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INITIAL CLAIMS: A SPEED BUMP IN THE LABOR MARKET PARKING LOT

Takeaway: Today marks the first week of bona fide soft data in a long time. We'll see if this is the start of a new trend through year-end.

Should We Be Concerned?

The labor data has softened now for two weeks in a row. The first week of weak data (two weeks ago) represented a seasonal mismatch and wasn't anything overly noteworthy. The second week - the most recent week - however, showed a more legitimate soft patch in the data. Normally, we see a surge in claims following black Friday representing the seasonal layoff of retail workers. Then, in the following week we see claims drop sharply. For reference, the average increase in claims from post-Black Friday layoffs over the last six years has been 175,000 (NSA). The subsequent decline in claims has averaged 91,000. That works out to a 52% reduction in the post-black Friday surge. This year, we saw an increase of 147,000 post-black Friday followed by a decline of 48,000, or right around a decline of 1/3 - well below the normal retracement. We'll keep a close eye on the trends into year-end.

 

Separately, with the Fed finally tapering its bond purchases we think it's important to remind investors of the setup going into the new year. Remember that the labor market has a built in tailwind that strengthens steadily from September through February, peaking in February/March and then reversing, and, ultimately, troughing in August/September. This should be supportive of rising rates through 1Q14. We've shown rate correlations across the Financials over the bulk of 2013 and we would expect that the playbook through the next 2-4 months should mirror that. For more information on how to position in that environment, see our note from 11/22/13 entitled #Rates-Rising: A Current Look at Rate Sensitivity Across Financials.

 

The Data

Prior to revision, initial jobless claims rose 11k to 379k from 368k WoW, as the prior week's number was revised up by 1k to 369k.

 

The headline (unrevised) number shows claims were higher by 10k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 13.25k WoW to 342.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.7% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -13.0%

 

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Yield Spreads

The 2-10 spread rose 1 basis points WoW to 256 bps. 4Q13TD, the 2-10 spread is averaging 238 bps, which is higher by 4 bps relative to 3Q13.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


[podcast] mccullough: what do we do now? #BTDB?

Hedgeye CEO Keith McCullough says he was "dead wrong" on yesterday's no-taper call and "lucky" (after covering his US Dollar short position soon after, he was somehow positioned right with 8 LONGS, 0 SHORTS.) So what do we do now? Keith discusses.

 



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ICI Fund Flow Survey - Worst Week for U.S. Stock Funds and Tax Loss Selling in Bonds

Takeaway: Worst outflow in domestic stock funds in all of 2013 and tax-loss selling across the board in fixed income

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Total equity mutual funds experienced outflows for the week ending December 11th with $1.0 billion leaving the category, the first withdrawal in 9 weeks. Within the total equity outflow result, domestic equity mutual funds lost $5.6 billion, the biggest weekly outflow in U.S. stock funds year-to-date against International equity funds which posted a $4.5 billion inflow, a sequential improvement from the week prior. Total equity mutual fund trends in 2013 however now tally a $3.0 billion weekly average inflow, a complete reversal from 2012's $3.0 billion weekly outflow 

 

Fixed income mutual funds continued persistent outflows during the most recent 5 day period with another $6.7 billion withdrawn from bond funds. This week's draw down worsened sequentially from the $4.4 billion outflow the week prior but ongoing redemptions have now forced the 2013 weekly average for all fixed income funds to a $1.3 billion outflow, which compares to the strong weekly inflow of $5.8 billion throughout 2012

 

ETFs experienced positive trends in the most recent 5 day period, with equity products seeing heavy inflows with fixed income ETFs also seeing moderate subscriptions week-to-week. Passive equity products gained $6.2 billion for the 5 day period ending December 11th with bond ETFs experiencing a $986 million inflow, an improvement from the $331 million redemption the 5 days prior. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results


 

ICI Fund Flow Survey - Worst Week for U.S. Stock Funds and Tax Loss Selling in Bonds - ICI chart 1

 

 

For the week ending December 11th, the Investment Company Institute reported slight equity outflows from mutual funds with over $1.0 billion flowing out of total stock funds. The breakout between domestic and world stock funds separated to a $5.6 billion outflow into domestic stock funds, the biggest weekly outflow for U.S. stock funds in 2013, and a $4.5 billion inflow into international or world stock funds, the biggest inflow since February for international funds. These results for the most recent 5 day period compared to the year-to-date weekly averages of a $424 million inflow for U.S. funds and a running $2.6 billion weekly inflow for international funds. The aggregate inflow for all stock funds this year now sits at a $3.0 billion inflow, an average which has been getting progressively bigger each week and a complete reversal from the $3.0 billion outflow averaged per week in 2012.

 

On the fixed income side, bond funds continued their weak trends for the 5 day period ended December 11th with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $6.7 billion outflow, a sequential deceleration from the $4.4 billion lost in the 5 day period prior. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $4.2 billion, which joined the $2.5 billion outflow in tax-free or municipal bonds, the worst 5 day period in muni bonds in 13 weeks. Taxable bonds have now had outflows in 24 of the past 28 weeks and municipal bonds having had 28 consecutive weeks of outflow. These redemptions late in the year are likely tax loss selling related with the Barclay's Aggregate Bond index down nearly 2% in 2013, the first annual loss in 14 years. The 2013 weekly average for fixed income fund flows is now a $1.3 billion weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.

 

Hybrid mutual funds, products which combine both equity and fixed income allocations, continue to be the most stable category within the ICI survey with another $877 million inflow in the most recent 5 day period, although the past 3 weeks have been below year-to-date averages. Hybrid funds have had inflow in 26 of the past 28 weeks with the 2013 weekly average inflow now at $1.5 billion, a strong advance versus the 2012 weekly average inflow of $911 million.

 

 

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Passive Products:

 

 

Exchange traded funds had positive trends within the same 5 day period ending December 11th with equity ETFs posting a strong $6.2 billion inflow, the fourth consecutive week of positive equity ETF flow. The 2013 weekly average for stock ETFs is now a $3.3 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.

 

Bond ETFs experienced moderate inflow for the 5 day period ending December 11th, with a $986 million subscription, a reversal from the week prior which produced a $331 million outflow for passive bond products. Taking in consideration this most recent data however, 2013 averages for bond ETFs are flagging with just a $268 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.

 

 

ICI Fund Flow Survey - Worst Week for U.S. Stock Funds and Tax Loss Selling in Bonds - ICI chart 7 revised

ICI Fund Flow Survey - Worst Week for U.S. Stock Funds and Tax Loss Selling in Bonds - ICI chart 8 revised 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


I Was Wrong

Client Talking Points

US DOLLAR

I was dead wrong on the no-taper call, so I covered the US Dollar short position and sold my Pound long on strength. Being net long equities yesterday (as we were) was effectively pure luck. Bernanke did the right thing, protecting the Dollar (that was in a 6 week free fall). The question now is did he do it too late? Tapering into US #GrowthSlowing (sequentially) in Q1 won’t be for the faint of heart. But if the US Dollar can breakout above our TREND line of $81.14, that gives US growth a shot. Stay tuned.

UST 10YR

Got #RatesRising? The bond market had this right. Don't forget: the 10-year yield is up +17 basis points month-over-month and up +108 basis points year-over-year. Ex the no-taper decision in September (which evidently Bernanke now has the growth data, on a lag, to have tapered in SEP), this flow call out of bonds and into growth equities is very straightforward, and very well may continue.

GOLD

Thank God my signals said stay out of gold into yesterday’s Fed decision. Gold hates #RatesRising and is being tapered (hard) this morning back down to its June lows. If it doesn’t hold the June 27th closing low of $1200, and the USD breaks out above $81.14, I’ll have no problem going back to the bear side of Gold. We get the bear case.

Asset Allocation

CASH 52% US EQUITIES 12%
INTL EQUITIES 12% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
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

Being wrong in macro happens; you have to move quickly so that your mistakes don't run against you @KeithMcCullough

QUOTE OF THE DAY

More than anything else, what differentiates people who live up to their potential from those who don't is a willingness to look at themselves and others objectively. -Ray Dalio

STAT OF THE DAY

Mark Zuckerberg, the CEO of Facebook (FB), is selling shares to help pay taxes, joining the company and some other shareholders in an offering worth about $3.9 billion. About 27 million shares will be offered by Facebook, and almost 43 million shares are being sold by certain stockholders, including 41,350,000 shares by Zuckerberg, the company said in a statement today. Facebook fell as much as 5.3% in pre-market trading.


December 19, 2013

December 19, 2013 - 1

 

BULLISH TRENDS

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BEARISH TRENDS

December 19, 2013 - Slide10

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