Editor's Note: The U.S. stock market is getting pummeled again today. Below is a particularly prescient Early Look written by Hedgeye CEO Keith McCullough on July 14, 2015, just before the July/August selloff in stocks. We've been bearish ever since and warning that the stock market's fundamentals have been breaking down. That's been the right call all year. Click here to learn more.
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“Ask ourselves why we do what we do…”
The big picture
That’s a pretty basic leadership and risk management question. And I sincerely hope that you ask yourself that question every day. I do. Being transparent and accountable isn’t easy; especially where it all starts – with yourself.
Why did we build a firm that dares recommend you actually SELL things? Whether it’s hyped up “social” cloud stocks with “TAM multiples” or Ponzi-like MLP schemes that could only be concocted by Old Wall bankers, I’m sure glad we did.
How about the simpler market SELL calls, like the ones you should have heeded every time the SP500 is up +2-3% for 2015 YTD? The US stock market has mean reverted to DOWN YTD multiple times. I wonder if both growth and earnings slowing have had anything to do with it? Ask yourself. And be honest. Did you buy stocks expecting earnings to be down in 2015?
When top-down GDP growth slows, consensus needs central-planning to reflate markets. And when bottom-up earnings slow, we definitely need to beg the company to “buy back the stock.” This happens at the end of every economic cycle, fyi.
Another way to look at growth (when both US and Global growth are slowing) is to buck up for the growth that you can find. Our buddies at Morgan Stanley call this “New Tech” and, oh boy, are the chart chasers loving that stuff.
As you can see in the Chart of the Day, the “New Tech” trades at, on average 149.5x earnings. So no worries there. As long as the products are cool, I’m sure this time will be different (until they miss a sales growth whisper).
Instead of debating why you shouldn’t sell some Netflix (NFLX) at 278x earnings this morning (why not just buy one of these names that has no earnings at all? #EasierToDebate), allow me to get back to doing what I do - risk managing growth.
Let’s do #EuropeSlowing because, unfortunately post Greek Gong Show, they still had to report their data this morning:
- Eurozone ZEW (economic sentiment) slows again in JUL to 42.7 from 53.7 in JUN
- German and Spanish inflation (CPI) stalled at +0.3% and +0.1% year-over-year, respectively
- Swedish and Finnish #deflation came back online with year-over-year prints of -0.4% and -0.1%, respectively
- Swiss Producer Prices (PPI) maintained #deflation at -6.1% year-over-year
- UK CPI of 0.0% y/y (JUN) and PPI of -1.5% y/y were pretty much flat with where the data was in MAY
In bottom-up-stock-picker speak:
- If you are a producer and you have no pricing power, that is bad
- If you are a consumer and you get lower-prices, that is good
The problem is that corporate profits lose during the #Deflation inasmuch as the consumer takes that spread. Now that would be a great thing for US and Global consumption demand, if only we were at the beginning (not the end) of a cycle.
NEWSFLASH: you can’t centrally plan economic cycles, age, and/or time
But you can squeeze the poor hedgie who chases high and shorts low. And, to a degree, I think that was the main driver of yesterday’s global stock market ramp to lower-all-time-highs. Here are 3 nuts to consider within that thought:
- CFTC non-commercial futures/options data showed a net SHORT position of -162,467 SP500 contracts
- Thursday’s front-month VIX close of 19.97 was at the top-end of my 13.52-20.63 risk range
- High Beta Stocks (in SP500 Style Factor terms) were -5.1% (vs. Low Beta +0.5%) on a 1-month duration
Oh, and Total US Equity market Volume (including dark pool) was -16% and -17% yesterday vs. its 1-month and 1-year averages, respectively. We former hedgie guys call that a no-volume squeeze.
So what do you do today? You sell.
Yep. That’s it. That’s my “call.” You look at everything you own and ask yourself whether or not what you own is at the top-end of its immediate-term risk range or not. And if it is (like SBUX is for example), you sell some.
If I’m the bad guy for thinking that way, so be it. Where I was bred in this business, when both top-down growth and bottom-up profit cycle earnings started to go from good to bad, I was taught to sell.
That’s what I did at the end of the 2000 cycle. That’s what I did at the end of the 2007 cycle. And that’s what I am telling you to do now at the end of the 2015 cycle. That’s what I do. Ask yourself what you did/do.
Our immediate-term Global Macro Risk Ranges (and intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.19-2.47% (bearish)
SPX 2041-2105 (bearish)
RUT 1228-1270 (bearish)
Nikkei 19899-20501 (bullish)
VIX 13.52-20.63 (bullish)
USD 95.61-97.42 (bullish)
EUR/USD 1.09-1.12 (bearish)
YEN 122.14-124.10 (bearish)
Oil (WTI) 49.08-53.14 (bearish)
Nat Gas 2.65-2.89 (bearish)
Gold 1148-1165 (bearish)
Copper 2.43-2.62 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer