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[UNLOCKED] Early Look: The Taming of Profits

Editor's Note: The Early Look below was written by Hedgeye CEO Keith McCullough one week ago. It crystallizes many of our current thoughts about the precarious macro setup and why we think U.S. equities are in trouble. Click here to get it delivered in your inbox weekday mornings.

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“No profit grows where no pleasure is taken.”

-William Shakespeare

 

And, generally speaking, no multiple expansion grows when there’s no corporate profit growth. Rather than The Taming of the Shrew (i.e. where that Shakespeare quote comes from), USA is seeing The Taming of Profits.

 

No, I’m not talking about the taming of US stock market profits and/or returns (i.e. the ones that were negative in 2015 and mostly negative for 2016 YTD) – I’m simply talking about US Corporate Profits, which were reported to have remained in #Recession on Friday.

 

No worries. We’ll probably be the only ones on Wall St. writing about it this morning. 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.

 

[UNLOCKED] Early Look: The Taming of Profits - recession cartoon 02.22.2016

 

Back to the Global Macro Grind

 

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 (Q408) to find a worse year-over-year decline in US Corporate Profits.

 

“More importantly, Q4 marked the 2nd consecutive quarter of declining corporate profit growth… such occurrences have been proceeded by stock market crashes in the subsequent year for at least the past 30 years (5 occurrences).”

 

Since Q4 ended on December 31st (they haven’t been able to centrally plan a change in the calendar dates yet), has anyone considered why we just saw the worst 6 week start to a stock market year ever? Yep, it’s the Profit vs. Credit Cycle (within the Economic Cycle), stupid.

 

Ok. If you’re not stupid, but really super smart and still blaming “the algos and risk parity funds” for the AUG-SEP and DEC-FEB US stock market declines, but giving them 0% credit for the JUL, OCT, and MAR decelerating volume bounces… all good, Old Wall broheem, all good.

 

Many who missed the economic cycle slowing from its peak (and the commensurate profit #slowing and credit cycles that always come along with such a rate of change move) will blame the US Dollar for that.

 

They, of course, wouldn’t have blamed Ben Bernanke devaluing the US Dollar to a 40 year low for the all-time high in SP500 Earnings (2015) though. That would be as ridiculous as blaming the machines and corporate buy-backs for market up days.

 

Last week the US Dollar came back, and the “reflation” trade didn’t like that. With the US Dollar Index +1.2% on the week:

 

  1. The Euro (vs. USD) fell -0.9% on the week to +2.8% YTD
  2. The Yen (vs. USD) fell -1.4% on the week to +6.3% YTD
  3. The Canadian Dollar (vs. USD) fell -2.0% on the week to +4.3% YTD
  4. Commodities (CRB Index) fell -2.4% on the week to -2.3% YTD
  5. Oil (WTI) fell -4.1% on the week to -1.3% YTD
  6. Gold fell -2.5% on the week to +15.3% YTD

 

Yeah, I know. Those 5 things are just the things that have immediate-term inverse correlations of 79-99% vs. the US Dollar, but there’s this other big thing called the SP500 that now has an immediate-term (3-week) inverse correlation of -0.80 vs. USD too.

 

Imagine that. Imagine the machines stopped chasing the hope that the Fed fades on their rate hike plan, the US dollar gets devalued (again), and all of America keeps arguing about the “inequality” gap having nothing to do with Fed Dollar Policy?

 

You see, when you devalue the purchasing power of a human being:

 

A) Almost everything they need to buy to survive goes up in price as the value of their currency falls

B) A small % of human beings (i.e. us) get paid if they own the asset prices we are “reflating”

 

And if you’re not a human being (i.e. you’re a US corporation) and your profits are falling, all you have to do is lever the company up with “cheap” US debt, buy back the stock with other people’s money, lower the share count, and pay yourself on non-GAAP earnings per share.

 

#America

 

While small/mid cap US Equities reverted to their bear market mean last week (Russell 2000 down -2.0% on the week and -16.7% since US Corporate Profits peaked in Q2 of 2015), so did a few other US Equity Market Style Factors that had had a big 1-month bounce:

 

  1. High Beta stocks were -2.0% on the week
  2. High Leverage (Debt/EBITDA) stocks were -1.9% on the week
  3. High Short Interest stocks were -1.7% on the week

*Mean performance of Top Quintile vs. Bottom Quintile (SP500 companies)

 

At the same time, Consensus Macro positioning remained what most US stock market bulls would have to admit they want/need from here (Down Dollar => Up Gold, Commodities, and Oil):

 

  1. Net LONG position in USD (CFTC futures/options contracts) was -2.16x standard deviations vs. its TTM average
  2. Net LONG positions in Gold and Oil held 1yr z-scores of +2.45x and +1.33x, respectively

 

In other words, in the face of both the economy and profits slowing, Wall St. wants to go back to that ole story of Burning The Buck, I guess. It’s sad and it probably won’t work… but, as Shakespeare went on to say about profits and pleasures, “study what you most affect.”

 

Our immediate-term Global Macro Risk Ranges are now:

 

SPX 1983-2061
RUT 1060-1107
USD 94.68-97.01
Oil (WTI) 36.06-42.91

Gold 1208-1275

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

[UNLOCKED] Early Look: The Taming of Profits - 3 28 Profits Down  Stocks Down Slide 39


Wavering Fed Faith: Will U.S. Follow (Crashing) Japan & Europe?

Takeaway: The central planning #BeliefSystem is breaking down.

Following the worst U.S. stock market decline to start a year (ever), manic market myopia has set in among investors overweight advice of domestic permabull storytellers. They're missing criticial context in addition to a significant risk developing with respect to wavering faith in the global central bankers. 

Wavering Fed Faith: Will U.S. Follow (Crashing) Japan & Europe? - Central banker cartoon 03.03.2015

 

For the record, outside the recent Fed-stoked rally in U.S. equities, European and Asian markets remain deeply troubled as the central planning #BeliefSystem (in the ECB and BOJ) continues to break down.

 

Here's Asian market analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers this morning: 

 

"The yen up small +0.2% vs USD was enough to keep the Nikkei from bouncing overnight; Nikkei 225 closed down another -0.3% taking its crash from the July 2015 high to -22.8% and -15.4% YTD (China and Hong Kong closed today)"

 

Wavering Fed Faith: Will U.S. Follow (Crashing) Japan & Europe? - nikkei 52 wk

 

Looking at Europe...

 

"Post a dreadful producer price report of -4.2% y/y for the Eurozone this am the ECB’s Praet is saying they’ll “continue to act forcefully” (to try to tone down Euro Up vs Yellen’s Dollar Down move) so let’s see how European stocks react to this as they were down (again) last week with Italy’s MIB Index -2.1% w/w to -17.0% YTD."

 

Wavering Fed Faith: Will U.S. Follow (Crashing) Japan & Europe? - european equities

 

So ... what happens when the Fed (like its central-planning brethren abroad) loses all macro market credibility and the U.S. economy continues to deteriorate? If Europe and Japan are any indication, the outlook isn't good.

 

more to be revealed.


CHART OF THE DAY: Why Stocks & Long-Term Treasury Bonds Are Rallying

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 the US economy was even half as “good” as the bulls would lead you to believe, the Fed would be raising rates and the US Dollar would be ripping higher (as opposed to closing -1.8% lower last week to -4.1% YTD).

 

The reason why both stocks and long-term Treasury bonds are rallying in sync right now is the same reason they always do when the market is begging for the Fed to replace what is disappointing economic growth with the illusion of growth (inflation)."

 

CHART OF THE DAY: Why Stocks & Long-Term Treasury Bonds Are Rallying - 04.04.16 chart


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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.)

 

Enjoy!   

 

1. McCullough: Is The Fed Dumb Enough To Hike On Today’s Jobs Report? (4/1/2016)

 

 

In this brief excerpt from The Macro Show earlier today, Hedgeye CEO Keith McCullough discussed how the Fed will interpret today’s late cycle non-farm payroll numbers and its implications for investors.

 

2. McCullough: Shame On You Mark Zandi (3/31/2016)

 

 

In this animated excerpt from The Macro Show, Hedgeye CEO Keith McCullough pulls no punches on establishment economist Mark Zandi and establishment financial media which is failing America. 

 

3. McCullough: S&P Earnings Confront ‘Toughest Comps In U.S. History’ (3/31/2016)

 

 

Hedgeye CEO Keith McCullough crystalizes an enormous risk facing the U.S. stock market right now in this brief excerpt from The Macro Show today. 

 

4. One Of Our Best Calls YTD (3/30/2016)

 

 

In this brief excerpt from The Macro Show today, Hedgeye Senior Macro analyst Darius Dale discusses our macro team’s call to remove the Industrials and Energy sector as top short ideas while adding short Financials. 

 

5. Millennials Gone Mild: The Investing Implications (3/30/2016)

 

 

In this complimentary edition of “About Everything,” Hedgeye Demography Sector Head Neil Howe discusses the sweeping behavioral changes of Millennials (“Generation Yawn”) compared to prior generations, and spells out what it all means for investors and companies around the globe.

 

6. The Airbnb Impact On Hotels & Timeshare (3/30/2016)

 

 

Hedgeye’s Gaming, Lodging, and Leisure team hosted a presentation recently to introduce our proprietary Airbnb listings/price tracker and discuss the Airbnb impact on the lodging and timeshare space.

 

7. McCullough: Short Rich People? (3/28/2016)

 

 

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.


This Week In Hedgeye Cartoons

Our cartoonist Bob Rich captures the tenor on Wall Street every weekday in Hedgeye's widely-acclaimed Cartoon of the Day. Below are his five latest cartoons. We hope you enjoy his humor and wit as filtered through Hedgeye's market insights. (Click here to receive our daily cartoon for free.)

 

Enjoy!

 

1. Happy April Fools' Day (4/1/2016)

This Week In Hedgeye Cartoons - April foo cartoon 04.01.2016

 

See today's supposedly "bullish" non-farm payroll numbers? Nothing to celebrate. "Remember, whatever the bulls want to characterize as "good" news now = #Fed rate hike," says Hedgeye CEO Keith McCullough. 

 

On a related note, we've got big news.

 

2. Dysfunction (3/31/2016)

This Week In Hedgeye Cartoons - Yellen cartoon 03.31.2016

 

"The Fed is S&P 500 dependent, not data dependent," Hedgeye CEO Keith McCullough wrote recently. 

 

3. Reality Check (3/30/2016)

This Week In Hedgeye Cartoons - Math   Myth cartoon 03.30.2016

 

"Since Q4 ended on December 31st (they haven’t been able to centrally plan a change in the calendar dates yet), has anyone considered why we just saw the worst 6 week start to a stock market year ever? Yep, it’s the Profit vs. Credit Cycle (within the Economic Cycle), stupid," Hedgeye CEO Keith McCullough wrote in a recent Early Look.

 

4. Whack! (3/29/2016)

This Week In Hedgeye Cartoons - oil cartoon 03.29.2016

 

Oil is getting knocked around again today, down another -2.4%, despite Fed head Janet Yellen reiterating that declining crude prices are "transitory."

 

5. Corporate Contraction (3/28/2016)

This Week In Hedgeye Cartoons - 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.


The Week Ahead

The Economic Data calendar for the week of the 4th of April through the 8th of April is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.

 

CLICK IMAGE TO ENLARGE.

The Week Ahead - 04.01.16 Week Ahead


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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.

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