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TAX HIKE AT THE PUMP

Client Talking Points

VIX

So far so good – it’s not different this time. The VIX has never held below 10 and it stopped going down this time at 10.61 (June 18); +14.3% from there, if front month VIX can start to make a series of all-time-higher-lows, this should get interesting, faster.

OIL

WTI crude continued higher this morning, then backed off small – higher-lows and higher-highs continue to signal there’s going to be one heck of a tax hike at the pump in the summer months for U.S. consumers; bond yields agree.

UST 10YR

UST 10YR yield back down to 2.58% and the Yield Spread (10s minus 2s) continues to compress (down to 209bps wide this morning, breaking down to fresh year-to-date lows, which is an explicit #GrowthSlowing signal).

Asset Allocation

CASH 12% US EQUITIES 6%
INTL EQUITIES 15% COMMODITIES 24%
FIXED INCOME 28% INTL CURRENCIES 15%

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.

LM

Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road

TWEET OF THE DAY

I published an updated deck on $DRI yesterday - the issues will never be fixed unless the company’s vision changes.

@HedgeyeHWP  

 

QUOTE OF THE DAY

“There is far more opportunity than there is ability. “

-Thomas A. Edison

STAT OF THE DAY

On June 20th the most-traded gold option the previous day was a $1,350 August call. The contract surged more than four-fold to $8.60, from $1.80 the previous day - the biggest gain since at least November 2012. (Bloomberg)


CHART OF THE DAY: The Pinch of Rising Inflation

Takeaway: Got #InflationAccelerating yet? Hedgeye reiterates the Street high on inflation expectations for 2014 and slowing US growth.

 

CHART OF THE DAY: The Pinch of Rising Inflation - Chart of the Day


The Fourth Turning

“That which hath been is now; and that which is to be, hath already been”

-Ecclesiastes

 

That’s the opening volley in one of the most recommended books Institutional Investors have offered up to me in the last year: The Fourth TurningWhat Cycles of History Tell Us About America’s Next Rendezvous with Destiny. I’m finally reading it on my family vacation this week in the homeland.

 

The Fourth Turning - flag

 

Back to the Global Macro Grind

 

One of the best ways to insure yourself against groupthink is not anchoring on a confirmation bias that “it’s different this time.” That’s why so many thoughtful buy-siders like The Fourth Turning. Its main premise is pretty much the only protection against long-term risk – mean reversion.

 

In order to contextualize mean reversion risk, I think you need to:

 

  1. Study #History (so that you can contextualize where you are)
  2. Understand #Math (2nd derivative moves and how they are a leading indicator for mean reversions)
  3. Embrace Uncertainty (from a #Behavioral perspective, accept that risks happen fast, and slow)

 

Or at least that’s what my ongoing studies (which started with being immersed in linear-supply/demand Keynesian Economics @Yale in 1995) and risk management experience in real-time markets has led me to believe, so far…

 

If it is indeed, “different this time” (as the Ben Bernanke’s and Mohammed El-Erian’s of the world would lead you to believe), I’ll be dead wrong on my fundamental #history #math #behavioral framework. But none of us will know that until I’m long gone anyway.

 

That’s one of the most humbling points William Strauss and Neil Howe make in The Fourth Turning about cycles. They are long. And by the time you read enough #history to know that you just happen to be alive within one of them, you’ll wish you had read more, sooner.

 

What was America like 80 years ago?

 

We were proud as people, but modest as individuals…” –Strauss/Howe

 

How important are you, personally, to this world today?

 

Fewer than two people in ten said yes when asked around WWII… Today, more than six in ten say yes. Where we once thought ourselves collectively strong, we now regard ourselves as individually entitled.” –Strauss/Howe

 

That’s page 1 of the book. Since it was written in 1997, I’m betting that 7, 8, or 9 in ten central planners think of themselves as the epicenter of the universe today. How else could someone at the Federal Reserve wake up every morning fundamentally believing that they can bend economic gravity?

 

Gravity? How do Strauss/Howe define cycles?

 

Each cycle spans the length of a long human life, roughly eighty to one hundred years, a unit of time the ancients called the saeculum. Together, the four turnings of the saeculum comprise history’s seasonal rhythm of growth, maturation, entropy, and destruction:

 

  1. The First Turning is a High
  2. The Second Turning is an Awakening
  3. The Third Turning is an Unraveling
  4.  The Fourth Turning is a Crisis

 

The good news is that after a decade of Bush/Obama inflation policies slowing real-consumption growth and perpetuating “inequality”, we’re already solidly in The Fourth Turning in America.

 

You’ll get the updated US GDP report for Q114 to remind you of that today. Inclusive of the central-planners making up that US inflation is only running in the “low 1%” range, real (inflation-adjusted) GDP growth will be revised to negative, yet again.

 

The only way out is time.

 

Eventually, time runs out on broken policies. Sometimes this happens slowly; sometimes it happens all at once.

 

Now that US equity volatility (VIX) has made another all-time-higher-low at 10.61 (June 18th, 2014), we’ll see if it really is different this time – or if the crisis phase of US growth being infected by Federal Reserve Policies to Inflate is to be what it hath already been.

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now:

 

UST 10yr Yield 2.46-2.64% (bearish)

SPX 1 (bullish)

RUT 1155-1195 (neutral)

India’s BSE Sensex 246 (bullish)

USD 80.17-80.51 (bearish)

Pound 1.69-1.71 (bullish)

WTIC Oil 105.71-107.28 (bullish)

Gold 1 (bullish)

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Fourth Turning - Chart of the Day


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Self-Evident Brats

This note was originally published at 8am on June 11, 2014 for Hedgeye subscribers.

“We hold these truths to be self-evident: that all men are created equal.”

-Thomas Jefferson

 

A big government central planning bureaucrat got his butt whipped down in the heartland of American Constitutionalism last night. Not unlike in the 1970s, when Nixonian Republicans and Cartering Democrats all started to sound the same on economic matters, Americans voted for change.

 

If Eric Cantor doesn’t make your skin crawl, you and I probably won’t be having beers at the Rangers/Kings Stanley Cup tilt tonight in NYC. This guy isn’t a free-market-liberal-conservative like me. On economic matters, he is a raging Keynesian.

 

Bring on the self-evidence that is the Policy To Inflate crushing at least 80% of Americans via cost of living and The Dave Brat. The winner of the 7th District of Virginia is a free-market economics professor! How cool is that? On days like this, even this proud Canadian wants to be American.

 

Self-Evident Brats - brat

 

Back to the Global Macro Grind

 

This is not a political statement. I don’t support the Tea Party inasmuch as I don’t support either the Republican or Democrat parties. This is an economic statement that is ringing as true in the United Kingdom today as it did in the Unites States of America in 2013. Strong Currency; Stronger Country.

 

If you have a Policy To Inflate (weaken your currency via both monetary and fiscal policy), you get what Harvard’s Marty Feldstein finally explained (WSJ Op-Ed yesterday) to the central planning wonks at the Fed: #InflationAccelerating.

 

And when you get inflation accelerating the cost of living in America to all-time highs, you aren’t going to get re-elected by lying to people and telling them otherwise. The truth is self-evident.

 

BREAKING: World Bank Cuts US GDP Growth Forecast

 

#nice

 

Finally someone, somewhere, in the land of officialdom-nod took their US GDP forecast closer to Hedgeye Risk Management’s. While the World Bank didn’t cut its GDP outlook by enough, the point is they had the spine to do what Consensus Macro research won’t, until it’s too late.

 

To review our call on US GDP Growth slowing into Q3 of 2014 – it’s math:

 

  1. Top line (GDP) acceleration in US GDP growth peaked in Q3 of 2013
  2. Inflation (the Deflator, which you subtract from nominal GDP) bottomed in Q2/Q3 of 2013

 

In other words, the year-over-year comparisons put Q3’s probability of inflation slowing US consumption growth at its highest level since Q1 of 2008.

 

“So”, don’t ask a linear-economist who missed calling either the Q1 of 2008 or Q1 of 2011 US #InflationAccelerating calls for their Top 10 reasons why they are still using the same models that haven’t proactively predicted real-world consumption slowdowns. Ask the bond market.

 

At 2.64% on the 10yr US Treasury Yield (down hard from 3.03% on January 1st, 2014), the entire construct of #OldWall consensus still thinks “it’s different this time” (i.e. that they were only wrong on both rates and GDP rising in Q1 because of the weather).

 

Every time the bond market sells off to higher-lows, you buy it. Every time US domestic consumption growth gets bid up to no-volume-lower-highs, you sell it. That is the Hedgeye Macro Playbook for US stocks vs bonds investing in 2014, and we are sticking to it.

 

Another way to position for what I just wrote is as follows:

 

  1. Buy Bonds via TLT, BND, or anything equities that looks like a bond (XLU, VNQ, etc.)
  2. Sell US Domestic Growth like Consumer Discretionary (XLY) and Housing (ITB)

 

If you didn’t buy puts on Cantor’s political message, you could have bought #InflationAccelerating via Oil and Gold futures too.

 

In other news, the SP500 had its 38th day of not moving more (+/-) 1% yesterday. That’s the 2nd longest streak of compressed complacency in 15 years. No worries though, everyone will be able to get out, at the same time, because “this time is different.”

 

In case you aren’t yet convinced that it is different this time:

 

  1. Fear (VIX) has never held below 10, ever (it’s at 10.99 this morning)
  2. II’s Bull/Bear Spread (survey) just hit fresh YTD highs at +4540 basis points wide to the Bull side
  3. One legged ducks still swim in a circle

 

Whether you are a bond bull, US growth bear, or a Brat from Virginia this morning, we stand together fighting the tyranny of mediocre minds trying to centrally plan us into thinking we need their inflation policies to live freely. We hold these free-market truths to be self-evident. They always have been.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.44-2.65%

SPX 1935-1959

RUT 1136-1184

VIX 10.78-13.34

Pound 1.67-1.69

Brent Oil 109.10-110.96

Gold 1240-1273

 

Best of luck out there today,

KM

 

Self-Evident Brats - Chart of the Day


LULU - Flash Call Today (6/25) 11am ET

Takeaway: We'll be hosting a flash call to discuss why we turned positive and added LULU to our Best Ideas List - Today, June 25th, at 11am ET.

Please join us for a Flash Call on Lululemon (LULU) today, June 25th, at 11am ET. The purpose of the call is to review why we turned positive and added LULU to our Best Ideas list as a Long following the company’s latest disappointing quarter.

 

Simply put, our view is that things are so bad, that it’s good – and the subsequent activism by Chip Wilson supports that case.  Don’t get us wrong, Wilson is as much a liability now as he ever has been. But, we think that the path he’s marching down leads this company, and the stock, down an array of very defined outcomes - most of which are positive for LULU shareholders.  Our math suggests at least 3-to-1 upside/downside.

 

We’ll be exploring the following…

  1. A key focus for us is the decision tree facing this company based on Wilson’s effort to regain control of the Board. If he wins, certain things will happen. If he loses, there’s a completely different set of outcomes. We look at all outcomes that have a remote chance of happening and look at likely ensuing stock price.
  2. What obstacles does Wilson face in going activist on the company that he created? There are many. We’ve done the deep dive on the Board history and relationships.
  3. We’ll analyze the governance factors surrounding anyone who wants to influence this Board.
  4. What factors could lead to a take-out? Who could absorb a deal this big, and more importantly, who wants to?
  5. What’s the worst case scenario, and what would need to happen for us to back off of our thesis?
  6. Yes, there’s this thing called Selling Yoga Apparel. That matters. We’ll outline what fix we think the company needs in order to jump start its financial model.  

 

CALL DETAILS

Toll Free Number:

Direct Dial Number:

Conference Code: 619868#

Materials: CLICK HERE

 


ICI Fund Flows, Refreshed: More Equity Choppiness

Takeaway: Taxable bonds have just put up their 18 consecutive week of inflow assisted by tax-free inflows at 22 consecutive weeks.

This note was originally published June 19, 2014 at 08:28 in Financials

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period, bond fund flows in both taxable and tax-free products had solid production producing inflows last week over the year-to-date running averages. This intermediate term trend for fixed income is highlighted by 18 consecutive weeks of inflow into taxable bonds assisted by 22 consecutive weeks of inflow into tax-free fixed income funds. Conversely, equity funds had another choppy week with domestic stock fund outflows, the 7th consecutive week, offset by international stock fund inflows.

 

ICI Fund Flows, Refreshed: More Equity Choppiness - w34

 

Total equity mutual funds put up a modest inflow in the most recent 5 day period ending June 11th with $2.2 billion coming into the all stock category as reported by the Investment Company Institute. The composition of the $2.2 billion subscription continued to be weighted towards international equity funds with $3.7 billion coming into international stock funds which was offset by a $1.4 billion outflow in domestic products. This outflow within domestic equity funds has become an intermediate term trend with now the seventh consecutive week of outflow in the category. The aggregate subscription of $2.2 billion for the recent five day period was below the year-to-date average for equity funds of a $2.6 billion inflow, which is now running below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual fund flows had a solid week of production with the aggregate $2.3 billion that came into the asset class besting the 2014 running year-to-date average inflow of $2.0 billion. The inflow into taxable products of $1.8 billion was the 18th consecutive week of positive flow and the inflow into municipal or tax-free products of $527 million was the 22nd consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.0 billion weekly inflow, an 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 a mixed showing versus mutual funds last week with equity ETFs putting up a strong week of production offset by weak passive bond flows. Equity ETFs experienced a robust $8.6 billion inflow, while fixed income ETFs put up a meager $137 million subscription. The 2014 weekly averages are now a $1.1 billion weekly inflow for equity ETFs and a $1.2 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 $8.3 billion spread for the week ($10.8 billion of total equity inflow versus the $2.4 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 $6.9 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 Flows, Refreshed: More Equity Choppiness - cast1

 

 

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

 

ICI Fund Flows, Refreshed: More Equity Choppiness - ICI chart2

 

ICI Fund Flows, Refreshed: More Equity Choppiness - ICI chart3

 

ICI Fund Flows, Refreshed: More Equity Choppiness - ICI chart4

 

ICI Fund Flows, Refreshed: More Equity Choppiness - ICI chart5

 

ICI Fund Flows, Refreshed: More Equity Choppiness - ICI chart6

 

 

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

 

ICI Fund Flows, Refreshed: More Equity Choppiness - ICI chart7

 

ICI Fund Flows, Refreshed: More Equity Choppiness - ICI chart8

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $8.3 billion spread for the week ($10.8 billion of total equity inflow versus the $2.4 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 $6.9 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 Flows, Refreshed: More Equity Choppiness - ICI chart9 

 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com


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