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INSTANT INSIGHT: An Update On Our #CreditCycle Call

Takeaway: At the current default rate, 2016 is on track to surpass the 2009 all-time corporate bankruptcy high.

INSTANT INSIGHT: An Update On Our #CreditCycle Call - The Cycle cartoon 05.12.2016


As U.S. equity markets hit all-time highs, subtly simmering beneath the surface, the bond market is telling an entirely different story about the state of the U.S. economy.


According to the Financial Times:


"Global defaults hit the milestone century mark last week, a 50% jump from the number of delinquencies at the same point last year and the highest level since the US emerged from recession in 2009.


The number rose by four to 100 in the first full week of July, as defaults in the US oil and gas sector ratcheted higher, according to Diane Vazza of S&P Global Ratings.


That brings the amount that has been defaulted on to $154 billion."


(**S&P Global Ratings now predicts the default rate by junk-rated companies in the U.S. will climb to 5.3% by March 2017, up from 3.8% a year earlier.)


More disconcerting still, at the current default rate, 2016 is on track to surpass the 2009 all-time corporate bankruptcy high. 


INSTANT INSIGHT: An Update On Our #CreditCycle Call - global corp defaults



"The asymmetry between Rising Stars (potential for upgrade) & Fallen Angels (downgraded to Junk) in U.S. Credit continues," Hedgeye Financials analyst Jonathan Casteleyn wrote earlier today.


INSTANT INSIGHT: An Update On Our #CreditCycle Call - rising star fallen angel

More to be revealed.


**To read more of our #CreditCycle work check out:


Daily Market Data Dump: Monday

Takeaway: A closer look at global macro market developments.

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: Monday - equity markets 7 18


Daily Market Data Dump: Monday - sector performance 7 18


Daily Market Data Dump: Monday - volume 7 18


Daily Market Data Dump: Monday - rates and spreads 7 18


Daily Market Data Dump: Monday - currencies 7 18

QUICK TAKE: What's Ahead For Oil Prices

QUICK TAKE: What's Ahead For Oil Prices - oil cartoon 03.29.2016


Below is analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning: 


"Stronger Dollar = weaker reflation returns… no follow through to Oil being +1.2% (WTI) last week as it’s still -5% in the last month and trading below @Hedgeye TREND resistance of $47.37/barrel."


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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

CHART OF THE DAY: A Closer Look At Retail Sales

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more. 


"... A few points on why we’ve been revising GDP higher throughout the quarter:

  1. The government has been understating “inflation” in both GDP and PCE Consumption reports
  2. When you understate inflation, you can overstate “real” consumption and GDP growth

A real-world example of this is Retail Sales. Because it’s reported nominally, lower gas prices actually drag on reported growth while higher prices – despite acting as a tax on real consumption – actually manifest as stronger reported growth."


CHART OF THE DAY: A Closer Look At Retail Sales - 07.18.16 EL Chart

NFLX | Thoughts into the Print (2Q16)

Takeaway: We're bearish over 2016/2017, but our trackers suggest it's too early to short it here, and sentiment is so bad that we may go long tomorrow


  1. THESIS RECAP: We doubt NFLX will be able to sustain its model and/or the breadth of its content offering, and that's it 2016 ROW launch will put that into context over 2016/2017.  We see NFLX’s contractual obligations as a considerably understated proxy for the ongoing cost of running its business rather than a distinct set of milestones; especially since its content outlays profile more as recurring quarterly expenses rather than asset purchases.  That said, the viability of its model is dependent on its ability to realize its user TAM.  However, our analysis of the US market suggests it may only have limited near-term runway, making the int’l expansion story crucial.  NFLX has essentially accelerated the test case for whether that story will work into 2016/2017 with its ROW launch, so we suspect the story may be coming to a head this year.  If Int'l starts sputtering out, we suspect the hype around the longer-term story fizzles out, and the multiple gets sucked out of the stock.
  2. US DOES APPEAR TO BE UNDER PRESSURE: Consensus is expecting net subscriber adds to decline -41% y/y to 532K in 2Q (vs. guidance of 500K), followed by a -12% decline in 3Q.  Our trackers are suggesting that the US did decline at a decelerating rate in 2Q, but not quite at the pace implied by guidance/consensus.  The 3Q guide may be a different story though since consensus is expecting a considerable moderation in the y/y decline in US net adds, and our tracker suggests only marginal improvement in the y/y trend in 3Q vs. 2Q.  Granted it’s still early in 3Q, but given that NFLX reports so early in the quarter, we suspect mgmt would need to take a big leap of faith in order to guide consensus domestic 3Q net adds.  We’re expecting 2Q net adds to come in at roughly 650K, with the 3Q guide slightly below that (vs. consensus of 774K).
  3. BUT INT’L LOOKS MUCH BETTER: Consensus is expecting net adds to decline -11% y/y to 2.1M in 2Q (vs. guidance of 2.0M), followed by a 4% increase in 3Q.  Remember that NFLX hasn’t annualized past all of its 2015 country launches yet, so a y/y decline in 2Q seems overdone, especially considering its 2016 ROW launch.  While our trackers are pointing to decelerating 2Q growth, we’re not seeing declines outside of a few notable countries (UK, CA, AU), but that is being largely offset by elevated growth throughout Latin America.  Our trackers also suggest that those two themes are largely extending early into 3Q as well, however the decline in those countries mentioned above is moderating, while Latin American growth remains elevated, if not accelerating in certain countries on a y/y basis QTD.  Collectively, we’re expecting int’l net adds to approach 3M in 2Q, with the 3Q guide coming in around 3.5M (vs. consensus of 2.85M)
  4. 2Q16 = BULLISH SETUP? We suspect that sentiment around the US story is fairly muted at this point, so attention has shifted toward the int’l markets as the proxy for whether the longer-term NFLX story has any legs.  In turn, we suspect if int’l works then than the stock could work as well.  We know we’re not alone in expecting upside to 2Q int’l net sub adds, but the 3Q guide hasn’t gotten as much attention.  If NFLX guides to a 3-handle for 3Q int’l net sub adds, we suspect the int’l story will find rekindled optimism following the shell shock from the 2Q guide, which would likely appear as a hiccup and/or sandbag in retrospect.  Regarding the US story, it’s tougher to gauge how sentiment tracks from here since we’re expecting a miss on the 3Q net sub adds guide, which could propel the bear case around potential churn from NFLX’s planned price increases.  But we suspect the street could look past a miss on US net sub adds as long as the 3Q guide isn’t worse than the 2Q guide, especially if NFLX produces upside to its 2Q net adds metric as we expect, and more importantly shows promise around the int’l story.   


See the notes below for supporting detail around our thesis.  Let us know if you have any questions, or would like to discuss further.


Hesham Shaaban, CFA
Managing Director




NFLX | Good vs. Bad (US User Survey)
06/09/16 10:41 AM EDT
[click here


NFLX | Breaking Down Content Costs
05/26/16 08:14 AM EDT
[click here

CALL INVITE | Brexit Implications – a 360° Analysis

Hedgeye Potomac, in conjunction with the international law firm of Squire Patton Boggs, will be hosting a series of calls on Brexit and will first examine the legal and procedural implications.  


With Prime Minister Theresa May now formally installed at 10 Downing Street, we will discuss with Squire’s Brexit Task Force the events following the UK’s exit vote from the EU and what the outcome of the vote spells for the UK and the rest of the world.


The call will take place on July 22nd at 11:00AM EST with prepared remarks followed by Q&A.



  • The timing and procedure of the withdrawal, and future negotiations between the UK and the EU
  • The consequences for UK, EU and US companies arising from the end of the application of EU Freedoms, Mutual Recognition, Passports and other privileges
  • Consequences under the domestic laws of the UK and the remaining 27 Member States
  • What happens to International Agreements entered into by the EU
  • What you need to know when entering into new contracts after June 23, 2016 and what you should do with respect to existing contracts
  • Labor, Employment and Immigration
  • What alternatives are available to the UK, including WTO, EFTA, EEA, Swiss-Style, Free Trade Agreements




Squire Patton Boggs is a full service global law firm that provides insight at the point where law, business and government meet. Squire Patton Boggs consists of over 1,500 lawyers in 45 offices across 21 countries.


Squire Patton Boggs’ Brexit Task Force is a multi-disciplinary team of lawyers and policy advisers who are uniquely placed to support clients from across the globe on the effects Brexit will have on business.


The Public Policy teams, particularly in Brussels and Washington, D.C., consist of top tier lawyers with considerable public policy experience - which helps them provide seamless and coordinated discussions with the relevant authorities.





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