Most of you are aware that a multi-quarter acceleration into peak capital markets activity has historically been a harbinger of economic downturn. In light of that, we found yesterday’s headline news on that front quite interesting: multiple reports claimed DD and DOW are in advanced talks to merge, with the combination to then split into three separate companies; both stocks finished ~12% higher on the day. This is exactly the kind of frothy, head-scratching headline you’d like to see to confirm the forward outlook for global economic growth is as bad as we think it is.
The WSJ recently noted that worldwide M&A, excluding buyouts, has totaled $3.7T this year, beating the previous record set in 2007. M&A peaks when sellers agree to sell and that’s exactly what you’re seeing amid insider transaction reports. At $7.6B, November 2015 was the fourth-highest month of insider selling on record. This comes amid record share buyback activity, which has averaged $3.9B/day since the beginning of earnings season in October. Data firm Trim Tabs notes that this is the highest pace since the current bull market began in March 2009 (coincidentally when we turned bullish). Hooray for Santa Claus!
Companies both domestic and global are doing everything they can to arrest the gravity weighing on peak margins in order to protect earnings amid #GlobalDeflation – which has perpetuated the ongoing global industrial recession, including right here in the U.S. All told, there is a ton of risk to forward estimates for GDP and EPS growth if we’re right on the economic cycle.
With respect to the U.S. equity market itself, we continue to highlight the dour signal for the S&P 500 and U.S. economy that is the current trending deterioration in market breadth.
Specifically, market breath as measured by the percentage of stocks that are technically broken is almost as bad now as it was in early November 2007, which is when the broad U.S. equity market (i.e. Russell 3000 Index which accounts for ~98% of investable market cap) had declined a commensurate level from its then all-time high as it has now (roughly -5%). Currently 60.2% and 62.4% of Russell 3000 constituent stocks below their 50-day and 2000-day moving averages, respectively. This compares to 68.2% and 64%, respectively, on 11/7/07.
Looking to the S&P 500 – which is essentially flat for the YTD and off a mere -4% from its all-time high – one could make the case that Hedgeye has been wrong for being so bearish. That would certainly be the case if our clients were allowed to charge 2&20 simply to invest in the SPY on behalf of their investors. That’s obviously not the case, which is why I’m not aware of a single client that has chosen to cite the performance of the S&P 500 as proof that we are off base or as a reason to be bullish.
If anything, the fact that so many investors are forced to use the S&P 500 as their bogey actually amplifies our point: irrespective of what the SPX does, the carnage out there is real and it’s incredibly hard to post good return numbers when so many stocks are crashing in accordance with the bearish fundamental narratives Hedgeye has authored while “the market” itself won’t go down.
All told, we continue to see exceptional risk in searching for an investable bottom in equities at this stage in the economic cycle. Perhaps the ongoing deterioration within the high-yield credit market is as much of a warning signal about the business cycle as it was back in 2007 – and this has occurred prior to any rate hikes out of the FOMC.
Our competition continues to be surprised to the downside by key high-frequency economic data and we expect that to continue. It’s not unlike 1H07 in that regard. The same cast of characters who failed to help you proactively prepare for the 2008-09 downturn are likely to fail you this time around too.
Best of luck out there as you continue to “high-grade” your portfolios in order to shield your investors from incremental economic weakness.