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About Everything: The Global Economy Gears Down

Even Before Brexit, Global Growth Was Decelerating.


Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses lackluster global growth and the IMF's continually downgraded GDP forecasts. 


About Everything: The Global Economy Gears Down - dead flower


Shortly before the Brexit vote, the International Monetary Fund (IMF) warned that a British exit could cut U.K. GDP growth by 0.8 to 3.0% in 2017. In the following year, 2018, it projected that Brexit would cut rest-of-EU GDP by 0.2 to 0.5% and rest-of-world GDP by 0.0 to 0.2%.


No news there: Few imagined that Brexit would be a stimulant. What’s less widely known is that the global economy was slowing down well before it entered the Brexit sand trap.


According to the IMF, GDP growth shrank from 5.0% in 2010 to 3.1% last year. The World Bank reports that global GDP growth fell from 3.8% in 2010 to 2.4% last year. The brief re-acceleration in 2014 kindled momentary optimism and then disappeared. Emerging markets and developing economies (EMDEs) have fared the worst, with growth sliding almost every year, while advanced economies have been zig-zagging well below 2% growth for years now. (The IMF and World Bank global growth rates don’t match due to the different ways they weight national GDPs.)


About Everything: The Global Economy Gears Down - chart 2


About Everything: The Global Economy Gears Down - chart 3


Current-year forecasts are marred by negative surprises. The latest IMF projection pegs global growth in 2016 at 3.2%—down from an earlier 2016 projection of 3.4% in January and 3.8% last year. The World Bank’s 2016 projection of 2.4% has likewise shriveled— from 3.2% in January and 3.5% last year.


If this strikes you like a quarterly earnings forecast (where the quarter gets uglier the closer it gets), you’re on to something.


In fact, over the past decade, these highly compensated, D.C.-based bureaucrats have consistently chosen to revise their predictions downward. Back in 2010, when the IMF took its first stab at growth figures for 2015, the estimate (+4.6 percent) came in at nearly double the final figure. 


About Everything: The Global Economy Gears Down - chart 4


About Everything: The Global Economy Gears Down - chart 5


This pattern means that, as disappointing as the 2016 projection looks today, the final number will probably come in even lower.


Not surprisingly, the IMF year-ahead odds of recession have been rising since April of 2015 in nearly every region except Emerging Asia (where it remains zero). Since Latin America is already in a recession, that one is an easy call.


About Everything: The Global Economy Gears Down - chart 6


If you don’t trust national accounting and prefer to look at the activity reported by firms, the picture you get is pretty much the same. Take a look at Markit’s Global PMIs: You see a dip in 2012, a peak in 2014, and decline thereafter. Indeed, Global Manufacturing now teeters on the edge of contraction.


About Everything: The Global Economy Gears Down - chart 7


The high-income economies haven’t exactly surged over the past five years—but they haven’t done too badly, either. Back in 2012 and 2013, both the Eurozone and Japan were moving in and out of recession. Today, at least for now, they’re out. According to the World Bank, GDP growth in these regions did pick up in 2014, rising from 1.3% to 1.8% (about where it was last year). Real import growth and real investment growth have been trending up since 2012.


Labor conditions are also improving in most advanced economies—most notably the United States. According to the most recent BLS Employment Situation Summary, the U.S. unemployment rate took its first big step downward in months, hitting 4.7% in May.


Other indicators are less encouraging. The IMF reports that headline inflation in advanced economies averaged just 0.3% in 2015, the lowest level since the recession. Long-term interest rates have been on a downward slide for years. Ten-year bond yields are now well below 2% in the United States and—post-Brexit—heading below zero in Germany and Japan.


Unfavorable demographics has constrained high-income GDP growth in recent years and will constrain it further in the future. According to the U.N. Population Division’s medium growth variant, the working-age populations of Japan and most European nations have already peaked and will decline at gathering speed in the decades to come.


While the developed world is speeding up slightly, the EMDEs as a whole is slowing down sharply. Unlike in advanced economies, rates of real import growth and real investment growth have been falling in EMDEs since 2010 and are now approaching recession levels.


About Everything: The Global Economy Gears Down - chart 8


Yet the bigger story is the wide divergence of growth trends within the EMDEs.


Commodity-exporting EMDEs. Economies that mainly export stuff (oil, gas, minerals, agricultural products) are doing very poorly as a whole. The World Bank projects that commodity-exporting emerging markets will grow by a miniscule 0.4% this year, down from 3.2% in 2013. That’s by far the fastest deceleration of any group.


About Everything: The Global Economy Gears Down - chart 9


Obviously, these economies are getting hammered by falling commodity prices. Energy prices plummeted by more than two-thirds from mid-2014 to early 2016, and raw materials did little better. Sure, they’ve rebounded some this year, but commodities are still trading at bargain-bin prices, much to the dismay of export-dependent emerging markets like Russia, Saudi Arabia, Nigeria, South Africa, Venezuela, Chile, and Brazil.


Part of the problem is China’s “rebalancing” policy—moving the economy away from massive capital outlays and toward consumer spending. This may be good news for China’s emerging middle class, but it’s bad news for the export-dependent and often low-income countries that used to furnish the raw materials for all of China’s buildings, trains, harbors, and dams.


China. The largest of the non-export dependent EMDEs, China is still growing rapidly—just less rapidly than before. The World Bank predicts that the country’s GDP growth rate will shrink from 7.7% in 2013 to 6.3% in 2018.


On top of China’s marked shift in trade philosophy, it’s also facing a “currency crisis” that has many savers looking for an exit ramp. China’s efforts to downsize its industrial capacity, plus efforts to defend its currency, have had a tidal impact on the direction of global capital flows. Emerging market capital inflows have recently turned negative for the first time since 2008.


About Everything: The Global Economy Gears Down - chart 10


Other non-export dependent EMDEs. Most other non-exporters, however, are doing better than they were a few years ago. According to the World Bank, the GDP for this group (excluding China) has grown by nearly a full percentage point since 2013.


India’s economy is expanding well over 7% annually, where it’s expected to remain in the near future. Southeast Asia’s largest economies, the ASEAN-5 (Malaysia, Philippines, Indonesia, Thailand, and Vietnam), together are growing more than 4% per year.


Typically, these economies benefit from lower raw material and energy prices. And few of them are hurt by China’s declining import demand: ASEAN, for example, has turned into a net importer of Chinese goods.


  • Even before Brexit, global growth was gearing down. Each year since 2010—aside from a blip in 2014—the world economy’s growth rate has slowed. The IMF and the World Bank, if the past is any guide, will continue to lower their estimates for the coming years as time passes.
  • The global slowdown varies widely by region. China and the export-dependent EMDEs are falling fastest. Advanced economies are stable, even rising slightly, while non-export EMDEs (ex China) are speeding up

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.)




1. Happy Independence Day (7/1/2016)

This Week In Hedgeye Cartoons - 4th of July cartoon 07.01.2016


Happy Independence Day.


2. Running Of The Bears (6/30/2016)

This Week In Hedgeye Cartoons - Spain cartoon 06.30.2016


Spain's IBEX is down 32% from its 2015 peak.


3. Guru Wisdom (6/29/2016)

This Week In Hedgeye Cartoons - central bankers cartoon 06.29.2016


This one speaks for itself.


4. Eject! (6/28/2016)

This Week In Hedgeye Cartoons - EU cartoon 06.28.2016


Who's next? Grexit? Spexit? Frexit?


5. A Not So Happy Hour For Bulls (6/27/2016)

This Week In Hedgeye Cartoons - Not last Friday cartoon 06.27.2016


Equity markets continued to tumble today as post-Brexit aftershocks continue to be felt.

The Week Ahead

The Economic Data calendar for the week of the 4th of July through the 8th of July is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - 07.01.16 Week Ahead

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 80.51%
  • SHORT SIGNALS 78.32%

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: DNKN, HOLX, HBI, LAZ, MDRX, FL, JNK, TIF, WAB, ZBH, TIP, LMT, GLD, TLT

Investing Ideas Newsletter - 4th of July cartoon 07.01.2016


Below are our analysts’ new updates on our fourteen 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 removed McDonald's (MCD) from the long side of Investing Ideas. We will send Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction Investing Ideas in a seperate email.



To view our analyst's original report on Junk Bonds click here, here for TIPs and here for Gold.


It was another week of all-time lows in long-term Treasury yields and YTD highs in Gold (GLD), Treasury Inflation-Protected Securities (TIP), and Long Bonds (TLT is at a new all-time high!) as the rotation out of volatile equity markets continues. Investors are getting fed-up with the value in their accounts going up and down on a daily basis as evidenced in the fund flows chart at the bottom of the note.


Since equity markets peaked last summer, TLT has been a resilient and less volatile source of absolute alpha, and the good news is that spotting the opportunity requires a daily data grind and a wrestling with reality more than a sky-high IQ:

  • S&P 500: +0.1% Y/Y
  • TLT: +22.0% Y/Y

Brexit, Frexit, Yuan devaluation – whatever the story, investors are paying higher premiums for the safety and appreciation potential of the long bond, a source of long-standing outperformance in this #GrowthSlowing environment. Moving into 2015, net futures and options positioning shows that traders had the largest net short position in the 10-year Treasury of the entire cycle, as most were positioned for rate hikes and a “lift-off economy."


A year and a half later, the 10-year yield is crashing to all-time lows. That’s called consensus being out to lunch on growth.  


Investing Ideas Newsletter - 07.01.16 US 10YR


Investing Ideas Newsletter - 07.01.16 treasury positioning


The bottom line is that individual investors are no longer buying the latest bullet market narratives from old Wall Street. In the fund flow chart below which is published by our Financials team, we show the net difference between equity and bond money flow, which has been in negative territory for all of 2016. We agree with these allocation decisions in today’s environment, and we hope some of our subscribers are contributing to this shift and protecting their hard-earned wealth.  


Investing Ideas Newsletter - 07.01.16 ICI Equity Bond Flows


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


No update on Dunkin Brands (DNKN) this week but Hedgeye Restaurants analyst Howard Penney reiterates his short call. Here are the key takeaways on DNKN from our original stock report:


  • Slowing Top Line: Since peaking in 4Q12, Dunkin Brands' 2-year same-store sales trends have slowed by over 350 basis points to 1.7% in 1Q16. Adjusting for the weather benefit in 1Q16, 2-year sales trends are likely flat. 

  • Our proprietary Donut Tracker model continues to trend downward, making DNKN’s positive performance in 1Q16 look like a one quarter phenomenon supported by price, and is not indicative of stability or strength.

  • Overcomplicating The Menu Is Bad For Operations: DNKN currently faces an issue many operators have faced => menu overload. The number of Dunkin’ menu items is up over 43% since 2010 and up 19% YoY in 2015.

  • Slowing Unit Growth And Uses of Cash: The slowing sales trends poses a longer-term risk to the company => slowing unit growth. In addition, the further the brand gets from the core markets in New England, the more expensive it is to build stores.

  • Finally, due to the aforementioned slowing trends, the company’s ability to pay out significant amounts of cash to shareholders is also at risk.


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


We got further confirmation of our Wabtech (WAB) short thesis this week. According to the most recent report issued by railroad industry consultancy group Economic Planning Associates:


"Railcar demand 'has weakened significantly in this year’s opening quarter and backlogs have dropped to only 95,038 cars,' according to the most recent report issued by Economic Planning Associates. The smaller backlog represents 5.6 quarters (roughly 17 months, through November 2017) of assemblies at current rates."


Other key callouts from the report:

  • “The railroads will shoulder a heavy commodities burden this year,”
  • “Coal and petroleum loadings have faltered considerably this year and will be slow in recovery."
  • Demand for coal cars “is nonexistent,” EPA said. 

We've continued to reiterate our view that weak rail volumes and poor railcar and locomotive orders will weigh on WAB. We continue to expect 2016 EPS ex-Faiveley below $4/share as the company’s core freight market enters a multi-year downturn.  


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

ZBH | Yeah, we could be wrong

Zimmer Biomet (ZBH) has been a frustrating name. On the one hand, we have built out and challenged a longer term negative view of the orthopedic space and ZBH’s role, particulalry now that they have doubled down on the market at a time when pricing and unit volume (in our view) are likely to deteriorate for some time. But a long term view, particulalry when it’s not held by the majority of investors, is a problem when the short term data doesn’t agree.  In a battle of narratives, the last data point carry forward is the norm. 


So with growth across the US Medical economy coming in stronger in 1Q16 and acclerating on a 2Y basis, despite the ACA tailwind fading, the question to answer now is where are we wrong? On the pricing front, the PPI Artificial Joints is a useful proxy for ZBH, although not perfect.  The comparison is tougher sequentially so we’re expecting (our narrative) is that pricing gets worse sequentially and the positive narrative, that pricing is getting less worse and positive, will be a challenge to hold. 


As for the broader uptick in consumption, we are in the process of challenging our own #ACATaper view by gathering data to analyze the number of insured persons in the United States, their consumption patterns over multiple years, and test if there is indeed a large upswing in medical consumption many years in the making.  We’ll present our findings the week after next, so stay tuned. And if you’ve lost money in ZBH following our short recommendation, we’re not taking it lightly or sitting on our hands waiting for a better outcome.


Investing Ideas Newsletter - zbh


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


This week, Hanesbrands (HBI) closed its acquisition of Champion Europe at a multiple of 10x EBITDA. 


One of the reasons we think HBI is paying desperately high multiples for new businesses is that they need to offset the quietly declining core US business. One area we think is underappreciated is the magnitude of the impact that Gildan is having on the low end of the underwear market. NPD reported about 7% share for Gildan Branded (which was just launched in 2013) underwear last year, which jumped to over 8% in Q1.  The sentiment was that Gildan branded would take private label share, but if the NPD data is correct, the magnitude of growth implies it must be taking share from national brands like Hanes as well, which puts further pressure on an already depressed organic growth rate.


To view our analyst's original report on Allscripts click here. Below is an excerpt from an institutional research note written by our Healthcare team on Allscripts (MDRX).



Takeaway: Another ambulatory loss likely for Allscripts and Sunrise risk in 3 Hospitals.


Investing Ideas Newsletter - mdrx1


Providence Health & Services (PHS) and St. Joseph Health (STJSH) signed a letter of intent to merge in July 2015, and recently received regulatory approval from the California Attorney General's office.  The combined organization will have 44 hospitals (29 PHS / 14 STJSH) and over 5,000 employed physicians (~4,000 PHS / ~1,500 STJSH). St. Joseph Health leverages a 'best of breed' IT strategy with exposure to 106 products from 75 different vendors.


STJSH's primary EHR vendors are MEDITECH for inpatient, Allscripts Pro in ambulatory and GE Centricity for practice management.  STJSH also uses Allscript's FollowMyHealth patient portal in their medical group, as well as Hoag Health's medical group where they have an affiliation.


We believe these vendors are at risk for replacement as PHS is the larger organization in the merger and uses Epic as their primary inpatient and ambulatory EHR.

allscripts loss likely

For Allscripts, this translates into approximately $4.4 million in annual revenue at risk based on $429 per doc per month pricing for Pro EHR and $69 per doc per month pricing for FollowMyHealth. Assuming 5-year contracts, this equals a bookings value of $22 million.  


However, the risk for Allscripts extends beyond St. Joseph Health as Hoag Health will likely feel pressure to make the switch to Epic as a result of a 2013 affiliation to form an integrated care network with St. Joseph. Hoag Health currently uses Allscripts Sunrise EHR for their 3 hospitals (571 beds) and 104 employed physicians, which we estimate represents $3-6 million in recurring maintenance revenue to Allscripts.


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


Last week's Brexit announcement will likely have very negative implications for Tiffany (TIF).

  1. In the near term the resulting drops in the Euro and the pound will reduce reported revenue as Europe makes up ~11% of sales.
  2. Tiffany has been hurt by weak tourist traffic in the US over the last year and a half,  while about 20% of US sales come from tourists.  Expectations had been for this to be at or near a bottom with relatively stabile FX rates, but the strengthening dollar after the Brexit vote should only exacerbate the tourism issues.

Overall we continue to see global consumer demand slowing which means Tiffany earnings should continue to underperform expectations.


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


While risk assets for the week recovered slightly after the unexpected shock of the British exit from the EU last week, some stories are starting to greatly lag the broader indices. Lazard (LAZ) is working on a downright awful earnings print for the second quarter and we think entering the seasonally slow summer months will also forgo any hope of a rebound for third quarter numbers.


Furthermore, we are operating on a $2.57 per share earnings estimate for 2017, -30% below the Street and we think the firm has no chance of comping higher year-over-year until 1Q 2017. With the Street still offsides on estimates and a 2016 that can only be salvaged by a rebound in 4Q, we remain Sell rated on shares of LAZ. Our fair value range continues at $22-26 per share.


Investing Ideas Newsletter - laz


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


Nike reported its fiscal 4th quarter 2016 this week and results were poor.


Sales missed. Nike confirmed price pressure with basketball that retailers raised last month. Futures slowed sequentially, and missed expectations in every region. Gross Margins were uncharacteristically weak. Inventories were quite weak – eroding sequentially by 500bps relative to sales. SG&A remains elevated (Olympics). And guidance suggests an acceleration throughout the year – but isn’t that a stretch w/Brexit and 23% of Nike’s sales in Europe?


How does this translate to Foot Locker (FL)?

There’s no way FL comes out of this smelling better than it does today. Sales should weaken, gross margins should decline (remember 20%+ Europe exposure), SG&A and capex will BOTH head higher as FL tries to build up a more successful e-comm business. Management is good at FL, and it will spend where it needs to – and after its Nike business went from 50% to 73% of revs over six years it really did not have to invest at all (hence unsustainably low SG&A). Now that changes.


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

HOLX | MQSA shows the market is where Hologic was 9 months ago. 

Takeaway: MQSA DBT facilities up 63 m/m while HOLX gains 21.



MQSA added DBT facility and unit counts at the end of May.  With the update this morning for June, we can see that the market added 107 new units and 63 new facilities month over month.  This compares to just 21 new facilities in our Tomo Tracker.  We believe this means that market share was less robust month over month than the stated market share of ~60% that management has quoted in the past.  The DBT units per facility were flat at 1.38 per facility, below the 1.47 for FFDM broadly (3D is a subset of FFDM).  This implies facilities have yet to convert 100% of their 2D gantries, but that further upside is limited.


The market is 28.7% penetrated, exactly where Hologic (HOLX) was 9 months ago when the company last reported 3D unit number of 2,400.  We think it is reasonable that Hologic has penetrated their market share to a greater degree than the DBT adoption reported by MQSA this morning.  This would imply that growth will begin to decline sequentially from here and turn negative on a year over year basis late 4Q16/1Q17.



As the variance between actual and predicted penetration for HOLX 3D facilities widens, the implication for our below consensus 2017 Breast Health estimate is that we will need to reduce our estimate for 3D palcements and revenue, something we will address prior to the company's 3Q16 earnings release.  Estimates have come in dramatically since the last earnings release, but management has been strenuous with their description of a market that has continued "runway" for growth, setting up a reasonable opportuninty for negative revision in the near term should our view play out.


Investing Ideas Newsletter - TOMOJUL2016


Click here to read our original report on Lockheed Martin.

Cartoon of the Day: Happy Independence Day

Cartoon of the Day: Happy Independence Day - 4th of July cartoon 07.01.2016


Happy Independence Day.

HEDGEYE Exchange Tracker | Fireworks

Takeaway: The Brexit explosion pushed volume to extreme highs making the last week of the quarter the biggest for options and cash equity all quarter.

Weekly Activity Wrap Up

The breaking Brexit pushed exchange traded volumes to extreme highs this week with futures traded through CME Group and ICE topping 24.7 million contracts per day, pushing 2Q16 average daily volume in the futures industry to 19.8 million, +12% higher than the year-ago quarter. Open interest at CME has grown by +16% year-to-date in 2016, a widening gap to the more energy (and European) exposure at ICE which has zero YTD growth in open interest. As we head into the second part of the year, CME's variable dividend starts to be discounted by the market which we forecast at over $3 per share this year (to be announced in December) for a total yield of +5.5%. The stock remains on our Best Ideas list as a Long and is a defensive stock in volatile markets.


Options volume came in at 20.8 million contracts per day, the highest level all quarter, bringing the 2Q16 ADV to 15.8 million, +3% higher than 2Q15. Finally, cash equity volume came in at 10.3 billion share per day this week, the highest level all quarter, bringing the 2Q16 ADV to 7.3 billion, +14% higher than one year ago.


HEDGEYE Exchange Tracker | Fireworks - XMon16


U.S. Cash Equity Detail

U.S. cash equities trading came in at 10.3 billion shares per day this week, bringing the 2Q16 ADV to 7.3 billion. That marks +14% Y/Y growth. The market share battle for volume is mixed. The New York Stock Exchange/ICE took a 25% share of second-quarter volume, which is +115 bps higher Y/Y, while NASDAQ took a 17% share, -115 bps lower than one year ago.


HEDGEYE Exchange Tracker | Fireworks - XMon2


HEDGEYE Exchange Tracker | Fireworks - XMon3


U.S. Options Detail

U.S. options activity came in at a 20.8 million ADV this week, bringing the 2Q16 average to 15.8 million, +3% higher than the year-ago quarter. In the market share battle amongst venues, NYSE/ICE's 17% share of 2Q16 volume is +17 bps higher than one year ago. BATS has also been taking share from the competing exchanges, up to a 12% share from 10% a year ago. NASDAQ's 22% share is consistent with 2Q15. Meanwhile, CBOE's 27% market share of 2Q16 is down -19 bps Y/Y, although it has been rising in recent weeks. Finally, ISE/Deutsche's 14% share is -183 bps lower than 2Q15.


HEDGEYE Exchange Tracker | Fireworks - XMon4


HEDGEYE Exchange Tracker | Fireworks - XMon5


U.S. Futures Detail

18.7 million futures contracts per day traded through CME Group this week, bringing the 2Q16 ADV to 15.1 million, +13% higher Y/Y. Additionally, CME open interest, the most important beacon of forward activity, currently sits at 105.7 million CME contracts pending, good for +16% growth over the 91.3 million pending at the end of 4Q15, although a contraction from the previous week's +19%.


Contracts traded through ICE came in at 6.0 million per day this week, the exchange's highest volume all quarter, bringing the 2Q16 ADV to 4.7 million, a +10% Y/Y expansion. ICE open interest this week tallied 63.8 million contracts, about in line with the 63.7 million contracts open at the end of 4Q15 but a contraction from the previous week's +1%.


HEDGEYE Exchange Tracker | Fireworks - XMon6


HEDGEYE Exchange Tracker | Fireworks - XMon8


HEDGEYE Exchange Tracker | Fireworks - XMon7


HEDGEYE Exchange Tracker | Fireworks - XMon9 


Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.


HEDGEYE Exchange Tracker | Fireworks - XMon10


HEDGEYE Exchange Tracker | Fireworks - XMon11


HEDGEYE Exchange Tracker | Fireworks - XMon12


HEDGEYE Exchange Tracker | Fireworks - XMon13


HEDGEYE Exchange Tracker | Fireworks - XMon14

HEDGEYE Exchange Tracker | Fireworks - XMon15



Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA




Patrick Staudt, CFA