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[UNLOCKED] Early Look: Gentlemanly Bears

Editor's Note: The Early Look below was written by Hedgeye CEO Keith McCullough one week ago. It discusses how "large components of the US economy already in a recession" and why "the US economic and profit cycle won’t even have a chance of putting in a rate of change (cycle) bottom until Q2 which, candidly, won’t be reported until Q3." Click here to get the Early Look delivered in your inbox weekday mornings.

 

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“It meant being reasonable, tolerant, honest, virtuous, and candid.”

-Gordon Wood

 

As I push into my early 40s, I’d like to think a Gentlemanly Bear can be thought of that way inasmuch as a Gentlemanly Bull can be. After all, sometimes (when GDP growth is slowing) gentlemen prefer being bullish on long-term bonds!

 

In the latest history book I’ve cracked open, Revolutionary Characters, Gordon Wood used the aforementioned characteristics to describe America’s Founding Fathers. How well do you think they describe your economic, profit, or credit cycle resources?

 

Or are we all partisan now? Rate of change isn’t partisan. It’s honest math. And I think being candid about it accelerating or decelerating is, as Wood wrote, “an important 18th century characteristic that connoted being unbiased and just as well frank.” (pg 15)

 

[UNLOCKED] Early Look: Gentlemanly Bears - GDP cartoon 10.29.2015

 

Back to the Global Macro Grind

 

Yesterday we received more intermediate-term TREND (not to be confused with monthly or sequential immediate-term TRADE head-fakes) confirmation that the US economy is indeed well past the peak of the cycle:

 

  1. Having peaked at +3.8% y/y in JAN 2015, Real Consumer Spending was revised down -30bps to +2.6% growth for JAN 2016
  2. Having peaked at +13.1% y/y in APR 2015, US Pending Home Sales slowed to 0.7% year-over-year (y/y) in FEB of 2016

 

Sure, a growth bull might say “but, the consumer and housing are still strong parts of the US economy”… but a gentlemanly rate of change person like me would correct them by reminding them that rates of change continue to slow from their respective cycle peaks.

 

On economic cycle matters, saying things are “good” or “bad” means absolutely nothing to us; measuring and mapping whether things are getting better or worse is what matters most. We’re very reasonable and tolerant about all 2nd derivative debates.

 

While Real Consumer Spending isn’t crashing into a #Recession (that was never our call), there are large components of the US economy already in a recession (no you can’t “back out” Energy, Industrials, Cyclicals, Financials, etc.). That’s why:

 

  1. US Long-term Treasury Yields have dropped from 2.27% at the start of 2016 to 1.87% this morning
  2. The Yield Spread (10yr minus 2yr Yield) is right around cycle lows at 100 basis points wide
  3. High Yield Spreads remain elevated and rising (above the recessionary signal of its historical mean)

 

Yes, the commercial and industrial (C&I) side of the economy matters inasmuch as the consumption and real estate cycle will if these rates of change in both consumer spending and housing demand continue to slow.

 

By the time it’s all slowed to cycle lows, you start buying again.

 

Let me say that differently. If you’ve been positioned properly for the last 3-6 months (instead of last 3-6 weeks), once the entire cycle has slowed to its slowest rate of change, you’ll actually start selling what you already own:

 

  1. Long-term Treasuries (TLT) = +7.8% YTD
  2. Utilities (XLU) = +12.6% YTD
  3. Gold (GLD) = +15.1% YTD

 

And then you’ll probably start buying the classic #LateCycle things (lower) that you shouldn’t have owned from last year’s cycle peak (note: all 3 of these US Equity Style Factors have underperformed Energy YTD – so you definitely don’t want to “back out” Energy):

 

  1. Consumer Discretionary (XLY) = -0.3% YTD
  2. Financials (XLF) = -6.1% YTD
  3. Healthcare (XLV) = -6.7% YTD

 

I know. I know. The YTD performance isn’t “as bad” as this Gentlemanly Bear sounds. But, as you know, staring at a month-end markup performance snapshot can be very risky. Remember “stocks” ramped +6% from the FEB low to MAR 2008 high too…

 

Again, not that things being “bad” matter as much as things getting better or worse do. But wow is this Atlanta Fed “GDP Now” model getting ugly. How a GDP “forecast” goes from +2.7% GDP only a month ago to +0.6% today is beyond me, to be quite frank!

 

We’re sticking with what was the Street’s low Q1 US GDP forecast of 1% (our predictive tracking algorithm and mapping/measurement #process has been accurate, within 25-50 basis points, on GDP for the last 5 quarters – without the 200bps intra-quarter swings!).

 

And, more importantly, we’re reiterating that the US economic and profit cycle won’t even have a chance of putting in a rate of change (cycle) bottom until Q2 which, candidly, won’t be reported until Q3.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.84-1.97%

SPX 1984-2059
RUT 1060-1107

NASDAQ 4699-4828
EUR/USD 1.10-1.13

Gold 1205-1275

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

[UNLOCKED] Early Look: Gentlemanly Bears - 03.29.16 chart


CHART OF THE DAY: More Evidence Of Investors Losing Faith In Central Planners

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to learn more.

 

"... As the Chart of the Day below illustrates, with swap rates, inflation expectations and growth estimates falling, currencies appreciating and European and Asian equities still in crash mode off their respective highs in the face of the latest quantitative and qualitative easing announcements, investors are believing that conditions are as bad as policy makers suggest but are in increasing disbelief of their ability to do anything about it."

 

CHART OF THE DAY: More Evidence Of Investors Losing Faith In Central Planners - CoD inflation Expectations


Cartoon of the Day: The Central Bank Of Neverland

Cartoon of the Day: The Central Bank Of Neverland - Draghi Peter Pan cartoon 04.13.2016

 

Central planners are increasingly pushing on a string as macro markets continue to move in direct opposition to the best efforts of policymakers at the ECB and BOJ.


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

LinkedIn: ‘Proceed With Caution’ | $LNKD

 

Hedgeye Internet & Media analyst Hesham Shaaban removed LinkedIn from his Best Ideas Long list heading into fourth quarter earnings. Good call. The stock is down 50% year-to-date. In this brief excerpt from The Macro Show earlier today, Shaaban responds to a subscriber’s question about whether LinkedIn is now “too cheap to ignore” and gives a deep dive explanation as to why he’s cautious on the stock.


About Everything | When Less Is More

 

In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses why "we’re entering a new era in which simplicity — not choice — is the hallmark of a cutting-edge brand." 

 

Click here to read Howe's accompanying About Everything research note.


A Look At Yellen's (Nonsensical) Claim That Fed Is "Focused On Main Street"

A Look At Yellen's (Nonsensical) Claim That Fed Is "Focused On Main Street" - Yellen cartoon 03.31.2016

 

In case you missed it... 

 

In an exclusive interview with Time magazine, Fed head Janet Yellen said:

 

"We are focused on Main Street, on supporting economic conditions—plentiful jobs and stable prices—that help all Americans."

 

We've been arguing that Fed policies have, in fact, perpetuated the exact opposite of Yellen's stated goal for some time now. In the charts below, via Hedgeye Senior Macro analyst Darius Dale, you can clearly see the massive build in asset prices that Fed helped create. This swelling of financial assets flowed predominantly to the balance sheets of the wealthy. Not Main Street.

 

 

As Darius Dale wrote earlier today:

 

"This grand central planning experiment where we've made literal market-moving rock stars out of government bureaucrats will definitely come to an end." 

 

More on that...

 

Yellen & Co. have this nonsensical line of thinking that the Fed "did not make a mistake" with its December rate hike, a pause in April rate hikes was warranted because the Fed is "willing to be cautious" about poor economic data but that, ultimately, the economy is doing "quite well" so further Fed rate hikes is one of the world's "worst-kept" secrets.

 

Huh?

 

Well, data-dependent Fed, what does the data say?

 

 

Here are a few charts via Hedgeye Senior Macro analyst Darius Dale of recent data releases. Notice the clear-cut declines across these data sets (Retail sales, PPI, and NFIB Business Survey):

 

Click the images below to enlarge: 

 

A Look At Yellen's (Nonsensical) Claim That Fed Is "Focused On Main Street" - darius retail sales

 

A Look At Yellen's (Nonsensical) Claim That Fed Is "Focused On Main Street" - darius ppi

 

A Look At Yellen's (Nonsensical) Claim That Fed Is "Focused On Main Street" - darius nfib


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