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May 22, 2014

May 22, 2014 - 1

 

BULLISH TRENDS

May 22, 2014 - Slide2

May 22, 2014 - Slide3

May 22, 2014 - Slide4

May 22, 2014 - Slide5

May 22, 2014 - Slide6

May 22, 2014 - Slide7 

BEARISH TRENDS

 

May 22, 2014 - Slide8

May 22, 2014 - Slide9

May 22, 2014 - Slide10

May 22, 2014 - Slide11
May 22, 2014 - Slide12



Inflation Is a Lie

“Inflation is taxation without legislation.”

-Milton Friedman

 

It’s a good thing for Janet Yellen that Milton Friedman isn’t around to call her out. Ben Bernanke can get paid another $400,000 to spew to a bunch of head-nodders that there’s no inflation at $110/barrel oil and the all-time high in US rents too, I guess.

 

Friedman also said that a “government solution to a problem is usually as bad as the problem.” #Agreed. But the Federal Reserve is becoming a much larger problem than that. These people aren’t even elected.

 

“So”, after Soybeans, Oil, and Orange Juice prices inflated another +2.4%, +1.7%, and +1.3%, respectively, yesterday, Mr. Macro Market took the Fed’s commentary (Federal Reserve Minutes were released intraday) that there is no #InflationAccelerating risk as a sign to buy more inflation. 

Inflation Is a Lie - Inflation 04.29.2014

 

Back to the Global Macro Grind

 

On US rents (34% of Americans have to rent, and like it) and cost of living hitting all-time highs this week, this is what one of the most uninformed members of the US Federal Reserve, Bill Dudley, had to say:

 

“prices look likely to firm, somewhat”

 

Thanks for coming out Bill. And yes, I’m calling you out. When our kids look back on this period of US economic history, they’ll call you a lot worse than that. They might even call guys like you Jimmy Carter.

 

While it’s part of winning a hockey game, name-calling is no way to win a debate. Alongside #RentRipping, here’s more YTD #InflationAcclerating data:

 

  1. CRB Foodstuffs Index +21.9% YTD
  2. CRB Commodities Index +10% YTD
  3. Coffee +57.6% YTD
  4. Nickel +42.1% YTD
  5. Lean Hogs +28.3% YTD
  6. Soybeans +19.2% YTD
  7. Cattle +15.4% YTD
  8. Palladium +15.4% YTD
  9. Orange Juice +10.9% YTD
  10. Oil +7.9% YTD

 

Oh, right. Oil is only +8% YTD vs. US growth stocks (Russell 2000) and US Consumer Discretionary (XLY) down -5.7% and -3.9% YTD, respectively. No worries. Ben Bernanke said there was no inflation with Oil at $150 in Q2 of 2008 either.

 

It’s one thing for me to rant about this using real-time prices paid. It’s going to be an entirely different thing when the 80% of people in this country getting jammed by the Fed’s Policy To Inflate revolt.

 

As the late Robert Heinlein astutely observed, “there is no worse tyranny than to force a man to pay for what he does not want merely because you think it would be good for him.” But he’s dead now too. So Janet doesn’t have to deal with him either.

 

Inflation Is a Lie - Chart of the Day

 

In other real-time (price, volume, volatility) news:

 

  1. PRICE – SP500, Nasdaq, and Russell all bounced to lower-highs (down -0.6%, -5.2%, and -8.7% from their bubble highs) yesterday
  2. VOLUME – total US Equity market volume was DOWN again on the UP-day (-9% and -31% versus its 1 and 3 months averages)
  3. VOLATILITY – front month VIX got smashed to a fresh YTD closing low of 11.91

 

And you buy stocks when volatility is at its oversold lows, right? Only if you are doing it with other people’s money! Must #chase daily #performance. Must short low and cover high. Must bang head against Old Wall.

 

No thanks.

 

If you bought US stocks at this level in the VIX in August of 2013, you were down -3.5% (in the SP500) in less than 2 weeks after that. The most recent time-spanking you’d have had buying US growth stocks (Russell 2000) with a “low VIX” in Jan-Mar 2014 is more like -7-9%.

 

But, if you play this game with real-ammo, you already know that.

 

Other than front-month-frustration for growth bears trying to express their fears in VIX (which has not been a recommendation in the Hedgeye Macro Theme playbook in 2014 due to 6,000 hedge funds trying to do the same, at the same time), where is US stock market sentiment at?

 

  1. II’s Bull Bear Survey just flashed a fresh new Q2 high in consensus bullishness
  2. After another no-volume bounce, Bulls have chased back up to 57.2% (from low 50%s at the YTD lows)
  3. The Bull/Bear Spread has widened +30% to the Bullish side since mid-April to +3890 basis points wide

 

In other words, the point here isn’t that 65-70% of people are bullish. It’s that only 17-19% will admit they are bearish! Do not underestimate the #behavioral risk to this US stock market that is called career risk management.

 

Not only has the Fed implicitly imposed a short-term performance chasing hyperactivity on equity fund managers being forced to chase yield, bubbles, etc., they’ve made a large % of the hedge fund business a levered long beta strategy.

 

But I digress. Having someone at the Fed explain what that means to Maxine Waters will be as difficult as these people trying to convince you that cost of living isn’t at all-time highs. While lies about inflation in Washington can most definitely live, they can’t live forever.

 

Our immediate-term Global Macro Risk Ranges are now:

 

RUT 1085-1121

VIX 11.84-14.02

USD 79.61-80.23

Brent Oil 109.05-110.99

Gold 1

Copper 3.08-3.19

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer


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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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