Earnings Season? Ugly. Nasty. Just Getting Started

Takeaway: Earnings season has just begun and the outlook for the Industrials is looking awful.

Earnings Season? Ugly. Nasty. Just Getting Started - Earnings cartoon 11.03.2015


If the past week of company earnings updates is any indication of what's in store for earnings this quarter, it could get ugly in equity markets fast.


First, we heard pre-announced guidance revisions on Friday from Honeywell (HON) and PPG Industries (PPG), and then Dover (DOV), yesterday. The results weren't pretty, with downward revisions to company earnings and revenue estimates which sent shares tumbling.


Alcoa (AA) kicked off (official) earnings season today with a bang. But not in a good way. Shares of the industrial conglomerate have plunged -11% so far today after reporting $5.21 billion in revenue. That's down 6% from the prior year. It missed analyst projections of $5.31 billion. 


For the record, Alcoa even managed to miss bombed-out Wall Street consensus' earnings per share estimates of $0.33, versus as reported EPS of $0.32. (Note: Wall Street's estimates were down -12% from the prior week and down -30% from a year ago. #Sad.)


Then came Fastenal (FAST)...


Shares are down -5% so far today after the manufacturer of screws, nuts and bolts missed EPS and revenue estimates. Not pretty.


Digging into Fastenal's conference call revealed some interesting insight about the broader U.S. economy. Here's CFO Holden Lewis:


"Qualitatively, it's not clear to us that the tone changed much in the third quarter. We saw that the sales of fasteners and heavy manufacturing construction end markets were relatively weak as we have seen before. The same could be said of our largest customers, our top 100 was flat to maybe down slightly during the period. But again, these are the same dynamics that have persisted throughout 2016."


The company execs were candid about the outlook for the industrial economy. During Q&A, the first question was directed to CEO Daniel Florness about whether he was "seeing any signs that the industrial economy is bottoming?"


"I can't say that we are... I can't say that we saw any kind of inflection."


Wow. Keep in mind this is the same guy who said, while CFO of Fastenal in October 2015, “The industrial environment is in a recession. I don’t care what anybody says because nobody knows that market better than we do.” Believe him.


On a related note, our Macro team reiterates last week's 4Q Macro Themes call for a #DoubleDipRecession in Industrials. An appropriately timed callout, indeed. With earnings season just getting started there's no telling what's in store.


So far, it's not looking good.

Yellen's Favorite Economic Indicator Is Still Falling

Takeaway: The latest signal from Janet Yellen's favorite economic indicator flies square in the face of a rate hike.

Yellen's Favorite Economic Indicator Is Still Falling - labor market conditions 10 11 16




Now go flip a coin as to what they'll say tomorrow (they've flip-flopped their rate hike rhetoric 7 times in the last 10 months) particularly in light of what Fed head Janet Yellen's *favorite* economic indicator just revealed.


That indicator, "Change in Labor Market Conditions Index," just fell again to -2.2 for the month of September. This index has declined 8 of the last 10 months. Aside from a short-lived blip in July (a reading of 0.8), the last time the index registered positive sequential readings was back in December. Of course, that was the last time the Fed raised interest rates.


At its September meeting, the FOMC said "the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year." It will be interesting to see how continued job market weakness and slow growth filters into the Fed's rate hike calculus heading into its November and December meetings.


  • Will they pull back their hawkish rhetoric ... ?
  • Will they ignore economic reality and raise rates anyway ... ? (The latter would be disastrous)


Your best bet is to flip a coin with this "data dependent" Fed.


Yellen's Favorite Economic Indicator Is Still Falling - Fed birdbrain cartoon 06.15.2015 

This Chart Is a Powerful Indictment of Current Fed Policy

Takeaway: It's a wonder anyone listens to anything the Fed says anymore.

This Chart Is a Powerful Indictment of Current Fed Policy - rate hike prob 10 11 16


Take a close look at that (ridiculous) chart. 


What it shows you is investor rate hike probabilities for November (grey line) and December (black line), overlaid with the myriad policy pivots (Fed commentary included). As crazy as it may sound, our omnipotent Fed has gone back and forth on its rate hike rhetoric 7 times in just the last 10 months.


  • Hawkish (December 2015)
  • Dovish (March 2016)
  • Hawkish (May 2016)
  • Dovish (June 2016)
  • Hawkish (August 2016)
  • Dovish (September 2016)
  • Hawkish (October 2016)


Absurd? You decide.


Now, with current December rate hike expectations at 70%, here's the key takeaway for investors confused about what all this Fed jawboning means:


(An excerpt from today's Early Look by Hedgeye CEO Keith McCullough)


"If we’re right on the profit, employment, and GDP cycle slowing to its slowest point in Q4 (we’re at 0.4% q/q SAAR GDP), Yellen's either going to pivot for the 8th time (back to dovish) or make her 2nd policy mistake of #TheCycle and hike into the slow-down."


That's right. When the Fed raised rates last December, the S&P 500 dropped over -10% (peak-to-trough), as economic data continued to slow and investors freaked about the prospects of rate hikes into this slowdown. 


In other words...


This Chart Is a Powerful Indictment of Current Fed Policy - zyb

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[UNLOCKED] Fund Flow Survey | Stock Funds Bleeding...Bonds Funds Booming

[UNLOCKED] Fund Flow Survey | Stock Funds Bleeding...Bonds Funds Booming - dollar

In the 5-day period ending September 28th, equity mutual funds lost another -$4.6B while bonds funds gained +$5.0B. This is a complimentary research note originally published last week by our Financials team. For more info on our institutional research email

6 Key Points From Our Housing Outlook Call

Takeaway: Luxury & High End real estate is struggling with steadily increasing supply of high end homes as demand has been waning and pricing weakens.

6 Key Points From Our Housing Outlook Call - housing14


Hedgeye Housing analysts Josh Steiner and Christian Drake are hosting a conference call on Thursday, October 13th (11am ET) to update their Q4 outlook.  


Three key developments will be discussed which are important for investors to understand. One is a headwind set to grow stronger over the course of 2017. The other two are risks that just recently emerged which bear close monitoring. 


  • High-End Hangover: Luxury & High End real estate is struggling for a multitude of reasons. The supply of high end homes has been increasing steadily as demand has been waning, while pricing is beginning to weaken. This trend looks set to continue and likely worsen.
  • Headfake or Harbinger #1: Collapse in Household Formation: July/August of 2016 saw the sharpest slowdown in household formation since 2011 and is similar in scale to what was observed back in December, 1999 and January, 2008. 
  • Headfake or Harbinger #2: Decline in Birth Rates: Our Healthcare Team's proprietary Hedgeye Maternity Tracker is showing a significant decline in maternity rates YTD across the US. The stork's arrival is one of the primary precipitants of change for living arrangements.  
  • Zika Toll: Zika has instilled fear across the country. What impact could the spillover of this fear have on birth trends, household formation and the U.S. housing market?  We'll attempt to quantify the risk.  
  • Gotham: NYC is feeling the effects of building pressures across the financial sector landscape. This quarter, we'll take a look at the underlying trends in the largest US market.
  • Uncertainty: Rates, Elections, Global Macro Risks and their probable impacts on the US Housing market. 


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

CHART OF THE DAY: What's Behind U.S. Productivity's Worst Streak In 40 Years

CHART OF THE DAY: What's Behind U.S. Productivity's Worst Streak In 40 Years  - 10.11.16 EL Chart

Productivity's Worst streak in four decades ... WHY?


Most mainstream economists don't have a good explanation. In recent testimony before Congress, Fed head Janet Yellen lamented that productivity growth has been "very, very low." She called it a "depressing finding." We don't disagree.


Here's our explanation: Jobs growth slows => Number of Hours Worked falling => Productivity slips => GPD dips


1. Jobs Growth 


Year-over-year nonfarm payroll growth has declined from its February 2015 peak of 2.3% down to 1.7% today

2. Aggregate Weekly Hours 


Private sector year-over-year has declined from its 2015 peak around 3.5% to 1.05% today


3. Productivity


See chart above. 40-year low. Not good.


4. GDP


U.S. economic growth has slowed from 3.3% (March 2015) to 1.2% reported in June 2016 



Hedgeye CEO Keith McCullough lays out this cascading domino effect in greater detail in the 3-minute video below.



 Want more? For an in-depth discussion of the productivity slowdown, see Hedgeye Demography Sector Head Neil Howe's piece "The Great Productivity Slowdown.")

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