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“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