Crazy Rich Earnings

“Comedy in general is the ultimate form of free speech…” 
-Denis Leary 

“Because you get to poke holes in all the pretentious bubbles politicians and pundits and popes and pretenders try to float over our heads.” And, like Leary, because I’m an Irish Catholic, I can agree with all of that, including the part about the pope. 

Vicki Barbolak, baby. Even in America’s Got Talent #AGT, comedy is back! Have you seen Crazy Rich Asians? That was the #1 movie in the USA for the 2^nd week in a row. Have you read Dr. Denis Leary’s Why We Don’t Suck? I did this summer. #hilarious 

Have you seen these Crazy Rich Earnings? Did you know that being long China, Europe, or Emerging Markets has sucked in 2018? Did you know that a truly, massively, big trade deal with Mexico was going to make for freshly squeezed all-time highs? 

Back to the Global Macro Grind… 

Leary likes jokes, hockey players, and firefighters. He also likes lists – so do I. So here’s your Top 3 Reasons Why US Stock Market Bears Have Sucked for the past 2 years: 

1. US GDP GROWTH #accelerated (year-over-year) for a record 8 straight quarters in a row in Q218
2. US headline INFLATION #accelerated (year-over-year) to 75-80 month highs in June and July of 2018
3. US EARNINGS growth #accelerated (year-over-year for the SP500) to a new #PeakCycle high of +25.4% in Q218 

Now I’ve personally sucked for the last 2 trading days. Nope, not happy about it. But, in hindsight I can either always laugh at myself or just watch political pundits lose it emotionally on Trump’s tweets. 

While I didn’t know that an alleged deal with Mexico is the next frontier of measuring and mapping the rates of change in Global Growth and Inflation (Macro Tourists did), I did know that US Earnings Season has been crazy good. 

As of last night, 97% of the SP500’s companies have reported yesterday’s news: 

1. 483 of the SP500’s companies have reported aggregate year-over-year EPS growth of +25.4%
2. 68 of 71 Tech companies in the SP500 have reported aggregate year-over-year EPS growth of +35.6%
3. 94 of the NASDAQ 100’s companies have reported aggregate year-over-year EPS growth of +33.5%
4. All 30 of the Dow’s companies have reported aggregate year-over-year EPS growth of +26.5%
5. 1876 of the Russell’s companies have reported aggregate year-over-year EPS growth of +33.9% 

Looking back 2 years (Q2 of 2016) when US Tech Earnings growth was NEGATIVE on a year-over-year basis (stocks looked “expensive” back then on the wrong numbers too), do you think the buy side missed something huger than Trump? 

Good news, not everyone missed this move. 

In fact, if you’re like me and you run an American pass-through entity (i.e. a company organized as a LLC), your taxes are lower than they’ve ever been and most of your investment accounts are at or very close to all-time highs. 

That doesn’t suck. 

But, again, in the last 2 days, I’ve really sucked. Why? For one I haven’t been fishing, golfing, or drinking summer beers. More relevant to what you might be tied to, I’ve been long US Dollars (UUP) and Long-term Treasury Bonds (TLT) instead of the NASDAQ. 

What would really suck is giving up on my process though. 

And guess what, over the last 10 years of measuring and mapping markets publicly @Hedgeye, my most protracted periods of sucking absolute and relative performance wind have been when I didn’t adhere to the process. 

The reason why I’m long US Dollar’s, Treasuries, and Bond Proxies gets back to those Top 3 Things: 

1. #PeakCycle US headline GDP was Q218 (we’re at 2.3% headline GDP for Q3)
2. #PeakCycle US headline CPI was JUN/JUL (we’re looking for US #InflationSlowing from here into Q219)
3. #PeakCycle US Earning Growth can easily be Q2 of 2018 as well 

Given Tax Reform and alleged deals with super hugely smart Canadians, that 3^rd thing is harder to predict with precision than the 1^st two things. That said, for SP500 Earnings Growth in Q318, Q418, and Q119, here are the Top 3 Headwinds: 

1. #StrongDollar on multi-nationals reporting in Dollars
2. Late Cycle US #WageGrowth
3. China, Europe, and Emerging Markets continuing to slow… 

So, I say we don’t plan on sucking for the next 2 quarters. All the while we can focus on not sucking for the next 2 years. Because, you know what? We don’t suck. And why we don’t suck is because we have an apolitical rate of change process. 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now: 

UST 10yr Yield 2.79-2.90% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Utilities (XLU) 53.01-54.75 (bullish)
VIX 11.22-14.42 (neutral)
USD 94.30-97.01 (bullish)
Oil (WTI) 63.78-69.71 (bearish)
Nat Gas 2.85-3.01 (bullish)
Gold 1173-1221 (bearish)
Copper 2.55-2.76 (bearish) 

Best of luck out there today,

KM 

Keith R. McCullough
Chief Executive Officer