Editor's Note: Below is a complimentary Early Look (our daily morning market newsletter) written by Hedgeye CEO Keith McCullough. In it, McCullough explains why stocks crash when earnings roll over. "Is this time different?," he asks. "Unlikely." Click here to subscribe.
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“There were humans long before there was history.”
-Yuval Noah Harari
The big picture
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.
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