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The World Changed

Client Talking Points

YEN

The Yen breaking out now on my immediate-term risk duration (vs. USD); breakout line = 107.79 and it’s important to realize how much Correlation Risk was embedded in macro markets during the biggest USD ramp since 1997; Nikkei does not like this USD reversal, down another -2.2% overnight to -8.2% year-to-date.

EUROPE

They tried bouncing the DAX and FTSE early this morning, but the rest of the European equity market faded to red in a hurry. Italy and Spain are down again; Greece and Portugal are both #crashing (again) at -23.5% and -21.6% year-to-date, respectively. Draghi’s drugs didn’t stop gravity #EuropeSlowing.

OIL

If what’s going on from a #Quad4 deflation perspective in Oil and related energy stocks (XLE -11.1% for OCT) isn’t telling you the world changed, it should. These draw-downs are both nasty and pervasive. Chasing a Russell #bubble bounce when it is in freefall is as risky as it gets during a macro phase transition like this – stay hedged!

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 3%
FIXED INCOME 24% INTL CURRENCIES 3%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

VIDEO | I Talk Market Mess With @MariaBartiromo @FoxBusiness http://app.hedgeye.com/media/1313-video-keith-talks-market-turbulence-with-maria

@KeithMcCullough

QUOTE OF THE DAY

The way I see it, if you want the rainbow, you gotta put up with the rain.

-Dolly Parton

STAT OF THE DAY

The UST 10YR Yield at 2.06% has crashed, down -32% year-to-date.



"Ebeta"

Let them eat debt.”

-Dan Alpert

 

That’s how my friend Dan Alpert starts chapter 4 of a non-perma-bull book I have been reviewing as of late – The Age of Oversupply. It’s a play on Marie Antoinette telling those who were plundered by central planners in France to eat cake.

 

Ironically enough, it was on this day in 1793 that Marie was guillotined at the epicenter of the French Revolution. The People will only put up with negative real incomes and the all-time highs in cost of living for so long…

 

Right in the middle of our new bear cave (Hedgeye Headquarters in Stamford, CT), we have an office I painted pink (with fluffy white couches) that we call the Marie Antoinette Room. There’s a guillotine painted in black on the wall.

 

"Ebeta" - EL chart 2

 

Back to the Global Macro Grind

 

Yep, we do things a little differently over here. And thank God for that. If anyone who works for me bought the “bounce” in the Russell #Bubble (into yesterday’s close), we’d be having a little chat in the pink room today.

 

Newsflash: the world changed yesterday.

 

And I can’t for the life of me understand why money managers who haven’t been positioned for it for the last, say 3-6 weeks, wouldn’t respect that. There has never been a % move like that in the Treasury market (in that compressed window of time), ever. I call that part of the phase transition of market risk, The Waterfall.

 

The Waterfall isn’t ebola (or whatever bulls want to blame next). It’s levered-long hedge fund beta.

 

And until I get at least a dozen shorter-term hedge funds calling/emailing me (at the same time) and telling me we’re going to crash, we’re probably going lower.

 

“We”, in market terms – dammit I hate that word. This market isn’t we. That would include me, Mucker, as having some ownership in being long the US equity market. To be clear, I am long the Treasury Bond market – Long Bond style!

 

Back to the #behavioral point on fund manager positioning and sentiment…

 

Understand that this entire way down (-11.2% for the Russell 2000, -32% for the 10yr bond yield, -7.4% for the SP500), I have generally been asked about where “we bounce.”

 

The reason for that is pretty simple. In the Chart of The Day (exhibit 45 in our Q4 Macro Themes deck) you can see Hedge Fund Correlation to SP500 and Average Relative Performance (using a 60 month trailing correlation).

 

Punch-line: forget ebola – correlation to Ebeta for the levered-long beta chasing trade = +0.90-0.95

 

When the US equity market goes down, for real… that’s more dangerous than almost any data point you can give me other than the following 3-factor #Bubble chart (exhibit 52 in our Q4 Macro Themes deck) – Spread Risk:

 

  1. All-time low in credit spreads
  2. All-time low in cross-asset class volatility
  3. All-time high in debt outstanding

 

No, I didn’t need a one-on-one meeting with my favorite stock picker to come up with that… I am pretty sure that the CFO of the only company I hit the buy button on as of late in Real-Time Alerts (HCA) wouldn’t know what to do with it anyway.

 

Q: Who does?

 

A: No one

 

How could anyone tell you, with a straight face that, even though, they “don’t do macro”, they just know that buying the damn dip is going to work, in spite of coming off the all-time lows in volatility and highs in, well, everything?

 

To review why our call on rates really matters to cross asset class expectations (risk):

 

  1. Long-term rates shock consensus to the downside
  2. Yield Spread (leading indicator for US #GrowthSlowing) crashes -34% (10yr minus 2yr yield)
  3. Small caps, bank stocks, and anything illiquid credit junk gets slammed

 

In the non-it’s-different-this-time playbook, this is what is called an early-cycle slowdown. And from the all-time highs in debt outstanding, I don’t think piling on more of what hasn’t worked (Qe4) is going to make this better.

 

I am not trying to scare you, or be “not nice” about this. I like to be right as much as you do. “So”, I say, let whoever bought yesterday’s intraday bounce in the Russell #Bubble eat beta.

 

Tomorrow at 1PM EST I’ll be hosting a Hedgeye Flash Call#Bubble Or Bottom”, updating our Q4 Macro Themes. Ping if you’d like to participate.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.01-2.22%

SPX 1

RUT 1038-1080

VIX 19.55-27.99

USD 84.76-85.79

Gold 1


Best of luck out there today,

KM

 

"Ebeta" - Chart of the Day


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 16, 2014


As we look at today's setup for the S&P 500, the range is 56 points or 1.58% downside to 1833 and 1.42% upside to 1889.                                                   

                                                                            

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: 1.73 from 1.83
  • VIX closed at 26.25 1 day percent change of 15.18%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8am: Fed’s Plosser speaks in Allentown, Pa.
  • 8:30am: Initial Jobless Claims, Oct. 11, est. 290k (pr 287k)
  • Continuing Claims, Oct. 4, est. 2.380m (prior 2.381m)
  • 9am: Fed’s Lockhart speaks in New Brunswick, N.J.
  • 9:15am: Ind. Production, m/m, Sept., est. 0.4% (prior -0.1%)
  • 9:45am: Bloomberg Consumer Comfort, Oct. 12 (prior 36.8)
  • 10am: Philly Fed Business Outlook, Oct., est. 19.8 (pr 22.5)
  • 10am: NAHB Housing Market Index, Oct., est. 59 (prior 59)
  • 10am: Fed’s Kocherlakota speaks in Billings, Mont.
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: U.S. to announce plans for auction of 3M/6M bills, 30Y TIPS
  • 12:45pm: Fed’s Bullard speaks in Washington
  • 12:45pm: Fed’s Yellen attends event in Chelsea, Mass.
  • 4pm: Net Long-term TIC Flows, Aug. (prior -$18.6b)

 

GOVERNMENT:

    • Senate, House out of session
    • Obama Says Response Team to Be Dispatched for Any Ebola Case, cancels trip to R.I., N.Y.
    • Sec. of State Kerry delivers remarks at reception in honor of Eid, then working dinner w/ Foreign Affairs Policy Board
    • 10am CFTC Chairman Massad to Keynote Managed Funds Assn’s Outlook 2014 Conference in N.Y.
    • 12pm: House Energy and Commerce Oversight and Investigations Subcmte hearing on Ebola; CDC’s Frieden, National Institute of Allergy and Infectious Disease at NIH’s Fauci to testify
    • 12:30 p.m.: Michael Huerta, FAA administrator, speaks to Aero Club ofWashington
    • U.S. ELECTION WRAP: Guns & Democrats; $1b Ads; Grimes Takes Hit

 

WHAT TO WATCH:

  • Some in Ebola Trials Wouldn’t Get Tested Drugs Under U.S. Plan
  • New Ebola Patient’s Trip Raises Concern on U.S. Spread of Virus
  • U.S. House of Representatives panel holds hearing on Ebola
  • Obama Says Response Team to Be Dispatched for Any Ebola Case, cancels trip to R.I., N.Y.
  • Apple Event: IPad, Mac Updates, Potentially Larger IPad
  • AbbVie Board Recommends Shareholders Vote Against Shire Deal
  • Dark Pools Said to Direct Orders Elsewhere as U.S. Volume Surged
  • Netflix Skids on User Slowdown as HBO Plots Web Competition
  • EBay Holiday Sales Forecast Misses Estimates After Data Breach
  • AmEx Profit Tops Analysts Estimates as Card Spending Climbs
  • Las Vegas Sands Profit Tops Estimates on Mass Market Revenue
  • Tesla Facing Possible Ban on Direct Automobile Sales in Michigan
  • IPO Outlook Dims as Zoosk, GoDaddy Said to Mull Punting to 2015
  • Dow Says World Carbon Market Needs Less Intervention to Succeed
  • Citigroup’s Mexico Unit Fined $2.2m Over Loan Controls
  • Oracle Sued Over Antitrust Claims Echoing Apple-Google Suit
  • Apple Told to List Items to Keep Secret in GT Advanced Case
  • Banker Pay Clampdown in Europe Puts Firms at Risk in Talent Race

 

AM EARNS:

    • Alliance Data Systems (ADS) 7:30am, $3.31
    • Baker Hughes (BHI) 6am, $1.13 - Preview
    • Baxter Intl (BAX) 7am, $1.31 - Preview
    • BB&T (BBT) 5:45am, $0.72
    • Blackstone (BX) 7am, $0.71
    • ClubCorp (MYCC) 7am, $0.10
    • Cypress Semiconductor (CY) 8am, $0.16
    • Danaher (DHR) 6am, $0.89
    • Delta Air Lines (DAL) 7:30am, $1.18
    • Dover (DOV) 7am, $1.31
    • Fairchild Semiconductor (FCS) 7:30am, $0.21
    • Fifth Third Bancorp (FITB) 6:30am, $0.43
    • First Republic (FRC) 7am, $0.86
    • Goldman Sachs (GS) 7:35am, $3.21 -Preview
    • Marriott Vacations (VAC) 8am, $0.80
    • Mattel (MAT) 6am, $1.02 - Preview
    • Orbital Sciences (ORB) 6am, $0.28
    • Philip Morris Intl (PM) 6:59am, $1.33 - Preview
    • PPG Industries (PPG) 8:11am, $2.76
    • Snap-On (SNA) 7am, $1.62
    • Sonoco Products (SON) 7:30am, $0.68
    • Supervalu (SVU) 8am, $0.11
    • UnitedHealth (UNH) 6am, $1.53 - Preview
    • Webster Financial (WBS) 7:55am, $0.52
    • Winnebago (WGO) 7am, $0.46
    • WW Grainger (GWW) 7:30am, $3.29 -Preview

 

PM EARNS:

  • Advanced Micro Devices (AMD) 4:15pm, $0.04 - Preview
  • Athenahealth (ATHN) 4:01pm, $0.27
  • Capital One Financial (COF) 4:05pm, $1.94
  • Cepheid (CPHD) 4:05pm, ($0.16)
  • Crown Holdings (CCK) 5:03pm, $1.21
  • Cytec Industries (CYT) Aft-mkt, N/A
  • Google (GOOGL) 4:02pm, $6.53
  • People’s United Finl (PBCT) 4:03pm, $0.21
  • QLogic (QLGC) 4:15pm, $0.22
  • SanDisk (SNDK) 4:05pm, $1.33
  • Schlumberger (SLB) 4:05pm, $1.47 - Preview
  • Stryker (SYK) 4pm, $1.14 - Preview
  • Wintrust Financial (WTFC) 5:01pm, $0.78
  • Xilinx (XLNX) 4:20pm, $0.56

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

  • LME to Run London Platinum to Palladium Fixings Replacement
  • Copper Demand Seen by CRU Slowing as China’s Imports Set to Drop
  • Trading Metals for Music Shows Shrinking Job Market: Commodities
  • WTI Crude Oil Falls Below $80 for First Time Since June 2012
  • Lead to Tin Fall to Lowest in More Than a Year on Demand Concern
  • Gold Falls From 5-Week High as Sales Seen to Cover Other Losses
  • Corn Slides as Drier U.S. Weather Puts Focus Back on Record Crop
  • Coffee Harvest in Indonesia Seen Heading for Record on Rainfall
  • End to Oil Rout Seen by BofA as $80-a-Barrel Gains Support
  • Citigroup Sees $1.1 Trillion Stimulus From Oil Bear Market Rout
  • Palm Declines to Three-Week Low as Biofuel Demand Eases on Crude
  • Oil Bear Market Shows Saudis Still Pick Winners in Shakeout
  • More Iron Ore Supply Coming in Wake of 37% Price Plunge
  • Dow Says World Carbon Market Needs Less Intervention to Work

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 - Taxable Bond Bleeding Continues - BlackRock Puts Up Soft Equity Results

Takeaway: Dislocation at PIMCO continued last week with BlackRock signaling weak retail and institutional equity trends in yesterday's earnings

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

The most recent weekly ICI fund flow survey relayed the ongoing distribution within the taxable bond fund category as a result of the reshuffling of the cards among the major bond fund managers with the Bill Gross departure from PIMCO. Taxable bonds lost another $4.6 billion last week according to the ICI which brings the money in motion from the Gross transfer to over $25 billion over the past two weeks. According to several sources, Gross' new home Janus Capital (JNS), has collected just $60 million of these funds up for grabs which still doesn't foote with the stock's recent strong move up in market value. We are still looking to Janus' conference call next Thursday October 23rd to understand the compensation award to Gross versus his new assets-under-management win potential. While JNS stock has corrected over 12% since September 26th, we still see more downside should the company have awarded a large comp structure to Gross without requisite inbound assets to offset new operating costs. In addition, the earnings print from asset management juggernaut BlackRock (BLK) yesterday displayed weakness in both retail equity mutual fund flows as well as institutional equity fund flows which we think is a negative read through for T Rowe Price (TROW). While there are some ideosyncrasies between the two franchises (mainly that institutionally, BLK is in the midst of a fundamental equity restructuring), we point out however that over the past 6 quarters that both T Rowe and BlackRock fund flow trends have not decoupled from each other. In addition, we highlight that both active mutual fund only managers Janus and T Rowe continue to swim upstream against ongoing market share gains by passive ETFs trends which continue to be fairly robust on a year-to-date basis versus active management mutual fund trends. Thus we continue to be cautious on TROW as we are forecasting negative organic growth in its upcoming earnings print on October 23rd versus the Street's ongoing positive growth estimates (see our Best Ideas research below)   

 

ICI Fund Flow Survey - Taxable Bond Bleeding Continues - BlackRock Puts Up Soft Equity Results - BLK TROW chart

 

ICI Fund Flow Survey - Taxable Bond Bleeding Continues - BlackRock Puts Up Soft Equity Results - ETF share

 

Hedgeye Best Ideas TROW Short Research 

Hedgeye Best Ideas JNS Short Research

 

In the most recent 5 day period ending October 8th, total equity mutual funds put up moderate inflows with $1.0 billion coming into the total equity fund category according to the Investment Company Institute. The composition of the inflow continued to be weighted towards International stock funds with a $1.6 billion inflow buffering another outflow of $533 million in U.S. stock funds. The inflow into International stock funds made it a perfect 40 for 40, i.e. inflows in all 40 weeks of 2014. Conversely, domestic trends continue to be very soft with now 23 of 24 weeks of outflow now totaling over $57 billion lost. The running year-to-date weekly average for all equity fund flow continues to decline and now settles at a $1.1 billion inflow, now well below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual fund flow had another drawdown in the most recent ICI data succumbing to more net selling from the dislocation at large bond fund manager PIMCO. Total bond funds lost another $3.7 billion last week with the distribution focused with the taxable bond fund category which lost another $4.6 billion last week. Despite the taxable outflow, intermediate term trends are still quite positive however for taxable fixed income with 29 of the past 35 weeks having had positive subscriptions. Municipal or tax-free bond funds in the most recent survey put up a $895 million inflow, making it 34 of 35 weeks with positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.1 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 mixed during the week with substantial outflows into equity funds but subscriptions in passive fixed income products mopping up the ongoing redemption in taxable bond funds. Equity ETFs suffered a $6.2 billion redemption while fixed income ETFs put up a $4.6 billion subscription, the biggest inflow in almost 5 months. The 2014 weekly averages are now a $1.7 billion weekly inflow for equity ETFs and a $946 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 $6.1 billion spread for the week (-$5.2 billion of total equity outflow versus the $896 million 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 $3.5 billion (more positive money flow to equities), with a 52 week high of $27.2 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.   

 

ICI Fund Flow Survey - Taxable Bond Bleeding Continues - BlackRock Puts Up Soft Equity Results - ICI chart 1

ICI Fund Flow Survey - Taxable Bond Bleeding Continues - BlackRock Puts Up Soft Equity Results - ICI chart 2

 

 

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

 

ICI Fund Flow Survey - Taxable Bond Bleeding Continues - BlackRock Puts Up Soft Equity Results - ICI chart 3

 

ICI Fund Flow Survey - Taxable Bond Bleeding Continues - BlackRock Puts Up Soft Equity Results - ICI chart 4

 

ICI Fund Flow Survey - Taxable Bond Bleeding Continues - BlackRock Puts Up Soft Equity Results - ICI chart 5

 

ICI Fund Flow Survey - Taxable Bond Bleeding Continues - BlackRock Puts Up Soft Equity Results - ICI chart 6

 

ICI Fund Flow Survey - Taxable Bond Bleeding Continues - BlackRock Puts Up Soft Equity Results - ICI chart 7

 

 

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

 

ICI Fund Flow Survey - Taxable Bond Bleeding Continues - BlackRock Puts Up Soft Equity Results - ICI chart 8

 

ICI Fund Flow Survey - Taxable Bond Bleeding Continues - BlackRock Puts Up Soft Equity Results - ICI chart 9A

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $6.1 billion spread for the week (-$5.2 billion of total equity outflow versus the $896 million 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 $3.5 billion (more positive money flow to equities), with a 52 week high of $27.2 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. 

 

 

ICI Fund Flow Survey - Taxable Bond Bleeding Continues - BlackRock Puts Up Soft Equity Results - ICI chart 9 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


October 16, 2014

October 16, 2014 - Slide1

 

BULLISH TRENDS

October 16, 2014 - Slide2

October 16, 2014 - Slide3

October 16, 2014 - Slide4

 

 

BEARISH TRENDS

October 16, 2014 - Slide5

October 16, 2014 - Slide6 

October 16, 2014 - Slide7

October 16, 2014 - Slide8

October 16, 2014 - Slide9

October 16, 2014 - Slide10

October 16, 2014 - Slide11


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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