“We relentlessly stimulate what-ifs.”
-David Eagleman
It’s Day 2 for Darius Dale and I in California. Don’t worry, I don’t have a qualitative “channel check” for you that CA growth is slowing. All I can tell you is that I’ve never seen San Francisco any dirtier. Market Street smells, bad.
What if California and/or “Tech” slows? What if the state or the sector slows to “levels” that are “still good”, but growth stocks get hammered anyway? What if what always happens in Quad 4 happens again?
These aren’t the what-ifs I lead off with in new CA client prospect meetings where the manager has 90% or more of his/her exposure to US Growth. I lead off with the #process. Then I hit on China, EM, and Europe already #slowing. Then I ease into it!
Back to the Global Macro Grind…
The Quote of The Day comes from a book I’m grinding through called The Runaway Species. It’s about innovation, creativity, and the future. I’ve built a growth company. But I don’t wake-up every morning assuming that what-ifs can only be positive.
You know what was really negative yesterday? The performance of US Growth Stocks in an up tape:
A) Russell 2000 was down -1.4% on the day, taking its correction to -3.9% since AUG 31
B) Russell Growth (IWO) was down -1.6% on the day, taking it’s 1-month correction to -3.3%
Does 1-month price MOMENTUM matter? Big time. Did it matter when:
A) US GDP Growth was #accelerating for a record 9 quarters in a row … and
B) Momentum, Growth, and High Beta were the overweight Factor Exposures with the US economy in Quad 2
Hugely big time.
But what if Quad 2 (when both US growth and inflation were #accelerating, at the same time) ended in Q3 and we slow, even marginally, in rate of change terms to Quad 4 in Q4? What if Mr. Market had this right so far in Q4?
A) Dollar Up
B) Rates Down
C) Growth Down, hard
Yeah, I know. This is only Day 2 of the quarter. But don’t forget that means that USA’s Earnings Season for Q3 is about to start and the expected growth rates for the following A/B test are off the modern day charts:
A) Aggregate SP500 Earning’s Growth is expected to #accelerate from +25.3% y/y in Q2 to +36.7% in Q3
B) Aggregate US Tech Earnings Growth is expected to #accelerate from +35.5% y/y in Q2 to +41.9% in Q3
Hoowah! This should be fun. Growth, as an equity Factor Exposure, could correct -10% or more on basic expectations disappointments, never mind this Quad 4 speak. What % of money managers who don’t use Hedgeye even know what Quad 4 is?
And how, with the SP500’s operating margin at an all-time high for the 3rd time in my career (see Chart of The Day), are SP500 margins going to continue to make new all-time highs if:
A) The US Dollar continues higher … and
B) US Wages continue to #accelerate into #CyclicalPeaks?
This should be easier to explain to people in CA today with Amazon (AMZN) under political pressure to take its minimum wage to $15/hour. If you’ve never run your own company, try raising wages into a revenue slow-down. Been there, done that. #NotGood
And neither was chasing the head-fake-news associated with multiple bear market bounces in China, Europe, and Emerging Markets throughout September. Yesterday’s Macro Tourist click-bait was the “Canada” deal. I hope you didn’t chase that on the open.
What if the Hang Seng closing down -2.4% overnight (taking its draw-down to -18.2% since JAN) and stocks in the Philippines down -9.2% in the last month alone still matters? Australian and Indonesian stocks are down -2.4-2.8% in the last month too.
What if Italian stocks bouncing to lower-highs yesterday and reversing again this morning with Italian Bond Yields up another +10 basis points on the 10yr is still part of the #EuropeSlowing call?
Greek stocks aren’t Canadian news, but down another -1.1% this morning that takes the 2018 Greek stock market crash to -22.9% since the alleged “globally synchronized recovery” macro meme peaked in JAN of 2018.
What if it all matters, like it always does? As one of your Risk Managers, instead of chasing the touristy headline of the day, I’ll relentlessly stimulate these data-driven-what-if questions. Someone who wasn’t bearish the whole way up has to do it.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.95-3.10% (neutral)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (bullish)
DAX 12115-12495 (bearish)
VIX 11.31-13.84 (neutral)
USD 93.50-95.75 (bullish)
EUR/USD 1.14-1.17 (bearish)
GBP/USD 1.29-1.32 (bearish)
Oil (WTI) 68.96-75.52 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
