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Don’t Sell This ‘Heart Attack Stock,’ Buy It

 

Don’t freak out.

 

Micron Technology (MU) shares were down -3% yesterday, as a Wall Street analyst warned of softness in PC pricing. But hang on a sec.

 

“While it’s always tempting to sell Micron and run away because it’s a heart attack stock, the data actually shows very stable, seasonal orders for smart phones and PCs,” says Hedgeye Technology analyst Ami Joseph in the video above.

 

Bottom Line? Joseph says:

 

“The bear case is still a theory while the current data is real, and we are still about 50% above Street EPS for the next 4 quarters due to the lagging impact of pricing on MU model and implied May-Aug quarterly revenue and incremental gross margins.”

 

Stay long.

 


Cartoon of the Day: Janet Yellen's Shadow

Cartoon of the Day: Janet Yellen's Shadow - Janet Yellen 02.15.2017

 

Is Fed head Janet Yellen a Dead Dove Walking or did she finally turn hawkish? 

 

 

Click here to receive our daily cartoon for free.


Capital Brief: Inside The Trump Administration's Growing Pains

Capital Brief: Inside The Trump Administration's Growing Pains  - Washington D Usa White House C America 1641327

Source: Max Pixel

 

As President Donald Trump blasts the mainstream media for peddling fake news, here's a quick look at the key issues all investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

BLUNT TALK

#Russia #FlynnResignation

 

Capital Brief: Inside The Trump Administration's Growing Pains  - roy blunt wiki
Source: Flickr 

 

Democrats have called for investigations into the ties between Russia and the Trump Administration, and now following Flynn’s resignation Republicans are starting to hop on board. Republican Senator and Senate Select Committee on Intelligence member Roy Blunt has joined them in their calls for an investigation and Majority Leader McConnell has now said it is highly likely the committee will probe Flynn’s Russia ties.

 

Blunt believes that every president can reexamine their relationship with any country, but wants to find out if their is a larger problem in the Administration's relationship with Russia.

 

POLARIZING EXPRESS

#GOP #Trump

 

Capital Brief: Inside The Trump Administration's Growing Pains  - trump 2 15

 

 

Although the Trump Presidency has experienced some growing pains early on, one thing he has been able to count on is support from Republicans in the House and most of the Republicans in the Senate. On the other hand, what Trump has not been able to rely on so far is crossing the aisle to get votes from Democrats - particularly in the House.  

 

Again, it’s still early, but if trends and the hyper-partisanship continue, Trump and his Republican allies will likely go it alone in the House and focus their energies on winning over a handful of Dems in the Senate.

FREEDOM FIGHTERS FOIL

#FreedomCaucus #Obamacare

 

Capital Brief: Inside The Trump Administration's Growing Pains  - dont tread

Source: Flickr 

 

Even though Republicans have control of the House, Senate, and White House, the Freedom Caucus is still not satisfied with the way things are, well, progressing. The conservative caucus voted to oppose an ACA repeal bill if it does not go as far as the repeal measure that President Obama vetoed in 2015.  

 

This bill killed the core elements of the law including subsidies, taxes, mandates, and Medicaid expansion. The Freedom Caucus isn’t just focused on repeal though, they will support adding elements of replacement to a quick repeal as long as it meets their stringent demands.

DON’T BANK ON IT

Three years ago former House Ways and Means Chairman Dave Camp proposed a tax on banks and other financial institutions as part of a tax reform proposal. The tax received major push back from the industry, but tax reform didn’t move forward with Obama in office.

 

Now the Republicans are in control of Washington, banks are looking to make sure the tax doesn’t re-enter the picture. As we get closer to the start of the tax reform process, expect banks to push much harder to avoid any sort of bank tax that would allow Republicans to pay for lowering tax rates.

DIVIDED ON DEFENSE

The Pentagon will forward its supplemental request for the FY 2017 budget to OMB on March 1 and an expanded FY 2018 budget on May 1.  Both items are splitting Republican members on the Hill. The The FY 2017 supplemental request will be for at least the $15B approved by the House last fall and could be for as much as $40B as discussed by Senator John McCain and others.

 

While the urgent need to improve near term readiness is universally accepted, how to pay for it is not. An increase in Pentagon spending in 2017 could be done passing a baseline budget that conforms to the Budget Control Act and then plussing up the OCO by the $15-$40B being discussed. Not improbable.

 

Any expansion to the FY 2018 budget, however, will require changes to the Budget Control Act and a budget resolution that lays out a broader and longer term discussion of government finances. That can wait until this summer/fall but will expose the rifts among Republican fiscal conservatives, Republican hawks and Democrats.

CALL REPLAY: GENERAL EMO GARDNER ON NATIONAL SECURITY

Our Senior Defense Policy Analyst Emo Gardner spoke about the Flynn resignation, its impact and what’s next. You can listen to the replay here.

AT&T LIKELY WINNER OF PUBLIC SAFETY NETWORK CONTRACT

Our Senior Telecom & Media Policy Analyst Paul Glenchur writes the AT&T is likely to win the public safety network contract. Rules discouraging state opt-outs should boost network and contract value. You can read the full analysis here.

 

 

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


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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. 


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