Hedgeye Guest Contributor | Cliggott: A Tired, Fragile Stock Market

Takeaway: The footings now supporting US equity prices are looking pretty tired and fragile.

Editor's Note: Below is a Hedgeye Guest Contributor research note written by our friend Doug Cliggott. Cliggott is a former U.S. equity strategist at Credit Suisse and chief investment strategist at J.P. Morgan. He is currently a lecturer in the Economics Department at UMass Amherst. 


A brief note on our contributor policy. While this column does not necessarily reflect the opinion of Hedgeye, suffice to say, more often than not we concur with our contributors. In the piece below, Cliggott writes, "The footings now supporting US equity prices are looking pretty tired and fragile."


Hedgeye Guest Contributor | Cliggott: A Tired, Fragile Stock Market - corp profits cartoon 03.28.2016


Total income has expanded at a slow, but steady pace in the U.S. during the past several quarters – national income grew by 3.1 percent during 2015 and 2.9 percent in Q1.2016. Not much change there. What has changed in an important way is the composition of overall income – labor compensation grew by 4.5 percent in 2015 and accelerated a bit to 5.0 percent in the first quarter.


The flip side of the pick up in labor compensation is a weakening of corporate profits. They contracted by 3.1% in 2015 and by 5.8% in the first quarter. So what we are seeing is a clear weakening of profit margins – a very natural outcome 7 to 8 years into a profit cycle.


The dismal trend in U.S. labor productivity and OECD data on leading economic indicators of the most relevant markets for large US corporations – the US, Europe, China – strongly suggest a further intensification of “profit problems”.


Corporate America has reacted to weakening profitability in traditional fashion. They have scaled back capital spending (down about 2% versus a year ago in the first quarter) and they have slowed their pace of new hiring, from about 200,000 jobs a month this time last year to about 100,000 per month during the past three months.


We know what usually happens next – weaker capex and slower job creation slows demand growth, this weakens profitability further, and down we go in a negative, re-enforcing cycle. The normal “end game” – outright declines in total income and employment – may now be just months away in the U.S.


What corporate America has not done – yet – is slow their accumulation of new debt. Non-financial corporations increased their borrowing in the first quarter by $180 billion, to $8.28 trillion. The last time U.S. corporations borrowed this much in a 3-month period was the last quarter of 2007. And it looks like their primary motivation for borrowing in 2016 is exactly the same as it was back then – to support their stock prices by ratcheting up the amount of cash they give back to shareholders even as their profits and cash flows weaken.


The shrinkage in equity outstanding through both mergers and share buybacks added together with dividend payments totaled $1.27 trillion (at an annual rate) in the first quarter, up about 10 percent from the $1.15 trillion pace during 2015. These shareholder payments represented 59 percent of the after-tax cash flow of non-financial corporations in Q1 2016, up from 53 percent in 2015 and 43 percent in 2014. By contrast, capital spending as a share of cash flow declined modestly, to 80 percent in Q1.2016 versus 83 percent in 2015. 


Looking back at seventy years of US financial history, the only time corporate America devoted a similar amount of their cash flows to dividend payments and share buybacks was in 2006 (56 percent) and 2007 (70 percent). And then when corporate borrowing slowed, total shareholder payments were cut hard – to 46 percent of cash flow in 2008, and 25 percent of cash flow in 2009. 


The key lesson from this time, I think, is that while corporate cash flow declined by less than 5 percent between 2007 to 2009, shareholder payments were cut by two thirds – from $1.20 trillion to $400 billion.


Since it is commonly acknowledged that shareholder payments are now the primary, and in some months, the sole, source of demand for US equities, the pace of corporate borrowing may be our best guide to the direction stock prices in America. With profits declining and cash flow stalling it wouldn’t be too surprising to see borrowing slowdown real soon.


So here’s the punch line: The footings now supporting US equity prices are looking pretty tired and fragile.

Stormy U.S. Economic Data

Takeaway: U.S. Consumer Confidence and Jobless Claims data paint an ugly economic picture.

Stormy U.S. Economic Data - S P 500 cartoon 06.08.2016


"If you're bullish on a US economic recovery in 2H, I've got a couple of charts for you to be willfully ignorant of," writes Hedgeye Senior Macro analyst Darius Dale.


Consumer Confidence


Stormy U.S. Economic Data - consumer confidence 6 13


Jobless Claims


Stormy U.S. Economic Data - jobless claims 6 13


...Not to mention May's U.S. jobs report, which just so happened to be the worst report in almost six years.


So, what do you do with that? 


Here's Darius:

Meanwhile ... our non-consensus call on long bonds (via TLT) continues to serve Hedgeye subscribers rather well too. It's up 12% YTD vs a 2.5% return for the S&P 500.

[Crash]: A Look At Global Stocks

Takeaway: "The Old Wall will blame Brexit, but stocks in London are only -0.39% - blame #GrowthSlowing."

[Crash]: A Look At Global Stocks - World Market No 12.16.14


Global Equity markets are getting crushed this morning.


  1. Japan, Nikkei (-3.5%)
  2. China, Shanghai Comp (-3.2%)
  3. Germany, DAX (-1.3%)
  4. Italy, FTSE MIB (-2.3%)


The common refrain cited by mainstream media this morning is Brexit risk ... but that's a mirage. "The Old Wall will blame Brexit, but stocks in London are only -0.39% - blame #GrowthSlowing," Hedgeye CEO Keith McCullough wrote this morning.


Here's more analysis from McCullough in a note sent to subscribers this morning:


"... Not that this would matter, but Japan, China, Germany, Italy, etc. are all in crash mode from 2015 cycle highs – Nikkei hammered -3.5% last night (-23% from July 2015); Shanghai -3.2% overnight (-45% y/y); Italy -2.4% (-30% from July 2015) #GrowthSlowing."


Take a look at Japan...



... And China



Meanwhile, over in Europe...


Italian equities lead the losers:




... German equities are still crashing:



While global equity markets get eviserated, our favorite Macro positions like Long Bonds (TLT) and Gold (GLD) are winning. McCullough continues:


"Our call for an all-time low this year in the UST 10yr is playing out and the Long Bond remains our Best (Long) Macro Idea – 1.62% 10yr in the USA, taking it to -65bps YTD; Germany 10yr testing negative at 0.01%, Swiss 10s new lows at -0.51%."





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Daily Market Data Dump: Monday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products




Daily Market Data Dump: Monday - equity markets 6 13


Daily Market Data Dump: Monday - sector performance 6 13


Daily Market Data Dump: Monday - volume 6 13


Daily Market Data Dump: Monday - rates and spreads 6 13


Daily Market Data Dump: Monday - currencies 6 13

CHART OF THE DAY: What's Winning (& Losing) As U.S. Growth Slows

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.


"... If you’re long things that are crushing it when growth slows (and bond yields fall), congrats:


  1. Utilities (XLU) added another +1.0% absolute return last week taking them to +16.8% YTD
  2. Gold rose another +2.8% last week to +20.2% YTD


On the other side of that, classic #LateCycle consumption Sector Styles in the USA lagged:


  1. Financials (XLF) lost another -1.5% on the week to -2.8% YTD
  2. Consumer Discretionary (XLY) fell back into the red last week, closing -0.8% to -0.8% YTD"


CHART OF THE DAY: What's Winning (& Losing) As U.S. Growth Slows - 06.13.16 Chart

REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.


Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)




1. Airbnb Is an Existential Threat to the Hotel Industry (6/11/2016)



In this brief excerpt from The Macro Show, our Gaming, Lodging & Leisure Sector Head Todd Jordan explains why Airbnb is a significant threat to the hotel industry.


2. This Is One of the Top-3 Stock Market Bubbles in History (6/10/2016)



In this excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough and Demographics Sector Head Neil Howe discuss why “the stock market is one gigantic emotional rollercoaster” perched perilously at its peak. 


3. The Bullish Case for Life Insurance | Q&A with Neil Howe (6/9/2016)



Hedgeye Managing Director Neil Howe held a live Q&A on Thursday June 9 in which he discussed why life insurance company shares have been beaten down since the Great Recession, and makes the case for their comeback.


Click here to read Howe’s associated About Everything piece.


Click here to access the associated slides.


4. Benn Steil: Donald Trump Is a Clear and Present Market Danger (6/8/2016)



Would a Trump presidency be bad news for the global economy and markets? Benn Steil, director of international economics at the Council on Foreign Relations and author of "The Battle of Bretton Woods" thinks so. He discusses the disconcerting and adverse consequences a Trump presidency may have with Hedgeye CEO Keith McCullough.


5. Drake: Contextualizing the Biggest Deceleration in Credit Growth Since 2010 (6/7/2016)



In this brief discussion, Hedgeye U.S. Macro analyst Christian Drake analyzes the trend in consumer credit growth, which has been supporting consumption in the face of slowing income growth.


6. Yikes: Yellen’s Favorite Market Indicator Hits 7-Year Low (6/6/2016)



Hedgeye U.S. macro analyst Christian Drake takes a look at the “Labor Market Conditions Index” which just posted its 5th consecutive month of negative reading (worse since 2009) and what it portends for Fed policy.


7. McCullough: The Most Asymmetric US Corporate Profit Risk (Ever) (6/6/2016)



In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough reviews the “Fantasy Island” earnings risk blinding many investors and why second and third quarter earnings for most sectors will be “awful.”

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