“The trick to forgetting the big picture is to look at everything close up.”
-Chuck Palahniuk
For back to back Early Looks I chose a fictional writer. Most humans love narratives. I love numbers.
I also love living in the now. What are the numbers in my #VASP (Volatility Adjusted Signaling Process) signaling now? What does now signal across my TRADE, TREND, and TAIL durations?
Core to Tourist behavior is living in the past. What is the Moving Monkey telling them about what happened yesterday? What about PPI or CPI can they see as upside to reverse yesterday’s downside? The yolo Call Option buying ahead of CPI days is surreal!
Back to the Global Macro Grind…
Looking at the past on a longer-term basis is critical in Macro. If you cannot put the intermediate-term TREND of The Cycle in context of historical ones, your probability of getting the future right falls.
Since very few Tourists and Tweeters will put today’s PPI (Producer Price Index) report in historical context, let me do that for you this morning: As PPI #slows, Profits slow.
You get that, right?
That’s why #Quad4 Recessions (i.e. when the ROC of GROWTH and INFLATION slow at the same time) always end in PROFIT #Recessions. Revenues slow faster than Late Cycle Labor costs do.
I’ll show you the numbers on that in a second.
But this is also why some of the best brands and businesses in American history get built during depressions and/or US Profit Recessions. Ryan Holiday did a nice job summarizing that history in The Obstacle (Recession) Is The Way:
- Fedex was born during the Oil Crisis of 1973
- Disney (market crash of 1929)
- Hewlett Packard (Great Depression 1935)
- Charles Schwab was born during the market crash of 1974-75
- Standard Oil (final year of the Civil War, 1865)
- Coors (Depression of 1873)
- Costco (1970s Recession)
- GM (Panic of 1907)
- Proctor & Gamble (Panic of 1837)
- Microsoft (1973-75 Recession)
*Hedgeye (market crash of 2008)
“For the most part, these businesses had little awareness they were in some historically significant depression. Why? Because the Founders were too busy existing in the present – actually dealing with the situation at hand.” -pg 46
All the while, existing companies (i.e. the competition) are dealing with the crisis in their P&L that they didn’t see coming. Generally speaking, companies are Macro Unaware of The Pending Quads, don’t forget.
As GDP slows from 6% to 3% to 0%, revenues slow much faster than companies can right-size their cost structures. Most of their time and head-space is consumed by their internal profit recession, and creative entrepreneurs capitalize on the crisis.
Back to the numbers – let’s look at The Mother of All Bubbles in US Corporate Profits:
A) Take this Chart of The Day (slide 122 in the current Macro Deck) and melt it into your mind
B) This is the ROC (rate of change) history of recent SP500 REVENUES and PROFITS, by SECTOR
C) Companies generally SLOW against bright RED numbers and ACCELERATE against bright GREEN ones
The Mother of All Peaks in SP500 was in Q2 of 2021:
A) And by Q2 of 2022, the INFLATION component of the last #Quad2 was ripping
B) ENERGY profits peaked at +283% year-over-year growth when The Inflation Cycle peaked
C) Now you know why a #slowing PPI will SLOW REVS and EPS for Energy, Industrials, Materials, etc.
I could spend an entire day alongside my Sector Heads giving you a teach-in on how every line item in this model has lead-lags and will or will not see pending accelerations and decelerations.
But I need to wrap this up and get on The Call @Hedgeye where we live in the now and discuss it daily instead.
Before I go, here are 3 Big Things you should immediately notice on this page:
- Q3 of 2022 is now officially yesterday’s Inflation Cycle Peak news
- Q3 of 2022 year-over-year EPS growth of +3.8% had a Communications (XLC) EPS recession of -21.7%
- Q3 of 2022 year-over-year EPS growth of +3.8% had the boom in Energy (XLE) EPS slow to +140%
Yep. If all you knew were the Pending Quads, you’d have been Long Energy vs. Short Communications 12 months ago… and absolutely crushed Macro Unaware Captain Stock Pickers at most Long/Short “Fundamental” US Hedge Funds in 2022.
This is also why I sold ALL of my Energy heading into 2023. Those triple digit Energy Comps are nasty! With Oil having crashed -41% from its Inflation Cycle Peak in Q2 of this year, what do you think Q3 2023 Energy Profits are going to do as PPI slows?
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.32-3.79% (bearish)
UST 10yr Yield 3.35-3.79% (bearish)
UST 2yr Yield 4.20-4.54% (bullish)
High Yield (HYG) 73.45-75.71 (bearish)
SPX 3 (bearish)
NASDAQ 10,713-11,399 (bearish)
RUT 1 (bearish)
Tech (XLK) 126-135 (bearish)
Consumer Staples (XLP) 75.07-77.58 (bullish)
Healthcare (XLV) 135-142 (bullish)
Defense (ITA) 108-114 (bullish)
Utilities (XLU) 69.21-72.16 (bullish)
Nikkei 27,500-28,408 (bullish)
VIX 19.00-25.01 (bullish)
USD 104.01-108.25 (bullish)
CAD/USD 0.727-0.749 (bearish)
Oil (WTI) 70.03-80.38 (bearish)
Gold 1 (bullish)
Silver 20.85-23.94 (bullish)
Bitcoin 16,018-17,430 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
