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ICYMI: The S&P 500 Earnings Scorecard & What to Buy

 

We’re now three-quarters of the way through earnings season. The profit outlook for corporate America is looking up. If current S&P 500 profits hold, it would be the first time in two years companies have generated positive earnings growth for two consecutive quarters.

 

So here are the numbers. As of last night, 370 of 500 S&P 500 companies have reported aggregate sales and earnings growth 4.3% and 5.2% respectively (year-over-year). Below are the top-five leading sectors so far, broken down by year-over-year earnings growth:

 

  1. Utilities (9 of 28 reported): +17.9%
  2. Real Estate (20 of 29): 11.4%
  3. Information Technology (55 of 66): +10.2%
  4. Financials (60 of 63): +9.8%
  5. Consumer Staples (28 of 37): +7.2%

WHAT TO BUY

Heading into the first quarter of 2017, we like Energy (XLE) and Financials (XLF). Why? As you can see in the video above, these sectors, particularly the Energy sector, were severely challenged from the end of 2015 into early 2016. (Energy and Financials sector earnings were down -72.6% and -5.4% in the fourth quarter of 2015).

 

In other words, we’re lapping last year’s tough times so the earnings outlook is looking up. We say buy them.

 

(Note: These sectors also benefit from two of our core macro themes U.S. #GrowthAccelerating and #InflationAccelerating.)


Is Fed's Janet Yellen Hawkish, Dovish Or Just Plain Chicken?

Is Fed's Janet Yellen Hawkish, Dovish Or Just Plain Chicken? - janet yellen chicken

Source: Flickr

 

For the past 26 days, investors have placed the post-Inauguration Day spotlight on Donald Trump. That's changing. The U.S. economy and inflationary data have been heating up of late and investors are justifiably wondering, will the Federal Reserve dial back its easy money policies and raise rates faster than is investors currently expect?

 

That's why investors watched in earnest yesterday as Fed head Janet Yellen took center stage to give her semiannual testimony before Senate Banking Committee. Unsurprisingly, Yellen declined to lay out a specific rate hike timeline but did sound ratchet up rate hike speculation. Here's the key statement:

 

“[W]aiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession."

Investor Rate Hike Expectations

Investors read Yellen's comments as hawkish (i.e. rate hike possibilities rising). Following Yellen's testimony, investor rate hike expectations rose, particularly for the back half of 2017. As you can see in the Chart of the Day below (from today's Early Look), here's what consensus considers probable on the rate hike front this year?

 

  1. Probability of a March 2017 rate hike = 34%
  2. Probability of a May 2017 rate hike = 53%
  3. Probability of a June 2017 rate hike = 74% 

 

Is Fed's Janet Yellen Hawkish, Dovish Or Just Plain Chicken? - 02.15.17 EL Chart

YELLEN: HAWKISH, DOVISH OR CHICKEN?

Here are some questions to consider. What if consensus is wrong? What if U.S. economic growth and inflation are accelerating faster than consensus (and the Fed) expects? Will the Fed raise interest rates faster than is currently expected?

 

We think so. Here are some stats:

 

  • The U.S. economy is heating up: Fourth quarter U.S. GDP (year-over-year growth) came in at 1.9%, up from 1.7% in the third quarter (the second consecutive quarter of accelerating growth, since five quarters of decelerating growth to the 1.3% second quarter low.)
  • Inflation is rising: The Consumer Price Index just accelerated for a 6th consecutive month, taking consumer price growth to its highest level since March 2012 at +2.54% in January.

 

The Fed risks falling behind the curve if they don't raise rates (and soon). As we wrote recently, our proprietary leading indicator on inflation suggests year-over-year CPI readings could hit three, even four, percent in the first quarter of 2017, as previously beleaguered commodity prices contribute to inflation growth in the coming months. 

 

This would shock Yellen & Co. An inflation rate at or above 4% hasn't been seen since September of 2008. 

 

Bottom Line

We think investors don't yet appreciate how fast rates could rise in 2017. The Fed is falling behind and Janet Yellen is a Dead Dove Walking.

 

Is Fed's Janet Yellen Hawkish, Dovish Or Just Plain Chicken? - dead dove walking


ICYMI: A Simple Playbook for European Stocks

 

We are long-term U.S. Dollar bulls. And as the euro falls versus the dollar, that’s bullish for European equities.

 

Euro ↓ = European Stocks  ↑

 

That’s it.

 

Simple.

 

If you’ve been playing that game profitably for some time now, consider selling some (European equities that is). The euro is oversold. Plus, stock markets in Europe have had a great since run in the past three months as the post-Election Day rally in the U.S. dollar weakened the euro:

 

  • Italy, FTSE MIB: +15%
  • Germany, DAX: +10%
  • Spain, IBEX: +9.8%

HOW TO TRADE IT:

Our immediate-term proprietary risk range for the Euro versus the U.S. Dollar is $1.05 to $1.08. As the euro dipped to the low-end, European equities flat-lined in today’s trading. At the end of the range on the euro, that means sell some European equities. 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.37%
  • SHORT SIGNALS 78.32%

Cartoon of the Day: Donald + The Bull

Cartoon of the Day: Donald + The Bull - Trump valentine 02.14.2017

 

Apparently the bull loves Trump? The S&P 500 is up 9% since Election Day.

 

Click here to receive our daily cartoon emailed to you for free.


Kevin Kaiser’s Latest Short Call: Why The Bull Case Is Poorly Thought Out | $MIC

 

“You don’t want to be on the wrong end of a short call by Kevin Kaiser of Hedgeye Risk Management,” Bloomberg wrote recently. A series of Kaiser’s short calls, from Linn Energy to Breitburn Energy Partners, have resulted in bankruptcy.

 

Kaiser’s latest short? Macquarie Infrastructure Corp (MIC). It’s a $6.4 billion collection of energy and industrial businesses.

 

In the days following the announcement of Kaiser’s short call, MIC shares fell almost 10%. It’s not looking up either. “It doesn’t take a lot to go wrong for this to get really ugly,” says Energy analyst Kaiser. He continues:

 

“I think probably a key tenet of the bull case is betting on management and the company’s capital allocation strategy. I think that’s poorly thought out.”

 

Here’s why:

 

  1. The existing businesses are clearly mature—there’s not much growth.
  2. The company relies mostly on acquisitions to grow.
  3. MIC has an aggressive dividend payout, over 150% of their earnings and free cash flow.

 

In other words, the stock is highly-sensitive to changes in U.S. economic cycles since they’re largely acquiring growth by tapping capital markets. Kaiser has seen this before. He explains how he thinks this plays out.

 

“So with this capital asset allocation strategy, like any other company that does this, what tends to happen is you buy when times are good. You buy when your stock price is high. You buy when asset valuations are high; when profit margins are near peak.

 

And then when capital market cycles roll over, you have to hunker down because your stock price has gone down, your leverage is high and you had to cut your dividend.”

 

Many investors are long MIC because they believe management can create value simply by deploying capital.

 

As Kaiser says, “I’m not so sure about that.” 


5 Reasons This Sporting Goods Retailer Is Still A Short (Even After Today's -13% Tumble)

5 Reasons This Sporting Goods Retailer Is Still A Short (Even After Today's -13% Tumble) - hibbett sports 2 14 17

Source: Wikipedia

 

Shares of Hibbett Sports (HIBB) are down -13% today. We’ve been short Hibbett for the better part of 2-years. Sometimes with high confidence, sometimes low – but always short.

 

I don’t like saying that, because "perma shorts" in Retail almost never work. In other words, 2-years is a REALLY long time to be short. But expectations are consistently too high.

 

Last night’s miss is the second or third in a series of ‘many more’ misses barring a significant rebase in margin expectations (like coming down by another 400bp). I’d argue that this name has even more margin downside than Nordstrom (JWN).

 

That's because of:

 

  1. Sub-average management.
  2. Tapped out on store growth
  3. No more Wal-Mart (WMT) stores to move next to (that had been its strategy for 20 years – sell a $125 baseball bat to people who go to WMT to buy eggs).
  4. Moving out of core ‘bible belt’ area into regions where it has a higher cost structure because of no nearby distribution centers.
  5. The bull case is about 'building e-comm.' Well guess what…I’m pretty sure that it does not have ecomm because Nike told them not to. Now it’s trying to catch up to peers who have a 10-year head start. Good luck with that. That’s like ‘shopzilla’ trying to catch up to Amazon.

 

This is not a terminal story – there’s a definite need for it. But simply at a size 40% below where it is today, and at a margin structure nearly half of where it is today.

 

And, I actually don’t think this is a relevant read through to Foot Locker, the so-called basketball cycle, or whatever. It is probably not completely isolated… but this is very company specific.

 

I think Foot Locker (FL) is in deep deep trouble, but probably not in 1H as Nike throws it a bone to re-accelerate top line. 

 

5 Reasons This Sporting Goods Retailer Is Still A Short (Even After Today's -13% Tumble) - 2 14 2017 HIBB

 

*Email sales@hedgeye.com for more access to and information on our institutional research.


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