“Two-thirds of the investments Blackstone made in 2000, at the height of the market, were wipeouts.”
- Casey & Morris, King of Capital
Forget about the US Growth bears having a few bear market bounce days to deal with during The Crash of 2020. They were short-selling into the month-end “rebal” and have been long-term investors in Treasuries, across the curve, since Q4 of 2018.
As a result, Full Cycle Investors had a great quarter. The Q1 of 2020 wipeouts were those who were long of super late-cycle Equity and Credit. Unfortunately for that type of investor, this happens at the end of every cycle.
As Casey & Morris reminded us in King of Capital, “Blackstone was hardly alone in 2000. The losses it suffered in 2001 and 2002 came as technology and telecom bubbles were pricked, and the air hissed out of the entire stock market.” (pg 165)
Back to the Global Macro Grind…
It’s a good thing we didn’t have a Tech and Communications bubble in 2019. We Work must have been a real estate company? Silicon Valley Tech is a far purer play on a diversified basket of profitless ideas. They’re far cooler too. Plenty of those still trade at 15-20x Revenue!
It’s not just the VC and PE Bubbles that are choke full of Tech and Comms (again). Those Sectors have their highest representation in High Yield Credit indexes since… wait on it… the year 2000.
The other thing that happened to Tech/Comms in 2001-2002 is that Earnings Growth went from Cycle Peak to negative year-over-year growth on the order of -25-75%. And those were the SP500 companies that actually had earnings.
In today’s Chart of The Day I’m showing you a slide (76 in our Q2 Macro deck) I’ve been chatting with clients about for the last week:
A) PRE VIRUS, profitability was already deteriorating (like it always does at this stage of The Cycle)
B) Alongside Global #Quad4 Slowing since the beginning of 2018, US Labor Costs Rising was classic late cycle
That’s why:
C) PRE VIRUS, 37% of the companies in the Russell 2000 had NEGATIVE pre-tax income … and
D) PRE VIRUS, 27% of companies with market caps > $10B had NEGATIVE year-over-year EPS growth
“No one” (ex the legally blind) could have seen The Cycle coming, eh?
What happens next?
A) Greater than 50% of companies in the Russell will be profitless and …
B) At least 40-50% of large cap US listed companies will have negative year-over-year EPS growth
But, but, these “stocks” are cheap if:
A) You use the wrong year-over-year EPS growth assumptions for the next 2 quarters and …
B) You don’t know that a “Secular Grower” (i.e. a company that’s never seen a cycle) is now a Cyclical Slower
But, if you back out the virus and call for a v-bottom on the “other side” of the US recession…
Yes, you can do that, if you’d like. But I’m going to keep shorting what everyone still owns until I see these super cool story stocks go up on bad news. I’m not the coolest cat, but someday (when The Cycle & Signal support it), I want to be long the cool things again too!
If you’d like to see how wrong Wall Street consensus is on widely owned names like Google (GOOGL), Facebook (FB), and Visa (V) or Mastercard (MA), my analysts (Andrew Freedman on Comms and Josh Steiner on Financials) can help you with that.
A lot of what differentiates us vs. the consensus hope that all the downside is “priced in”, is a basic level of Macro Awareness. If you are simply picking stocks and you have literally zero context on where The Employment & Profit Cycle was pre-virus, you’re lost in “valuation” space.
That’s precisely why, at the end of every cycle, The Cycle cycles late-cycle bulls out of their positions.
In terms of US Equity Beta, I have immediate-term downside of -14.8% in SPY. Short-term Treasuries (SHY) are going to make a new cycle high this morning with the UST 2yr Yield at 0.22%. Whoever just “re-balanced” out of Treasuries into “stocks” might keep getting wiped out too.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.57-0.98% (bearish)
UST 2yr Yield 0.16-0.32% (bearish)
SPX 2 (bearish)
RUT (bearish)
NASDAQ 6 (bearish)
Tech (XLK) 68.41-83.64 (bearish)
DAX 87 (bearish)
VIX 51.43-76.55 (bullish)
USD 97.25-105.00 (bullish)
EUR/USD 1.05-1.10 (bearish)
Oil (WTI) 19.01-23.79 (bearish)
FB 143-170 (bearish)
GOOGL 1033-1189 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
