This May Be The Most Important Market Chart Right Now

Takeaway: For the record, we've been warning about corporate profits since early January.

Hedgeye senior macro analyst Darius Dale wrote a compelling note this past Friday highlighting corporate profits which just posted their worst growth (Y/Y) since 4Q08.


While U.S. 4Q GDP was revised up to +1.4%, the corporate profit component showed a -10.5% Y/Y contraction. That marks the second consecutive quarter in which corporate profit growth was down Y/Y. Check out the chart below illustrating why that's such bad news.


Bottom line? In the 30 years since 1985, two consecutive quarters of shrinking corporate profits have preceded a material stock market downturn over the next twelve months in all five occurrences.


Click to enlarge

This May Be The Most Important Market Chart Right Now - z 77

McCullough: Short Rich People?


In this recent clip from The Macro Show Hedgeye Demography Sector Neil Howe and CEO Keith McCullough discuss the income gulf between America’s “haves” and “have-nots” and why that gap may narrow in the years to come.

Why Atlanta Fed's GDP Forecast Is Crashing

Why Atlanta Fed's GDP Forecast Is Crashing - Fed cartoon 02.01.2016


The latest Atlanta Fed forecast for Q1 2016 GDP is now (drumroll please)... 0.6%.


That's down from 2.7% in February. Yes, that means the Atlanta Fed has lopped off more than 200 bps from its GDP forecast in a month.





Here's a chart of the Atlanta Fed's latest hatchet job:



According to the Atlanta Fed, the estimate's recent decline, from 1.4% to 0.6%, was the result of revised down consumer spending growth and the added drag of declining net exports:


"The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 0.6 percent on March 28, down from 1.4 percent on March 24. After this morning's personal income and outlays release from the U.S. Bureau of Economic Analysis, the forecast for first-quarter real consumer spending growth fell from 2.5 percent to 1.8 percent. The forecast for the contribution of net exports to first-quarter real GDP growth declined from –0.26 percentage points to –0.52 percentage points following this morning's advance report on international trade in goods from the U.S. Census Bureau."


As Hedgeye Senior Macro analyst Darius Dale points out, the tracking error of the Atlanta Fed's forecast is a shocking 252 bps.



Hedgeye U.S. Macro analyst Christian Drake offers some critical context on the methodology underpinning the Atlanta Fed's estimate:




How useful is that? Not very.


On a related note, Hedgeye's Macro team has nailed the last five U.S. GDP numbers. Our current estimate?


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

Not a Pretty Picture ... A Look At Corporate Profits, Small Caps & Bond Yields

Not a Pretty Picture ... A Look At Corporate Profits, Small Caps & Bond Yields  - Bull herd cartoon 03.18.2016


While the permabull marketing machine keeps churning, macro market internals are crumbling. Whether you're looking at performance of small cap stocks, declining bond yields, or the ongoing corporate profit recession, deteriorating economic data appears to be largely lost on Wall Street consensus.


Meanwhile, forecasts of our omnipotent Fed central planners remain disconnected from economic reality. As Hedgeye CEO Keith McCullough writes in a note to subscribers this morning:


"Treasury Yields stopped going down last week as Fed Heads jawboned about a rate hike (Dollar Up); immediate-term risk range on the UST 10YR is 1.84-1.98%; that’s a tight range – let’s see if they’re serious this time or just S&P 500 dependent (tightening into this Profit #Recession would be deflationary, again)."



More on the corporate profit recession reported friday...


It's getting pretty ugly. Corporate profits declined -10.5% year-over-year, slowing an additional -540 basis points versus Q3 when the data first went negative. We've been warning about declining corporate profits since January, with the release of our 1Q16 Quarterly Macro Themes. 


Declining profits have been hammering stocks since the data peaked in Q2, McCullough writes. 


"The Russell 2000 lagged (again) last week, dropping -2.0% on the week (vs. -0.7% for the S&P 500); at -16.8% from its all-time high in July. The RUT is back to within 330 basis points of being in crash mode (> 20% decline from the July peak); Russell 2000 peaked when U.S. corporate profits peaked (Q2 of 2015)."


Not a Pretty Picture ... A Look At Corporate Profits, Small Caps & Bond Yields  - russell


Where do we go from here?


Here's another callout from our 73-page 1Q Macro Themes deck. In the past 30 years, two consecutive quarters of declining corporate profits always precedes a stock market crash:


Not a Pretty Picture ... A Look At Corporate Profits, Small Caps & Bond Yields  - 3 28 Profits Down  Stocks Down Slide 39

CHART OF THE DAY: Corporate Profits' Worst Decline Since 2008 Financial Crisis

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.


"... If only the bulls of the 2015 peak warned you that Q415 corporate profits would slow another -540 basis points sequentially (vs. Q3 when they first went negative) to -10.5% year-over-year.


As Darius Dale wrote to our Institutional clients on Friday, you have to go all the way back to the depths of the 2008 Financial Crisis (Q4 08) to find a worse year-over-year decline in US Corporate Profits."


CHART OF THE DAY: Corporate Profits' Worst Decline Since 2008 Financial Crisis - 3 28 Profits Down  Stocks Down Slide 39

REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.


Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)




1. Washington on Wall Street: A ‘Foreboding’ Election And Its Implications (3/24/2016)



Hedgeye's Demography Sector Head Neil Howe discusses the GOP and Democratic presidential candidates, how Donald Trump could “destroy the traditional Republican party,” and what it means for markets.



2. McCullough: Give Me Liberty! (3/23/2016)



In this excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough takes a page out of American patriot Patrick Henry’s playbook on the anniversary of his "Give me liberty, or give me death!" speech. He also addresses critics of his current bearish stance on equities.


3. McCullough: Joke of the Year? Fed Data Dependence (3/22/2016)



In this animated excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough pulls no punches on San Francisco Fed President John Williams’ head-scratching contention that he’s data dependent. If you like this excerpt, you’ll love The Macro Show.

Early Look

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