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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 large

 

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%


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


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