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QUICK HIT ON Q3 GDP: #Quad4 CONFIRMED

Takeaway: With this [soon-to-be-revised-down, pre-election Q3 GDP print], the U.S. economy is squarely in #Quad4 and should remain there throughout Q4

It’s busy morning for our Macro Team here at Hedgeye with Keith live on Fox Business with Maria Bartiromo for the 9am hour, this Q3 GDP release and a busy day of customer meetings in New York. Fortuitously, we have a #process that allows us to quickly and appropriately contextualize this Q3 GDP “beat”:

 

QUICK HIT ON Q3 GDP: #Quad4 CONFIRMED - UNITED STATES

 

Yes, that’s #Quad4, and yes, #Quad4 is bearish for asset prices:

 

QUICK HIT ON Q3 GDP: #Quad4 CONFIRMED - GIP Model Backtest

 

The good news for growth bulls is that the YoY number (i.e. the one 20 years of backtest data suggests the market actually cares about) came in above our +1.9% estimate at +2.3%. The bad news is that that figure is still down from +2.6% in Q3.

 

#GrowthSlowing, in rate-of-change terms.

 

Refer to our note from last night titled, “NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU…” for more details on why the U.S. economy is set to slow further here in Q4. The 20 charts in that note are very easy to consume and startling, to say the least.

 

Best of luck out there!

 

DD

 

Darius Dale

Associate: Macro Team


ICI Fund Flow Survey - Domestic Equity Funds Perk Up with Taxable Fixed Income Still Getting Grossed

Takeaway: The most recent ICI fund flow survey produced the first robust domestic equity fund result in 5 months with taxable fixed income in outflow

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

The most recent ICI mutual fund survey showed a reprieve from the drastic domestic equity fund outflows of the past 5 months with a solid $4.6 billion inflow coming into U.S. stock funds last week. Despite this one week uptick, domestic stock funds have had outflow in 24 of the past 26 weeks with over $57 billion lost which continues to be supportive of our underweight recommendations on the U.S. equity asset managers. In other important trends, the bleeding in taxable bond funds continued with another $5.1 billion redemption being yanked from the category. This dislocation in taxable fixed income has largely come about with the transfer of Bill Gross from PIMCO to Janus Capital and in aggregate has put over $35 billion in motion over past 4 weeks. Fixed Income ETFs have been a direct beneficiary with over $17 billion picked up in those products during the same time. In addition, BlackRock has been mentioned in several media outlets as also having picked up new assets-under-management (AUM). There still has been di minimus mention of any new Janus gains with the Gross addition however the October Simfund report will be out next week which will highlight AUM wins at the manager level. We are still skeptical that the magnitude of any Janus wins will match the market cap rise in shares of the company (see our ongoing view on Janus in the research link enclosed). In ETF trends detailed below, we highlight that the Basic Materials ETF (XLB) took in $328 million of new money last week or a 9% gain in total AUM. Conversely, investor interest waned in the XLU or the Utilities Sector SPDR, with a 5% net redemption in that ETF. In addition, despite all the noise around the energy patch over the past several months, the XLE or the Energy Sector SPDR has still added 34% to its total AUM in 2014 which could mean the blood letting in that group could continue.

 

ICI Fund Flow Survey - Domestic Equity Funds Perk Up with Taxable Fixed Income Still Getting Grossed - ICI chart 1

 

 

Hedgeye Research - Mantaining Shorts on the Equity Asset Managers After Earnings 

 

 

In the most recent 5 day period ending October 22nd, total equity mutual funds put up solid inflows with $6.0 billion coming into the category according to the Investment Company Institute. The composition of the inflow for the first time in over 7 months was weighted towards Domestic stock funds which had a $4.6 billion inflow supporting the $1.3 billion which came into International stock funds. The two equity categories have been a tale of two cities all year with International stock funds having had inflow in 41 of the past 42 weeks. Conversely, domestic trends have been very soft with inflow in just 14 weeks of the 42 weeks thus far year-to-date and have been drastically negative the past 6 months with just 2 weeks of inflow in the past 26 weeks. While one week does yet make a trend, it will be worth watching if the current equity rally spurs domestic investors to change their recent risk aversion. The running year-to-date weekly average for all equity fund flow continues to decline however 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 $4.9 billion last week with the distribution focused within the taxable bond fund category which lost another $5.1 billion in the most recent 5 days. This brings the "money in motion" or the taxable outflow to over $35 billion in the past 4 weeks. Municipal or tax-free bond funds put up a $139 million inflow, making it 40 of 41 weeks with positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $900 million 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 very mixed during the week with substantial outflows in equity funds but subscriptions in passive fixed income products mopping up the ongoing redemption in taxable bond funds. Equity ETFs suffered a $9.4 billion redemption while fixed income ETFs put up a $6.6 billion subscription, the biggest inflow in 9 months (undoubtedly taking in some of that taxable fixed income fund money in motion). The 2014 weekly averages are now a $1.5 billion 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 negative $5.0 billion spread for the week (-$3.3 billion of total equity outflow versus the $1.6 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 $3.3 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.   

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the running weekly year-to-date average for 2014 and the weekly quarter-to-date average for 4Q 2014:

 

ICI Fund Flow Survey - Domestic Equity Funds Perk Up with Taxable Fixed Income Still Getting Grossed - ICI chart 2

 

ICI Fund Flow Survey - Domestic Equity Funds Perk Up with Taxable Fixed Income Still Getting Grossed - ICI chart 3

 

ICI Fund Flow Survey - Domestic Equity Funds Perk Up with Taxable Fixed Income Still Getting Grossed - ICI chart 4

 

ICI Fund Flow Survey - Domestic Equity Funds Perk Up with Taxable Fixed Income Still Getting Grossed - ICI chart 5

 

ICI Fund Flow Survey - Domestic Equity Funds Perk Up with Taxable Fixed Income Still Getting Grossed - ICI chart 6

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI) and the running weekly year-to-date average for 2014 and the weekly quarter-to-date average for 4Q 2014. The third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

ICI Fund Flow Survey - Domestic Equity Funds Perk Up with Taxable Fixed Income Still Getting Grossed - ICI chart 7

 

ICI Fund Flow Survey - Domestic Equity Funds Perk Up with Taxable Fixed Income Still Getting Grossed - ICI chart 8

 

Sector and Asset Class Weekly ETF and Year-to-Date Results: In specific callouts, the Basic Materials ETF (XLB) took in $328 million of new money last week or a 9% gain in total AUM. Conversely, investor interest waned in the XLU or the Utilities Sector SPDR, with a 5% net redemption in that ETF. In addition, despite all the noise around the energy patch over the past several months, the XLE or the Energy Sector SPDR has still added 34% to its total AUM thus far in 2014 which could mean the blood letting in that group could continue.

 

ICI Fund Flow Survey - Domestic Equity Funds Perk Up with Taxable Fixed Income Still Getting Grossed - 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 negative $5.0 billion spread for the week (-$3.3 billion of total equity outflow versus the $1.6 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 $3.3 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 - Domestic Equity Funds Perk Up with Taxable Fixed Income Still Getting Grossed - ICI chart 10

 

Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

ICI Fund Flow Survey - Domestic Equity Funds Perk Up with Taxable Fixed Income Still Getting Grossed - ICI chart 11 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


"Ebeta"

This note was originally published at 8am on October 16, 2014 for Hedgeye subscribers.

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 sales@Hedgeye.com if you’d like to participate.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.01-2.22%

SPX 1833-1889

RUT 1038-1080

VIX 19.55-27.99

USD 84.76-85.79

Gold 1220-1251


Best of luck out there today,

KM

 

"Ebeta" - Chart of the Day


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USD, Oil and the UST 10YR

Client Talking Points

USD

The opposite of the Fed’s Policy To Inflate = #deflation; the Dollar Up, Rates Down move of 2014 continues to crush former carry trades (Energy and Basic Material stocks) and pay slow-growth #yieldchasing.

OIL

Another 1-day bounce is met with more selling; WTI down -0.8% this morning to $81.51 and has no immediate-term support to $79.98/barrel. Gas prices are 6.4% of the median consumer (U.S.) budget – that’s not nearly enough to offset either the all-time highs in U.S. cost of living or the wealth compression of falling stock and home prices.

UST 10YR

The UST  10YR Yield is meandering around the top end of its immediate-term 2.16-2.35% risk range; don’t forget that the UST  10YR Yield, like oil, has crashed in 2014 (-23%) and that its highly sensitive to U.S. #GrowthSlowing data (like Durable Goods, Retail Sales, New Homes, etc.).

Asset Allocation

CASH 72% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 28% INTL CURRENCIES 0%

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

RUSSIA: probability of economic collapse continues to rise; Russian stock market continues to crash -23.8% YTD

@KeithMcCullough

QUOTE OF THE DAY

Well done is better than well said.

-Benjamin Franklin

STAT OF THE DAY

A Starbucks Grande Pumpkin Spice Latte has 49 grams of sugar, compared to a 1.55 oz Hershey’s Milk Chocolate bar, which has 24 grams per bar. That’s more than double the amount of sugar.


CHART OF THE DAY: @Hedgeye Longs vs. Shorts #TimeStamped

 

CHART OF THE DAY: @Hedgeye Longs vs. Shorts #TimeStamped - Chart of the Day


Deflated Disputants

“How many a dispute could have been deflated into a single paragraph if the disputants had dared to define their terms?”

-Aristotle

 

Are you a central planning disputant? I am, big time. So, please, allow me to define my terms:

 

  1. The Fed’s QE was a Policy To Inflate asset prices
  2. After that inflation, you get the #deflation

 

That is all.

 

Deflated Disputants - EL chart 2

 

Back to the Global Macro Grind

 

I know. So easy a Mucker can explain it.

 

If you’d like to have a dispute with me on these terms (or change the M in my nickname to an F like the 1997 Princeton Hockey Team did), I’m happy to have it as long as you define yours. Mr. Market has been pricing them in all year long.

 

When our #process signals #Quad4 deflation (growth and inflation slowing, at the same time) here’s our asset allocation:

 

  1. Cash
  2. Long Term Treasuries (TLT, EDV, etc.)
  3. Municipal Bonds (MUB)
  4. Healthcare Stocks (XLV)
  5. Consumer Staple Stocks (XLP)

 

We #timestamped that in our Q4 Macro Themes deck on October 1st (pre-Oct 14th fetal position for the levered long beta portfolios) and we’ll reiterate that again, now that the Fed has done precisely what they said they’d do (ending the Policy To Inflate).

 

Now that that’s over, what I think happens next is where I’ll have many disputes. Here’s what I’m thinking:

 

  1. As both US and Global growth slows, the Fed will be under pressure to say that they can provide moarrr #cowbell
  2. Mean Reversions: classic late-cycle indicators (like employment and “confidence”) should roll over; Fed will freak out on that
  3. Long-term rates will continue to make a series of lower-highs and lower-lows, tracking lower growth and inflation expectations

 

Again, think like a Fed head. Define their terms – then front-run their proactively predictable behavior.

 

The main problem my disputants have with me is that I don’t think like they do. I am a dynamic counter-cyclical strategist and they are pro-cyclical linear economists. The economy is non-linear. It’s also one massive cyclical. You don’t buy a cyclical at the top of a cycle – you sell it.

 

The #1 question you should be asking Ed & Nancy (linear economists) has two parts:

 

A)     After 65 straight months of US economic expansion, isn’t this an early-cycle slowdown, and

B)      Now that everyone has cut to zero, where are we in the worldwide easing-cycle?

 

We know how they think about this. They’re making the same calls that they made at the top of prior cycles (that the cycle wasn’t slowing in 2H of 2007). They have defined their surveys and their terms. Those are pro-cyclical too.

 

What does being pro-cyclical mean?

 

  1. That you think late-cycle indicators being good is good
  2. That you don’t think in 2nd derivative terms (going from great to good is bad)
  3. And that once things are actually bad, you’re both late and getting bearish a lot lower

 

No,  I’m not calling anyone names. I am not being “mean” either. Rather than drifting from bullish to bullish thesis on the economy (at the beginning of the year they said inflation and capex would drive the economy; now they are saying global slowing and deflation will), I am being a consistent disputant.

 

This morning I’ll list the Top 12 Big Macro Risk Ranges (and our TREND views in brackets) – they are in our Daily Trading Ranges product too:

 

UST 10yr yield 2.16-2.35% (bearish)

SPX 1 (neutral)

RUT 1071-1157 (bearish)

DAX 8 (bearish)

VIX 12.89-22.25 (bullish)

USD 85.34-86.24 (bullish)

EUR/USD 1.25-1.27 (bearish)

Yen 107.11-109.77 (bearish)

WTI Oil 79.98-83.05 (bearish)
Natural Gas 3.57-3.82 (bearish)

Gold 1194-1231 (neutral)

Copper 2.96-3.09 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Deflated Disputants - Chart of the Day


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