“Speak a little truth and people lose they mind.”
For those of you who are new to following our research rhymes, the maestro on the Hedgeye Macro Team is Darius Dale. He hails from West Seattle. And in case you’ve never been there, let me give you the “upper class” short cut – it’s not where Wall St. consensus lives.
The aforementioned quote comes from a non-peddled-fiction movie called Straight Outta Compton. For those of you “sheltered folk” who don’t do chaos theory, recessions, or rap, the movie’s title was also the name of N.W.A.’s pioneering West Coast hip-hop album in 1988.
I was in college by the time Dr. Dre and Ice Cube made it to my virgin ears. But I can assure you that I get the evolution of it all now. If we have the humility to open our eyes/ears (and the empathy to open our minds), we have the opportunity to learn something, every day.
Back to the Global Macro Grind…
What we learned yesterday was that, no matter what the Establishment police has to say, the bear market in stocks isn’t over. To put closing prices in context:
- The SP500 was -1.6% on the day, taking it to -8.2% YTD, and -13.6% since the all-time #Bubble high in July
- The Russell 2000 remains in crash mode (I won’t gore you with the details) down -23.0% since July 2015
In terms of US Equity Sector Styles, here’s where the mauling was most obvious:
- Energy Stocks (XLE) down another -4.7% on the day and already down another -11.9% YTD
- Basic Materials Stocks (XLB) down another -3.2% on the day, leading YTD losers -14.1%
- Financial Stocks (XLF) down another -2.0% on the day, shocking “rate hike” bulls at -12.5% YTD
If you’re shocked, that’s ok. Consensus “folks” are losing their minds over these losses of capital. Life could be worse.
If you’re thinking this ends with some magical “valuation” love song, think again. We’ve busted a rhyme many times on this simple reality, but to boil it down for you one more time – valuation (during a #Deflation and #GrowthSlowing Phase Transition) is not a catalyst.
A cyclical #Recession morphing into a revenue recession is a serious catalyst (for multiple compression).
It’s early, but for Q4 Earnings Season to-date:
- Energy Revenues (for the 4 out of 40 Energy companies in the SP500 who have reported) are -24.4% so far
- Industrial Revenues (for the 20 out of 60 companies in the SP500 who have reported) are -9.1% so far
- Financials Revenues (for the 28 out of 88 companies in the SP500 who have reported) are 0.1% so far
But, if you back out that 10% of the SP500 and just focus on the good news, no worries. Until an $11B levered “value stock” like Hess (HES) reports what it did last night and you have to go back to the pre 2000-2002 US #Recession lows to find your “price target.”
I realize this morning’s note is a little too bearish for the average bull. But remember, it’s Straight Outta Hedgeye – that fringe firm that authored some of the things that “no one” saw coming.
If the SP500 drops to fresh closing lows this week, I’ll back off, cover some shorts, and take a knee again. But if the 2015 turned 2016 US stock market bulls want to start parading around the field disrespectfully, I’m bringing Darius out to rap some recession research rhymes.
To paraphrase Ice Cube, ‘our art (macro #process) is a reflection of (the data’s) reality.’
Our immediate-term Global Macro Risk Ranges (+ Intermediate-term TREND Research Views in brackets):
UST 10yr Yield 1.96-2.07% (bearish)
SPX 1 (bearish)
NASDAQ 4 (bearish)
Nikkei 16001-17925 (bearish)
DAX 9 (bearish)
VIX 21.51-29.72 (bullish)
USD 98.80-99.98 (bullish)
EUR/USD 1.07-1.10 (bearish)
YEN 116.59-118.99 (bullish)
Oil (WTI) 28.09-32.51 (bearish)
Nat Gas 1.98-2.28 (bearish)
Gold 1075-1119 (neutral)
Copper 1.93-2.04 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer