prev

Inflation Matters (Big Time)

Client Talking Points

#InflationAccelerating

Accelerating inflation is still Macro Theme #1 here at Hedgeye. Check out the CRB Index which closed up another +1.1% yesterday to up +7.8% year-to-date (compare that with the S&P 500 which was -0.65% on the day, down -1.1% YTD). There is no question that this is a tax on U.S. consumption expectations. What's that? Consumer Discretionary has tumbled -3.2% YTD? Yes, exactly.

YEN

The Yellen Fed moving to “rate guidance” (i.e. price fixing) along with Treasury Secretary Jack Lew encouraging the world to reflate is totally nuts. Or at least nuts enough that even the Yen looks healthier than the US Dollar right now (policy is causal). The Nikkei fell -2.2% overnight to down -11.3% year-to-date.

Financials

Watch the Financials (XLF) very closely. As the US Dollar and Rates go, so will go the Financials (they were down -1.4% yesterday) and the market. The long-end of the yield curve needs to rise for the XLF to work – not get “rate guided” down by some un-elected bureaucrat.

Asset Allocation

CASH 53% US EQUITIES 0%
INTL EQUITIES 6% COMMODITIES 16%
FIXED INCOME 10% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
FXB

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

LVS

Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike.  The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet.  The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%.  And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

GOLD: up another +0.2% to +9.3% YTD with US #GrowthSlowing @KeithMcCullough

QUOTE OF THE DAY

“Eat me alive right now.” - Zinetula Bilyaletdinov, head coach of Russia's hockey team which was just eliminated

STAT OF THE DAY

In a play to dominate messaging on phones and the Web, Facebook has acquired WhatsApp for $19 billion. WhatsApp has been able to hold its weight against messaging heavyweights like Twitter, Google and Microsoft's Skype. WhatsApp has upwards of 450 million users, and is adding an additional million users every day. It's the most popular messaging app for smartphones, according to OnDevice Research. (CNN)


ICI Fund Flow Survey - Equity Products Outperform Across The Board

Takeaway: Both equity mutual funds and equity ETFs had more positive flow trends than fixed income products in the most recent week

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent week, both equity vehicles including mutual funds and ETFs produced higher net inflows than commensurate fixed income products.

 

Total equity mutual funds produced a strong week of inflow with $7.2 billion of net subscriptions, an acceleration from the $1.8 billion inflow the week prior. The $7.2 billion inflow was balanced during the most recent 5 day period, with $4.1 billion flowing into domestic equity funds and $3.1 billion flowing into international stock funds. The 2014 running weekly average inflow for equity mutual funds is now $4.8 billion, an improvement from the $3.0 billion weekly average inflow for 2013. 

 

Fixed income mutual funds also had net inflows during the 5 day period ending February 12th with $1.1 billion flowing into all fixed income funds. The breakout of the slight inflow amounted to $968 million into taxable products and a $162 million inflow into tax-free or municipal products, the 5th consecutive week of inflow into munis after 33 consecutive weeks of outflow. The 2014 weekly average for fixed income mutual funds now stands at a slight $128 million weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).

 

ETFs, across the board, had a strong week of subscriptions with stock ETFs drawing in $6.9 billion in net inflow with bond ETFs taking in $3.0 billion in net new money. This was an improvement on the stock side this week after a record all time withdrawal in equity ETFs the week prior of $27.4 billion. The bond inflow this week of $3.0 billion decelerated from the record all-time inflow the week prior of $14.0 billion. The 2014 weekly averages are now a $5.4 billion weekly outflow for equity ETFs and a $2.8 billion weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $10.0 billion spread for the week ($14.2 billion of total equity inflow versus the $4.2 billion inflow within fixed income; positive numbers imply inflows for stocks; negative numbers imply inflows for bonds). The 52 week moving average has been $6.6 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) and a 52 week low of -$36.9 billion (negative numbers imply a net inflow into bonds for the week). 

 

Continued strong equity mutual fund inflow trends currently support our favorite long idea in the sector, T Rowe Price (TROW) which should benefit with a leading retail equity mutual fund franchise.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey representing 95% of the investment management industry's mutual fund assets. This data largely represents the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 1

 

 ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 2

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 3

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 4

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 5

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 6

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 7

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

  

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 8

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 9

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $10.0 billion spread for the week ($14.2 billion of total equity inflow versus the $4.2 billion inflow within fixed income; positive numbers imply inflows for stocks; negative numbers imply inflows for bonds). The 52 week moving average has been $6.6 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) and a 52 week low of -$36.9 billion (negative numbers imply a net inflow into bonds for the week). 

 

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 11 

 

 

Continued strong equity mutual fund inflow trends currently support our favorite long idea in the sector, T Rowe Price (TROW) which should benefit with a leading retail equity mutual fund franchise.

 

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 12 

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 13 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – February 20, 2014


As we look at today's setup for the S&P 500, the range is 39 points or 1.08% downside to 1809 and 1.05% upside to 1848.                                    

                                                                                           

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.41 from 2.43
  • VIX closed at 15.5 1 day percent change of 11.75%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: CPI m/m, Jan., est. 0.1% (prior 0.3%)
  • 8:30am: Init Jobless Claims, Feb. 15, est. 335k (pr 339k)
  • 8:58am: Markit US PMI Preliminary, Feb., est. 53.6
  • 9:45am: Bloomberg Economic Expectations, Feb. (prior -5)
  • Bloomberg Consumer Comfort, Feb. 16 (prior -30.7)
  • 10am: Philadelphia Fed Bus Outlk, Feb., est. 8.0 (pr 9.4)
  • 10am: Leading Econ Indicators, Jan., est. 0.4% (pr 0.1%)
  • 10:00am: Mortgage Delinquencies, 4Q (prior 6.41%)
  • 10am: Freddie Mac Mortgage Rates
  • 10:30am: EIA natural gas
  • 11am: DOE Energy Inventories

GOVERNMENT:

    • 8am, USDA begins 2-day 2014 Agricultural Outlook Forum, with remarks from Ag. Sec. Tom Vilsack
    • 2pm, SEC holds closed mtg on enforcement matters

WHAT TO WATCH:

  • Facebook agrees to buy mobile-messaging app WhatsApp for $19b
  • WhatsApp deal seen avoiding U.S. antitrust challenge
  • Sequoia Capital said to make $3.5b backing WhatsApp
  • China manufacturing index slides to lowest level in 7 months
  • Safeway said in talks with firms including CVC, Leonard Green
  • Peltz still seeks PepsiCo split, to lobby shareholders: WSJ
  • Citigroup appoints Mahmud to succeed Prasad as currencies chief
  • Wall Street girds for China bribery probe as share sales beckon
  • Ukraine truce crumbles as fights erupt with talks set to resume
  • BofA said to increase CEO Moynihan’s compensation 17% to $14m
  • Danone earns drop for first time in decade on baby-food scare
  • Sbarro closing 155 North American locations in comeback effort
  • Merck & Co. unit eyed by cos. incl. Bayer, Novartis: Reuters
  • Ardagh Glass may get bids for U.S. unit this week: FT
  • SEC’s Stein calls for short-term lending rules reform: Reuters
  • PBOC drains cash as overnight rate slides to lowest in 10 mos.
  • Japan trade deficit widens to record as import costs jump

AM EARNS:

    • Actavis (ACT) 7am, $3.05
    • AerCap Holdings (AER) 6:57am, $0.65
    • Altisource Residential (RESI) 7:30am, $0.40
    • CVR Energy (CVI) 8:30am, $0.39
    • Dana Holding (DAN) 7am, $0.44
    • Denbury Resources (DNR) 7:30am, $0.30
    • DirecTV (DTV) 7am, $1.29 - Preview
    • Hormel Foods (HRL) 6:30am, $0.58
    • InterDigital (IDCC) 8:30am, $0.30
    • Lexington Realty Trust (LXP) 7:30am, $0.05
    • Loblaw Cos (L CN) 6am, C$0.55
    • Patterson (PDCO) 7am, $0.57
    • Public Service Enterprise (PEG) 7:30am, $0.45
    • Quanta Services (PWR) 6:07am, $0.43
    • Reliance Steel & Aluminum (RS) 8:50am, $0.98
    • Scana (SCG) 7:30am, $0.78
    • Sonus Networks (SONS) 6am, $0.02
    • Teekay (TK) 8am, $(0.04)
    • Teekay LNG Partners (TGP) 8am, $0.55
    • Teekay Offshore Partners (TOO) 8am, $0.39
    • Teekay Tankers (TNK) 8am, $(0.04)
    • Tim Hortons (THI CN) 7:30am, C$0.76
    • Toro (TTC) 8:30am, $0.37
    • TransAlta (TA CN) 7:45am, C$0.20
    • TransCanada (TRP CN) 8:32am, C$0.60 - Preview
    • Ultra Petroleum (UPL) 8am, $0.38
    • Wal-Mart Stores (WMT) 7am, $1.59 - Preview
    • Walter Energy (WLT) 7:38am, $(0.83)
    • Westlake Chemical (WLK) 6am, $2.23
    • Yandex (YNDX) 6am, $11.38

PM EARNS:

    • Agrium (AGU CN) 5:30pm, $0.85
    • Allscripts Healthcare Solution (MDRX) 4:01pm, $0.08
    • Aruba Networks (ARUN) 4:05pm, $0.17
    • Bill Barrett (BBG) 4pm, $(0.03)
    • Cabot Oil & Gas (COG) 5:01pm, $0.17
    • Capstone Mining (CS CN) 5:37pm, $0.07
    • Exelixis (EXEL) 4:12pm, $(0.38)
    • Express Scripts Holding (ESRX) 4:01pm, $1.12 - Preview
    • First Quantum Minerals (FM CN) 5pm, $0.22
    • Groupon (GRPN) 4pm, $0.02
    • Hewlett-Packard (HPQ) 4:04pm, $0.84 - Preview
    • Intuit (INTU) 4pm, $0.02
    • Lundin Mining (LUN CN) 5:56pm, $0.07
    • Marvell Technology Group (MRVL) 4:03pm, $0.25
    • Mohawk Industries (MHK) 4:01pm, $1.75
    • MRC Global (MRC) 4:05pm, $0.42
    • Newmont Mining (NEM) 4:15pm, $0.44
    • Nordstrom (JWN) 4:04pm, $1.34 - Preview
    • Pharmacyclics (PCYC) 4:01pm, $0.88
    • Priceline.com (PCLN) 4:01pm, $8.30 - Preview
    • Qlik Technologies (QLIK) 4:05pm, $0.30
    • Tile Shop Holdings (TTS) 4:01pm, $0.04
    • WebMD Health (WBMD) 4pm, $0.24

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Losing Stigma for UBS as Tully Increases Forecasts for 2014
  • WTI Oil Falls From Four-Month High as China Manufacturing Slows
  • Coffee Exports From Indonesia to Drop on World Cup; Prices Jump
  • Rarest of Rare Iridium Gains as Growth Spurs Demand: Commodities
  • Gold Advances as Investors Weigh Fed Outlook Against U.S. Data
  • Ivorian Cocoa Crop Seen by Ecobank Rising to Highest in 3 Years
  • Soybean Futures Climb as Drought in Brazil May Cut Production
  • Cocoa Rebounds on Slowing Ivory Coast Deliveries Before Mid-Crop
  • China Iron Ore Mining Decline May Be Global Producer Bonanza
  • Switzerland Sent 80% of Bullion Exports to Asia in January
  • Shale Gas Halted in U.K. by Six-Month Wait for Permits: Energy
  • U.S. Aluminum Premiums Falling as Metal Released From Financings
  • Key Potash Demand Driver at Risk as India Mulls Subsidy Freeze
  • Palm Oil Advances to 17-Month High as Malaysian Exports Expand

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

 

 

 

 

 

 

 

 

 

 

 

 

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


Price-Fixing Crisis

“Government policy is the primary cause of the financial crisis.”

-John Allison

 

That’s “fundamental theme” #1 in one of the most important post 2008 market crisis books – Chairman (and former longstanding CEO of BB&T Bank), John Allison’s The Financial Crisis and The Free Market Cure.

 

As I was taking a few pseudo vaca days with my kids (if you own a small business in America, there are no bailouts – no real vacations either – and real capitalists like that), I was struck by the simplicity of what hasn’t changed in this country – government price fixing.

 

Price-Fixing Crisis - go2

 

Yep, that’s what Allison and anyone who has studied economic #history calls it too (plenty of big time capitalists like Charles Koch agree). That’s what “forward rate guidance” by the Fed really is; it’s also what Presidential executive orders on minimum wage hikes and Policies to Inflate via currency devaluation are. Inflation is an un-elected tax that politicians aren’t accountable to. That’s why they cheer it on.

 

Back to the Global Macro Grind

 

Who needs to cheer for Latvia’s hockey team when you can wake up in America watching the Treasury Secretary (Jack Lew) whine about taxes (consumer price inflation) on European consumers being “too low.” Heck, the descendent of Geithner and Wesley Mouch is egging on the Japanese to burn its currency at the stake too.

 

Not to be outdone, the Congressional Budget Office is now analyzing what Obama thinks is his only way out of the tax he and Bush had the Bernanke impose on America’s poor (Down Dollar, Food/Energy Inflation) – wage inflation. My brother runs a McDonald’s franchise – ask him how many new stores he’ll be interested in opening if food costs rip and his “poor” employees cost him 10-20% more…

 

In other central planning news, Venezuela is “expelling” US diplomats this morning for “undermining the government.” Evidently some of these Americans aren’t yet socialist enough. Argentina and Venezuela are realizing the other side of currency devaluation, debt-rising, and #InflationAccelerating this morning – it’s called social unrest.

 

#InflationAccelerating? Who the heck does this Canadian think he is making that call without the government’s approval?

  1. US Dollar is down again this morning = down for 3 consecutive weeks, and now negative for 2014 YTD
  2. CRB Commodities Index (19 commodities) was up another +1.1% yesterday to a fresh 52-wk high of 302 (+7.9% YTD)
  3. Natural Gas is up (again!) this morning to $6.20 = +46.7% YTD (they don’t have heat or air conditioning in Washington)

I know, I know. It’s all the weather. Wages, Rents, Schooling – Facebook paying $16B for “WhatsApp”, Candy Crush going public – all of it!

 

But, but, the US stock market (SP500) is only down -1.1% YTD. And:

  1. Slow-growth Gold is +9.3% YTD
  2. Slow-growth-yield-chasing Utilities (XLU) are +5.9% YTD
  3. Lever-yourself-up-long Real Estate (REITS) are +7.5% YTD

Yep. As #InflationAccelerates, 71% of the US economy (consumption) gets A) taxed and B) slows:

  1. US Consumer Discretionary Stocks (XLY) are -3.2% YTD
  2. Consumer Staples Stocks (XLP) are -3.4% YTD
  3. Financials (XLF) are -2.2% YTD

But, don’t worry about it – when the weather improves, it’s all coming back – all of it.

 

Wait a minute. Will the spring in the Northeast change US monetary and fiscal policy? Or, as the economy slows, will Lew and Yellen quintuple down on the Down Dollar, Down Rates, House Flipping American Dream?

 

How’s that working out for Barney Frank and Ben Bernanke btw? US Mortgage Purchase Applications were down another -6% last week (after being down -5% in the week prior), testing post 2008 crisis lows. Imagine that, as the purchasing power of Americans falls alongside interest and savings rates, there are less lemmings this time who are going to join Than Merrill’s “Flip This House!”

 

John Allison’s book is a Top-10 on my shelf because he explains the basics of economics that we attempt to articulate each and every risk management morning. Two more of his “Fundamental Themes” are:

  1. “Government policy created a bubble in residential real estate”
  2. “Almost every government action taken since the crisis started (even those that may help in the short-term) will reduce the standard of living in the long-term”

#Agreed

 

And sometimes the short-term morphs into the long-term a lot faster than consensus government policy apologists think…

 

Our immediate-term Macro Risk Ranges are now:

 

SPX 1

Nikkei 14083-14992

VIX 12.76-16.99

USD 79.82-80.51

Natural Gas 5.34-6.22

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Price-Fixing Crisis - Chart of the Day

 

Price-Fixing Crisis - Virtual Portfolio


February 20, 2014

February 20, 2014 - Slide1

BULLISH TRENDS

February 20, 2014 - Slide2

February 20, 2014 - Slide3

February 20, 2014 - Slide4

February 20, 2014 - Slide5

February 20, 2014 - Slide6

February 20, 2014 - Slide7

February 20, 2014 - Slide8

February 20, 2014 - Slide9

BEARISH TRENDS

February 20, 2014 - Slide10

February 20, 2014 - Slide11

February 20, 2014 - Slide12


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

next