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What's Next For Oil (As The Chart Chasing Pros Freak Out)

Takeaway: Oil & Energy assets are a big part of the asset inflation the Fed needed off the lows. My risk ranges signal lower-highs and lower-lows.

Every time I refresh my immediate-term risk range model (price/volume/volatility) I get a lower-high and a lower-low; currently that risk range for WTI = $38.71-42.24 with bearish TREND overhead at $47.55; how does this problem go away?



What's Next For Oil (As The Chart Chasing Pros Freak Out) - Oil cartoon 12.08.2015


Editor's Note: The snippet above is from a note Hedgeye CEO Keith McCullough wrote for subscribers this morning. Click here to learn more.

CHART OF THE DAY: The Mother Of All Tops Is In... Don't Chase The Sucker's Rally

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 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."


CHART OF THE DAY: The Mother Of All Tops Is In... Don't Chase The Sucker's Rally - 08.03.16 EL Chart

Peace And Quiet?

“Never for the sake of peace and quiet, deny your own experience or convictions.”

-Dag Hammarskjold


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.


Peace And Quiet? - earnings cartoon 01.27.2015


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:


  1. 367 of 500 S&P500 companies have reported an aggregate y/y non-GAAP EPS decline of -4.0%
  2. 27 of the 367 companies that have reported are “Energy” companies – and no you can’t “ex-that-out”
  3. 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%

SPX 2142-2177
RUT 1190-1220

VIX 11.86-15.38
USD 94.75-96.50
Oil (WTI) 39.78-42.24

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Peace And Quiet? - 08.03.16 EL Chart

Early Look

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JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2

“Words without actions are the assassins of idealism.”

-        Herbert Hoover


TRUMP TURMOIL: Donald Trump is losing support within Republican party - and his campaign - at a time when unity and consolidation should be a foregone conclusion. His refusal to back Speaker Paul Ryan and Senator John McCain is the latest salvo with no end in sight. Republicans are refusing to campaign with Trump and are denouncing him or even withdrawing their endorsements – with NY Congressman Richard Hanna being the first to announce that he’s throwing his weight behind Hillary Clinton. To make matters worse, turmoil is the norm at Trump Towers these days with fresh news that senior campaign officials are either being fired or are beyond frustration with their candidate. Not a good time to reshuffle the decks with 96 days to go.


CONTINUING THE KAHN CONTROVERSY: We’re now entering day five of the Khan saga after Trump (and his son) let fly a series of comments about the Gold Star family of a fallen U.S. soldier whose father spoke out against him at the DNC. The rift is starting to take a toll on the Republican party just as they were feeling better about their chances to keep the Senate this fall. The sooner Trump moves off this issue (neither the Khan family nor the media should sit by the phone waiting for an apology), the sooner he and the party can address the elephant in the room - Republican unity.


CLINTON CASHES IN: Clinton has raised nearly $90 million in July compared to Trump’s $30 million, setting her up for a massive grassroots, voter registration and media movement in the usually quiet month of August. Coming off a successful convention with a sizeable bounce and sitting on top of her cash reserves, Clinton and Co. will be making critical investments this month in swing states as both campaigns buckle down (or should be buckling down) in preparation for the fall slog.


TIME RUNNING OUT FOR TRUMP: Letting Trump be Trump worked for the Trump campaign in the Republican primaries and it even helped him make it through the convention with a decent bounce. Through each and every controversy his supporters have stood by him with abandon - but in reality, he will not win over Independents and undecideds growing his base and appealing to those outside the party without making some character changes. If he wants to win the general election, picking up these two voter groups has to be the top - if not only - priority. There’s no time left for Trump’s tirades and twitter tantrums.


BEFORE IT WAS A REFORM EFFORT, THE ACA WAS A JOBS PROGRAM: Our Healthcare Policy Analyst Emily Evans shared her insight on the ACA’s two phased implementation; increased coverage and utilization and payment reform. You can read her piece here.


CLINTON v. TRUMP: WHAT DO THE FORECASTERS SAY: With the presidential election heating up, our Demography Sector Head Neil Howe shared his opinion on current predictions. You can read his piece here.


The Macro Show with Keith McCullough Replay | August 3, 2016

CLICK HERE to access the associated slides. 



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

#NFPTaper | Cloaked Stimulus and ACA Benefit Reversal

Takeaway: The Affordable Care Act provided a conspicuous benefit to employment and consumption growth. From here, #ACATaper is likely to = #NFPTaper

Our healthcare team has had a great call with their #ACATaper theme. 


#ACATaper | Theme Summary:  The implementation of the Affordable Care Act (ACA) resulted in a largely unprecedented influx of newly insured individuals.  Because many of those formerly chronically uninsured had deferred care and carried higher acuity, their utilization rates subsequent to gaining coverage were comparably higher.  The ramp in the insured base coupled with higher utilization and cost rates for the newly insured drove healthcare consumption higher and a discrete ramp in sales in earnings growth for the sector.  Growth rates in healthcare relative to the S&P500 broadly and its defensive brethren (staples and utilities) decoupled, leading to marked outperformance in the related equities.  The #ACATaper theme is centered on the reversal of this dynamic as the sector comps out of the benefit and growth shows a marked deceleration (email sales@hedgeye.com if you are interested in the Healthcare teams work).


Cloaked Stimulus:  This past week the healthcare newsflow was headlined by the revelation that the Affordable Care Act was explicitly conceived and sold internally as a Jobs Program.   The Reform Effort became a latent objective.


As Politico reported a couple weeks ago and our Health Policy team highlighted:


“Health care experts like [Bob] Kocher and colleague Zeke Emanuel wanted reforms that would increase efficiency and tamp down the sector's growth. But ‘people on the jobs team were saying we need more middle-class jobs and the best place to create them was in health care,’ Kocher says. ‘And after we lost 7 million jobs [in the recession], that argument was winning.’


Contextualizing the Benefit:  From a macro perspective, the implementation of ACA has provided a clear benefited to aggregate consumption and employment growth.  


That benefit becomes evident in the data concurrent with the initial enrollment deadline for ACA at the start of 2014 and builds conspicuously through 2015.  The chart selection below illustrates the impact:

  • Employment Impact:  Healthcare's share of total employment began to ramp in mid-2014 with Healthcare payroll gains driving ~16% of total NFP growth from 2Q14-2Q16 (punching above its weight given it's 10% of total employment).
  • Benefit = Past Peak? Healthcare Job Openings (JOLTS) and net monthly payroll gains peaked in late 2015 alongside peak NFP gains and have begun a modest retreat in 2016.  After broadly accelerating for 2 years, Healthcare employment growth peaked in March 2016 and has now decelerated in each of the last 3 months.
  • Ex-Healthcare Weakness:  While trailing 3M/6M NFP gains have slowed in 2016, monthly Healthcare job gains have slowed only modestly.  Should the fledgling deceleration in Healthcare employment progress, Healthcare would reverse from a relative support to a negative amplifier.
  • Contribution to GDP:  Over the last 8-quarters Healthcare’s contribution to GDP has seen a step function increase, contributing almost double its average contribution observed over the last 20 years.

The simple takeaway is this:  ACA has proven effective as a jobs and consumption stimulus program.  It served to “artificially” augment employment growth over the last two years and has helped buttress headline payroll gains in the face of ex-healthcare weakness in recent months.  However, as the #ACATaper theme plays out and the benefit decays, the support to NFP will similarly diminish.  In other words:  #ACATaper is likely to = #NFPTaper.


#NFPTaper | Cloaked Stimulus and ACA Benefit Reversal  - HC Employment TTM


#NFPTaper | Cloaked Stimulus and ACA Benefit Reversal  - HC Contribution to GDP


#NFPTaper | Cloaked Stimulus and ACA Benefit Reversal  - Hospital PCE


#NFPTaper | Cloaked Stimulus and ACA Benefit Reversal  - HC Employment   of Total NFP


#NFPTaper | Cloaked Stimulus and ACA Benefit Reversal  - HC employment Jolts



Christian B. Drake


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