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

Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more