In this brief excerpt from a HedgeyeTV video presentation, our Retail team explains why Nike remains a Best Idea Long heading into tomorrow’s earnings report. Analysts Brian McGough and Alexander Richards discuss an underappreciated bullish catalyst.
Industry veteran and portfolio manager Michael Aronstein, CIO of Marketfield Asset Management, sat down with private investor Buddy Carter and Hedgeye CEO Keith McCullough in this edition of “Real Conversations.” The trio discussed critical developments facing investors right now and why the markets and economy look increasingly vulnerable.
Below is a transcribed excerpt from that discussion. (Click here to watch the video in its entirety.)
Aronstein: When I look out my window in Manhattan and see what’s being built and the prices people are asking. It’s an anomaly and the type of thing that signals the terminal stage of a cycle.
McCullough: Good point. It’s unique but you actually define the topping process as a surge in supply.
Aronstein: It is and it’s relentless. In 2003 to 2007, in the U.S., we were building 1 million extra homes a year because people thought it was like printing currency. But by the time mortgage conditions changed and the yield curve finally flattened there was no escape for anybody because you realized you had a lot more houses than there were people who wanted houses.
Carter: I see similarities today. Keith, you talk to private bankers. They are having the damnedest time appealing to people in any way shape or form because benign neglect has been so profitable. But the problem is that you don’t transition from rewarding benign neglect to being adroit in a single moment.
McCullough: Yes, it just doesn’t happen like that.
Carter: Michael said this to me many years ago. ‘People don't realize the difference in liquidity on the right-hand side,’ meaning past the peak, during the evidence of the new phase condition. The problem is if you are a little late in realizing you're past the peak it can be very expensive. But it's tough to spot. Like what we’re seeing in high-end real estate now. We haven’t seen it before. Not only is there more supply but it’s heavier supply.
McCullough: Heavier and at epic prices. Everything that you guys are talking about is captured in this chart that we show in the Macro deck. It shows household net worth as a percentage of disposable income. As you can see, this is the third of three epic peaks. Buddy, you keep citing Cisco Systems and, Michael, you’re talking about real estate into 2006-2007, I’m looking at this cycle and we have both.
Now, I’m 17 years into this business so compared to you guys I’m a rookie. But I’m sitting here watching this one and saying ‘Oh my god.’ This has every component of every bubble I’ve ever seen but it has less liquidity. What do you think about that chart and the cyclicality?
Aronstein: As Buddy was saying, one of the things that tells you’re past the peak is when there are no transactions. The bid offer has gone to a point where it’s not even worth picking up the phone. There’s just too big a difference of opinion so the liquidity vanishes.
And so you first get a seizure in the market. Once the volume and transactional liquidity shows itself, that’s when you get the declines like 1987. You get these discontinuities and what has actually happened is that a few trades have pushed something down 10-15-20-25-30%.
McCullough: We like to explain risk this way. It’s like a riverbed that you don’t know what’s around the corner but you can start to measure and map the speed of the water and the rocks that may be around. Because by the time you do get to the waterfall everyone’s dead.
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To watch the discussion in its entirety click on the video below.
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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.
Takeaway: Individual sectors may be affected by year-end budget bills but macro changes to the ACA unlikely until 2019. Going to be interesting 2 yrs
Notes from the Road.
Technically, a trip to Capitol Hill does not constitute being on the road. It is more like down the road – or more accurately, the Avenue. With Congress back in session, the end of the federal fiscal year looming, a once-in-a-lifetime kind of presidential campaign underway and Americans generally in a bad mood, I thought it might be a good use of time to make the rounds with staff of leadership offices and major committees and a Member or two to see what they are thinking about the next three to six months. As it happened the MYL CEO was on the testifying about the price of EpiPens which made everyone want to talk about Pharma. Most of these conversations are pretty general and high level. But health care is almost 20 percent of the American economy so it winds its way into even high level, general conversations. Below are some notes that capture much of the trends and ideas:
The presidential campaign
- Clinton finds herself in a competitive race because she is such a weak candidate
- Clinton is not expected to have a mandate from the electorate so major changes to the ACA will be tough
- No one (on the Hill) is afraid of her
- Some Republicans think of Trump as an “empty vessel” into which they can pour their own policy ideas (like House Republicans’ A Better Way)
- Other Republicans think Trump is too unpredictable for any prognostication about what he might do on health care (or anything else)
- Trump has no network of policy people to support him if elected
- The issue is not developed enough in terms of what solutions are possible politically or otherwise
- A Republican close to leadership called price hikes “a legitimate concern” but not sure what to do
- The Sanders/Warren wing of Democrat Party advocate for extreme measures like price controls which makes it difficult for moderates to consider other possibilities
- Republicans are getting a little irritated with an industry they have long supported due to the steady drip of bad PR like the EpiPen price hikes
- Pharma has defined success in the Part B Drug demo as complete repeal or withdrawal. If they lose, does rep take a hit?
- Notwithstanding the sequence of bad PR moves, and damaging headlines, most people think Pharma still has enough influence and power to fend off any significant assaults but they are losing friends for certain
- Possible punishments for Pharma include greater transparency in R & D, resolving the generic backlog and eliminating pay for delay
Changes to ACA
- Democrats say they would consider tweaks to the law but could not articulate any specific changes they would consider
- Freedom Caucus (shorthand reference to hard right conservatives) still want repeal and replace which is a non-starter for Democrats
- Republican leadership says that repeal via reconciliation could happen but the problem is there would be a vacuum left. One staff member called it “the toughest puzzle piece.”
- Republican leadership thinks ACA will fail especially with departure of Obama people who have affixed Band-Aids to keep it going
- The next two years will be tough for health care with a divided Congress unable to do much of anything about it
- Cuts to Medicare Advantage in Puerto Rico are leading to a humanitarian crisis
- Republicans are staking their claim on 2018 when the electoral map changes dramatically
Year-end budget negotiations
- Continuing Resolution until December
- December could see a large bill and include tax extenders, health care provisions (please see our note on this topic)
- What happens will depend on leadership election dynamics as Ryan attempts to keep Freedom Caucus under control and maintain Speakership
- Democrats want an active lame duck and President Obama will want to play heavily as this is last chance to influence
- Republicans’ chief demand in lame duck is spending caps remain pretty much where agreed to as part of two year deal except for increase in defense spending
- If no year-end deal, another CR to March which may coincide with debt ceiling vote (though extraordinary measures may extend debt ceiling until September)
To bring it all home for the health care investors, it looks like the year-end spending bill may have a few health care provisions that could be important for individual sectors but macro changes to the ACA are unlikely between now and the end of 2018. With little relief for health insurance cost sharing for on and off-exchange plans, the high deductibles will be exerting their influence on the market. The next two years will be very interesting.
Takeaway: AUM balances are closing on their lows for the quarter and while rate of change is improving, fundamentals aren't.
Editor’s Note: With shares of WisdomTree (WETF) down -5% today, below is an excerpt from an institutional research note written by Hedgeye Financials analyst Jonathan Casteleyn last week. Since Casteleyn's original short call on WETF in December, shares are down -45%. To access our Financials research ping email@example.com.
WisdomTree assets-under-management (AUM) balances are closing on their quarterly lows for 3Q and are back to near year-to-date lows from June. The factors that have driven investor interest from currency hedged products remain intact including a continued sharp rally in the Japanese Yen and also a marginally positive Euro return.
The plight in Japan is most pertinent as an +18% rally in the Yen continues to be perpetuated by ongoing risk aversion with a failing monetary experiment by the BoJ. Margin balances across all three Japanese equity exchanges continue to deflate, and the -20% decline in leverage year-to-date has almost overlayed exactly with the +18% rise of the country's currency.
That said, margin balances are still nowhere near levels which historically have corresponded to a reversal of current trends and the current margin reading of ¥2.0 trillion Yen is still over a trillion Yen higher than levels which marked major currency reversals in 1998, 2002, 2008, and 2011.
Simply put Japanese leverage can fall by another -50% before reaching levels which have historically been a solid level for a reversal of current Yen strength.
Takeaway: The steadily falling 10s/2s yield spread continues to indicate U.S. #GrowthSlowing.
There are innumerable examples of economic indicators rolling over that support our U.S. #GrowthSlowing call. So what's Fed head Janet Yellen talking about when she said the following last week:
“The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”
The Fed's own 2016 GDP forecast was just revised down to +1.7%-1.9% from 1.9%-2.0% prior. Clearly, the Fed is trying to push a narrative about the U.S. economy that simply isn't true.
So, after balking yet again on rate hikes, the 10s/2s Treasury yield spread compressed to 85 bps today. That's a crystal clear macro market signal confirming our call that U.S. growth continues to slow.
As you can see in the chart below...
The Treasury yield curve continues to flatten in spite of all the talk of Fed rate hikes and Wall Street's perennial fear that the bond market rally is finally dead.
Make no mistake...
The U.S. economy continues to slow. The Fed can continue to pretend otherwise but reality always prevails.
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.46%
SHORT SIGNALS 78.35%