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“The wavering multitude is divided into opposite factions.”


For those of you who have been following us since we called the US economic cycle top in late 2007, you know that there’s frequently an opposite faction to our most important Global Macro Themes – it’s called Wall Street consensus.

Not that we keep score or anything, but if you go back to what we thought were 3 of the most important (already in motion) Global Macro Risks 1-year ago today, they were: #Inflation Slowing, Rates Falling, and Cross Asset-Class Volatility bottoming.

All of those calls were based on forward looking indicators born out of a repeatable research and risk management #process. Today, the biggest disconnect between our indicators and consensus is #GrowthSlowing in the 2nd half of 2015 (in both the US and Europe).

Wavering Data - z cons

Back to the Global Macro Grind

But, “if you don’t want to get caught up in the data” (which is what one of my competitors wrote yesterday in his “unwavering” support for #GrowthAccelerating, despite wavering on his “reflation” call two weeks ago), #NoWorries.

Who needs data and market indicators anyway? Maybe we’ve all become so damn “smart” in this business (after consensus missed calling the last 2 US cycle tops), that we can just ignore the rate of change in the data until it fits our narrative.

This isn’t personal. This is the cycle. It bases, bottoms, accelerates, peaks, then slows. And it takes time. A lot more time, in fact, than the most dogmatic bull on “reflation” can remain solvent.

I’m not going to hammer on whoever is still long inflation expectations this morning (Energy, Metals & Mining, Materials). They had a big beta bounce yesterday (Oil & Gas stocks, XOP +3.7%, after crashing to new lows the day prior), so I’ll play nice.

Instead, I want to re-focus your attention on the Industrial sector (XLI) because:

  1. XLI bounced +1.9% yesterday (to down -5.2% YTD), providing you another selling opportunity
  2. Revenues (for Q2 to-date) for the Industrials Sector are down -3% and earnings are down -4%
  3. And the US/European Industrial cycle only peaked in Q4 of 2014

Sure, you can ignore this “data” until your boss taps you on the shoulder and/or reads you this note. Or you can objectively analyze the risks associated with a #StrongerDollarForLonger colliding with the toughest revenue and margin comps of the year (in Q4).

And you’ll end up where we continue to be on most things cyclical that have perpetual inflation expectations built into them, never mind some kind of mainstream 1990s early cycle “demand.”

I’m not trying to be a bully on this. I’m just trying to make sure you don’t get run-over (like many have in the last 6 weeks) being long “cheap” cyclicals when “cheap” is based on not only the wrong revenue and earnings assumptions, but the wrong commodity prices.

I think this is one of the key differentiators in my process and perspective vs. many of my sell-side competitors. Most of them never worked on the buy-side, traded Global Macro, and/or modeled bottom-up company risks using a top-down macro overlay.

That’s not to say I’m always right. Newsflash: no one is. But it is to remind you that I typically don’t blow you up by ignoring the big stuff like data and market signals. In rate of change terms, they matter and are crystal clear to watch.

Notwithstanding another classic #LateCycle rollover in the US #ConsumerCycle slowing yesterday (US Consumer Confidence getting hammered to 90.9 this month vs. 101.4 last – see Chart of The Day), here’s some important pending data to consider:

  1. US GDP for Q2 (it’s now Q3) will be reported on Thursday and should be a “good” headline number vs. a “bad” Q1
  2. US Employment (Jobs Report) will be reported next Friday and should be a “less great” number vs. the Q1 cycle top

You see, the way consensus looks at GDP is somewhat confusing because they look at what the government calls a “Quarter-Over-Quarter SAAR.” It’s a sequential (i.e. quarterly) read on how they think the economy is trending.

In order to see (and front-run using forward looking Hedgeye “tools”) the cycle though, you need to look at how the economy is trending on both a Year-Over-Year basis and relative to the 2-3 year trend.

I don’t model it this way for kicks and giggles. I model it this way because this is how I model companies and it made no sense to me to model it in a way that an Old Wall “economist” or strategist does. Oh, and did I mention that their way doesn’t work?

The key differentiators in our USA and Europe models (we have 86 countries in the model) are currently as follows:

  1. US GDP 1.6-1.8% for Q3 and Q4 (consensus has back-end loaded the year, we have it slowing)
  2. Eurozone GDP slowing in 2H15 to a CY15 growth rate of +0.6%

Since Bloomberg Consensus on Eurozone GDP for 2015 is still up at +1.5%, that’s the most important component of #GlobalSlowing we see that our competition doesn’t. Then again, if you ignore the last 3 months of #EuropeSlowing data, you’d miss that too.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND research views in brackets) are now:

UST 10yr Yield 2.21-2.34% (bearish)

SPX 2069-2098 (bearish)
RUT 1 (bearish)
Nikkei 202 (bullish)

VIX 12.53-14.58 (bullish)
USD 96.61-98.35 (bullish)
EUR/USD 1.07-1.10 (bearish)
YEN 123.03-124.49 (bearish)
Oil (WTI) 47.07-50.49 (bearish)

Nat Gas 2.71-2.92 (bearish)

Gold 1067-1117 (bearish)
Copper 2.35-2.46 (bearish)

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Wavering Data - z Confidence CoD