“Remember, all I am offering is the truth – nothing more.”
If you haven’t seen The Matrix, you should. In the classic aforementioned quote from 1999, Morpheus, played by Lawrence Fishburne, was offering Neo (Keanu Reeves) the ultimate decision between taking the blue or red pill.
“You take the blue pill, the story ends. You wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland and I show you how deep the rabbit hole goes.”
In life and/or in markets, you can obviously believe whatever you want to believe. Personally, I believe in last price. No matter what “could” or “should” have happened, that’s the score. Last price is also an opportunity to position for the future.
Back to the Global Macro Grind…
What is the truth about Q1 Earnings Season?
A) Earnings #Slowing
B) Not #Slowing into an Earnings #Recession, yet… and
C) Better than expected
If you’re uncomfortable with that truth (lots of Perma Bear Blue Pills will do it), here’s the ABC on that in numbers:
A) Aggregate SP500 Earnings have #Slowed from #PeakCycle of > +24% y/y in 2018 to +1.36% in Q119 to-date
B) #Slowing from +24.2% in Q318 to 12.6% in Q418 to +1.36% in Q119 is not yet negative y/y (or recessionary)
C) After the Old Wall buried the Q119 expectation to slightly negative y/y EPS, +1.36% isn’t negative
Expectations, as your former Shakespearean lovers will remind you, are the roots of all heartache. If you were expecting SPY to crash and burn AFTER it already #crashed into its DEC 24th, 2018 low (as EPS growth got cut in half), you got that wrong.
Not that anyone cares about the whole #timestamp thing (unless they were running a hedge fund that was up +30-40% last year after shorting all their prior growth longs in SEP of 2018 for an awesome Quad 4 in Q4 perf rip)…
But I covered every single one of my Equity SHORTS on Christmas eve of 2018, not because I had a premonition from Santa that Earnings would be better than expected by May of 2019… simply because SPY was signaling #oversold.
Then, of course, I got smoked re-shorting my Quad 4 shorts in mid-JAN…
Then, as the Quad 3 data started rolling in… my p.a. got back into the black in mid-FEB when I just started buying the damn dips in everything that is a LONG in that economic Quadrant, including Treasuries.
Again, that was then. Today is now. It’s the best opportunity you’ll have to position for the future.
What are the details on that +1.36% SP500 EPS growth rate?
A) 290 of the SP500 companies have reported so we’re +58% of the way through Q1 EPS Season
B) The Peak year-over-year ROC (rate of change) growth rate was earlier last week at +2.7%
C) Tech Earnings are actually NEGATIVE -6.2% year-over-year with 37 of 68 Tech names having reported
But Tech (XLK) is a Top 4 US Equity Sector LONG in #Quad3, so you have to be careful with that one and engage either your own inner-Neo stock-picking ability and/or the analysts you compensate to do that for you.
As you can see in our Chart of The Day (slide 47 in our current Q2 Macro Themes deck), BUYER BEWARE in Tech because not all Tech “growth” is welcomed by The Matrix in #Quad3:
A) Long Organic Growth (Software)
B) Short Cyclical Growth (Hardware)
Another way to simplify the complex is that you want to be:
A) Long “Secular Growers” (i.e. companies unaffected by The Cycle – lots of red pills)
B) Short The GDP Cycle (i.e. companies affected by The Cycle – blue pills will do)
This, of course, drives the Valuation Experts right batty. How can one be Long Utilities (XLU up another +1.6% yesterday making another run at an all-time high) REITS, Energy, and Tech at the same time?
*Note: 1st year b-school students can tell you that Utes and Smid-Cap Cloud stocks are “really expensive”
To be clear, as the US Economy digs deeper into #Quad3, The Cycle will negatively impact more and more “Secular Growers” (see GOOGL yesterday for details), so just like in May of 2001 and in May of 2008:
A) The rally in “stocks” gets narrower and narrower (winners win), the deeper the US economy goes into #Quad3
B) The alpha you can generate being in the right longs vs. shorts is the best of any of the 4 economic Quadrants
With SPY closing at its all-time high of 2945 yesterday and the Russell 2000 both down on the day and still DOWN -8.6% from where the US Profit Cycle peaked in Q3 of 2018, this is what makes the Macro Matrix so exciting right now.
Unless you chose to swallow the Perma Bull Blue Pill, that is.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.46-2.60% (bearish)
UST 2yr Yield 2.23-2.42% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (bullish)
Utilities (XLU) 56.80-58.91 (bullish)
REITS (VNQ) 84.06-87.42 (bullish)
VIX 11.90-15.16 (bearish)
USD 96.35-98.28 (bullish)
GBP/USD 1.28-1.31 (bearish)
Oil (WTI) 62.50-66.83 (bullish)
Nat Gas 2.45-2.64 (bearish)
Gold 1 (bullish)
Copper 2.85-2.95 (bearish)
AAPL 197.70-212.06 (bullish)
FB 179-200 (bullish)
GOOGL 1175-1305 (neutral)
TSLA 225-256 (bearish)
Bitcoin 4 (bullish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer