Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.
"... After this 1-day bounce off the Russell 2000’s crash (20% decline from July) intraday low yesterday, and commodities “bouncing” off 5-13 year lows (CRB Commodities Index down -20% in the last 3 months alone – see 5-year non-“transitory” deflation chart for details), I’m looking forward to swimming with both Potomac and the non-peddled-rate-of-change data. I won’t drown our clients that way."
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“President Can’t Swim.”
That’s what President Johnson said “if one morning I walked on top of the water across the Potomac River.”
For those of you still trying to decipher fact from fiction from Obama’s State of The Union address last night, there is a long history of US Presidents being straight up with people on certain matters.
Sometimes to a fault, I’m going to tell you like it is. We built our firm on the principles of transparency, accountability, and trust. And we’re super excited to have announced that we acquired another truth-telling firm, in D.C. based Potomac Research Group yesterday.
Click here to read more about our PRG acquisition.
Back to the Global Macro Grind…
When the President of the United States feels compelled to use a mainstream media stage like #SOTU to suggest his economic critics are “peddling fiction”, you know we’re telling the truth about #Deflation and #GrowthSlowing into the end of his reign.
One of the main reasons why I’m so excited to partner with Potomac’s thought-leader in chief, Suzanne Clark, is that she calls it like it is too. She’s built a culture of truth-seekers at Potomac. And, together, we’re going to open Pandora’s box on people who get paid to lie to you.
“What’s the truth?”
It’s such a basic but differentiating question in this age of people from Wall Street to Washington doing “whatever it takes” to get themselves paid. It’s also the #1 question one of the world’s best macro investors (Ray Dalio) wakes up to every morning.
For anyone who has a 10th or 11th grade education in math (the new baseline for Americans being able to understand who is telling the truth), whether the US economy is accelerating or slowing, in rate of change terms, is a trivial matter.
Commonly called calculus, or the mathematical study of change, “in the same way that geometry is the study of a shape” (Wikipedia). Unlike political ideologies, rate-of-change is very easy to see on these things we call charts.
Whether it’s #Deflation or US #Recession data, you’ll see on Friday that both:
- US Producer Prices (PPI) continue to TREND (rate of change slowing) bearish
- US Industrial Production (IP) growth continues to TREND recessionary
To boil this down for who Obama calls the “folks” (are they people who don’t do math? or can only “rich” people do math?), there is a difference between:
A) Growth Slowing from its cycle peak (these are called #LateCycle factors like employment, consumption, auto sales, etc.)
B) And Recessionary Data – i.e. when the rate of change goes from slowing to negative year-over-year growth
Corporate profits, for example, are not only #LateCycle (they peak at the end of an economic cycle like they just did in Q2 of 2015), but critical to understand when they become recessionary.
CSX Corporation (CSX) is a $24B railroad company that, right before The Big O called me a peddler, said “with negative global growth and industrial market trends… our earnings are going to be lower in 2016 versus 2015.”
Sounds like some truth-telling to me.
A railroad is called an “industrial cyclical.” And I’ll be damned if the truth about a stock like CSX is that it peaked when the US Industrial growth cycle did in 2014.
An auto company (like Ford) is called a “consumer cyclical.” And they typically outperform industrial cyclicals at the end of an economic cycle. That’s why they’re called #LateCycle stocks.
If you bought CSX when Hedgeye went bullish on US #GrowthAccelerating (end of 2012) and sold it when the Industrial Cycle peaked, you made +105%. If you bought CSX “on valuation” (using the wrong #s) when the cycle peaked, you’re down -34%.
If you don’t do the macro truth about cycles, the cycle is going to do you.
What’s next? Earnings season:
- It started with an industrial cyclical, Alcoa (AA), hitting a fresh cycle low this week (down -60% from cycle peak in 2014)
- And continues with a #LateCycle financial (JPM) reporting tomorrow (still only -15% from its cycle peak in 2015)
After this 1-day bounce off the Russell 2000’s crash (20% decline from July) intraday low yesterday, and commodities “bouncing” off 5-13 year lows (CRB Commodities Index down -20% in the last 3 months alone – see 5-year non-“transitory” deflation chart for details), I’m looking forward to swimming with both Potomac and the non-peddled-rate-of-change data. I won’t drown our clients that way.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.06-2.20%
Oil (WTI) 29.45-34.21
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Client Talking Points
The key to our quantitative signal is price/volume/volatility, so we’ll be watching those volatility components (both Equities and OVX) very closely this morning. Front month VIX would need to break-down below 15.52 to turn the bearish SPX/Russell tide.
With the CRB Index closing at 162 yesterday (Oil sub $30, Copper $1.94, Nickel -5.7% on the day!, etc) macro markets are bouncing on those crashes bouncing, not Chinese trade data (Shanghai was -2.4%). #Deflation/Recession reports pending on Friday with USA’s PPI and Industrial Production reports.
Not much of a bounce in UST 10YR Yield terms this morning, the UST 10YR is at 2.14% with immediate-term downside to 2.06% this week if we continue to be right on that #Deflation data. We looking for the JPM report tomorrow to be bearish on the margin too.
*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE.
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Top Long Ideas
McDonald's boasts style factors that are best in class for turbulent times in the market, big cap and low beta and it has handily been outperforming the market and its competitors as of late. One of the biggest aspects of competing in their space is value offering.
McDonald’s has ceded share in the value category primarily to Burger King over the last two years. Now that they are launching a national value platform with a full slate of media support, MCD will recover the value customer.
General Mills' business seems to be starting to pick up steam, as the company is working to improve merchandising and advertising on core business.
In addition they have executed a few small, but meaningful M&A deals showcasing the change in managements thinking. The divestiture of Green Giant to B&G Foods, for instance, although a profitable business, was a good move for them given their lack of focus/investment in the brand (they have more opportunities like this throughout their portfolio, in addition to SKU rationalization).
GIS continues to look for more sizeable acquisitions in emerging markets, but the string of pearls approach may remain most effective domestically.
After the worst start to a year literally EVER for U.S. equity markets, TLT caught a bid in the first week of trading as the centrally-planned Chinese stock markets traded limit down earlier in the week. It was the largest central bank liquidity injection from Beijing since Chinese markets crashed in September.
TLT remains one of our strongest long idea calls heading into 2016 as junk bond markets begin to crack.
Three for the Road
TWEET OF THE DAY
Keith McCullough @KeithMcCullough 1h1 hour ago
VIDEO (3mins) Why Hedgeye Acquired Potomac Research https://www.youtube.com/watch?v=-kYtVLJc_y0 via @YouTube #SOTU
QUOTE OF THE DAY
The surest way not to fail is to determine to succeed.
Richard Brinsley Sheridan
STAT OF THE DAY
Christmas sales in the UK "disappointing", growing just 1% in December, after a 0.7% increase in November.