“A teddy bear will give you love. A grizzly bear will give you a mauling. Some bears aren't just the same.”
-Anthony Hincks
The Big Quadruple D (Data Dependent Darius Dale) and I spent all of yesterday meeting with Institutional Investors in NYC. As the day wore on, it became clear to us that most people we met with just aren’t Bearish Enough.
After 5 straight up days for the SP500, that didn’t surprise me. The STPA (short-term-perf-anxiety) is surreal in this business at this point. It should be when fundamental investors “feel” so many things about what they can’t control.
While The New Hope is that The Fed will bail the US economy out of having a full cyclical slow-down, many “feel” that as long as the US “doesn’t have a recession”, they just buy every dip. That feeling didn’t end well during Quad 4 in Q4.
Back to the Global Macro Grind…
What are some of the differences between Quad 4 in Q4 of 2018 and this pending Quad 4 in Q3 of 2019?
- Quad 4 in Q319 is a much easier call to make
- Quad 4 in Q319 will have NEGATIVE year-over-year SP500 Earnings
- Quad 4 in Q319 has consensus expecting rate cuts in response
Just to put less “feel” on those 3 points and layer in some facts:
- Quad 4 in Q4 was a tougher call to make because all of the Q318 data accelerated to #PeakCycle
- Quad 4 in Q4 saw SP500 earnings #slow from +24.2% y/y growth in Q3 to +12.6% #notNEGATIVE y/y
- In SEP and OCT of 2018, consensus was SHORTING Treasuries, across the curve!
In sharp contrast to the 1st ROC (rate of change) slowdown in GROWTH, INFLATION, and PROFITS during Quad 4 in Q4, Quad 4 in Q3 of 2019 has ONGOING slow-downs in all 3 of those things. It’s so easy to see that the Fed sees it!
But can the Fed CTRL+Print Q2 Earnings Season during Quad 4 in Q3?
A: Nope
If the #1 leading indicator for Jobless Claims #accelerating = a corporate profit #recession (down year-over-year earnings for the SP500 for at least 2 quarters in a row), can the Fed print jobs?
A: Nope
As you can see in today’s Chart of The Day (slide 65 in the current Macro Themes deck is one of the most asymmetric risk charts left in US macro), once jobless claims bottom and hook higher, they don’t go up slowly – they rip higher.
Who’s Bearish Enough on that?
And if you are Bearish Enough on LABOR joining GROWTH, INFLATION, and PROFITS #slowing, why aren’t your top asset allocations Treasury Bonds (across the curve), Utilities (XLU) and REITS (VNQ)? Because they’re “expensive”? Ha!
As importantly, is the Fed Bearish Enough? Since they didn’t have the now-casting #process to call for Quad 4 in Q4, do you really think their June meeting is going to outline Quad 4 in Q3 as bearishly as we have?
Lots of clients were asking questions about the expected July rate cut yesterday because:
A) The market is pricing that probability at 76% (extremely high probability)…
B) If the Fed doesn’t cut, the “risk on” market is not going to like that…
C) If the Fed does cut but either doesn’t cut by enough or guide to enough futures cuts…
Then what? Then, just like in Q3 of 2001, the Fed going dovish didn’t do a damn thing for whoever was buying stocks into NEGATIVE year-over-year earnings for the SP500.
And what if it’s not Q3 of 2001 and it’s actually Q3 of 2019, what happens if the Fed isn’t Bearish Enough (until after all of this has hit the fan in September) and we don’t have this allegedly wonderfully huge “trade deal” with China?
If you back out the 5-day June STPA disorder of US Equity investors and just look at macro markets this morning:
- The Hang Seng got hammered for a -1.7% loss overnight and confirmed China’s Bearish @Hedgeye TREND
- Oil (WIT) is getting Quad 4’d (again), down another -2.7% this morning with immediate-term downside to $49.91
- Copper is down another -1% this morning and remains Bearish @Hedgeye TREND
- Gold is up another +0.7%, confirming Quad 4 in Q3 (like it did Quad 4 in Q4)
- UST 10yr Yield is back down to 2.12% and the curve has inverted (again) on 5s vs 2s
And there’s an implied volatility DISCOUNT in SPY of -12% (vs. 30-day realized, that’s ultra-complacent) with immediate-term downside in my SP500 Risk Range of -5.8% to 2719 (which would be a lower-low than the June 3rd closing low).
Day 2 for DDDD and I in NYC should be interesting - especially if today is a “down day” for “stocks.” Those were the client meeting days in May where people were “feeling” much more bearish!
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.04-2.22% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 57.65-60.99 (bullish)
REITS (VNQ) 85.86-89.98 (bullish)
Shanghai Comp 2 (bearish)
VIX 14.90-20.11 (bullish)
USD 96.15-98.06 (bullish)
Oil (WTI) 49.91-56.01 (bearish)
Gold 1 (bullish)
Copper 2.60-2.69 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
