Where The Winds Blow

“One ship drives East and another drives West

With the self-same winds that blow.

‘Tis the set of sails

And not the gales

Which tells us the way to go.”

-Ella Wheeler Wilcox


That’s how David McCullough introduces Chapter 3 of The Wright Brothers as he tells the story of the boys moving East (from Ohio) toward the Outer Banks of the Carolinas. We should all be thankful that they took the risk and made that trip.


Whether you’re headed toward Kitty Hawk, North Carolina this week or just staying close to home, the Hedgeye team and I want to wish you a very peaceful and happy Thanksgiving.


With a record 94 million Americans not in the US labor force and approximately 46 million people on food-stamps, I’m quite humbled by the blessed life my family and firm is living. I can never say thank you enough. Our collective responsibility remains being the change we all want to see in this world.


Where The Winds Blow - turkey


Back to the Global Macro Grind


While I’d like nothing more than to write about the prospects of US #GrowthAccelerating (like I did around this time in 2012), I don’t like to write fiction on economic matters. While hope often gives us the wonderful gift of life, it is not a risk management process.


Sadly, going into this Thanksgiving break, the US economy was dealt two of the Top 3 leading indicators for a US Recession yesterday:


  1. US Corporate Profits breaking down below their 12-month trailing average
  2. US Consumer Confidence rolling off its multi-year cycle peak


As you can see in the Chart of The Day, Consumer Confidence peaked in Q1 of 2015 in conjunction with:


  1. US Consumption Growth (Real PCE Growth) peaking at 3.3% year-over-year in Q1 of 2015
  2. Non-Farm Payroll Growth peaking at +2.3% year-over-year in Q1 of 2015


Unless you think it’s the 1990s (newsflash: it’s not), US Consumer Confidence always puts in a cycle peak in the 100-110 range, right before a US recession. Yesterday’s reading of 90.4 for November dropped almost 10% from 99.1 in October.


On the corporate profit cycle side, yesterday’s year-over-year #GrowthSlowing US GDP report had the following two realities:


  1. US GDP slowed to 2.2% year-over-year growth (that’s the lowest of the year)
  2. US Corporate Profits slowed to -3.2% year-over-year growth (that’s the lowest of the year)


Yep. Simply following the rate of change in a sine curve, it is. Don’t let someone who is in the business of writing reasons to always be bullish obfuscate the simple reality that US GDP growth went from 1 to 2 to 3% year-over-year into the cycle peak (Q1)…


And is in the midst of slowing from 3 to 2 to 1% here in Q4 of 2015.

*sine curve math wizards note: after 1% comes 0%


Unless, of course, “it’s different this time”, profits slowing to negative year-over-year growth is a leading indicator for people losing their jobs and becoming less confident. Of the 500 companies in the S&P, 490 have now reported an aggregate Q3 earnings decline of -4.4%.


Now if you’re still not aware of the #LateCycle call on both US employment and consumption growth – but still data mining for a 9-month lag chart of a PMI to bottom, the US Market PMI reading of 52.6 in NOV slowed vs. the head-fake-counter-TREND-bounce to 54.1 in OCT.


In other reality-check news:


  1. Last night, Argentina told the world that its central bank has “no Dollars left…”
  2. Chinese (and American) Corporate Bond Spreads continue to widen here in November
  3. Copper continues to crash (-30% YTD)
  4. US Treasury Yield Spread continues to compress (-6 basis points this week to +129bps 10s/2s)
  5. Japan announced they’re going to hand out 30,000 Yen to 100 million low-income people


To put the latest Japanese social plan in context, since a Yen isn’t what it used to be, 30,000 Yens = $245 US Dollars. So it will take roughly 300 billion Burning Yens to fund that.


If the US Federal Reserve didn’t do QE and just wrote checks to impoverished Americans like Japan has resorted to doing (post QE failing), at least we’d have a better conscience about the fact that it was QE’s asset price inflation that hurt the many, in lieu of paying the few.


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


UST 10yr Yield 2.18-2.30% (neutral)

SPX 2020-2109 (neutral)
RUT 1139--1193 (bearish)

NASDAQ 4 (bullish)

Nikkei 199 (bullish)

DAX 101 (bullish)

VIX 14.66-20.47 (bullish)
USD 98.81-100.19 (bullish)
EUR/USD 1.05-1.08 (bearish)
YEN 122.04-123.73 (bearish)
Oil (WTI) 40.05-43.56 (bearish)

Nat Gas 2.15-2.35 (bearish)

Gold 1060-1085 (bearish)
Copper 1.98-2.09 (bearish)


Best of luck out there today and Happy Thanksgiving,



Keith R. McCullough
Chief Executive Officer


Where The Winds Blow - 11.25.15 EL chart

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