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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.
"... How the heck could that ever happen? It’s impossible that the #BeliefSystem could ever break down, isn’t it? Other than US corporate profits being negative for 2 consecutive quarters (which has always equated to a > 20% decline), what is your catalyst, Keith??”
A: The Cycle"
“Because I and my companions suffer from a disease of the heart which can be cured only with gold.”
Not to be confused with the disease of begging central-market-planners for more currency devaluation (punishes the many) in exchange for short-term asset inflation (pays the few), that’s how the boys back in the day used to think about pillaging populations for Gold.
“In 1519, Hernan Cortes and his conquistadors invaded Mexico, hitherto an isolated human world. The Aztecs, as the people who lived there called themselves, quickly noticed that the aliens showed an extraordinary interest in a certain yellow metal.”
Since the Aztecs were used to paying for things with cocoa beans and cloth, “the Spanish obsession with gold thus seemed inexplicable” (Sapiens, pg 173). Ah, what idiots those Aztecs must have been. They totally wouldn’t have understood QE either.
Back to the Global Macro Grind…
I believe that our profession is fighting a serious mental disease. I spent all of yesterday going from meeting to meeting in NYC and eventually, most meetings devolved into why stocks can’t go down because the Fed has an extraordinary interest in keeping them up.
‘Yeah Keith, we hear you Brofessor… you say it’s The Cycle… but if you’re right then the Fed is definitely going to bail out markets and go to Qe4, aren’t they? Why not? Seriously, think about everything the Fed can still do – they’re already going dovish…’
Sadly, at that point in the conversation (trust me, I have a lot of reps when it goes that way!), I immediately agree with the client and say, “absolutely – they can do anything they want to do – they can make it really big and super you-ge.”
That is core to the #BeliefSystem.
And, by the way, in going to “negative yields” (after 90-100 TRILLION Yen in money printing, per year, AND buying stocks) in Japan, and QE + buying corporate bonds in Europe, you know what their hoped-for stock market inflations are doing this morning?
- Japanese Stocks (Nikkei) down another -2.4%, taking their #crash since July’s (2015) high to -24.6%
- German Stocks (DAX) down another -2.4% this morning, taking their #crash since April’s high to -22.6%
- Italian Stocks (MIB Index) no bid, -1.8% this morning, taking their #crash from last year’s high to -28.1%
Q: Do you know what the range on the SP500 would be on a -23% to -28% #crash?
A: SPX 1
So, I’m “reducing my price target” (since everyone asks me for one!) to that range, down from a prior target of 1704 (which would be a -20% decline from the all-time closing #Bubble high of July = 2130).
How the heck could that ever happen? It’s impossible that the #BeliefSystem could ever break down, isn’t it? Other than US corporate profits being negative for 2 consecutive quarters (which has always equated to a > 20% decline), what is your catalyst, Keith??”
A: The Cycle
Oh, am I teasing you? Not on the probability of 1704 then 1640 then 1533 rising (SP500). Just a little tickler for you ahead of our Q2 Macro Themes Call that we’ll host at 11AM EST on Thursday (ping for access).
In other news this morning, here’s how our Q1 Macro Ideas are doing (hint: I’m doubling down on them in Q2):
- Long-term US Treasury Yields dropping to 1.73% on the 10yr, only 5 basis points away from the Q1 low
- Utilities (XLU) are +14.6% YTD and primed to outperform Financials (XLF) -5.6% today with rates crashing
- Gold is +1.4% this morning to +16.2% YTD
Why didn’t the masters of the super smart alpha generating universe go all 16th century on their investors and ramp up their Gold holdings? “Believe me”, the spread on GLD vs. Valeant is super huge and really really smart. You need a really big brain for it.
According to the FT, Q1 report cards weren’t as good as yours was. Apparently 19% of mutual funds beat their benchmark in Q1. That was their worst quarter since 1998. Only 6% of “Growth” fund managers beat their bench (worst performance since 1991).
Many are suffering from a disease of expectations (either they’re too bullish on growth and/or always too bullish because they think the Fed can do something to replicate growth via asset inflation when they’re wrong) which can only be cured by performance.
So, instead of whining about where the SP500 is (which you don’t need an active manager to buy for you), I say they better get on board with our Best Long Ideas, Macro Exposures, and Style Factors, before it’s too late.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.71-1.85%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
daily macro intelligence
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Client Talking Points
Big rip higher in the Yen to immediate-term overbought at 110 (vs USD) smoked Japanese stocks again, -2.4% Nikkei taking the crash from the July U.S. Equity market high of 2015 to -24.6% - negative yields is not working in Japan or Europe (DAX down -2.4% and -22.6% since last year’s top).
What went up to a lower-high and failed @Hedgeye TREND resistance of $46/barrel came straight back down – an 11% drop in the last week in WTI should back the machines off from chasing Energy related charts; risk range now = $35.09-38.64.
Forcing yourself NOT to buy/cover U.S. Equities at VIX 12-14 has saved/made you a lot of absolute and relative return since that July #Bubble High and that just happened again; FT with a long-only performance article this morning citing only 6% of Growth managers beating their bench in Q1 (worst since 1991).
*Tune into The Macro Show with Hedgeye CEO Keith McCullough, Demography analyst Neil Howe and Macro analyst Darius Dale live in the studio at 9:00AM ET - CLICK HERE.
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Top Long Ideas
McDonald's (MCD) hit an all-time highs last week. "They can't chase Energy Charts today, so they're just dog-piling into our long calls on GIS and MCD," wrote Hedgeye CEO Keith McCullough on Friday.
We've said it before, McDonald's has all the style factors that we like during these turbulent macro market times; high market cap, low beta and liquidity. The stock is up 7.5% this year beating the S&P 500 by more than 600 bps. In August 2015, Restaurants analyst Howard Penney wrote that "2015 will be the last time this stock is below $100."
CME Group (CME) stock is among the small cohort of financial companies that benefit from volatile markets. With the exchange's open interest continuing to expand, which will drag trading volume higher, CME Group is one of the few lower beta longs that will hold up relatively better in the current environment.
The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, at over 111 million contracts. Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials.
Non-Farm payroll additions came in over +200 again (+215K to be exact) and private sector wage growth was also “good,” increasing +4.2% year-over-year on Friday. We’re most concerned with "better" or "worse" from a rate of change perspective. The non-farm payroll number is "less good" (i.e. "worse") from a year-over-year rate-of-change perspective. Growth in non-farm payrolls peaked in February 2015 at +2.3% year-over-year and the trend since then has been one of decline (+2.0% Y/Y for March 2016). And private sector salary and wage growth peaked on a year-over-year percent change basis in December of 2014.
We remain bullish on Long Bonds (TLT and ZROZ), Utilities (XLU) and short Junk Bonds (JNK). We expect more alpha after what was a great Q1, as the back-end of the Treasury curve continues to get flatter regardless of Fed rate hikes. We were alone in that camp, in December, when we first told you that a rate hike was in fact good for long-duration Treasury bonds. Stick with what's worked.
Here's the Q1 2016 Scorecard (data through 3/31):
Three for the Road
TWEET OF THE DAY
About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" https://app.hedgeye.com/insights/50098-about-everything-the-immaterial-world … via @hedgeye
QUOTE OF THE DAY
You can be comfortable or you can be courageous. But you cannot be both.
STAT OF THE DAY
32% of international students studying in the U.S. in 2015 were from China.
In this one-minute excerpt from The Macro Show, Hedgeye Financials analyst Jonathan Casteleyn highlights the key short catalyst for shares of Lazard and explains why the company is a compelling short.
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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.