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August 28, 2014

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BULLISH TRENDS

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BEARISH TRENDS

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Cartoon of the Day: All Time SPY-Highs

Cartoon of the Day: All Time SPY-Highs - Waiting bear 08.27.2014

 

Keith McCullough wrote in today's Morning Newsletter, "While the stock, bond, and commodity market bubbles have all had different narratives, one thing is not different – prices go up, then down, a lot."

 

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Shorting France (EWQ)

Investment Recommendations:  short France (EWQ),  EUR/USD (FXE) and Eurozone equities (EZU);   Long GBP/USD (FXB)

 

This morning Keith added a short signal in France (via the etf EWQ) to our Real-Time Alerts.  We’ve been waiting for an entry point on European equities, with major indices broken TREND for nearly two months in our model. We were afforded the opportunity today with ~ 50bp bounce in the EWQ as the CAC remains broken TREND and fundamentals support economic weakness ahead.

Shorting France (EWQ) - vv. cac

 

As Keith notes in the Real-Time Alert update:

 

“I make a lot of mistakes. One of them that I didn't make was re-shorting European Equities too early on the no-volume bounce. One big mistake I think the European Equity bulls are about to make is thesis drift. I don't know one PM who got long Europe because they thought European growth would slow and that the market would need another QE.  Time to sell the most socialist of European economies, France.”

 

While we are closely following the Draghi Card, namely the pull-forward expectations of QE that he sent to the market in his Jackson Hole commentary (for more see Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook), our call is simply that we do not see growth accelerating in Europe, and right here and now are not getting long equities simply on the prospect of QE.  Instead we’re getting short a weak horse in the region, France. 

 

Here’s our near term set-up on the region:

  • Process:  our TREND lines across major European indices remain broken = we’ll maintain a bearish bias on the equities
  • Friday’s CPI Print:  we expect Eurozone CPI (released at 5am EST this Friday) to tick down 10bps to 0.3% -- expect heightened investor expectations that Draghi needs more “powder” to revert falling inflation, however we do not see Friday’s print as the catalyst to issue QE at the September 4th ECB meeting
  • September 4th ECB Meeting:  we expect updated ECB staff projections to show downward revisions to growth and inflation. Draghi will “push” the growth and inflation prospects from TLTROs and QE-lite (ABS buying) programs in his commentary (although we are not buying it), and will leave QE in his back pocket

Weak Growth And Weakening. Last week’s Eurozone Q2 GDP print confirmed massive slowing for the region to 0.0% Q/Q (vs 0.2% prior) and 0.7% Y/Y (vs 0.9% prior) – and while both France and Germany slowed, our call is that France will underperform its main peer in the quarters ahead. Here’s the Q2 divergence:

 

France  0.0% Q/Q (0.1% est.) vs. 0.0% prior

France  0.1% Y/Y (0.3% est.) vs. 0.7% prior (0.8% revised)

 

Germany  -0.2% Q/Q (-0.1% est.) vs. 0.8% prior

Germany  1.3% Y/Y (1.4% est.) vs. 2.2% prior

 

Supportive of today’s call is also survey data out that showed France Business Confidence declining in the August figure, its 4th straight month of declines; PMI Services and Manufacturing data that has shown France squarely underperforming the region since 2012 (largely below the 50 line indicating contraction); record-high jobless numbers; a 16-year low in housing starts; weak industrial production; low inflation (+0.5% Y/Y); and government bond yields falling steadily (down -1.2% Y/Y).

Shorting France (EWQ) - vv. businss conf france

Shorting France (EWQ) - vv pmis

Shorting France (EWQ) - vv. yields

 

Politically Weak.  Just two weeks ago France’s government cut its GDP forecast in half (again) to 0.5% (from 1.0%) for 2014 and it will likely miss its FY deficit target of 4%.  News this week of President Hollande reshuffling his government (after Economy Minister Arnaud Montebourg stepped down on Monday), is confirming evidence to us that the policies of Hollande’s government are not on track to return growth to the economy over the medium term. That Hollande himself is wildly unpopular, with a paltry approval rating of 17%, furthers the outlook that the government’s pledge that the “recovery is there” is grossly disingenuous. 

 

Matthew Hedrick
Associate

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.32%
  • SHORT SIGNALS 78.48%

Stay Far Away From Burger King, BK Looking to Tim Hortons to Bail Them Out Via 'Enrichment Scheme'

Takeaway: 5 words from Hedgeye's Howard Penney: Stay away from Burger King.

Hedgeye managing director and restaurants analyst Howard Penney was interviewed by BNN earlier today and explained why he believes owning Burger King is a big mistake for investors. Penney says 'Burger King is looking to Tim Hortons to bail them out of a bad situation.

 

Stay Far Away From Burger King, BK Looking to Tim Hortons to Bail Them Out Via 'Enrichment Scheme' - hp3

Click here to watch the full interview.

 

 


Investing Ideas - Levels

Takeaway: Here are Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction investing ideas.

Investing Ideas - Levels - LEVELS

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

Anything longer than 3 years is unpredictable.

 


Fund Flows, Refreshed (U.S. Stock Funds Just Can't Get a Bid - 4 Month Running Outflow)

Takeaway: Domestic stock funds put up their 16 consecutive week of outflow and are now entering the seasonally weakest period of the year.

This note was originally published August 21, 2014 at 09:33 in Financials

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Fund Flows, Refreshed (U.S. Stock Funds Just Can't Get a Bid - 4 Month Running Outflow) - b7 

In the most recent 5 day period ending August 13th, taxable fixed income flows snapped back to positive territory, eking out a slight inflow of $519 million after the substantial panic outflow of over $8.0 billion the week prior. Intermediate term trends are still intact for taxable bonds with inflow in 25 of the past 27 weeks. Domestic stock funds conversely continue to struggle with another $1.0 billion being withdrawn by investors last week which make it 16 consecutive weeks of outflows with now over $40 billion lost in the category. We remind investors that looking back to 2007, that the average outflow sequence in domestic stock funds has averaged 40 weeks with over $113 billion on average drawn down, so the initial weakness in domestic stock funds could easily run through the rest of 2014 (and into 2015). The equity mutual fund channel is also entering the seasonally weakest part of the year (the fourth quarter), and we recommend that investors avoid Janus Capital (JNS) and T Rowe Price (TROW) with the most exposure to the U.S. stock funds (see our report on why TROW should underperform).

 

Fund Flows, Refreshed (U.S. Stock Funds Just Can't Get a Bid - 4 Month Running Outflow) - cast1


Fund Flows, Refreshed (U.S. Stock Funds Just Can't Get a Bid - 4 Month Running Outflow) - chart 2 seasonality

 

Total equity mutual funds put up a slight inflow in the most recent 5 day period ending August 13th with $225 million coming into the all stock category as reported by the Investment Company Institute. The composition of the inflow continued to be weighted towards International stock funds with $1.2 billion coming into the category offset by the ongoing 16 week redemption in domestic equity funds which totaled a $1.0 billion outflow last week. This draw down in domestic equity funds has now totaled a $40 billion outflow over the past 4 months. The running year-to-date weekly average for equity fund flow is now a $1.5 billion inflow, which is now well below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual funds had another positive week of production with $1.8 billion coming into the asset class. The inflow into taxable products of $519 million made it 25 of 27 weeks with positive flow. Municipal or tax-free bond funds put up a $897 million inflow, making it 30 of 31 weeks with 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 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). 

 

ETF results were broadly positive during the week with inflows into both equity funds and fixed income products. Equity ETFs put up a $2.8 billion subscription while fixed income ETFs put up a $2.6 billion inflow. The 2014 weekly averages are now a $1.2 billion weekly inflow for equity ETFs and a $939 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 $1.0 billion spread for the week ($3.0 billion of total equity inflow versus the $4.1 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 $4.0 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). The 52 week moving average chart displays the declining demand for all equity products (funds and ETFs) for the safety and security of fixed income. 

 

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.   

 

Fund Flows, Refreshed (U.S. Stock Funds Just Can't Get a Bid - 4 Month Running Outflow) - ICI chart1

Fund Flows, Refreshed (U.S. Stock Funds Just Can't Get a Bid - 4 Month Running Outflow) - ICI chart2

 

 

 

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

 

Fund Flows, Refreshed (U.S. Stock Funds Just Can't Get a Bid - 4 Month Running Outflow) - ICI chart3

 

Fund Flows, Refreshed (U.S. Stock Funds Just Can't Get a Bid - 4 Month Running Outflow) - ICI chart4

 

Fund Flows, Refreshed (U.S. Stock Funds Just Can't Get a Bid - 4 Month Running Outflow) - ICI chart5

 

Fund Flows, Refreshed (U.S. Stock Funds Just Can't Get a Bid - 4 Month Running Outflow) - ICI chart6

 

Fund Flows, Refreshed (U.S. Stock Funds Just Can't Get a Bid - 4 Month Running Outflow) - ICI chart7

 

 

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

 

Fund Flows, Refreshed (U.S. Stock Funds Just Can't Get a Bid - 4 Month Running Outflow) - ICI chart8

 

Fund Flows, Refreshed (U.S. Stock Funds Just Can't Get a Bid - 4 Month Running Outflow) - ICI chart9

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $1.0 billion spread for the week ($3.0 billion of total equity inflow versus the $4.1 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 $4.0 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). The 52 week moving average chart displays the declining demand for all equity products (funds and ETFs) for the safety and security of fixed income. 

 

Fund Flows, Refreshed (U.S. Stock Funds Just Can't Get a Bid - 4 Month Running Outflow) - ICI chart10 

 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com


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