“The great thing in the world is not so much where we stand, as in what direction we are moving.”
-Oliver Wendell Holmes
Yesterday was one of the most humbling days of my professional life. It was Moving Day @Hedgeye. It was our first full day working as a team in our new Stamford, CT studio office space. We had all hands on deck.
I say studio because that’s what we are building – the next evolution of independent research coming out of our firm will include more simplifying communication tools like visualization and video-streaming. As Albert Einstein said about ideas, “if you can’t explain it simply, you don’t understand it well enough.” More on that as we move forward.
On the humbling part, externally at least, that’s not the first word that tends to come to mind beside my name. I don’t care about that as much as how my teammates and I feel when we are grinding it out together. Alongside my two beautiful children, I’ve never been so proud to see my family and firm move forward so selflessly. Thank you, to all of you, who have been a part of it.
Back to the Global Macro Grind…
Selfless, objective, flexible – these aren’t the words you’d use to describe the US government this morning. That means we have to overcompensate for their lack of resolve and prepare for whatever direction they try to take our said free-markets next.
Yesterday was a fascinating day on that score because, after the media monetized all the ad sales associated with “shut-down” drama, markets actually traded on the economic data. As Christian Drake pointed out to me just after 11AM EST on our desk, it’s #OctTaper versus Bernanke.
Put another way, it’s economic gravity (the data) vs. he who promises to bend it (Bernanke). And it’s not just the US stock market that is handicapping this battle of data versus un-elected opinion in real-time. Immediately after the USA posted another “surprisingly” bullish US #GrowthAccelerating ISM report for September (56.2 vs 55.7 in AUG), this is what happened:
- Gold got tapered
- Oil got tapered
- Bonds got tapered
This was kind of cool (for us) because we haven’t liked the Gold Bond thing for all of 2013 (we still have 0% asset allocations to both Fixed Income and Commodities; both are down YTD).
But it was also cool for the one thing that consensus missed alongside US #GrowthAccelerating for the past 10 months which is, of course, growth expectations embedded in the US stock market.
That’s right anti-Bernanke-policy-to-try-to-bend-gravity-fans:
- US Dollar Stabilizing
- And #RatesRising
- = all-time highs in US growth expectations (growth stocks)
As The Champ used to say “Pardon?”
Indeed, Sir Champ. All-time is a long time, bro – and the proxy for US growth stocks (the Russell 2000) closed at an all-time high yesterday of 1087. That’s +28.0% for 2013 YTD!
Yes, I’m sure whatever partisan #OldMedia channel you were watching nailed that.
I’m sure every fear-mongering and end #EOW (end of the world) idle threat thrown at The Rest of Us by the #PoliticalClass was a risk managed one based on selfless, objective, and flexible analysis too. Up next on cable, “the sun no longer rises in the East.”
Where to from here?
As I wrote in yesterday’s rant, I have no idea. I’m just saying that it was nice to see Mr. Market rub it in Washington’s nose for a few more hours. Today is simply another day to embrace the uncertainty and volatility of it all.
Key intermediate and long-term (TREND and TAIL lines) to keep front and center into Friday’s jobs report:
- CURRENCY: US Dollar Index long-term TAIL support = $79.21
- BONDS: US 10yr Treasury Yield intermediate-term TREND support = 2.55%
- STOCKS: US Stock Market (SP500) TREND support = 1660
To be clear, while US #GrowthAccelerating has been the surprise of 2013, A) that’s now old news and B) the slope of US growth’s line can go anywhere from here.
That’s what Big Government Intervention does – it shortens economic cycles, and amplifies market volatility. There’s a deep simplicity in understanding that too. So keep moving out there.
Our immediate-term Risk Ranges are now as follows (we have 12 Macro ranges in our Daily Trading Range product):
UST 10yr Yield 2.58-2.68%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: The trend of smaller bond fund outflows continued in the most recent week but still both taxable and tax-free bond funds booked outflows
This note was originally published September 26, 2013 at 12:15 in Financials
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Equity mutual fund inflow decelerated week-to-week to $3.4 billion for the 5 day period ending September 18th, down from the $5.2 billion inflow the week prior but remained well above last year's weekly average
Fixed income mutual fund outflows improved sequentially W-o-W but still resulted in a $2.6 billion withdrawal by investors, an improvement from the $6.7 billion draw down last week
Within ETFs, passive equity products experienced the largest weekly inflow in at least 2 years, with $25.8 billion coming into the equity category. Bond ETFs also had positive trends, although on a much smaller scale, with an $850 million inflow in the most recent weekly period
For the week ending September 18th, the Investment Company Institute reported a deceleration in equity fund flow trends although with fund flow still positive for stocks and an improvement in fixed income mutual fund flows, however with bond trends simply booking a smaller outflow. Total equity fund flow totaled a $3.4 billion inflow which broke out to a $3.3 billion inflow into international equity products and a $44 million inflow in domestic stock funds. These trends decelerated from the prior week's total equity fund inflow of $5.2 billion. Despite this slow down in stock fund flows, the year-to-date weekly average for 2013 now sits at a $2.6 billion inflow for total equity mutual funds, a substantial improvement from the $3.0 billion outflow averaged per week in 2012.
On the fixed income side, outflow trends continued for the week ending September 18th with the aggregate of taxable and tax-free bond funds combining to lose $2.6 billion in fund flow. The taxable bond category specifically shed nearly $900 million, the smallest weekly outflow in 6 weeks and a vast improvement from the $2.8 billion loss last week. Tax-free or municipal bonds continued their sharp outflow trends losing another $1.7 billion in the week ending September 18th, an improvement from last week's $2.7 billion outflow but none-the-less the 11th consecutive week over the $1.5 billion outflow mark. Franklin Resources (BEN) continues to have the most exposure in our coverage group to declining Municipal bond trends with over 10% of its assets-under-management in the tax-free category. The 2013 weekly average for fixed income fund flow has now drastically declined from 2012, now averaging a $521 million weekly outflow this year, a far cry from the $5.8 billion weekly inflow averaged last year.
Hybrid funds, or products that combine both fixed income and equity allocation, continue to be the most stable category bringing in another $1.5 billion in the most recent weekly period, an improvement from the $1.2 billion inflow the week prior. The year-to-date weekly average inflow for hybrid products is now $1.6 billion for '13, almost a 100% increase from 2012's $911 million weekly average.
Passive Products - Largest Weekly Equity ETF Inflow In Our Dataset:
Exchange traded funds experienced wildly positive trends on the equity side and mildly positive trends in fixed income for the week ending September 18th. Equity ETFs gained $25.8 billion, the biggest weekly inflow in our data set with balanced inflow into international, sector focused, and large-cap products. Including this week's inflow, 2013 weekly average equity ETF trends are averaging a $3.4 billion weekly inflow, an improvement from last year's $2.2 billion weekly inflow average.
Bond ETFs also had a mildly positive week with an $850 million inflow, which was a slight decline from last week's $1.4 billion subscription. Including this sequential drop in the most recent period, the 2013 weekly bond ETF average is now just a $388 million inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow from 2012.
HEDGEYE Asset Management Thought of the Week: The Market is Tapering the Long End Itself:
While the U.S. central bank continues to peg its bond buying programs to backward looking forecasts, the bond market continues to taper the long end of the curve itself and has pushed the 10 year Treasury yield up from a low of 1.6% in May to its current level of 2.6% this week. Hedgeye's Macro Team has introduced the thought that the continued accelerating improvement in year-over-year weekly jobless claims will eventually be reflected in the monthly Non Farm Payroll (NFP) numbers (despite different bias' in these data-sets) and that next week's NFP print for September on Friday, October 4th may finally prove out a closer relationship between these two employment variables. Thus, the 10 year Treasury yield may again spike up to recent highs on renewed Fed tapering expectations. In the event of a back up in 10 year rates again, we continue to observe the correlation between 10 year Treasury yields and Franklin Resources (BEN) stock which has strengthened over recent weeks. This investment manager with a large exposure to Municipal bond trends and Global Bond flows has been trading on the trajectory of long term yields under the thought that as bonds sell off, the fixed income and retail nature of BEN's assets-under-management levels will be negatively impacted. When we first spotted this developing correlation, the R-squared between BEN and the US10YR was 0.32. The R-squared currently is 0.50 and continues to bear watching especially if U.S. macro economic data continues to improve.
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
Daily Trading Ranges
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No market was hit harder by the downturn than the local LV market. Here’s one of the reasons why BYD may finally have turned onto recovery road.
- BYD generates 30% of its property EBITDA in the LV locals market and is benefiting from improving top-line trends in that market and a lower cost structure
- After peaking in Q4 of 2009, mortgages with negative equity and delinquencies are moving lower at an accelerating rate in Nevada
- We’ve consistently found that while other macro variables are important, housing price was the most significant driver of gaming revenues across the country and especially in the LV locals market
- The relationship has actually dissipated over the past 2 years as housing prices recovered but gaming revenues have not
- Our theory is that gaming growth has resumed and should begin to grow at an accelerating rate over the next few years as more and more consumers pull their heads above water in their mortgages. In other words, rising home prices and gaming revenues will again be highly correlated
No September slump for domestic manufacturing with the ISM Mfg data - the first (and arguably most impactful) private sector release of the month – strengthening for a 4th consecutive month. The Composite index advanced to 56.2, New Orders remained north of 60 and the Employment and Backlog components both improved sequentially.
Across each of the five sub-components of the index, the TREND remains one of improvement with the trailing 3M/6M/12M averages all advancing in the latest month.
For now, strength across the balance of domestic macro metrics continues to belie the extraordinary, dovish policy lean out of the Fed while markets and main street continue to largely ignore the latest iteration of fabricated brinksmanship out of the beltway.
With both equities and yields advancing and gold rolling over in the wake of this morning’s ISM and Markit PMI strength, fundamentals appear to be prevailing as the principal market driver here. Let's hope that continues.
Economic Gravity 1, Government 0 to start October.
Christian B. Drake
- LO announced this morning its acquisition of SKYCIG for £30MM in cash, plus an additional £30MM to be paid in 2016 based on the achievement of certain financial benchmarks
- SKYCIG is a three year old UK based company with ~ 300,000 users that offers e-cigs in traditional and flavored offerings (including vanilla, cherry, and cinnamon)
- LO has indicated the it plans to leave the current management in place
- Among Big Tobacco, LO was first to the U.S. e-cig market through its acquisition of Blu in April 2012
- LO currently enjoys the largest market share in the U.S.; today’s acquisition, while relatively small, allows LO to expand internationally in a developed and fragmented e-cig market
- We’ve expected Big Tobacco to look outside the U.S. shores for growth, and LO remains ahead of the pack, with both RAI and MO only releasing their e-cig brands in initial test states in the U.S. within the last two months
- We believe there’s huge runway for the e-cig category in the U.S. and internationally, as we’re in the early innings of manufacturers creating brand awareness, identity, and appeal (for now consumer preference has been anchored on availability and taste)
- We’re focused on what restrictions the FDA may place on e-cigs in the U.S. If, for example, the FDA decides to restrict online sales and/or flavored offerings, we believe that Big Tobacco and select e-cig manufacturers with strong retail relationships will stand to benefit
Investment: we remain bullish on LO’s portfolio of full-flavored and menthol offerings and leading share in e-cigs. We’re cognizant that any restrictions that the FDA may place on menthol would have material negative implications for the stock. For now, we’re bullish on the stock over the immediate term TRADE and intermediate term TREND durations (see chart below).
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