prev

[UNLOCKED] Big Bang Theory

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.

*  *  *  * 

 

“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.

 

[UNLOCKED] Big Bang Theory - Growth cartoon 11.10.2014

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 levels

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.62-1.84%

SPX 1811-1966 
RUT 939-1038

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,

KM

 

Keith R. McCullough
Chief Executive Officer

 

[UNLOCKED] Big Bang Theory - 02.23.16 chart


A Brief Appraisal Of Central Banker Credibility

Takeaway: Fitch cuts its global growth outlook. BIS economists say central bankers are out of ammo. Should bulls really be all that bullish?

A Brief Appraisal Of Central Banker Credibility - central bank cartoon 02.17.2016

 

As faith in global central planners continues to wane, policymakers from the Fed to the BOJ watch as macro markets deteriorate in direct opposition to their optimistic forecasts. 

 

This Thursday (drumroll please...) we'll hear from ECB head Mario "Whatever It Takes" Draghi. Below is an update from our Macro team on what we expect to hear from him in a note sent to subscribers this morning:

 

"This Thursday the ECB meets and we expect it to announce additional simulative policy. According to our Big Bang Theory, after 600 rate cuts globally, there’s a new regime of investors that has given up on the belief that central bankers can artificially produce stimulus and weaken their currency for economic benefit.

 

This policy hasn’t worked in Japan, and it isn’t going to work in the Eurozone. We expect the EUR/USD to bounce on a simulative announcement:  to our TREND ($1.12) and TAIL ($1.13) resistance levels. We also expect associated selling of European equities."

 

A Brief Appraisal Of Central Banker Credibility - eurusd

 

More bad news for global central planners 

Over the weekend, Bank For International Settlements chief Claudio Borio said there are "signs of a gathering storm" as central banking policies lose their potency.

 

In a paper, the BIS noted that inflation expectations were deteriorating, high-yield credit and sovereign emerging market debt spreads have blown out, and there has been a marked selloff in global banks. Here's the conclusion:

 

"Underlying some of the turbulence of the past few months was a growing perception in financial markets that central banks might be running out of effective policy options... Markets had seemingly become uncertain of the backstop that had been supporting asset valuations for years. With other policies not taking up the baton following the financial crisis, the burden on central banks has been steadily growing, making their task increasingly challenging."

 

A Brief Appraisal Of Central Banker Credibility - Draghi cartoon 01.08.2015

 

Meanwhile, earlier today ratings agency Fitch cut its outlook for global growth to 2.5% in 2016. (Welcome aboard the #GrowthSlowing train.) This is down from its previous forecast in December of 2.9%. Apparently, the slowdown in China and collapsing commodity prices that shocked emerging markets had handicapped prior estimates.

 

No worries right? With bulls placing their faith in omnipotent, gravity-arresting, global central banks to stop the bleeding, what could possibly go wrong?

 

more to be revealed...

 


JT Taylor: How To Beat Trump... & Thoughts On Current GOP & Democratic Delegate Counts

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.

THE DELEGATE COUNT:  

Despite the increasing chatter about Trump's unstoppable momentum, everyone in the field is far from the 1237 required for the nomination: 

  1. Trump has 392 delegates;
  2. Cruz has 305;
  3. Rubio has 130;
  4. And Kasich has 35

So On the Democratic side, where a candidate needs 2,383 delegates to secure the nomination:

  1. Clinton has a clear lead with 1,121;
  2. Compared to Sanders' 481.  

 

MI, MS and HI are up to bat tomorrow.

FLINTY DEBATE:

 

JT Taylor: How To Beat Trump... & Thoughts On Current GOP & Democratic Delegate Counts - hill bern

 

Hillary Clinton and Bernie Sanders clashed in MI last night two days before another critical primary in that state. The debate felt like a sharper-elbowed replay of their past performances covering some of the same ground -- trade, economic plans and of course the water crisis and auto bailout.

 

Clinton holds a double-digit lead going into tomorrow's primary and, despite Sanders racking up a number of wins this weekend (ME, KS and NE), he needs to beat her in a big state to actually change the trajectory of the race.

 

We've said before that Sanders is in this for the long haul, and certainly realizes the math is not in his favor -- he's pinning his hopes on amassing enough delegates to ensure his role and message in Philadelphia will be felt and heard.

CLOSED PRIMARIES -- A WAY TO TRIP TRUMP?

 

JT Taylor: How To Beat Trump... & Thoughts On Current GOP & Democratic Delegate Counts - cruz trump

 

Ted Cruz effectively split the day with Donald Trump on Saturday, and importantly, the reasons why may offer a potential path ahead to Cruz contesting the nomination. The Republican contests this weekend marked the beginning of several closed primaries, meaning only Republicans can vote in Republican primaries and Democrats in Democratic primaries.

 

From here on out, closed primaries dominate the nominating calendar, offering Cruz an opportunity to methodically close the delegate gap. By appealing to Republican voters who may feel a Trump candidacy is a bridge too far, Cruz may be able to take advantage of the long primary calendar in order to prevent Trump from securing enough delegates too early in the contest.

 

No one can argue that the nomination appears to be Trump's to lose, but were not ready to concede that one of the wildest and most surprising contests in history is all wrapped up.  


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.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN

Takeaway: Much of the data we track globally has been bouncing for the last few weeks. This doesn't change our increasingly bearish view of the setup.

 

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM11

 

Key Takeaway:

Last week's better than expected reading on non-farm payrolls coupled with the ongoing stabilization in oil has fueled an impressive relief rally. Our heatmap shows that CDS spread significantly tightened across the globe last week. Additionally, high yield YTM dropped 58 bps to 8.0%, and the Leveraged Loan index rose by 24 points.

 

While short-term readings have skewed positive over the last three weeks, intermediate and longer-term measures remain negative, on balance.

 

Current Ideas:

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 8 of 13 improved / 3 out of 13 worsened / 2 of 13 unchanged
• Intermediate-term(WoW): Negative / 3 of 13 improved / 7 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 4 out of 13 worsened / 8 of 13 unchanged

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM15

 

1. U.S. Financial CDS – Swaps tightened for 12 out of 27 domestic financial institutions. With last week's better than expected reading on non-farm payrolls, domestic CDS tightened by an average 9 bps.

Tightened the most WoW: AIG, PRU, HIG
Widened the most WoW: AGO, TRV, MBI
Tightened the most WoW: AXP, JPM, C
Widened the most MoM: AIG, COF, MET

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM1

 

2. European Financial CDS – With positive economic data from the United States and the continued stabalization in oil, swaps mostly tightened in Europe last week .

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM2

 

3. Asian Financial CDS – Swaps tightened across the board in Asia last week. Japan's Sumitomo Mitsui tightened the most, by 24 bps to 131.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Portuguese swaps tightened the most, by 57 bps to 268.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM18

 

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM3

 

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps tightened last week. Brazilian and Russian swaps tightened the most, by -40 bps to 416 and by -30 bps to 302 respectively.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM16

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 58 bps last week, ending the week at 7.99% versus 8.56% the prior week.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 24.0 points last week, ending at 1813.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM6

8. TED Spread Monitor  – The TED spread rose 5 basis points last week, ending the week at 37 bps this week versus last week’s print of 32 bps.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM7

9. CRB Commodity Price Index – The CRB index rose 4.4%, ending the week at 169 versus 161 the prior week. As compared with the prior month, commodity prices have increased 4.1%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 14 bps.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 10 basis points last week, ending the week at 1.95% versus last week’s print of 2.05%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM10

12. Chinese Steel – Steel prices in China rose 2.2% last week, or 47 yuan/ton, to 2172 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM12

13. 2-10 Spread – Last week the 2-10 spread widened to 101 bps, 4 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM13

14. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread widened by 2 bps to 41 bps.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


The Unvarnished Truth: A Look At Year-To-Date Global Equity Performance

Takeaway: Here's the breakdown of S&P 500 sectors and global equity markets in 2016.

S&P 500 year-to-date SECTOR performance...

 

The Unvarnished Truth: A Look At Year-To-Date Global Equity Performance - sector performance 3 7 16

 

... And a look at global equity markets.

 

The Unvarnished Truth: A Look At Year-To-Date Global Equity Performance - world equity markets


Euro, Style Factors and Income

Client Talking Points

EURO

This Thursday the ECB meets and we expect it to announce additional simulative policy. According to our Big Bang Theory, after 600 rate cuts globally, there’s a new regime of investors that has given up on the belief that central bankers can artificially produce stimulus and weaken their currency for economic benefit.  This policy hasn’t worked in Japan, and it isn’t going to work in the Eurozone. We expect the EUR/USD to bounce on a simulative announcement:  to our TREND ($1.12) and TAIL ($1.13) resistance levels. We also expect associated selling of European equities.

STYLE FACTORS

Alongside another rate-of-change slowing in employment and income last week, High Beta (+8.4% on the week), Small Cap (+6.2%)  and High Debt (+7.2%) stocks led the counter-Trend move higher.  In other words, the leverage and illiquidity that got you crushed over the last 8-months reflated.  With growth slowing and the economic, profit and credit cycles past peak we don’t think the 3-week squeeze off of the mid-February 2016 Global Equity crash lows is sustainable.  

INCOME

In a Keynesian economy consumption is king and income growth drives the capacity for consumption growth.  With hourly earnings growth decelerating and average hours worked per week declining in Friday’s NFP data, aggregate income growth will decelerate both sequentially and year-over-year when the official data are released for February later this month.  Unless credit growth accelerates meaningful and/or the savings rates declines materially, consumption growth for February should show further deceleration and the labor, income, consumption peaks (4Q14/1Q15) will remain rearview.  

 

*Tune into The Macro Show with Hedgeye Healthcare Sector Head Tom Tobin live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 62% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 3%
FIXED INCOME 29% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
XLU

If you were long energy over utilities last week, nice trade! We'd remind you that Utilities (XLU) are outperforming the S&P 500 by +10% year-to-date. And that’s with the bounce. By contrast, Energy (XLE) was up 6.5% on the week but is up only 1% year-to-date.

GIS

General Mills (GIS) faces some headwinds across their portfolio, and although the 1H of FY16 was a challenge, the company has robust merchandising and consumer plans in the 2H that should improve results.

 

GIS has embarked on a mission to drive their top 450 SKUs, which represent 75-85% of their volume. Calling it their ‘Power 450’, surprisingly these 450 SKUs aren’t even in all retail locations and formats, broadening the distribution footprint of these top SKUs is priority number one for GIS’s sales team. The organization is also looking at the bottom 450, representing 1-2% of volume and making critical decisions on what products can be discontinued.

 

We continue to believe GIS is one of the best positioned consumer packaged foods companies due to its strong brands and best-in-class people and organization.

TLT

We can’t emphasize enough the bigger picture from both a data and top-down market signaling perspective. To contextualize the relief rallies and short squeezes in asset classes and instruments that are counter to our more longer-term view. Here’s what how we think the macro environment plays out from here:

  1. The market is positioned for more rate hikes into 2016
  2. The data continues to deteriorate, and market volatility ensues
  3. The expectation that “all is good” comes off the table and the market increasingly pivots to the view that, throughout 2016, the Fed is going to hike rates in methodical fashion straight into an economic slowdown
  4. The market takes in the growth slowing pivot in real-time (Treasury rates and the dollar both move lower, and inflation-leveraged assets like gold catch a bid)

 

Once the policy catalysts are out of the way in the next few weeks, our expectation is a return to outperformance in growth slowing asset classes (TLT and XLU). If you’re in for the TAIL and the TREND call, focus on the data, not the desperate attempts of central planners to arrest economic gravity. A brief reminder: ECB chief Mario Draghi will attempt to walk on water Thursday.

Three for the Road

TWEET OF THE DAY

VIDEO (15 mins) The Last Commodity Bubble Still Standing https://app.hedgeye.com/insights/49558-the-last-commodity-bubble-still-standing

@KeithMcCullough

QUOTE OF THE DAY

There is only one way to avoid criticism: do nothing, say nothing, and be nothing.

Aristotle

STAT OF THE DAY

Alibaba affiliate Ant Financial is valued at nearly $50 billion, the internet-finance company plans to raise up to $3.1 billion in its current funding round.


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

next