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“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