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Emerging Markets Love Janet Yellen

Takeaway: The recent convoluted, “data-dependent” guidance out of the FOMC has been and should continue to be a boon to EM asset prices.

Emerging Markets Love Janet Yellen - yellen 2733852b

 

Don’t look now, but the EM relief rally is happening. We’re not going to spend too much time on the “why” in this note, having already done that 2x last week and in a 72-slide presentation and conference call a little over 1 month ago. Today, we’re content to merely call attention to the weather. It’s sunny outside in EM land.

 

Emerging Markets Love Janet Yellen - 1 large

NOTE: Please refer to the explanation at the conclusion of this note for color on how these signals are derived and how to incorporate them into your investment process.

Emerging Markets Love Janet Yellen - EM Divergence Monitor

 

This concomitant breakout across EM capital and currency markets and across the capital and currency markets of commodity-producing nations is extremely newsworthy in the context of #GrowthSlowing and systemic risk accelerating in China in 1Q14. We’ve argued this ‘til we were blue in the face over the past 12-18 months, but if you didn’t know that Chinese demand was NOT the primary factor in determining asset prices in these markets, now you know.

 

In reviewing the March 19 FOMC statement and Janet Yellen’s recent commentary around the FOMC’s intention to: A) become incrementally more data dependent; and B) keep interest rates well below what they consider appropriate, at every step of the way, for the foreseeable future, one has to come to the conclusion that the Fed is less hawkish on the margin – despite the fact that the board continues to actively and rhetorically support tapering.

 

We think the market, at least marginally, is starting to sniff out what we’ve been communicating ad nauseam throughout the year-to-date: both the Fed and the Street are likely to be surprised to the downside with respect to GDP growth and that catalyst is likely to cause the former entity to decelerate the pace of tightening and/or pursue a strategy of outright monetary easing at some point over the intermediate term. That measure can take on various forms – including dovish rate guidance and general ambiguity (vs. communicating a clear path of tightening) – which is exactly what we’ve seen in recent weeks.  

 

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Emerging Markets Love Janet Yellen - UNITED STATES

 

It’s worth noting that the Bloomberg consensus 2014 real GDP forecast has come in -20 basis points since an early-March peak of +2.9%. We already expect 2014E to come in toward the low end of our forecast range, so once again consensus is playing catch up to our preexisting expectations for domestic economic growth – this time in the opposite direction (recall that we were the growth bulls in 2013).

 

Emerging Markets Love Janet Yellen - 6

 

At some point, we expect consensus to start playing catch up to our preexisting expectations for the slope of US monetary policy. Until a marginally dovish Fed (versus expectations) is fully priced in, we reckon you can continue to go bargain hunting across the spectrum of bombed-out EM assets. That sure beats the heck out of buying the dip in a bubbly social media stock at these ridiculous valuations!

ADDITIONAL NOTE

TACRM Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI):

TACRM™ is specifically designed to provide tactical security selection, general global macro market color and suggested dynamic asset allocation weightings. One of the ways it does this is by providing a standardized measure of momentum across various asset classes and systematically making sense of those signals.

 

This VAMDMI score is derived by calculating three independent z-scores of closing price data on a weekly basis and then calculating the arithmetic mean of this sample.

  • Short-term z-score: 1-3 month sample
  • Intermediate-term z-score: 3-6 month sample
  • Long-term z-score: 6-12 month sample

Each independent sample size is determined dynamically by prevailing trends in global macro volatility. Specifically, if the BofA Global Financial Stress Index is making lower-lows on an intermediate-term basis, then each of the sample sizes are larger in duration; if the BofA Global Financial Stress Index is making higher-lows on an intermediate-term basis, then each of the sample sizes are smaller in duration.

 

The momentum signaling indicator chart we highlight above generates a signal(s) when a particular market(s) crosses a critical quantitative threshold after having been above/below that level for at least 3 months:

 

Emerging Markets Love Janet Yellen - 7

 

Editor's Note: This research note was originally published April 1, 2014 by Hedgeye’s Macro Analyst Darius Dale. Follow Darius on Twitter @HedgeyeDDale

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INITIAL CLAIMS: MORE GOOD NEWS

Takeaway: Labor market data is getting better as this week's claims numbers mark a continuation of the positive news that began last week.

Labor Market Tailwinds

Today's initial jobless claims data is positive and marks a continuation of the positive inflection in labor market data seen last week, bringing the new trend to two weeks. As a reminder, we focus on the year-over-year rate of change in the rolling, non-seasonally adjusted data. This week, claims were lower by 8.0% y/y, which is better vs the prior week's 7.1% improvement y/y. More importantly, the trend had been deteriorating in the YTD period until the inflection two weeks ago. We've now seen positive data for two weeks in a row, which matters because we it may shed some light on the ongoing debate about what role weather may or may not be playing in the economic data.  

 

As we said last week:

One of the arguments put forward in support of the generally weak 1QTD data has been weather. If weather is playing a role in suppressing the strength of the data then one would expect that as we move from the winter to the spring months we could reasonably expect to see improvement in the data. The next few weeks of data should be important in this regard, as they may serve to answer this fundamental question. 

 

As a reminder, one of our favorite intermediate-term trade ideas on the long side remains Capital One (COF). We initiated that call in late January on the basis that seemingly every year Cap One misses 4Q and crushes 1Q. We argued for buying it post the 4Q wash-out, holding it through 1Q14 results and exiting ahead of 2Q results. The claims data this morning adds further support to that call. Almost all new loss content comes from newly unemployed people with the balance coming from divorce and illness (major medical expenses). Unsecured lenders like Capital One are hugely correlated with initial claims data, and claims tend to lead the fundamentals by ~13 weeks giving some visibility into what's coming down the pike. 

 

The Data

Prior to revision, initial jobless claims rose 15k to 326k from 311k WoW, as the prior week's number was revised down by -1k to 310k.

 

The headline (unrevised) number shows claims were higher by 16k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.5k WoW to 318k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.0% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.1%

 

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Yield Spreads

The 2-10 spread rose 10 basis points WoW to 235 bps. 1Q14TD, the 2-10 spread is averaging 239 bps, which is lower by -2 bps relative to 4Q13.

 

INITIAL CLAIMS: MORE GOOD NEWS - 15

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Retail Callouts (4/3): NKE, UA, URBN, HBC, AMZN

Takeaway: Nike tangles with USATF. URBN building palaces? UA first big presence on MayMyRun. HBC’s deeper pockets allow Saks to catch-up. Amazon TV.

COMPANY NEWS

 

URBN - Urban Outfitters Moves Into Space Ninety 8

(http://www.wwd.com/retail-news/specialty-stores/urban-outfitters-moves-into-space-ninety-8-7628817)

 

  • "With 37,000 square feet on four levels and a directive from chief executive officer Richard Hayne to come up with new ideas, the barriers in some ways were lifted."
  • "The non-traditional retail experience, as the company refers to the space, features a strong food component. The Gorbals Restaurant and Bar, operated by Ilan Hall, 'Top Chef' and host of Esquire TV’s 'Knife Fight,' will be in residence on the third floor. Hauser said food will also play a role in the 57,000-square-foot Urban Outfitters flagship opening in Herald Square in June, which will have a coffee shop, hair salon and eyeglass shop. Urban Outfitters’ Fifth Avenue flagship recently added a coffee bar."

 

Retail Callouts (4/3): NKE, UA, URBN, HBC, AMZN - chart2 4 3

 

Takeaway: Not really sure we understand these new prototypes. A coffee shop could work, but restaurants and hair salons are a bit much, if not borderline alarming. Not sure how many tourists are going to be looking for a fresh trim when shopping for skinny jeans in Herald Square. URBN is looking at new categories as growth drivers, which we get, but it sounds like the brand is running out of things to put in these boxes that are 4X-5X bigger than the typical footprint. We'd rather they keep the boxes a bit smaller and put more focus on what's inside.

 

NKE - Nike, Brooks Running Get Entangled in Track Controversy

(http://online.wsj.com/news/articles/SB10001424052702303847804579477820303024870?mod=ITP_marketplace_0&mg=reno64-wsj&cb=logged0.0330907825846225)

 

  • "Top professional track and field athletes are preparing for collective action against the sport's governing body that could lead some athletes to boycott the U.S. national track and field championships in June."
  • "The discord follows two disqualifications at indoor nationals in February. Both cases involved runners coached by Nike coach Alberto Salazar, which prompted opposing coaches, athletes and competing sponsors to question Nike's influence with the USATF and how the body applies its rules. USATF rejected claims that anyone received special treatment."

 

Takeaway: This one is dicey. Watch 'Prefontaine' or 'Without Limits' and see that from the very go-go (i.e. early 1970s), Nike was going head-to-head with amateur track & field organizations. It's no stranger to confrontation. Is it possible that the Brand has pulled a 180 and now has the USATF in its back pocket? We have a really hard time believing that one. Any erosion in it's authenticity as an independent brand would blow up Nike -- which is why they'd never let that happen. This should blow over.

 

UA - First Big Presence on MapMyRun

 

Retail Callouts (4/3): NKE, UA, URBN, HBC, AMZN - chart1 4 3

 

Takeaway: UA has taken it slow with MapMyRun. The training platform is still multi-branded and will most likely stay that way. The acquisition wasn't as much about marketing as it was about shopper data. NKE has years of insight through Nike+ and UA was pretty far behind the curve. So, instead of trying to develop its own device/software platform it decided to go the acquisition route. Right now - UA doesn't have the footwear product to service this channel - expect them to leverage the data as they try to make a more commercially viable product.

 

OTHER NEWS

 

AMZN - Introducing Amazon Fire TV: The Easiest Way to Watch Netflix, Prime Instant Video, Hulu Plus, WatchESPN, and More on Your Big-Screen TV

(http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=1915168&highlight=)

 

  • "All the content—instant access to Netflix, Prime Instant Video, Hulu Plus, WatchESPN, YouTube, and more, plus the largest selection of videos for rent and purchase—over 200,000 movies and TV episodes from Amazon Instant Video. Plus, listen to music with Amazon MP3, Pandora, iHeartRadio, TuneIn, and more."
  • "An exclusive new feature called ASAP (Advanced Streaming and Prediction) predicts which movies and TV episodes you’ll want to watch and buffers them for playback before you even hit play—instant start."
  • "Voice search that actually works—simply speak the name of a movie, TV show, actor, director, or genre into the remote, and you’re done. No more hunting and pecking in an alphabet grid."

 

Retail Callouts (4/3): NKE, UA, URBN, HBC, AMZN - chart3 4 3

 

HBC - Saks Fifth Avenue Tweaks Flagship Renovation Plan

(http://www.wwd.com/retail-news/department-stores/saks-fifth-avenue-tweaks-flagship-renovation-plan-7628809)

 

  • "Saks Fifth Avenue is close to finalizing a $200 million to $250 million renovation program for the Manhattan flagship as it strives to catch up to the competition."
  • "According to sources, Saks will transform the main level to a bigger and more powerful cosmetics presentation, extending the category further east through the bulk of the floor. Saks’ cosmetics floor is already among the most popular and productive in the city, with sources saying only the Macy’s and Bloomingdale’sflagships with larger cosmetic floors generate more volume."
  • "Sources have speculated that the ground floor at Saks could be redone by sometime in 2015."

 

 

 

 


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ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income

Takeaway: The 12 week moving averages continue to improve within fixed income products versus equities which are losing momentum

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent week, slightly positive fixed income trends outflanked weakened domestic equity trends which is leading to noticeably improving bond flows on a 12 week basis. Despite the slope of the line improvement near term in fixed income however, quarter-to-date flows still greatly favor equity funds which continues to support our long recommendation of T Rowe Price:

 

Total equity mutual funds produced a slight net inflow during the most recent 5 day period with domestic fund outflows offset by international equity inflows. Domestic stock funds lost $267 million in the week ending March 26th, an improvement from the $3.8 billion redemption the week prior but none-the-less the second consecutive week of outflow in U.S. stock funds. The total stock fund category however was bolstered by the $1.5 billion that flowed into international stock mutual funds which netted to a positive result for the category during the week. Despite the choppy trends, the 2014 running weekly average inflow for equity mutual funds is now $4.0 billion, still an improvement from the $3.0 billion weekly average inflow for 2013. 

 

Fixed income mutual funds trends decelerated from the week prior but none-the-less continued on a more positive path than weakening equity trends. The breakout of steadying bond fund inflow amounted to $1.2 billion into taxable products and a $49 million inflow into tax-free or municipal products. The inflow into taxable products in the week ending March 26th was the 7th consecutive week of positive flow and the inflow into municipal or tax-free products was the 11th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.8 billion 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 experienced volatile trends during the week, with a moderate decline in stock ETF trends with $5.5 billion in net redemptions with bond ETFs experiencing a slightly inflow of $447 million for the 5 day period. The 2014 weekly averages are now a $108 million weekly inflow for equity ETFs and a $886 million 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 negative $6.0 billion spread for the week ($4.2 billion of total equity outflow versus the $1.7 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 $7.1 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.4 billion (negative numbers imply more positive money flow to bonds for the week). 

 

With the first quarter of the 2014 in the books, the running total of equity and fixed income funds continues to favor the stock side of the ledger. Total equity mutual fund flow (domestic and international) amounted to $49 billion quarter-to-date, over double the $21 billion that has come into all bond funds (taxable and tax free products), so despite the short term momentum in bond funds, the equity category is still better for now. These quarterly totals continue to support our long recommendation in shares of T Rowe Price (TROW), which we estimate will have the best results in the upcoming earnings season.

 

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 - 12 Week Averages Continue to Improve in Fixed Income - ICI chart1

 

 

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

 

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart2

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart3

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart4

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart5

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart6

 

 

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

  

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart7

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart8

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $6.0 billion spread for the week ($4.2 billion of total equity outflow versus the $1.7 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 $7.1 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.4 billion (negative numbers imply more positive money flow to bonds for the week). 

 

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart9 

 

 

With the first quarter of the 2014 in the books, the running total of equity and fixed income funds continues to favor the stock side of the ledger. Total equity mutual fund flow (domestic and international) amounted to $49 billion quarter-to-date, over double the $21 billion that has come into all bond funds (taxable and tax free products), so despite the short term momentum in bond funds, the equity category is still better for now. These quarterly totals continue to support our long recommendation in shares of T Rowe Price (TROW), which we estimate will have the best results in the upcoming earnings season.

 

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart11

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 


The Best (Economic) News of the Week

Client Talking Points

OIL

The best economic news of the week is Oil continuing to break down. In case you missed it, Oil is diverging big time versus food inflation. Both Brent and WTIC remain below our long-term TAIL risk lines of $108.42 and $100.32, respectively. Brent is more decisively broken than WTI in our model.

RUSSIA

Well, what do you know? Putin power gets limp in the face of falling oil prices. #GoodNews. Meanwhile, Russian stocks are back to signaling a negative divergence versus both Europe and Global Equities this week. Tough sledding for the RTSI which is down -0.9% this morning to -16% year-to-date.

10YR

The 10-year yield tested my intermediate-term TREND resistance of 2.81% yesterday and has so far failed this morning. This clearly makes tomorrow’s U.S. jobs report all the more important. Expectations are high, so a miss could give you 10 to 15 basis points of immediate-term downside in the 10-year yield. We’re watching this closely.

Asset Allocation

CASH 22% US EQUITIES 6%
INTL EQUITIES 12% COMMODITIES 20%
FIXED INCOME 20% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

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

Stay with the process folks - buy the low end of range, sell the high @KeithMcCullough

QUOTE OF THE DAY

"I never panic when I get lost. I just change where it is I want to go." - Rita Rudner

STAT OF THE DAY

Doctors in Britain were paid £38.5 million by drugmakers last year, slightly less than 2012, according to new data underscoring the links between the pharmaceutical industry and prescribers. Industry payments to doctors have come under increased scrutiny following a number of scandals over sales practices, notably in the United States, and concerns that such ties could put commercial interests ahead of the best outcome for patients. (New York Times)


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