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ICI Fund Flow Survey | Category Killers

Takeaway: Last week, equity ETFs had their largest inflow of 2016 while domestic equity mutual funds had their largest outflow.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

The ongoing shift from the expensive, less liquid, and taxably inefficient mutual fund structure was most evident as although U.S. stocks rose in the 5-day period ending July 13th, investors put through the biggest redemption of 2016 in U.S. active equity mutual funds redeeming-$7.3 billion. International equity mutual funds were also losers giving up -$769 million in the period. Meanwhile, the reallocation to passive products continued with equity ETFs winning their largest inflow of the year with +$15.7 billion in new money last week ($8.4 billion of which went into the broad market SPY). In light of these trends, we maintain our short call on T. Rowe Price (TROW---most recent research HERE), which has the highest percentage of large-cap strategies of the public asset managers (the main category which is moving to passive). We estimate TROW continues to overearn in the current bull market in equities but with a stubbornly high cost structure, operating margins have peaked and are now compressing. We are also cautious near-term for the company's earning's print next Tuesday the 26th.

 

ICI Fund Flow Survey | Category Killers - chart1

 

ICI Fund Flow Survey | Category Killers - chart2

 

In fixed income, almost all categories experienced inflows last week. Total bond mutual fund flows were +$6.1 billion, and fixed income ETFs took in +$4.7 billion. Only global bond mutual funds lost a small -$8 million. Additionally, investors defensively shored up +$19 billion in money market funds.


ICI Fund Flow Survey | Category Killers - ICI1

 

In the most recent 5-day period ending July 13th, total equity mutual funds put up net outflows of -$8.1 billion, trailing the year-to-date weekly average outflow of -$3.0 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$6.1 billion, outpacing the year-to-date weekly average inflow of +$2.4 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$15.7 billion, outpacing the year-to-date weekly average outflow of -$420 million and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$4.7 billion, outpacing the year-to-date weekly average inflow of +$1.9 billion and the 2015 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

 

ICI Fund Flow Survey | Category Killers - ICI2 2

 

ICI Fund Flow Survey | Category Killers - ICI3

 

ICI Fund Flow Survey | Category Killers - ICI4

 

ICI Fund Flow Survey | Category Killers - ICI5

 

ICI Fund Flow Survey | Category Killers - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

ICI Fund Flow Survey | Category Killers - ICI12

 

ICI Fund Flow Survey | Category Killers - ICI13

 

ICI Fund Flow Survey | Category Killers - ICI14

 

ICI Fund Flow Survey | Category Killers - ICI15

 

ICI Fund Flow Survey | Category Killers - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

ICI Fund Flow Survey | Category Killers - ICI7

 

ICI Fund Flow Survey | Category Killers - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +$8.4 billion or +4% to the broad market SPY while withdrawing -$500 million or -6% from the utilities XLU.

 

ICI Fund Flow Survey | Category Killers - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

ICI Fund Flow Survey | Category Killers - ICI17

 

ICI Fund Flow Survey | Category Killers - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$3.2 billion spread for the week (+$7.6 billion of total equity inflow net of the +$10.8 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is -$3.4 billion (negative numbers imply more positive money flow to bonds for the week) with a 52-week high of +$20.2 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Category Killers - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

ICI Fund Flow Survey | Category Killers - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 

Patrick Staudt, CFA







WisdomTree (WETF) | Helicopter Helping...Brexit Hurting

Takeaway: Japanese trends are being "lifted" by rumors of Helicopter QE but Brexit is still pushing AUM out the door.

  • Trends have marginally improved in Japan with rumors of a new bout of QE and a potential last ditch effort to "Helicopter" credit to consumers and spur the moribund Japanese economy. With that speculation running through the market early last week, the firm's hedged Japanese product took in over +$400 MM in new AUM in the past 5 days, as the Yen sold off -5%. The respite to the consistent uptrend in the currency and the slough off in AUM is allowing the DXJ to put in its best running month in 9 months and has boosted the stock out of a consistent downtrend for now.
  • Europe is still a slippery slope with Brexit adding a layer of complexity to the already weak economic landscape with fears of an Italian banking crisis now being intermixed with the unknown of how the U.K. will divorce itself from existing agreements with the E.U. The firm's hedged European product lost over -$250 million alone on Friday, with the tally from Brexit over the past 15 trading days now at -$1.2 billion in AUM (outflows and depreciation).
  • The wiggle higher in DXJ AUM has helped the stock on a short term basis but we remain bearish on the concentration risk to the firm on these 2 products which total 45% of AUM (especially with the ongoing weakness and concern in Europe which is impacting HEDJ). Other fundamental issues include the consistent underperformance of the firm's smart beta products compared to local benchmarks and also that over a broader cycle that long currency exposure tends to stabilize returns for foreign investors and the currency hedges at DXJ and HEDJ have done nothing but nullify Euro and Yen gains all year. The stock still trades well over 30x earnings and will report quarterly results next Friday with a likely $0.06 per share earnings print. With an $0.08 quarterly dividend currently, management will need to either cost cuts, restrike the dividend policy, or grow out of the current weak trends in its main products. We see fair value at $5-$7 per share or ~20x a $0.28 estimate for 2017 (under a scenario where DXJ and HEDJ stabilize but the firm doesn't grow). Our bear case scenario is that the firm breaks even at $20 billion in AUM and the stock is worth $2 per share.

 

The rumors of a "Helicopter" bout of QE in Japan finally took the rally out of the Yen last week with the Japanese currency depreciating -5%. This helped DXJ AUM by over +$400 MM with the product working on its best month in 9. The downtrend in DXJ AUM is still substantially lower however:

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 1

 

The European hedged product is now discounting another unknown with Brexit fears running through the product the past 3 weeks. The HEDJ lost over $250 MM on Friday (July 15th) alone with the total tally on the fund's AUM at -$1.2 billion since the U.K. referendum to leave the E.U.

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 2

 

Both funds are highly responsive to the direction of their respective foreign currencies and the Yen's rally this year has been dramatic with a stubbornly high Euro also problematic for the firm's currency hedges:

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 3

 

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 4

 

One of our main contentions with the story is that outside of near term currency weakness (the past 3 years), that there are significant periods of time where long currency exposure significantly benefits foreign investors:

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 5

 

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 6

 

In addition, the firm's "smart beta" methodology or fundamentally indexing via dividend payouts has yet to prove that it can "outperform" established market cap weighted benchmarks:

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 7

 

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 8

 

Shares remain wildly expensive and still have very high embedded growth despite AUM in decline. The firm also has a capital management issue at hand, currently paying an $0.08 per share common dividend while currently at a $0.06-0.07 per share earnings run rate. WETF stock sits as a Best Idea Short with fair value at $5-7 (and a $2 valuation in a breakeven scenario).

 

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 9

 

WisdomTree (WETF) - Timber!

WisdomTree (WETF) - It's Different This Time

WisdomTree (WETF) - The Land of the Sinking Sun

WisdomTree (WETF) - The Kuroda Kicker

WisdomTree (WETF) - More Questions Than Answers - We Remain Short 

 

 

Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

 Joshua Steiner, CFA

 

 

 

Patrick Staudt, CFA


MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME

Takeaway: The reality of slowing growth and a likely British recession gave way to elation over future BoE stimulus and positive U.S. and Chinese data

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM11

 

Key Takeaway:

Extreme optimism took hold last week, especially with Bank of England officials advising that they expect to launch fresh stimulus next month, J.P. Morgan and Citigroup beating earnings expectations, U.S. retail sales coming in higher than expected, and Chinese economic growth coming in higher than expected at 6.7%. Almost all of our risk measures in the heatmap below eased week over week, most of them significantly. The heatmap is also positive on the intermediate and long term.

Current Ideas:


MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 8 of 13 improved / 0 out of 13 worsened / 5 of 13 unchanged
• Intermediate-term(WoW): Positive / 9 of 13 improved / 0 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Positive / 3 of 13 improved / 2 out of 13 worsened / 8 of 13 unchanged

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM15


1. U.S. Financial CDS
– Swaps tightened for 13 out of 13 domestic financial institutions. With J.P. Morgan and Citigroup beating earnings expectations, retail sales coming in higher than expected, and Brexit fears giving way to elation over future BoE stimulus, the median domestic financials CDS tightened by -8 bps to 78.

Tightened the most WoW: AIG, MS, PRU
Widened the most WoW: ACE, CB, MTG
Tightened the most WoW: JPM, BAC, C
Widened the most MoM: AGO, ACE, SLM

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM1

 

2. European Financial CDS – Financials swaps mostly tightened in Europe last week as the reality of slowing growth and a likely British recession gave way to elation over future BoE stimulus.

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM2

 

3. Asian Financial CDS – With relief provided by a weakening Yen and Chinese economic growth coming in higher than expected at 6.7%, all financials swaps in Asia tightened last week, with the exception of Japanese Mizuho CDS, which did not trade. 

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese swaps tightened the most, by -26 bps to 288.

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM18

 

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM3


5. Emerging Market Sovereign CDS – Emerging market swaps were propelled tightener last week by better-than-expected Chinese economic growth. The average CDS change was -13 bps.


MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM16

6. High Yield (YTM) Monitor – High Yield rates fell 24 bps last week, ending the week at 6.42% versus 6.66% the prior week.

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 15.0 points last week, ending at 1925.

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM6

8. TED Spread Monitor  – The TED spread fell 1 bps last week, ending the week at 38 bps this week versus last week’s print of 39 bps.

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM7

9. CRB Commodity Price Index – The CRB index fell -0.6%, ending the week at 189 versus 190 the prior week. As compared with the prior month, commodity prices have decreased -1.8%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 2 bps to 5 bps.

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 0 basis points last week, ending the week at 2.00% versus last week’s print of 2.00%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM10

12. Chinese Steel – Steel prices in China rose 3.8% last week, or 95 yuan/ton, to 2610 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM12

13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,392 billion Yuan as of March 31, 2016, which is up +41.7% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM4

14. Chinese Credit Outstanding – Chinese credit outstanding amounts to 151.0 trillion RMB as of June 30, 2016 (data released 7/14/2016), which is up +15.3 trillion RMB or +11.3% year over year. Month-over-month, credit is up +1,514 billion RMB or +1.0%. Note: this data is only updated monthly.

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM20

15. 2-10 Spread – Last week the 2-10 spread widened to 88 bps, 13 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM13

16. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread tightened by 1 bps to 39 bps.

MONDAY MORNING RISK MONITOR | OPTIMISM TO THE EXTREME - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT



Patrick Staudt, CFA


HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share

Takeaway: Not only has financial trader count growth of +22% outpaced commodity trader growth of +14%, it has effected OI exponentially.

Over the past 2 years, growth in financial traders has outpaced growth in commodities traders according to the weekly CFTC Committment of Traders Report. The number of commodities traders has grown +14% while financial traders have grown over 1.5x that rate, by +22%. Even more dramatic is the impact on all important open interest. While commodities trader growth of +14% has had a one-to-one effect on OI expanding an equivalent +14%, financial trader growth of +22% has effected open interest expontentially with a +51% expansion. This reinforces our long view on financials heavy CME Group (CME), the open interest for which now sits at 110.5 million, up +21% YTD versus only +3% OI growth at Intercontinental Exchange (ICE). CME Group stock finally punched through $100 a share this week, up over +12% year-to-date (before a +5% fully loaded dividend) versus just +2% return for ICE.

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon17

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon1

 

Weekly Activity Wrap Up

Volume for futures and options came in higher week over week. Futures activity came in at 20.3 million contracts per day, bringing the 3Q16TD average daily volume (ADV) to 19.8 million, +6% Y/Y growth. Options activity came in at 17.4 million contracts per day. However, the 3Q16TD ADV remains -10% lower than the year-ago quarter at 16.3 million. Cash equities came in lower week over week at 6.8 billion shares per day, bringing the quarter's ADV to 6.9 billion, -6% lower than 3Q15.

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon16

  

U.S. Cash Equity Detail

U.S. cash equities trading came in at 6.8 billion shares per day this week, bringing the 3Q16TD ADV to 6.9 billion, -6% lower than the year-ago quarter. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of third-quarter volume, which is just about in line with the year-ago quarter, while NASDAQ is taking a 17% share, -222 bps lower than one year ago.

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon2

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon3

 

U.S. Options Detail

U.S. options activity came in at a 17.4 million ADV this week, bringing the 3Q16TD ADV to 16.3 million, -10% lower than the year-ago quarter. In the market share battle amongst venues, NYSE/ICE's 14% share of 3Q16 volume is -315 bps lower than one year ago. Additionally, while BATS' share grew in the first half of 2016, growth has stalled somewhat in recent weeks, and the exchange's 11% share is -27 bps lower than the year-ago quarter. Meanwhile, NASDAQ's 22% share is +85 bps higher than in 3Q15, and CBOE's 30% market share of 3Q16 is up +276 bps Y/Y. Finally, ISE/Deutsche's 13% share is -139 bps lower than 3Q15.

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon4

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon5

 

U.S. Futures Detail

15.8 million futures contracts per day traded through CME Group this week. That puts the 3Q16TD ADV at 15.3 million, +7% higher Y/Y. Additionally, CME open interest, the most important beacon of forward activity, currently sits at 110.5 million CME contracts pending, good for +21% growth over the 91.3 million pending at the end of 4Q15, an expansion from the previous week's +18%.

 

Contracts traded through ICE came in at 4.5 million per day this week, pushing the 3Q16TD ADV to 4.4 million, a +4% Y/Y expansion. ICE open interest this week tallied 65.6 million contracts, +3% higher than the 63.7 million contracts open at the end of 4Q15 and an expansion from the previous week's 1%.

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon6

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon8

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon7

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon9 

 

Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon10

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon11 2

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon12

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon13

 

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon14

HEDGEYE Exchange Tracker | CME Group...Punching Through $100 Per Share - XMon15

 

 

Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

  

  

 

 Joshua Steiner, CFA

 

 

 

Patrick Staudt, CFA


FINANCIALS SENTIMENT SCOREBOARD | MONEY CENTERS REMAIN IN FOCUS

Takeaway: JPMorgan (JPM) still has extremely bullish sentiment according to our quantitative screen of Financials.

At the risk of sounding like a broken record, JPMorgan, Bank of America, and Citigroup (Scores: 97, 92, and 91) continue to stand out as three of the most overly bullish stocks on our scoreboard. All three bulge bracket/money center banks have high sell side ratings combined with low levels of short interest which historically have made them underperformers according to our score.

 

We are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.

 

The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  

 

We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.

 

Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.

 

The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 

 

FINANCIALS SENTIMENT SCOREBOARD | MONEY CENTERS REMAIN IN FOCUS - SI1

 

FINANCIALS SENTIMENT SCOREBOARD | MONEY CENTERS REMAIN IN FOCUS - SI2

 

FINANCIALS SENTIMENT SCOREBOARD | MONEY CENTERS REMAIN IN FOCUS - SI3

 

The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”

 

Let us know if you would like to receive a copy of our black book, which explains this system and its applications.

 

BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   

 

SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 

 

 

FINANCIALS SENTIMENT SCOREBOARD | MONEY CENTERS REMAIN IN FOCUS - Absolute 12 mo

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

Patrick Staudt, CFA


Initial Claims | Tick Tock

Takeaway: Claims have been sub-330k for 29 months, now just 16 months shy of the all-time duration record: 45 months set in the 1990s.

Initial Claims | Tick Tock - Claims1

 

While claims moved momentarily higher in early May, they have resumed a breakneck pace lower for now with the most recent week coming in at an impressively low 254k. However, the keyword here is "breakneck". While the labor market remains strong for now, the current level of claims seems unsustainable in the context of history. The chart below shows that in the last three cycles claims have dropped below and remained below 330k for 24, 45, and 31 months (average: 33 months) before the economy entered recession in the last three cycles. With the current cycle in its 29th month below that level, we are 5 months past the minimum, 4 months shy of the 33-month average, and 16 months from the max. With the market at all-time highs and the labor market classically late stage, we remain bearish.

Tick tock.

Initial Claims | Tick Tock - Claims20 2

 

The Data

Initial jobless claims were unchanged at 254k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -5.75k WoW to 259k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -9.1% lower YoY, which is a sequential improvement versus the previous week's YoY change of -4.9%

 

Initial Claims | Tick Tock - Claims2

 

Initial Claims | Tick Tock - Claims3

 

Initial Claims | Tick Tock - Claims4

 

Initial Claims | Tick Tock - Claims5

 

Initial Claims | Tick Tock - Claims6

 

Initial Claims | Tick Tock - Claims7

 

Initial Claims | Tick Tock - Claims8

 

Initial Claims | Tick Tock - Claims9

 

Initial Claims | Tick Tock - Claims10

 

Initial Claims | Tick Tock - Claims11

 

Initial Claims | Tick Tock - Claims19

 

 

Yield Spreads

The 2-10 spread rose 2 basis points WoW to 81 bps. 3Q16TD, the 2-10 spread is averaging 80 bps, which is lower by -17 bps relative to 2Q16.

 

Initial Claims | Tick Tock - Claims15

 

Initial Claims | Tick Tock - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

Patrick Staudt, CFA

 


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