The Macro Market Stage

Client Talking Points


Bear market in bonds just beginning... ICI just reported the worst bond market outflow since August. Fixed income mutual funds continued persistent outflows with $8.1B withdrawn from bond funds last week. At the peak of Bernanke's Bond Bubble (2012) average weekly flows were +$5.8B average inflow per week. Last week's -$8.1B outflow from bonds takes the year-to-date weekly average outflow to -$1.4B per week. Boom ... 3.01% on the 10-year this morning. What was immediate-term trade resistance of 2.91% is now support.


Stocks are ripping across the pond as the Euro rips a new high with #Eurobulls (Hedgeye Q4 Macro theme #1) featured front-and-center on the macro market stage this morning. #StrongEuro = #StrongGermany. The DAX? It's up +25.7% year-to-date as the Euro rips. What's that? Even Greece is joining in the party up +4.2% this morning. End of World? Currencies matter.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.


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.


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


Fear, as blogging ad strategy, continues to crash, -31.6% VIX for 2013 YTD @KeithMcCullough


"Self-trust is the first secret of success." - Ralph Waldo Emerson


The 2013 holiday season was the best ever for Amazon, with more than 36.8 million items ordered worldwide on Cyber Monday -- a record-breaking 426 items per second. (Amazon press release)


“Difficulties are just things to overcome, after all.”

 -Ernest Shackleton


Even though many of us thoroughly enjoy our jobs, most work years are still typically a bit of an endurance test.  Luckily, as I wrote yesterday, the U.S. stock markets had a very healthy year and returns were up and to the proverbial right.  So, for stock market operators, 2013 wasn’t all that much of an endurance test.


I recently finished reading a book called, “Endurance: Shackleton’s Incredible Voyage”, which tells the story of Ernest Shackleton and his failed attempt at being the first person to cross Antarctica from sea-to-sea via the pole.   Shackleton’s ship was named the Endurance and endure is exactly what he and his shipmates did.


The Endurance departed from South Georgia for the Weddell Sea on December 5th, 1914.  Two months later the Endurance was frozen in an ice flow and Shackleton ordered the abandonment of the ship and her conversion into an ice station.  For the next 8 months, the crew lived on the ice floe in the middle of the Antarctic Sea until the ship was finally broken in half by ice pressure.


At that point, Shackleton order his crew to another ice floe and for the next six month, until March 1916, he and his crew shifted between various floes.  By April, their current flow was becoming too small and Shackleton and his crew jumped into the remaining life boats to make a five day harrowing trip to Elephant Island. 


After a couple weeks on the deserted Elephant Island, Shackleton selected a crew of six to sail with him across the Drake Passage back to South Georgia Island, the nearest point of civilization more than 600 miles away.


The Drake passage is widely considered the most challenging water to sail on the planet. According to Wikipedia:


“There is no significant land anywhere around the world at the latitudes of the Drake Passage, which is important to the unimpeded flow of the Antarctic Circumpolar Current which carries a huge volume of water (about 600 times the flow of the Amazon River) through the Passage and around Antarctica.”


Shackleton and his crew sailed the Drake Passage in a 20-foot wooden sail boat in the middle of a hurricane and eventually made it to a whaling station on South Georgia Island (only after crossing the Island on foot, something no man or men had done to that point).  So, after almost 20 months of being stranded in the Antarctic, Shackleton and his crew made it to civilization.  And that, my friends, is endurance!


Back to the Global Macro Grind...


After a relative tame investing year in 2013, the question for all of us is: what will we have to endure in 2014 to generate outperformance? There are a few things that potentially come to mind, specifically:


1)      Debt Ceiling – The debt ceiling is set to expire on February 7th, though the Treasury Department has the ability to extend this via the use of extraordinary measures for about another month.  Treasury Secretary Jack Lew, and thus the Obama administration, has already sent the opening volley in a letter to Congress last week.  As Lew wrote in the letter:


“The creditworthiness of the United States is an essential underpinning of our strength as a nation; it is not a bargaining chip to be used for partisan political ends.”


In part he is of course correct, the debt ceiling shouldn’t be used as a bargaining chip, but in reality 2014 is an election year and it is a very good bargaining chip for the Republicans. In particular the Tea Party, who need a win to go back to their constituents with after the recent budget compromise.


In the Chart of the Day, we show the return of the SP500 in the summer and early fall of 2011.  As you may recall, while it wasn’t as difficult as sailing the Drake Passage in a wooden row boat, the last major debt ceiling debate was a difficult and volatile period for U.S. equities.


2)      Interest rates – As we’ve noted, the U.S. interest rate market has basically already front run the beginning of tapering.  The 10-year yield has close to doubled from the lows of May of this year to the recent high of around 3.0%.  Certainly increasing rates has its positive implications, especially as it relates to supporting U.S. dollar strength, the challenge of course is controlling the speed at which rates normalize.   An accelerated increase in interest rates will undoubtedly serve to stymy economic growth.


In the short run, the most significant impact that rising rates will have is on the housing market.  In part, the impact on the mortgage market is already being seen.   According to the Mortgage Bankers Association, mortgage applications fell 6.3% on a seasonally adjusted basis last week to their lowest level in 13-years.  National home prices are unlikely to continue climbing if mortgage demand and affordability are falling.


3)      Chinese growth – The Shanghai Composite is having a positive morning up more than 1.4% as Chinese Interbank rates fell for the fourth day in a row.  While the spike in Chinese interbank rates has garnered headlines over the last few weeks, our Asia Analyst Darius Dale has been quick to note that much of this recent spike relates to a liquidity crunch going into year-end and is likely to be short lived. The broader question for Chine relates to economic growth.


Certainly, managing growth lower will be important for Beijing in reigning in domestic credit growth and rebalancing the economy, but what of the implications globally?  A Chinese growth rate potentially slowing from 7.5% to 6-7% will definitely have implications on global economic activity.  Some may be positive, such as a decline in demand, and thus price, for certain commodities.  Conversely, a lower than expected Chinese growth rate may be a shock to barely recovering Western countries and companies that depend on Chinese demand.


In aggregate, the three points above may actually not provide an endurance test for stock market operators in 2014, but merely be “icebergs” that we easily sail around.  Only time will tell on that front.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.91-3.02%



VIX 11.35-13.94


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Endurance - Chart of the Day


Endurance - Virtual Portfolio


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ICI Fund Flow Survey - Worst Bond Outflow in over 3 Months Since August

Takeaway: Tax loss selling continued in bonds with the biggest outflow in 3 months while the combination of equity ETFs and funds had strong inflow

Investment Company Institute Mutual Fund Data and ETF Money Flow:


Total equity mutual funds experienced slight inflows for the week ending December 18th with a $433 million subscription, making it 9 of 10 weeks of total stock fund inflow. Within the total equity fund result, domestic equity mutual funds lost $2.6 billion with international equity funds posting a $3.1 billion inflow. Despite these mixed trends both categories of equity mutual funds have averaged positive flow in 2013 with an average weekly subscription of $3.0 billion weekly year-to-date, 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 $8.1 billion withdrawn from bond funds, the worst outflow in 3 months. This week's draw down worsened sequentially from the $6.7 billion outflow the week prior and ongoing redemptions have now forced the 2013 weekly average for all fixed income funds to a $1.4 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 and fixed income ETFs seeing slight inflows week-to-week. Passive equity products gained $9.9 billion for the 5 day period ending December 18th with bond ETFs experiencing a $293 million inflow. 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 Bond Outflow in over 3 Months Since August  - ICI chart 1

ICI Fund Flow Survey - Worst Bond Outflow in over 3 Months Since August  - ICI chart 2



For the week ending December 18th, the Investment Company Institute reported slight equity inflows into mutual funds with $433 million flowing into total stock funds. The breakout between domestic and world stock funds separated to a $2.6 billion outflow into domestic stock funds and a $3.1 billion inflow into international or world stock funds. These results for the most recent 5 day period compare to the year-to-date weekly averages of a $384 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 18th with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $8.1 billion outflow, a sequential decay from the $6.7 billion lost in the prior 5 day period and the worst weekly outflow in over 3 months since the $9.3 billion redemption in the final week of August. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $5.6 billion, which joined the $2.5 billion outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 25 of the past 29 weeks and municipal bonds having had 29 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 $1.4 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 $483 million inflow in the most recent 5 day period, although the past 4 weeks have been below year-to-date averages. Hybrid funds have had inflow in 27 of the past 29 weeks with the 2013 weekly average inflow now at $1.5 billion, a strong advance versus the 2012 weekly average inflow of $911 million.



ICI Fund Flow Survey - Worst Bond Outflow in over 3 Months Since August  - ICI chart 3

ICI Fund Flow Survey - Worst Bond Outflow in over 3 Months Since August  - ICI chart 4

ICI Fund Flow Survey - Worst Bond Outflow in over 3 Months Since August  - ICI chart 5

ICI Fund Flow Survey - Worst Bond Outflow in over 3 Months Since August  - ICI chart 6

ICI Fund Flow Survey - Worst Bond Outflow in over 3 Months Since August  - ICI chart 7



Passive Products:



Exchange traded funds had positive trends within the same 5 day period ending December 18th with equity ETFs posting a strong $9.9 billion inflow, the fifth consecutive week of positive equity ETF flow. The 2013 weekly average for stock ETFs is now a $3.4 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 18th with a $293 million subscription, a deceleration from the week prior which produced a $986 million inflow 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 Bond Outflow in over 3 Months Since August  - ICI chart 10

ICI Fund Flow Survey - Worst Bond Outflow in over 3 Months Since August  - ICI chart 9




Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA


December 27, 2013

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TODAY’S S&P 500 SET-UP – December 27, 2013

As we look at today's setup for the S&P 500, the range is 45 points or 1.74% downside to 1810 and 0.70% upside to 1855.                             










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.60 from 2.58
  • VIX closed at 12.33 1 day percent change of -1.20%

MACRO DATA POINTS (Bloomberg Estimates):

  • 10:30am: EIA natural gas storage change
  • 11am: DOE inventories
  • 1pm: Baker Hughes rig count


    • No major U.S. government news expected today


  • Textron to buy Beechcraft for $1.4b to boost lineup
  • U.S. budget easing cuts signed by Obama along with defense bill
  • Microsoft’s Nokia deal said to face China limits on patent fees
  • Apple renews request for sales ban on older Samsung products
  • Takeda stops development of TAK-875 diabetes drug
  • Audi plans to invest $30.3b through 2018 to challenge BMW
  • LDK Solar proposes cash-out or exchange of securities
  • Fastest Japan inflation since ’08 stokes wage pressures
  • Shanghai GM to recall almost 1.5m vehicles in China
  • China’s audit chief pledges checks of government debt, spending
  • Yildiz, maker of Godiva, purchases DeMet’s for $221m
  • ISS tweak to recommendations may shake up some boards: WSJ


    • No earnings expected from S&P 500


  • Indonesia to Regulate Metal Exports for Companies With Smelters
  • Copper Gains in London in Catch Up as Prices in New York Decline
  • Indian Probes Risk Revival of $160 Billion Projects: Commodities
  • Wheat Slides a Fourth Day, Nears 19-Month Low on Supply Outlook
  • Gold Seen Falling as Gains in Equities Sap Demand From Investors
  • WTI Swings on U.S. Jobless Claims as Crude Supplies Seen Falling
  • Aluminum Seen Extending Loss to $1,600 in First Half on Supply
  • Palm Oil Posts Second Weekly Gain as Weak Ringgit Spurs Demand
  • Zambia May Draft Glencore, Vedanta Power-Prise Rise by February
  • Indonesia 11-Mo. Nickel Ore Output at 47m Tons, Ministry Says
  • Worst Fuel Oil Loss Since 2011 Seen Easing on Import Cut: Energy
  • Workers at Total’s Largest French Oil Refinery Continue Strike
  • OECD Oil Inventory Rises to Highest Level Since April 2010
  • Rubber Advances for Second Day as Yen Weakens to Five-Year Low


























The Hedgeye Macro Team














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