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McCullough: The US Stock Market Is Going To Crash

"The US stock market has never NOT crashed (i.e. a 20% or more decline from peak – that would get you 1704 SPX from the 2130 #bubble high) when corporate profits go negative for 2 consecutive quarters," Hedgeye CEO Keith McCullough wrote earlier today in a note to clients.


Click to enlarge.

McCullough: The US Stock Market Is Going To Crash  - EL profits


Editor's Note: The chart above was featured in our recent 73-slide Q1 Macro Themes deck. If you would like more information on how you can subscribe to our non-consensus research please email sales@hedgeye.com.

FOUR SCORE | December Employment

Four Score and Zero Months ago the current expansion commenced.  0.5 Score months ago growth in the labor market peaked. 


Inclusive of the solid monthly gain in December hiring, the trend towards deceleration remains ongoing.  The net of a solid NFP print in December is likely more deflation risk. 


There’s no dearth in NFP data reporting so we’ll keep it to a quick quadfecta of key takeaways.  There’s a visual tour of the employment data below:

  • Between a RoC and a Hard Gray Bar:  From a rate-of-change perspective the employment cycle cycles rather cleanly (see 1st chart below).  Once employment growth peaks, it''s effectively a one way street towards contraction.  The RoC peak-to-recession timeline is cycle specific but roughly consistent (has averaged ~23 months in the last 3 cycles) and February 2015 (+2.34% YoY) marked peak growth in the current cycle. Employment growth in December was +1.88% YoY.   
  • Good is Probably Bad:  The macro factor flow stemming from a good domestic jobs report is basically this:  Solid NFP --> hawkish policy expectations ↑ --> $USD ↑ --> Deflation Risk ↑ = continuation of the market price and macro data trends that characterized 2H15.  With the $USD up, 10Y Yields flat-to-down and equities quickly fading early (lack of china crashing, not NFP) optimism, the market looks to be pricing in some measure of a similar conclusion. 
  • Income:  Sequential Acceleration, Trend Deceleration:  Income growth drives the capacity for consumption growth (and anchors the pro-cyclical trend in credit growth) and the net of the decline in aggregate hours growth and the acceleration in hourly earnings growth in December will result in a modest acceleration in salary and wage income growth when the December data is released later this month.  Like the employment data, aggregate income growth peaked in 4Q14/1Q15 and should continue to decelerate against tough comps.  The silver lining is that so long as employment/income growth can hold in (albeit slowing), the probability of an outright recession declines or, at least, gets pushed out.    
  • Labor Income ↑ = Profitability ↓:  With labor rising, topline (GDP & Corporate Profit estimates) decelerating and inventories spiking (see this mornings wholesale inventory data), the probability that positive hiring perpetuates continued margin contraction is more likely than not.  

FOUR SCORE | December Employment - NFP YoY


FOUR SCORE | December Employment - NFP Goods vs Services


FOUR SCORE | December Employment - Reported   IMplied income growth


FOUR SCORE | December Employment - Hourly Earnings


FOUR SCORE | December Employment - Payroll Growth vs Wage Growth


FOUR SCORE | December Employment - IS

FOUR SCORE | December Employment - Labor Income Share 

FOUR SCORE | December Employment - SPX Margins


FOUR SCORE | December Employment - Emp Summary


Christian B. Drake



Here's the REAL Picture Behind Today's Jobs Report

Takeaway: The US stock market has only had 16 up days in the last 42 – please, don’t blame China.

Here's the REAL Picture Behind Today's Jobs Report - ball drop cartoon 12.31.2015


Jobs, Jobs, Jobs...


That's what Old Wall is talking up today. 


Thinking like consensus is the biggest risk right now. On today's non-farm payroll number, Old Wall is staring at the absolute number this morning, instead of the rate-of-change. Don’t forget that the US employment cycle peak was a NFP growth rate of 2.3% year-over-year in Q1 of 2015. It’s also the latest of late cycle indicators (put another way, nothing could change our bearish TREND view).



To better understand the year-over-year slowdown in NFP, here's a quick visual summary from Hedgeye U.S. Macro analyst Christian Drake. Take a look at the circled fourth line down, labelled "NFP, Y/Y," with the current reading of 1.88% versus the aforementioned peak of 2.3% in Q1 of 2015.


In other words, this is the last data point you'll see that the bulls can try to hang their hat on. It was a nice ride. It's over.



The S&P 500 appears to be shrugging off the NFP number today anyway. Remember, the US stock market has never NOT crashed (i.e. a 20% or more decline from peak – that would get you 1704 SPX from the 2130 #bubble high) when corporate profits go negative for 2 consecutive quarters. We’ll have that in earnings season that starts next week.


Just look at the chart...



That's why JPMorgan's (JPM) earnings are way more important to me than this today's jobs report.


You won't hear that from anyone on Wall Street though.

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RTA Live: January 8, 2016


FL | FINL Closures Not Material For FL

Takeaway: FINL store closures worst case gives FL 1.5% in EPS Growth.

FINL announced yesterday that it would be closing 25% of its existing fleet over a 4 year time period. That’s gross closures as the company will be working on the quality of its real estate portfolio to increase its penetration in better quality malls, i.e. more overlap with FL in better markets. What we know – each of the 150 stores earmarked for closure are doing about 1mm bucks per store, about 50% below the company average of $2mm. 65% of those sales are attributed to FINL loyalty members.


If we look at the store footprint overlap by mall between Foot Locker (banner) and Finish Line it’s only 67% (chart 2 below). And our sense is, there is more overlap on the top end of the spectrum compared to the bottom end where FINL will be closing locations. That’s because FL has been extremely prudent over the past 5 years as it stripped capital out the model by rationalizing its store footprint.


All in we get to a $0.03 benefit to FL’s bottom line, and $20mm to the top line per year through FY19 from the door closures assuming a high overlap ratio between the store locations. Less than 1% accretion per year. To get there we assume that FINL recaptures 40% of the lost sales, and 80% of the forfeited share shifts over to FL. We assume a 30% margin for dollars transferred, as FL won’t have to spend up dramatically to win those $. Worst case, assuming FINL recaptures 0% of the dollars lost, and FL gets 100% (ain’t going to happen as NKE pushes its DTC agenda), we could see a $40mm benefit to the top line and $0.06 on the bottom about 1.5% of earnings growth.


FL |  FINL Closures Not Material For FL - FL 1 8 16 chart1


FL |  FINL Closures Not Material For FL - FINL FL overlap

CHART OF THE DAY | Recession? This Indicator Sees Worst Contraction Since 2009

Editor's Note: Below is a brief chart and excerpt from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more.  


"... In the Chart of the Day, we highlight ISM Manufacturing data, which contracted for the first back-to-back month since 2009. As the chart highlights going back to the 1980s, this type of contraction typically precedes or coincides with a recession. The same scenario could be said for a slew of data including industrial production, capital investment, durable goods, exports, and the list goes on. In fact, of the 34 key economic data points we track for the U.S., 24 have gotten worse sequentially."


CHART OF THE DAY | Recession? This Indicator Sees Worst Contraction Since 2009 - CoD 01.08.16

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