CHART OF THE DAY: A Key Consideration At All-Time Highs In U.S. Equities

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more.


"... And what about the “paradigm shift” U.S. equities are currently undergoing right now? You know – the one where fundamentals cease to matter; all that matters is the collective fear of monetary easing or fiscal stimulus."


CHART OF THE DAY: A Key Consideration At All-Time Highs In U.S. Equities - 8 16 16Chart of the Day


“How did we ever go two-a-days for all that time? I don’t know. What I do know is [that] everyone was doing it so everyone was relatively beat down. So when they were playing you couldn’t tell because everyone was pretty much worn out.”

-Pete Carroll, Head Coach of the Seattle Seahawks


That’s odd. Who would’ve ever thought that the NFL’s oldest and 7th most tenured head coach would be in support of new collective-bargaining rules that limit full-contact practices to just one per day during training camp? After all, this is a guy who played in an era where three-a-days were all too common – as was prohibiting players from drinking water during practice because the need for hydration was a widely viewed as a form of weakness.


While I’m certain the physical and mental toll of football camp falls shy of the beating the brave men and women of our armed forces experience in the process of training for combat, I’m relatively sure it’s not terribly far behind. The physical cost of hitting and being hit by other really large, really fast men day in and day out in 80-100+ degree temperatures adds up in a hurry.


But don’t take my word for it; in the following 90-second video, John Brenkus (host of ESPN’s Sport Science) explains how the average helmet-to-helmet collision among NFL players is effectively equivalent to being struck in the forehead with a sledgehammer:


Now, largely thanks to a bevy of medical research and intensified public scrutiny, football coaches are more willing than ever to adopt measures that make the game safer for their players. As evolving always does across industries and disciplines, the recent evolution in player safety required a critical mass of participants stepping away from perceived wisdoms and cultural norms in order to implement processes that could systematically improve results.


Back to the Global Macro Grind


What new processes have you put in place lately to systematically improve your results? Did you eschew, tweak or double-down on existing processes in hopes of finishing 2016 on a high note?


And what about the “paradigm shift” U.S. equities are currently undergoing right now? You know – the one where fundamentals cease to matter; all that matters is the collective fear of monetary easing or fiscal stimulus.


Two-A-Days - central bank kool aid 06.09.2016


So many questions, not nearly enough answers. Certainly the act of timestamping paradigm shifts in the $25T U.S. equity market is well above my pay grade, experience level and willingness to take on undue career risk. Moreover, the fact that I am as surprised as anyone to see the stock market (S&P 500) close at another all-time high yesterday amid a plethora of very tangible risks to the profits that [allegedly] support it is evidence of my skepticism towards this line of reasoning.


And market internals support said skepticism – for now at least. As we discussed in our 8/5 note titled, “#RoadWarriors: Important Considerations for Every Investor”, one of the most thought-provoking items of pushback Keith and I received on the road in recent weeks came from a discussion with a client in London roughly one month ago:


  • Client: “If I told you a year ago that corporate profits would enter a protracted recession, domestic and global growth would slow considerably, Brexit would occur and Donald Trump would become the GOP nominee and a viable candidate for president of the United States, would you have bet that U.S. equities would be higher or lower on that? In that regard, what’s the bear case from here?”
  • Hedgeye: This line of pushback upon our bearish bias is well-received. That said, however, naval gazing at all-time highs in the SPY completely misses the point of what is perpetuating said highs – i.e. the outperformance of the sector and style factors we like on the long side because of the aforementioned bearish catalysts: Utes at +10.0% YoY, REITS at +12.9% YoY, Defensive Yield at +12.5% YoY and Low Beta at +9.9% YoY are all trouncing the S&P 500’s paltry YoY return of +4.7%. The soft bigotry of low expectations that is trumpeting [mediocre] market beta is not a doctrine we will ever subscribe to.


*NOTE: The aforementioned YoY performance figures are updated for last price.


But with High Beta stocks and the Financials up +17.5% and +12.0%, respectively, since the post-Brexit v-bottom, you can make the case that something changed, big time, in late June. For reference, Utilities and Low Beta stocks are down -1.8% and up only +5.3%, respectively, over that same duration.


As also detailed in the aforementioned note, we explained away the aforementioned reversal of sector and style factor performance as evidence of upside capitulation – i.e. formerly-bearish investors broadly throwing in the towel and piling into what hasn’t worked in order to play catch-up with market beta. Moreover, that capitulation was to a similar degree (in Z-Score terms) as the downside capitulation that preceded the v-bottom off the early-February lows:


  • Week-ended February 2nd: Net SHORT position of -248.4k contracts in aggregate SPX and e-mini futures and options for a 1Y Z-Score of -1.8.
  • Latest: Net LONG position of +115.9k contracts for a 1Y Z-Score of +1.7 (down from +175.2k and +2.4, respectively, two weeks ago).


Kudos to you if you were similarly bearish, but mentally flexible enough to make either the early-FEB or post-Brexit pivot. In plain and simple SPX beta terms, we were not. That said, however, doing so would’ve required us to completely eschew all fundamental analysis and join the legions of our competitors who get paid to market ever-changing lists of reasons why the U.S. equity market will never again experience a material draw-down.


Our reasons for why it still might have not changed since we started making the #LateCycle employment and consumption slowdown call last July. If we’re right on that fundamental view and it culminates in recession as all #LateCycle slowdowns have before it, AND stocks are still making news highs throughout that process, then feel free to consider me fully on board the paradigm shift bandwagon.


Then and only then will we have enough data to support making such a bold call and evolving our process accordingly – just as so many football coaches have done before us. Until then, however, we prefer to keep grinding away at our research process in the summer heat.


The day fundamental research becomes irrelevant is the day central planners claim victory in the war against active fund management.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.47-1.60% (bearish)

SPX 2160-2195 (bullish)
VIX 11.01-14.70 (bullish)
EUR/USD 1.09-1.13 (bearish)
YEN 99.43-102.40 (bullish)
Oil (WTI) 39.67-45.99 (bearish)

Gold 1 (bullish)


Keep your head on a swivel,




Darius Dale



Two-A-Days - 8 16 16Chart of the Day

Dollar Down, Rates Down as Wall St begs for Dovish Fed Minutes...

Client Talking Points


Dollar Down, Yen Up …. And the Nikkei smoked right back into crash mode (-1.6% overnight and -21% from the 2015 Global Equity #Bubble peak) as the BOJ did the un-thinkable and didn’t “buy stocks” into the bell… (this should all end well).


Straight up 3-day ramp with Down Dollar helping the cause, but now we have both an immediate-term TRADE oversold signal in USD and an overbought one in WTI which now has a wide immediate-term risk range of $39.67-45.99/barrel.


Much prefer being long Gold to something like the US stock market and/or Oil here and we’ve been crystal clear on that – immediate-term risk range for Gold (and Platinum) is tightening (Oil’s is widening) and that’s a bullish signal (range = $1330-1372/oz).

Asset Allocation

8/15/16 56% 4% 4% 12% 15% 9%
8/16/16 55% 3% 4% 12% 16% 10%

Asset Allocation as a % of Max Preferred Exposure

8/15/16 56% 12% 12% 36% 45% 27%
8/16/16 55% 9% 12% 36% 48% 30%
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

See update on TLT below.


Eurozone GDP, reported Friday, signaled more of the same, stagnation. With that being said there were small but marginal Euro tailwinds against a U.S. retail sales report and PPI release that was likely dovish on the margin (USD -~20bps on Friday and -~60bps on the week). 


In line with our #EuropeSlowing theme, Q2 preliminary GDP slowed across the Eurozone to +0.3% vs. +0.6% in the prior quarter and +1.6% Y/Y for Q2 which was flat on a rate of change basis from Q1.

Looking at specific country results:


  • German (0.4% vs 0.7% sequentially) GDP accelerated to +1.8% Y/Y from +1.6% which was probably a minor Euro FX tailwind
  • Italian GDP came in at +0.7% Y/Y which was a deceleration from +1.0% in Q1
  • Greece GDP accelerated to contraction again, printing a measly -0.1% Y/Y from -1.3% in Q1

The Southern Eurozone states continue to implode  


Recall that a strong retail sales report for June, driven by a positive trend in goods consumption, was a large contributor to our GDP revision for Q2. The headline number, for June, was up +0.6% sequentially with the sequential acceleration in the control group accelerating +7.2% (annualized).


Friday’s retail sales report was a different story, and probably a dovish data point for the USD on the margin :

  • The control group printed flat sequentially, +0.0%
  • Retail sales ex. auto and gas printed -0.3% sequentially

Next to retail sales, July headline producer prices decelerated -0.4% vs. +0.5% in June sequentially and -0.2% Y/Y vs. +0.3% Y/Y in June. PPI ex. food and energy came in at 0.0% sequentially vs. +0.4% in June and +0.7% Y/Y from +1.3% in June. #Deflation  

Three for the Road


Hain: Something New Under The Sun?… via @HedgeyeHWP @HedgeyeFood @KeithMcCullough $HAIN $VRX



“Keep your eyes on the stars, and your feet on the ground.”

-Theodore Roosevelt


Simone Biles won her 3rd Gold Medal at the Rio games.  Only 12 other countries have more than 3 Gold Medals currently.

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FLASHBACK | Hain: Something New Under The Sun?

Editor's Note: Last night, Hain Celestial (HAIN) announced the delay of the release of its fourth quarter and fiscal year financial results. The statement went on to say that the company had “identified concessions that were granted to certain distributors in the United States." It was "evaluating whether the revenue associated with those concessions was accounted for" and as such noted they would not meet their fiscal year 2016 guidance. The stock dropped -25% in after-hours trading.


Below is an institutional research note written by Hedgeye Consumer Staples analysts Howard Penney and Shayne Laidlaw published last October. Penney and Laidlaw have been the bears on HAIN for some time now and, in the note, they draw similarities between HAIN and the battered mess that is Valeant Pharmaceuticals (VRX). For more information about our institutional research contact


FLASHBACK | Hain: Something New Under The Sun?  - sunset


Hain Celestial (HAIN) is on the Hedgeye Consumer Staples Best Ideas list as a SHORT.


It might be a stretch to draw similarities between Valeant (VRX) and HAIN, but we see some very eerie similarities relative to their respective industries. The centerpiece of the SHORT call on both companies is focused on that fact that roll-up models carry big risks and rarely work over the long run.   


Our Healthcare team used the following quote when they wrote the SHORT presentation on VRX last summer:


“That which has been is that which will be, and that which has been done is that which will be done. So there is nothing new under the sun.” -Ecclesiastes 1:9


The SHORT story was centered on Valeant operating an unsustainable business model of “serial acquisitions and underinvestment, fueled by debt that will continue to lead to deterioration in the ongoing business.” While the VRX story is just now coming to light and some smart money owns the name, there are now some very serious questions being asked about the company’s business model. 


In our view, HAIN is essentially no different. HAIN is operating an unsustainable business model of serial acquisitions and underinvestment in its brands that will continue to lead to deterioration in the ongoing business. In addition, the recently acquired businesses carry lower margins and overall returns. One difference would be that HAIN’s balance sheet is not overly leveraged.


Like VRX trying to change the pharmaceutical business model, HAIN is trying to redefine how a typical food manufacturer operates a traditional business and that carries significant unquantifiable risks. These risks will ultimately lead to the company trading at a discounted multiple over time.


In the case of VRX, the company purchases innovation through serial acquisitions, exchanging R&D costs for interest payments and integration and restructuring costs (R&D spending at acquired companies is dramatically reduced). In the case of HAIN, HAIN purchases “new brands” through serial acquisitions; exchanging G&A costs for interest payments (higher share count) and integration / restructuring costs (G&A spending is nearly eliminated at acquired companies over 12 months following the acquisition.) HAIN further complicates its strategy by diversifying into new “organic” categories in which they are not part of the core competency of the company.    


The short case for Valeant’s “new model” carries new and underappreciated risks. We now know what some of those unappreciated risks are for VRX. For HAIN, the street is just learning about some of the underappreciated risks. In our last note on HAIN, we outlined one of those risks that we see as being underappreciated by the market – outsourcing key brand related functions.    


One of our biggest issues with HAIN is the secular decline in gross margins. As the environment for “better-for-you” products in the U.S. gets more competitive, HAIN will not be able to defend brands or market position. To that end HAIN, like VRX, does not invest much in R&D. In FY2015, HAIN incurred approximately $10.3 million in company-sponsored (less than 0.5% of sales) in R&D, up only from $10.0 million in 2014. Given how competitive this market is, spending 50% less on R&D than their competitors, is a long term issue for the company. In addition, HAIN like all other consumer staples companies does not report the spending incurred by co-packers and suppliers on R&D, which does benefit the company. That being said, outsourcing a critical function like R&D is an unquantifiable business risk. 


As we see it, the only weapon the company has to defend itself from a secular decline in gross margins is to make massive cuts in G&A. Cutting G&A is never a long term winning proposition, and cutting too deep can put the long-term business model at risk. In 4Q15, it looks as if they are cutting into the muscle of the company. With the current G&A cuts announced for 2016, HAIN is now taking a big risk with their most important distribution channel. 


In 4Q15, HAIN announced that they were moving their natural channel sales/merchandising team to Advantage Sales & Marketing to “drive SG&A productivity.” Advantage is a third party national sales and marketing company that works with many companies within the consumer packaged goods space.


This is just the latest move by HAIN to reduce costs, saving them roughly 20-25% per year. Advantage is used by some of the big players to supplement their sales and marketing in the natural & organic channel, specifically on slower moving sku’s. The problem with HAIN’s use of this company is its sole dependence on it, as they said they moved their entire natural channel merchandising team to Advantage.


Transferring the entire operation out of HAIN is strategically a very risky idea and could lead to a loss of brand expertise at the company. HAIN will effectively go from managing their brands first hand to having a third party manage them, depending on how their contract is structured (dedicated resources or not) will be a pivotal factor. The biggest advantage of an internal sales force is, share of mind, you want your employees pitching your products. How do you know the third party will be representing your brands in the best light? 


These risks will only be known over time as selected brands begin to show slowing organic growth. Unfortunately, the street will never know that until it is too late, because the company lives in a culture of no bad news and does not disclose key metrics that allows investors to understand how the business is truly performing. Knowing they have something to hide, management has never consistently given the street historical context on:


  • Organic sales growth by segment
  • Non-organic sales growth by segment
  • Volume growth by segment
  • Price/mix by segment
  • Shipment vs consumption timing
  • Quarterly tone of business by region


Getting past the obvious similarities of roll up stories, HAIN is overvalued on its own merits. Nearly 40% of the operating profits of its UK business come from private label brands. In addition, most of the owned brands are not “organic” yet the company trades at a premium multiple relative to other mature food manufactures and/or private label business.

The Macro Show with Keith McCullough Replay | August 16, 2016

CLICK HERE to access the associated slides.

An audio-only replay of today's show is available here.

JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2


"Take time to deliberate; but when the time for action arrives, stop thinking and go in"
                      -  Andrew Jackson  


BOOST FROM BIDEN: Veep Joe Biden made his 2016 campaign debut in obvious fashion, stumping with Hillary Clinton in his hometown of Scranton, PA. Biden’s ability to connect with middle and working class voters is especially powerful in battleground Rust Belt states like PA, where economic frustrations still run high. Although Clinton’s lead has grown in the state, it’s a keystone for both candidates in their aggressive pursuit of its 20 electoral votes - with Trump making the rounds in western PA last week. Either way, Biden is the man you want by your side in that neck of the woods and with Clinton starting to trot out the big guns - President Obama will join the trail shortly - with the aim of burnishing her image and solidifying her lead.


TRUMPING TERROR: Trump kicked off his week in rather uncharacteristic form, introducing a three pillar strategy for fighting terrorism, defeating ISIS, and combating illegal  immigration. Yes, he stayed on message, but his message was somewhat of an issue as he called for “extreme” scrutiny when screening immigrants, particularly from countries he has described as “exporters” of terrorism. Trump is putting his best foot forward and building on his policy views after being highly criticized by national security and foreign policy experts over the past month. More detailed plans like these will help him in the future, but his message is still outside the mainstream and appeals to his most fervent supporters.


TRUMP’S TAXING ISSUE: Trump’s unprecedented refusal to release his tax returns could ultimately shatter the transparency of the democratic process for future generations in presidential and down-ballot races, even as his running mate, Mike Pence, is set to release his own. Demands to release his tax returns will only grow as his opponents will hammer the issue to undermine his campaign, but his obstinacy will have many more consequences in the end, as it adds more uncertainty in a time when undecided voters are finding it hard to connect with his candidacy. Though he’s claimed that he’s been advised against releasing his returns while “under audit,” it’s essential he makes some sort of concession to prove his trustworthiness to voters.  


CLINTON'S FBI INTERVIEW FALLOUT?: Despite Clinton’s massive lead in NY (as much as 30 points!) and growing lead nationally, her campaign is on edge as they brace for the impact of the Clinton-FBI interview notes (not a recorded interview or transcript, but notes) that will be delivered to the House Oversight Committee sometime this week. The matter, which has been progressing since early July, was formally requested by Committee Chair Jason Chaffetz who has acted as lead investigator for Republicans in the controversy. No expectations have been set for what's in the notes, but the Clinton campaign would rather it disappear altogether.


TANGLED TIES: The Trump campaign finds itself tangled in Eastern European politics yet again – this time with campaign chairman, Paul Manafort, being linked to a handwritten ledger showing his acceptance of $12.7 million in undisclosed cash payments. The accusations have sparked another controversy as relationships and ties to foreign entities are always hot button issues in a presidential campaign - from Trump’s statements about Vladimir Putin and the Russian hacking of Democrats’ emails to ties between the Clinton State Department and the Clinton Foundation. Whatever the case, the alleged compensation is still a mystery and its overall impact on the election - or more importantly, Trump’s poll numbers and public image - could be negative.


FCC MAINTAINS BROADCAST ANTI-CONSOLIDATION POLICIES: Our Telecommunications-Media Policy Analyst Paul Glenchur shared his insight on how the FCC maintained station ownership limits and JSA bans, hampering media consolidation strategies. You can read his piece here.



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