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U.S. Stocks Make Lower Closing Low

Client Talking Points

YEN

What happens when they move to infinity-bailout (BOJ) and the market no longer trusts them? Abe was forced to say “I trust Governor Kuroda” overnight as neither the FX nor Nikkei does (the Yen hit new year-to-date high = Nikkei down another -2.3%).

SECTORS

If you get the macro call on growth right, you will get rates and sector styles right. Financials (XLF) are down -14.4% year-to-date vs. Utes (XLU) up (again) on the day yesterday +7.6% year-to-date. Overbought? Yes – but we’re staying with this TREND long/short call.

EPS

If you get corporate profits (slowing to negative year-over-year) and credit spreads right, you’ve gotten a lot of other things right. With 335/500 companies reporting S&P 500 Revenues are down -4.4% year-over-year and EPS is down -6.2% year-over-year (only 3 of 10 sectors have positive EPS growth year-over-year).

 

*Tune into The Macro Show with Hedgeye Financials analyst Jonathan Casteleyn and Macro analyst Ben Ryan live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 13%

Top Long Ideas

Company Ticker Sector Duration
XLU

The bond market understands #GrowthSlowing. So do Utilities (XLU), which is why XLU is leading S&P sub-sector performance in 2016. XLU is up +7.6% versus down -8.0% for the S&P 500. Stick with it on the long side.  

GIS

GIS remains one of analyst Howard Penney's top Long ideas in the Consumer Staples space. As we have continued to say, it boasts style factors ideal in turbulent times; high market cap, low beta and liquidity. While GIS is down year-to-date, it's held up very well against the broader stock market. GIS is down -4% versus down -8% for the S&P 500 in 2016.

 

GIS has been picking up steam, as the company is working to improve merchandising and advertising on core business. One of the initiatives is making a distinct effort to delve deeper into the natural and organic category. That will certainly help them a lot in the long run. More to come.

TLT

Down go growth expectations and down goes the yield curve. That's the latest from Macro markets last week and it plays right into our long Long-Term Treasuries (TLT) and short Junk Bonds (JNK) Investing Ideas.

 

The UST 10YR Yield declined another -9 basis points last week which helped boost TLT +1.1% on the week. In a healthy environment, bonds as an asset class go up in tandem, but JNK lost -0.9% on the week despite a falling yield curve. That’s because we’re NOT in an “all is good” environment. Credit spreads widen in turbulent times. This widening is the alpha-generating opportunity in long TLT, short JNK.

Three for the Road

TWEET OF THE DAY

Need insight on #NewHampshirePrimary?

Another Test For #DonaldTrump.. Don't Rule Out #Rubio https://app.hedgeye.com/insights/49049-jt-taylor-another-test-for-donald-trump-don-t-rule-out-rubio

@Hedgeye

QUOTE OF THE DAY

You shall know the truth and the truth shall make you mad.

Aldous Huxley

STAT OF THE DAY

Hourly rates at large corporate law firms have increased 3-4% per year since the recession.


CHART OF THE DAY: Dear Janet, Is Deflation Still Transitory?

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more. 

 

"... 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.”

 

CHART OF THE DAY: Dear Janet, Is Deflation Still Transitory? - 02.10.16 chart


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%

SPX 1
RUT

NASDAQ 4

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

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Sheep Shearing - 02.10.16 chart


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Looking for Investment Ideas Across Asia, LatAm or EEMEA?

***Below are our latest thoughts on the key economies throughout Asia, Latin America and EEMEA. Please feel free to email us if you'd like to dig into a specific economy further or if you'd like to request analysis on a country not mentioned below.***

 

 

In China, officials continue to push back on a material devaluation of the CNY while concomitantly defending the currency with near-peak FX reserve deployment and incremental capital controls. While we remain explicitly bearish on China’s intermediate-to-long-term growth outlook, as well as the nation’s capital and currency markets, we continue to believe the path lower will remain piecemeal in nature, rather than sharp and/or sudden. To the extent that expectation is proven correct, we think the best way to profit from our view will be through shorting Chinese stocks and regional peer currencies – rather than the yuan itself – because the bearish overhang of CNY devaluation risk is set to persist indefinitely. Contrary to growing consensus among investors, we still believe the Chinese yuan is unlikely to go the way of the Thai baht, Philippine peso, Malaysian ringgit, Indonesian rupiah or South Korean won circa 1997-98. It’s decline will more than likely resemble that of an advanced economy’s currency – which means credit expansion and broader economic growth will continue to meaningfully decelerate amid tighter-than-necessary financial conditions on the mainland. That outcome will surely put Chinese corporate balance sheets and Beijing’s desire for incremental bail-outs to the test. All told, slower-for-longer in China = structurally-depressed-for-longer with respect to commodity prices, as well as the respective outlooks for global growth and inflation.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - China


In Japan, the introduction of NIRP has backfired aggressively with the Nikkei 225 down -9.4% WoW and the JPY up +4.2% WoW vs. the USD amid growing concerns about the efficacy of Abenomics. Complicating matters is the stagflationary #Quad3 setup implied by the preponderance of key high-frequency economic data, which is squeezing Japanese consumers at the margins. The BoJ will likely look to do more, but with JGBs yielding negatively across the curve through the 10Y maturity and select corporate bond issues following suit, you have to wonder about the efficacy and impact of further easing on risk assets in Japan. With their reputations and credibility at stake, look for Kuroda and Abe to materially ratchet up the scope of monetary easing in Japan over the next few months. But with the growing risk of a complete and recognized failure of Japanese monetary policy, we remain comfortably on the sidelines for now, having tactically (and appropriately) avoided much of the Abenomics unwind trade seen in recent weeks.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Japan


In India, liquidity continues to dry up amid RBI support of the INR. This tightening of domestic financial conditions has not been well-received by the nation’s capital and currency markets – which themselves continue to price in the stagflationary #Quad3 setup implied by the preponderance of key high-frequency economic data. All told, we reiterate our bearish bias on India’s capital and currency markets.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - India


In South Korea, the preponderance of key high-frequency economic data implies a deflationary #Quad4 setup. That, in conjunction with the advent of NIRP weighing on sovereign yields across Europe and Japan appears to be underpinning dovish expectations for the BoK, which, in turn, appear to be driving foreign portfolio flows into South Korea’s bond market. That said, however, we are comfortable fading the recent positive deltas seen in Korean stocks and the KRW, as the fundamentals (i.e. #Quad4), nor sentiment (i.e. bearish CNY overhang) appear set to materially inflect anytime soon.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - South Korea


In Australia, the preponderance of key high-frequency economic data implies a hawkish #Quad2 setup. With the RBA effectively guiding to a #Quad3 outcome per its recent Q4 Monetary Policy Statement, we think this divergence is potentially being priced into the AUD. Like South Korea, the Aussie rates curve may be benefitting from foreign portfolio flows emanating from NIRP and NYSD (i.e. “Negative-Yielding Sovereign Debt”) in Europe and Japan. The All-Ordinaries Index looks most mispriced relative to the country’s depleted structural growth outlook, pervasive commodity price deflation and an overreliance on wholesale funding across the Aussie banking industry. As such, we anticipate more downside.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Australia


In Taiwan, the preponderance of key high-frequency economic data implies a hawkish #Quad2 setup, which is positively impacting the TWD. We expect this relative currency stability to continue and for it to positively impact Taiwanese stocks – at least on a relative basis vs. peer economies. That said, however, the bearish CNY overhang is a key risk for Taiwan’s capital and currency markets given the strength of the TWD on a nominal effective exchange rate (i.e. NEER) basis and the structural weakness in Taiwanese industrial production and export growth. As such, we think it’s best to adopt a neutral approach here.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Taiwan


In Indonesia, the preponderance of key high-frequency economic data implies a bullish #Quad1 setup, which itself is being priced into Indonesian financial markets with both the IDR and JCI up on a 1-3 month basis. Indonesia is a current account deficit economy, so its sovereign debt market is also reacting accordingly to the aforementioned positive economic news, as well as BI’s recent -25bps cut to the policy rate. With the DXY still bullish from an intermediate-term TREND perspective, we don’t think it pays to be naked long of any emerging market asset. That said, however, we want to be positively exposed to Indonesia’s capital and currency markets on a relative basis within EM. A breakdown in the USD would make us explicitly bullish from an absolute return perspective as well.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Indonesia


In Thailand, the preponderance of key high-frequency economic data implies a hawkish #Quad2 setup, which itself is being priced into Thai financial markets with both the THB and SET up sharply on MoM basis. We also highlight the sharp bull flattening seen in the country’s sovereign debt market as evidence of a reversal in foreign portfolio flows. Much like in Taiwan, however, the bearish CNY overhang is a critical risk given the strength of the THB on a NEER basis and the structurally depressed nature of Thai export growth. As such, we think it’s best to adopt a neutral approach with respect to Thailand’s capital and currency markets.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Thailand


In Brazil, the preponderance of key high-frequency economic data implies a stagflationary #Quad3 setup, but the Bovespa and BRL are daring investors to chase the recent pullback in the DXY. Don’t – at least not in Brazil. The divergence between short-term sovereign debt yields and OIS spreads and long-term breakeven rates implies the country’s political dysfunction has yet to crescendo. Moreover, with BCB out to lunch with respect to its 2016 inflation forecast, there is a fair amount of risk that Brazilian policymakers have to aggressively tighten throughout 2016. Whether or not the political environment allows for that is beside the point. Both outcomes (i.e. tightening or political dysfunction that delays necessary cyclical responses and/or structural reforms) should continue to be bad for Brazil’s capital and currency markets – which we remain resoundingly bearish of.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Brazil


In Mexico, Banxico has shifted its attention from “keeping up with the Joneses” (i.e. monetary tightening by the Federal Reserve) to focusing on its own issues – which predominately include a currency that’s crashed to all-time lows on a NEER basis; we are adding the obvious stagflationary #Quad3 setup being implied by the preponderance of key high-frequency data to that equation as well. The obvious risk to investors here is that Banxico follows through on its incremental guidance and steps up the pace of tightening. While that might provide some short-term reprieve to the MXN, we can’t see how the MXN-dominated assets respond well to the rising probability of that outcome. As such, we feel comfortable reiterating our bearish biases on Mexico’s capital and currency markets.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Mexico


In Russia, the preponderance of key high-frequency economic data implies a deflationary #Quad4 setup. Moreover, the fact that Russian policymakers are out shopping global banks for international debt placement that will help plug the country’s widened fiscal deficit amid international sanctions and a rising cost of capital shines light on just how dire the country’s economic situation remains. Nothing has changed here fundamentally and Russia’s capital and currency markets are generally responding appropriately. As such, we feel comfortable reiterating our bearish bias on both.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Russia


In South Africa, it’s probably too soon to suggest that economic growth has sustainably inflected. That said, however, “green shoots” imply the country may be moving from a stagflationary #Quad3 setup to a hawkish #Quad2 setup. The SARB board has certainly responded in kind with a +50bps hike late last month. This incremental soundness has benefited the ZAR, on the margin; it’s “only” down -3.7% YTD after falling -15.7% in the final six weeks of 2015 alone. While we commend South African policymakers for finally getting serious in their response to the country’s currency crash to all-time lows on a NEER basis, the outlook for accelerated tightening is likely to quash the nascent recovery in growth and weigh incrementally on the prices, liquidity and valuations of ZAR-denominated assets. As such, we find it prudent to reiterate our bearish bias on South Africa’s capital and currency markets.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - South Africa

 

In Turkey, the preponderance of key high-frequency economic data implies a hawkish #Quad2 setup, which itself is being priced into the TRY in recent weeks. While we are predisposed to have a bullish bias on a country that is recording a sustained positive inflection in economic growth, narrowing spreads in the OIS market and a bull flattening in the country’s sovereign yield curve would seem to suggest Turkish policymakers aren’t serious about deferring to the improved growth backdrop as cover to promote a commensurate (i.e. sustained) recovery of the TRY from its effective all-time lows on a NEER basis. As such, feel comfortable reiterating our bearish bias on Turkey’s capital and currency markets.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Turkey

 

Enjoy the rest of your respective evenings,

 

DD

 

Darius Dale

Director


Cartoon of the Day: Head In The Sand

Cartoon of the Day: Head In The Sand - Fed ducks in a row

 

Our Macro team has been highlighting the increasing likelihood that the U.S. economy slips into recession this year. The Fed is completely oblivious to the slowdown. "Every time the Fed misses calling the recession, they reverse to panic policy then consensus panics," Hedgeye CEO Keith McCullough wrote today. 


JT Taylor: Another Test For Donald Trump... Don't Rule Out Rubio

Takeaway: Donald Trump leads in New Hampshire and battle for second place between Bush, Kasich, Christie, and Rubio is heating up.

Editor's Note: Below is a brief excerpt from Potomac Research Group Senior Analyst JT Taylor's Morning Bullets sent to institutional clients each morning. 

TRUMP'S TEST TAKE II:

JT Taylor: Another Test For Donald Trump... Don't Rule Out Rubio - trump 55

 

Heading into today's primary, Donald Trump leads the field by the same 15-20% polling margin he's maintained for the last six months. He's been downplaying the expectations set by his numbers -- the absence of a solid ground game could hurt him today, as it did in Iowa.

 

He's locked in his eclectic ~25% of the electorate, but he also has a ceiling; for every Trump vote there's another anti-Trump vote. With so many players still on the field though, that's likely enough for him to win. The latest post-debate tracking poll has Trump at 34%, and Bush/Kasich/Christie/Rubio at a combined 38% -- with some polls showing a late-breaking Bush surge into second place. 

DON'T RULE OUT RUBIO:

JT Taylor: Another Test For Donald Trump... Don't Rule Out Rubio - rubio christie

 

Despite last week's debate performance, Rubio is still in position for a good showing in today's vote. He risks real damage though if similar flubs, like at a rally last night, keep happening -- there's a fine line between being "on message" and "on repeat." He has to be less risk-averse and can't look like he's retreating to a script. Christie's line of attack on Rubio's "Obama Problem" is sure to come around again, and Rubio will have to show something new when it comes around again at the CBS debate this Saturday.


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