Q2 2016 MACRO THEMES Files...Q2 2016 MACRO THEMES JUNE 6-8 UPDATE ORIGINALLY PUBLISHED APRIL 7 TH...

Q2 2016 MACRO THEMES JUNE 6-8 UPDATE ORIGINALLY PUBLISHED APRIL 7TH 2016

MACRO TEAM

HEDGEYE 2

DISCLAIMER Hedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut. Hedgeye Risk Management is not a broker dealer and does not provide investment advice for individuals. This research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. The opinions and conclusions contained in this report are those of Hedgeye Risk Management, and are intended solely for the use of Hedgeye Risk Management’s clients and subscribers. In reaching these opinions and conclusions, Hedgeye Risk Management and its employees have relied upon research conducted by Hedgeye Risk Management’s employees, which is based upon sources considered credible and reliable within the industry. Hedgeye Risk Management is not responsible for the validity or authenticity of the information upon which it has relied. TERMS OF USE This report is intended solely for the use of its recipient. Re-distribution or republication of this report and its contents are prohibited. For more detail please refer to the appropriate sections of the Hedgeye Services Agreement and the Terms of Use at www.hedgeye.com.

LEGAL

HEDGEYE 3

PLEASE SUBMIT QUESTIONS TO

[email protected] TO BE ANSWERED AT THE END OF THE CALL

HEDGEYE 4

OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT

PROCESS SLIDE #1

DIFFERENTIATED FROM THE HERD Macroeconomics and Global Macro Risk Management are two very different fields. We specialize in the latter.

WE FOCUS ON THE SLOPES Everything that matters in Global Macro occurs on the margin.

HEDGEYE 5

PROCESS SLIDE #2 SPECIFICALLY, OUR BACKTEST DATA SHOWS THAT A LARGE DEGREE OF INTER AND INTRA ASSET CLASS RETURNS CAN BE EXPLAINED BY CHANGES IN GROWTH, INFLATION AND POLICY EXPECTATIONS. REFER TO THE FOLLOWING SLIDE FOR MORE DETAILS.

DATA SOURCE: BLOOMBERG

HEDGEYE 6

WHY DOES THE 2ND DERIVATIVE MATTER? BECAUSE FINANCIAL ASSET RETURNS HAVE HISTORICALLY ANCHORED ON THE MARGINAL RATE OF CHANGE IN BOTH GROWTH AND INFLATION – ESPECIALLY WHEN THESE DELTAS ARE COUNTER TO CONSENSUS EXPECTATIONS.

DATA SOURCE: BLOOMBERG. THE AVERAGE QUARTERLY RETURN DATA IS WEIGHTED BY DELTA INTO RESPECTIVE QUADRANT.

HEDGEYE 7

PROCESS SLIDE #3

Multi-factor: Price, Volume and Volatility Multi-duration: TRADE (3 weeks or less), TREND (3 months or more) and TAIL (3 years or less)

ALL BACKSTOPPED BY A PROVEN QUANTITATIVE OVERLAY


1,800

1,850

1,900

1,950

2,000

2,050

2,100

2,150

HEDGEYE QUANTITATIVE SETUP: US EQUITIES S&P 500 TREND = 2059 TAIL = 2066

HEDGEYE 8

Q1 2016 MACRO THEMES

U.S. #RECESSION Industrial activity and corporate profitability are already trending at recessionary levels. Meanwhile, domestic employment, consumption and income growth are all past peak and policy-driven deflationary pressures should persist in perpetuating soft external demand, EM distress, weak import pricing, HY credit risk and further flagging in corporate capex. We’ll contextualize the current macro data and handicap the probability of recession as the late-cycle U.S. economy traverses its steepest GDP base effects of the cycle.

#CREDITCYCLE An extended breakout in corporate credit spreads has preceded recessionary periods in prior cycles, and since we introduced our deflation theme in 2H14, both high yield and investment grade spreads have marched higher off all-time lows in cross-asset volatility and all-time highs in corporate credit outstanding. In effect, we are loudly reiterating our call that the unwind of ZIRP and QE will continue to deflate the easy money credit boom it fabricated in the form of continued recessionary earnings growth as the business cycle gets dangerously long in the tooth.

#CURRENCYWAR Historically, Fed tightening cycles, #LateCycle slowdowns and #Quad3 outcomes have all been independently been bearish for the USD. As such, our expectation for a continuation of #StrongDollar commodity and asset price deflation appears misguided in the context of our dour fundamental outlook for the U.S. economy. That said, however, currencies cannot be analyzed in isolation and our proprietary analysis of the world’s top-10 economies renders the [dollar-bullish] global monetary policy divergence theme we authored well intact.

1

2

3

HEDGEYE 9

Q2 2016 MACRO THEMES

#THECYCLE With the recessionary industrial data ongoing, employment, income and consumption growth decelerating, corporate profits facing a 3rd quarter of negative growth and Commercial and Industrial credit tightening, the domestic economic, profit and credit cycles are all past peak and continue to traverse their downslope. We’ll update our cycle view and detail why growth slowing – and its associated allocations – remains the call as the U.S. economy faces its toughest GDP comp of the cycle in 2Q16.

#BELIEFSYSTEM The notion that central bankers are increasingly pushing on a string is being progressively priced into global financial markets – with one lone holdout: U.S. equities. While we admire the blind faith of domestic stock market operators in Yellen’s ability to keep “the game” going, we are keen to cite specific risks that marginally dovish policy in the U.S. will fail to overcome the depths of the domestic economic, credit and corporate profit cycles.

#DEMOGRAPHYDEBATES We're entering an election season that could hugely impact markets - and probably not in a good way! What's the impact of a Clinton or Trump victory and how will market practitioners react? We'll also discuss housing and the impact of millennials and immigrants in shifting demand. Finally, we'll examine a recurring theme of U.S. growth slowing - what's under the hood for earnings and inflation expectations in 2016?

DATA SOURCE: HRM

1

2

3

#THECYCLE

HEDGEYE 11

FOUR SCORE & 5 MONTHS AGO … ….. OUR CENTRAL PLANNING FATHERS BROUGHT FORTH ON THIS CYCLE, A NEW PLAN, CONCEIVED IN ACADEMIA AND DEDICATED TO THE PROPOSITION THAT ALL ECONOMIC GRAVITY CAN, IN FACT, BE SMOOTHED.

DATA SOURCE: BLOOMBERG, NBER, BEA, HEDGEYE

HEDGEYE 12

A CYCLE, NOT A MYSTERY

DATA SOURCE: BLOOMBERG, HEDGEYE

HEDGEYE 13

2H14: INCOME GROWTH PEAK INCOME GROWTH DRIVES THE CAPACITY FOR CONSUMPTION GROWTH AND WITH EMPLOYMENT GROWTH SLOWING AND WAGE INFLATION FLAT, INCOME GROWTH CONTINUES TO DECELERATE

DATA SOURCE: BLOOMBERG, BEA, HEDGEYE

6.3%

4.7%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Ma

r-9

0S

ep

-90

Ma

r-9

1S

ep

-91

Ma

r-9

2S

ep

-92

Ma

r-9

3S

ep

-93

Ma

r-9

4S

ep

-94

Ma

r-9

5S

ep

-95

Ma

r-9

6S

ep

-96

Ma

r-9

7S

ep

-97

Ma

r-9

8S

ep

-98

Ma

r-9

9S

ep

-99

Ma

r-0

0S

ep

-00

Ma

r-0

1S

ep

-01

Ma

r-0

2S

ep

-02

Ma

r-0

3S

ep

-03

Ma

r-0

4S

ep

-04

Ma

r-0

5S

ep

-05

Ma

r-0

6S

ep

-06

Ma

r-0

7S

ep

-07

Ma

r-0

8S

ep

-08

Ma

r-0

9S

ep

-09

Ma

r-10

Se

p-1

0M

ar-

11S

ep

-11

Ma

r-12

Se

p-1

2M

ar-

13S

ep

-13

Ma

r-14

Se

p-1

4M

ar-

15S

ep

-15

Ma

r-16

AGGREGATE SALARY & WAGE INCOME Recession Dates Aggregate Private Sector Salary & Wages, YoY %

4Q14 = The Peak

“Fiscal Cliff” Related Distortion

HEDGEYE 14

2H14: PROFITS & MARGINS PEAK


6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

0

500

1,000

1,500

2,000

2,500

Mar

-90

Sep

-90

Mar

-91

Sep

-91

Mar

-92

Sep

-92

Mar

-93

Sep

-93

Mar

-94

Sep

-94

Mar

-95

Sep

-95

Mar

-96

Sep

-96

Mar

-97

Sep

-97

Mar

-98

Sep

-98

Mar

-99

Sep

-99

Mar

-00

Sep

-00

Mar

-01

Sep

-01

Mar

-02

Sep

-02

Mar

-03

Sep

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

SPX MARGINS & AGGREGATE CORPORATE PROFITS Recession Dates Corp Profits with IVA & CCA (Bil $'s) S&P 500 OPERATING MARGIN

2H14 = The Peak

HEDGEYE 15

1Q15: EMPLOYMENT GROWTH PEAK EMPLOYMENT GROWTH PEAKED AT +2.28% YOY IN FEBRUARY 2015. THE LAW OF LARGE NUMBERS AND DECLINING LABOR SUPPLY ENSURE 1Q15 WAS THE RATE OF CHANGE PEAK. WHILE IT TAKES TIME FOR THE CYCLE TO PLAY ITSELF OUT, HISTORICALLY, GROWTH HAS ALWAYS TRENDED TO NEGATIVE AFTER PEAKING

DATA SOURCE: BLOOMBERG, BLS, HEDGEYE

2.3%

1.9%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Ap

r-6

6

Ap

r-6

7

Ap

r-6

8

Ap

r-6

9

Ap

r-7

0

Ap

r-7

1

Ap

r-7

2

Ap

r-7

3

Ap

r-7

4

Ap

r-7

5

Ap

r-7

6

Ap

r-7

7

Ap

r-7

8

Ap

r-7

9

Ap

r-8

0

Ap

r-8

1

Ap

r-8

2

Ap

r-8

3

Ap

r-8

4

Ap

r-8

5

Ap

r-8

6

Ap

r-8

7

Ap

r-8

8

Ap

r-8

9

Ap

r-9

0

Ap

r-9

1

Ap

r-9

2

Ap

r-9

3

Ap

r-9

4

Ap

r-9

5

Ap

r-9

6

Ap

r-9

7

Ap

r-9

8

Ap

r-9

9

Ap

r-0

0

Ap

r-0

1

Ap

r-0

2

Ap

r-0

3

Ap

r-0

4

Ap

r-0

5

Ap

r-0

6

Ap

r-0

7

Ap

r-0

8

Ap

r-0

9

Ap

r-10

Ap

r-11

Ap

r-12

Ap

r-13

Ap

r-14

Ap

r-15

Ap

r-16

NONFARM PAYROLL GROWTH, YOY Recession Dates NFP, YoY %

-20 Mo.

-30 Mo. -24 Mo.

# of Months from Peak RoC in NFP to Peak in Economic Cycle

3.4% 2.8%

2.2%

1Q15 = The Peak

HEDGEYE 16

1Q15: CONSUMPTION GROWTH PEAK


3.3%

2.7%

-4%

-2%

0%

2%

4%

6%

8%

10%

Ma

r-6

2M

ar-

63

Ma

r-6

4M

ar-

65

Ma

r-6

6M

ar-

67

Ma

r-6

8M

ar-

69

Ma

r-70

Ma

r-71

Ma

r-72

Ma

r-73

Ma

r-74

Ma

r-75

Ma

r-76

Ma

r-77

Ma

r-78

Ma

r-79

Ma

r-8

0M

ar-

81

Ma

r-8

2M

ar-

83

Ma

r-8

4M

ar-

85

Ma

r-8

6M

ar-

87

Ma

r-8

8M

ar-

89

Ma

r-9

0M

ar-

91

Ma

r-9

2M

ar-

93

Ma

r-9

4M

ar-

95

Ma

r-9

6M

ar-

97

Ma

r-9

8M

ar-

99

Ma

r-0

0M

ar-

01

Ma

r-0

2M

ar-

03

Ma

r-0

4M

ar-

05

Ma

r-0

6M

ar-

07

Ma

r-0

8M

ar-

09

Ma

r-10

Ma

r-11

Ma

r-12

Ma

r-13

Ma

r-14

Ma

r-15

Ma

r-16

REAL PCE GROWTH, YOY% Recession Dates Real PCE, YoY %

1Q15 = The Peak

HEDGEYE 17

1Q15: CONSUMER CONFIDENCE PEAK


94.7

98.1

50

60

70

80

90

100

110

120

Ma

y-78

Ma

y-79

Ma

y-8

0

Ma

y-8

1

Ma

y-8

2

Ma

y-8

3

Ma

y-8

4

Ma

y-8

5

Ma

y-8

6

Ma

y-8

7

Ma

y-8

8

Ma

y-8

9

Ma

y-9

0

Ma

y-9

1

Ma

y-9

2

Ma

y-9

3

Ma

y-9

4

Ma

y-9

5

Ma

y-9

6

Ma

y-9

7

Ma

y-9

8

Ma

y-9

9

Ma

y-0

0

Ma

y-0

1

Ma

y-0

2

Ma

y-0

3

Ma

y-0

4

Ma

y-0

5

Ma

y-0

6

Ma

y-0

7

Ma

y-0

8

Ma

y-0

9

Ma

y-10

Ma

y-11

Ma

y-12

Ma

y-13

Ma

y-14

Ma

y-15

Ma

y-16

CONSUMER CONFIDENCE Recession Dates Consumer Confidence: Univ of Michigan Current latest peak

1Q15 = The Peak

HEDGEYE 18

1Q15: BUSINESS CONFIDENCE PEAK

DATA SOURCE: BLOOMBERG, NFIB

100.3

93.6

80

85

90

95

100

105

110

NFIB SMALL BUSINESS OPTIMISM Recession Dates NFIB Small Business Confidence

1Q15 = The Peak

HEDGEYE 19

1Q15: FORWARD MULTIPLES PEAK WITH FORWARD EARNINGS ESTIMATES STILL JUST +1.5% OFF THE LOWS, MULTIPLE EXPANSION HAS DRIVEN THE RECENT REBOUND IN PRICES. UPSIDE TO CYCLE PEAK VALUATION IMPLIES +68 SPX HANDLES (+3.3%) FROM CURRENT LEVELS*.

DATA SOURCE: BLOOMBERG , HEDGEYE *PRICES AS OF 5/25/16

Valuation Peak = 17.3X

Current PE = 16.8X

10.0X

11.0X

12.0X

13.0X

14.0X

15.0X

16.0X

17.0X

18.0X

19.0X

20.0XSPX: NTM PE

SPX, NTM P/E Valuation Peak Current PE

1Q15 = The Peak

HEDGEYE 20

2Q15: PRIVATE INVESTMENT PEAK


4.1%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Ma

r-6

8

Ma

r-6

9

Ma

r-7

0

Ma

r-7

1

Ma

r-7

2

Ma

r-7

3

Ma

r-7

4

Ma

r-7

5

Ma

r-7

6

Ma

r-7

7

Ma

r-7

8

Ma

r-7

9

Ma

r-8

0

Ma

r-8

1

Ma

r-8

2

Ma

r-8

3

Ma

r-8

4

Ma

r-8

5

Ma

r-8

6

Ma

r-8

7

Ma

r-8

8

Ma

r-8

9

Ma

r-9

0

Ma

r-9

1

Ma

r-9

2

Ma

r-9

3

Ma

r-9

4

Ma

r-9

5

Ma

r-9

6

Ma

r-9

7

Ma

r-9

8

Ma

r-9

9

Ma

r-0

0

Ma

r-0

1

Ma

r-0

2

Ma

r-0

3

Ma

r-0

4

Ma

r-0

5

Ma

r-0

6

Ma

r-0

7

Ma

r-0

8

Ma

r-0

9

Ma

r-10

Ma

r-11

Ma

r-12

Ma

r-13

Ma

r-14

Ma

r-15

Ma

r-16

NET DOMESTIC PRIVATE INVESTMENT, % OF GDP

Recession Dates NET DOMESTIC PRIVATE INVESTMENT, % OF GDP

1H15 = The Peak

HEDGEYE 21

2Q/3Q15: EQUITIES PEAK NO SURPRISE! EQUITIES PEAKED ON A SHORT LAG TO THE PEAK IN CONFIDENCE, CORPORATE MARGINS AND PROFITABILITY AND PEAK RATE-OF-CHANGE IN INCOME, EMPLOYMENT AND CONSUMPTION GROWTH


(100)

100

300

500

700

900

1,100

1,300

1,500

0

500

1000

1500

2000

May

-00

Nov

-00

May

-01

Nov

-01

May

-02

Nov

-02

May

-03

Nov

-03

May

-04

Nov

-04

May

-05

Nov

-05

May

-06

Nov

-06

May

-07

Nov

-07

May

-08

Nov

-08

May

-09

Nov

-09

May

-10

Nov

-10

May

-11

Nov

-11

May

-12

Nov

-12

May

-13

Nov

-13

May

-14

Nov

-14

May

-15

Nov

-15

May

-16

U.S. EQUITIES: S&P500 & RUSSELL 2000 Recession Dates SPX Index Russell 2000

3Q15 = The Peak

HEDGEYE 22

4Q15: M&A PEAKS (THEN PANICS) WITH GROWTH SLOWING AND PROFITABILITY PAST PEAK, THE LATE-CYCLE PLAYBOOK SAYS TO BUY ACCRETION.


0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

500

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2,300

2,500

Ma

r-0

4

Se

p-0

4

Ma

r-0

5

Se

p-0

5

Ma

r-0

6

Se

p-0

6

Ma

r-0

7

Se

p-0

7

Ma

r-0

8

Se

p-0

8

Ma

r-0

9

Se

p-0

9

Ma

r-10

Se

p-1

0

Ma

r-11

Se

p-1

1

Ma

r-12

Se

p-1

2

Ma

r-13

Se

p-1

3

Ma

r-14

Se

p-1

4

Ma

r-15

Se

p-1

5

Ma

r-16

CORPORATE PROFITS VS M&A ACTIVITY Recession Dates Corp Profits with IVA & CCA (Bil $'s) M&A Deal Volume (T $'s)

Profits Peak --> Then M&A Accelerates

HEDGEYE 23

MEANWHILE … ISM = STABILIZING

DATA SOURCE: BLOOMBERG, ISM

51.3

30

35

40

45

50

55

60

65

Ma

y-8

1

Ma

y-8

2

Ma

y-8

3

Ma

y-8

4

Ma

y-8

5

Ma

y-8

6

Ma

y-8

7

Ma

y-8

8

Ma

y-8

9

Ma

y-9

0

Ma

y-9

1

Ma

y-9

2

Ma

y-9

3

Ma

y-9

4

Ma

y-9

5

Ma

y-9

6

Ma

y-9

7

Ma

y-9

8

Ma

y-9

9

Ma

y-0

0

Ma

y-0

1

Ma

y-0

2

Ma

y-0

3

Ma

y-0

4

Ma

y-0

5

Ma

y-0

6

Ma

y-0

7

Ma

y-0

8

Ma

y-0

9

Ma

y-10

Ma

y-11

Ma

y-12

Ma

y-13

Ma

y-14

Ma

y-15

Ma

y-16

ISM Manufacturing Recession Dates ISM Mfg ISM Expansion-Contraction Line

HEDGEYE 24

BUT SERVICES = SLOWING

DATA SOURCE: BLOOMBERG, ISM

59.60

55.70

35

40

45

50

55

60

65

Ap

r-9

7

Ap

r-9

8

Ap

r-9

9

Ap

r-0

0

Ap

r-0

1

Ap

r-0

2

Ap

r-0

3

Ap

r-0

4

Ap

r-0

5

Ap

r-0

6

Ap

r-0

7

Ap

r-0

8

Ap

r-0

9

Ap

r-10

Ap

r-11

Ap

r-12

Ap

r-13

Ap

r-14

Ap

r-15

Ap

r-16

ISM Services Recession Dates ISM Services

HEDGEYE 25

MARGIN PRESSURE ↑ UNIT LABOR COSTS ARE GROWING AT A PREMIUM TO OUTPUT PRICES. IN OTHER WORDS, IF THE PRICE TO PRODUCE SOMETHING IS GROWING FASTER THAN THE SELLING PRICE, MARGIN PRESSURE WON’T ABATE.


-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Ma

r-5

1M

ar-

52

Ma

r-5

3M

ar-

54

Ma

r-5

5M

ar-

56

Ma

r-5

7M

ar-

58

Ma

r-5

9M

ar-

60

Ma

r-6

1M

ar-

62

Ma

r-6

3M

ar-

64

Ma

r-6

5M

ar-

66

Ma

r-6

7M

ar-

68

Ma

r-6

9M

ar-

70

Ma

r-7

1M

ar-

72

Ma

r-7

3M

ar-

74

Ma

r-7

5M

ar-

76

Ma

r-7

7M

ar-

78

Ma

r-7

9M

ar-

80

Ma

r-8

1M

ar-

82

Ma

r-8

3M

ar-

84

Ma

r-8

5M

ar-

86

Ma

r-8

7M

ar-

88

Ma

r-8

9M

ar-

90

Ma

r-9

1M

ar-

92

Ma

r-9

3M

ar-

94

Ma

r-9

5M

ar-

96

Ma

r-9

7M

ar-

98

Ma

r-9

9M

ar-

00

Ma

r-0

1M

ar-

02

Ma

r-0

3M

ar-

04

Ma

r-0

5M

ar-

06

Ma

r-0

7M

ar-

08

Ma

r-0

9M

ar-

10M

ar-

11M

ar-

12M

ar-

13M

ar-

14M

ar-

15M

ar-

16

INPUT COST > OUTPUT PRICE Recession Dates GDP Deflator less Unit Cost Growth 6 per. Mov. Avg. (GDP Deflator less Unit Cost Growth )

Input Costs > Output Price = ▼ Margins

HEDGEYE 26

PRODUCTIVITY = ↓ PRIVATE PAYROLL GROWTH IS SLOWING BUT IT’S STILL GROWING AT A PREMIUM TO OUTPUT GROWTH. A POSITIVE SPREAD IS A DRAG ON PRODUCTIVITY


-5%

-4%

-3%

-2%

-1%

0%

1%

2%

Ma

r-0

9

Se

p-0

9

Ma

r-10

Se

p-1

0

Ma

r-11

Se

p-1

1

Ma

r-12

Se

p-1

2

Ma

r-13

Se

p-1

3

Ma

r-14

Se

p-1

4

Ma

r-15

Se

p-1

5

Ma

r-16

LABOR VS OUTPUT Labor Growth less Output Growth

Labor Growth > Output Growth = ▼ Productivity

Labor Growth < Output Growth = ▲ Productivity

HEDGEYE 27

PRODUCTIVITY ↓ = REAL EARNINGS ↓ OVER THE LONGER-TERM, THE TREND IN PRODUCTIVITY DRIVES THE TREND IN REAL EARNINGS GROWTH

DATA SOURCE: BLOOMBERG, ECONOMIC REPORT OF THE PRESIDENT, HEDGEYE

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

De

c-6

2

De

c-6

3

De

c-6

4

De

c-6

5

De

c-6

6

De

c-6

7

De

c-6

8

De

c-6

9

De

c-7

0

De

c-7

1

De

c-7

2

De

c-7

3

De

c-7

4

De

c-7

5

De

c-7

6

De

c-7

7

De

c-7

8

De

c-7

9

De

c-8

0

De

c-8

1

De

c-8

2

De

c-8

3

De

c-8

4

De

c-8

5

De

c-8

6

De

c-8

7

De

c-8

8

De

c-8

9

De

c-9

0

De

c-9

1

De

c-9

2

De

c-9

3

De

c-9

4

De

c-9

5

De

c-9

6

De

c-9

7

De

c-9

8

De

c-9

9

De

c-0

0

De

c-0

1

De

c-0

2

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

De

c-1

4

De

c-1

5

PRODUCTIVITY GROWTH VS REAL EARNINGS GROWTH Recession Dates 3 per. Mov. Avg. (Real Earnings Growth) 3 per. Mov. Avg. (Productivity Growth)

HEDGEYE 28

NATIONWIDE CREDIT CONDITIONS WOULD IMPLY WE’RE SOMEWHERE BETWEEN THE TOP OF THE 8TH AND BOTTOM OF THE 9TH INNING WITH RESPECT TO THE CURRENT ECONOMIC EXPANSION.

CREDIT CYCLE = PAST PEAK Our proprietary Bank Credit Cycle Indicator is an equal-

weighted average of the following time series, each

derived from the Fed’s Senior Loan Officer Survey data:

1. Net % of Domestic Respondents Tightening

Lending Standards for C&I Loans (All Firms)

2. Net % of Domestic Respondents Increasing

Spreads of Loan Rates Over the Banks’ Cost of Financing

(All Firms) 3. Net % of Domestic

Respondents Increasing the Cost of Credit Lines (All

Firms) 4. Net % of Domestic Respondents Tightening

Loan Covenants (All Firms) 5. Net % of Domestic

Respondents Reporting Increased Willingness to

Make Consumer Installment Loans (Inverted)

DATA SOURCE: BLOOMBERG; FEDERAL RESERVE SENIOR LOAN OFFICER SURVEY

-40

-30

-20

-10

0

10

20

30

40

50

60

70

80

90U.S. Recession Hedgeye Macro U.S. Bank Credit Cycle Indicator Latest Reading = 1%

Our proprietary bank credit

cycle indicator broke out above the

latest reading of +1 at the tail

end of the DEC '82-JUN

'90 expansion. This historical

corollary would imply a recession is imminent.

Our proprietary bank credit cycle indicator broke out above the

latest reading of +1 79% into the APR '91-FEB '01 expansion. This

historical corollary would imply we are in the top of the 8th inning with respect to

the current expansion.

Our proprietary bank credit

cycle indicator broke out above the

latest reading of +1 at the tail

end of the DEC '01-NOV

'07 expansion. This historical

corollary would imply a recession is imminent.

HEDGEYE 29

YIELD SPREAD = FLATTENING FLATTENING ≠ BULLISH. THE YIELD CURVE FLATTENS AS THE ECONOMY SLOWS WITH POLICY AND/OR LIQUIDITY MANAGEMENT DRIVING THE SHORT-END HIGHER AND DEFENSIVE POSITIONING AND/OR DISCOUNTING OF LOWER FUTURE GROWTH/INFLATION DRIVING THE LONG END LOWER.


0.99

(2.00)

(1.00)

0.00

1.00

2.00

3.00

4.00

May

-77

May

-78

May

-79

May

-80

May

-81

May

-82

May

-83

May

-84

May

-85

May

-86

May

-87

May

-88

May

-89

May

-90

May

-91

May

-92

May

-93

May

-94

May

-95

May

-96

May

-97

May

-98

May

-99

May

-00

May

-01

May

-02

May

-03

May

-04

May

-05

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

May

-12

May

-13

May

-14

May

-15

May

-16

YIELD SPREAD: 10Y - 2Y Recession Dates Yield Spread (10-2)

HEDGEYE 30

2%

4%

6%

8%

10%

12%

14%

16%

18%

38%

39%

40%

41%

42%

43%

44%

45%

46%

Total Corporate Credit % GDP Barclays U.S. Corporate HY OAS (%)

ZIRP AND QE HAVE CONTRIBUTED TO THE HIGHEST RATES OF HIGH-YIELD BOND ISSUANCE EVER. WE’RE NOW AT A CYCLE PEAK IN CORPORATE CREDIT AS A % OF GDP

PEAK LEVERAGING OPPORTUNITY ALREADY IN

The Barclays High Yield Average OAS is still trading +~60 bps higher y/y (% Yield) even with the pullback in spreads since mid-February.

DATA SOURCE: FEDERAL RESERVE, CONFERENCE BOARD

HEDGEYE 31


CAPITAL MARKETS ACTIVITY = ↓

$0$10$20$30$40$50

Jan.15

Feb.15

Mar.15

Apr.15

May.15

Jun.15

Jul.15

Aug.15

Sep.15

Oct.15

Nov.15

Dec.15

Jan.16

Feb.16

Mar.16

Apr.16

High Yield Issuance ($Bn)

$0

$5

$10

$15

Jan.15

Feb.15

Mar.15

Apr.15

May.15

Jun.15

Jul.15

Aug.15

Sep.15

Oct.15

Nov.15

Dec.15

Jan.16

Feb.16

Mar.16

Apr.16

CMBS Issuance ($Bn)

WEAKNESS IN CMBS ISSUANCE CMBS issuance is down -52% Y/Y YTD in 2016 and total, mortgage-related issuance is down -10% Y/Y

HIGH YIELD MARKETS DRYING-UP High-Yield Issuance is down -48% Y/Y YTD and total corporate issuance is down -22% Y/Y

DATA SOURCE: SIFMA

HEDGEYE 32

RELIEF IN BLOWN-OUT SPREADS

The temporary relief in credit spreads since February doesn’t change the cyclical picture that spreads remain much wider vs. the 2014 trough: Spread (bps) off 2015 avg: HY Energy: -130 HY Matrls: +20 HY Industrls: +112 HY Aggte: +60


FINANCING REMAINS MUCH MORE EXPENSIVE Y/Y DESPITE THE TEMPORARY PULLBACK IN HIGH YIELD SPREADS, PARTICULARLY IN THE COMMODITY SPACE

-400

100

600

1100

1600

U.S. HY Avg. OAS (Bps) U.S. HY Avg. 2015 OAS

HY Industrials OAS U.S. HY Industrials Avg. 2015 OAS

HY Energy OAS U.S. HY Energy Avg. 2015 OAS

HY Materials OAS U.S. HY Materials Avg. 2015 OAS

HEDGEYE 33

Q4 WAS UGLY….. Q4 2015 EARNINGS SEASON WAS UGLY, BUT REMEMBER THAT Q1 OF 2015 SAW POSITIVE COMPS IN 8 OUT OF 10 SECTORS


HEDGEYE 34

AND Q1 WILL BE TOO….. ONLY ENERGY AND MATERIALS SAW Y/Y EARNINGS DECLINE IN Q1 2015, A QUARTER WHERE THE AVERAGE PRICE OF WTI CRUDE OIL WAS $48.57 VS. $33.63 IN Q1 2016


-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%S&P 500 Earnings Growth

Q1 2015 Avg. Price of WTI in Q1 2015: $48.57

HEDGEYE 35

THINK WE’RE LAPPING BAD COMPS BY Q2? THINK AGAIN. ONLY ENERGY AND INDUSTRIALS SAW Y/Y EARNINGS DECLINE IN Q2 2015, A QUARTER WHERE THE AVERAGE PRICE OF WTI CRUDE OIL WAS $57.95


-80%

-60%

-40%

-20%

0%

20%S&P 500 Earnings Growth

Q2 2015Avg. Price of WTI in Q2 2015: $57.95

HEDGEYE 36

2Q COMPS = HARDEST OF THE CYCLE


1.8%

2.2% 2.2%

2.2%

2.4%

2.1%

1.8%

1.5%

2.0%

1.7%

2.0% 1.9%

1.4%

1.8%

2.2%

2.5%

2.3%

2.7%

2.5%

2.3%

2.8%

2.5%

2.4%

1.3%

1.1%

0.9%

1.5%

2.5%

1.7%

2.6%

2.9%

2.5%

2.9%

2.7%

2.1%

2.0% 2.0% 2.0%

1.5% 1.5%

1.9%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

U.S. 2Y Average Real GDP Growth Rate in Comparative Base Period U.S. Real GDP YoY Hedgeye Macro GIP Model Forecasts

#BELIEFSYSTEM

Q: WHAT HAPPENS WHEN YOU COMBINE...

HEDGEYE 39

NEGATIVE INTEREST RATES


-0.4%

-0.1%

-0.5%

-0.4%

-0.3%

-0.2%

-0.1%

0.0%

0.1%

0.2%

ECB Deposit Facility Rate (TTM Peak-to-Present Decline = -20bps) BoJ Deposit Facility Rate (TTM Peak-to-Present Decline = -20bps)

HEDGEYE 40

QUANTITATIVE & QUALITATIVE EASING


¥320,000

¥330,000

¥340,000

¥350,000

¥360,000

¥370,000

¥380,000

¥390,000

¥400,000

¥410,000

¥420,000

€ 2,300

€ 2,400

€ 2,500

€ 2,600

€ 2,700

€ 2,800

€ 2,900

€ 3,000

€ 3,100

ECB Balance Sheet, billions of EUR (YoY $ Change = $764B) BoJ Balance Sheet, billions of JPY (YoY $ Change = $1005B)

HEDGEYE 41

… AND FORWARD GUIDANCE?


-0.40%

-0.26%

-0.6%

-0.5%

-0.4%

-0.3%

-0.2%

-0.1%

0.0%

0.1%

Eurozone 2Y OIS Rate (TTM Peak-to-Present Decline = -35bps) Japan 2Y OIS Rate (TTM Peak-to-Present Decline = -33bps)

HEDGEYE 42

SLOWING CONSUMPTION GROWTH? RETAIL SALES GROWTH IS DECELERATING ON A TRENDING BASIS IN BOTH THE EUROZONE AND JAPAN. THAT IS NOT PART OF THE AGREED UPON #BELIEFSYSTEM.


81%

68% 67%

40%

22% 25%

15%

25%

35%

45%

55%

65%

75%

85%

12MMA 6MMA 3MMA

Retail Sales YoY % Change (Values Shown as a Percentile of Trailing 3Y Sample)

Eurozone (Latest = 2.1%) Japan (Latest = -0.8%) Linear (Eurozone (Latest = 2.1%)) Linear (Japan (Latest = -0.8%))

HEDGEYE 43

STAGNANT MANUFACTURING GROWTH? INDUSTRIAL PRODUCTION GROWTH IS DECELERATING ON A TRENDING BASIS IN BOTH THE EUROZONE AND JAPAN. THAT IS NOT PART OF THE AGREED UPON #BELIEFSYSTEM.


60% 58%

60%

30% 29% 29%

20%

30%

40%

50%

60%

70%

12MMA 6MMA 3MMA

Industrial Production YoY % Change (Values Shown as a Percentile of the Trailing 3Y Sample)

Eurozone (Latest = 0.2%) Japan (Latest = -3.5%) Linear (Eurozone (Latest = 0.2%)) Linear (Japan (Latest = -3.5%))

HEDGEYE 44

SLOWING EXPORT GROWTH? EXPORT GROWTH IS DECELERATING ON A TRENDING BASIS IN BOTH THE EUROZONE AND JAPAN. THAT IS NOT PART OF THE AGREED UPON #BELIEFSYSTEM.


65%

46%

19% 22%

7% 8%

0%

10%

20%

30%

40%

50%

60%

70%

12MMA 6MMA 3MMA

Exports YoY % Change (Values Shown as a Percentile of the Trailing 3Y Sample)

Eurozone (Latest = -2.7%) Japan (Latest = -10.1%) Linear (Eurozone (Latest = -2.7%)) Linear (Japan (Latest = -10.1%))

HEDGEYE 45

DECLINING CONSUMER CONFIDENCE? CONSUMER CONFIDENCE IS DECELERATING ON A TRENDING BASIS IN BOTH THE EUROZONE AND JAPAN. THAT IS NOT PART OF THE AGREED UPON #BELIEFSYSTEM.


67%

60%

53%

56% 55%

38%

35%

40%

45%

50%

55%

60%

65%

70%

12MMA 6MMA 3MMA

Consumer Confidence Index (Values Shown as a Percentile of the Trailing 3Y Sample)

Eurozone - European Commission Survey (Latest = -7) Japan - ESRI Survey (Latest = 40.2)

Linear (Eurozone - European Commission Survey (Latest = -7)) Linear (Japan - ESRI Survey (Latest = 40.2))

HEDGEYE 46

DECLINING BUSINESS CONFIDENCE? BUSINESS CONFIDENCE IS DECELERATING ON A TRENDING BASIS IN BOTH THE EUROZONE AND JAPAN. THAT IS NOT PART OF THE AGREED UPON #BELIEFSYSTEM.


28%

16% 14%

52% 50%

47%

5%

15%

25%

35%

45%

55%

12MMA 6MMA 3MMA

Business Confidence Index (Values Shown as a Percentile of the Trailing 3Y Sample)

Eurozone - ZEW Survey (Latest = 16.8) Japan - Tankan Survey (Latest = 6)

Linear (Eurozone - ZEW Survey (Latest = 16.8)) Linear (Japan - Tankan Survey (Latest = 6))

HEDGEYE 47

FALLING INFLATION EXPECTATIONS? CORE INFLATION IN BOTH THE EUROZONE AND JAPAN IS TRACKING CONSIDERABLY BELOW TARGET, WHILE MEASURES OF INFLATION EXPECTATIONS CONTINUE TO TREND LOWER. THAT IS NOT PART OF THE AGREED UPON #BELIEFSYSTEM.


0.8%

1.5%

0.7%

0.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Eurozone CPI ex-Food & Energy YoY % Change (Number of Months Below +2% Price Stability Target = 98)

Eurozone 5Y 5Y-Forward Inflation Swap Rate - Monthly Average

Japan Nationwide CPI ex-Food & Energy YoY % Change (Number of Months Below +2% Price Stability Target = 13)

Japan 5Y 5Y-Forward Inflation Swap Rate - Monthly Average

ECB and BoJ "Price Stability" Target

HEDGEYE 48

WANING CORPORATE PROFITABILITY? TRAILING 12-MONTH RETURN ON EQUITY AND FORWARD EARNINGS EXPECTATIONS ARE DECLINING IN BOTH THE EUROZONE AND JAPAN. THAT IS NOT PART OF THE AGREED UPON #BELIEFSYSTEM.


¥90¥92¥94¥96¥98¥100¥102¥104¥106

21.5 €

22.0 €

22.5 €

23.0 €

23.5 €

24.0 €

24.5 €

Eurostoxx 600 Index NTM EPS (TTM Peak-to-Present Decline = -9.1%) TOPIX Index NTM EPS (TTM Peak-to-Present Decline = -12.3%)

7.0%7.2%7.4%7.6%7.8%8.0%8.2%8.4%8.6%8.8%

6.8%7.2%7.6%8.0%8.4%8.8%9.2%9.6%

10.0%

Eurostoxx 600 Index TTM ROE (TTM Peak-to-Present Decline = -306bps) TOPIX Index TTM ROE (TTM Peak-to-Present Decline = -138bps)

HEDGEYE 49

CRASHING STOCK MARKETS? BROAD EQUITY INDICES HAVE CRASHED FROM THEIR RESPECTIVE 52-WEEK HIGHS IN BOTH THE EUROZONE AND JAPAN. THAT IS NOT PART OF THE AGREED UPON #BELIEFSYSTEM.


1,100

1,200

1,300

1,400

1,500

1,600

1,700

300

325

350

375

400

425

Eurostoxx 600 Index (TTM Peak-to-Present Decline = -15.4%) TOPIX Index (TTM Peak-to-Present Decline = -19.5%)

HEDGEYE 50

WHY? #NIRP CERTAINLY HAS BEEN AN OVERWHELMINGLY NEGATIVE FACTOR FOR BANK STOCKS IN BOTH ECONOMIES.


-33.1%

-15.3%

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%Eurostoxx Banks Index (Indexed to the ECB's 6/5/14 Adoption of NIRP) TOPIX Banks Index (Indexed to the BoJ's 1/29/16 Adoption of NIRP)

HEDGEYE 51

BECAUSE #THECYCLE MATTERS WILL THE CONFLUENCE OF NIRP, QE AND FORWARD GUIDANCE OFFSET THE EUROZONE’S TOUGHEST GDP COMPARES IN FOUR YEARS, ALLOWING THE EUROZONE ECONOMY TO MAINTAIN PEAK GROWTH RATES IN THE PROCESS? WE DOUBT IT.


2.0% 2.1%

1.9%

1.5%

1.3%

0.6%

0.3%

-0.2%

-0.8% -0.6%

-0.5%

-0.2%

0.0% 0.2%

0.4%

0.8%

1.2% 1.2% 1.2% 1.3%

-0.4%

-0.8% -0.8%

-1.0% -1.1%

-0.4%

-0.1%

0.6%

1.1%

0.7% 0.8%

1.0%

1.3%

1.6% 1.6% 1.6% 1.5% 1.5%

1.3%

1.1%

0.7%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%


Eurozone 2Y Average Real GDP Growth Rate in Comparative Base Period

Eurozone Real GDP YoY

Hedgeye Macro GIP Model Forecasts

HEDGEYE 52

BECAUSE #THECYCLE MATTERS WILL THE CONFLUENCE OF NIRP, QQE AND FORWARD GUIDANCE OFFSET INVESTORS’ PILING INTO THE PERCEIVED SAFETY OF THE JAPANESE YEN AMID GLOBAL UNCERTAINTY, THUS PERPETUATING A RECOVERY IN MANUFACTURING IN JAPAN? PROBABLY NOT.


5

6

7

8

9

10

11

12

13

14

15

16

112

114

116

118

120

122

124

USD/JPY Spot - Monthly Average BoJ Tankan Survey - Large Manufacturing Index

HEDGEYE 53

AS DO SECULAR HEADWINDS BURGEONING PUBLIC SECTOR DEBT IS INCREASINGLY CROWDING OUT PRIVATE SECTOR LEVERAGE IN BOTH THE EUROZONE AND JAPAN AMID THE SECULAR TREND OF WANING AGGREGATE DEMAND IN BOTH ECONOMIES.

DATA SOURCE: BIS

160%

165%

170%

175%

180%

145%

165%

185%

205%

225%

Japan General Government Debt/GDP Japan Private Nonfinancial Sector Credit/GDP (rhs)

145%

150%

155%

160%

165%

170%

60%

70%

80%

90%

100%

110%

Eurozone General Government Debt/GDP Eurozone Private Nonfinancial Sector Credit/GDP (rhs)

HEDGEYE 54

PUSHING ON A STRING? PERHAPS EUROZONE AND JAPANESE FINANCIAL MARKETS ARE ARRIVING AT THE CONCLUSION THAT NO AMOUNT OF MONETARY EASING CAN OFFSET THE STRUCTURAL HEADWIND THAT IS NEGATIVELY COMPOUNDING ORGANIC DEMAND.

DATA SOURCE: OECD

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%35-54 Year-Old Population Cohort YoY % Change

Eurozone Japan

HEDGEYE 55

THE U.S. ISN’T ANY DIFFERENT MUCH LIKE IN THE EUROZONE AND JAPAN, THE U.S. CONSUMPTION ECONOMY IS ALSO SUFFERING FROM PERSISTENT DECLINES IN ITS CORE CONSUMPTION COHORT. MILLENNIALS WON’T FULLY OFFSET THE BABY BOOM BUST UNTIL 2020.


-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%35-54 Year-Old Population Cohort YoY % Change

U.S.

HEDGEYE 56

SIMILAR STRUCTURAL HEADWINDS LIKE IN THE EUROZONE AND JAPAN, PRIVATE SECTOR DELEVERAGING HAS WEIGHED ON TREND GDP GROWTH RATES IN THE U.S., SULLYING THE PUBLIC SECTOR’S BALANCE SHEET IN THE PROCESS.

DATA SOURCE: BIS

140%

145%

150%

155%

160%

165%

170%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%U.S. General Government Debt/GDP U.S. Private Nonfinancial Sector Credit/GDP

HEDGEYE 57

WELCOME BACK TO #QUAD4 REMEMBER THE SECOND HALF OF 2014? THAT’S TYPICALLY WHAT #QUAD4 LOOKS LIKE IN ASSET PRICE TERMS.


HEDGEYE 58

CAN THE FED BEND GRAVITY? HISTORICALLY SPEAKING, WHENEVER #THECYCLE HAS BEEN MET WITH MONETARY EASING, IT IS #THECYCLE THAT HAS LEFT WITH ITS REPUTATION INTACT. IF THE FIRST SIX WEEKS OF 2016 IS ANY INDICATION, THE #BELIEFSYSTEM BREAKS DOWN WHEN THE ECONOMY DOES.


-125bps

-525bps -500bps

-19.92%

-49.15%

-56.78%

-60%

-50%

-40%

-30%

-20%

-10%

0%

-600bps

-500bps

-400bps

-300bps

-200bps

-100bps

0bps

Early 1990s Recession Early 2000s Recession The Great Recession

Peak-to-Trough bps Change in Fed Funds Rate Peak-to-Trough Drawdown in S&P 500 Index (rhs)

HEDGEYE 59

#BELIEFSYSTEM BREAKING DOWN? WHILE DOMESTIC CAPITAL MARKETS ACTIVITY HAS BEEN IN CYCLICAL DECLINE SINCE VOLATILITY BROKE OUT IN 2H14, THE COLLAPSE IN HIGH YIELD CREDIT AND EQUITY ISSUANCE THROUGHOUT THE YTD IMPLIES A DRAMATIC LOSS OF CONFIDENCE IN THE #BELIEFSYSTEM.


47% 51%

-17%

32%

5%

-3%

-22%

-38%

21%

-23%

-5%

38%

7%

-9% -6%

-44%

-60%

-40%

-20%

0%

20%

40%

60%

2009 2010 2011 2012 2013 2014 2015 2016 YTD

U.S. High Yield Bond Issuance YoY % Change U.S. Public Equity Issuance YoY % Change

HEDGEYE 60


BUSTED #BELIEFSYSTEM = DEFLATION

DOLLAR UP RATES DOWN


HEDGEYE 61

DOLLAR UP = YUAN DOWN TO THE EXTENT BEIJING MAINTAINS ITS POLICY OF KEEPING THE YUAN “BASICALLY STABLE VS. A BASKET OF [PEER] CURRENCIES”, A SERIES OF HIGHER-LOWS IN THE DXY FROM HERE SHOULD REIGNITE CNY DEVALUATION FEARS.


6.30

6.35

6.40

6.45

6.50

6.55

6.60

6.65

92

93

94

95

96

97

98

99

100

101 U.S. Dollar Index PBoC USD/CNY Reference Rate

HEDGEYE 62

YUAN DOWN = REFLATION DOWN IN LINE WITH OUR EXPECTATIONS, THE CHINESE ECONOMY HAS STABILIZED IN THE YTD. THAT BEING SAID, DON’T DISRESPECT THE POTENTIAL NEGATIVE IMPACT RENEWED CAPITAL OUTFLOW PRESSURES IN CHINA WILL HAVE ON THE GLOBAL REFLATION TRADE.


0.90

0.90

0.94

0.86

-0.84

0.79

-1.00 -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00

JPMorgan EM FX Index

MSCI Emerging Markets Index

S&P 500 Industrials Index

S&P 500 Energy Index

U.S. High-Yield OAS

Brent Crude Oil

Correlation w/ CNH 1Y NDF % Spread vs. Spot CNH Since January 18th YTD Trough

HEDGEYE 63

THE U.S. DOLLAR’S ASCENT FROM ITS ALL-TIME LOWS HAS PETERED OUT AT A VERY IMPORTANT RETRACEMENT LEVEL, IMPLYING A SERIES OF LOWER-HIGHS FROM HERE.

TO PLAY DEVIL’S ADVOCATE…

Important Long-term TAIL Duration

Breakdown/Breakout Levels to Watch:

U.S. Dollar Index: 93.07

Support

Crude Oil (WTI): 45.44 Resistance

S&P 500: 2066

Resistance

VIX: 11.71 Support


70

80

90

100

110

120

130

140

150

160

170

U.S. Dollar Index (DXY) 100% (1985-92 Decline) 0% (1985-92 Decline)

50% Retracement (1985-92 Decline) 100% (2002-11 Decline) 0% (2002-11 Decline)

50% Retracement (2002-11 Decline) 61.8% Retracement (2002-11 Decline)

#DEMOGRAPHYDEBATES

THE RUMORED RETURN OF INFLATION

HEDGEYE 66

CONSUMER INFLATION, SUBDUED

3M MOVING AVERAGE FOR CPI & PCE DEFLATOR ARE TRENDING BELOW YOY VALUES. DATA SOURCE: BLS, BEA

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

CPI: YOY CPI: T3M

PCE Deflator: YOY PCE Deflator: T3M

FED TARGET

HEDGEYE 67

WAGES OR ABROAD: LITTLE PRESSURE

REMARKABLY, BIG RECENT JUMP IN REAL WAGES HAS HAD LITTLE IMPACT ON NOMINAL WAGES DATA SOURCE: BLS, FACTSET

0.0%

1.0%

2.0%

3.0%

4.0%

5.0% Avg Hourly Earnings: YOY

Avg Hourly Earnings: T3M

Real Avg Hourly Earnings:YOY

Average Earnings, Private Sector

1.0%

0.3%

-0.1%

0.3%

1.7%

1.4%

0.6%

-0.1%

-0.5%

0.5%

1.5%

2.5%

U.S. UK Eurozone Japan

* as of 4/5/16

CPI: YOY

10-Yr Govt Yield*

Inflation and Govt Yields

HEDGEYE 68

BUT NFP WORRIES INFLATION HAWKS

THE EXPECTATIONS MARKETS ARE APPARENTLY REACTING TO HEALTHY GAINS IN REPORTED EMPLOYMENT. DATA SOURCE: BLS, FACTSET

1000

1050

1100

1150

1200

1250

1300

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

TIPS 10-Yr Breakeven

5 Yr-5 Yr Forward Inflation Exp

GLD

Inflation Expectations & Gold Spot

76.0%

76.5%

77.0%

77.5%

78.0%

78.5%

Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16

Prime-Age Employment Ratio

Ratio of Employment to U.S. Population, Age 25-54

HEDGEYE 69

IS NFP HIDING RISE OF GIG ECONOMY?

DEEPER STORY BEHIND NFP GAINS: DECLINING AVG. WEEKLY HOURS & RISING PART-TIME EMPLOYMENT. DATA SOURCE: BLS

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

NFP Employment

Aggregate Private Hours

Average Weekly Hours

Employment & Hours: Total Growth Since Aug 2015

HEDGEYE 70

SHARP FALL IN JANET'S FAVORITE INDEX

THE LAST 4 MONTHS HAVE REGISTERED LOWEST READINGS SINCE JUNE, 2009. DATA SOURCE: FEDERAL RESERVE

-30

-20

-10

0

10

20

30

Recessions Change in Labor Market Conditions Index 12/2015 = +1.2 01/2016 = −1.9 02/2016 = −2.5 03/2016 = −2.3

04/2016 = - 0.9

WHITHER HOUSING

HEDGEYE 72

STARTS VS. NEW HOME SALES

MOST HOME DATA (INC. SALES) SHOW DECELERATION, THOUGH STARTS REMAIN STRONG DATA SOURCE: CENSUS BUREAU

-35.0%-25.0%-15.0%-5.0%5.0%15.0%25.0%35.0%

0200400600800

1,0001,200

U.S. Housing Starts (Privately-Owned Units Thds.) New Home Sales (One Family Thds.)

Housing Starts 3-Mth Avg. Y/Y % Chg. New Home Sales 3-Mth Avg. Y/Y % Chg.

HEDGEYE 73

0.2%

7.7%

0.3% 0.3%

18.0%

-0.7%

5.1% 6.8%

-4.2%

16.2%

0.4% 0.6%

7.7%

-1.0%

11.1%

-10%

-5%

0%

5%

10%

15%

20%

Perc

ent C

hang

e

2016 to 2021 2021 to 2026 2026 to 2031

Source: U.S. Census Bureau (2016)

20- to 29-year-olds 30- to 39-year-olds 40- to 49-year-olds 65 and older

Projected Changes in Population by Age Bracket

50- to 64-year-olds

DEMO ALERT: MILLENNIALS HIT THEIR 30S

IF THE PENT-UP MILLENNIAL WAVE IS GOING TO HIT HOUSING, THE TIME IS NOW.

Data source: Census Bureau

HEDGEYE 74

KEEP AN EYE ON THESE 3 INDICATORS

POP GROWTH & JOB GROWTH AMONG YOUNG ADULTS NOW BOTH ABOVE-AVERAGE. DATA SOURCE: CENSUS, BLS, DEPT. OF HOMELAND SECURITY

0.40%

0.80%

1.63%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

Age 18-64 All Ages Age 30-34

Population Growth (CAGR 2015-2020)

0.51%

0.79%

0.0%0.1%0.2%0.3%0.4%0.5%0.6%0.7%0.8%0.9%

All Ages (Ages 16+) Millenial Population(Ages 25-34)

Growth in Employment/Population

Ratio (8/15 to 3/16)

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

Temporary Immigrant Inflow

Temporary Workers And Families

Students

WHY THE ELECTION WILL MOVE MARKETS IN Q2

HEDGEYE 76

-120

-100

-80

-60

-40

-20

0

20

40

60

80

0

20

40

60

80

100

120

140

160

180

200

Apr-86 Jan-89 Oct-91 Jul-94 Apr-97 Jan-00 Oct-02 Jul-05 Apr-08 Jan-11 Oct-13

Recessions Spread (Expectations-Current Situation)

United States - Present Situation United States - Expectations

FORWARD EXPECTATIONS GETTING GLOOMIER

In past cycles, when the index of forward looking economic expectations have crossed below the index measuring the current situation, a downturn has followed.

Data Source: Conference Board

Monthly Indexes from the Conference Board Consumer Confidence Survey: “Current Situation” index minus “Expectations for 6 Months Hence.”

HEDGEYE 77

POLITICAL POLARIZATION IN CONGRESS

NO MIDDLE. NO COMPROMISE. Each member of the house in a given year represents a dot. Blue is Democrat; red is Republican. Edges between nodes (right and left) are drawn if each member agrees with another member more often than the "threshold value" of votes specific to that particular Congress (threshold value is # of agreements where any pair exhibiting this number of agreements is equally likely to be comprised of two members of the same party.) Each node is made bigger or smaller based on the number of connections it has. Edges are thicker if the pair agrees on more votes.

DATA SOURCE: MAMARTINO

HEDGEYE 78

2017 POLICY DIRECTION: ANYWHERE!

DATA SOURCE: HRM , * PREDICTED.COM AS OF 4/6/16

HEDGEYE 79

THEMATIC INVESTMENT CONCLUSIONS

TRADE (3 WEEKS OR LESS) LONGS: Long-term Treasuries (TLT), Utilities (XLU), Gold (GLD) SHORTS: S&P 500 (SPY), Healthcare (XLV), Financials (XLF)

TREND (3 MONTHS OR MORE) LONGS: Long-term Treasuries (TLT), Muni Bonds (MUB), Ultra Long-term Treasuries (EDV), U.S. Equity Volatility (VXX) SHORTS: S&P 500 (SPY), Retailers (XRT), Financials (XLF), Russell 2000 (IWM), Spain (EWP)

TAIL (3 YEARS OR LESS) LONGS: U.S. Dollar (UUP), Long-term Treasuries (TLT), Muni Bonds (MUB) SHORTS: Financials (XLF), High-Yield Credit (JNK), Russell 2000 (IWM)

APPENDIX

HEDGEYE 81

THE CONSUMER FACES DIFFICULT COMPS QUANTITATIVELY SPEAKING, 65% OF THE TIME THE 2ND DERIVATIVE IN THE FORECAST PERIOD CARRIES AN OPPOSITE SIGN (+ OR -) TO THE 2ND DERIVATIVE IN THE COMPARATIVE BASE PERIOD, WHICH PROVIDES A GOOD STARTING POINT FOR DIRECTIONAL ADJUSTMENTS TO THE BASE RATE.


1.85%

2.17% 2.10%

2.27% 2.28%

1.98%

1.78%

1.42% 1.47%

1.55% 1.53%

1.80%

1.67%

2.05%

2.37%

2.73% 2.65%

2.92%

3.08%

2.95%

1.44%

1.75%

1.97% 1.85%

1.95% 1.98%

1.83% 1.75%

1.70% 1.63%

1.89%

2.03%

2.26% 2.22%

2.45%

2.62% 2.72%

1.6% 1.6%

1.4% 1.3% 1.4%

1.5%

1.7%

2.3%

2.0%

2.6%

3.0%

3.2%

3.3% 3.3%

3.1%

2.7% 2.7%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%


Comparative Base Effect for the Respective Real PCE Reporting Period

2Y Average Growth Rate in Comparative Base Period Trailing 3Y CAGR in Comparative Base Period

Actual Recorded YoY Growth Rate

HEDGEYE 82

AND SECULAR STAGNATION PERSISTS GIVEN THE DISAPPOINTING TREND IN U.S. GROWTH SINCE 2007, IT’S NOT AT ALL IRONIC THAT GROWTH IN THE U.S.’S CORE CONSUMPTION DEMOGRAPHIC WENT NEGATIVE IN 2008 AND IS PROJECTED TO CONTINUE CONTRACTING THOUGH 2019

DATA SOURCE: OECD

2.4%

2.8% 3.0%

3.2% 3.2% 3.2%

3.4%

3.6%

3.3%

3.1% 3.1% 2.9%

2.7%

2.0% 2.1%

1.9%

1.5%

0.2% 0.4%

0.5% 0.7% 0.6%

0.2%

-0.1%

-0.3% -0.4%

-0.7% -0.7% -0.7% -0.6%

-0.4% -0.4% -0.2% -0.2% -0.2%

0.1%

22%

23%

24%

25%

26%

27%

28%

29%

30%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

U.S. 35-54 Year-Old Population YoY % Change U.S. 35-54 Year-Old Population as a % of Total

HEDGEYE 83

WHY DO 35-54 YEAR-OLDS MATTER? BECAUSE ACCORDING TO BOTH EMPIRICAL EVIDENCE AND LIFE-CYCLE ECONOMICS THEORY, THIS IS THE WORLD’S CORE END CONSUMPTION DEMAND DEMOGRAPHIC.

DATA SOURCE: 2014 BLS CONSUMER EXPENDITURE SURVEY

$28,518

$54,622

$72,495 $74,344

$63,703

$47,779

$34,056 $32,179

$49,547

$62,512 $65,651

$56,267

$48,885

$36,673

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

Under 25 Years-Old 25-34 Years Old 35-44 Years Old 45-54 Years Old 55-64 Years Old 65-74 Years Old 75+ Years-Old

U.S. Average Annual Disposable Income by Age Bracket U.S. Average Annual Expenditures by Age Bracket

Poly. (U.S. Average Annual Disposable Income by Age Bracket) Poly. (U.S. Average Annual Expenditures by Age Bracket)

HEDGEYE 84

THE “WEALTH EFFECT” IS TAPPED OUT WE EXPECT A MEANINGFUL MEAN REVERSION IN THE SPREAD BETWEEN THE “HAVES” AND THE “HAVE NOTS” AS ASSET PRICE DEFLATION CONTINUES AMID WHAT WE SEE AS ELEVATED RISK OF A REPUDIATION OF “TRICKLE DOWN” MONETARY POLICY.

DATA SOURCE: FEDERAL RESERVE, BEA

56%

57%

58%

59%

60%

61%

62%

63%

64%

65%

66%

455%

475%

495%

515%

535%

555%

575%

595%

615%

635%

655%

U.S. Household Wealth as a % of Disposable Personal Income

U.S. Employee Compensation as a % of Gross Value Added of Domestic Corporate Business

Pre-Bernanke Average = 63%

Bernanke/Yellen Average = 58%

2Q87

1Q00

1Q07 1Q15

HEDGEYE 85


HOW IS U.S. WEALTH DISTRIBUTED?

DATA SOURCE: FEDERAL RESERVE 2014 CONSUMER EXPENDITURE SURVEY

84.5%

11.5% 3.0%

1.0%

Ownership of U.S. Financial Assets, by Household Wealth Distribution

Top 10% Next 15% Next 25% Bottom 50%

Data Source: Bloomberg

54%

21%

25%

Distribution of U.S. Household Wealth, by Percentile

Top 3% Next 7% Bottom 90%

Data Source: Bloomberg

HEDGEYE 86

CORPORATE LEVERAGE IS PEAKING AS A RATIO TO THE ECONOMY, U.S. COMPANIES ARE AS LEVERED AS THEY’VE EVER BEEN OUTSIDE OF THE DEPTHS OF THE GREAT RECESSION.


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

U.S. Non-Financial Corporate Credit Outstanding as a % of GDP

U.S. Non-Financial Non-Corporate Business Credit Outstanding as a % of GDP

Total

HEDGEYE 87

2%

4%

6%

8%

10%

12%

14%

$0

$200

$400

$600

$800

$1,000

$1,200Coal Miners

O&G Services

Oil Majors

Large Miners

Commodity Producer Debt (% Corporate Credit Oustanding)

DOMESTIC COMMODITY PRODUCERS HAVE ESPECIALLY PIGGED OUT ON THE HIGH-YIELD CREDIT BINGE TO FINANCE CAPEX DESIGNED TO CHASE THE ALL-TIME HIGHS IN COMMODITY PRICES (2011).

PEAK LEVERAGE IN THE WORST SECTORS

The total debt of this sample of 34 commodity producers has gone from 5% of total corporate credit outstanding in 2003 to 14% of corporate credit outstanding by year-end 2014.

DATA SOURCE: SIFMA, COMPANY FILINGS

HEDGEYE 88

BALANCE SHEET HEALTH IS DETERIORATING AT BEST, THE VIEW THAT U.S. CORPORATE BALANCE SHEETS ARE HEALTHY IS A NARRATIVE FALLACY. AT WORST, IT IS THE SOURCE OF A LARGE DEGREE OF FINANCIAL MARKET RISK AS THE DOMESTIC BANKRUPTCY CYCLE HAS ALREADY ACCELERATED TO POST-CRISIS HIGHS.


HEDGEYE 89

HY SPREAD WIDENING = RECESSION SIGNAL THE HORSE HAS OFFICIALLY LEFT THE BARN WITH RESPECT TO THE DOMESTIC CREDIT CYCLE.


567bps 522bps

200

400

600

800

1000

1200

1400

1600

1800

2000

U.S. Recessions

Barclays High Yield Bond Index Yield To Worst (%) Less U.S. Treasury 10Y Bond Yield, Basis Point Spread (Monthly Average)

Historical Mean

HEDGEYE 90

RECESSIONS PERPETUATE RED DOTS ONCE THE HORSE LEAVES THE BARN ON THE DOMESTIC CREDIT CYCLE, THERE’S NO TURNING BACK; YOU ALWAYS END UP WITH A RED BUBBLE THAT APPROACHES THE TOP RIGHT OF THE CHART.


1989

1990

1991

1992

1994

1995 1996

1997

1998 1999

2000

2001 2002

2003

2004 2005 2006

2007

2008

2009

2010 2011

2012

2013

2014

2015

200bps

300bps

400bps

500bps

600bps

700bps

800bps

900bps

1000bps

1100bps

1200bps

55 65 75 85 95 105 115 125 135 145 155 165

x-axis: Merrill Lynch Treasury Bond Option Volatility Index (MOVE)

y-axis: Barclays U.S. High Yield Credit Index - Yield To Worst, bps Spread Over 10Y U.S. Treasury Yield

bubble size: U.S. Non-Financial Corporate Credit Outstanding as a % of GDP (percentile basis)

HEDGEYE 91

RECESSION WATCH: CONSUMER CONFIDENCE RECESSIONS TEND TO OCCUR WHEN THE INTERMEDIATE-TERM TREND IN CONSUMER CONFIDENCE BREAKS DOWN BELOW THE LONG-TERM TREND. MOREOVER, THE ONE YEAR-PLUS TREND OF CONSOLIDATION INCREASES THE RISK OF THAT OCCURRING BY THE END OF 2016.


20

30

40

50

60

70

80

90

100

110

120

130

140

150U.S. Recession Conference Board Consumer Confidence Index SMAVG(12MO) SMAVG(36MO)

HEDGEYE 92

RECESSION WATCH: JOBLESS CLAIMS THE TREND IN INITIAL JOBLESS CLAIMS SUGGESTS THE CURRENT ECONOMIC EXPANSION MAY ONLY HAVE ABOUT 3-6 MORE MONTHS LEFT.


250k

300k

350k

400k

450k

500k

550k

600k

650kU.S. Recession Initial Jobless Claims SA, SMAVG(6MO) Indicator of Late-Cycle Labor Market Strength: 300k

18 months 19 months 20 months

18 months

HEDGEYE 93

RECESSION WATCH: CORPORATE PROFITS THERE IS PERHAPS NO SUCH THING AS AN “EARNINGS RECESSION” WITHOUT AN ACTUAL RECESSION; THE LAST THREE RECESSIONS HAVE BEEN PRECEDED BY S&P 500 TTM EPS BREAKING DOWN BELOW ITS TTM AVERAGE – AN EVENT THAT OCCURRED IN JUNE OF 2015.


0

20

40

60

80

100

120U.S. Recession S&P 500 TTM EPS 12MMA

HEDGEYE 94

CORPORATE PROFITS ↓ = STOCKS ↓ WHILE 2+ CONSECUTIVE QUARTERS OF DECLINING CORPORATE PROFITS HAVEN’T ALWAYS SIGNALED RECESSION, SUCH OCCURRENCES HAVE ALWAYS SIGNALED STOCK MARKET CRASHES IN THE SUBSEQUENT YEAR.

DATA SOURCE: BLOOMBERG; FEDERAL RESERVE FLOW OF FUNDS REPORT

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

U.S. Corporate Profits Before Tax w/ Inventory Valuation and Capital Consumption Adjustments - YoY % Change

S&P 500: NTM-Forward Max Drawdown (rhs)

?

FOR MORE INFORMATION CONTACT:

[email protected] 203.562.6500

Q2 2016 MACRO THEMES Files...Q2 2016 MACRO THEMES JUNE 6-8 UPDATE ORIGINALLY PUBLISHED APRIL 7 TH...

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