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Cartoon of the Day: Corporate Contraction

Cartoon of the Day: Corporate Contraction - corp profits cartoon 03.28.2016

 

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. Over the past 30 years, two consecutive quarters of shrinking corporate profits have always preceded a material stock market crash.


Small Caps Flirt With Full-Blown Crash Mode

Takeaway: The reality remains that small cap stocks are in rough shape.

Small Caps Flirt With Full-Blown Crash Mode - Russell cartoon 12.02.2014

 

As Hedgeye CEO Keith McCullough noted to subscribers this morning:

 

"The Russell 2000 lagged (again) last week, dropping -2.0% on the week (vs. -0.7% for the SP500); at -16.7% from its all-time high in July, RUT is back to within 330 bps of being in crash mode (> 20% decline from the July peak); Russell 2000 peaked when US corporate profits peaked (Q2 of 2015)." 

 

Small Caps Flirt With Full-Blown Crash Mode - russell 2000 high

 

Meanwhile, the average Russell 3000 stock (98% of the available U.S. equity universe) is down -29.2% from it's 52-week high.

Still feeling bullish?

 

Small Caps Flirt With Full-Blown Crash Mode - Small cap canaries 09.23.2014


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


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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.

 

Nice.

 

 

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?

1.0%


PHS | Leap Days, Midwest Marvels & Trend Deceleration

Takeaway: The PHS report this morning has a Leap Day asterisk on it, as does the reported strength in the Midwest. Trend deceleration remains.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

 

PHS | Leap Days, Midwest Marvels & Trend Deceleration - Compendium 032816

 


Today’s Focus: February Pending Home Sales 

Signed contract activity in February rose +3.5% sequentially against downwardly revised January estimates while decelerating to +0.7% YoY on a seasonally-adjusted basis as growth slowed to its weakest pace in 18-months.  On an NSA basis, year-over-year growth accelerated to +5.1%, bouncing off the worst rate of change print in 1.5 years in the previous month.   

  • Leap Day? It's unclear the extent to which the NAR adjusted the February report for the extra day in February.  The seasonal adjustment factor was less supportive of the reported, seasonally-adjusted figures than in prior years so it was seemingly part of the adjustment calculus but it wasn't mentioned in the release and we couldn't find a specific reference in a methodology search.  Unadjusted, the leap day would account for the entire +3.5% M/M increase. 
  • Midwest Marvel: Notably, the Midwest was responsible for most of the sequential strength with sales rising +11.4% MoM (+61% MoM NSA) – the largest increase ever with the exception of December 2008.  The NAR didn’t offer any commentary or speculation around the outsized gain in the region.
  • Trend = Deceleration:  January marks the 10th month of deceleration in PHS off the April 2015 peak.  While activity in the existing market saw some moderate mojo in February, the larger Trend remains one of deceleration and we continue to expect that trend to extend for at least the next three months with volume growth going negative as comps steepen into April/May. 
  • EHS vs PHS:  The risk to EHS in March is to the upside should closed transaction volume recouple with the trend in signed contract activity.

 

 

 

PHS | Leap Days, Midwest Marvels & Trend Deceleration - PHS SA   NSA YoY

 

PHS | Leap Days, Midwest Marvels & Trend Deceleration - PHS Midwest

 

PHS | Leap Days, Midwest Marvels & Trend Deceleration - PHS YoY   Index

 

PHS | Leap Days, Midwest Marvels & Trend Deceleration - EHS vs PHS

 

PHS | Leap Days, Midwest Marvels & Trend Deceleration - PHS Regional YoY

 

PHS | Leap Days, Midwest Marvels & Trend Deceleration - PHS LT

 

 

 

About Pending Home Sales:

The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.

 

Frequency:

The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake


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