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Sell Baby, Sell

Client Talking Points

RUSSIA

The bear is back in Russia. That one day bounce for Vladimir Putin’s stock market? It has ended. Abruptly. That puts the Russian Trading System down -1.6% this morning to -19.5% year-to-date. Policies have consequences.

UST 10YR

Both the US currency and bond markets are baking in US #GrowthSlowing. The 10-year yield of 2.70% this morning is A) bearish versus our Hedgeye TREND resistance of 2.80% and B) has an immediate-term downside to 2.59%. What does this mean? Buy bonds.

FINANCIALS

If you agree with our macro call (inflation slowing US growth), then you sell Financials (XLF) on the open. Any downside pressure on bond yields from here on out pressures the Yield Spread, (10s minus 2s) which is signaling lower-highs. Incidentally, despite another US #GrowthSlowing data point yesterday (ISM non-manufacturing), we’re still at all-time highs on the S&P 500. #Sell.

Asset Allocation

CASH 31% US EQUITIES 3%
INTL EQUITIES 10% COMMODITIES 16%
FIXED INCOME 20% INTL CURRENCIES 20%

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

FX: Euro and Pound continue to signal solid vs Burning Buck @KeithMcCullough

QUOTE OF THE DAY

“An intellectual is someone whose mind watches itself.” - Albert Camus

STAT OF THE DAY

Wal-Mart just announced price cuts on the Samsung Galaxy S4, as well as Apple's 16-gigabyte iPhone 5s and 5c, for customers signing two-year contracts with AT&T and Verizon. A Galaxy S4 is now $49, down from $99. The 16-gigabyte 5s is dropping from $145 to $119, while the 5c is now $29, down from $45. In addition, customers who purchase any Samsung phone with a two-year contract between March 9 and March 22 will receive a free $50 Wal-Mart gift card. The move will fuel speculation Apple is planning a new iPhone release this spring, rather than its usual fall launch. (CNN)


ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up

Takeaway: Equity mutual funds had $4.9 billion in inflow this week, in-line with the YTD average but bond inflow trends were higher than the '14 mean

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent week, equity mutual funds had another solid inflow albeit just inline with the year-to-date averages with bonds funds showing improving subscriptions, well above the year-to-date mean:

 

Total equity mutual funds produced another strong week of inflow with $4.9 billion of net subscriptions, a slight deceleration from the $5.8 billion inflow the week prior. The $4.9 billion inflow had a domestic bend during the most recent 5 day period, with $3.1 billion flowing into domestic equity funds and $1.8 billion flowing into international stock funds. The 2014 running weekly average inflow for equity mutual funds is now $4.9 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 26th with $2.3 billion flowing into all fixed income funds. The breakout of improving bond fund inflow amounted to $1.6 billion into taxable products and a $667 million inflow into tax-free or municipal products, the 7th 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 $751 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 had mixed trends during the week, with a strong week of subscriptions in stock ETFs with $5.8 billion in net inflow with bond ETFs experiencing flat-ish trends with just $458 million of inflow. The 2014 weekly averages are now a $2.2 billion weekly outflow for equity ETFs and a $2.1 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 $8.0 billion spread for the week ($10.8 billion of total equity inflow versus the $2.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.0 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to 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. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the emerging trends on the institutional side of the industry which is experiencing inflow into fixed income and outflow in equities (see our Legg report here).

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects 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 mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 1 png

 

 

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

 

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 2 png

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 3 png

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 4 png

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 5 png

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 6 png

 

 

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

  

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 7 png

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 8 png

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $8.0 billion spread for the week ($10.8 billion of total equity inflow versus the $2.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.0 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 

 

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 9 png 

 

 

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. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the emerging trends on the institutional side of the industry which is experiencing inflow into fixed income and outflow in equities (see our Legg report here).

 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 



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Rose Colored Bubbles

“What’s in a name? That which we call a rose by any other name would smell as sweet.”

-William Shakespeare

 

What’s in a bubble?

 

I’ve been channeling my inner 1999 for the last 3-days in California. I’ve done Los Angeles, San Diego, and San Francisco. And while it would be cute to tell you that I can actually smell a bubble, these types of things don’t have a particular scent.

 

Rose Colored Bubbles - bub

 

At the all-time highs, they just look sweet.

Back to the Global Macro Grind

All-time highs? Yep. It’s not just Yelp (YELP) and Facebook (FB). It’s Barney Frank’s American Housing dream. The all-time highs in the largest component of American cost of living are here. It’s called rent.

 

Oh, you don’t rent? Ok, you’re like me then. You’re big time – you own. But don’t confuse the 20% of us who are long asset price inflation with the rest of them (80% of Americans) who get pulverized by Policies to Inflate. The cost to live in this country has never been bubblier.

 

What’s in the cost of living?

  1. Shelter
  2. Food
  3. Transportation

Unless you’re like the “folks” in Washington who take car service to work, you have to put gas in the transportation thing too. And if you can’t afford a car, you can always save some money and take the bus, or walk…

 

What’s in the all-time high in American “inequality”?

  1. The Housing Bubble
  2. The Commodity Bubble
  3. The Bond Bubble

One by one, central planners at the Fed blow these bubbles up so big that, like Jim Carey in The Truman Show, we start to live inside them. There’s an effervescence to that, I guess.

 

Or at least that’s what Oaktree’s Howard Marks said in our back to back presentations at the CFA Society’s Annual Forecast Dinner in San Diego on Monday night.  He called the cov-light-pik-toggle-bond thing being “back” – an “effervescent bubble.”

 

As we went back and forth in the Q&A part of the event, Marks made an astute observation about real-world life. The average American has $20,000 in post tax income, but spends approximately $22,000 a year.

 

So, if you ramp up the Top 3 things Americans have to pay for (if they don’t pay for their kids to go to school), the Bush/Obama/Bernanke/Yellen Policy to Inflate should drive cost of living up to say $25,000-30,000/year. That’s why the US Savings (as a % of disposable income) is retracing its 2008 crisis lows. Like their government, Americans once again have to borrow to spend.

 

In other news, inflation slowed US consumption growth again in February:

  1. USA’s ISM Services report for FEB (reported yesterday) slowed to its lowest level since FEB of 2010
  2. The Employment component of the ISM Services Series dropped < 50 (largest m/m drop since NOV 2008)
  3. US Services PMI (Markit data series) slowed from 56.7 in JAN to 53.3 in FEB

No worries though, it’s all “weather.”

 

If you want to join the Federal Reserve and believe that (and tell the 80% that inflation doesn’t slow growth), you can start turning on the Weather Channel and buying the all-time highs in social media every day they forecast yesterday’s sunny news.

 

I’ll be selling stocks (and buying Commodities, Bonds, and Foreign Currencies) into that. Because, like in Q1 of 2011, Down Dollar and Down Rates were signaling a US consumption growth slowdown inasmuch as they did in Q1 of 2008.

 

As for retracing my California travels of 1999, Q1 of 2000 wasn’t exactly the time to be wearing rose colored glasses either.

 

Our immediate-term Macro Risk Ranges are now:

 

UST 10yr Yield 2.59-2.75%

SPX 1

VIX 13.01-15.64

USD 79.86-80.43

Brent 107.31-110.02

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Rose Colored Bubbles - San Fran HPI

 

Rose Colored Bubbles - rta7


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 6, 2014


As we look at today's setup for the S&P 500, the range is 31 points or 1.38% downside to 1848 and 0.28% upside to 1879.             

                                                                                                                  

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: 2.38 from 2.37
  • VIX closed at 13.89 1 day percent change of -1.49%

MACRO DATA POINTS (Bloomberg Estimates):

 

• 7am: RBC Consumer Outlook Index, March (est. 50.4)

• 7:30am: Challenger Job Cuts y/y, Feb. (prior 11.6%)

• 8:15am: Fed’s Dudley at Wall St. Journal event in New York

• 8:30am: Non-Farm Productivity, 4Q final, est. 2.2% (pr 3.2%)

• 8:30am: Initial Jobless Claims, Feb 28, est. 336k (prior 348k)

• 9:45am: Bloomberg Consumer Comfort, March 2 (prior -28.6)

• 10am: Factory Orders, Jan., est. -0.5% (prior -1.5%)

• 10am: Freddie Mac mortgage rates

• 10:30am: EIA natural-gas storage change

• 12pm: Household Change in Net Worth, 4Q (prior $1.922t)

• 1pm: Fed’s Plosser speaks in London

• 6pm: Fed’s Lockhart speaks in Washington

 

GOVERNMENT:

    • President Obama to speak on economy, healthcare
    • 9am: House Foreign Affairs Cmte hears Treasury, State, USAID officials on U.S. foreign policy, Ukraine
    • 9:30am Jack Lew testifies on FY15 budget at House Ways & Means Cmte
    • 9:30am: Defense Sec. Chuck Hagel at House Armed Svcs Cmte
    • 10am: House Small Business workforce subcommittee holds hearing, “ObamaCare and the Self-Employed: What About Us?”
    • 10am: Medicare Payment Advisory Commission meets
    • 12pm: Airline Pilots Assn President Lee Moak discusses state of airline industry at National Economists Club
    • Election Wrap: Romney backs Ernst in Iowa, Texas Primary

WHAT TO WATCH:

  • EU to consider Ukraine sanctions; Russia spurns U.S. diplomacy
  • Buffett cuts bond allocation as Berkshire warns on low yields
  • Bouygues offers $14.4b cash for SFR to rival Drahi’s bid
  • IMF said to demand greater say on Greek banks in ECB wrangle
  • GM weighs increasing South Korean car exports to Australia
  • Sinclair TV ownership model said targeted for breakup by FCC
  • Darden cancels analyst, investor mtg amid pressure: Reuters
  • Virgin America CEO Cush sees IPO late 3Q: Reuters
  • Jack Lew testifies on FY15 budget proposal
  • Feb. U.S. retail sales likely “lackluster,” hurt by weather
  • VTB cancels NY forum as U.S. relations over Ukraine sour
  • Multi-billion dollar LNG plants at risk over fuel price tussle
  • Rolls-Royce says DOJ probing bribery allegations: Telegraph

AM EARNS:

    • Canadian Western Bank (CWB CN) 8:30am, C$0.65 - Preview
    • Ciena (CIEN) 7am, $0.06 - Preview
    • CST Brands (CST) 7am, $0.51
    • Joy Global (JOY) 6am, $0.65 - Preview
    • Kroger (KR) 8:45am, $0.72 - Preview
    • Pinnacle Foods (PF) 8am, $0.58
    • SNC-Lavalin Group (SNC CN) 8:27am, C$0.64
    • Stage Stores (SSI) 6am, $0.99
    • Staples (SPLS) 6am, $0.39 - Preview

PM EARNS:

    • Alon USA Energy (ALJ) 6pm, ($0.14)
    • Ambarella (AMBA) 4:05pm, $0.19
    • Analogic (ALOG) 4:15pm, $1.20
    • Checkpoint Systems (CKP) 4:02pm, $0.31
    • Constellation Software/Can (CSU CN) 4:30pm, $2.50
    • Cooper Cos. (COO) 4:01pm, $1.46
    • Finisar (FNSR) 4pm, $0.44
    • Fresh Market (TFM) 4:02pm, $0.42
    • H&R Block (HRB) 4:03pm, ($0.11)
    • Korn/Ferry International (KFY) 4:01pm, $0.34
    • Quiksilver (ZQK) 4:01pm, ($0.06)
    • Spectrum Pharmaceuticals (SPPI) 4pm, ($0.11)
    • Thor Industries (THO) 4:15pm, $0.34
    • W&T Offshore (WTI) 5:20pm, ($0.14)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Ukraine’s Revolutionary Farmers Back Home in Time to Plant Crops
  • Chinalco’s Sun Sees Aluminum Industry ‘Shakeout’ as Prices Drop
  • WTI Falls for Third Day as U.S. Oil Supplies Gain; Brent Stable
  • Syrup Sours as Rules Menace World’s Oldest Branding: Commodities
  • Palm Reserves in Malaysia Falling to Five-Month Low; Prices Rise
  • Copper Trades Below One-Week High Amid China Growth Concern
  • Gold Trades Below Four-Month High as Investors Weigh Ukraine
  • Coffee Tops $2 in Surge to Two-Year High on Brazil Drought Woes
  • India Mills Cut Sugar Production Estimate 4.8% to 23.8 Mln Tons
  • Off-Radar Iron Ore Exports Helping Hasten Global Market Glut
  • Frackers May Gain From U.S.-EU Free Trade Accord, Opponents Say
  • Europe’s Russia Gas Flows Jump to Month High as Buyers Hoard
  • Crude Gains Evaporate as Russia Seen Too Big to Sanction: Energy
  • Sugar Mills in India Reduce Output Estimate as Rains Hurt Yields

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

 

 

 

 

 

 

 

 

 

 

 

 

 


March 6, 2014

March 6, 2014 - Slide1 

BULLISH TRENDS

March 6, 2014 - Slide2

March 6, 2014 - Slide3

March 6, 2014 - Slide4

March 6, 2014 - Slide5

March 6, 2014 - Slide6

March 6, 2014 - Slide7

March 6, 2014 - Slide8

BEARISH TRENDS

March 6, 2014 - Slide9

March 6, 2014 - Slide10

March 6, 2014 - Slide11

March 6, 2014 - Slide12


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