Cartoon of the Day: Economic Ills

Cartoon of the Day: Economic Ills - cyclicals cartoon 10.11.2016


We are entering the slowest part of the U.S. economic cycle and there's no cure for these economic ills.

Double Dip Industrial Recession? Yup. Just Ask Honeywell & Dover

Takeaway: It's shaping up to be an ugly earnings season for Industrials as companies like Honeywell and Dover Corp cut guidance.

Double Dip Industrial Recession? Yup. Just Ask Honeywell & Dover - recession cartoon 04.14.2016


The U.S. #GrowthSlowing carnage continues.


That's the latest from a few big, publically-traded companies this week. It's shaping up to be an ugly earnings season for the Industrials sector as multi-billion dollar conglomerates like Honeywell and Dover Corp are pre-announcing downgraded earnings and sales guidance to investors. 


Double Dip Industrial Recession? Yup. Just Ask Honeywell & Dover - honeywell


First came Honeywell (HON). Shares of the aerospace manufacturer are down almost -8% since Thursday, when the company cut its full-year guidance for earnings per share (from $6.60 - $6.70 to $6.60 - $6.64) and sales (projected to be down 1% to 2%).


Equally distressing was the commentary from Honeywell management. Sales of aftermarket business-jet services and shipping and logistics products "failed to materialize," CEO David Cote told investors on a conference call. Furthermore, "customer inventory levels were unusually high," CFO Thomas Szlosek added, "causing a temporary slowdown in revenue growth."


Here's a key excerpt from the call via CEO Cote:


"I would say the economy is clearly slow. It's still growing, but it's even slower growth than what we'd expected before. And we've planned for that everywhere. And that's pretty much what we've been seeing. Up to this point, biz jets had actually been okay, especially in that mid – super mid-size category. That's the thing that has changed with the, let's say the additional slowing in the growth rate for the economy. And we're going to plan for that continuing." 



The Hedgeye Macro team released their Q4 2016 Macro Themes last week. One of the themes called for a #DoubleDipRecession in Industrials. Here's the brief summary:


"The cyclical-industrial complex peaks ahead of the peak in the economic cycle and the current cycle has not proved different. Globally, growth and inflation expectations continue to be marked lower while PMI’s and Industrial activity remain in Trend retreat. Domestically, manufacturing ISM’s remain peri-contractionary while industrial production and corporate capex remain mired in their worst non-recession streaks of negative growth ever." 


Add Dover Corp (DOV) to the list of companies caught up in this double dip industrial production downturn. Dover pre-announced results and it now expects:


  • Full-year organic revenue declines of -7% to -8%, versus the prior forecast of -3% to -5%.
  • Third quarter earnings per share guided down to $0.81 to $0.83, versus $1.02 expected


Dover shares reflect this weakness. DOV is down almost 9% since Thursday. Here's Dover CEO Robert Livingston explaining the downgraded guidance:


"While our upstream drilling and production businesses showed solid improvement in the third quarter, and our Printing & Identification businesses continued to perform well, our overall results were well below our expectations. These results were principally impacted by a weak global economy and ongoing production inefficiencies in our retail refrigeration business... We also expect the macro global economy to remain soft, later cycle oil & gas exposed businesses to remain weak, and continued margin pressures in Refrigeration & Food Equipment through the end of the year, as we work to streamline and improve our production systems."


So not good. And just think, this is only the beginning of Q3 earnings season.

More to be revealed.

A Cautionary Note On The Putin Pop In Oil Prices

Takeaway: Putin's production freeze comments sent oil markets into hyper-drive. But Russia is essentially telling OPEC: you go first.

A Cautionary Note On The Putin Pop In Oil Prices - oil russia


The World Energy Congress got underway in Istanbul today creating another opportunity for OPEC ministers and Russia to talk up oil prices on the heels of last month’s Algiers “deal” to limit production.


President Putin attended the opening day and used his appearance to promote the OPEC Algiers deal. Putin said “Russia is ready to join in joint measures to limit output” but added that “we think that a freeze or even a cut in oil production is probably the only proper decision to preserve stability in the global energy market.”


The Russian President’s comments sent oil markets and headline writers into hyper-drive on Monday. But a closer examination of the situation should provide some caution.


Earlier on Monday Russia’s energy minister Alexander Novak said Russia would prefer to freeze its output at current levels rather than make reductions. The production freeze theme was echoed by Gazprom’s deputy CEO Alexander Medvedev who also said on Monday “Freeze not contraction.”


The freeze play is not insignificant since Russia’s current October production is at a post-Soviet record of 11.2 million barrels a day.


Still Russia is not taking any unilateral action to stabilize prices as President Putin said it defers a decision if an OPEC deal in November “will materialize.”  It does not seem that Russia is too confident in the prospects for an OPEC deal. Russia is essentially telling OPEC: you go first. 


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Buy Textron ... 4 Key Discussion Points

Takeaway: Textron shares are pricing-in ongoing weakness. investors don't appreciate its sales pipeline, new products and restructuring opportunities.

Buy Textron ... 4 Key Discussion Points - txt


Hedgeye will host a call October 11th (at 11:00 a.m. ET) to review our LONG thesis on Textron Inc. (TXT).


We will be collaborating with Hedgeye Potomac Defense Policy head LtGen Emerson "Emo" Gardner USMC ret. to provide a multifaceted view of Textron's longer-term prospects. LtGen Gardner brings unique insight into key TXT programs, like the V-22 and V-280.


  • Favorable Asymmetric Set-up: With key segment results already depressed, TXT shares appear to price in ongoing weakness, missing what can go "right".
  • Significant Aftermarket Sales, Existing Orders, FMS Potential: TXT should benefit from a well-developed installed base and sales pipeline.
  • Restructuring Underway: Management is already focused on opportunities within Industrial & Systems segments, with modest charges expected in 2H16.
  • Strong Platforms For Growth: New product introductions and potential product development, like tiltrotor drones, should add to TXT's already strong franchises. 


Lieutenant General Emerson N. Gardner, USMC, (ret.) is a recognized expert on the Department of Defense programming and budgeting process. He is the Senior Defense Analyst at Potomac Research Group in Washington, DC and has an independent consulting practice.


From 2007 to 2010 LtGen Gardner was the Principal Deputy Director and acting Director of Cost Assessment and Program Evaluation for the Office of the Secretary of Defense. In this billet he led independent evaluations of all major defense programs and managed the development of the Department of Defense's $3 Trillion, six year Future Year Defense Plan. In his book "Call to Duty", Secretary of Defense Robert Gates cited General Gardner as his "go to guy on the budget." Gardner had previously been the Deputy Commandant of the Marine Corps for Programs and Resources where he was directly responsible for the development and execution of all aspects of the Corps' $33 Billion annual budget.


For more information please go to


Attendance on this call is limited. Please note if you are not a current subscriber to our Industrials research there will be a fee associated with this research call and related material. Ping for more information.

A Week Of Wall Street Hopes, Dreams & Fairy Tales

A Week Of Wall Street Hopes, Dreams & Fairy Tales - fairy tale



Everyone from the Fed to Wall Street to the White House tried to call Friday's jobs report "good enough," with total nonfarm payroll employment increasing by 156,000 in September. But that's just spin. (It should be noted that Wall Street's non-farm payroll estimates have come down 25-30% this year.)


More importantly, as we highlighted on Friday, jobs growth (year-over-year) continues to slow from its cycle peak hit in February 2015. Simply put, employment is slowing along with U.S. economic growth


With that in mind, back to economic fairy tales. Here's a recap of last week’s headscratchers:


  • Cleveland Fed head Loretta Mester: "It's a solid labor market report... it makes sense to move up the [fed funds] rate another 25 basis points." (10/7/2016)
  • Fed Vice Chairman Stanley Fischer said holding rates steady in September was a "close call" and expect "gradual increases" in interest rates, even though productivity growth is "exceptionally poor." (10/9/2016)
  • Then this gem from Jason Furman, chair of the White House Council of Economic Advisers, "I don't think you're late cycle... I just don't believe in the concept of late cycle." (10/7/2016)


We crowned Furman’s statement “the most glaringly irresponsible” of the week but Fischer and Mester certainly gave him a run for his money. 


We'll say it again... the U.S. economy is slowing. 

CHART OF THE DAY: The Profit Cycle Peak Is In (An Economic Cycle Reality Check)

CHART OF THE DAY: The Profit Cycle Peak Is In (An Economic Cycle Reality Check) - 10.10.16 EL Chart


The Chart of the Day above shows the peak in S&P 500 corporate profits (hit in the second half of 2014). As you can see, once the peak is in, there's no coming back as the top always predates the next recession (red bar in the above).


As Hedgeye CEO Keith McCullough wrote in today's Early Look (our daily morning newsletter to subscribers) Wall Street remains way behind the curve in understanding our call on the peak in corporate profits. But reality continues to be priced into markets.


"Last I checked Wells Fargo (WFC) still has to report their new business reality on Friday... And I guess that brings me back to trying to find a bottom in the US corporate profit cycle. As you can see in today’s Chart of The Day, it’s coming off its all-time highs. And… for those who tried to “buy the bottom” during the last two economic cycle recessions (2000 and 2008), they better believe in the concept of cycles."


Getting ahead of major shifts in the economic cycle is how investors generate excess returns and avoid massive drawdowns. So just to recap, here's how the U.S. economic cycle has played out thus far…


  • 2H 2014: Income growth, corporate profits, and S&P 500 margins peak;
  • 1H 2015: Employment growth, consumption growth, consumer confidence, business confidence, net domestic investment and forward multiples peak;
  • 2Q/3Q 2015: Global equity markets peak;
  • 4Q 2015: M&A peaks and the bankruptcy cycle and credit market dislocations begin;

(Click here to watch a brief video of Hedgeye CEO Keith McCullough discussing U.S. economic growth in "An Animated History of U.S. #GrowthSlowing.")

Bottom Line:

Stay ahead of economic reality or get run over. No matter Wall Street's latest permabull narrative, the U.S. economy is past peak.