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Where's the Party?

Client Talking Points

U.S.

Well the U.S. government is back to work and the debt ceiling is averted. For the time being at least. So now global equity markets should be rallying hard right?  That’s not quite how it is working out this morning.  U.S. futures are down, Europe is off 25 – 80 basis points, and Asia is up, albeit small.  So much for the party! Our immediate risk range for SPX is 1685-1725. Now we have to focus on the Fed.  The key question there is, of course, will they taper or not taper?

EUROPE

As global asset allocators, we have the choice to be underweight the U.S. and our view on Europe is looking very compelling on a comparative basis as we highlighted in our recent Q4 theme - #EuroBulls. The euro, a currency we do have longer term issues with, is breaking out on our quant models and is up another 70 basis points this morning to $1.3629 versus the U.S. dollar. Some interesting recent items of note include the Greek 10-year yield down 206 basis points month-over-month to 8.4% and European new passenger car registrations up the most in two years at +5.4% year-over-year in September.

Asset Allocation

CASH 42% US EQUITIES 18%
INTL EQUITIES 22% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
DAX

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up. 

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

Street isn't bearish enough on $WTW pic.twitter.com/Fs9zfCwwCX

@HedgeyeHC2

QUOTE OF THE DAY

This country has come to feel the same when Congress is in session as when the baby gets hold of a hammer. -Will Rogers 

STAT OF THE DAY

U.S. National Debt: $16,964,507,500,000 (USDebtClock.org)


ICI Fund Flow Survey and our take on the BlackRock Conference Call

Takeaway: ICI's weekly data marked outflows across the board in both stocks and fixed income with D.C. gridlock having spooked investors last week

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Equity mutual funds joined all product classes last week with outflows in front of the gridlock in Washington with a $3.1 billion outflow, a slight deceleration from the prior week's outflow of $3.3 billion. Despite these soft trends near term, total equity mutual funds have reversed weekly outflow trends from last year and are averaging a $2.5 billion weekly inflow in '13 versus 2012's $3.0 billion weekly outflow 

 

There wasn't even a flight to quality last week, with fixed income mutual funds booking redemptions of $2.5 billion, an acceleration from the week prior's $397 million outflow and now sending 2013's weekly average fund flow to a negative $561 million. This compares to the weekly inflow from last year in 2012 of $5.8 billion for fixed income funds

 

ETFs were also a source of funds last week, with outflows in both equity and fixed income products. Passive equity products experienced outflows of $4.7 billion for the 5 day period ending October 9nd with Bond ETFs losing $1.3 billion in investor funds during the same time period

 

In the Hedgeye Thought of the Week, we outline our 5 main takeaways from yesterday's conference call of industry leader BlackRock, the largest asset manager in the world with now over $4 trillion in assets-under-management


 

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 1 revised

 

 

For the week ending October 9nd, the Investment Company Institute reported another weekly outflow in combined stock funds to the tune of $3.1 billion, a slight improvement from the $3.3 billion outflow the week prior. The $3.1 billion outflow for the week broke out to a $2.0 billion inflow into international equity products and a $5.1 billion outflow within domestic stock funds. The equity category has been a tale of two tapes recently with domestic equity funds having had outflows in 8 of the past 13 weeks compared to international equity funds which have had inflows every week in the past 13. Despite this weak run in domestic stock fund flows, the year-to-date weekly average for 2013 for all equity mutual funds now sits at a $2.5 billion, a complete reversal from the $3.0 billion outflow averaged per week in 2012.

 

On the fixed income side, bond funds were not able to generate any new investor interest despite the uncertainty created by Washington and for the 5 days ending October 9nd, the aggregate of taxable and tax-free bond funds booked a $2.5 billion outflow. Both categories of fixed income contributed to outflows with taxable bonds having outflows of $1.5 billion which joined a $1.0 billion outflow in tax-free or municipal bonds. While the sharp outflows that marked most of the summer and the start of the third quarter have moderated, the appetite for bonds has hardly rebounded. The 2013 weekly average for fixed income fund flows is now a $561 million weekly outflow, a far cry from the $5.8 billion weekly inflow averaged last year.

 

 

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 2

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 3

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 4

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 5

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 6

 

 

Passive Products:

 

 

Exchange traded funds also experienced weak trends last week with equity products booking a large outflow and bond ETFs also experiencing mild redemptions. Equity ETFs lost $4.7 billion in funds, a reversal from the $1.3 billion inflow in the prior week and also down from the impressive $25.8 billion inflow three weeks ago. Including this week's outflow however, 2013 weekly average equity ETF trends are averaging a $3.1 billion weekly inflow, an improvement from last year's $2.2 billion weekly inflow average.

 

Bond ETFs experienced their second consecutive weekly redemption of $1.3 billion which was a slight improvement from the $2.0 billion in funds lost the week prior. Including this most recent redemption within passive bond products, the 2013 weekly bond ETF average is flagging at just a $325 million inflow, much lower than the $1.0 billion average weekly inflow from 2012.

 

 

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 7

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 8

 

 

Hedgeye's Asset Management Thought of the Week:

 

We view the BlackRock earnings conference call as an important indication of broader asset management industry trends with the wide spectrum that the $4 trillion asset manager covers. Our top 5 takeaways from the firm's conference call yesterday are:

 

1.)  CEO Larry Fink had an interesting perspective on potential future communication from the Federal Reserve. In essence his commentary alluded to a Fed that will be on hold in regard to tapering for longer than expected as the real byproduct of the current government shut down has not been a stock market sell off but potentially a Fed that will want to evaluate the impact of the shut down and will wait longer than expected to start any reduction in bond buying. Aside from BlackRock's inherent bias to pitch its strong fixed income franchise which would benefit in this scenario, this outcome may make some sense considering the change in Fed Chairman upcoming (any current communication change will wait to be made after the Fed transition).

 

2.) The firm's scientific equity or quant products experienced outflows in the quarter which were performance related but the category continues to remain out of favor according to the company. This has the biggest implication for Janus Capital (JNS) which has $41.3 billion in quant assets, over 25% of its total assets-under-management.

 

3.) One of the fastest growing categories within the firm's third quarter was BlackRock's LifePath franchise which had $3 billion in net inflows in the quarter or a 17% annualized organic growth. While the $70 billion in total LifePath assets is only a small percentage of BLK's overall assets, similar target date funds and the entire 401K category comprise over 15% of assets-under-management at T Rowe Price (TROW), which is a positive read through for them.

 

4.) While the firm guided down expectations for year-over-year performance fees (citing an abnormally strong period last year on a one time PPIP fee), BlackRock is entering the 4th quarter with some earnings momentum. Period ending assets-under-management are up over 6% quarter-over-quarter which will help base fees and the firm cited only a slight upward drift on marketing spend in the fourth quarter which could be really good for year ending margins.

 

5.) The firm also alluded to a reversal in flows within its important emerging market franchise. While the second quarter marked outflows in some of its flagship products including the EEM exchange traded fund, the firm saw inflows into the EM category in September which is positive for overall realization rates as these products have some of the highest fees within the BLK product suite. 

 


 

Jonathan Casteleyn, CFA, CMT

 

 

 

 

 

 

Joshua Steiner, CFA

 

 


THE M3: Q3 TABLE/SLOT COUNT; GREEK MYTHOLOGY TABLES; PACKAGE TOURS/HOTEL DATA

THE MACAU METRO MONITOR, OCTOBER 17, 2013

 

 

GAMING TABLES AND SLOT COUNT DICJ

At the end of 3Q, there were 5,748 gaming tables (+2 tables QoQ) and 14,775 slot machines (-535 machines QoQ).

 

DOUBTS ON FUTURE OF TAIPA CASINO'S TABLES Macau Business

Questions have arisen about the future of 80 gaming tables currently assigned to a Taipa casino and belonging to SJM.  An executive connected with the New Century Hotel and Greek Mythology Casino has been arrested in Macau on suspicion of fraud.  Chen Mei Huan – also known as Chan Mei Fun – was held on Sunday over the allegations, which involve 35 Macau and mainland Chinese investors and more than HK$300 million (US$38.7 million), said police.

 

SJM had previously stripped Greek Mythology of a third of its then 120 tables in August 2012 following a dramatic and bizarre series of events.  They included an attack the previous June by masked men on Chen’s former boyfriend and business partner, the Macau junket veteran Ng Man Sun, and complaints from tourists that they had been locked out of their rooms at the hotel portion of the property.

 

In October last year Ambrose So, SJM CEO said that the 40 gaming tables previously confiscated from Greek Mythology had been transferred to Grand Lisboa and were operational.  

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR AUGUST 2013 DSEC

Visitor arrivals in package tour increased by 6.6% YoY to 973,766 in August 2013.  Visitors in package tour mostly came from Mainland China (770,365), with 292,733 from Guangdong Province; followed by Taiwan (62,622); Hong Kong (38,586); and the Republic of Korea (32,706).

 

There were 97 hotels and guesthouses operating at the end of August 2013, providing 27,761 guest rooms, up by 14.4% YoY, of which the 5-star hotels had 18,373 rooms, accounting for 66.2% of the total.  The average length of stay of guests held stable as August 2012, at 1.3 nights.

 


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Parasitic Policy

“By definition, a government has no conscience. Sometimes it has a policy, but nothing more.”

-Albert Camus

 

With the debt ceiling and government shutdown behind us (at least for a few months), we can now all go back to focusing on doing investment research.  Well, not so fast, now we actually have to focus on the Federal Reserve.  The key question there is, of course, will they taper or not taper.

 

Yesterday, we wrote in the Early Look about an interesting study from the San Francisco Fed, which showed that the Fed’s program of quantitative easing had a de minimis impact on the real economy.  We would actually take it a step further and suggest that with the inflation of commodities due to printing more dollars, QE may have even eaten into the real economy.

 

In that regard, we were trying to think of an analogy from the animal kingdom that best represented the impact of QE on the real economy and very naturally the tape(r) worm came to mind.  For those that didn’t know the following is a description of a tape worm (emphasis mine):

 

“Tapeworms, or cestodes, are intestinal parasites; they are worms that are flattened like a tape measure. A tapeworm cannot live freely on its own - it survives within the gut (intestine) of an animal, including a human.”

 

To be fair, my assessment that QE effectively eats into its host, the real economy, has led to some push back.  As my colleague Christian Drake rightfully pointed out to me earlier this week, while QE may not have an impact on the real economy, it does have an impact on asset prices.  As an example, in the Chart of the Day we show the S&P 500 index with and without the twenty-four hour pre-FOMC returns.

 

The implication of this chart is quite astoundingly that the Fed may be responsible for almost all returns of the SP500 since 1994.  Further, if QE truly does inflate asset prices, as the correlations suggest, then there is likely a wealth impact that ultimately does impact the economy by the way of increased consumption.

 

As we stand here today though, it seems much easier to argue that some easing of stimulus is likely to strengthen the U.S. dollar and deflate oil, which is probably the most important consumer stimulus the Fed could implement over the coming quarters and years.  Hopefully, Mrs. Yellen gets the memo on this point.  Let’s face it, if oil were at $50, we’d all be buying jelly doughnuts for the office.

 

Back to the global macro grind . . .

 

As noted, the government is back to work and the debt ceiling is averted, so now the global equity markets should be rallying hard.  Well, that’s not quite how it is working out this morning.  U.S. futures are down, Europe is off 25 – 80 basis points, and Asia is up, albeit small.  So much for the party!

 

As we, and people much smarter than us have often said, markets don’t like uncertainty and our fine elected officials have now created more uncertainty with a number of looming deadlines, specifically:

 

-          December 13th – the date when a House-Senate committee will report back on negotiations on a longer term budget deal;

-          January 15th – the date on which the government is now open until subject to another budget agreement being reached; and

-          February 7th – the next debt ceiling.

 

Now of course, Washington is changing this morning.  Former Newark Mayor (although we understand he didn’t actually live there) Cory Booker is the newly minted Senator from New Jersey.  We knew Cory when we were undergrads at Yale and he was in law school and he can be persuasive, but we aren’t sure even he can resolve this mess of catalysts that Congress will be dealing with in the next three months.

 

So, speaking of the real economy, what impact does this massive amount of uncertainty have?  According to Gallup, the economic confidence index has fallen off a cliff in the last month from -15 (a range it had been in for awhile) to -40.  With such short term and potentially negative catalysts on the horizon, it is unlikely this confidence improves meaningfully.

 

Luckily, as global asset allocators, we have the choice to be underweight the U.S. and our view on Europe is looking very compelling on a comparative basis as we highlighted in our recent Q4 theme - #EuroBulls. The euro, a currency we do have longer term issues with, is breaking out on our quant models and is up another 70 basis points this morning to $1.3629 versus the U.S. dollar. 

 

Increasingly, the recent data from Europe is also supportive of being a #EuroBull.  Some examples include:

 

-          Greek 10-year yield down 206 basis points month-over-month to 8.4%;

-          Eurozone September CPI benign at 1.1%;

-          European new passenger car registrations up the most in two years at +5.4% year-over-year in September;

-          European ZEW economic expectations at 59.1 in October, a sequential improvement from September; and

-          U.K. ONS house price index +3.8% in August which beat expectations and increased sequentially.

 

To be fair, all is not great in Europe. But, in global macro markets, change happens on the margin, and on the margin the European economy is improving.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr yield 2.66-2.73%

SPX 1

VIX 15.21-17.63

USD 80.11-80.67

Brent 110.01-112.05

Gold 1

 

Good luck out there today.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research 

 

Parasitic Policy - The Drift

 

Parasitic Policy - z. vp 10 17


Obama Bucks

This note was originally published at 8am on October 03, 2013 for Hedgeye subscribers.

“If making money is a slow process, losing it is quickly done.”

-Saikaku Ihara

 

That’s a mint quote at the start of chapter 13 (“Wild Money And The Stealth Tax”) in one of my favorite economic history books, Jack Weatherford’s The History of Money (pg 193). I’d love to hear Bernanke and Obama’s version of this history. Devaluing the purchasing power of The People for political gain is as old as politics itself. It’s called inflation – and it’s a stealth tax.

 

Ex the anti-dog-eat-dog-class-warfare-storytelling, you’ve probably noticed that US politicians are currently burning the credibility of your hard earned currency at the stake (see Chart of The Day). No US President and/or Federal Reserve Chief has overseen A) a lower US Dollar value and/or B) a higher Oil price than Obama and Bernanke. Nice job boys.

 

No US President has been forced to “shut-down” the government in 17 years either. In order to explain the mechanics of it all, we’ll be hosting a call with the last man to force Big Government’s hand on this, Newt Gingrich, at 11AM EST @Hedgeye today (email Sales@Hedgeye.com if you’d like access – we’ll have a full access client Q&A for Newt too).

 

Back to the Global Macro Grind

 

Simple question: When it comes to the purchasing power (currency) of who Obama labels “ordinary, middle class folks”, doesn’t the buck stop with the President of The United States?

 

As Obama pointed out yesterday in an interview with raging Republican, John Harwood, the appointment of Bernanke was as important as any he’s made. So, doesn’t that make The President accountable to empowering a Burning Buck policy?

 

Silly questions, I’m sure. That’s why CNBC didn’t get me to do the interview.

 

In other news, the US stock market is now down for 9 of 11 days since Ben Bernanke arbitrarily decided to do precisely the opposite of what he was “communicating” to the marketplace (taper).

 

Counter to consensus thinking, the better part of this recent correction in stocks has come on days when:

  1. US Dollar is DOWN, and
  2. US Interest Rates are DOWN

The causal factor in driving Down Dollar has been a two track (monetary and fiscal) political strategy that is starting to look like an idea that came out of a Roman bath club circa 52 BC. Plunder the people for political gain. They won’t understand. #stealth

 

With the US Dollar having given back all of its YTD gains (it’s down -2.7% in the last month):

  1. The US Dollar Index now has a 6-week POSITIVE correlation of +0.95 to the 10yr US Treasury Yield
  2. And the USD has a 6-week POSITIVE correlation of +0.82 to the US Treasury 10Y-2Y Yield Spread

Just because you won’t get things like leading indicators from your President or the US Federal Reserve doesn’t mean they cease to exist:

  1. Down Dollar and Down Interest Rates are starting to = Down Stock Market
  2. Down Dollar and Down Interest Rates = a leading indicator for #GrowthSlowing

If this sounds familiar to you, it should – this is basically the inverse of our call for the last 10 months. We were bullish on US GDP #GrowthAccelerating because two of the most obvious leading indicators for growth (#StrongDollar + #RatesRising) had both #OldWall Street and Washington consensus chasing the rising growth expectations.

 

From a S&P Sector perspective, the easiest way to summarize growth expectations slowing is via the Financials (XLF). The reason why the 10Y minus 2Y Yield Spread matters is because this is how a bank makes money. As the long-end of the curve (interest rates) falls, banks make less of a margin and can then lend less.  How’s that for “ordinary folks”?

 

While almost every said “economics” guru advising Obama will tell him that a “weak Dollar is good for manufacturing and exports”, that’s the biggest crock since Nero started devaluing The People’s currency in the first place. Let’s look at what just happened in a country whose currency was lit on fire earlier this year (and whose stock market was crashing, in kind) – Brazil:

  1. Brazil finally said enough is enough, and RAISED rates to defend its currency (the Real)
  2. Brazilian Real is now +7.8% in the last month versus USD; Brazilian Stocks (Bovespa)= +17.9% in the last 3 months
  3. Brazil’s SEP economic data (both manufacturing PMI and Exports) accelerated as its currency did (Exports +5% y/y SEP)

Yep. Them be the facts, “folks.” And if you want to re-gain the trust of The People, you better start talking #truth. Politically preying on the ignorance of “ordinary” people is un-American. Losing respect like the US Dollar has happens slowly, then all at once.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.58-2.73%

SPX 1681-1696

Nikkei 13931-14604

VIX 14.86-17.39

USD 79.21-80.42

Euro 1.34-1.36

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Obama Bucks - Chart of the Day

 

Obama Bucks - Virtual Portfolio


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