Soft Earnings

This note was originally published at 8am on January 08, 2013 for Hedgeye subscribers.

“Never have I seen a country so utterly unprepared for war and so soft.”

-Field Marshall John Dill


In one of the more poorly timed British central command comments during WWII, that’s what the Chief of the Imperial General Staff, Sir John Greer Dill, had to say about America just before December 1941 (The Last Lion, page 421).


Japan, of course, attacked the US at Pearl Harbor on December 7th, 1941. And, after President Roosevelt told Winston Churchill that “we are all in the same boat now”, America all of a sudden didn’t seem so “soft” anymore.


In his memoirs Churchill explained that he was quite happy about the whole turn of events. On the night of the Japanese attack he “slept the sleep of the saved and thankful” (page 423).


Back to the Global Macro Grind


After watching Notre Dame’s defense last night, I am still pretty sure that soft is as soft does. That’s also one of the Top 3 Global Macro Risks to being really long US Equities here: Soft Earnings.


Given our view of Global #GrowthStabilizing, that might confuse come people – but it shouldn’t. Veteran Risk Managers know that earnings are a lagging indicator, while growth is a leading one.


That doesn’t mean that #EarningsSlowing won’t matter. We introduced that Global Macro Theme in October of 2012, right before the worst US corporate earnings season since 2006. It too, didn’t matter, until it did.


One of the core takeaways from that theme was that this isn’t a ‘one-off’ where we’ll have 1 quarter of down earnings then straight back up again. That’s because US corporate margins are coming off all-time peaks. All-time is a long time.


I think #EarningsSlowing will matter, but so will the timing it:

  1. Alcoa (AA) and Monsanto (MON) kick off Earning Season tonight, but they aren’t driving the boat; Financials (XLF) are
  2. Financials Earnings Season starts on Friday, and we expect both Housing and Yield Spread to make that Sector bullish
  3. The biggest sector with #EarningsSlowing risk remains Tech (XLK); we don’t get those reports for a few more weeks

Yes, there’s a big difference between buying US stocks with the SP500 at 1400 and levering up long at a 5-yr closing high (1466). So be mindful of that. Be sector selective and stock specific.


Back to the Top 3 Global Macro Risks to being long overbought beta (Equities) here:

  1. #EarningsSlowing
  2. Japanese Policy To Inflate
  3. Rising Oil Prices

The 3rd risk in my Top 3 is the most trivial. Oil’s price, volume, and volatility is measurable within our TRADE/TREND/TAIL process, so as time/price changes, my fundamental research view of how that factor impacts our growth model does.


A far less obvious risk remains what could happen to Japan if they pull an Argentina in 2013. I think this old (but new) bureaucrat they have brought back as Japan’s Finance Minister is crazy. That’s not a typo – plenty of politicians are crazy. Especially Keynesian ones.


Last night Taro Aso (great name for the history books if he rips his country a new one) said Japan is going to print money and buy ESM debt (as in European Bonds) in order to devalue the Japanese Yen further. We’ll walk through what that means as Japan blows through their 44 TRILLION Yen debt issuance ceiling on our Q1 Macro Themes Call (January 15th). Key word score: Quadrill-Yen.


Away from all of that, there’s nothing to worry about out there…


“During the first week of December (1941), Churchill regularly telephoned Bletchley to ask about the disposition of the Japanese Combined Fleet (Kido Butai)… Each time Churchill asked, the Bletchley reply remained the same: No intelligence was forthcoming. The Japanese navy had vanished.” (The Last Lion, page 416)


I am sure some dude in Spain, Taro Aso, and Obama’s latest son-of-Summers US Treasury bureaucrat (Jack Lew) have all central economic command under control. Full debt printing and deficit spending ahead.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now, $1639-1646, $110.19-113.06, $3.63-3.75, $79.99-80.49, 1.30-1.31, 1.84-1.96%, and 1438-1483, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Soft Earnings - Chart of the Day


Soft Earnings - Virtual Portfolio

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