Last week, hedge fund titan George Soros grabbed headlines after it was announced he had come out of semi-retirement and placed bearish bets, shorting the S&P 500 and buying gold.
Hedgeye Potomac is hosting a call with one of Washington’s top political strategists, Scott Reed, to share insight on the presidential election, the upcoming Democratic and Republican conventions, and outlook on the Senate and House races this fall.
The call will take place on Tuesday, June 21st at 11am ET with prepared remarks from Reed followed by Q&A.
KEY TOPICS ON THE CALL WILL INCLUDE
ABOUT SCOTT REED
Scott Reed is the senior political strategist at the U.S. Chamber of Commerce. He is responsible for overseeing the Chamber’s federal voter education program. Reed created and implemented the blueprint for that strategy to help recruit business-friendly candidates, overseeing traditional and digital advertising campaigns, and identifying credible messengers to showcase the importance of the free enterprise system.
Reed was campaign manager for Bob Dole’s 1996 presidential campaign. He oversaw the national campaign, which included political strategy, policy development, communications, and advertising during the GOP primary and the general election. In addition, he directed preparations for the 1996 Republican National Convention in San Diego and the vice presidential selection process of Jack Kemp. In 1993, Reed was appointed executive director of the Republican National Committee. He served as chief operating officer of the GOP during the historic elections in 1993 and 1994 when the Republicans gained control of both the House and the Senate for the first time in more than 40 years. During the Bush administration, Reed served as chief of staff to Secretary Jack Kemp at the Department of Housing and Urban Development. He directed personnel, political, and policy matters, employing a long-term empowerment and privatization program.
Confirmation Number: 13638941
Takeaway: Misguided? Out to lunch? Delusional? You decide.
That was San Francisco Fed head John Williams' call in January of this year.
Now that the Fed has turned dovish (again), with poor economic data continuing its past peak cliffdive, markets are discounting the probability of any rate hike in 2016 at all. Currently, the market's probability of a hike isn't above 50% until February 2017.
Going out on a limb here ... but five hikes look like a stretch (given that there are just five meetings left in 2016).
Click to enlarge
Here's an illuminating excerpt from the interview with CNBC's Steve Liesman back in January, in which John Williams discussed his rate hike outlook.
LIESMAN: So let's talk about the path for Fed rate hikes this year. The median seems to suggest four this year. Is that also your forecast?
WILLIAMS: Well, I think that given the forecast they have for where the economy's going, what's happening with inflation – and inflation is the one thing that we're still struggling to get back to our 2% goal. That to me is the main focus. You know, I think something in that 3 to 5 rate hike range makes sense, at least at this time. But we're data dependent. We continue to be data dependent so the data's suggesting that gradual pace of rate hikes makes sense. But we'll have to re-evaluate that, reassess that, based on where we see inflation and other indicators that kind of are factors in inflation and how we see economic growth over the next year." (Emphasis added)
Williams continued saying that, by his estimation, U.S. GDP is headed toward 2% at the end of this year.
(**If you'd like to read more Fed nonsense, here's the full transcript of the interview with links to the video.)
Takeaway: This is very bad for HBI almost any way we slice it.
A quick note on the CEO stepping down at HBI, which is on our Best Idea List as a Short.
a) HBI is the leader in a no-growth category
b) Starting to feel pressure from competition at the high-end (Tommy John, Lululemon, Underarmour, etc…) while getting incrementally squeezed at the low end as Gildan gets heavier into underwear.
c) Margins are beyond peak as factory utilization (something most retail analysts don’t understand) is at peak of 90%+, and cotton costs are near trough.
d) The primary channels where HBI sells its product clearly have too much inventory (WalMart, Target, Macy’s, Kohl’s, JC Penney, etc…)
e) Due to the grim outlook in its ‘core’ business, HBI has been acquiring other businesses at what we’d consider an alarming rate at equally alarming prices. Its latest acquisition – an underwear company in Australia -- is at 12x EBITDA according to the acquired company – despite Noll’s assertion that they were buying it closer to 10x EBITDA. Noll announced that he is stepping down before that deal even closes.
f) HBI takes egregious special charges that strip out of earnings costs that would otherwise prevent management from getting paid, according to what is dictated in the proxy statement. These ‘adjusted earnings’ have been a key factor in Noll’s compensation, allowing him to sell $26mm in stock over the past 7 months.
g) It’s tax rate of 8.8% is unsustainably low, and is likely to head closer to a normal rate for your average US tax-paying multinational.
The bottom line is that we think HBI is egregiously overpriced with an EBITDA multiple and PE of 12x and 13.9x, respectively. This is a financial model that we view as riddled with risk, and smoothed over for the investment community by ‘special charges’ that we’ve never seen any company take – ever. The only thing ‘special’ about them is that they do a great job in obfuscating the real earnings, and hence the valuation. We think this story is going to end violently for shareholders. We’d avoid it by any means necessary.
Takeaway: The footings now supporting US equity prices are looking pretty tired and fragile.
Editor's Note: Below is a Hedgeye Guest Contributor research note written by our friend Doug Cliggott. Cliggott is a former U.S. equity strategist at Credit Suisse and chief investment strategist at J.P. Morgan. He is currently a lecturer in the Economics Department at UMass Amherst.
A brief note on our contributor policy. While this column does not necessarily reflect the opinion of Hedgeye, suffice to say, more often than not we concur with our contributors. In the piece below, Cliggott writes, "The footings now supporting US equity prices are looking pretty tired and fragile."
Total income has expanded at a slow, but steady pace in the U.S. during the past several quarters – national income grew by 3.1 percent during 2015 and 2.9 percent in Q1.2016. Not much change there. What has changed in an important way is the composition of overall income – labor compensation grew by 4.5 percent in 2015 and accelerated a bit to 5.0 percent in the first quarter.
The flip side of the pick up in labor compensation is a weakening of corporate profits. They contracted by 3.1% in 2015 and by 5.8% in the first quarter. So what we are seeing is a clear weakening of profit margins – a very natural outcome 7 to 8 years into a profit cycle.
The dismal trend in U.S. labor productivity and OECD data on leading economic indicators of the most relevant markets for large US corporations – the US, Europe, China – strongly suggest a further intensification of “profit problems”.
Corporate America has reacted to weakening profitability in traditional fashion. They have scaled back capital spending (down about 2% versus a year ago in the first quarter) and they have slowed their pace of new hiring, from about 200,000 jobs a month this time last year to about 100,000 per month during the past three months.
We know what usually happens next – weaker capex and slower job creation slows demand growth, this weakens profitability further, and down we go in a negative, re-enforcing cycle. The normal “end game” – outright declines in total income and employment – may now be just months away in the U.S.
What corporate America has not done – yet – is slow their accumulation of new debt. Non-financial corporations increased their borrowing in the first quarter by $180 billion, to $8.28 trillion. The last time U.S. corporations borrowed this much in a 3-month period was the last quarter of 2007. And it looks like their primary motivation for borrowing in 2016 is exactly the same as it was back then – to support their stock prices by ratcheting up the amount of cash they give back to shareholders even as their profits and cash flows weaken.
The shrinkage in equity outstanding through both mergers and share buybacks added together with dividend payments totaled $1.27 trillion (at an annual rate) in the first quarter, up about 10 percent from the $1.15 trillion pace during 2015. These shareholder payments represented 59 percent of the after-tax cash flow of non-financial corporations in Q1 2016, up from 53 percent in 2015 and 43 percent in 2014. By contrast, capital spending as a share of cash flow declined modestly, to 80 percent in Q1.2016 versus 83 percent in 2015.
Looking back at seventy years of US financial history, the only time corporate America devoted a similar amount of their cash flows to dividend payments and share buybacks was in 2006 (56 percent) and 2007 (70 percent). And then when corporate borrowing slowed, total shareholder payments were cut hard – to 46 percent of cash flow in 2008, and 25 percent of cash flow in 2009.
The key lesson from this time, I think, is that while corporate cash flow declined by less than 5 percent between 2007 to 2009, shareholder payments were cut by two thirds – from $1.20 trillion to $400 billion.
Since it is commonly acknowledged that shareholder payments are now the primary, and in some months, the sole, source of demand for US equities, the pace of corporate borrowing may be our best guide to the direction stock prices in America. With profits declining and cash flow stalling it wouldn’t be too surprising to see borrowing slowdown real soon.
So here’s the punch line: The footings now supporting US equity prices are looking pretty tired and fragile.
Takeaway: U.S. Consumer Confidence and Jobless Claims data paint an ugly economic picture.
"If you're bullish on a US economic recovery in 2H, I've got a couple of charts for you to be willfully ignorant of," writes Hedgeye Senior Macro analyst Darius Dale.
...Not to mention May's U.S. jobs report, which just so happened to be the worst report in almost six years.
Meanwhile ... our non-consensus call on long bonds (via TLT) continues to serve Hedgeye subscribers rather well too. It's up 12% YTD vs a 2.5% return for the S&P 500.