CHART OF THE DAY: The Latest Of #LateCycle Economic Indicators

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.


"... The latest of #LateCycle economic indicators is obviously employment. That component of the USA’s ISM report remained < 50 (at 49.2) for the 5th consecutive month. Not ironically, NFP (non-farm payrolls) peak, on average, 4-6 months AFTER #TheCycle (GDP) does."


CHART OF THE DAY: The Latest Of #LateCycle Economic Indicators - 05.03.16 Chart

Transparently Slowing

“China is not doing this transparently.”

-Jim Rickards


While my friend, analyst, and author Jim Rickards could have obviously been talking about Chinese PMI and/or GDP data, in his latest book (The New Case For Gold), he was alluding to Chinese stockpiling of a precious currency that’s currently up over +22% YTD.


“China, Russia, Iran, and other countries’ central banks are stockpiling gold as quickly as they can. In July 2015, it updated its official gold reserves for the first time since 2009 to show 1,658 tons, up from the previous reserve of 1,054 tons… China’s figures are deceptively low because it holds huge reserves, perhaps 3,000 additional tons or more in an agency called the State Administration of Foreign Exchange, or SAFE.” (pg 92)


I don’t know about you, but I put my physical Gold in a safe. So, maybe these Chinese dudes deserve some “clever” points for hiding theirs in a place where only a macro moron wouldn’t consider searching for it.


Back to the Global Macro Grind


You don’t have to search very far to see that Global #GrowthSlowing remains reality inasmuch as that intermediate-term macro TREND “bottoming” remains a hope.


The Australians cut rates another 25 basis points overnight and the European Commission cut their growth forecasts (again) this morning. Consensus still isn’t in the area code of our Street low 0.2% GDP estimate for the Eurozone in Q4 of 2016.


Transparently Slowing - Japan cartoon 05.02.2016


As Japan’s grand central-market-planning experiment blows up in their unaccountable face (and Japanese growth slows, again), both the American and Chinese macro data continues to TREND bearish as well:


  1. China reported a made-up PMI of 49.4 for APR vs. 49.8 in MAR
  2. USA reported an ISM for APR of 50.8 vs. 51.8 in MAR


I know. Lots of people have been calling for ISMs and PMIs to bottom this year. And in anchoring on that, they completely missed that the later cycle sectors of the US economy (Consumer, Financials, Healthcare, and Tech) #slowing.


The latest of #LateCycle economic indicators is obviously employment. That component of the USA’s ISM report remained < 50 (at 49.2) for the 5th consecutive month. Not ironically, NFP (non-farm payrolls) peak, on average, 4-6 months AFTER #TheCycle (GDP) does.


But that US #EmploymentSlowing surprise is something you Long Bond (TLT), Utilities (XLU), and Gold (GLD) bulls can look forward to by the end of this week. In the meantime, we have this other big thing going on called Earnings Season.


For Q1 Earnings Season to-date, 315 of the 500 companies in the S&P 500 have reported results:


  1. Aggregate SALES growth is down -2.6% year-over-year = worst level of the season so far
  2. Aggregate EPS growth is down -8.9% year-over-year = worst level of the season so far
  3. Industrials and Financials have EPS down -7.6% and -13.4% year-over-year, respectively


But if you back all of that out and just look at Energy, earnings for that sector are down -96.5% year-over-year. So, what you really want to do to in perma-bull storytelling on SPY is “Ex-Energy” earnings from the picture, but be overweight Energy (XLE) stocks.


The Top 3 Losing Sectors in the SP500 YTD are:


  1. Healthcare (XLV) -2.6% YTD
  2. Financials (XLF) -1.3% YTD
  3. Technology (XLK) -0.9% YTD


You can probably get that Tech (XLK) component “up” YTD if you go Ex-AAPL. Heck, who has owned Apple or European stocks since #TheCycle peaked in Q2 of 2015 anyway? Probably no one, eh.


To be fair to those who deal with “relative” returns… German, Italian, and Spanish stocks are down -20%, -25%, and -25%, respectively, from their 2015 #Bubble highs, so “cheap” (getting cheaper) European stocks are still “outperforming” a you-gely cheap AAPL!


Admittedly, you can get lost in the mess that is the narrative on why the US stock market should be at all-time highs right now. Perversely that narrative should be grounded in the US economic data being so bad that the US Dollar gets torched to all-time lows.


But, for now, with last year’s biggest losers (Energy and Industrials) placing 2nd and 3rd in the Sector leaderboard to our Utilities (XLU +12.8% YTD), the storytelling is still trying to hang onto a hope that cyclical demand has “bottomed”, however transparently inaccurate that is.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.72-1.92%

SPX 2065-2090
RUT 1120-1156


DAX 95
USD 92.03-94.57
EUR/USD 1.13-1.16
Oil (WTI) 41.96-46.37

Gold 1255--1302


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Transparently Slowing - 05.03.16 Chart

The Macro Show with Darius Dale Replay | May 3, 2016

CLICK HERE to access the associated slides.

An audio-only replay of today's show is available here.

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

China, Euro and Gold

Client Talking Points


USA’s ISM slows (50.8), China’s PMI slows (49.4)… We are guessing demand hasn’t “bottomed.” The Hang Seng (getting little to no air-time these days) got smoked for a -1.9% loss overnight, only down -27% from where you could have bought it in May of last year.


Isn’t the Fed burning the U.S. Dollar and Wall St begging for more fun? Not in Japanese and European stock “chart” terms; the Euro is testing $1.16 vs. USD this morning (almost a 4 standard deviation move) and European Equity markets remain in crash mode from their 2015 highs (draw-downs: DAX -20%, Spain’s IBEX -25%, Italy’s MIB -25%).


Instead of down -20% to -27%, Gold is already +22% for the year-to-date! That remains in our Top 3 Macro Long Ideas (Macro Themes Deck) alongside the Long Bond and Utilities (XLU) – these ideas all reflect the same view that #GrowthSlowing globally (i.e. economic gravity) can’t be fixed by a central market planning #BeliefSystem this time.


*Tune into The Macro Show with Hedgeye Restaurants & Consumer Staples analyst Howard Penney live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Please note we are removed General Mills (GIS)  from Investing Ideas (long side) on Monday. Hedgeye CEO Keith McCullough wrote in Real-Time Alerts: "While I like GIS from a Style Factor perspective (it did its job last week, closing up in a down tape - doing its job again this a.m. +1%), it's:

A) Signaling a series of lower-highs from a long-term perspective

B) Not as well loved by my analyst team (Penney and Laidlaw)


While we still like the long-term story, the stock’s performance in 2016 has been nothing short of spectacular. Year-to-date GIS is up +7.8% versus +1.3% for the S&P 500. The company’s 3Q15 performance was mixed with the company missing on revenues and beating on EPS with the benefit of cost cutting.


That being said, there are a number of one-time items impacting volume growth that should self-correct in 4Q16 and FY17. GIS is currently trading at 13.9x EV / NTM EBITDA an all-time high for the company. Looking past GIS, the entire Consumer Staples space feel like there is a Safety Trade/ZBB/M&A bid underneath the entire group. We maintain our long-term bullish stance on GIS, but given the rapid acceleration to all-time highs in the YTD period, a correction is inevitable.


In a recent note to Real-Time Alerts subscribers, Hedgeye CEO Keith McCullough asked rhetorically, "What to buy?" "On pull backs to the low-end of my immediate-term risk range, I'd be buying more:

1. Long-duration Bond Exposures (TLT, ZROZ, EDV, etc)

2. Low-Beta Big Cap Stocks With Safe Yields (MCD, GIS, NKE, etc.)

3. Gold (GLD)"


McDonald's (MCD) has all the style factors we like for these turbulent markets, which explains why it's up 27% since we added it to Investing Ideas in August. Stick with it here.


Despite the weak U.S. GDP print, growth is very unlikely to rebound here in Q2. Don't get caught up in residual seasonality hopium. The confluence of steepening base effects amid the trending deterioration in economic momentum support our GIP Model forecast of a continued deceleration in the YoY growth rate of real GDP from +1.9% in 1Q16 to +1% in 2Q16E. The latter growth rate translates to +0.3% on a QoQ SAAR basis, which is up from our previous forecast of -0.5% (a lower base rate implies a smaller delta to get to the same numbers, all things being equal).


Assuming Q1 isn’t revised in any material way, our forecast for 1H16E is represents the slowest pace of domestic economic growth on a multi-quarter basis since 2H12. Any downside surprises from there will surely translate to renewed recession fears.” Giddy up for continued #GrowthSlowing!


The good thing about each of our active Macro positions (i.e. TLT, ZROZ, XLU and JNK) is that each of them typically works on an absolute return basis when growth slows.

Three for the Road


RISK MGMT ALERT via @KeithMcCullough:

"The Most Important Point I’ll Make Today"… $SPY



Our greatest weakness lies in giving up. The most certain way to succeed is always to try just one more time.

Thomas A. Edison


Drake’s VIEWS album sold a reported 630,000 copies in one night after its release to iTunes and Apple Music on April 29th. Hits Daily Double reports that VIEWS will sell 1 million album equivalent units its first week.

Credit Cycle = Past Peak | 2Q16 Senior Loan Officer Survey

The Fed Senior Loan officer survey for 2Q16 released today showed a further tightening in corporate & commercial credit.


Specifically, a net percentage of banks tightened C&I lending standards for the third quarter in a row (11.6% in 2Q, up from 8.2% in 1Q) while C&I loan demand was negative (-8.7% net) for a 2nd consecutive quarter. 


Dynamics were similar on the CRE side as the net percentage of domestic respondents tightening standards for Commercial Real Estate loans increased across all loan categories while the percentage of firms reporting increased demand for CRE loans was largely flat sequentially


From a macro perspective, there are a few notable takeaways: 

  • Credit is Causal:  It’s both virtuous and vicious and just as it can serve to jumpstart or amplify a virtuous cycle on the upside, it can similarly serve to catalyze a negative self-reinforcing downcycle.  As is the case currently, banks tightening the screws, increasing the price of money or reporting reduced demand for money all portend a slowing of economic activity.
  • Spill Over?  This quarter's survey included special questions about lending to firms in the oil and natural gas drilling or extraction sector. Notably, direct exposure to the sector is relatively small with the majority of domestic banks indicating that such lending accounts for less than 5 percent of their outstanding C&I loans. However, as the survey notes, “banks indicated a spillover from the energy sector onto credit quality of loans made to businesses and households located in energy-sector-dependent regions. In particular, a significant net fraction of banks reported that credit quality deteriorated for both auto loans and non-energy-sector C&I loans somewhat over the past year. Furthermore, moderate fractions of banks indicated that CRE loans, consumer credit card loans, and consumer loans other than credit card and auto loans made to businesses and households in these regions also deteriorated somewhat over the past year.”
  • Recessionary Harbinger:  Historically, a broad and sustained tightening of credit has been a harbinger of recession.  As can be seen in the C&I and CRE Survey Charts below the prevailing trend has clearly been one of tighter credit and declining/less-good demand.  Concentrated tightening in the commercial sector suggests capex and nonresidential fixed investment will remain underwhelming and a headwind to headline growth, at the least.  We expect declining corporate profitability and spending to carry negative flow through to consumer credit trends on a lag.  
  • The Credit Cycle:  The credit cycle is, indeed, a cycle that has, historically, played itself out in autocorrelated fashion in both directions.  Our bank credit cycle indicator, which represents an equal weighted composite of the key credit metrics in the Loan Officer Survey, went positive (i.e. a net tightening) for the 1st time this cycle in 2Q. 

In short, the Senior Loan Officer data continues to suggest the credit cycle is past peak and in phase with the labor, income, confidence and profit cycles, all of which are traversing their downslopes at present.  


Credit Cycle = Past Peak | 2Q16 Senior Loan Officer Survey -  CreditCycle Senior Loan Officer Survey Slide 34


Credit Cycle = Past Peak | 2Q16 Senior Loan Officer Survey - C I Indicators


Credit Cycle = Past Peak | 2Q16 Senior Loan Officer Survey - Fed CRE loans


Credit Cycle = Past Peak | 2Q16 Senior Loan Officer Survey - Fed C I loans



Christian B. Drake


McCullough: The Most Important Point I’ll Make Today


In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why “S&P 500 positioning is at its most bullish point of 2016.”