This note was originally published at 8am on September 20, 2012 for Hedgeye subscribers.
“Betting taxpayer money on similar models seemed unacceptably risky.”
You can change the word taxpayer to investor, and you’d be making the same point. That’s what Barofsky said in Chapter 5 of Bailout, “Drinking the Wall Street Kool-Aid”, after listening to the New York Fed’s Bill Dudley attempt to explain his risk management process. Dudley is the economist who is now infamous for suggesting there is no real-world food/energy inflation because iPads are cheap.
Don’t blame all the ex-Goldman turned government guys (Paulson, Kashkari, Dudley, etc.) for making the biggest risk-adjusted US taxpayer commitments ever to bailout losing positions. Free-market capitalism is the best path to prosperity, baby! You don’t have to get the fundamentals right anymore. America 2.0 prosperity is all in the money-printing.
Setting aside the 10-13% March-June draw-down in US Equities, some may have had the stock market right “year-to-date.” But that’s not getting the economy right. The last time the economy started to diverge from the stock market like this was in Q3 of 2007. By then “the stock market was up double digits year-to-date”, then poof. Earnings slowed, and cheap got a lot cheaper from there.
Back to the Global Macro Grind…
Like iPads, I guess you can say stocks are “cheap”, but you better not be using the wrong numbers, or that’s where you’ll definitely get some multiple expansion! Cheap gets more expensive as companies guide down revenues and earnings. Ironically (see Chart of The Day), the most powerful side of the bull case in Q4 of 2011 (“earnings are great”) is now the biggest risk.
Here’s a snapshot preview of Q3 2012 Earnings Season:
- Fedex (FDX) = $27.3B market cap
- Staples (SPLS) = $8.3B market cap
- Intel (INTC) = $116B market cap
- Norfolk Southern (NSC) = $23.2B market cap
- Bed Bath & Beyond (BBBY) = $16B market cap
- Adobe (ADBE) = $16.3B market cap
The first 3 of those companies (FDX, SPLS, and INTC) already told you about #EarningsSlowing – they’ve been saying it for almost a month. The last 3 (NSC, BBBY, ADBE) just told you the same thing, but as of last night. Watch those stocks today.
Now maybe fundamentals “don’t matter” and, somehow, at the same time it’s all about stock picking again (always seems to be after the move) – but those maybes might only be maybes until the companies you are invested in report reality.
The storytelling in our profession is always impressive, but it will be really interesting to see who gets sucked into thesis drift (like they did at the Q3 top of 2007) as their “growth is back, earnings are great, and stocks are cheap” thesis of March 2012 comes unglued.
If it’s all about Apple and money printing, that’s a much more acceptable explanation – I get it. I had last week’s Viagra melt-up dead wrong inasmuch as being long the US Dollar and short Commodities this week looks dead right.
Apple is not the economy.
Apple is a great company that is not doing what companies explicitly linked to the global economy without a mega-innovation cycle are doing. FDX + SPLS + INTC + NSC + BBBY + ADBE = $207B in market cap exposed to #EarningsSlowing. AAPL has over 3x that market cap, and expectations are that their earnings may never slow again.
Put another way, Apple is not the economy but it is, increasingly, holding up the US stock market.
The other big thing going on all of a sudden this week is the other side of the Dollar Debauchery trade. Causality (Bernanke’s Policy to Inflate) has its short-term perks, but it also has its correlation risk.
- US Dollar Index was down for 6 consecutive weeks into and out of Bernanke’s to “infinity and beyond” move September 13th
- A 6wk draw-down of over 6% in the US Dollar Index took stocks and commodities to 6 week highs
- This is the first UP week the US Dollar has had in the last 7 (USD +0.9% week-to-date)
- Oil collapsed on that, down -8% in a straight line, breaking our long-term TAIL risk line of $111.44/barrel (Brent)
- The immediate-term TRADE correlation between USD and Gold = -0.97; that’s surreal
- Gold just failed to make a higher all-time high (versus the post January 25 Bernanke push to 2014 on 0% money in Feb)
So, what do you do with Growth and #EarningsSlowing, laced with a record level of correlation risk on the side this morning? I don’t know. All I can do is stay true to the research and risk management process that got me out of the way before the SP500 was down -4.4% when the music stopped in November of 2007.
My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Treasury Yield, and the SP500 are now $1753-1785, $107.46-111.44, $78.56-80.54, $1.29-1.31, 1.72-1.77%, and 1449-1474, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer