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Caterpillar: 6 Questions & 1 Chart From Our Short CAT Conference Call

Takeaway: Hedgeye Industrials analyst Jay Van Sciver recently added Caterpillar to their Best Ideas Short List

Editor's Note: Our Industrials analyst Jay Van Sciver hosted an in-depth presentation on his Caterpillar short call today. He recently added CAT back to his Best Ideas list. Below are key discussion points he covered during the call. 

Caterpillar: 6 Questions & 1 Chart From Our Short CAT Conference Call - z cat cartoon

KEY DISCUSSION POINTS:

  • Orders vs. Sales: Do order rates support current 2H16 & 2017 consensus estimates?
  • Mutually Exclusive Goals:  Can CAT maintain its dividend and its credit rating?
  • Materials Cost:  What do higher steel prices mean for future manufacturing decrementals?
  • CAT Financial: Is the decline in allowances appropriate and sustainable?
  • Aftermarket Cycle Stability: Do improvements in mining equipment aftermarket move the needle for CAT?
  • Valuation:  Are CAT shares pricing in a cyclical rebound in Mining and Oil & Gas capital spending? 

 

Caterpillar: 6 Questions & 1 Chart From Our Short CAT Conference Call - caterpillar


PREMIUM INSIGHT

New Potential Risks For Energy Infrastructure Projects From Obama Administration

New Potential Risks For Energy Infrastructure Projects From Obama Administration - z pipe

Below is an excerpt from an institutional research note written by Senior Energy Analyst Joe McMonigle on the Obama Administration’s Council of Environmental Quality (CEQ) rule.


Carney Pounds the Pound

The Bank of England (BoE) met this morning and Governor Mark Carney stepped up to the plate to join his fellow central bankers in cutting the country’s interest rate (by 25bps to 0.25% - the first cut in 7 years) and expanding its quantitative easing program (by £60 billion to £435, including £10 billion corporate purchases). 

 

And so the Currency Wars continue!

 

In the chart below we update our levels on the GBP/USD, currently showing intermediate TREND broken @ $1.39 with an additional -1.8% downside to our immediate term TRADE support level of $1.29.  Following today’s announcement the cross is down -1.5% and counting!

 

Carney Pounds the Pound - Sterling 84

 

BoE Commentary and updated Outlook:

  • The biggest signal to the market in Carney’s remarks is the willingness to do more (rate cuts and QE) if warranted. Carney characterized the economic outlook as changed “markedly”, and the Bank is ready to cut rates to zero if necessary. 
  • Carney’s updated economic forecasts suggest increased downward pressure:
    • 2017 GDP cut to 0.8% from 2.3% in May; 2018 GDP cut to 1.8% from 2.3% (see chart)
    • Inflation at 2.1% in 2017 and 2.4% in 2018
    • Business investment down 3.75% in 2016 vs 2.5% growth in May, and down 2.0% in 2017 vs 7.25% growth in May.
    • Housing investment forecast up 1.25% in 2016 vs 4.0% in May, down 4.75% in 2017 vs 7.25% growth in May.
  • This policy stance should continue to pull the Pound Sterling and gilt yields lower!

 Carney Pounds the Pound - BOE Growth Forecasts

 

Does Brexit matter?  Yes! 

 

While Carney’s commentary may elude linking any economic weakness to the decision to Brexit, the fact remains that Brexit spells great uncertainty to the evolution of trade arrangement with global partners, especially the EU.  While we believe a swift cabinet change is overall positive in terms of market sentiment (vs a lingering David Cameron, for example), we expect Brexit to continue to weigh on consumer and business confidence throughout the year. 

 

In case you missed the call we hosted with the international law firm of Squire Patton Boggs on the implication of Brexit (note, we’ll be continuing in a series of call on the subject), an audio replay is available. 

 

Carney Pounds the Pound - Cartoon Pounded


TIP: We Are Removing Treasury Inflation-Protected Securities

Takeaway: Please note we are removing TIP from Investing Ideas (long side) today.

"With the latest breakdown in both the CRB Index and Oil, I don’t think being long TIP has as much upside (from here) as I originally thought," writes Hedgeye CEO Keith McCullough. "Changing my mind on longer-term longs has happened infrequently this year, but it should happen. That’s how the game goes."

 

TIP: We Are Removing Treasury Inflation-Protected Securities - Inflation cartoon 02.26.2015


[UNLOCKED] Early Look: Find Simplicity

Editor's Note: Below is a complimentary Early Look written today by Hedgeye CEO Keith McCullough. Click here to learn more.

 

[UNLOCKED] Early Look: Find Simplicity - early look 8 4

 

“Out of clutter find simplicity.”

-Marc Benioff

 

That’s one of the many great business-builder quotes from Marc Benioff in Behind The Cloud The Untold Story of How Salesforce.com Went From Idea to Billion-Dollar Company – and Revolutionized an Industry.

 

I’m just finishing the book now, but Benioff actually wrote it in 2009. No matter what you think of the guy as a person (I don’t know him), as an entrepreneur and innovator, his growth story is an incredibly powerful one. No matter what happens to CRM from here, he took on the establishment of the software industry, and won.

 

As a leader, he hammers home a lot of principles that resonate with me. He says we should all “have the courage to pursue our innovation before it is obvious to the market.” That might sound simple. Executing on it, repeatedly, is not. You have to foster a culture that isn’t afraid to fail fast, recover, and re-accelerate. I’m working on that too.

 

[UNLOCKED] Early Look: Find Simplicity - benioff

 

Back to the Global Macro Grind

 

Where do we go from here? What’s the next @Hedgeye Best Idea? Who is the next best hire? How are we going to keep pushing the envelope on not only the creation of original content, but how we present and deliver it?

 

So much to do.

 

When it comes to idea generation (particularly on the long side), there isn’t a lot of clutter to simplify. Especially when it comes to long-term sovereign bonds and/or any “safe-yield” equity (that looks like a bond), reality is that they’ve all gone up into the right.

 

To a degree, that’s accelerated our business. Lower and Slower-For-Longer used to be our original idea, inasmuch as the willingness to buy “expensive” and short what’s “cheap” was. Now, the deep simplicity associated with #GrowthSlowing is priced in.

 

So where do we go from here?

 

If growth was accelerating, I’d have a ton of “new” ideas. I’d basically reverse all of what I own and short it (Ex-Hedgeye and my wine). But it’s not. So I stay the course. Keep the winning team on the field, and pick my spots.

 

How do you pick your spots?

 

  1. Wait and watch for macro “events” that knock the Long Bond, Gold, Utilities, etc. to the low-end of their risk range
  2. Wait and watch for the Old Wall to “upgrade” stocks and/or asset classes we don’t like to the top-end of their range
  3. Wait and watch during the Morning Research Meeting for legitimately “new” ideas that I haven’t yet considered

 

And, all the while, grind…

 

That’s it really, so the rest of this note will be a line by line copy of my notebook this morning. That’s the grind.

 

I do the same thing, every morning. I measure and map price/volume/volatility, across asset classes and across durations. Eventually something simple jumps off the page as “new.” And new is what I’m looking for…

 

  1. US Dollar Index is testing the low-end of my 94.50-96.60 risk range and remains bullish TREND
  2. UST 10yr Yield is in the middle of my 1.45-1.62% immediate-term risk range and remains bearish TREND
  3. SP500 tested and held the low-end of my immediate-term 2153-2178 risk range (bullish TREND)
  4. Nasdaq tested and held the low-end of my immediate-term 5038-5196 risk range (bullish TREND)
  5. US Equity Volatility (VIX) backed off the top-end of my 11.77-15.32 risk range (bullish TREND)
  6. Utilities (XLU) are still in correction mode (bullish TREND), with a risk range of 51.04-52.99
  7. Financials (XLF) are still in squeeze mode (bearish TREND), with a risk range of 23.13-23.99
  8. Japanese Equities bounced off the low-end of my risk range and remain bearish TREND
  9. Chinese Equities bounced off the low-end of my risk range and remain bearish TREND
  10. Malaysian Equities bounced off the low-end of my risk range and remain bullish TREND
  11. Spanish Equities bounced off the low-end of my risk range and remain bearish TREND
  12. Italian Equities bounced off the low-end of my risk range and remain bearish TREND
  13. Russian Equities bounced off the low-end of my risk range and are testing a bearish TREND break-down
  14. Commodities (CRB Index) have already broken down back into bearish TREND mode
  15. Oil (WTI) bounced off the low-end of my $38.71-41.90 immediate-term risk range and remains bearish TREND
  16. Gold is correcting off the top-end of my $1330-1380 immediate-term risk range and remains bullish TREND
  17. Platinum is correcting off the top-end of my risk range and remains bullish TREND
  18. Copper failed at the top-end of my immediate-term risk range and remains bearish TREND
  19. EUR/USD failed at the top-end of my $1.09-1.12 risk range and remains bearish TREND
  20. GBP/USD failed at the top-end of my $1.29-1.34 risk range and remains bearish TREND

 

I’ll stop there. You get the point. Again, all I’m doing, every day, is measuring and mapping the immediate-term moves relative not only to themselves, but in the context of the entire macro market message… and then contextualizing it across durations.

 

This is Global Macro. There’s a lot of clutter. And lord knows there are a lot of politicized, ideological, and linear opinions that clutter the clutter. But, if we can have the patience to wait and watch, we’ll eventually find simple opportunities.

 

I’m not finding one today that I’d consider new. So here’s to what tomorrow might bring!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.45-1.62%

SPX 2153-2178

VIX 11.77-15.32
USD 94.50-96.60
EUR/USD 1.09-1.12
Oil (WTI) 38.74-41.90

Gold 1330-1380

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

[UNLOCKED] Early Look: Find Simplicity - 08.04.16 chart


Ahead Of Friday's Jobs Report: Risk Range On 10-Year Treasury Yield

Takeaway: Ahead of the Friday Jobs Report, risk range on the 10-year Treasury yield is 1.45% to 1.62%.

Ahead of the jobs report the 10-year yield is sitting right in the middle of its risk range (1.45-1.62%) so I’d do nothing on that and/or yield chasing securities – bad jobs print gets you 1.45%; “good” gets you 1.62% and I’m not in the business of guessing the number – no one we know has process driven edge on nailing NFP consistently.

 

Ahead Of Friday's Jobs Report: Risk Range On 10-Year Treasury Yield - 10yr risk range

 

Editor's Note: The snippet above is from a note Hedgeye CEO Keith McCullough wrote for subscribers this morning. Click here to learn more.


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