Forecasting 2016

“I have seen the future and it is very much like the present, only longer.”

-Kehlog Albran

That’s a quote from a book called The Profit that was published in 1973 as a parody to a popular poetry book called The Prophet. I sincerely hope you’ve learned enough in this profession to realize that it’s processes that consistently predict the future, not pundits.

While last week’s macro market moves shouldn’t surprise anyone who understands both #Deflation Risk and #LateCycle Slowing, it surprised me that the cover article of Barron’s 2016 Forecasts didn’t incorporate anyone seeing what’s happening in the present.

If you haven’t seen my crystal ball, I can show it to you. My wife gave it to me for my birthday last year. It’s cool. I have seen the future. And it is very much like what we’ve been seeing Mr. Macro Market price in since July.

Back to the Global Macro Grind…

At this time last year, the Barron’s Forecasts were looking for 3-3.5% GDP, 8-10% profit growth, a 3-3.5% 10yr Bond Yield and 2275 SP500. Now they’re looking for 2.5-2.75% GDP, +5% profit growth, a 2.75% 10yr Yield, and 2220 SP500.

In other news, US GDP is about to drop towards 1.5% year-over-year growth (at best) in Q4, profit growth is tracking down -5-10%, the 10yr Yield is at 2.13%, and the SP500 is -2.2% YTD in 2015.

But you already know that.

What you may not know is that if the data continues to TREND bearish (on both growth and inflation), you’ll see both the slowest year-over-year GDP and S&P profit growth of the cycle in the 1^st half of 2016.

Sure, there are plenty of buy-siders who agree with us on this. And they will continue to make money on that. But what about those who didn’t believe there would be something like a credit-cycle alongside this? Shall they all just “bar investor withdrawals”?

Reviewing what the present told us about the future last week, here’s what macro markets did:

1. Commodities (CRB Index) continued to crash, closing down another -2.9% on the week to -24.0% YTD
2. Oil (WTI) continued to crash, deflating another -11.6% on the week to -41.1% YTD
3. Nickel prices saw another -5.1% draw-down on the week to -44.3% YTD
4. Coffee prices got slammed for another -4.5% deflation, taking their crash to -32.3%% YTD
5. Natural Gas continued to crash, deflating another -9.5% on the week to -44.0% YTD
6. The Canadian Dollar dropped another -2.9% on the week, making lower-lows at -15.9% YTD
7. The Toronto Stock Exchange (TSX) lost another -4.3% on the week to -12.6% YTD
8. Emerging Market Stocks (MSCI) deflated another -2.9% on the week to -17.5% YTD
9. Latin American Stocks (MSCI) continued to crash, -1.9% on the week to -29.8% YTD
10. High Yield Credit Yields ramped another +39 basis points to 8.34% (that’s +153 basis points YTD)

Apologies for not cherry picking and pointing out that the MLP #Bubble imploded to -41.1% YTD on the Alerian MLP Index. But I had to remind you that the Global Macro market isn’t the Dow, Bro. It’s interconnected and very much trading on #Deflation Risk.

No, you didn’t see any of the blue chippers forecast a breakout in High Yield Spread Risk in 2015. You saw them all hope for GDP to have a 3-handle and rates to “move higher” in a healthy way. They’re expecting more of that in 2016.

Don’t worry, I didn’t forget what happened in US Equities last week:

1. SP500 lost -3.8% of its value and is heading into the messiest Santa Rally I’ve seen in a while at -2.2% YTD
2. Russell 2000 got slammed for another -5.1% weekly loss and is currently -6.7% YTD
3. Energy Stocks (XLE) led decliners (despite being up for 3 days) at -6.6%, but remain in crash mode at -23.6% YTD
4. The Beloved “rate hike” Financials (XLF) got crushed, dropping -5.4% on the week at -5.2% YTD
5. The ole “PMIs have bottomed” Industrials (XLI) dropped another -3.6% on the week to -7.0% YTD

And finally, from a SP500 Style Factor perspective:

 

1. LEVERAGE: High Debt Stocks (EV/EBITDA) dropped another -4.4% on the week to -13.5% YTD
2. BETA: High Beta Stocks got buried -6.6% on the week to -14.2% YTD
3. SIZE: Small Cap Stocks were down another -5.7% on the week to -15.9% YTD

*Mean performance of the Top Quartile vs. Bottom Quartile of SP500 companies

I’m sorry (I really am). But I didn’t do this to macro markets. Economic gravity did.

And, while I think it’s totally fair to ask me in 1 on 1 meetings “where I could be wrong”, I think it’s equally fair to ask yourself if your prediction of the future is more in line with what’s actually happening out there, or with what you might like to see happen.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.10-2.22%

SPX 2001-2049
RUT 1116--1149

VIX 17.82-25.85
EUR/USD 1.05-1.11
Oil (WTI) 34.08-38.54

Nat Gas 1.85-2.11

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer