• run with the bulls

    get your first month

    of hedgeye free


Hedgeye Guest Contributor | O'Rourke: Fairy Tale Earnings

Takeaway: Earnings estimates appear untethered from reality.

Editor's Note: This is a special Hedgeye Guest Contributor note written by Mike O'Rourke. Mike is the Chief Market Strategist at JonesTrading where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.”


Hedgeye Guest Contributor | O'Rourke: Fairy Tale Earnings - earnings cartoon 04.12.2016


Now that Q2 earnings season has commenced, it is an opportune time to examine the expectations landscape. 


According to Standard & Poor’s, 2015 earnings finished at $100.45, down from $113.01 in 2014.  The current forecast for 2016 earnings is $113.96. Considering Q1 2016 earnings were down 7% year over year, it obviously makes 13% full year earnings growth a tall order. Per the S&P data, the last 6 quarters have posted year over year declines.  Despite that disappointing trend, Q2 earnings are forecast to rise 7% year over year. As is typical, earnings estimates are very back end loaded, allowing more time to deny reality. 


For Q3, earnings are forecast to grow 19% year over year, and in Q4, they are forecast to grow a whopping 37% year over year (chart below).  Of course, quarterly earnings in excess of $30 per share would be new record levels (chart below).  For some reason, this does not seem like an environment primed for posting record quarterly earnings.


Certain aspects of the environment that led to the peak in earnings in 2014 softened, but they have not reversed.  The Dollar remains relatively strong.  Although the Dollar index is down 4% from its recent peak, it is still up over 20% from the 2014 level from which it broke out.  While Crude has managed a remarkable rebound from its February low, the average price of spot WTI was $48.65 in 2015, and thus far in 2016, it is just over $40. 


The volatility around earnings due to the broad decline should fade and this is expected to be the Energy Sector’s first positive earnings quarter since the end of 2014.  The Health Care sector will be key, and is expected to do much of the heavy lifting for index earnings, growing close to 30% in 2016 (table below).  Considering Q1 earnings for the sector only grew 3.3% year over year, Q2, Q3 and Q4 are forecast to grow 31.7%, 37.7% and 40.5% respectively.  There is not much else based on reality in the markets these days, so maybe there is no reason to expect earnings estimates to be any different.


Hedgeye Guest Contributor | O'Rourke: Fairy Tale Earnings - z a


Hedgeye Guest Contributor | O'Rourke: Fairy Tale Earnings - z aa

Initial Claims | Tick Tock

Takeaway: Claims have been sub-330k for 29 months, now just 16 months shy of the all-time duration record: 45 months set in the 1990s.

Initial Claims | Tick Tock - Claims1


While claims moved momentarily higher in early May, they have resumed a breakneck pace lower for now with the most recent week coming in at an impressively low 254k. However, the keyword here is "breakneck". While the labor market remains strong for now, the current level of claims seems unsustainable in the context of history. The chart below shows that in the last three cycles claims have dropped below and remained below 330k for 24, 45, and 31 months (average: 33 months) before the economy entered recession in the last three cycles. With the current cycle in its 29th month below that level, we are 5 months past the minimum, 4 months shy of the 33-month average, and 16 months from the max. With the market at all-time highs and the labor market classically late stage, we remain bearish.

Tick tock.

Initial Claims | Tick Tock - Claims20 2


The Data

Initial jobless claims were unchanged at 254k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -5.75k WoW to 259k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -9.1% lower YoY, which is a sequential improvement versus the previous week's YoY change of -4.9%


Initial Claims | Tick Tock - Claims2


Initial Claims | Tick Tock - Claims3


Initial Claims | Tick Tock - Claims4


Initial Claims | Tick Tock - Claims5


Initial Claims | Tick Tock - Claims6


Initial Claims | Tick Tock - Claims7


Initial Claims | Tick Tock - Claims8


Initial Claims | Tick Tock - Claims9


Initial Claims | Tick Tock - Claims10


Initial Claims | Tick Tock - Claims11


Initial Claims | Tick Tock - Claims19



Yield Spreads

The 2-10 spread rose 2 basis points WoW to 81 bps. 3Q16TD, the 2-10 spread is averaging 80 bps, which is lower by -17 bps relative to 2Q16.


Initial Claims | Tick Tock - Claims15


Initial Claims | Tick Tock - Claims16



Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Patrick Staudt, CFA



Client Talking Points


JPMorgan kicked off bulge bracket earnings this morning and the headlines of the top stories all centered around JPM “beating” estimates. As you can clearly see where we show an earnings beat/miss heatmap (where companies print relative to where consensus expects) everyone beats estimates. It’s part of modern financial reporting, and much less relevant than Y/Y earnings growth. JP Morgan reported a -1.4% hit to net income in Q2 Y/Y to kick off what we think could be another disappointing earnings season for Q2.

Pound Sterling

The GBP/USD is bouncing higher to $1.3374 (+1.73%) following this morning’s announcement from the BOE to keep the main interest rate UNCH at 0.5% (voted 8-1). The Bank continues to underline its willingness to stimulate the economy following Brexit, and said it will look to its August 4th meeting for updated data and forecasts to determine its decision making. Today’s BOE decision may well be teeing itself up to take the next three weeks to explain a rate cut.

Style Factors

While “the market” is at new highs the internals still matter and the same style factors that have worked for the YTD are the same ones that led yesterday. We continue to like lower beta, large cap, defensive yield in terms of both sector and equity style exposure.

Asset Allocation

7/13/16 56% 0% 0% 12% 25% 7%
7/14/16 56% 0% 0% 12% 25% 7%

Asset Allocation as a % of Max Preferred Exposure

7/13/16 56% 0% 0% 36% 76% 21%
7/14/16 56% 0% 0% 36% 76% 21%
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

Last week, we introduced our Q3 Macro Themes: #ProfitCycle, #ConsumerCredit, #EuropeImploding. The gist of themes #1 and #2 emphasize that the economic cycle continues to roll over as evidenced by declining corporate profitability and the pending deceleration in consumer credit growth which is more of a “when” rather than an “if” scenario. 


Consumer credit growth has a direct effect on consumption. Employment and consumption peaked on a Y/Y rate of change basis in Q1 2015 right after corporate profits peaked in the second half of 2014.


We want to be long of continued growth decelerating and inflation picking up from a GIP modeling perspective into the back half of 2016. TIPS are a great way to play both of these views along with our GLD (reflation) and TLT (growth slowing) positions.


See update on TLT/GLD.

Three for the Road


Hedgeye @Hedgeye


"We can bunt guys over. But we're built on power. That's American baseball."

-Chipper Jones


Chipper Jones had a .303 batting average over his 19 year career.

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

Daily Market Data Dump: Thursday

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, rates and bond spreads, and key currency crosses. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products




Daily Market Data Dump: Thursday - equity markets 7 14


Daily Market Data Dump: Thursday - sector performance 7 14


Daily Market Data Dump: Thursday - volume 7 14


Daily Market Data Dump: Thursday - rates and spreads 7 14


Daily Market Data Dump: Thursday - currencies 7 14

The Big Healthcare Themes - Institutional Call Today

Takeaway: We don't believe that the U.S. Medical Economy growth recovery of 2014 -2015 is durable.

The Big Healthcare Themes - Institutional Call Today - z hc


Hedgeye Healthcare analysts Tom Tobin and Andrew Freedman will provide a comprehensive overview of our #ACATaper and Healthcare Deflation themes with new datasets and analysis. 


The U.S. Medical Economy remains extended after the largest expansion in insured medical consumers in a generation.  Slowing growth in medical consumers, continued deterioration in affordability, aggressive payor reforms, company leverage at 15-year highs, and multiples at 10-year highs is a recipe for downside.  


We don't believe that the U.S. Medical Economy growth recovery of 2014 -2015 is durable, but rather a temporary boost in consumption driven by massive government stimulus.


The chart below is from our team's +100-slide deck.

The Big Healthcare Themes - Institutional Call Today - z xxc


We are also extremely pleased to announce that Emily Evans, Director of Health Policy at Hedgeye, will be joining the presentation and sharing her views on major policy initiatives including Alternative Payment Models, MACRA, and post-acute reform, among other topics that significantly impact our fundamental views.


**Email sales@hedgeye.com for access.

CHART OF THE DAY: Hubris? Tesla's Quest For The Driverless Car

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Managing Director Neil Howe. Click here to learn more.


"... As head of Hedgeye’s new Demographic Sector, on Monday I wrote a Hedgeye column called “Driverless Cars: Unsafe at Any Speed: Why Fully Autonomous Vehicles are Still a Long Way Off.” I won’t recap the piece here (you can read it yourself), but my basic argument focuses on (1) the absurd overconfidence in the ability of today’s AI and sensors to replace the higher-order thinking of human drivers; (2) the all-or-nothing contradiction of semi-automatic driving; and (3) the obvious revulsion with which people will respond to machines that kill them at random." 


CHART OF THE DAY: Hubris? Tesla's Quest For The Driverless Car - driverless 3

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.