Early Look: S&P Earnings Are Past Their #CyClePeak

Below is an excerpt from a recent Early Look written by CEO Keith McCullough:

Whether it was Fedex (FDX) or Apple (AAPL) or any of the many companies that will guide lower on both revenues and earnings in the coming months, what will all of these international companies have in common?

  1. A) US Growth and #InflationSlowing from Q318’s Cycle Peaks
    B) #ChinaSlowing
    C) #EuropeSlowing
    D) #StrongDollar
    E) US Corporate #ProfitsSlowing from Q318’s Cycle Peak

A: all of the above.

While the summary of A, B, C, D, and E = Quad 4, and many of you have been kind in complimenting us on making that call on The Cycle when it mattered back in September, that was only Theme #1 in Q4 of 2018 @Hedgeye.

Theme #2 was called #CyclicalPeaks and here’s how Jedi Cycle Master Dale explained that in the SEP @HedgeyeTV presentation invite:

  • #CyclicalPeak: Two of the most underappreciated risks heading into Q4 of 2018 among investor consensus are the cyclical peaks in corporate profit growth and corporate profit margins – both of which have important sector and style factor implications. We’ll detail why investors would do well to adopt a defensive posture with respect to their respective portfolios as the associated rotation out of the domestic Momentum, High Beta, and Growth style factors could be quite violent given current positioning.

Cool. Tim Cook should have paid for a Hedgeye Macro subscription like a growing number of corporate clients we have did.

Those executives are not only proactively prepared for probable mean reversion risks in big macro factors like GROWTH, INFLATION, and PROFITS, but they have more credibility than those who guide lower using scarecrow excuses like “Trade War.”

By the way, I didn’t see Cook or the Fedex Execs doing i-Phone demand dances in Q2 and Q3 of 2018 blaming “Tax Reform” for part of the upside! As you can see in our Chart of The Day (slide 62 of our Q4 Macro Themes deck):

  1. Q2 of 2018 is when The ROC (rate of change) in year-over-year US Technology Earnings Growth peaked at +32.0% y/y
  2. Q3 of 2018 is when The ROC (rate of change) in year-over-year US SP500 Earnings Growth peaked at +26.1% y/y

For those of you who have Ole Wall school friends who still believe that you can’t use modern machine learning, technology, math, etc. to proactively predict #accelerations and #decelerations in big cycles like this, please send them our way.

AFTER a record 9 straight quarters of US #GrowthAccelerating:

  1. A) Corporate Earnings Growth peaked
    B) Corporate Margins peaked

THEN, stocks blew up… AND Credit Spread blew out.

Oh yeah, now I’m going all CAPS on their complacent Ole Wall you know whats this morning. It’s only Day 2 of the New Year and I seriously can’t handle seeing another year of people voluntarily losing money because they’re unaware of these Cyclical Peak compares.

I know US Equity Futures are down a lot again this morning. I know you have bosses and higher-ups who keep buying what aren’t damn-dips. I know you’re struggling to remind some people that if they don’t do macro, it will do them.

If you want to try to “Master Market Cycles”, start with both modern day market signals and fundamental ROC (rate of change) research that front-runs CEOs, CFOs, and whoever is still out there that thinks that you can’t use these tools to help you time them.


The Key Takeaways on The December Jobs Report

The mainstream media doesn’t know what to make of the December Jobs report. Here’s CNBC:

  • “In addition to the big job gains, wages jumped 3.2 percent from a year ago and 0.4 percent over the previous month. The year-over-year increase is tied with October for the best since April 2009. The average work week rose 0.1 hour to 34.5 hours.”

“The far bigger than expected 312,000 jump in non-farm payrolls in December would seem to make a mockery of market fears of an impending recession,” an Old Wall economist told CNBC. He added that the report “suggests the US economy still has considerable forward momentum.”

Here’s the deal.

Yes, headline job additions came in at 312,000, up from an upwardly revised +176K in November. That was the highest headline since February. In terms of year-over-year nonfarm payroll growth and, based on the December 2017 comp, we only needed +178K to get an acceleration in payroll growth. In other words, +312K was good for a +9 bps re-acceleration to +1.79% Y/Y.

But this wasn’t the most important takeaway. Average hourly earnings came in at +3.2% Y/Y, the fastest pace of growth in the cycle. Notably, wage growth for Non-Supervisory workers (~80% of the Labor Force) accelerated to +3.96% Y/Y also the fastest pace of growth of the cycle.

Why does this matter? There’s been a lot of talk on Wall Street about a dovish pivot from the Federal Reserve. But with wage growth near 9-year highs we think the Fed is boxed-in on its current hawkishness. We continue to think the probability is high that the Fed raises rates into a slowing U.S. economy.

Remember, fourth quarter GDP isn’t reported until January 30th. That matters because our nowcast for US Real GDP growth is 2.82% YoY/1.57% QoQ SAAR. The latter figure compares to 2.60% and 2.71% for Bloomberg Consensus and the Atlanta Fed, respectively. In other words, the Fed will likely maintain its hawkishness as GDP slows unexpectedly relative to Wall Street and Fed forecasts (see the CNBC-quoted economist above saying the “US economy still has considerable forward momentum”!).

We think this mismatch between expectations and reality will prove very consequential for financial markets. Still, there’s a lot of time between now and January 30th. Stay tuned and data dependent!


THE MACRO SHOW: How To Prepare Your Portfolio For The Year Ahead

Below is an excerpt transcribed from a recent edition of The Macro Show hosted by CEO Keith McCullough. Click here to watch this entire show.

Keith McCullough: First on Japan, down hard overnight. This was the first day of the year for the Japanese stock market. If you want an update on that it is careening toward a crash. Now a crash, as defined by most people that have run money in their life, is a greater than 20% drop in a straight line. Japan, as you can see, peaked in October and was down -2.3% and remains bearish trend at Hedgeye. So we remain bearish on Japanese stocks and with a big breakout makes the Japanese Yen bullish trend, which is also new at Hedgeye.

And finally what I’d say about Japan is what’s a very good indicator of both global growth and inflation expectations is the yield on JGBs or Japanese government bonds. JGBs now have a yield of -0.05%, down 11 basis points in the last month alone. The Japanese see what we’ve been seeing for a long time at Hedgeye, for over a year, and it’s that the global economic cycle peaked in January of last year and now we go on and on with that being priced-in by markets.

McCullough: Point number two this morning is counter-trend bounces. We see countertrend bounces in China, Copper, Europe, in the U.S. equity market, in Tech, which got absolutely body bagged yesterday. Don’t forget that the Nasdaq yesterday got to down -20.3%. That’s a crash. You don’t want that. You want to have your shorts on.

So on the downside of yesterday’s move the Nasdaq is down -20.3% from where it was at the end of August, when the U.S. economic cycle peak and the corporate profit cycle peaked.

Now, we’re going to constantly see these counter-trend bounces because everyone who missed it is trying to tell you that it’s over with. They’re confusing dips with disasters. Dips are not disasters. For two and a half years going into September, I was bullish on growth stocks, Tech and FAANG fully-loaded. That changed in September for us.

That was a really important pivot. When you go from being long growth to short growth, then you’re long Treasuries. And there you have a smart buying opportunity this morning on the Jobs Report.

McCullough: Point number three this morning is the 10-year yield. There are late cycle indicators in Macro and there are early cycle indicators in Macro. The latest of late cycle indicators, the latest of late, is wages. Look at these wage inflation charts, 3.5% on average hourly earnings. Do you think that this chart has gone up quite a bit. Those charts look pretty bullish to me, hitting a 9-year high.

That’s called a big pain in the you-know-what for corporations that have to pay people wages. So again this is quintessentially what happens at the end of the economic cycle. In every economic cycle, wages always increase into a recession and therefore perpetuate a recession. So wages go up, companies’ revenue start to slow and margins get compressed. And then guess what, you have to fire people. That’s how the labor market works. If you didn’t know that now you know.

This is going to put a new nail in the coffin for people who have been saying ‘The Fed has to cut interest rates tomorrow.’ They’re not going to do it with that kind of a labor report.

What I want you to focus on doing today is buying Treasuries and or securities that are linked to falling bond yields. What we think and continue to think, and we’re one of the first firms to make the turn on growth to slower growth is that bond yields would fall from those peaks in September and October.

You didn’t want to be shorting Treasuries up there, which is what a lot of Macro hedge funds did. You can beat most Macro hedge funds by using Hedgeye.

So we’re going to get the bounce. How much lower we’re going to go from here is a function of the Risk Ranges, which the low end of the range is currently at 2.54%. So we’ll consider it probable that over the intermediate term, which is different than the immediate term at 2.54%, could easily go down to 2.50% and then lower.

So we’re going to stay with that and all the functions of that: Buying Utilities at the low-end of the range and REITs, Gold and Housing stocks at the low-end of the risk range.

Brian Sly


Brian Sly and Company, Inc.