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“Give me six hours to chop down a tree, and I will spend the first four sharpening the axe.”
-Abraham Lincoln

As most you know by now, we are all about the "grind" and process at Hedgeye when preparing for the trading day ahead.  Our office is usually abuzz by 6:00am ET with the coffee on full brew.  Aside from rising early, and going through the morning grind, there are other important ways to be on your “A” game by the time the morning market bell chimes.  The most important of these may be sleep.

According to The National Sleep Foundation, we require roughly 7.5 hours of sleep every day for optimal performance.  Attaining optimal sleep can help performance in a few key areas:

  • Burnout prevention – According to the research, sleeping less than six hours each night is one of the best predictors of burnout at work.  By some measures, sleep deprivation costs American companies more than $100 billion a year in lost productivity.
  • Cognitive decisions – A Duke University sleep study looked at MRIs on subjects with varying levels of sleep deprivation.  The researchers found that nucleus accumbens, (an area in the brain involved in with the anticipation of reward) became “selectively more active when high-risk payoff choices were made under conditions of sleep deprivation”.  In other words, sleep deprived people tend to make higher risk decisions, with an anticipation of unrealistic rewards.
  • Accuracy – Even a small amount of sleep derivation can have an overwhelming effect on accuracy of decision making.  A Iowa University study recently highlighted that sleep deprivation can lead to a 50% slower response time and worse accuracy rate on simple tasks than someone under the influence of alcohol.

At risk of putting you to sleep, I won’t list any more negative impacts of too little sleep.  Just rest assured (pun intended), that what you do away from the office or your computer can have as meaningful impact on your job and portfolio performance as what you do in the office.

Back to the Global Macro Grind . . .

Global markets seem to have started the week basically sleep walking.   U.S. equities were flat yesterday and are opening-up similarly today.  The proverbial canary in the coal mine again appears to be earnings. If early indications offer any clue, this is shaping up to be a contractionary earnings season.

Sharpening the Axe - 07.15.2019 microscope earnings cartoon

While only 25 companies have reported so far, earnings for the SP500 are coming in down a nasty -10.9% so far in the quarter.  This of course jives with one of our key Q3 Macro Themes, appropriately named (and hash tagged) #EarningsRecession

In part, of course, this is related to tough comparisons and as the Chart of the Day shows, earnings growth comparisons for Q2 and Q3 are very challenging.  Now what doesn’t jive is a stock market up double digits and earnings down double digits . . .

We received another wake-up call that the European economy is weak overnight as Germany’s July Zew Economic Sentiment Indicator came in at a rather nasty -24.5 versus a consensus estimate of -22.9 and a prior reading -21.1.  While we would never put too much weight on a survey-based guide to the economy, this reading is certainly indicative that Germans are getting less optimistic about their economy . . . and as with most things confidence matters!

Economic challenges in Europe, so far at least, aren’t adversely impacting the sovereign debt market.  Greece is currently planning a seven-year bond sale with an interest rate tagged at 2.1%, which is a pricing just above the 1.97% yield on comparable duration U.S. Treasuries. 

Of course, it’s not only the European sovereign debt market that appears to be mispriced.  Currently, more than 12% of the European high yield market is trading with a negative yield.  So not only are European debt investors paying for the privilege of owning more secure government bonds, they are also now paying for the privilege of owning a good chunk of European high yield debt.  As Shakespeare famously wrote, “something is rotten in the state of Denmark”, or in this case the EU more generally.

In terms of U.S. high frequency data this morning, June U.S. Retail sales came in better than expected at +0.4% versus a consensus estimate 0.2%.  Along with that was a slight downward revision in May’s retails sales number.  The only areas that saw a declines in the June report were electronics -0.3%, gasoline stations -2.8%, and department stores -1.1%. 

The other important U.S. high frequency data reported this morning was import and export prices.  Unlike Retail sales, this report came in “worse” than expected with June Import prices at -0.9% versus consensus of 0.5% and June export prices at -0.7% versus consensus of -0.3%. 

Certainly, some mixed messaging for P.E. Powell to consider ahead of Jackson Hole!

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

UST 10yr Yield 1.94-2.16% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
Utilities (XLU) 59.91-61.26 (bullish)
Financials (XLF) 27.28-28.34 (neutral)
Shanghai Comp 2 (bearish)
Nikkei 21 (bearish)
DAX 129 (bullish)
VIX 12.00-16.23 (neutral)
USD 95.75-97.30 (neutral)
Oil (WTI) 55.60-61.49 (bearish)
Gold 1 (bullish) 

Keep your head up and stick on the ice,

Daryl G. Jones
Director of Research

Sharpening the Axe - CoD Earnings Growth Best Ramp Ever