All three major U.S. equity benchmarks are in correction territory. The Russell 2000 is now in a bear market down 20%.
In other news—portfolios of Hedgeye subscribers who followed CEO Keith McCullough and our Macro team’s recommendations are performing very well.
What did Wall Street miss?
For starters… our call on U.S. growth slowing. That’s been ravaging equity markets, particularly the Technology sector in the quarter-to-date.
Meanwhile in the bond market…
Wall Street has built a massive short position in Treasury bonds. Right now one of the most contrarian long position in Macro is long Treasuries. Yes, you read that right. According to CFTC Futures and Options data, Wall Street is net short the 2-year Treasury by -421,551 contracts (registering -2.1x on a 1-year Z-score basis).
FYI: The 10yr Treasury yield is now around 2.83%, falling from its October high of 3.26%.
“One of the big things that the most politically inclined had wrong on inflation and bond yields was tariffs,” McCullough writes. “Remember Tariffs? Allegedly US Import Prices did not fall -260bps to a 26-month low of 0.7% YoY in November. The annualized strength of #StrongDollar is having a disinflationary impact on domestic imports.”
And then there was this Old Wall Media meme about our U.S. growth slowing call from September:
“But you’re not seeing it in credit.”
Hold on a sec… “In other news, no company has borrowed money in the high-yield corporate bond market this month,” writes McCullough. “That hasn’t happened since Q4 of 2008.”
On Commodities… More #Quad4 Deflation
Wall Street Cutting Its Earnings Estimates
Is Wall Street wising up to the shaky U.S. growth foundation on which rosy company estimates are built? Maybe. Analysts continue to cut Q4 earnings estimates and are now expecting 12.8% growth, down from 16.7% at the start of the current quarter.
Meanwhile, here’s what we wrote on 9/27/2018 in our 4Q 2018 Quarterly Macro Themes presentation:
#CYCLICALPEAKS: 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 whyinvestors 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.
In other words, we’ve been preparing subscribers for this U.S. growth slowdown.
Insights Ahead of Fed Day?
Everybody is talking about how the Fed’s most recent signaling is dovish. Senior Macro analyst Darius Dale shared his thoughts on the Fed (ahead of this week’s Fed rates decision) in this recent CNN Business interview…
“Right now the Fed doesn’t have enough hard data to suggest that they’re able to pivot in January and not hike in December. They actually might even spook markets if they don’t hike in December because it’s priced in.”
Dale’s main point is that the “full dovish pivot” will come when we get Q4 GDP data in late January. “In January we have a 1-handle on our Nowcast for headline GDP,” Dale explains. “Consensus still has to come down from about 2.8% or 2.5% in terms of downward revisions to their forecast. We’re at 1.4%. If we get that [Fed chair Jerome Powell] going to have to pause in January.”
Dale explains why we continue to think there’s downside in stocks particularly tethered to a slowdown in U.S. growth (like Tech, Momentum and High Beta stocks).
So much for that Santa Claus rally…
Brian Sly and Company, Inc.