SPECIAL EDITION of The Macro Show: Why Markets Are Crashing






2 Key Charts Underpinning Our Recession Call

Editor's Note: Want a better understanding of why our macro team thinks the likelihood of a U.S. #Recession in Q2 or Q3 of 2016 is significant? Wall Street is completely missing this. It has to do with the relationship between labor income and corporate profitability.


See below a brief excerpt from a research note written by our U.S. Macro analyst Christian Drake explaining this relationship. To learn more about how you can subscribe to our institutional research email


... And click here to join us on The Macro Show today with Hedgeye CEO Keith McCullough. It's free


2 Key Charts Underpinning Our Recession Call  - recession cartoon 12.22.2015


According to Drake:

Labor Income ↑ = Profitability ↓

With labor rising, topline (GDP & Corporate Profit estimates) decelerating and inventories spiking (see the recent wholesale inventory data), the probability that positive hiring perpetuates continued margin contraction is more likely than not.  


Take a closer look at the charts below.


2 Key Charts Underpinning Our Recession Call  - labor income


2 Key Charts Underpinning Our Recession Call  - profit

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  • Bullish Trend
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10-Year U.S. Treasury Yield
2.16 2.03 2.10
S&P 500
1,865 1,950 1,921
Russell 2000
991 1,059 1,025
NASDAQ Composite
4,440 4,614 4,615
Nikkei 225 Index
16,804 17,905 17,240
German DAX Composite
9,507 10,022 9,794
Volatility Index
22.17 28.98 23.95
U.S. Dollar Index
98.66 100.12 99.14
1.07 1.10 1.08
Japanese Yen
116.41 118.99 118.06
Light Crude Oil Spot Price
28.41 32.99 31.21
Natural Gas Spot Price
2.02 2.31 2.14
Gold Spot Price
1,068 1,098 1,078
Copper Spot Price
1.91 2.02 1.98
Apple Inc.
93 101 99
564 616 593
Alphabet Inc.
704 748 731
McDonald's Inc.
113 119 116
Facebook Inc.
92 100 98
Intel Corp.
30.06 33.07 32.74

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Recessionary Data Pending...

Client Talking Points


The biggest tell yesterday was volatility – i.e. no change – it remains in what we call a Bullish Formation with an immediate-term risk range of 22.17-28.98. #Deflation’s Dominoes end with massive volatility and a breakout in credit spreads.


China was hammered another -3.6% overnight in Shanghai after Trump reminded the world he wants to eviscerate Chinese trade – that would have to be super bullish for macro markets, no? #GOPDebate .


After every high profile pundit tries to call the bottom, Oil takes another leg down – this is #Deflation and it is not “transitory.”  Oil is crashing again this morning down -5.2%, this ensures Producer Prices in America are in a #Recession.


*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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


VIDEO | Here's what we really think about the #Fed and QE… cc @KeithMcCullough @HedgeyeDDale



Impatience never commanded success.

Edwin H. Chapin


According to an analysis by Bloomberg Intelligence, Apple Inc. could owe more than $8 billion in back taxes as a result of a European Commission investigation into its tax policies.

CHART OF THE DAY | How To Play Defense In A Recession and Rising Rate Environment

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to join Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale on today's The Macro Show. It's FREE!


"... Within the housing related equity complex, REITs provide the best relative returns during recession and rate risk environments.  As can be seen in the Chart of the Day below, REIT’s are essentially the Utilities of the Housing industry. While the r-square isn’t exceedingly high, the relative return distribution plots as you would expect and want in a growth slowing environment."  


CHART OF THE DAY | How To Play Defense In A Recession and Rising Rate Environment - CoD 2



“A calorie is a calorie is a calorie”


My grad school Bionutrition professors peddled that perceived wisdom about caloric intake and its flow through to body composition every semester.


I think they truly believed it.


The math behind the conventional thinking ran like this:  1 lb of fat = 395g (~87% lipids) … 395g X 9 calories per gram  = ~3500 calories. 


So, create a caloric deficit of 3500 and the muffin-top melts to memory. 


Intuitively compelling, expositionally convenient …. and (mostly) empirically false. 


You don’t need an advanced degree to poke common sense holes in that orthodoxy. 


At the time, my simple pushback was something like this:  “If I eat 2K calories of butter, 2K calories of chicken, or 2K calories of lettuce everyday, do you think I’ll look and perform the same after 3-months?”


Empirically, physiology and physique transformation are nonlinear processes and simple calorie reduction works … until it doesn’t.   


The further someone progresses beyond the “honeymoon” dieting period, the more progress gets choppy and less predictable. 


Most people have experienced a form of diet nonlinearity.  Diet, Diet, Diet and nothing happens for days/weeks then wake up one morning and you lost 5 lbs overnight and look noticeably different. 


Having trained hundreds of high-level, competitive athletes and bodybuilders, you learn what works with live ammo.  It’s called Bro-Science. 


Bro-Science has had a sneaking tendency to become ivory tower doctrine … on a lag. 


Relatedly, this week I put on a pair of spandex and looked in the mirror.  It’s called #TruthSerum.  


Bro-Science - CoD 1

Click here to join Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale on today's The Macro Show.


Back to the Global Macro Grind ….


On Wednesday, we strapped the research spandex on Housing and delivered our outlook for 2016.  The conclusion, in rate-of-change bro-science empiricist terms is:  Less Good is Bad (ping if you’re interested in reviewing the 150-pg deck detailing our view) 


Without giving away the full institutional research alpha thunder, here’s a select summary of some of the issues facing the industry: 


  • WALL OF WORRY OR SLOPE OF HOPE?  The long-term bull case for Housing is still alive, but the short and intermediate term outlooks are dominated by negatives.  At the macro level, the manufacturing-industrial data is conspicuously contractionary, income and consumption growth are both past peak, birth trends are rolling over and recession risk is rising.  Housing related equities (Builders, Building Products, Home Improvement, Title Insurers, etc) underperform in both recessionary and rising rate periods.   Rather than climbing the wall of worry, we think the first 6-9 months of 2016 will be spent riding the slope of hope lower.
  • FUNDAMENTAL DECELERATION | VOLUME & PRICE:   Rate of change in both volume and price are set to decelerate in 2016. The short-term will be pressured by a late-4Q15 pull forward of demand ahead of the Fed’s rate hike. Beyond this, however, tough comps through 3Q16 will push Y/Y growth down sharply and home price trends will begin to play catch up (i.e. decelerate) to 2015’s back half volume slowdown.  Decelerating fundamentals are rarely a catalyst. 
  • HOUSTON, WE HAVE A PROBLEM:   While Houston is small relative to the country as a whole, it’s not small for builders.  The Houston Metro population is the fifth largest in the US with ~6.5 million residents and was the fastest growing metro from 2010-2014.  Builders ramped exposure to Houston and benefited over the last half-decade+ as demand and construction accelerated but conditions have reversed and activity is now spiraling south.  Job growth in the region slowed from +4.4% last year to just +0.8% in November, existing home inventory is up +28% YoY, demand is down -11% YoY, new orders at LEN were down -20.4% in 4Q and home prices and permitting activity have just begun to roll over.  Further, oil hedges for major E&P employers in the region will decline by -23% in 1H16 and further headcount “adjustments” will follow.  In short, don’t try to catch the falling knife in Houston – it’s going to get worse.
  • LABOR SUPPLY:  Builders have complained about the dearth in specialty trade contractors in recent quarters as the peri-crisis retreat in immigration, a lack of hiring of younger workers, and residual post-crisis industry level labor issues have reduced the supply of skilled workers to the industry.  A tight resi labor market is indicative of rising demand (i.e. a high quality problem from a longer-term perspective) but the associated cost and margin pressure will not resolve in 1H16 as the pace of new construction activity continues to outpace the growth in industry employment. 
  • HIGH END:  Growth in New Home Purchases at the high end (>$500K) has slowed to -10% YoY in 4Q and demand is unlikely to materially re-accelerate over the shorter-term.  As can be seen in the Chart above, High ticket discretionary consumption is (unsurprisingly) sensitive to asset market volatility and with the VIX in Bullish Formation and global equities in hard-hat mode, the high end probably won’t carry the consumption curve higher here in early 2016. 
  • PLAYING DEFENSE:  Within the housing related equity complex, REITs provide the best relative returns during recession and rate risk environments.  As can be seen in the Chart of the Day below, REIT’s are essentially the Utilities of the Housing industry. While the r-square isn’t exceedingly high, the relative return distribution plots as you would expect and want in a growth slowing environment. 


With the future’s red this morning, today’s domestic macro data is unlikely to fuel an appetite for holding risk over the long weekend. 


The PPI data will remain deflationary, Industrial Production growth should remain negative for 2nd month (and – outside of a prospective cold weather bounce in utilities production in January – it’s unlikely to reverse in the coming months with both backlogs and new orders holding <50 across the ISM/PMI surveys) and with savings rates elevated and durable goods orders and consumer credit growth flagging in recent months, Retail Sales are unlikely to surprise to the upside.  


God was in a good mood the day he created the intelligent bro-scientist gene. 


At some point we’ll be very publically wrong, but in the meantime …


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.03-2.16%


VIX 22.17-28.98
USD 98.66-100.12


To the bro’s continuing to front-run the (macro) flows,


Christian B. Drake

U.S. Macro Analyst 


Bro-Science - CoD 2

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