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They Cannot Pretend

“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,

KM

 

Keith R. McCullough
Chief Executive Officer

 

They Cannot Pretend - 02.02.16 chart


The Macro Show Replay | February 2, 2016

 


WisdomTree (WETF) | The Kuroda Kicker?

Takeaway: While the BoJ cut overnight lending rates into negative territory last week, DXJ assets improved only marginally.

No investable turn yet

While a single day doesn't make a trend, the Bank of Japan's move to negative overnight lending rates last week was hardly a stop gap in the ongoing slippery slope in fund flows at WisdomTree's Japan Hedged equity fund (DXJ). The +$19 million inflow last Friday into the DXJ following that BoJ announcement failed to markedly improve trends and the WisdomTree product still put in the worst month in its history losing -$967 million in the first month of '16 following the -$887 million outflow in December. Zooming out, these redemptions have resulted in DXJ's AUM falling from a high of $18.7 billion on June 8th, 2015 to $12.7 billion as of last week with competing hedged products continuing to pick up share. The DXJ lost another 2 points of market share through the end of the first month of 2016 with the 87% share from the beginning of December 2015 receding to 85% at the end of January 2016 (with iShares continuing to pick up incremental AUM).

 

WisdomTree (WETF) | The Kuroda Kicker? - Recolored 1

 

WisdomTree (WETF) | The Kuroda Kicker? - 2 DXJ AUM 2

 

WisdomTree (WETF) | The Kuroda Kicker? - 4 JPY AUM Share

 

MEANWHILE IN EUROPE...SLIGHTLY BETTER SLEDDING

Meanwhile the rate of change in fund flows at WisdomTree's hedged Euro product, the HEDJ, bounced off of December lows. While January still resulted in redemptions of -$814 million following December's 2015 loss of -$1.9 billion, total AUM is still headed in the wrong direction. The past several months have brought HEDJ’s AUM down to $15.3 billion from its August 5, 2015 high of $22.3 billion. Similar to its Japanese counterpart, HEDJ is losing share on the margin to competitors, with iShares and Deutsche Bank now totaling 14% of the market at the end of January 2016.

 

WisdomTree (WETF) | The Kuroda Kicker? - Recolored 5

 

WisdomTree (WETF) | The Kuroda Kicker? - 6 HEDJ AUM 2

 

WisdomTree (WETF) | The Kuroda Kicker? - 7 EUR AUM Share

 

Less bad for now but we need more evidence

Bigger picture, our research shows that industry hedged equity products are dependent on substantial dollar strength to provide value, and with only a marginal rise year-to-date, the U.S. dollar's ascent is stalling from several perspectives (namely a 3 sigma move on a 10 year timeframe and also at its historical +20% year-over-year real rate of change). In addition, the U.S. dollar in all but one instance has historically declined after initial Fed Fund rate increases (with the sole exception being the move in 1988).

 

 

 

WisdomTree (WETF) | The Kuroda Kicker? - 3 DXY 2

 

WisdomTree (WETF) | The Kuroda Kicker? - 10 2

 

WisdomTree (WETF) | The Kuroda Kicker? - JC roc us dollar 

 

 

The DXJ and HEDJ outflows contributed to overall firm redemptions of -$1.7 billion in January 2016, off of December lows but a far cry from +$4.0 billion in January last year. While the stock has discounted these current trends having dropped substantially from year-end, shares are far from any relative value yet. WETF still sports a 22.4x forward 12-month multiple on Street estimates of $0.54 per share. The asset management group trades currently at 14.1x '16 numbers which means that either WETF trends have to substantially improve or the stock still has meaningful downside. The stock remains on our Best Ideas list as a Short.

 

WisdomTree (WETF) | The Kuroda Kicker? - Recolored 8

 

WisdomTree (WETF) | The Kuroda Kicker? - 9 PE

 

 

WisdomTree (WETF) - More Questions Than Answers - We Remain Short 

WisdomTree (WETF) Black Book Presentation - Not So Smart Beta 

 

 

 

Please let us know of questions,

Jonathan Casteleyn, CFA, CMT 

 



Joshua Steiner, CFA

 

 

 


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#Crash Mode

Client Talking Points

RUSSELL 2000

One of the signals that remained in #crash mode yesterday (> 20% decline from bubble peak) was the Russell. It has no immediate-term support to the low-end of the 981-1,032 risk range (sell high end of range, cover low) – both the ISM of 48.2 (4th straight month of contraction) and Fed Loan Officer Survey’s keep #Recession probability rising.

EUROPE

Too bad both the Draghi devaluation move (and the Japanese negative rates one) only gave those stock markets 2-day rallies. Straight down again for the DAX, IBEX, and MIB Index (all are in #crash mode with Spain leading the draw-down at -27.4% from its 2015 bubble peak) #EuropeSlowing.

OIL

Wow is chasing charts getting painful to watch – straight back down this week for WTI (down -6.6% yesterday and down another -2.3% this morning with no support to the low-end of the risk range at $27.62). Draghi and Kuroda Devaluation moves are Dollar #Deflation ones; UST Yield Spread (10s/2s) 113 basis points is flattest curve of the cycle.

 

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

Asset Allocation

CASH 59% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 2%
FIXED INCOME 25% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
XLU

After a busy week of domestic data, you probably don’t need us to tell you that growth continues to slow. Despite the short-covering squeeze in energy stocks, Utilities (XLU) closed out January as the only sector in positive territory (+5%), other than Consumer Staples which eeked out a +0.5% gain. It was an awful start to the year for the S&P 500 (-5%). Don’t expect +10% of relative outperformance every month, but if you stuck with us on this trade, you’re in much better shape than most.

GIS

GIS remains one of our top Long ideas in the consumer staples space. As we have continued to say it boasts style factors that are ideal in turbulent times; high market cap, low beta and liquidity.

 

Recently, General Mills has been attacked by Chobani commercials, claiming that Yoplait yogurt contains the same ingredients used in pesticide. GIS filed a false advertising lawsuit against Chobani demanding that they stop showing that commercial because it could be detrimental to sales. GIS just got word that a federal judge has barred Chobani from continuing the ad campaign. This is a win for GIS, but it is unclear right now if there was any damage done to the brand. At this time we do not believe it had any serious impact on the company. We will keep you informed of any material information regarding this lawsuit as it moves forward.  

TLT

Long-Term Treasuries (TLT) continues to preserve capital against the slow-moving trainwreck in Junk Bonds (JNK). Week-over-week, 10-year bond yields crashed 13 basis points to 1.92%. That helped lift the best play on U.S. growth slowing (TLT) by 0.85% on the week as credit spreads continued to widen (JNK gained +0.76% on the week, underperforming TLT marginally on a relative basis).

Three for the Road

TWEET OF THE DAY

$HAIN core US business is in a free fall...

@HedgeyeHWP

QUOTE OF THE DAY

You will either step forward into growth, or back into safety.

Abraham Maslow                                      

STAT OF THE DAY

70% of fatal avalanches take place within four days of another avalanche.


INSTANT INSIGHT | Taylor: 'The Iowa Vote Is A Referendum On Donald Trump's Candidacy'

Ahead of tonight's Iowa caucuses, we thought we'd bring you a few key insights from Potomac Research Group Senior Analyst JT Taylor. Below is a brief excerpt from Taylor's "Morning Bullets" sent to PRG institutional clients each morning. 

 

Enjoy!

 

INSTANT INSIGHT | Taylor: 'The Iowa Vote Is A Referendum On Donald Trump's Candidacy' - trump

 

"TRUMPING THE COMPETITION?: The Iowa vote will be a referendum on Donald Trump's candidacy; if Trump can convert his massive crowds into turnout at the caucus tonight, then he should notch his first victory. Those hoping for a lot of Trump no-shows will probably be disappointed. He's been at the top of the polls for six (!) full months now, and one shouldn't doubt the enthusiasm. The last Des Moines Register poll released over the weekend showed Trump leading Ted Cruz by five percent, and higher turnout will be to his benefit, not Cruz's. 

 

A win in Iowa would turn the Trump phenomenon into cold reality. In the event he wins Iowa, establishment-wing Republicans worry he'll have enough momentum to roll on through NH and then the Super Tuesday primaries with almost triple the number of delegates than anyone else. Cruz would be the most immediately hurt -- but what could he or the other candidates do to dent Trump in return? Cruz, meanwhile, has made a late shift towards attacking Marco Rubio in ads, rather than the frontrunner." 

 

For more insights from Taylor watch the video below:


Cartoon of the Day: Headstand

Cartoon of the Day: Headstand - Fed cartoon 02.01.2016

 

"At this point, it is difficult to judge the likely implications of this volatility," said Fed Vice Chairman Stanley Fischer today. No it's not. Our Macro team has been calling U.S. #GrowthSlowing for a year and a half now.


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