“The only real mistake is the one from which we learn nothing.”
– Henry Ford
Here we are again, the anxiety meter is accelerating and the Vix has gone sub 20. Almost like clockwork.
One of the hallmarks of any championship team or all-star player is film study. Now I’m not talking simply watching a game back of which you played in. I’m talking about going frame by frame to see the minute instances that you would never be able to see in real time and criticizing those at the highest degree.
If you can start to be aware of the minute instances that lead to a mistake, well now we can fix them. But if you never go back… well now we are changing my quote of the day to about insanity: “Insanity is doing the same thing over & over again & expecting different results.” Albert Einstein.
So I’ll ask the simple questions once again: What were you doing on 1/13? What was your net positioning? Were you able to add to shorts? Did you panic cover? What were you doing on 1/19? What was your net positioning? Were you covering shorts? Were you hoping that the S&P 500 would go to 3,808? Were you adding to any of the 17 longs in ETF Pro? What were you doing on 1/24? What was your net positioning? Were you able to add to shorts? Did you panic cover? Did you sell some longs?
Yes, it’s easy to know today what the tops and bottoms were… understood. But if as professionals we want to be as close as possible to nailing those instances, well then let’s study ourselves to see how we can improve.
Back to the Global Macro Grind…
One of the biggest lessons that I have learned in my first bear market (yes I’m a bear market baby) is that things do not happen in a straight line. These rallies are a defining feature of bear markets. Let’s look at the chart below outlining all the up and down moves of SPX during the past crashes.
What does that chart tell us about our positioning during a bear market? That we must be nimble, we must be quick, and we can’t just short and hold. We are not talking about Quad 2 where I can go to any preschool, have kids pick tickers out of a hat, and they will all be winners… No, we are talking about Quad 4 where net positioning looks like a first-time bowler using bumpers (you know, like when you would throw a bowling ball at the bumpers, and you would watch the ball go from side to side 8 times before it hits the pins. I digress).
Now let’s talk about the “it’s all priced in” mumbo jumbo. It’s easy to say but here is the argument: Yes, the consumer is in bad shape, but the market already knows that and has already priced in the next 6 months. Therefore, time to get long (notice the lack of numbers).
Has anyone graphed out the YoY Revenue/EPS of major companies against the S&P 500 during the past crashes? Let’s look at the chart of the day. The bottom of the S&P 500 didn’t come until about 1 year after trough revenue growth. If you do the same for 2008 using Financials companies, the bottom in the S&P 500 didn’t come until about 6 months after trough revenue growth.
Now let’s ask the question: how do we know when trough revenue growth will be? Well, let’s just go to our GDP estimates (yes, earnings and revenue follow GDP). GDP was -1.6% QoQ in 1Q22, and -0.6% QoQ in 2Q22. The S&P 500 hit one of its bottoms on 6/16/2022. GDP then accelerates to +3.2% QoQ in 3Q22. But going forward we have GDP decelerating to -2.87% QoQ and remaining negative for a quarter thereafter (slide 14 of the macro deck).
The numbers that companies are putting up in today’s earnings season are on GDP of ~+2.0% QoQ and we have yet to see what companies will report when GDP goes even more negative than it did in 1Q22.
Nonetheless even with 4Q22 GDP being positive, company profits have sequentially decelerated to -4.4% YoY 4Q22 from +3.4% YoY in 3Q22.
I know, there are a lot of numbers in there… but the fact remains the numbers do not lie, people do. As do the click bait headlines that have zero accountability.
Yes, it was Dec 14th that we last got to listen to Powell (here is the link) but do you really think that someone who is openly saying that we need an extended period of a weaker consumer is going to stop raising interest rates on a positive GDP number? The Fed has told us over and over again what they are going to do, we just have to listen instead of thinking of what they should do.
Let’s go to the data of this morning:
- Tesla has downside potential of 34.5%, Bitcoin 42.2%, AAPL 12.2%, Netflix 17.4%, Google 14.9%.
- IVOL Discount Callouts: Brazil $EWZ, South Korea $EWY, Taiwan $EWT, Turkey $TUR, Clean Energy $PBD, Jets $JETS, Self Driving $IDRV, Yen $FXY
- IVOL Premium Callouts: Italy $EWI, Switzerland $EWL, Netherlands $EWN, Greece $GREK, Colombia $GXG, India $INDA, Homebuilding $XHB, Broker Dealers $IAI, Capital Markets $KCE, Smallcap Healthcare $PSCH, Tips $TIP
- The current 2-10 Spread is -71 bps and the forward 2-10 Spread is -21 bps
- International 2-10 spreads remain inverted for: Germany, UK, France, Canada, South Korea, Mexico, Sweden, Poland, Norway, Singapore, Philippines, Czech, New Zealand
- Yesterday was a big manufacturing/services PMI day. There weren’t any large moves to the upside or downside. The commentary was very similar though: New orders came up slightly although remained contractionary, confidence is up, employment is down, and propensity to buy remains at lows
- Aka people are getting fired, people are not willing to buy. But believe that we are seeing the worst of the economy right now. Just wait till US GDP goes negative…
- UK public sector net borrowing is lower than what it was in 2000 or 2008 and has only had lower readings during the pandemic
- UK industrial trend orders decline to the lowest since Feb 21 and have been negative for 6m
- Switzerland M2 YoY went to -3.12% YoY, lowest since 2008
- Indonesia M2 Decelerated
- Inflation in Australia accelerated and is expected to continue to accelerate (no reprieve on their tightening cycle)
- PPIs in Spain and UK decelerate although remain high on an absolute basis
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 3.51-3.76% (bearish)
UST 10yr Yield 3.34-3.62% (bearish)
UST 2yr Yield 4.05-4.31% (bullish)
High Yield (HYG) 74.52-76.80 (bearish)
SPX 3 (bearish)
NASDAQ 10,554-11,410 (bearish)
RUT 1 (bearish)
Tech (XLK) 122-135 (bearish)
Utilities (XLU) 68.02-72.65 (bullish)
Shanghai Comp 3142-3287 (bullish)
VIX 18.17-23.15 (bullish)
USD 101.55-105.27 (bullish)
EUR/USD 1.057-1.091 (bearish)
USD/YEN 126.90-131.98 (bearish)
CAD/USD 0.739-0.752 (bearish)
Oil (WTI) 74.17-82.65 (bearish)
Nat Gas 2.93-3.83 (bearish)
Gold 1 (bullish)
Copper 3.99-4.33 (bullish)
Silver 23.23-24.49 (bullish)
Bitcoin 16,608-24,208 (bearish)
Ryan Ricci
