CHART OF THE DAY: Stocks Always Crash When This Rolls Over. Is This Time Different? Probably Not

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.


"... Unless it’s different this time, US stocks always crash (greater than 20% decline from peak) once corporate profits go negative (on a year-over-year basis) for two consecutive quarters."


CHART OF THE DAY: Stocks Always Crash When This Rolls Over. Is This Time Different? Probably Not - 02.23.16 chart

Big Bang Theory

“There were humans long before there was history.”

-Yuval Noah Harari


I think there were lots of bears before there was a Wall St. bull too. If you go all the way back, you’ll find that there was physics before humans. A new book on #evolution called Sapiens, by Yuval Noah Harari, got me thinking about this last night.


As Harari reminded me, “about 13.5 billion years ago matter, energy, time and space came into being in what is known as the Big Bang…” After physics, came biology (3.8 billion years ago) … then human history (70,000 years ago)…


And now, post a 500 year long scientific revolution, we have a social “science” experiment (or ideology) called central-market-planning (or QE)… which could easily implode if the #BeliefSystem that humans can bend and smooth economic gravity crashes.


Big Bang Theory - Growth cartoon 11.10.2014


Back to the Global Macro Grind


Wow. In terms of a time-series, that’s a little deeper than staring at a 50-day moving monkey, isn’t it? While our understanding of physical, biological, and human histories continue to evolve at an accelerating rate, how did the Old Wall’s thinking get left behind?


Over the course of the last 30 years, Japan’s “growth” story has been left for dead. Instead of asking yourself when you should be “buying Japanese stocks”, why not ask yourself if this is the beginning of the end – of the grand central-market-plan, that is?


My Big Bang Theory for the #CurrencyWar (one of the Top 3 Themes in our Macro deck right now) is as follows:


  1. Japan is no longer able to convince markets that it can burn its currency at the stake on command
  2. Japan’s Yen starts to rise, and Japanese stocks start to crash
  3. Europe then fails to convince consensus of the same
  4. Euro goes up (instead of down) on Draghi’s next central-market-planning day (March 10)
  5. European and US stocks resume their current crashes and go straight down


I know, I know. It’s just a theory. But it’s what I would call one that has a probability that is rising, not falling, in rate-of-change terms. Not only is my intermediate-term TREND signal research suggesting rising probability, but super long-term history has always sided with gravity. So why would economic reality vs. perma-asset-inflation-hope be any different?


On a much shorter-term basis (because that’s where the next ECB and Fed meetings reside):


  1. Realize that the inverse correlation between the USD and Commodities remains pervasive (not transitory)
  2. But there is a developing POSITIVE correlation (15-30 day = +0.5-0.7) between USD and US stocks


What that tells me is that if we’re right on both the US economic and profit cycle continuing to slow in 1H 2016, Dollar Down => Rates Down => Stocks Down, could easily be perpetuated by the #BeliefSystem in both Japan and Europe breaking down.


Anyway – just a theory. Moving along…


As you know, irrespective of any longer-term Big Bang Theories that have a short-term catalyst, the easiest call for me to stick with is the intimate relationship PROFITS have with CREDITS at this stage of the cycle.


While they’ve “rallied” US stocks “off the lows” on slow-volume (Total US Equity Volume -15% vs. 1-month avg yesterday), the SP500 and Russell 2000 are still -8.7% and -21.1% (crashing), respectively, from their all-time #Bubble highs established in July.


Meanwhile, here’s the update on corporate profits:


  1. 435 of 500 S&P 500 companies have reported their respective quarters
  2. Aggregate SALES growth is -4.2% year-over-year and EPS down -6.5% year-over-year
  3. Only 3 of 10 S&P Sectors have POSITIVE year-over-year EPS growth
  4. ENERGY (31 of 41 companies reported) has SALES -34%, EPS -74%
  5. FINANCIALS (85 of 89 companies reported) has SALES -1%, EPS -8.8%


In other words, if your friends are still “backing out energy” and levered long US Equity beta, they’re a lot more exposed to rates crashing, Yield Spread compressing, and the Financials (XLF -11% YTD) than they’ve ever been!


Unless it’s different this time, US stocks always crash (greater than 20% decline from peak) once corporate profits go negative (on a year-over-year basis) for two consecutive quarters.


I’m certain that physics and biology have played a part in all economic cycles. But given that there was history before there were “stocks”, I have no idea how slowly or quickly the beginning of the end turns into a new beginning for a more credible belief system.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.62-1.84%

SPX 1811-1966

Nikkei 15129-16740

VIX 18.43-29.58
YEN 111.41-114.86
Oil (WTI) 25.77-33.61


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Big Bang Theory - 02.23.16 chart

Cartoon of the Day: Recession Knocking?

Cartoon of the Day: Recession Knocking? - recession cartoon 02.22.2016


Since January, our Macro team has been highlighting the increasing likelihood that the U.S. economy slips into recession in Q2 or Q3 of 2016, as the preponderance of economic data continues to roll over. 

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

JT Taylor: Can Cruz Or Rubio Win? Is Sanders Losing Momentum?

Takeaway: What to watch on the election 2016 campaign trail.

Below is a brief excerpt from Potomac Research Group Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. 



JT Taylor: Can Cruz Or Rubio Win? Is Sanders Losing Momentum? - rubio cruz


With Donald Trump's decisive win on Saturday and likely victory in Nevada tomorrow, his opponents -- namely Ted Cruz and Marco Rubio -- don't have much time to stop his march to Cleveland. While the terrain between NV and the mid-March primary states looks a lot like SC, two states on the docket are delegate-rich TX (March 1) and FL (March 15).


If Cruz and Rubio can't win their home states, where can they win, with the map turning to primary days with multiple contests? That gives them a significant disadvantage against a candidate who has mastered media coverage -- and who benefits from a divided three-way race when the map transitions to winner-take-all states. 



JT Taylor: Can Cruz Or Rubio Win? Is Sanders Losing Momentum? - bernie sanders


In the Democratic race, Bernie Sanders is now staring down a similar numbers problem. Clinton's victory in Nevada wasn't the same kind of razor-thin margin in Iowa, in fact it was a stronger showing than many expected. This weekend's vote feels decisive, as the "Sanders Surge" narrative gets quickly rewritten. His coalition, while enthusiastic, doesn't have the same deep roots as Clinton's -- her firewall among African Americans and older voters in Nevada held.


Sanders has the cash and momentum to continue far into the primary -- but the campaign trail over the next three weeks doesn't get any less rocky for him, and the delegate math could quickly become insurmountable.



JT Taylor: Can Cruz Or Rubio Win? Is Sanders Losing Momentum? - bloomberg mayor


Clinton's victory in Nevada on Saturday dealt a blow not only to Bernie Sanders' campaign hopes, but also severely undercut the rationale for a run by Michael Bloomberg. He has left the trial balloon floating for a few weeks now, bemoaning the country's ills in public remarks, while remaining careful not to tip his hand as his decision deadline, at latest a few days after Super Tuesday, gets closer. The plausibility of his candidacy has fallen along with Sanders' prospects. 

Barron’s: ‘3% Growth, No Recession’ … LOL


In this animated excerpt of The Macro Show, Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale discuss why Barron’s is wrong on U.S. economic growth and why Friday’s GDP report will have a “0” in front of it.


Subscribe to The Macro Show today for access to this and all other episodes. 


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From The Vault | 5 Must See Interviews With Rickards, Roach, Stockman, Alpert & Grant

Takeaway: High-level insights with some of the smartest investors and thinkers in the world.

From The Vault | 5 Must See Interviews With Rickards, Roach, Stockman, Alpert & Grant - keith cartoon


Beyond our 30-plus analysts, Hedgeye's reach runs deep. We're fortunate to have relationships with some of the smartest and most sophisticated investors in the world. It's on that note that we highlight these five must-see Real Conversations where Hedgeye CEO Keith McCullough goes deep with some of the best and brightest global minds. 


1. Jim Rickards, "Rickards, McCullough Unplugged on Fed, USD, Economy & More" (5/9/2014)


Controversial best-selling author James Rickards sits down with Hedgeye CEO Keith McCullough to discussed why "Keynesian economics is junk" and why "Yellen is worse than Bernanke."


2. David Stockman, "Crisis Coming? Stockman on ‘Likely Global Recession’ & Consequences of the Fed"


David Stockman, the outspoken former Reagan budget director and bestselling author of “The Great Deformation,” sat down with McCullough discussed why "we are in a fantastic bubble... that is a function of rogue central banking now fundamentally off the deep end."


3. "Real Conversations with James Grant of Grant's Interest Rate Observer" (6/12/2014)


James Grant, editor of Grant's Interest Rate Observer, discussed monetary policy, market froth, and why central banker-induced "financial leverage will fail."


4. Stephen Roach, "Roach on Global Imbalances, Risks and How It All Ends" (4/6/2015)


Stephen Roach, Yale University professor and former Chairman of Morgan Stanley Asia, joined McCullough to discussed why "central banking has lost its way." 


5. Dan Alpert, "A Dire Appraisal of Our ‘Broken Global Economy’"(11/18/2014)


Dan Alpert, economic policy expert, author of “The Age of Oversupply,” and founding Managing Partner of investment bank Westwood Capital, discussed with McCullough why central bankers are "between a rock and a hard place" because "if you remove the stimulus keeping financial and real asset prices up... deflation would bring them crashing down."

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