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“Something is going to have to change.”

-Cam Newton

That’s what the young leader of the Carolina Panthers had to say after last night’s Super Bowl loss to the Denver Broncos. I thought Newton was both truthful and accountable. When things don’t go your way, change is the only path forward.

Fortunately, we don’t have to apologize this morning. We were on the right side of the #LateCycle US Employment report going into the weekend. And we’re on the strong side of a worldwide selloff in both stocks and long-term bond yields this morning.

As Cam said in the post-game press conference: “That’s it man – I sound like a broken record, but it’s the same old thing.” Global #Deflation of asset prices combined with US #GrowthSlowing into recessionary expectations needs to be risk managed.

Same Old Thing - Deflation cartoon 12.29.2014

Back to the Global Macro Grind

There comes a point in an economic cycle when the latest cycle factors (employment and consumption) start to slow. That’s when bad becomes bad. And there’s no amount of “Fed Easing” that can arrest that economic gravity. Newsflash: Fed is still tightening.

Friday’s Non-Farm Payroll (NFP) print of 151,000 may have been “decent” on the surface, but words like “good” and “decent” don’t register in our #process as relevant. Did the number get better or worse? That’s the only question that matters.

After peaking at +2.34% year-over-year growth in FEB of 2015, US NFP slowed (in rate of change terms) to 1.9% year-over-year in JAN 2016 and is primed to slow to its slowest rate of the cycle when it bumps up against that peak-cycle FEB comp next month.

*“Comp” = comparative period (vs. last year or whatever time-series you choose to analyze)

Since both the US Profit Cycle and GDP comps peaked in Q2 of 2015, you should get used to me writing about the same old thing for the next 5-6 months. That’s why we’re staying with the best big-liquid-long for that prevailing macro environment – The Long Bond.

Here’s how that boring old Long Bond (TLT) did in the face of a lot of other things not working last week:

  1. US 10yr Treasury Yield down another 8 basis points on the week (down 43 basis points YTD) to 1.84%
  2. US Dollar -2.7% on the week (one of its worst weeks in a year) to $96.95 on the US Dollar Index
  3. EUR/USD +3.1% week-over-week to +2.8% YTD
  4. Yen (vs. USD) +3.6% week-over-week to +2.9% YTD
  5. Commodities (CRB) Index down another -2.9% on the week to -8.1% YTD
  6. Oil (WTI) continued to crash, down another -7.8% on the week to -18.8% YTD
  7. Gold continued to rally +5.1% week-over-week to a league leading +10.6% YTD
  8. SP500 dropped another -3.1% week-over-week to a dismal -8.0% YTD
  9. Russell 2000 continued to crash, down another -4.8% on the week to -13.2% YTD
  10. Nasdaq underperformed both the SP500 and Russell, -5.4% on the week to -12.9% YTD

That last bit (Nasdaq) got de-fanged on Friday. When I said there will come a time in the US stock market when bad is bad, that was pretty much what I meant by that. Every “General” of the #LateCycle bull market gets shot.

Looking at that Breaking Bad reality from a US Equity Style Factor perspective:

  1. Top 25% Sales Growers led losers last week, closing down -4.8% to -12.1% YTD
  2. Top 25% EPS Growers dropped -4.0% week-over-week to -11.0% YTD
  3. High Beta Stocks lost another -3.7% last week, crashing to -14.7% YTD

*Mean Performance of Top Quintile vs. Bottom Quintile of SP500 Companies

In other words, if your competition was levered long High Beta and Growth (and averaging down throughout January, getting longer) last week, you made them look like the Denver Defense did to Carolina last night.

I realize that playing defense isn’t going to make you a “billionaire”, but it can win you a Championship. For those of us who believe that the name on the front of our jersey matters more than the one on the back, we’re cool with that.

You don’t just have to be in Cash and Long-term Treasuries to win the 2016 Alpha Bowl. You could have easily ran a net neutral exposure long/short US equity hedge fund and set yourself up with the following portfolio:

  1. Put a billion into Long Utilities (XLU) which were up another +2.5% last week to +7.6% YTD
  2. Put a billion on the short side of the Financials (XLF) which got sacked for another -3.5% loss last week (-12.1% YTD)

Why don’t any of these big time players in the league have this position on? Is it too boring? Or is consensus simply whining that “consensus is bearish” while they’re still positioned way too bullish?

The other consensus out there is classic #LateCycle and that’s that US consumption is still “good.” True. But the rate of change process point being missed here is that that factor has gone from great to good. And that’s bad.

Consumer Discretionary (XLY) stocks led US Equity Sector Style losers last week, closing down -5.3% on the week to -10.2% YTD. Yep. Same old thing as the consumer peaking and rolling over at the end of 2007, but with more leverage on the market side of that trade.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.80-1.94%



VIX 20.31-27.98
USD 96.07-98.26
EUR/USD 1.07-1.12
Oil (WTI) 28.83-34.36

Best of luck out there this week,


Keith R. McCullough
Chief Executive Officer

Same Old Thing - 02.08.16 Chart