield curve on 12/15/15 and today's is the green line.


Rate hike ... What rate hike?


Click image to enlarge.

Remember The Fed's December Rate Hike? What Happened Again? - rate hike yield spread


To be clear, long the Long Bond (TLT) has been our most vocal Macro call. 


Heading into this year, it was a massively contrarian and in direct opposition to Wall Street consensus, which remained convinced the 10yr Treasury yield would hit 2.5% to 3% on Fed rate hikes. 


Guess what? Our Long Bond call...




The flattening of the yield curve has paid off massively for investors in TLT. Below are the year-to-date returns on Long Bonds versus the S&P 500.


Remember The Fed's December Rate Hike? What Happened Again? - long bonds vs s p

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

This Is One of the Top-3 Stock Market Bubbles in History


In this excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough and Demographics Sector Head Neil Howe discuss why “the stock market is one gigantic emotional rollercoaster” perched perilously at its peak.


Subscribe to The Macro Show today for access to this and all other episodes. 


Subscribe to Hedgeye on YouTube for all of our free video content.

Got #GrowthSlowing? European Equities Hammered

Takeaway: We again reiterate our call for slowing growth in the Eurozone beginning in Q2.

Got #GrowthSlowing? European Equities Hammered - growth cartoon 10.08.2014


Below is analysis from our Macro team in a note sent to subscribers earlier today:


"Got #GrowthSlowing? We again reiterate our call for slowing growth in the Eurozone beginning in Q2 and today got classic "late to the party" confirmation from the German economy ministry who said the country’s economy had a decent start to the Q2 but its growth pace is likely to slow during the course of the April-June period."


The 1yr drawdowns in European equities are unequivocally terrible:


Got #GrowthSlowing? European Equities Hammered - european equities 6 10


This isn't a trend exclusive to Europe:


"No matter what side of the reflation/deflation trade you’re on, the growth in global demand continues to decelerate on a trending basis. Only 35% of country and regional PMI figures across manufacturing, services and composite readings are both expanding (i.e. > 50) and accelerating sequentially as of last month. The rest are either expanding but decelerating or in outright contraction (i.e. < 50).


With continued evidence of economic contraction, we’re confident stick with growth-slowing allocations (TLT, XLU) while waiting and watching on deflation/reflation exposure."


Here's the S&P sector scorecard:


Got #GrowthSlowing? European Equities Hammered - sector performance 6 10


Takeaway: JPMorgan (JPM) still has extremely bullish sentiment according to our quantitative screen of Financials.

JPMorgan, Bank of America, and Citigroup (Scores: 95, 92, and 92) continue to stand out as three of the most overly bullish stocks on our scoreboard. All three bulge bracket/money center banks have high sell side ratings combined with low levels of short interest which historically have made them underperformers according to our score.


We are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.


The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  


We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.


Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.


The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 








The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”


Let us know if you would like to receive a copy of our black book, which explains this system and its applications.


BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   


SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 






Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

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