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[From The Vault] Cartoon of the Day: Happy Hour?

[From The Vault] Cartoon of the Day: Happy Hour? - Oil cartoon 11.20.2015


Our inimitable, in-house cartoonist Bob Rich is on a much-deserved summer vacation. While he kicks back and relaxes, we're going into the Hedgeye Vault and highlighting some of his best work. With oil down 28% from its recent high, we bring you another audience favorite.


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Europe's Carnage Continues: Stress Tests Reveal No Faith In The Continent's Big Banks

Takeaway: The Euro Stoxx Bank sub-index is down -7.5% so far this week, as stress tests revealed big bank weakness.

Europe's Carnage Continues: Stress Tests Reveal No Faith In The Continent's Big Banks - Europe three bears cartoon 07.21.2016 


It was an ugly day for European stocks. Eurozone equity markets were down between -0.8% and -2.8% today as investors continued the mass exodus out of the continent's struggling banks.


Europe's Carnage Continues: Stress Tests Reveal No Faith In The Continent's Big Banks - european equities 8 2


Check out the collection of laggers in the Euro Stoxx 600 below. Leading the losers were a handful of Italian bank stocks. Topping the list was Monte dei Paschi di Siena (BMPS.Italy), down nearly -13% today, after failing European stress tests and announcing a supposed "definitive solution" to solve its legacy of bad loans. Note: The bank has lost €4.2 billion in market capitalization since Q2 2015 or 83% of its value.


Europe's Carnage Continues: Stress Tests Reveal No Faith In The Continent's Big Banks - europe leaders lagg 8 2


The Euro Stoxx Bank sub-index is down -7.5% so far this week.


Europe's Carnage Continues: Stress Tests Reveal No Faith In The Continent's Big Banks - european bank stocks


As the European carnage continues, we reiterate our call ... #EuropeImploding.

Asinine Fed Doublespeak (You Just Can't Make This Stuff Up)

Takeaway: Fed heads are putting the most wish-washy, flip flopping politicians to shame.

Asinine Fed Doublespeak (You Just Can't Make This Stuff Up) - Hawk dove cartoon 06.06.2016



That's probably the best way to sum up market uncertainty surrounding future Fed rate hikes. Regional Fed presidents continue talking out of both sides of their mouth, under the guise of "data dependence." Investors? They're left scratching their heads.


After last Friday's GDP implosion (1.2% for 2Q16 ... half what Wall Street economists predicted), market implied rate hike probabilities for September and November FOMC meetings dipped below 20%. Meanwhile, Fed governors are out there chomping at the bit to get their names in print ... trying to convince investors that the next three meetings of 2016 are "live." Okay.


Newsflash. The U.S. economy is slowing.


Take a look below at some recent headscratching headlines courtesy of our omnipotent Fed. You can't make this stuff up.


Asinine Fed Doublespeak (You Just Can't Make This Stuff Up) - dudley 8 2


Here's the opening line from CNBC's story:


"The market shouldn't be ruling out the possibility the Federal Reserve will hike interest rates again this year, William Dudley, president of the New York Fed, said on Monday."


Now cue the Reuters story (again the opening line):


"The Federal Reserve should be cautious on interest rate increases due to lingering risks to the U.S. economy, one of its most influential policymakers said on Monday, appearing to signal the chance of a hike by the end of the year was fading."



BUT wait. it gets worse.


Enter Dallas Fed head Robert Kaplan with his two cents. 


Asinine Fed Doublespeak (You Just Can't Make This Stuff Up) - kaplan 8 2


Holy smokes.


All of this is seemingly innocuous to a casual observer. But it underscores the frenetic nature of Fed following these days. Here's a brief recap of the year-to-date Fed policy pivots which is either disillusioning or highly frustrating (perhaps both):


  • Hawkish in December
  • Dovish in March
  • Hawkish in May
  • Dovish in June
  • Hawkish in July

Asinine Fed Doublespeak (You Just Can't Make This Stuff Up) - Fed grasping cartoon 01.14.2015 


These Fed heads put even the most wish-washy of flip flopping politicians to shame...


Asinine Fed Doublespeak (You Just Can't Make This Stuff Up) - fed flip flops

What does it all mean?


Here's a mouthful: Following the frantic Fed's fork-tongued forecasts is a fool's errand.


Fade the Fed.

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KATE | Thoughts Into the Print

Takeaway: A high bar in the back half & current sentiment concern us, but we still believe KATE is a 40%+ EPS CAGR over next 2 years.

There’s no company we cover that worries us as much headed into a print than KATE. Tomorrow is no different. The quarter looks to be in good shape, but we’re not as concerned about the numbers the company will print tomorrow as we are about a) the high bar that guidance assumes from here with a low-teens comp baked into Consensus models for 2H, and b) the overwhelming lack of interest in the name from most of the investors we talk to.


To be perfectly clear, we still think there is a lot to like as the company goes from having lost money every year since 2007, to one with strong sales momentum, some earnings/cash flow and valuation support, and plenty of catalysts to continue to drive earnings growth from here. The problem is, right now, the market does not seem to care. We strongly believed that once 2016 rolled around investors would be looking at 60% earnings growth rate and $0.80 in earnings power and would slap a growth multiple on KATE again. That hasn’t been the case. And we don’t think the macro overlay is helping at any rate. Last year it was all about the handbag space imploding, led by KORS and COH. Today, sentiment on the space has improved, but we just saw May real luxury spend (Jewelry/Watches & Pleasure Vehicles) go negative in the US for the first time in 4 and a half years. Those are not confidence inspiring data points – even if we think that KATE, who has less than 5% share of the market, is an outperformer.


For the year, we are more or less in line with the street – Hedgeye $0.81 vs. Consensus $0.78, meaning for the stock to work from here it’d need to be driven by multiple expansion rather than earnings out performance. We’re not banking on the latter, especially in the light of the continued pressure on the tourist dependent outlet channel, which pressured margins in 1Q. At some point, we think the $1.20+ in earnings power we have modeled for 2017 will matter to investors, but that’s for not another 3-6 months at the earliest.


KATE | Thoughts Into the Print - 8 2 2016 KATE chart1


Additional Thoughts Into The Print:


Tourism: This was the company’s Achilles heel in an otherwise solid 1Q16 print. There was a slight drag to comps due to the pressure in the outlet doors, which makes the 19% comp even more impressive because the Juicy outlet door conversion was a tailwind that never materialized – but the biggest hit was to the gross margin line which contracted by 20bps. Management noted that continued pressure in both international tourism and the outlet channel were contemplated in guidance for the year, which calls for mid-to-low-teen comps and $0.70-$0.80 in earnings, but any additional pressure would lead to potential downside. We know what the likes of RL reported in April with -25% international tourism comps, and what CRI (not the best comp, but most recent data point) reported last week that foreign tourism comps softened sequentially from -17% to -18% in 2Q16. At the very least, we think this limits the upside to margins, which we think the company would need to recognize in order to generate earnings beats from here.

KATE | Thoughts Into the Print - 8 2 2016 CRI chart2


Promotional Cadence ✓: On the positive side, the promotional cadence in 2Q was spot on with what we saw in 2015. All in the google interest trends were slightly ahead of last year with a bit of weakness at the end of the quarter when the company didn’t repeat a 60% off sale (30% off this year). That’s important context when we look back at 2Q15, when the decision to promote quality of sale cost the company $6mm in online sales. That’s the easiest comp of the year, and goes to a $2.5mm tailwind in 3Q16 and a $13mm headwind in 4Q16. That’s clearly evident in the comp compares in the back half, which go to mid-teens vs. 9-10% in 1H – another reason we don’t see considerable upside to current numbers.

KATE | Thoughts Into the Print - 8 2 2016 KATE Promo Activity

Tightening Trifecta | 3Q16 Senior Loan Officer Survey

Takeaway: Credit tightening completed the trifecta in 3Q with consumer auto loans joining the multi-quarter tightening in C&I and CRE.

In a financialized, developed market economy where there is ~16.8X more obligations to pay dollars than there are actual dollars, credit matters. 


Domestically, credit is generally both pro-cyclical and causal, both virtuous and vicious.  Just as it can serve to jumpstart or amplify a virtuous cycle on the upside, it can similarly serve to catalyze a negative self-reinforcing downcycle.


Conceptually, in the contractionary phase, the negative self-reinforcement proceeds as follows:


banks tighten credit => consumption/investment decline => hiring slows/workers are laid off => delinquencies rise => banks further tighten credit => and so on.


Consumer Completes the Trifecta: The 3Q16 Senior Loan Officer Survey released yesterday showed the first signs of emergent pressure on consumer credit as tightening in consumer auto loans joined the multi-quarter tightening in C&I and CRE lending.


The Data:

  • C&I:  9% of banks tightened C&I standards for large and medium firms, marking a 4th consecutive quarter of tightening.  Whether the modest uptick in loan demand can serve as an offset (and/or prove durable with oil down >20% again off its June peak) is an open question.
  • CRE:  Commercial real estate lending saw continued and more aggressive tightening this quarter across all three categories (Construction and Development, Nonfarm Residential and Multifamily).  While the survey format changed in 2013, 3Q16 represents the highest level of tightening in its 12 quarter history
  • Auto Loans:  With concerns rising over auto loans, especially in the subprime space, banks have begun to tighten standards for the first time since the Senior Loan Officer Survey introduced this category.  Although the introduction of the auto loan category post-dates the GFC, the implications of consumer credit tightening are fairly straightforward vis-à-vis the capacity for Main Street credit and consumption. On net, 8.1% of banks reported tightening standards for Auto loans

Recessionary Harbinger?  As our Financials team has highlighted, historically, a broad and sustained tightening of credit has been a harbinger of recession.  As can be seen in the C&I and CRE Survey Charts below the prevailing trend has clearly been one of tighter credit and declining/less-good demand. 


Concentrated tightening in the commercial sector suggests nonresidential fixed investment will remain underwhelming and a headwind to headline growth, at the least, and will serve as an incremental headwind to the ongoing recession in core capex spending – where order growth has been negative in 17 of the last 18-months.  We continue to expect declining corporate profitability and spending to carry negative flow through to consumer credit trends on a lag.  


The Credit Cycle = Past Peak | In short, the Senior Loan Officer data continues to suggest the current credit cycle is now past peak – still “okay’’ on an absolute basis but trending towards less good as the negative trend in credit availability has both confirmed (C&I, CRE) and metastasized (Consumer Auto) in 3Q. 


Timing the pace and duration of the deterioration is challenging but, historically, the credit cycles has played itself out fully in autocorrelated fashion in both directions once inflecting.  


Tightening Trifecta | 3Q16 Senior Loan Officer Survey - SLOS Auto


Tightening Trifecta | 3Q16 Senior Loan Officer Survey - CRE


Tightening Trifecta | 3Q16 Senior Loan Officer Survey - C I Spreads


Tightening Trifecta | 3Q16 Senior Loan Officer Survey - CRE Demand


Tightening Trifecta | 3Q16 Senior Loan Officer Survey -  CreditCycle Senior Loan Officer Survey 1Q16 Slide 34


Tightening Trifecta | 3Q16 Senior Loan Officer Survey -  CreditCycle Delinquencies 1Q16 Slide 35


Tightening Trifecta | 3Q16 Senior Loan Officer Survey - SLOS Credit Standards Rarely Easier Slide 40


Christian B. Drake


Looking For a Turnaround: Sector Sentiment Run

Takeaway: August Materials Sector Sentiment Run

Our monthly sentiment run is a behavioral, market-based gauge of investor sentiment in the Basic Materials Sector. Any relative performance measure is tied to an S&P 500 Materials Sector INDEX (GICS or XLB). Further screening methodologies are included in the link to the tracker below.



Click Here to access the associated slides. 


Key Call-Outs:


Positive Sentiment (or more positive)

Negative Sentiment (or more negative)


  • Short-Interest: Gold Miners remain among the least shorted. Month-over-month, short-interest has shifted back toward the chemical companies (basic, diversified, fertilizer). 8 of 12 of the highest short interest names are in the chemicals space if Ag. Chem is included (Mosaic (MOS) and CF Industries (CF) are among the top 12).
  • Buy Ratings: After a shifting and re-shifting of miner short-positioning, metals & miners have consistently had the lowest buy ratings in the sector in 2016 (VALE, FCX, FMG). Mosaic (MOS) and Yara (YARIY) are also in the top 12. 
  • Combining consensus “buy” ratings and short-interest, Construction Materials (VMC, MLM) have the most positive relative sentiment when combining both metrics. Sentiment in the chemicals space is mixed. Looking at the sub-sectors in aggregate, sentiment among specialty and diversified chemicals is relatively positive when combining short-interest and "buy" ratings despite 8 of 12 with the highest short-interest being chemical companies.
  • Earnings Season: Sales and earnings growth has come in -8.8% and -6.7% respectively for the 21 out of 27 Materials names in the S&P 500 that have reported. The one sub-sector that has comped higher Y/Y for Q2 (sales +7.3% and earnings +41.3%) is construction materials (VMC, MLM).  Q2 will likely mark the 4th consecutive quarter for negative earnings growth for S&P 500 materials constituents.
  • LOOKING FOR A TURNAROUND: However, past Q2 2016, consensus currently expects a sharp turnaround in sector earnings (+6.1% in Q3, +19.1% in Q4, 20.9% in Q1 2017, and 12.0% in Q2 2017), so today's current forward multiple, near a cycle peak, has in it a sharp expected earnings turnaround on the whole.   

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