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McCullough: My Thoughts On Today's Fed Statement

Editor's Note: This is abridged commentary from Hedgeye CEO Keith McCullough following today's Fed statement.


McCullough: My Thoughts On Today's Fed Statement - z rubble


The decaying foundation of the already shaky Old Wall edifice took another major hit today. Make no mistake, it is crumbling fast ... brick by brick. The reality is that very few market pundits (or TV channels for that matter) prepared you for where you are today.


That’s a statement of fact. 


My message? Stick with the 2.0 sources. Stick with the risk managers that warned you and helped you protect your hard earned capital. After all, if you've completely missed the mark on the last 7 months of this move, why would anyone trust you'll get the next 7 days?


Now... where do we come in?


Here's what I said in real-time just after the FOMC statement.


...Here's what happened.


McCullough: My Thoughts On Today's Fed Statement - s p


So, what exactly happened today? For starters, this FOMC statement was nowhere near as "dovish" as people we speak to were thinking it might be. In other words, our unelected central planners at the Fed didn't remove their "transitory" view of #Deflation (despite it being pervasive). This keeps the US Dollar strong and deflation intact.


The Fed is in a box. So, keep doing what we have had you doing. That means buy US Dollars, buy the Long Bond (TLT), and sell stocks.


Here's what we said following the last Fed decision:

  1. USD would rise
  2. 10yr Yield would fall
  3. Stocks would fall

As the tape showed today, there is very low probability that any of those 3 Big Macro Trends above changed at all today.


This has been one of the worst January's ever for US stocks and it will likely end that way. By our calculus, "ever" remains a very long time. And while it may seem like a joke, Old Wall is begging for easing now. 


I don't know how much longer The People will stand for Old Wall and its Media lying to them... but wow. Old Wall Consensus on the US economy is a certified train wreck. The truth is not that hard to see at this point, unless you’re compensated to be willfully blind to it.


Rest assured of one thing: we will never bow down to the conflict of interest of Old Wall or its media.




This Old Wall is coming down.



Cartoon of the Day: Tyrannosaurus Wrecked

Cartoon of the Day: Tyrannosaurus Wrecked - fossil fuel cartoon 01.27.2016


It's the fracking economy, stupid!

McCullough: Feckless Fed Can't Stop 20% Correction

Takeaway: Central planners can't arrest economic gravity.

IT'S FED DAY ... joy.

McCullough: Feckless Fed Can't Stop 20% Correction - Yellen Yoda cartoon 12.01.2015 

In this no punches pulled excerpt from The Macro Show today, Hedgeye CEO Keith McCullough explains why regardless of what the Fed says today, he still thinks we're headed for a 20% or more correction in the S&P 500.


"No matter what the Fed gives you today, they're not going to give you economic growth. They might get oil prices to $33. I'll give them a hero cookie for that.


But the bigger question here is what happens when investors realize that central planners cannot arrest economic gravity? The answer: People start to sell because profits are slowing. That's the most obvious call. 


Whether you look at Boeing or Apple this morning, profits continue to slow. And if profits continue to slow -- we laid this out in our Macro themes deck -- for two consecutive quarters, the S&P 500 is most likely to be around 1700. That's a 20% correction from the highs. That's the call that I'm staying with.



McCullough: Feckless Fed Can't Stop 20% Correction - EL profits


So I don't really care what the Fed says. It's not going to change the economic trajectory. It's not going to change the economic data. The U.S. economy is still going to be what it is and that's slowing.


I don't think the Fed is going to be as dovish as people are hoping. As we have continued to remind clients for a long time, you can hope all you want, but hope is not a risk management process."

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INSTANT INSIGHT | Europe, China & #GrowthSlowing

Takeaway: The latest data out of Europe and China confirms our 18-month old #GrowthSlowing theme.

INSTANT INSIGHT | Europe, China & #GrowthSlowing - growth cartoon 10.08.2014

Got global growth slowing?  


Our Macro team analyzed the latest batch of global #GrowthSlowing data in a note sent to subscribers this morning.


Here is the key takeaway on Europe:


"... Today, the German economic ministry cut Germany’s 2016 growth forecast to 1.7% from 1.8% previously forecast. It also cut the 2016 export growth outlook to 3.2% vs prior 4.2% and lowered its outlook for import growth to 4.8% vs 5.3%. #EuropeSlowing."


INSTANT INSIGHT | Europe, China & #GrowthSlowing - Growthslowing europe us 10.22.14


... Then there's China:


"... Chinese industrial profits declined -4.9% Y/Y in December which is a sharp deceleration from -1.4% Y/Y in December. Whispers of fresh stimulus might be the only fading hope to delaying the flush of global overcapacity hanging on the “Chinese Demand” story."   


INSTANT INSIGHT | Europe, China & #GrowthSlowing - china year of the snal


Global #GrowthSlowing has been our Macro call for 18 months now. The latest batch of data confirms our thesis. We're sticking with it.


CHART OF THE DAY: Why Jobless Claims Imply Just Six More Months Of Economic Expansion


CHART OF THE DAY: Why Jobless Claims Imply Just Six More Months Of Economic Expansion - 01.27.16 EL Chart


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


"... That said, one of the most focused on lagging indicators -- employment -- still appears strong. But as the Chart of the Day highlights, employment is very long in the tooth. Not only have jobless claims bottomed (meaning employment is worsening on the margin) the current length of time at/below the critical threshold of 300K jobless claims would imply only six more months of economic expansion."

The Antarctic

“Better a live donkey than a dead lion.”

-Sir Ernest Shackleton


Over the years, I’ve read a number of books about the life of Sir Ernest Shackleton. The most recent, “Shackleton’s Way,”is a “study of the leadership lessons of the great Antarctic explorer.” 


There are many key lessons to learn from Shackleton. In particular, his ability to manage a small group of disparate characters in the most challenging of environments. From my perch, the most significant lesson is how Shackleton “always put the well-being of his crew first”. In terms of morale and minimizing turnover, this is a lesson leaders across the spectrums of business, sports, politics, and the military can take to heart.


Put another way: generals should eat last.


Inasmuch as the book tends to idolize Shackleton, he ultimately died heavily in debt and on the short end of many failed business ventures. His true Antarctic ultimately wasn’t the one he conquered, but, rather, the one back in England that ultimately conquered him.


These days, no doubt, the stock market seems like the Antarctic to many of us – depressing, dark, and endless. Year-to-date, the SP500 is down -6.8%. If we annualize that return to the end of the year, the SP500 will be close to zero. Lucky for us, that’s not going to happen. 


There will be an end to The Antarctic that is the U.S. and global equity markets this year. Ultimately, equities won’t bottom on some arbitrary call on valuation in which the denominator of the multiple is likely wrong, but as they usually do when a recession has hit and the economic news is as dark as an Antarctic winter night.  


On that front, clearly some economic news is getting increasingly bleak. As we highlighted in our Q1 Themes presentation a few weeks back, a whole slew of economic data including manufacturing, PMIs, exports, capital investment, durable goods, and corporate profits are showing are showing y-o-y declines. 


That said, one of the most focused on lagging indicators -- employment -- still appears strong. But as the Chart of the Day highlights, employment is very long in the tooth. Not only have jobless claims bottomed (meaning employment is worsening on the margin) the current length of time at/below the critical threshold of 300K jobless claims would imply only six more months of economic expansion.


So... has the stock market bottomed yet? Probably not. But it certainly will in time, as it always does. But be forewarned, it took Sir Ernest Shackleton three attempts before he was able to cross the Antarctic.


The Antarctic  - bear cartoon 01.26.2016


Back to the Global Macro Grind


In what has become the new standard for "good" stock market news, China closed well off its lows. At one point during the trading day, the Shanghai Composite was, well, getting Shanghai-ed down almost 4%. Finishing down only 50 basis points on the day and avoiding the another two day -10% loss? Well, it's a victory, of sorts.


This “victory” was catalyzed by rumors of an increased crackdown on short sellers. As conjecture goes, the PBOC is giving guidance to some offshore banks in Hong Kong to suspend offshore Yuan lending. In addition, the PBOC supposedly asked both the banks and various companies to collect information about short sellers in the offshore Yuan market.


If this all sounds familiar, it should. In the 2008-2009 time frame, the crackdown on dastardly short sellers was rampant globally. When all else fails, blame the shorts! That all works fine in some central planning "La-La Land" of economics, but back in the real world blaming short selling doesn’t suspend economic gravity. In fact, if anything, it makes markets less efficient. (Note to Chineses policy makers: the $1 trillion in capital that exited your economy last year wasn’t due to short sellers!)


Back in the U.S., the central planners aren’t yet intervening, but the news over the last 24 hours certainly isn’t all that encouraging. In fact, the all-knowing indicator of U.S. economic health, iPhone sales, grew at its slowest pace since 2007. 


We will be receiving more information from the Fed today, but since they just raised rates, it is unlikely they will be getting dovish anytime soon.  In the world of globally connected markets, this means the U.S. dollar is likely to strengthen even more from here.


A strong dollar is fine, to a point. But it's also detrimental when it's crushing the U.S. energy, industrial and export sectors. It is great that gasoline is cheaper in Houston than Saudi Arabia, but the derivative impact on the high levered energy industry and debt markets is not going to be pretty. In the short run, it looks like the Fed is tightening into deflationary headwinds and a potential recession. No doubt we know how that ends.


In lighter news, I wanted to highlight this interesting excerpt from my colleague JT Taylor’s "Morning Bullets" at Potomac Research Group relating to Donald Trump:


What Does The Fox Say? – In a campaign that’s been defined by redefining conventional wisdom, this new twist takes the cake. Donald Trump announced last night that he will not participate in Thursday’s debate. As part of the ongoing, sophomoric feud between the front runner and Fox, the network put out a press release essentially taunting Trump (itself unprecedented), who then called Roger Ailes' bluff . . . we can be almost certain that Trump will dominate the news cycle from now until the caucus in Iowa on Monday.


Meanwhile, according to the most recent Washington Post poll, Trump’s lead is as strong as ever. 60% of Republicans see him as the eventual nominee. The Antarctica of politics? It is just beginning.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.96-2.09%


Nikkei 159

DAX 9 (bearish)

VIX 19.94-28.90
USD 98.64-99.73


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Antarctic  - 01.27.16 EL Chart

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