This note was originally published at 8am on May 13, 2015 for Hedgeye subscribers.
“Growing old is not upsetting; being perceived as old is.”
It’s hard to believe that legendary singer-songwriter, Kenny Rogers, is 76 years old. I can still remember my Dad playing his 8-tracks in our pickup-truck on the way to a day on the worksite.
I’m 40 years old now, and I’m pretty sure that if my old man told me to get up and dig 18 post holes tomorrow morning I’d pull every muscle in my back. There are millions of hard working men my age who can still bang that out, no problem.
While I agree that age is an attitude, there’s one component to it that we can’t control: #time. I’ve been to Chicago, NYC, CT, and Boston in the last 48 hours – and that’s all I’ve been talking about. This economic cycle is running out of time.
Back to the Global Macro Grind…
I’ve spent a lot of time on the road, debating with investors and … in the words of one of my favorite Rogers songs (The Gambler) “readin’ people’s faces… knowin’ what the cards were, by the way they held their eyes…”
And, while I am sure I mis-read plenty of people, I don’t think that’s one of my weaknesses. After Darius and I slap our current 99 slide-deck on the table, the investor can see all of our aces – and I’m not bad at hearing what they say back.
The best cards the buy-side plays on us are bottom-up ones. Almost every great stock picker has an ability to communicate a corrolary from the perspective of a company they either just talked to and/or are invested in.
The least impressive cards they show us are in quantifying what that means within the macro cycle. In fact, many aren’t focused on cyclical risk management, and by their investing nature don’t consider a business being “good” as bad.
While our #process is easier to understand by using today’s Chart of The Day (a sine curve), let me just make this macro Risk Manager point one more time in plain english:
- When #LateCycle macro indicators go from good to less good, that’s bad
- When #EarlyCycle macro indicators go from bad to less bad, that’s good
In other words, if a company’s revenues and earnings have been accelerating to their all-time highs, then start to slow, sequentially – that’s less good. And it will likely go from good to bad if the macro cycle turns, at the same time.
But, but, business is good and it’s a “great company.” Roger that. And only the super-duper-great ones can trump cyclical slow-downs. The time to buy a great company like Starbucks (SBUX) was in 2009, at $5.76/share (split adjusted). Not now.
By the time a company tells you things are slowing, markets have usually front-run them. This is called discounting the future, and most of you who have been at this for a while get that.
In Boston today, I’ll be focusing on the #LateCycle data showing things like:
- US Corporate Profits as a % of GDP being “past peak”
- How the beloved “Earnings” consensus trumpets peak #LateCycle too
- And how SP500 Operating Margins look, in context (hint: rolling off peak)
You did not want to be the bottom-up investor who missed the peak-and-rolls off the 2000 or 2007 peaks (in either margins or the earnings that manifested from them).
You don’t want to be assigning peak multiples to cyclical companies whose revenue growth rates and margins have peaked and rolled either (hint: the stock gets more “expensive” on the way down, when EPS get cut).
Unless, of course, it’s “different this time”… (which people pitch to me all the time). If that’s your bottom-up call, just know that that perception is as timeless as economic cycles themselves.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.91-2.32%
Oil (WTI) 55.62-61.12
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer