"Unlike many strategists (who missed calling the cycle top in US Consumption, Employment, and Profits last year), we have stayed with The Cycle call we’ve had all along here in Q2," Hedgeye CEO Keith McCullough wrote recently.
"I really don’t think that the introduction of the negative interest rate backfired or caused the yen to appreciate and stock markets to decline in Japan... If anything, I can say that if we didn’t introduce the QQE with the negative interest rate, financial markets in Japan would have been even worse.”
That's BOJ head Haruhiko Kuroda, during a speech at Columbia University yesterday. Kuroda continued reiterating that the BOJ "will not hesitate to take additional easing measures in terms of three dimensions — quantity, quality and the interest rate — if it is judged necessary."
Here's analysis from our Macro team in a note sent to subscribers this morning:
"The Japanese yen’s -1% decline to the mid-109’s on the USD cross in the WTD has been good for a major squeeze higher in the Nikkei this week. Today’s massive +3.2% rally puts the index up +6.9% WTD with one more day of trading to go.
In a speech at Colombia University yesterday, BoJ Governor Haruhiko Kuroda doubled down on NIRP by highlighting how it “boosts the effects of existing policy measures by directly pushing down the short-end of the yield curve”. Despite this week’s spectacular gains, the Nikkei more-or-less remains in crash mode down -19.3% from its peak last June and we think it’ll take more than jawboning to perpetuate a series of lower-highs in the yen and higher-lows in the Nikkei from here.
We expect the pressure of decelerating trends across headline, core and producer price inflation – as well as long-term breakeven rates – to cause the BoJ to add to its easing measures at its April 27-28 meeting. Will additional easing in Japan be met with additional repudiation of the central planning #BeliefSystem, or will Japan simply export this growing lack of faith to U.S. markets via a stronger dollar?"
Below is a brief excerpt from our Potomac Research Group colleague and Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. For more information on how you can access our institutional research please email email@example.com.
NY is Hillary Clinton's Northeastern firewall, but like many of her other firewalls, the Bern found a way to jump it - and enthusiasm for him was more than validated by last night's crowd of 27,000 in NYC. Sanders had started to gain momentum, and was trending up in the polls - but Clinton has pulled out all of the stops, and his momentum statewide stalled. The surest sign of a Sanders loss is that he is following through with his scheduled trip to the Vatican after participating in tonight's Brooklyn debate. If he thought he was anywhere close to pulling off an upset victory he would be spending those two days in Rome, NY instead.
Following a big win for the anti-Trump movement in WI, their efforts heading into NY have lost as much steam as Cruz's campaign. Perhaps knowing a defeat was inevitable, the anti-Trump aligned PACs haven't spent any money on ads in NY. Whether it's a calculated decision or not, it may be a mistake - even slight resistance and microtargeting (a Cruz mainstay) in select Congressional districts could substantially decrease how many delegates Trump wins in NY, and at this point a mere 20 extra delegates could be the make or break for a first ballot Trump victory.
With preparations and plotting for the Republican convention in full effect, prominent Republicans across the party are declaring they will not attend as a number of them are facing competitive races this fall. NH Senator Kelly Ayotte and NC Senator Richard Burr have suggested they will skip the event - keeping out of the unpredictable spotlight or being tied to Donald Trump or Ted Cruz - reaffirming what a number of our political sources having been telling us for weeks: Republican incumbents are running intensely localized campaigns that more resemble those vying to be sheriff than Washington power brokers.
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Takeaway: What do declining corporate profits mean for U.S. equities?
In a note sent to subscribers earlier this morning, the Hedgeye Macro team provides some early insights on how earnings season is shaping up thus far:
"It’s early in earnings season, but we got an early look at tough comps in commodity land (Monsanto and Agrium have both comped down double digits on top and bottom line). Alcoa fired 1,000 people globally in the process.
One of the key call-outs in our macro deck was that S&P 500 companies face tough comps for Q1 and Q2 (8 of 10 sectors comped higher in Q1 2015), with the flow through sparking the big question: with forward-looking earnings being taken down, what multiple will the market slap on declining forward looking expectations?"
For more, in the video below, Hedgeye CEO Keith McCullough explains why "we are vigilantly bearish on corporate earnings and junk bonds" while tearing down the latest permabull narrative that a weaker U.S. dollar will lead to “widespread earnings beats.”
If the ugly earnings picture holds, Q1 will be the third consecutive quarter of negative corporate profits. Look out below equity investors! Here's the must-see chart:
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.
* * * *
“It meant being reasonable, tolerant, honest, virtuous, and candid.”
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)
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:
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:
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:
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):
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%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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."
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