prev

CHART OF THE DAY: When US Corporate Profit Growth Is Negative S&P 500 Does This...

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.

 

"... As you know, 100% of the time that US corporate profits slow to negative (year-over-year), the SP500 has had a draw-down (crash) of 20% or more. We’re about to see the 3rd consecutive quarter of a US #ProfitRecession. And Q3 of 2016 will probably be the 4th."

 

CHART OF THE DAY: When US Corporate Profit Growth Is Negative S&P 500 Does This... - 06.09.16 EL Chart


Reflation's Shadow

“You see a shadow moving in the long grass – should you worry about lions?”

-Phil Tetlock

 

I guess it depends if you are in Thunder Bay, Ontario (it could be a wolf or a bear), NYC, or Africa…

 

In an excellent excerpt from Superforecasting titled Probability For The Stone Age, Phil Tetlock reminds us that “it was remarkably late in history, arguably as late as the 1713 publication of Bernoulli’s Ars Conjectandi, before the best minds started to think seriously about probability. Before that, people had no choice but to rely on the tip-of-your-nose perspective.” (pg 137)

 

Sadly, over 300 years later, I wouldn’t say the Old Wall’s “blue chip” forecasters have evolved much. I hear a lot about how GDP “feels like it could be 2.5%.” Then again, this comes from people who were “feeling” like it was 4% only six months ago. I can assure you that I feel absolutely nothing about the numbers that run through our predictive tracking algos.

 

Reflation's Shadow - 4  growth cartoon 03.02.2016

 

Back to the Global Macro Grind

 

Let’s start with some questions I asked the CFA Society at a lunch in Pittsburgh yesterday (Go Pens!):

 

  1. JOBS: given that the rate of change in US Non-Farm Payroll growth TRENDS toward negative 100% of the time after putting in its cycle-peak, is the probability rising or falling that the US labor market is doing what it always does at the end of a cycle?
  2. RATE HIKES? With US #EmploymentSlowing, does the Federal Reserve have it in its non-SP500-dependent mandate to be raising rates as that slowing labor and consumption data is reported?
  3. USD: If both the US Dollar and US Interest Rates go DOWN, every day, pricing in that the answer to question #1 Is YES and the answer to question #2 Is NO, can all assets priced in Dollars ramp to infinity and beyond?

 

Answer to question #3: possibly.

 

But in probability speak, possible is not the same word as probable. This isn’t my first bubble reflation chasing rodeo. Every 5-7 years of my 17 year career on Wall Street, I’ve been told that the US stock market just cannot go down, for real, ever again.

 

If both US and Global Growth continues to slow, it’s much more probable that US Equities crash from here (greater than 20% draw-down from its cycle-peak) than they go to infinity because “this time is different.”

 

As you know, 100% of the time that US corporate profits slow to negative (year-over-year), the SP500 has had a draw-down (crash) of 20% or more. We’re about to see the 3rd consecutive quarter of a US #ProfitRecession. And Q3 of 2016 will probably be the 4th.

 

During stagflation (Quad3) in Q3, can the US equity market see multiple expansion?

 

  1. Anything is possible
  2. But the probable answer is no

 

Why? Because the probable answer starts with what probability theorists call Frequency Theory. Most of the time when nominal growth slows while inflation is accelerating, profits get squeezed and multiples compress on that.

 

Now if you’re long Bernanke’s Bubbles again (i.e. Reflating the mother of all Commodity and Cost of Living Inflations), the market is telling you that you can (once again) get paid on that. How?

 

  1. Late cycle employment and consumption growth slows
  2. The Fed hurries to protect asset inflation via Dollar Devaluation
  3. In Dollars, you get paid by Reflation’s Shadow

 

I know. If you’re just looking at a 50-day moving monkey, most things Reflation (Commodities, Energy Stocks, Emerging Markets, etc.) look like they can outrun any lion right now. The 3 month performance (price) charts are breaking out the bananas. It’s a party, baby!

 

But, god forbid you are a longer-term investor, you pull back those same charts to 5, 15, and 30 year charts, and you’ll see that you might be the monkey hanging out by the tall grass line somewhere in Africa.

 

This, of course, has happened 100% of the time in my carreer. And the non-fiction bubble reflation story goes something like this:

 

  1. 1 #TheCycle peaks and there was one mother of a Q1-Q2 rally to lower-highs in Tech Stocks
  2. 2007-2008 #TheCycle peaks there was one mother of a Q1-Q2 rally in everything levered to Consumer/Housing
  3. 2015-2016 #TheCycle peaks and there’s been one mother of a rally in Commodity Inflation

 

Is it demand or is it the Fed? (i.e. the Dollar)

 

I realize that some big EM like Brazil has its own political story, but does Russia? Both China and Europe continue to slow as Japan falls somewhere inside its own economic abyss (Nikkei and DAX -1% this a.m. and -19-20% from last year’s cycle peak).

 

How about the divergence between 2 big 2011-2012 Bernanke Bubbles that imploded – Oil vs. Copper?

 

  1. Oil (WTI) is up +41% in the last 3 months, but is still down -12% year-over-year
  2. Copper is down -7% in the last 3 months, and remains in crash mode -23% year-over-year

 

Ok. So Energy stocks (XLE +15.0% YTD) look almost as awesome as Utilities (XLU +16.2% YTD), but is that because Oil’s volatility (OVX) has crashed from 80 in FEB to 35 in JUN? Or is that because everything demand is awesome again and suppy will never come back?

 

I’ve been much more vocal on the Long Utilities (XLU) vs. Short Financials (XLF) view than I have been on being long Reflation and that’s basically because it was an easier call to make that growth would slow than it was that being right on #GrowthSlowing would get people to chase Reflation Charts that have been blowing investors up for 3 years.

 

I don’t think of this as a mistake yet (this “bull” only started in MAR/APR). I’m actually thinking of it as an opportunity. While I haven’t been short Energy this year (we were last year with our #StrongDollar Deflation call), I haven’t been long it either.

 

Do I buy something that I’ve initially missed (that’s already had a huge move) that doesn’t have global demand behind it?

 

Maybe.

 

I have no problem buying or selling anything, don’t forget. If Energy stocks (XLE, XOP, OIH, etc.) are about to put on a 6-12 month move (higher) from here, it’s my job not to miss that inasmuch as it’s my job not to get sucked into the allure of its momentum.

 

Maybe it’s a bull. Maybe it’s a bear. Maybe it’s a lion.

 

I just don’t want to end up becoming the monkey in Reflation’s Shadow.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.64-1.78%

SPX 2082-2121

RUT 1139-1195
USD 93.15-94.87
Oil (WTI) 47.78-51.37

Gold 1
Copper 2.02-2.11

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Reflation's Shadow - 06.09.16 EL Chart


ICI Fund Flow Survey | Continuing to Run from Equity

Takeaway: The trend of defensiveness continued last week, although to less of an extreme, with bond flows outpacing equity by $2.2 billion.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

The trend of defensiveness continued last week, although to less of an extreme. Total mutual fund and ETF bond flows outpaced equity by $2.2 billion in the 5-day period ending June 1st. All active equity categories lost funds, amounting to a -$6.4 billion outflow for total equity mutual funds. However, investors did contribute +$5.7 billion to passive equity ETFs, the first contribution to that category in four weeks. Meanwhile, defensiveness continued to prevail with +$1.9 billion in contributions to total bond mutual funds. The -$1.1 billion outflow from global bonds was the only fixed income mutual fund withdrawal last week. Also, bond ETF flows were mildly negative at -$456 million. Allocations to money funds during the week were flat, a trend we are watching closely after the biggest annual inflow into cash products last year in 2015 since 2008.


ICI Fund Flow Survey | Continuing to Run from Equity - ICI19

 

In the most recent 5-day period ending June 1st, total equity mutual funds put up net outflows of -$6.4 billion, trailing the year-to-date weekly average outflow of -$2.5 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$1.9 billion, trailing the year-to-date weekly average inflow of +$2.3 billion but outpacing the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$5.7 billion, outpacing the year-to-date weekly average outflow of -$1.0 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net outflows of -$456 million, trailing the year-to-date weekly average inflow of +$1.4 billion and the 2015 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI2

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI3

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI4

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI5

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI12

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI13

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI14

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI15

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI7

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +$299 million or +4% to the industrials XLI ETF last week.

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI17

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$2.2 billion spread for the week (-$689 million of total equity outflow net of the +$1.5 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is -$2.1 billion (negative numbers imply more positive money flow to bonds for the week) with a 52-week high of +$20.2 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Continuing to Run from Equity - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







investing ideas

Risk Managed Long Term Investing for Pros

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.

The Macro Show with Neil Howe Replay | June 9, 2016

CLICK HERE to access the associated slides.

 

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


Good thing the jobs number was a bomb!

Client Talking Points

Reflation

With USD signaling immediate-term TRADE oversold this week, did we see the final push/capitulation/chase in all things Down Dollar Dovish Fed, or is reflating the former bubble just getting started? Sounds like a Q3 Hedgeye Macro Theme in the works… Oil +41% in the last 3 months but Copper -6.4% - demand?

Russell

We didn’t think we’d get yet another shot at shorting the Russell closer to 1200, but we get things wrong all of the time. While it hasn’t been wrong to be short the Russell from this time last year (RUT still -8.2% from #TheCycle high), it’s been dead wrong for the last month. Short more here with immediate-term downside to where it started 2016.

Global Equities

We know. When trying weave the “global demand has bottomed” narrative about US stocks, you have to ex-out things like Japanese and German Equities (and their bond yields hitting all time lows) – small details we're sure, but both Nikkei and DAX down another -1% today and down -20% and -19%, respectively, from last year’s highs.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/8/16 74% 0% 0% 4% 14% 8%
6/9/16 69% 0% 0% 5% 16% 10%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/8/16 74% 0% 0% 12% 42% 24%
6/9/16 69% 0% 0% 15% 48% 30%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's (MCD) is testing fresh beef in 14 Dallas-area restaurants in an attempt to become a modern progressive burger company and better compete with smaller, premium chains. Part of the reason they haven’t done this in the past is because there hasn’t been enough supply of fresh beef for their demand.

 

The initiative will expand further to more markets over the course of the year to test both consumer perception and their supply chains ability. This could be a big move for MCD that will undoubtedly improve food quality and consumer perception of the company.

 

Also in the news over the last couple of weeks is MCD’s plan to move its HQ from Oak Brook to downtown Chicago. Although not important from an operational perspective immediately, it will help the company attract and retain top talent which will be beneficial overtime. MCD remains one of our top ideas in the Restaurant space.

TLT

Friday’s jobs report represented a complete shift to any renewed expectations of a June/July hike. The yield spread ended the week pinned near the bottom of the cycle low at 92 basis points (10yr-2yr yield %). And, looking at real-time rate hike expectations, the bid-yield of December 2016 Federal Funds Futures Contracts dipped 8 basis points day-over-day, implying the market’s expectations for the first rate hike is now in 2017!

GLD

That was the commentary that closed out a deflationary month of May – USD +3.1% with Gold -6.3% and the long end of the Treasury curve and the S&P roughly flat. Fast forward a week. Gold, the Treasury market, and Federal Fund futures don’t buy the hawkish rhetoric for a second.

 

We’ve shown our chart of the Y/Y% change in Non-Farm Payrolls numerous times, so Friday’s Jobs report was no surprise to us. Consumption and labor market strength are classic late-cycle indicators, but eventually these indicators peak and roll-over in rate-of change terms. Here's the Jobs Report breakdown:

Non-Farm payroll additions totaled +38K in May vs. +160K est. and +160K prior. While the number was a bomb for those who follow the month-to-month sequential change (which is useless), we expected the weakness. To be clear, history paints a very clear picture. NFP additions peaked in Q1 of 2015 and have since rolled over. It’s part of #TheCycle.  

Three for the Road

TWEET OF THE DAY

Cartoon of the Day: Squirrelly app.hedgeye.com/insights/51529… via @Hedgeye

@KeithMcCullough

QUOTE OF THE DAY

“To be prepared for war is one of the most effective means of preserving peace.”

         -George Washington

STAT OF THE DAY

LeBron James scored 32 points last night in the Cavaliers victory over the GS Warriors.


JT TAYLOR: Capital Brief

Takeaway: Clinton's Courtship, Trump's Bad Week; When Will Bernie Go?

JT TAYLOR:  Capital Brief - JT   Potomac banner 2

 

CLINTON’S COURTSHIP: The rivalry between Hillary Clinton and Bernie Sanders moves into a new phase where Clinton hopes to soothe tensions and move the party towards unification and eventually instill enthusiasm among Sanders’ loyalists. It won’t be completely one-sided and no candidate will get their own way –  and she’ll likely have to concede more ground on trade, financial services, as well as labor issues. If Clinton wants to get a head start on beating Donald Trump in the fall, she and Democratic party chieftains need appeal to him and his most fervent followers who toil outside the traditional boundaries of the Democratic party. As we’ve noted before, look for Senator Elizabeth Warren to play a central role in brokering a deal in the coming days.

 

SELF-INFLICTED WOUNDS: Bad week for Trump and the timing couldn’t be worse. Party leaders are admonishing him to avoid controversy and focus on policy issues - and fast. With the Democrats uniting - and with five months to go to election day - they fear that they’ll be dragged down with him if he doesn’t pivot away from his sideshows and focus on what Americans care about.

 

EXTINGUISHING THE FLAME: Sanders hasn’t sacked his campaign, but he is sure to shortly. With DC being the only remaining primary and Clinton’s grip on the nomination all but assured, his campaign has begun laying off staff as a large majority of superdelegates are expected to go public with a Clinton endorsement. Sanders will meet with President Obama this morning and  Minority Leader Harry Reid later in the day -who along with Warren will work to convince Sanders to exit gracefully.  Sanders says he’ll remain in the race until next week’s DC primary – but the reality of flipping over 400 superdelegates is starting to sink in...

 

LOOKING AT THE LIBERTARIANS: Libertarian presidential nominee Gary Johnson is making a pitch to Sander’s supporters by asking them to take a look at the Libertarian agenda. Johnson is positioning himself as the “real alternative” to voters choosing between two wildly unpopular candidates. Objectively, a connection to Sanders’ supporters is there – Johnson believes he and Sanders share a connection on many things like social issues and foreign policy – but diverge on matters like the economy. Johnson will be vying for disenfranchised Republicans and Democrats  – but as importantly - he’ll be looking to take advantage of any and every opportunity to bring Independents in his fold.

 

KEEPING THE PROMESA: H.R. 5278, The Promesa Act – the Puerto Rico debt stability bill – worked its way through House Rules Committee and is now off to a floor vote. PR’s next major payment due to bondholders is fast approaching - Congress must act before July 1st to provide a life vest for the island. The House will take it up today - giving the Senate little time for consideration, let alone changes, to the legislation.

 

FIDUCIARY RULE UPDATE: President Obama vetoed a resolution that would block the DOL’s fiduciary rule. The veto will make it even more unlikely that the resolution will see the light of day as neither the House nor the Senate have enough votes to override.

 

PREVIEW OF THE JUNE FOMC MEETING: Join us today for a preview of the June 14-15 FOMC meeting with former Fed Vice Chairman Don Kohn.  Don will offer his outlook on the jobs report, consumer spending, personal consumption, GDP growth, and other factors expected to influence the Fed's rate hike calculus.  Email us for dial-in information.


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.

next