“My ventures are not in one bottom trusted, nor to one place.”
-William Shakespeare
That, of course, is the classic diversification quote from Act 1, Scene 1 of The Merchant of Venice. Shakespeare wasn’t all rainbows and puppy dogs. I think he would have been a great risk manager.
Don’t expect me to trust that there’s a foreseeable bottom for political discourse in this country. It’s both sad and frightening that this is the current definition of American “leadership.” I’ll be keeping my 4 children far away from the baby boom generation’s media.
One bottom that l would like to trust is that of our research and risk management process. While I’d call it more of a correction than a crash (European Equities are still in the midst of one of those), last week once again tested my convictions in lower for longer.
Back to the Global Macro Grind…
Where should I start this morning? With another rate of change slow-down in non-farm payrolls? How about the “surprising” pre-announcement of some major Industrial companies like Honeywell (HON) and PPG Industries (PPG)?
Or should I just ex-all-that-out and go with what these forecasting quacks at the Fed had to say on Friday about the jobs report being “solid” (voting Fed head, Mester) and a “goldilocks number” (Vice Chair, Fischer)?
To be, or not to be aware that we are entering the slowest part of #TheCycle… remains the question.
Since I think we’re one of the few firms to have called for the US labor cycle to slow in 2016 (i.e. at the start of 2016, when the UST 10yr was at 2.27%), I think our call on where that #LateCycle reality is headed is critical when considering being long bonds and their proxies.
Here are what we call the “comps” for NFP (non-farm payrolls), or the comparative period numbers:
- SEP 2015 = +142,000 jobs
- OCT 2015 = +295,000 jobs
- NOV 2015 = +280,000 jobs
In other words, while Old Wall “expectations” for monthly job adds have come down by 25-30% this year, the most recent jobs slowing report was against the last “easy comp” of the cycle (+142,000 SEP).
The OCT “comp” is 2x as tough. That all but ensures a major year-over-year slow-down in the next US jobs report. And yes, that’s going to be reported on the Friday, right before The Election.
Not that there’s a standard for how US politicians lie to The People anymore, but this is what Obama’s Chair of The Council of Economic Advisors, Jason Furman, said on Friday about US economic cycles:
“I don’t think you’re late cycle… I just don’t believe in the concept of late cycle.”
Ok Furman. You don’t believe in the concept of late cycle, and I don’t believe in the concept of the sun rising in the East, ok? So go back to bed while the rest of us measure and map the economy, in rate of change terms. “Solid” labor data is, by definition, late cycle.
All that said, bond yields rose (to lower-highs) again last week. And most asset prices didn’t like that:
- The 2YR and 10YR UST Yields rose +7 bps and +13bps, week-over-week, respectively (bonds were down on that)
- The SP500 and Russell 2000 lost -0.7% and -1.2% week-over-week, respectively
- European Stocks fell, again (Eurostoxx50 and Spain were -1.0% and -1.8% week-over-week, respectively)
- Gold corrected, hard, dropping -4.6% week-over-week
- Utilities (XLU) and REITS (MSCI) were down, hard, as well, falling -3.8% and -5.4% week-over-week, respectively
Sure, some of the worst places to have your money in 2016 had a “great week” (bad year) on the counter-TREND move in bond yields (US Financials and the Nikkei were +1.6% and +2.5%, week-over-week, respectively), but last I checked Wells Fargo (WFC) still has to report their new business reality on Friday. And for long-term Bond Bulls, that’s our next catalyst: economic gravity.
Clearly Furman didn’t read the Honeywell comments before saying the same thing he’d have said if the jobs report was 56k instead of 156k. Even if he did, he wouldn’t highlight them as that would remind voters that the industrial/cyclical side of the US Economy is beyond late cycle – it remains in a recession. That’s why Industrials (XLI) were -1.4% last week. Earnings season is going to be ugly.
And I guess that brings me back to trying to find a bottom in the US corporate profit cycle. As you can see in today’s Chart of The Day, it’s coming off its all-time highs. And… for those who tried to “buy the bottom” during the last two economic cycle recessions (2000 and 2008), they better believe in the concept of cycles. Unlike politicians, they can be trusted.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.49-1.78%
SPX 2143-2174
RUT 1
VIX 12.24-16.15
USD 95.15-96.99
Gold 1
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
