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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 22, 2014


As we look at today's setup for the S&P 500, the range is 32 points or 1.22% downside to 1865 and 0.48% upside to 1897.                                                         

                                                                      

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: 2.20 from 2.19
  • VIX closed at 11.91 1 day percent change of -8.10%

 

MACRO DATA POINTS (Bloomberg Estimates):

 

  • 8:30am: Chicago Fed National Activity Index, April est. 0.0 (prior 0.2)
  • 8:30am: Initial Jobless Claims, May 17, est. 310k (prior 297k)
  • Continuing Claims, May 10, est. 2.675m (prior 2.667m)
  • 9:45am: Bloomberg Economic Expectations, May (prior 48)
  • 9:45am: Markit US Manufacturing PMI, May prelim est. 55.5 (prior 55.4)
  • 10am: Existing Home Sales, April, est. 4.69m (prior 4.59m)
  • 10am: Index of Leading Economic Indicators, April, est. 0.4% (prior 0.8%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Kansas City May Fed Manufact. Index, est. 7 (prior 7)
  • 4pm: Fed’s Williams speaks in San Francisco

 

GOVERNMENT:

    • President Obama speaks on tourism at Baseball Hall of Fame, travels to Chicago for DSCC events
    • 8am: SEC Chair Mary Jo White at Investment Co. Institute
    • 9:45am: House Financial Svcs Cmte resumes May 7 small cap., emerging growth co. legislation, community banks
    • 10am: U.S. Chamber of Commerce conf. call on SEC’s Pay Ratio Rule
    • 10:45am: House Minority Leader Pelosi holds press conference
    • 11:30am: House Speaker Boehner holds news conference

 

WHAT TO WATCH:

  • BofA said to abandon market-making unit amid industry scrutiny
  • Vivendi selling Activision stake worth ~$850m
  • China manufacturing gauge rises in stabilization sign
  • JD.com raises $1.78b, pricing IPO above offer range
  • Mastercard declined Sberbank offer to buy Maestro brand: IFX
  • Reynolds in advanced talks to buy Lorillard, Reuters says
  • Weibo loss more than doubles on rising costs to add users
  • China to review security of IT products, suppliers: Xinhua
  • Unilever to sell sauce brands to Mizkan for $2.15b
  • Russia says troops near Ukraine to return to base by June 1
  • Euro-area services surge helps recovery as factories cool
  • U.S. sends troops to Chad to hunt for kidnapped Nigerian girls
  • EU 4-day parliament elections begin in U.K., Netherlands
  • Germany wants to question Facebook, Google CEOs on NSA: Welt

 

AM EARNS:

    • Best Buy Co. (BBY) 7am, $0.19 - Preview
    • Buckle (BKE) 7am, $0.78
    • Dollar Tree (DLTR) 7:31am, $0.66
    • GameStop (GME) 8:30am, $0.57
    • Movado Group (MOV) 7am, $0.32
    • Nordson (NDSN) 7am, $0.89
    • Patterson Cos (PDCO) 7am, $0.66
    • Perry Ellis International (PERY) 7am, $0.27
    • Royal Bank of Canada (RY CN) 6am, C$1.43 - Preview
    • Sears Holdings (SHLD) 6am, ($1.91)
    • Toro Co. (TTC) 8:30am, $1.48
    • Toronto-Dominion Bank (TD CN) 6:30am, C$1.02

 

PM EARNS:

    • Aeropostale (ARO) 4:01pm, ($0.72) - Preview
    • Aruba Networks (ARUN) 4:05pm, $0.20
    • Brocade Communications Systems (BRCD) 4pm,$0.18
    • Compuware (CPWR) 4:05pm, $0.08
    • DryShips (DRYS) 4:05pm, $0.004
    • Fresh Market (TFM) 4:02pm, $0.43
    • Gap/The (GPS) 4pm, $0.57
    • Hewlett-Packard Co (HPQ) 4:04pm, $0.88 - Preview
    • Marvell Technology Group (MRVL) 4:05pm, $0.22
    • Mentor Graphics (MENT) 4:05pm, $0.06
    • Ross Stores (ROST) 4pm,$1.15  - Preview
    • TiVo (TIVO) 4:01pm, $0.06
    • Youku Tudou (YOKU) 4:30pm, ($1.11)
    • Zumiez (ZUMZ) 4pm, $0.05

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

  • Soybeans Advance to 11-Month High as China Demand Seen Rising
  • Brent Trades Near 11-Week High on China Factory Data; WTI Steady
  • China’s Bauxite Loss Spurs Export Boom in Australia: Commodities
  • Copper Rises as China Factory Gauge Adds to World Demand Outlook
  • Gold Trades Above One-Week Low as Palladium Near 33-Month High
  • Arabica Drops to 7-Week Low on Ample Supplies; Cocoa Advances
  • Steel Rebar Climbs for Second Day on Iron Ore Price, China PMI
  • Russia-China Deal Seen Damping LNG Prices Amid Rising Output
  • Gold Imports by India Seen Advancing as RBI Relaxes Some Curbs
  • Mexico Crude Needs New Markets as U.S. Exports Surge, Citi Says
  • Aluminum Market Focuses on Surplus, Premiums: Outlook
  • Gold-Palladium Ratio at 10-Year Low on Supply: Chart of the Day
  • U.S. Crude Oil, Like Horses, Banned From Being Exported Overseas
  • Gazprom Bulls’ China Fixation Is Misguided to Top Moscow Broker

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 


ICI Fund Flow Survey - Continued Defensive Posture with Equity Outflows and Bond Inflows

Takeaway: In the most recent 5 day period all equity mutual funds experienced net outflows versus all bond funds which captured net inflows

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period, the combination of taxable and tax-free bond funds had another strong week of production with $3.9 billion in inflow, well above the running year-to-date average of $2.1 billion. Conversely, equity funds had only the third net outflow of the year with $1.0 billion leaving all equity mutual funds, well below the year-to-date average of a $3.1 billion inflow

 

Total equity mutual fund flows experienced only the third net outflow of 2014 with $1.0 billion being redeemed through a combination of domestic and international equity funds as reported by the Investment Company Institute. The culprit was the substantial $2.3 billion that came out of domestic stock funds which was slightly offset by the $1.2 billion inflow into international products for the week ending May 14th. Both equity categories were below the running 2014 weekly averages with the combined weekly mean for all equity products remaining a $3.1 billion inflow, now basically on par with the $3.1 billion weekly average inflow from 2013. 

 

Conversely, fixed income mutual fund flows continued on much strong footing for the week ending May 14th, with another solid $3.9 billion flowing into all fixed income funds. While this production was a slight deceleration from the $5.4 billion that came into bond products last week, the inflow into taxable products was the 14th consecutive week of positive flow and the inflow into municipal or tax-free products was the 18th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.1 billion weekly inflow, a vast improvement from 2013's weekly average outflow of $1.5 billion, but still 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 positive trends on both sides of the ledger this week with a solid equity inflow complemented by a moderate inflow into bond exchange traded funds. Equity ETFs experienced a robust $9.6 billion inflow, while fixed income ETFs put up a $1.0 billion subscription. The 2014 weekly averages are now a $870 million weekly inflow for equity ETFs and a $1.0 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 $3.4 billion spread for the week ($8.5 billion of total equity inflow versus the $5.1 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 $7.3 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 -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

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 - Continued Defensive Posture with Equity Outflows and Bond Inflows - ICI chart 1

ICI Fund Flow Survey - Continued Defensive Posture with Equity Outflows and Bond Inflows - ICI chart 2

 

 

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

 

ICI Fund Flow Survey - Continued Defensive Posture with Equity Outflows and Bond Inflows - ICI chart 3

 

ICI Fund Flow Survey - Continued Defensive Posture with Equity Outflows and Bond Inflows - ICI chart 4

 

ICI Fund Flow Survey - Continued Defensive Posture with Equity Outflows and Bond Inflows - ICI chart 5

 

ICI Fund Flow Survey - Continued Defensive Posture with Equity Outflows and Bond Inflows - ICI chart 6

 

ICI Fund Flow Survey - Continued Defensive Posture with Equity Outflows and Bond Inflows - ICI chart 7

 

 

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

 

ICI Fund Flow Survey - Continued Defensive Posture with Equity Outflows and Bond Inflows - ICI chart 8

 

ICI Fund Flow Survey - Continued Defensive Posture with Equity Outflows and Bond Inflows - 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 $3.4 billion spread for the week ($8.5 billion of total equity inflow versus the $5.1 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 $7.3 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 -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

ICI Fund Flow Survey - Continued Defensive Posture with Equity Outflows and Bond Inflows - ICI chart 10 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 


TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING?

Takeaway: HF investors may be increasingly forced to flip-flop their L/S book by selling 2014’s losers in order to fund a chase in 2014’s winners.

38.5% through CY14, hedge funds have found themselves broadly underwater remaining long our preferred exposures in the Hedgeye 2013 Macro Playbook and short our least-liked ones. The key issue with that is that it’s 2014, not 2013. Macro markets have been front-running a cessation of our #StrongDollar + #RatesRising = #StrongAmerica view since JAN.

 

To recap hedge fund performance:

 

  • HFRX Equity Hedge Fund Index: -166bps MTD, -306bps QTD and -185bps YTD
  • HFRX Macro/CTA Index: -57bps MTD, -113bps QTD and -216bps YTD

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - 1

 

Obviously, we have number of hedge fund customers, so we don’t write this to be trite or disrespectful. We only call this to your attention because if this trend of poor performance continues, there will likely be an industry-wide lowering of gross exposures and tightening of net exposures, with capital outflows as a key tail risk.

 

With the exception of a handful of very astute investors (and an independent research firm domiciled in CT), it’s become increasingly clear through monitoring performance and collecting anecdotes that the majority of the hedge fund space came into 2014 with basically the same exposures:

 

  • LONG BOOK: US equities – particularly the growth style factor(s) and Japanese equities.
  • SHORT BOOK: US Treasury bonds, long-duration credit, everything-EM, commodities and the Japanese yen.

 

A subtle, but important callout here is that with the exception of a handful of very astute investors (and an independent research firm domiciled in CT), not everyone nailed front-running all of these major macro moves in 2013 (e.g. HFRX Macro/CTA Index down -1.8% in 2013 vs. S&P 500 Index up +29.6%). That means there’s likely a fair amount of funds that jammed into the 2013 playbook at precisely the wrong time (i.e. just in time for CY13 “window dressing”).  

 

The key risk here for investors to manage is that the longer 2013’s losers (i.e. the aforementioned SHORT BOOK) continue to exhibit higher degrees of relative momentum on a trending basis, the greater risk there is to the upside, given the crowded nature of these trades and the propensity for investors to unwind such underwater exposures at roughly same time – likely on the same catalyst(s).

 

Our TACRM All-Weather System continues to signal rotation-based flows into Fixed Income & Yield Chasing and EM Equities as primary asset classes, in lieu of DM Equities, at the margins:

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - TACRM Global Macro Weathervane

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - TACRM Global Macro Barometer

 

This is a direct function of the relative momentum taking place at the secondary asset class level – which is more-or-less a 180° flip from 2013:

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - TACRM Global Macro Thermodynamic Monitor

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - TACRM Heat Map

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - TACRM 20 20 Vision Thermodynnmic Monitor

 

For more details on how to interpret these charts, please review the following presentation: http://docs.hedgeye.com/HE_TACRM_2014.pdf. Email us if you’re interested in how TACRM can beef up your research and risk management processes; we are happy to customize it to your watch list.

 

Going back to the aforementioned point regarding the rotation in Fixed Income & Yield Chasing and EM Equities, we encourage you to review the following two research notes:

 

 

If a trip to Quad #3 on our GIP model is not “the catalyst” mentioned above, then we too are still searching for that “ah ha” moment.

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - UNITED STATES

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - 7

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - 8

 

Even without a catalyst, the risk that fund managers are broadly forced to sell 2013’s winners in order to finance an industry-wide performance chase in 2014’s winners is not inconsequential. That would roughly equate to investors broadly flipping their entire exposures (and thesis) on its head, so we’re comfortable with our anecdotal evidence that most people have yet to do so.

 

In fact, our conversations with some customers and prospective customers have gone a lot like this:

 

  • Hedgeye Macro Team: “We continue to like bonds, slow-growth/yield chasing stocks like Utes and REITs, commodities and emerging markets in lieu of things like US and Japanese equities and the US dollar.”
  • Investor: “Nice call. I hear ya, but I can’t justify buying Utilities up here. They are so expensive now. I feel like the money has already been made.”
  • Hedgeye Macro Team: “Ok, that’s fair. You know how we feel about valuation not being a catalyst, but, at a bare minimum, don’t be short these markets. The risk in these asset classes is up, not down, given the consensus lean in the hedge fund community.”
  • Investor: “Got it; thanks.”

 

If we had this conversation 10 times in the past week, we’ve had it 1,000 times since FEB. Make this the 1,001th  time.

 

Have a great evening,

 

DD

 

Darius Dale

Associate: Macro Team


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Poll of the Day Recap: 76% Are Pessimistic About US Housing Market

Takeaway: 76% PESSIMISTIC; 24% OPTIMISTIC.

Earlier this week, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said the housing market’s fundamentals “remain sound,” with faster hiring supporting the economy, while William Dudley, president of the Federal Reserve Bank of New York, argued that he expects a slow pace for the housing market’s recovery as headwinds take some time to abate.

 

Meanwhile, despite mortgage rates at their lowest levels since November, applications to buy a home fell 3% week to week and are now nearly 12% lower than a year ago.

 

We wanted to know what you thought, so today’s poll question was: Are you optimistic or pessimistic on the growth of the US housing market?

 

Poll of the Day Recap: 76% Are Pessimistic About US Housing Market - 1


At the time of this post, 76% said they were PESSIMISTIC; 24% were OPTIMISTIC.


(Voters sharply swung so much in one way, that we didn’t receive any comments on why people voted NO.)

 

Here’s what those who are PESSIMISTIC had to say:

 

  • “The middle class is so squeezed by inflation on one side, taxes on the other. The lower class has been cut off from credit and is pushed toward renting (at all time high levels). The upper class isn’t numerous enough to make a difference. No growth in aggregate demand.”
     
  • “Low interests asset bubbles is the most dangerous type of bubble in real estate. Bidding wars in hot markets (CA), stagnate inventories in cold markets (OH), rents rising in all markets and nothing left in the Fed's bag of tricks short of covering one's down payment.”
     
  • “The near-term price trend for housing appears to be down, with rental properties rising, but home buyers declining. I believe this will persist into next year and will be highlighted by a stock market correction.”
     
  • “Housing supply/demand/price trends tend to be auto correlated -- i.e. the tide turn (up or down), the trend tends to last for a while.”
     
  • “Buying in 1-2 years... need prices to drop some.”

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Hedgeye Energy: Why $BPT Is A One Dollar Bill Selling for Two

Takeaway: We still think that BPT is a solid short.

Editor's Note: This research note was originally sent to subscribers on May 20, 2014 by Hedgeye Energy analyst Kevin Kaiser. Follow Kevin on Twitter @HedgeyeENERGY.

 

Hedgeye Energy: Why $BPT Is A One Dollar Bill Selling for Two - 424 10 slick operators

 

I'll pay you $1 per year for the next 8 years.  The payments are not guaranteed, they have equity-like risk.  How much would you pay me today for this deal?  A BPT long would give me $10.

 

BP Prudhoe Bay Royalty Trust (BPT) lives in the obscure world of high-yielding energy equities where retail investors value securities as if the current distribution is a perpetuity – the ultimate Efficient Markets Hypothesis refutation...

 

We added Short BPT to our Best Ideas list on 1/15/2014 at $77.24/unit. We've been wrong on the scoreboard, but don't believe that the fundamental analysis is off.  In our view, BPT is still a $1 bill selling for $2. And sure, this $1 bill could trade at $2.50 or $3.00, but that only makes it more of a short.  

 

In hindsight, we underestimated just how inefficient the market for BPT is. With virtually no institutional holders and limited units available to borrow, it's uncertain when (not if) BPT will move to intrinsic value, which we calculate to be $49.70/unit, 47% below the current price of $94.40.

 

Perhaps we are too early, as the true distribution-destroying function of this trust – the automatic increases to the trust's chargeable costs – do not begin to increase drastically until 2018. By that point, the writing on the wall should be more obvious. However, BPT collapsed ~50% in the second half of 2012, and the same thing could have been said back then.  

 

In the short-term, seasonality is now on our side, as the next two distributions payments should be below the $3.01/unit distribution paid in the second quarter of 2014 given summer field maintenance.

 

Provided the borrow cost is reasonable, we still think that BPT is a solid short.  If you hedge out the WTI price risk, you're short negative carry and playing for ~50% downside to net asset value (NAV). Pair a quality, reliable oil producer like an EOG Resources, Anadarko, Denbury Resources, Suncor Energy, Canadian Natural Resource, or Imperial Oil against it.

 

We've updated our BPT NAV model for the recent increase in the WTI strip, the changes to the production tax regime, and a lower discount rate.  Our base case NAV assumes: production declines at 2% per annum; future oil prices equal the current WTI strip; the current tax regime (35% base + a production credit); 1.5% annual CPI; and a 7.75% discount rate. We calculate the discount rate (BPT's cost of equity) using the capital asset pricing model and the following assumptions: R-free = 2.50%, R-market = 10.0%, Beta = 0.70.

 

The result is a NAV of $49.70, 47% below BPT's current price. And the undiscounted sum of future distribution payments is only $66.20.

 

Hedgeye Energy: Why $BPT Is A One Dollar Bill Selling for Two - bpt1a large

 

Hedgeye Energy: Why $BPT Is A One Dollar Bill Selling for Two - bpt2

 

Hedgeye Energy: Why $BPT Is A One Dollar Bill Selling for Two - bpt3

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Mortgage Demand Falls Again This Week

Takeaway: This morning's MBA mortgage purchase application data shows housing demand dropped for a second week in a row in spite of falling rates.

Mortgage Demand Falls Again This Week - alg mortgage refinancing jpg

MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ending May 16. The interesting takeaway is that while mortgage refinancing volume has shown a modestly positive response to falling rates (+4% week-over-week this week and +7% w/w in the previous week, but still down -66% year-over-year), mortgage purchase application volume continues to slide (-3% w/w this week and -1% w/w in the previous week and down -12.3% y/y). 

 

Essentially, demand continues to slow and, remember, price growth follows the slope of demand.

 

In fact, the Corelogic early read on April showed home prices decelerated to +9.2% year-over-year versus their March reading of +11.1% year-over-year. This marked one of the steepest sequential decelerations (-190 bps) in years.

 

Mortgage Demand Falls Again This Week - Purchase   Refi YoY

 

About MBA Mortgage Applications

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

The MBA Purchase Apps index is released every Wednesday morning at 7 a.m. EST.

 

*     *     *     *     *     *

 

Editor's Note: This is a brief excerpt of a research note that was originally sent to subscribers on May 21, 2014 at 8:14 a.m. EST by by Josh Steiner and Christian Drake from Hedgeye's Financials and Macro teams. Follow Josh & Christian on Twitter @HedgeyeFIG and @HedgeyeUSA.

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