“Unlike your living room, most borders and coastlines aren’t straight lines.”
-Geoffrey West 

Sorry to disrupt the linear political minds of both border wall builders and their critics alike this morning but, mathematically speaking, big things like borders and coastlines are “squiggly and meandering lines… that follow simple power law behavior.” 

As Geoffrey West goes on to explain in one of my favorite fractal books, Scale, “these borders are in fact self-similar fractals. In other words, the wiggles and squiggles at one scale are, on average, scaled versions of the wiggles and squiggles at another.” (pg 137) 

The same goes for non-linear and dynamic ecosystems like markets. If you think markets go up and down based on an arbitrary opinion of a market multiple that’s based on a static (i.e. wrong) future earnings estimate, you need to re-think that. 

Back to the Global Macro Grind… 

Earnings #Slowing, Continues - 01.28.2019 lower highs cartoon

When we measure and map the rates of change in:

  1. The GDP Cycle
  2. The Inflation Cycle …
  3. The Ensuing Earnings Cycle 

We never make static assumptions. To the contrary, in order to reveal self-similar sets (accelerations and decelerations in the data), we’re constantly measuring and mapping with the humility that we don’t know what we don’t know… until we know.

Cycle data (like the ROC data during Earnings Season) wiggles and squiggles in the short-term and has a central tendency to find a @Hedgeye cyclical TREND in the intermediate-term. 

On that score, here’s this morning’s Q4 of 2018 US Earnings Season update: 

  1. 116 of the SP500’s companies have reported aggregate year-over-year Earnings growth of +13.1%
  2. That’s wiggling down from last week’s early EPS Season growth rate of +16-18%
  3. That’s #slowing, big time, from the #PeakCycle EPS growth rate of +26.2% of Q3 of 2018 

And the Macro Tourist and/or unaware journo citing market multiples wonders why the US stock market was breaking out in Q1 and Q2 of 2018 (getting more “expensive”) but is now making a series of lower-highs in Q418 and Q119 and getting “cheaper”… 

Don’t be mad @Hedgeye, bros. It’s just math. 

While you’re measuring and mapping market multiples, here are some simple patterns to remember:

  1. When the ROC (rate of change) of GDP and Earnings is #accelerating, the multiple expands… and
  2. When the ROC (rate of change) of GDP and Earnings is #decelerating, the multiple compresses 

Why? Not to state the obvious, but I will: 

  1. If the market is discounting an #acceleration in future earnings growth, it will look more “expensive” on the wrong EPS #
  2. If the market is discounting a #deceleration in future earnings growth, it will look “cheap” on yesterday’s (wrong) EPS # 

Then, as companies cut their numbers and their stock prices fall (CAT yesterday, as an example), “cheap” can remain cheap until either the right trough EPS growth rate is baked into the stocks, and/or the economy (and earnings) re-accelerate.

While I’m not a “value” or a “growth” guy (I’m just a macro guy), even the value guys and gals will ultimately agree that “valuation” alone is not a catalyst, especially when “value” is being defined using the wrong numbers. 

As the late and legendary value manager, Marty Whitman, used to say “a bargain that remains a bargain is no bargain.” All investing styles and factor exposures need a catalyst to really make them work. Why else do you think we have “activism”?

So what’s your catalyst? 

A) US Growth accelerating or decelerating?
B) US Inflation accelerating or decelerating?
C) US Earnings accelerating or decelerating?
D) A “trade deal” with China that will change the TREND in A,B, or C?
E) The Fed providing more #cowbell because A, B, and, C are #slowing?
F) A dude on CNBC telling you to buy the market because “stocks are cheap”? 

I could obviously have every letter of the alphabet with market catalysts that investors want to have (and/or hope) come to fruition, but I’m never going to ignore the ABC’s of my process. Currently it’s crystal clear that Earnings #Slowing continues. 

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

UST 10yr Yield 2.65-2.79% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
REITS (VNQ) 77.87-81.55 (bullish)
Industrials (XLI) 67.09-70.66 (bearish)
Shanghai Comp 2 (bearish)
VIX 16.89-23.00 (bullish)
Oil (WTI) 50.46-54.16 (bearish)
Gold 1 (bullish) 

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Earnings #Slowing, Continues - Get the Growth and Inflation Cycles Right...