“The measurement must be done.”
-Jordan Ellenberg
Are you tired of measuring the slowing rates of change in both growth and earnings? No worries – give yourself a break this morning and strap on the magic multiple pants… tell yourself some stories… it’s “Merger Monday”, baby!
This morning’s proposed “mega” deal in a #GrowthSlowing company (AT&T) trying to pay $85B for Time Warner (TWX), reminds me a lot of OCT 2007. Remember, back then, everyone was going to (try to) buy everyone too…
For those of you who are still mapping rates of change, this discipline has gone on for a while now. “It was Archimedes who really brought the project to its full fruition. Today we call this approach the method of exhaustion.” (How Not To Be Wrong, pg 34)
Back to the Global Macro Grind…
With M&A slowing on a year-over-year basis in 2016 (like it always does at this stage of #TheCycle), it looks like we’re going to see a final dash to the banker compensation finish line where companies who are going to miss revenue and earnings try to sell themselves.
Once this Hillary/Trump gong show is over (t-minus 2 weeks, thank God), how are these Broken Baby Boomer Brand media companies going to drive ad revenues? Sell magazines? And how are the legacy telcos going to save themselves from being melting ice cubes?
A: tie two rocks together and see if they float
Good luck with selling me that idea. From my risk management process’ perspective, the potential acquirers that consensus owns (T, CMCSA, etc.) are breaking bad into bearish TRENDs right now. Bad, levered, deals are the other side of the trade.
Meanwhile, measuring and mapping the rates of change across economies, earnings, and macro risks, last week didn’t help the narrative that “a falling Dollar is a tailwind to earnings going forward”:
- The US Dollar Index was up another +0.6% on the week, taking its ramp in OCT to +3.3% (vs. SP500 -1.3%)
- Industrial Stocks (XLI) corrected another -0.4% on the week, taking their loss in OCT to -1.4%
- Late Cycle Healthcare (XLV) stocks have fallen -3.3% in OCT, taking over from the Financials as worst place to be in 2016
So what we really need this morning is someone like GE or Honeywell (HON) levering up to buy someone – anyone really – and then we can forget that we’re seeing a double-dip #Recession in cyclicals.
Interestingly, after GE guided down Friday morning, the US Equity market looked a lot like it has for the last 3 months of #GrowthSlowing (down). It was indicated lower, for the 3rd straight week… then, midday… zoom! A new M&A narrative to roll with!
All the while, the rest of the world’s macro moves didn’t cease to exist. Here’s what happened in Europe last week:
- Down Euro (-0.8% on the week, taking the EUR/USD all the way back to flat for 2016 YTD)
- Up EuroStoxx! Yep. The Europeans are begging for the FX devaluation that the British got, in Pound (ed) terms
- EuroStoxx50 and Italy’s MIB Index were +1.3% and +3.5% to -5.9% and -19.9% YTD, respectively, on the week
Oh yeah. That’s what the US Equity market used to rock n’ roll to fresh all-time highs on. Dovish Fed, Down Dollar, baby! So if you’re looking to get a piece of that pin action again, you need more US #GrowthSlowing data and a Fed fade on the DEC hike.
One baby boomer brand that isn’t breaking down yet on that front is the Gold Bond trade:
- Long-term Yields (10yr) fell -6 basis points last week to -53 bps YTD (1.73%)
- Gold was up +1.0% on the week to +19.1% YTD
- Utilities (XLU) were up another +0.4% on the week to +10.9% YTD
No, not as exhilarating as Tinder or buying stocks on takeout rumors, but I’ll stick with my Gold Bond’s double-digit returns in 2016. It has tended to outperform when the Old Wall’s Dow Bro runs out of momentum (Dow was dead flat at 0.0% last week = +4.1% YTD).
And this, of course, comes on the heels of both Gold and Treasuries falling out of consensus hedgie favor. Here’s our latest read on Consensus Macro sentiment, from a futures & options positioning perspective:
- SP500 (Index +E-mini) and Russell 2000 net LONG positions are currently +0.7x and +1.5x on a 1yr z-score
- Crude Oil is still the most consensus net LONG positon, currently at +2.0x on a 1yr z-score
- Gold has fallen out of consensus with a net LONG position that’s currently -0.1x on a 1yr z-score
Nope, consensus isn’t nearly as bearish as it is on something that’s crashed (like the British Pound which has a net SHORT position that registers -1.5x on a 1yr z-score). Then again, from what we can tell, most firms don’t measure sentiment using standard deviations, z-scores, etc., never mind mapping them in rate of change terms.
While there’s a method of exhaustion in that, that’s the point. No one wins this long-term cycle race taking short-cuts.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.59-1.79%
SPX 2125-2155
RUT 1
DAX 109
VIX 12.51-17.53
USD 96.88-98.99
EUR/USD 1.08-1.10
Gold 1
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
