Sheep Shearing

“You can sheer a sheep a hundred times, but you can only skin it once.”

-Amarillo Slim


Thanks for all the feedback on my poker note yesterday. Evidently our audience likes the gambling metaphors! Thomas Austin Preston Jr., aka Amarillo Slim, was one of the original American poker beauties, winning the World Series of Poker back in 1972.


I was thinking about Slim’s sheep shearing quote within the context of the ideology (or belief-system) of central-market-planners. What happens when you’ve sheered market players to the point where they just don’t trust your tools anymore? #BOJ


If you asked Slim how to deal with disbelief, he’d be solidly in the Bernanke/BOJ camp. If your goal is to keep the game going, you know you can’t just beat everyone out of all their money – you have to find a way to keep the sheep coming back to the tables.


Sheep Shearing - sheep


Back to the Global Macro Grind


So, we’ll do that for the next few days as Sheep Herder In Chief, Janet Yellen, descends from upon high to explain to both the House and Senate committees how she didn’t mean to skin the stock market.


While it will be fascinating to watch Yellen pivot from where she was last time she testified (forecasting economic acceleration, “transitory” #Deflation, and rate hikes), I’d hate to see another Democrat resort to peddling another round of “economic fiction.”


Instead of being data dependent (which has been crystal clear #DataSlowing now since the US economic cycle peaked in Q2 of 2015), what the Federal Reserve really is at this point, as my friend David Einhorn likes to say, is SP500 dependent.


In other words, as long as the US stock market was “up”, the well-compensated-permanently-bullish-political-sheep-herders could tell stories about just about anything. Now, however, this is what Yellen has to explain:


  1. The SP500 is down -9.4% for 2016 YTD and -13.1% since July (cycle peak) 2015
  2. The Russell 2000 continues to crash to new lows, -25.6% since July (cycle peak) 2015
  3. And the Financials (supposed to be rising on “rate hikes”) are the worst sector at -14.4% YTD


That’s right – as one of the biggest risks to cutting into the skin of the market’s psyche (the Fed’s serially bullish forecast) has played out, both rates and the stocks begging for rate hikes (Financials, XLF, -20.2% since July’s peak) have moved into #crash mode.


All the while, the Long Bond (TLT = +9.2% YTD) and its proxies have broken out to the upside (Utilities, XLU, up again yesterday to +7.6% YTD) as US corporate profit growth has gone negative for the 2nd consecutive quarter (always predicts a stock market crash).


So what is Janet going to tell the sheep?


  1. That #Deflation is still “transitory”?
  2. That her growth forecasts were dead wrong, or about to be right?
  3. That growth is still fine but she needs to panic and do Operation Twist?


That last rumor (Operation Twist) brought all the degenerate gamblers right back to the table yesterday.


As the SP500 was breaking to its lows of the day, my “600 rate cuts globally is going to create demand” friends started circulating notes on another Fed bailout of their failed economic forecasts.


To be clear, I have no doubt that many who are getting smoked will eventually give up more of their free-market liberty for a little month-end markup compensation security. But if #history serves as a guide, no central-market-plan can arrest economic gravity.


That’s why, no matter what Janet says to the herd, the Top 3 things that matter to me right now are:


  1. The Economic Cycle
  2. The Profit Cycle
  3. The Credit Cycle


On the economic cycle, our US GDP forecast (predictive tracking algo that has nailed GDP for 5 quarters, in a row) is at 0.2% GDP growth for Q1 (the Atlanta Fed is still 10x higher than that and our friends are still at “it feels like 3% GDP”).


On the profit cycle, 335 companies in the SP500 have reported Q4 numbers and the summary slow-down looks like this:


  1. SP500 Total Revenue growth down -4.4% year-over-year
  2. SP500 Total EPS growth down -6.4% year-over-year
  3. Only 3 of 10 S&P Sectors have POSITIVE year-over-year growth


If you “ex-out” those 3 sectors, you have no sector profit growth at all. But ex’ing things out is for excuse makers. We’re more interested in being alpha generators. Looking back, you can only skin a cycle’s peak once. So don’t be that sheep.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.71-1.89%



VIX 22.57-28.01
USD 95.23-97.86
Oil (WTI) 27.63-31.48


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Sheep Shearing - 02.10.16 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