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01/05/16 07:33 AM EST

What Will You Tolerate? Keith McCullough

“It’s not what you preach, it’s what you tolerate.”

-Leif Babin

Yep. I’m going back-to-back US Navy SEAL leadership quotes on you to start the year. Welcome to Day 2 of 2016.

“When leaders who epitomize Extreme Ownership drive their teams to achieve a higher standard of performance, they must recognize that it’s not what you preach, it’s what you tolerate. When setting expectations, no matter what has been said or written, if substandard performance is accepted and no one is held accountable, that poor performance becomes the new standard.” (Extreme Ownership, pg 54)

With back to back recessionary Chicago PMI and ISM Manufacturing reports of 42.9 and 48.2, respectively, in the USA for December, will you tolerate an internal or external strategist/economist being wrong on US GDP growth for another entire year? Don’t be the person with poor performance. Back to the Global Macro Grind…

Don’t just blame China. That’s lame. Not only was the ISM report in the US as bad as the made-up Chinese PMI report for December, it was the 1st back to back sub 50 reading (< 50 signals economic contraction) going all the way back to when the US was last in a recession.

The good news is that someone at the Fed has to keep plugging the actual Q4 2015 numbers into their model, so the Atlanta Fed cut its GDP forecast for Q4 closer to the low-end of our forecast range yesterday to 0.7%.

In other words, if we continue to be right on both #Deflation and #GrowthSlowing, US GDP just got cut in half (sequentially) from Q3 to Q4 and the US Federal Reserve raised rates into that slow-down.

Both credit and stock markets (around the world) are starting to understand the economic gravity of the matter. Yesterday marked the worst Day 1 for US stocks since… drumroll… the last US #Recession started to get discounted by markets (2008).

This morning’s Yield Spread (US 10yr Treasury Yield MINUS the 2yr Yield) of 119 basis points is the flattest it’s been in 12 months too (flattening Yield Spread is one of the many leading indicators for #GrowthSlowing, on the margin).

Additionally, on accelerating volume, some major lines of risk management support broke yesterday:

What all 5 of these verified (volume accelerated on the break as volatility broke out) risk signals have in common is that these were market indices (AMZN = core component of FANG chart chasing index) that were UP last year (vs. something like the Russell 2000 down -5.7%).

In other words, they finally wounded the very narrow leadership that was left.

This is not to say that the almighty jungle-multiple-bearer Bezos can’t have a great Christmas and see his stock ramp back above a line that every algo from here to Chicago will chase ($670 AMZN) – but what if he doesn’t?

Not that the numbers matter more than Old Wall’s narrative that US Retail (XRT) only sucks because of “Amazon”, but AMZN has less than $50B (billion) in US Revenues while total US Retail Sales = $4.6T (trillion).

What if Facebook (FB) sees the multiple compression that Google (GOOGL) did during the last US #Recession? How about the ongoing “cheap” multiple Apple (AAPL) has had since it started crashing from the all-time US stock market #bubble high in July?

Oh, right. We’re the only ones making the US #Recession call (for now). So these “what if” questions don’t have to be tolerated (yet).

My Global Macro Team and I will present the case for what is already a US #Recession in industrial/cyclical terms on our Q1 Global Macro Themes call today at 1PM EST – please ping if you’d like access to the call.

Since we’re the rate-of-change-data-dependent guys, you’ll see 73 compelling slides (and some cartoons!) of historical and forward looking data that supports why you shouldn’t tolerate +2.5-3% US GDP “forecasters” this year.

Neither should you tolerate SP500 “revenue and earnings growth” forecasts, particularly in the 1st half of 2016. If you’re preaching #SuperLateCycle on both employment and consumption, you shouldn’t ignore the credit market cycle we’ll be focusing on either.

UST 10yr Yield 2.16-2.32% (bearish)

SPX 1 (bearish)
RUT 1092-1142 (bearish)

NASDAQ 4 (bearish)

Nikkei 18111-19118 (bearish)

DAX 10118-10633 (bearish)

VIX 17.21-23.51 (bullish)
USD 97.67-99.41 (bullish)
AAPL 103-109 (bearish)

AMZN 618-670 (bullish)

Best of luck out there today,


Keith R. McCullough 








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