“Never for the sake of peace and quiet, deny your own experience or convictions.”
Don’t worry. I’m not going to go all Swedish on you this morning. That said, Hammarskjold has some great leadership quotes.
The main reason why I’m thinking about peace and quiet this morning is that Darius Dale and I spent all of yesterday in NYC meeting with Institutional Investors. And we couldn’t believe how quiet the streets of New York were.
I’m not talking side streets. I mean the main streets like Park and Madison where there’s always a hustle and bustle of business suits. Not yesterday. Is everyone on vaca? It’s Earnings Season. I doubt it. It was weird.
Back to the Global Macro Grind…
What wasn’t weird was seeing volume accelerate on yesterday’s US stock market down move. Yes, amidst the performance chase, down days have been infrequent as of late. But the pattern of this liquidity trap remains consistent:
A) Equity Market UP days have generally had decelerating volume
B) Equity Market DOWN days have generally had accelerating volume
We map Total US Equity Volume (including dark pool), across multiple durations, daily. As opposed to just staring at the surface area of the market (i.e. a moving avg of price), I like to measure it in 3D (price, volume, and volatility).
In stark contrast to the down -20-27% volume days we’d been seeing during the SP500’s relentless march to multiple-all-time-closing-highs in July, yesterday’s volume (on SP500 -0.64%) was +12% and -7% vs. its 1-month and 1-year averages, respectively.
On the intraday lows (where I sent out a buy/cover signal on SPY and IWM in Real-Time Alerts), front-month US Equity volatility was +12% on the day. By the close, VIX was +8%.
What does it all mean?
In a vacuum, not much away from the obvious. The majority of US equity only Portfolio Managers have not been able to beat beta (SPX +5.5% YTD) this year, so there’s been a reluctantly long community of bears who are quick to sell when the selling starts.
As for how crazy the quietness of it all is. It’s been a disservice to clients to be chasing charts (after they’ve moved) every time US Equity Volatility (VIX) has fallen below 12, going all the way back to the summer of 2014.
Hedgeye veterans will recall that one of our Top 3 Macro Themes in Q3 of 2014 was called #VolatilityAsymmetry. That was not only the all-time high in US corporate profitability, but the all-time low in cross asset class volatility.
Never, ever, forget where we came from.
I spend a lot of time pounding this asymmetry of profits point into both current and prospective clients, mainly because I think contextualizing the risk of the #ProfitCycle, across durations, is critical to risk managing where asset prices go next.
As you can see in today’s Chart of The Day (slide 13 in our current Q3 Macro Themes deck), US domestic corporate profits (and margins) put in the mother of all tops in the 2nd half of 2014. And at $60 Oil (never mind $39), we’re not going back there.
Alas, after any long-term #bubble chart like this peaks and rolls, everyone in the Old Wall research department wants to call it “bottoming” (having never called it topping of course). That’s typically the last sucker’s rally.
The bounce in a bubble to a lower-high, that is…
But, but, KM… CNBC keeps saying “Earnings Beat.” Yep. Got that. So easy a person who has never modeled a company can do it. “They beat, bro!” Oh yes, journo-pro… thundering statesman of headline teleprompter, you go!
For Q2 Earnings Season to-date:
- 367 of 500 S&P500 companies have reported an aggregate y/y non-GAAP EPS decline of -4.0%
- 27 of the 367 companies that have reported are “Energy” companies – and no you can’t “ex-that-out”
- 79 of the 367 companies are called Financials, and their aggregate y/y EPS decline is -5.4%
I gave you my “Low Energy” view yesterday and I’m quite happy to not have to make excuses on why “everyone’s a buyer at $36” when mostly everyone who chased anything energy in June is already long it at $50.
I remain quite concerned about the Financials and increasingly concerned about the only “Earnings Growth” story that was up double-digit in Q2, which is Consumer Discretionary (46 companies have reported an aggregate y/y EPS gain of +16.7%).
As you all know, Q2 is over. We’re in Q3. And especially for American Consumer Discretionary companies, Q3 is what we call the “toughest 2-year comp” (comparative base effect period) in 9 years. That’s why we’re already seeing both Luxury and Autos implode.
Never, for the sake of peace and quiet, ignore #bubbles and/or deny yourself the learnings of #TheCycle.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.45-1.60%
Oil (WTI) 39.78-42.24
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer