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PREMIUM INSIGHT

1 Chart: Why Wall Street's Earnings Estimates Defy Common Sense & Rationality

1 Chart: Why Wall Street's Earnings Estimates Defy Common Sense & Rationality - earnings cartoon 07.18.2016

Given the nasty reality of underperforming corporate earnings, Wall Street's earnings estimates for coming quarters look downright ridiculous.


Daily Market Data Dump: Friday

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, key currency crosses, and commodities. 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

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Friday - equity markets 8 12

 

Daily Market Data Dump: Friday - sector performance 8 12

 

Daily Market Data Dump: Friday - currencies 8 12

 

Daily Market Data Dump: Friday - commodities 8 12


A Closer Look At Europe's (Still Slowing) Economic "Growth"

Takeaway: European economic growth data disappoints (again).

A Closer Look At Europe's (Still Slowing) Economic "Growth" - Draghi cartoon 03.09.2016

 

Got GDP Slowing? Yes! Inline with our #EuropeSlowing theme, Q2 preliminary GDP slowed across the Eurozone, to 0.3% vs 0.6% in the prior quarter. Specific country results: Germany (0.4% vs 0.7% in the prior quarter); France (0.0% vs 0.7%); and Italy (0.0% vs 0.3%). Our bearish bias on the Eurozone remains intact.

 

Below is the country-by-country breakdown.

 

Click image to enlarge

A Closer Look At Europe's (Still Slowing) Economic "Growth" - eurostat

 

Editor's Note: The snippet above is from a note written by the Hedgeye Macro team and sent to subscribers this morning. Click here to learn more.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Got GDP Slowing? Yes!

Client Talking Points

EUROZONE

Got GDP Slowing? Yes! Inline with our #EuropeSlowing theme, Q2 preliminary GDP slowed across the Eurozone, to 0.3% vs 0.6% in the prior quarter. Specific country results: Germany (0.4% vs 0.7% in the prior quarter); France (0.0% vs 0.7%); and Italy (0.0% vs 0.3%). Our bearish bias on the Eurozone remains intact.

#CREDITCYCLE

Looking at corporate credit there is a large divergence between different issues. Despite corporate bankruptcies on a pace not seen since 2009, credit spreads have tightened meaningfully. High-yield energy spreads have been more than cut in half since February from +1600 to +718 this morning. Resource high-yield spreads have reverted nearly back to trade at the same spreads as high yield broadly since the U.S. dollar broke out in July of 2014. Corporate leverage broadly (median debt/ EBITDA) reached record highs this week as reported by S&P, so if you believe this ends well, you also have to believe the fed’s next ease will involve buying of corporate bonds and monetization of debt

#VOLATILITYASSYMETRY

Once again vol. is for sale at all-time highs. In the summer of 2014, we introduced our #volatilityassymetry theme at all-time lows in cross asset volatility. While a number of indices haven’t quite reached those level, the VIX is looking to test its YTD low from last week, trading at 11.59 this morning – still a handle off all-time lows. The MOVE Index is at a level not seen since December 2014 which has helped drive corporate spreads lower.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
8/11/16 61% 3% 3% 10% 14% 9%
8/12/16 61% 3% 3% 10% 14% 9%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
8/11/16 61% 9% 9% 30% 42% 27%
8/12/16 61% 9% 9% 30% 42% 27%
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
GLD

See update on TLT/UUP.

TLT

Back to growth ... we’ll refrain from commenting on Friday’s headline non-farm payrolls number in isolation, and rather offer some perspective on the cyclical nature of the non-farm payroll data series (you’ve heard it before):

  • On a Y/Y rate of change basis, Non-Farm Payrolls peaked in February of 2015;
  • Once growth in this series peaks and rolls over, it doesn’t return and we move toward economic contraction on the margin. Read: Bullish for Long Bonds (TLT);

A print of +282K jobs was needed for July to avoid another Y/Y sequential deceleration in the series. NFP additions were +255K. While this beat expectations of +180K (which was cheered by just about every mainstream media outlet), the TREND in this series remains slow-moving, predictable, and most importantly past peak.

UUP

Our team’s macro process is both fundamental and top-down, and we get the top-down signals in real-time. The bottom-line is that both the CRB Commodities Index and crude oil have recently broken down from a quantitative risk management perspective. While this is a key factor contributing to our recent addition of the PowerShares DB US Dollar Index Bullish Fund (UUP), it also signals that TIP does not have as much upside as we thought. As Keith McCullough wrote to subscribers this week:

 

“Changing my mind on longer-term longs has happened infrequently this year, but it should happen. That’s how the game goes.”

Three for the Road

TWEET OF THE DAY

**NEW VIDEO Van Sciver: I’m Pretty Excited About The $CAT Short Call https://app.hedgeye.com/insights/53050-van-sciver-i-m-pretty-excited-about-the-cat-short-call … @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

"When nothing is sure, everything is possible."

-Margaret Drabble

STAT OF THE DAY

Ay 41 years old, Oksana Chusovitina is the oldest female gymnast in Olympic history. She is competing in her seventh Olympics for Uzbekistan. 


CHART OF THE DAY: The Gig Economy is Alive and Growing

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.

 

"... One is part-time workers, who have grown as a share of the workforce by about 2 percentage points since the Great Recession. Another is independent digital contractors, who—while still few in number—are surging. JPMorgan Chase finds that, as of August 2015, 1 percent of adults make money in the “online platform economy” each month (as Uber drivers, Airbnb renters, etc.)—a tenfold increase from October 2012. During the same time period, the share of Americans who report ever having worked in the online platform economy exploded 47-fold to 4.2%."

 

CHART OF THE DAY: The Gig Economy is Alive and Growing - neil 6


The Gig Economy is Alive and Growing

“I entered the work force cleaning breast pumps at the pharmacy! It was a part-time gig while I was at school… no interview required.”

-Chris Hemsworth

 

Humor aside, and as the Demographer on the Hedgeye research bench, it’s my job to make sense of the larger trends we’re seeing across the country. Taking the Early Look pen for Keith this morning, I see an important rhythm-of-history subtext playing out related to the “gig” economy.  

 

Yes, the gig economy is alive and well – but could America be reaching peak gig? I think it's likely. The generation most attracted to gig work (Gen X) is now reaching maturity. The generation now rising in the workplace (Millennials) accepts informal and impermanent work arrangements less by preference than out of necessity: If offered the choice, what most Millennials prefer in their workplace is community, security, institutional attachment, and long time horizons – i.e., something very ungiglike.

 

Meanwhile, with both parties vying to offer workers greater protection against job loss, pay cuts, and uncompensated overtime, the political wind is definitely blowing in the Millennial direction. It is only a matter of time, and perhaps not much time, before policy makers accompany this "formalization" of employment with measures to prevent employers from making end runs around the rules via "gig" workers. Uber's insistence that its drivers are contractors and McDonalds' claim that its franchisees are independent employers are just the opening salvos of this emerging generational weather front.

 

Back to the Global Macro Grind

 

The Gig Economy is alive and growing. What’s happening?  The Commerce Department recently proposed a four-part definition for what it calls “digital matching firms.” (Think of your Ubers, your Airbnbs, and your TaskRabbits.) According to the definition, these firms use technology to facilitate P2P transactions, rely on user reviews for quality control, offer worker hour flexibility, and rely on workers to use their own assets to perform their job duties.

 

Why is this important? Because it’s the first significant step anyone’s taken in some time to try to define—and ultimately measure—the so-called “gig economy.”

 

It seems silly, really. Everyone from Hillary Clinton to Barack Obama has been urging regulators to protect gig economy workers—yet nobody seems quite sure of who works in the gig economy, whether or not it comprises a growing share of the workforce, or even what it is. The last official study of this sector took place over a decade ago by way of the BLS 2005 Contingent Work Supplement (CWS).

 

One thing is for sure: Though the number of digital matching firms is expanding rapidly, these companies represent only the tiniest sliver of a growing gig economy.

 

How big is the whole gig economy, exactly? Again, your bureaucracy is working on it—and it’s left to analysts like me to draw their own inclusions.

 

What is the Gig Economy?  Experts often define the “gig economy” by equating it with so-called contingent employment. At its narrowest, the BLS classifies contingent work as a strictly impermanent position, typically expected to last no longer than one year. Using this definition, the BLS reported that in 2005, between 1.8% and 4.1% of the workforce was contingent—a share that had declined slightly since 1995.

 

The Gig Economy is Alive and Growing - neil 1

 

The BLS also releases monthly data on another, slightly broader component of the gig economy: self-identified “self-employed” workers. Here too we see a decade-long period of gradual decline: Since 2006, the self-employed share of the population has slid from 11.5% to 10.3%.

 

The Gig Economy is Alive and Growing - neil 2

 

But here’s the thing: These BLS figures leave out a vast share of the true gig economy. Think about it. An agency temp, an on-call staffer, and even a standard part-time employee can and perhaps must be considered “contingent.” But these workers are left out by either of the above measures because they are not strictly “impermanent” or “self-employed.”

 

This is where an important 2015 GAO report on the gig economy comes in. The GAO broadens the notion of contingent workers to include “all individuals who maintain work arrangements without traditional employers or regular, full-time schedules.”

 

Using this more comprehensive measure, we see that the gig economy is much larger than the previous BLS estimates. By looking at historical CWS data, the GAO found that a whopping 30.6% of laborers were contingent in 2005.

 

Not only that, but the gig economy is also growing steadily. By analyzing more recent General Social Survey data, the GAO determined that the contingent share of the workforce grew to 40.4% by 2010. (Some of this growth may be due to differences in the sample populations surveyed.)

 

The Gig Economy is Alive and Growing - neil 3

 

The Gig Economy is Alive and Growing - neil 4

 

Within this GAO-defined gig economy, there are several categories of work that we know are growing rapidly.

 

One is part-time workers, who have grown as a share of the workforce by about 2 percentage points since the Great Recession. Another is independent digital contractors, who—while still few in number—are surging. JPMorgan Chase finds that, as of August 2015, 1 percent of adults make money in the “online platform economy” each month (as Uber drivers, Airbnb renters, etc.)—a tenfold increase from October 2012. During the same time period, the share of Americans who report ever having worked in the online platform economy exploded 47-fold to 4.2%.

 

The Gig Economy is Alive and Growing - neil 5

 

The Gig Economy is Alive and Growing - neil 6

 

All told, economist Gerald Friedman estimates that as much as 85% of the jobs added since 2005 have been temp, on-call, or contracting positions. Sara Horowitz, executive director of the Freelancers Union, asserts that, "The sector of workers who don't have traditional full-time jobs—whether by choice or not—is a sizable and growing portion of the workforce."

 

If anything, even the broad GAO definition may underestimate the gig economy. Virtually no full-time workers would self-identify as contingent workers, but at least some alternatively employed individuals—such as contractors—consider themselves regular full-time workers.

 

Why The Gig Economy is Growing: Drivers 

“Artisanal” makes a comeback. Before 2000, CPG companies and big-box retail chains were marginalizing mom-and-pop stores virtually to extinction. However, in the last decade-plus, we’ve seen the pendulum start to swing back toward freelancers. In agriculture and retail, much of the growth has been at the bottom of the market, from the small-scale organic farmers surging in popularity to the do-it-yourself Etsy crowd selling handmade products with great success.

 

Service sector grows, production stagnates. The growth of the gig economy is also rooted in the broader expansion of the service sector. (It’s hard to think of a contingent worker who isn’t providing services, whether it’s an Uber driver, a TaskRabbit “Tasker,” or a part-time musician.) Since 2006, service-sector employment has climbed by 10%, with the sector adding roughly 12 million new jobs. By contrast, goods-producing industry employment has not even come close to its pre-recession levels, falling by nearly 13% since 2006 (amounting to 3 million lost jobs).

 

The Gig Economy is Alive and Growing - neil 7

 

The service sector’s growth is also evident when we dig deeper into the newest GDP numbers. Buried in the overall negative report is this tidbit: The personal consumption of services, which grew by 1.3% during Q2 2016, contributed more than 100% of all Q2 GDP growth (which registered just 1.2%).

 

Generational change. Since the 1980s, generational forces have been tilting the economy toward more gig-like work arrangements. Boomer young adults were the first to separate from the conventional 9-to-5 jobs of their parents, preferring to “get by” rather than sell out.

 

Sure, many of these Boomers are now retiring. But they’re being replaced in the workforce by a generation that is even more gung-ho about gig work: Xers. This generation practically invented the phrase "free agency" and “be your own boss”—and now, the rise of the sharing economy has given them the chance to work as little or as much as they want depending on their personal obligations and financial needs.

 

Millennials have similarly flocked to piecemeal, part-time gigs—though many had no choice in the matter. Despite their reputation as job-hoppers and tech entrepreneurs, a much larger share of Millennials would prefer the security of a conventional full-time position. This generation joins their elders in this contingent labor force, but more as underemployed “perma-temps” stuck there unwillingly rather than as contingent workers by choice.

  

Broader Implication. Go long on businesses and services that create and manage a gig economy framework. Platforms that help gig economy companies manage their operations are a solid bet. For example, an IT-managed service provider could be the perfect solution for a business trying to migrate to a contractor-based workforce but unsure of the HR implications.

 

Privately held San Francisco-based startup Payable, which created a software-as-a-service product to make it easier for contractors to get paid, has seen heavy business-side demand from companies looking to manage their own independent contractor fleets. Services like QuickBooks Self-Employed, offered by Intuit (INTU), are valuable tools for freelancers trying to navigate the complex world of reporting earnings from a multitude of sources.

 

Brace for the continuing legal battle between the government and gig economy firms. Both political parties are increasingly concerned with kick-starting the economic fortunes of the lower and lower-middle class, whether by raising the minimum wage or ensuring overtime rights. The important stage two of this fight (which is already coming into view) is protecting all of the people who fall through the cracks because they have nontraditional jobs. The various lawsuits brought against gig economy giants like Uber are the government’s way of trying to bring contingent workers into the net of formal employment.

 

Millennial gig economy workers would be thrilled to get the same benefits and rights as traditional full-time employees. But the real battle of this socialized work movement will be between government regulators and Xer freelancers who don’t want assistance—i.e. rules that hamper their freedom and their earning opportunities.

 

To learn more about my sector and receive my demography work please contact .

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.46-1.60%

SPX 2156-2193 

VIX 11.01-14.76 
EUR/USD 1.09-1.12

Gold 1 

 

Best of luck out there today,

 

Neil Howe

Managing Director


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