Client Talking Points
The epicenter of big bang risk resides in the #BeliefSystem breaking down – meaning that when central-market-planners tell you to short their FX and it goes up (and stocks go down). That is becoming Japan with the Yen +0.8% here testing new year-to-date highs vs. USD – this is becoming as important a live quote as U.S. High Yield Spreads.
Oil ripped to the top-end of our immediate-term risk range and failed (again). There is no immediate-term downside support in the risk range for WTIC to $25.77 as the upside in Oil’s Volatility (OVX) remains 81!
With consensus staring (hoping) at oil, don’t forget that the most important relationship right now is that between profits and credits. With 435 out of 500 S&P companies reporting total revenues are -4.2% and EPS -6.5%; forget the “ex-Energy” thing – look at the best Sector Short (Financials) who now has EPS -8.8% year-over-year.
*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE.
|FIXED INCOME||25%||INTL CURRENCIES||8%|
Top Long Ideas
Long-Term Treasuries (TLT) and Utilities (XLU) remain our two best fixed income and equity vehicles to play #Lower-For-Longer on growth and interest rates as the market gets more and more skeptical about the central bank dogma.
With market turmoil, the Junk Bond ETF (JNK) is down -4.5% vs. the defensive, growth slowing equity sector Utilities (XLU) which is up 6.7%, outperforming the S&P 500 by 12.9% on a relative basis. That’s yet more confirmation of our dour economic outlook economy (spreads widen in tumultuous market environments and Utilities are a defensive sector that outperforms when growth is slowing).
General Mills (GIS) is a large player in the Yogurt category with their Yoplait brand. Their competitors, Dannon, Chobani and Fage have been aggressive on merchandising and consumer spending, making it difficult to compete while maintaining internal margin objectives. GIS is turning on innovation with the growth of Annie’s yogurt and that should help the trajectory of the business. Yogurt being a roughly $1.4 billion business, turning it around is a top priority for management.
On the broader GIS long thesis, it's unlikely that the stock is going to go up 20% in the next year, but we do believe it will fare better than most in the consumer staples sector, especially as we head into an economic slowdown.
With the market losing faith in the central planning policy backstop, investors continue to yield to top-down market signals and the direction of the data. To be clear, the data continues to deteriorate and volatility continues to break-out.
The yield spread (10-year Treasury yield minus 2-year Treasury yield) has compressed 24 basis points this year, and TLT is up 8.6% vs. the S&P 500 which is down -5.2%. The December Federal Funds Futures contract has declined in a straight line since December’s rate hike.
Three for the Road
TWEET OF THE DAY
WHAT: @HedgeyeCares Golf Challenge
WHEN: Tuesday, May 17
WHERE: Glenarbor Country Club in Bedford, NY
QUOTE OF THE DAY
Don’t play for safety. It’s the most dangerous thing in the world.
STAT OF THE DAY
435 of 500 S&P 500 companies have reported their respective quarters and only 3 of 10 S&P Sectors have positive year-over-year EPS growth and energy (31 of 41 companies reported) has sales down -34% and EPS -74%.
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."
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“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.
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:
- Japan is no longer able to convince markets that it can burn its currency at the stake on command
- Japan’s Yen starts to rise, and Japanese stocks start to crash
- Europe then fails to convince consensus of the same
- Euro goes up (instead of down) on Draghi’s next central-market-planning day (March 10)
- 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):
- Realize that the inverse correlation between the USD and Commodities remains pervasive (not transitory)
- 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:
- 435 of 500 S&P 500 companies have reported their respective quarters
- Aggregate SALES growth is -4.2% year-over-year and EPS down -6.5% year-over-year
- Only 3 of 10 S&P Sectors have POSITIVE year-over-year EPS growth
- ENERGY (31 of 41 companies reported) has SALES -34%, EPS -74%
- 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%
Oil (WTI) 25.77-33.61
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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.
T-MINUS THREE WEEKS:
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.
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.
BLOOMBERG BUBBLE BURSTING:
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.
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