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Get High

This note was originally published at 8am on September 18, 2013 for Hedgeye subscribers.

“If you want to get open under the basket, don’t just run towards the hoop – run to the free throw line first, then cut to the baseline to get open.  Get High to Get Low. “

-Coach Ken Smith, Windsor CT basketball   

 

Standing on stage in a Speedo with a freshly shaven body while a bunch of guys cheer for you elicits kind of an odd feeling.

 

The whole competitive bodybuilding scene is a singularly peculiar, multifarious mix of culture and personality and I do miss parts of it…kinda. 

 

For the un-indoctrinated, the canonical approach to (natural) bodybuilding contest preparation, from the nutritional side, goes something like this: 

 

In the 3 months leading up to contest day, you progressively tighten up the diet by concomitantly lowering total consumption and shifting your macronutrient profile increasingly towards protein and polyunsaturated fats (think olive oil, fish oil, mixed nuts, etc). 

 

At some point, as caloric intake declines, you initiate or increase caffeine consumption for its beneficial thermogenic and appetite suppression effects.  Nearer the end, if you need to further accelerate progress (and it’s the mid-2000’s when it was still legal) you may add in some measured amount of additional stimulant (via ephedrine) to help augment fat loss. 

 

In general, the diet-stimulant combo works exceptionally well - for a while.  Continue the regiment too long and the impact starts to diminish and ultimately reverse. 

 

While there is some definite science underpinning the contest preparation process, there’s an undeniable element of art in manipulating all the diet and exercise dynamics so that your physique peaks exactly on contest day. 

 

There is also the invariable, post-contest frustration.  Inevitably, following the aesthetic ‘peak’ on contest day, the veins start to disappear, muscle definition fades, and you begin to smooth out as both diet and fluid balance renormalize to sustainable levels.  After a week or two of physiological adjustment, you’re back to feeling (and looking) normal. 

 

Does that over-consume à diet à stimulate à adjustment cycle look familiar?

 

Bodybuilding contest preparation is not dissimilar to monetary stimulus in the aftermath of a multi-decade credit binge.   After the fun time (pizza eating/credit amplified consumption to offer both sides of the analogy) comes the diet/deleveraging and the stimulants/monetary stimulus to help things along - followed by the inevitable, but necessary, let down on the back end of the whole process. 

 

Consensus continues to believe we’ll start the QE reversal adjustment process today with something on the order of a $5-10B reduction in monthly purchasing.  Maybe it’s fully priced in, maybe not.  Ultimately, measured policy normalization is a healthy and necessary adjustment and one we think justified given the positive breadth of the data YTD. 

 

Back to the Global Macro Grind…..

 

There are three primary fiscal policy catalysts on the calendar in the near term:

  1. Oct 1st – Government Funding: the current Continuing Resolution, which provides funding for government operations in the (now all too familiar) event there is no official budget, ends on September 30th.
  2. Late October - Debt Ceiling:   The latest statements from Treasury Secretary Lew, place the breach date between the end of October and mid-November.
  3. Year End - Sequestration/Fiscal 2014 Budget – Spending levels decline in accordance with sequestration if Congress fails to reach an agreement on an alternative. 

Government funding, the Debt Ceiling, and the fiscal 2014 budget are three discrete events that have coalesced into a single, policy amorphism as each political side threatens standoff or promises compromise/concessions on one as a condition for an accord on another.  

 

The majority of recent reports suggest the appetite of Republicans to present a united front in tying a delay in Obamacare implementation and other spending and tax initiatives to the Sept 30th government funding deadline is fading – which leaves the debt ceiling as the brinksmanship event of choice.

 

So, does the Debt Ceiling matter?  

 

In large part, the debt ceiling matters as a political issue only in so much as the debt level exists as a partisan point of contention and a pervasive populous concern.   For both the politico and the populous, the precedent appears to be that debt generally only matters when the slope is going the wrong way. 

 

Consider the broader realities existent in 2011 vs. those prevailing today.  The contrast is both illustrative and stark.  

 

In 2011, when the Debt Ceiling clash roiled equities, we were still well north of $1T in deficit spending, the US credit rating hung in the balance, Europe was still on the brink, confidence remained near trough, QE was only midstream, and fixed income remained fully bid.

 

Presently, deficit spending is in retreat, the US credit rating isn’t a headline concern, confidence has inflected, Europe is stable-to-improving, policy is re-normalizing, and fund flows have begun a secular reversal.     

 

Clearly, both the macro and sentiment dynamics have changed materially since Debt Ceiling 1.0.  So has the trajectory of debt spending.  

 

In the Chart of the Day below, we show the Trend in the deficit-to-GDP ratio.   As can be seen, after reaching a peak of ~10% in 2009, the ratio has showed steady decline with accelerating improvement over the last year alongside stronger economic growth, higher taxes, a retreat in stabilizer payments, and a number of non-recurrent inflows.   

 

We expect the ratio to retreat further as the domestic macro data continues to reflect ongoing, albeit modest, improvement. 

 

Indeed, yesterday, in its latest update to the long-term budget outlook (Here), the CBO projected deficit spending would continue to drop over the next few years, falling to 2% of GDP by 2015 with the Debt-to-GDP ratio declining to 68% from its current level of ~73%. 

 

Yes, the long-term budget outlook, saddled with unsustainable growth in entitlement obligations, remains dire. We’ll break down the budget outlook in detail, by duration, in subsequent notes, but the key takeaway here is that the outlook for both growth and debt spending over the intermediate term remains positive.   

 

Markets and political strategy move on the slope of the line (better/worse, not good/bad) not on a highly uncertain, 12 year forward projection. 

 

At present, the Trend slope of improvement in domestic growth, credit, confidence, and deficit spending are all positive and both Treasury Yields and the $USD (our key price signals as it relates to concern over the debt ceiling) remain Bullish from a price perspective.

 

#RatesRising has been reflecting that positive fundamental reality as have market prices as pro-growth exposure continues to get marked higher (new YTD high yesterday for the QQQ’s and another new all-time high for the R2K) while the underperformance spread for slow growth, yield chase assets (Utilities, MLP’s) continues to expand.   

 

Notably, policy normalization and #RatesRising alongside Trend improvement in debt and deficit levels also holds important implications for future fiscal policy initiatives.  

 

If we actually allow rates to go higher over the next couple of years – monetary policy can again be used as a tool to help offset employment and output drags stemming from fiscal policy decisions aimed at putting the budget on a sustainable long-term course.

 

If we stay at zero percent until projected debt/deficit ratios trough in 2015/16 we lose that optionality.  To reiterate the basketball strategy quote from my AAU coach above:  “Go High to Get Low”.

 

Perhaps the journey starts today. 

 

Our immediate-term Macro Risk Ranges are now as follows:

 

UST 10yr Yield 2.82-2.99%
SPX 1680-1714

USD 80.79-81.73

Brent 107.58-111.43

NatGas 3.59-3.73

Gold 1288-1349

 

Christian B. Drake

Senior Analyst 

 

Get High - z. cd

 

Get High - zz. vp 918


October 2, 2013

October 2, 2013 - dtr

 

BULLISH TRENDS

October 2, 2013 - 10yr

October 2, 2013 - spx

October 2, 2013 - dax

October 2, 2013 - nik

October 2, 2013 - euro

 

BEARISH TRENDS

October 2, 2013 - VIX

October 2, 2013 - dxy

October 2, 2013 - oil

October 2, 2013 - natgas

October 2, 2013 - gold
October 2, 2013 - copper

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 2, 2013


As we look at today's setup for the S&P 500, the range is 14 points or 0.59% downside to 1685 and 0.24% upside to 1699.                               

                                                                                                

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10A

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.31 from 2.32
  • VIX closed at 15.54 1 day percent change of -6.39%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Sept. 27 (prior 5.5%)
  • 7:45am: ECB seen holding benchmark interest rate at 0.50%
  • 8:30am: ECB’s Draghi holds news conference on interest ra
  • 8:15am: ADP Employment Change, Sept., est. 180k (prior 176k)
  • 9:45am: ISM New York, Sept. (prior 60.5)
  • 10:30am: DOE energy inventories
  • 11:30am: U.S. to sell $20b cash management bills
  • 12pm: Fed’s Rosengren speaks on economy in Burlington, Vt.
  • 3:20pm: Fed’s Bullard speaks on community banks in St. Louis
  • 3:30pm: Fed’s Bernanke speaks on comm. banks in St. Louis

GOVERNMENT:

    • Second Day of federal govt shutdown, events may be canceled
    • Obama meets with CEOs of large banks, incl. Goldman Sachs CEO Lloyd Blankfein, to discuss stalemate on budget
    • House Armed Services Cmte hearing with Marine Corps logistics officials testifying on risks of sequestration, future force readiness, 2pm
    • SEC Chairman Mary Jo White speaks at Security Trader Association’s 80th annual Market Structure Conference, 2:45pm
    • House Transportation and Infrastructure Committee hears testimony on reauthorizing FEMA, 10am

WHAT TO WATCH:

  • U.S. government shuttered with no quick end seen amid discord
  • Overwhelming Obamacare demand signals potential success
  • Shutdown seen merging with debt-limit fight
  • Federal shutdown for a week seen shaving 0.1 point from growth
  • CEOs say shutdown poses risk to U.S. economic rebound
  • Microsoft board said to consider Mulally as Ford touts bench
  • Wells Fargo said to face New York action over accord compliance
  • ‘Candy Crush’ maker King said to file for U.S. public offering
  • BP wasn’t prepared for Deepwater blowout, professor testifies
  • Apple faces delay in producing new version of iPad Mini: Reuters
  • HTC, Qualcomm redesigning phone chip after patent ruling: WSJ
  • Cargill said to be close to buying ADM cocoa unit: Reuters
  • Bank credit-card fees face new scrutiny by U.S. consumer bureau
  • Tokyo Electron seeks deals after Applied Materials takeover
  • Facebook offers mobile promotions aimed at boosting app usage

EARNINGS:

    • CalAmp (CAMP) 4:01pm, $0.16
    • Monsanto (MON) 8am, $(0.43) - Preview

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Iron Ore Forecasts Raised by Australia as Chinese Demand Surges
  • Corn Reaches Three-Year Low as U.S. Production Outlook Improves
  • WTI Drops Ninth Time in 10 Days as U.S. Crude Stockpiles Advance
  • Gold Rebounds From 8-Week Low as Investors Weigh U.S. Shutdown
  • Sugar Rises to 5-Month High After Brazil Output Cut; Cocoa Falls
  • Copper Swings Between Gains and Drops Amid Shutdown in U.S.
  • Sugar Trade Spurs Land Grabs in Developing Countries, Oxfam Says
  • Yoshinoya to Grow Rice in Fukushima to Expand Farming Business
  • Falklands Tax Dispute Clouding Oil Dream for Investors: Energy
  • Aluminum Financing Threatened as Interest Rates Rise: Bear Case
  • Maersk Four Rate Rises Fail to Spread as Demand Falls: Freight
  • German Power’s Rebound Seen Ending on Coal Slide: Energy Markets
  • Barclays Hires Four Commodities Staff From JPMorgan, Citadel
  • Rubber Reaches 7-Week Low as U.S. Auto Data Raise Demand Concern

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

Moving Day

“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:

  1. Gold got tapered
  2. Oil got tapered
  3. 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:

  1. US Dollar Stabilizing
  2. And #RatesRising
  3. = 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:

  1. CURRENCY: US Dollar Index long-term TAIL support = $79.21
  2. BONDS: US 10yr Treasury Yield intermediate-term TREND support = 2.55%
  3. 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%

SPX 1

VIX 14.71-16.69

USD 80.02-80.75

Yen 97.04-98.76

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Moving Day - Chart of the Day

 

Moving Day - Virtual Portfolio


Continued Muni Weakness: BEN has Most Exposure

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

Continued Muni Weakness: BEN has Most Exposure - george1

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


 

Continued Muni Weakness: BEN has Most Exposure - cast1

Continued Muni Weakness: BEN has Most Exposure - ICI chart 2 revised

 

 

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.

 

 

Continued Muni Weakness: BEN has Most Exposure - ICI chart 3

Continued Muni Weakness: BEN has Most Exposure - ICI chart 4

Continued Muni Weakness: BEN has Most Exposure - ICI chart 5

Continued Muni Weakness: BEN has Most Exposure - ICI chart 6

Continued Muni Weakness: BEN has Most Exposure - ICI chart 7

 

 

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.

 

 

Continued Muni Weakness: BEN has Most Exposure - ICI chart 8

Continued Muni Weakness: BEN has Most Exposure - ICI chart 9

 

 

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.

 

 

Continued Muni Weakness: BEN has Most Exposure - ICI chart 10

 


 

 

 

Jonathan Casteleyn, CFA, CMT

 

203-562-6500

 

jcasteleyn@hedgeye.com 

 

 

 

Joshua Steiner, CFA

 

203-562-6500

 

jsteiner@hedgeye.com


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