When Bad Is Bad

“It is far better to be alone than to be in bad company.”

-George Washington


Not everyone thinks about our profession that way. There’s a comfort in consensus. And there’s discomfort in the idea of risking fluffy compensation structures.


When it comes to the now consensus debate about the timing of the next US #Recession, it was far better to have been alone considering this probability 3-6 months ago.


Today, even the Financials Times (FT) is running a headline that says “Yes, the risk of a US Recession is low. But It’s Rising.” And that, as Darius Dale tweeted in response, “is precisely the point – the market prices in rising or falling risks, not absolute probabilities.”


When Bad Is Bad - recession cartoon 02.04.2016

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


Back to the Global Macro Grind


For those of you who are new to our Independent Research #Process, alongside chaos theory, one of the fulcrum points of what we do is called Rate of Change. Math people call it calculus.


Both economic and market history will remind you that it’s not whether things are “good” or “bad” that matters most; it’s whether things are getting better or worse. In other words:


  1. If the growth data is slowing from its cycle peak, the probability of a US Recession is rising
  2. If the growth is slowing at a slower rate from its cycle low, the probability of an economic acceleration rises


No, measuring cycle peaks and lows isn’t easy. It’s a grind. It requires both flexibility and patience. While the consensus that tends to miss the turns wants to price everything that they missed in using “valuation” (i.e. an absolute), it’s better to ignore them.


While many will be navel gazing at today’s US jobs report, that’s not what matters most in handicapping the probability of a US stock market crash (> 20% decline from its cycle peak) – corporate profits and credit spreads do.


In terms of the US profit #Recession, here’s the update now that 308 of 500 S&P Companies have reported:


  1. Total SALES -4.7%, EPS -6.4% (both metrics slowed since I updated you on earnings season earlier in the week)
  2. NEGATIVE y/y EPS SECTORS: Energy, Materials, Industrials, Consumer Staples, Financials, Info. Technology, Utilities
  3. POSITIVE y/y EPS SECTORS: Consumer Discretionary, Healthcare, and Telecom


So if you back out the 3 of 10 S&P Sectors that don’t have profit recessions trending, you have no earnings growth in the SP500 at all. Isn’t it funny how a sentence like that sounds even though it’s precisely how the “Ex-Energy” crowd has been telling stories?


A better question is why an over-owned sector like Healthcare continues to flash bearish divergences (under-performing other sectors) in 2016? That’s a rate of change answer too: earnings are going from great to good.


To summarize how our Research Team speaks internally (i.e. mathematically):


  1. When something goes from great to good, that’s bad
  2. When something goes from good to bad, that’s really bad
  3. When something goes from bad to less bad, that’s good


And, of course, when something goes from good to great – well that’s just great!


Back to what consensus (and the Fed, since Yellen is basically a Labor Economist) will be focused on today, don’t forget the following rate of change realities:


  1. Non-Farm Payrolls (NFP) peaked at +2.34% year-over-year growth in FEB of 2015
  2. The most recent NFP report (December) slowed to +1.88% year-over-year growth
  3. Most employment data is the most lagging of #LateCycle economic data you can measure anyway


In other words, the peak of the US Labor Cycle is already in. The Bond Market gets that. It’s already priced in the #LateCycle slow-down call we made last year via A) long-term yields falling and B) credit spreads widening.


And unless your assumption is that we’re never going to have another recession, you’re just going to be wasting your time arguing with people who missed the most important part of calling for probabilities of a #Recession rising – the top.


When the economic growth data has already gone from great, to good, to bad – markets price bad news as bad, until the worst of the data has been discounted. And since it’s still “good”, US Labor data has a long way to go before bad gets less bad.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.81-1.96%


USD 96.19-98.66
Oil (WTI) 28.73-34.49

Gold 1110-1160


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


When Bad Is Bad - 02.05.16 chart

What Could Be Bullish?

Client Talking Points


What is breaking really bad is the Japanese assumption that they can print to infinity and beyond and get stock market inflation. The Nikkei is down for the 4th straight session, -1.3% overnight, and testing crash mode (again) at -19.3% since July.


308 of 500 S&P Companies have reported and it’s not pretty. On a year-over-year basis, SALES -4.7%, EPS -6.4% and only 3 of 10 SECTORs have year-over-year profit growth. *Reminder: 2 consecutive negative year-over-year profit quarters has always = 20% draw-down in the S&P 500.


The UST 10YR Yield is down at 1.85% getting ahead of the jobs report implies that buy-side expectations are for another rate of change slow-down in NFP. Don’t forget that no matter what the absolutists have to say about this print, NFP growth peaked at 2.34% in FEB of 2015 – add to Long Bond positions on all short-sighted rallies in yields.


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

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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 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.  


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


NEW | Under 60 Seconds: Ralph Lauren's Earnings Report

Watch it:

@KeithMcCullough $RL



It’s not what you look at that matters, it’s what you see.

Henry David Thoreau                                    


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Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

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Hedgeye highlights three key points from Ralph Lauren's (unimpressive) quarter courtesy of our veteran Retail analyst Brain McGough.

Cartoon of the Day: Recession Risk Rising

Cartoon of the Day: Recession Risk Rising - recession cartoon 02.04.2016


While a U.S. #Recession is not a certainty, the daily economic data coming in continues to bolster our Macro team's call.

JT Taylor: The Vulnerables Take Aim At Rubio ... Paul Ryan Channels William Wallace

Takeaway: Paul Ryan channels his inner William Wallace and Republicans take aim at Marco Rubio.

Editor's Note: Below is a brief excerpt from Potomac Research Group Senior Analyst JT Taylor's Morning Bullets sent to institutional clients each morning. 


JT Taylor: The Vulnerables Take Aim At Rubio ...  Paul Ryan Channels William Wallace  - braveheart


House Speaker Paul Ryan reiterated his vision for a 'Confident America' yesterday, exhorting Republicans to "Unite the clans!" a la Braveheart. He aims to channel the spirit of his mentor Jack Kemp and move the party towards a bold, aspirational, and above all positive image for the future of the country. He denounced the anger and disillusionment that has been a campaign staple, and is providing a striking counter-narrative. It's what gave Reagan his mandate, Ryan said, and we think that maybe Rubio has picked up on the message, with his recent shift away from the "doom and gloom."


JT Taylor: The Vulnerables Take Aim At Rubio ...  Paul Ryan Channels William Wallace  - republican take aim


Marco Rubio has lacked boots on the ground, but it's Governors Bush, Kasich, and Christie who are all at risk of being trampled in NH. Combined, the three governors have held more than 460 events in the state, all outstripping Rubio who has only held 76 events. Historically, NH has rewarded candidates who have put in more time on the ground; the governors have opened a new line of attack on Rubio -- that he hasn't made the effort and is trying to parachute in at the last minute.  


New polls out this morning have Rubio surging to second place or a close third behind Cruz. Third place won't be good enough for Rubio -- he has to show continued progress and run the table on the three governors who have all placed big bets here. The nervous party establishment is looking to pick its candidate quickly, and there's lots of chatter about donors and endorsements on hold until after Rubio demonstrates a clear lead.  He's got to win big enough to undercut the rationale behind his rivals' campaigns; and the sooner he can make this a three-way race, the better his chances. 

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