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“The Americans cannot protect themselves as they cannot pretend to have a Navy.”

-Lord Sheffield

That’s a truthful British quote from 1783 in Observations of the Commerce of the American States (when the USA didn’t have a real Navy). It’s also the opening volley in a book I started reading this past weekend called Thomas Jefferson and The Tripoli Pirates.

I kind of feel like a pirate these days. ‘Argh! Here I am, permee-bulls – I’m here to take your booty!’ And the reason why I’m not fazed by any of these bear market bounces is twofold: neither the corporate profit (slowing) nor credit signals (widening) have changed.

The levered long beta bulls can crowd all their holdings into two stocks (Google and Facebook), but they cannot pretend to have either accelerating GDP or earnings growth in the 1st half of 2016. Ex-ing everything out won’t change that. Protect yourself.

They Cannot Pretend - FANG cartoon 01.15.2016

Click here to join Hedgeye CEO Keith McCullough live on The Macro Show at 9am. 

Back to the Global Macro Grind

If you have friends who want to ex-out the American Socialist vote in Iowa last night, they can do that too. People are partisan – the economic data isn’t. Yesterday’s ISM report of 48.2 for JAN signaled:

  1. The 4th straight “contraction” (survey reading below 50)
  2. A year-over-year decline of -6% (last JAN the ISM was at 53.9)
  3. A sharp slow-down in the Employment component at 45.9 (vs. 48.0 DEC and 54.1 in JAN of last yr)

But no worries, if you ex-that-out, and just call it “transitory” (like the 1H 2015 US Employment and Consumption growth cycle highs were), you might end up summarizing the current macro market risks as follows:

“At this point, it is difficult to judge the likely implications of this volatility.”

-Federal Reserve Vice Chair Stanley Fischer


“It will take some time here to understand what is going on.”

-Dallas Fed Head, Robert Kaplan


“It appears we have slower growth… and may need a longer period of accommodation.”

-San Francisco Fed Head, John Williams

That last quote cracks me up the most as there was no more cocksure Federal Reserve pro-cyclical (bullish on late cycle indicators post the peak) economist than our friend from Berkeley, John Williams. Only 5 weeks ago, the guy wanted 5 “rate hikes” in 2016. #lol

And I get it. For a day, the “market liked an easier Fed.” Or at least the US stock market liked not going straight down (it still closed down on the day mind you) as the US Dollar finally dropped -0.6% on that.

But most of the playbook “Dollar Down” ideas (like Oil for example) didn’t cooperate at all with the “Fed is easy, buy everything” narrative. It reversed last week’s bear market bounce, dropping -6.6% on the day (WTI is down another -2.3% this a.m. to $30.88).

The Fed can get less-hawkish, but they cannot pretend to have US profit growth.

We’re almost half way through earnings season (215 of 500 companies in the SP500 have reported) and here’s the score:

  1. Total SP500 SALES -2.4% y/y and EPS -3.7% y/y
  2. Energy (13 of 40 reported) SALES -34.8%, EPS -70.6%
  3. Materials (13 of 27 reported) SALES -14.2%, EPS -32.7%
  4. Industrials (36 of 65 reported) SALES -7.7%, EPS -4.8%
  5. Financials (45 of 90 reported) SALES +1.2%, EPS -3.4%
  6. Information Technology (36 of 65 reported) SALES -1.2%, EPS -2.5%

But if you ex-out all of that negative year-over-year earnings growth (i.e. 287 companies in the aforementioned sectors or 57% of the SP500), you can pretend that there’s nothing to worry about.

Reality is that there’s only one firm that mapped and measured the probability of this happening (from the July cycle peak) 7 months ago. And that same firm is reminding you that this US equity market (and long-term Bond Yield) selloff isn’t over.

One of the most important relationships there is in macro is between PROFITS and STOCKS. And, unless it’s different this time, US stocks have always crashed (greater than 20% draw-down from prior peak) when US corporate profits go negative for 2 consecutive quarters.

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):

UST 10yr Yield 1.91-2.06% (bearish)

SPX 1 (bearish)
RUT (bearish)

NASDAQ 4 (bearish)

Nikkei 159 (bearish)

DAX 9 (bearish)

VIX 19.22-28.11 (bullish)
USD 98.48-100.01 (bullish)
EUR/USD 1.07-1.09 (bearish)
YEN 119.15-121.41 (bearish)
Oil (WTI) 27.62-33.21 (bearish)

Nat Gas 2.01-2.29 (bearish)

Gold 1098-1135 (bullish)
Copper 1.95-2.09 (bearish)

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

They Cannot Pretend - 02.02.16 chart