- Date: Thursday, January 9th at 11:00am EST
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- Direct Dial Number:
- Conference Code: 897866#
- Materials: CLICK HERE
Q1 2014 THEMES OVERVIEW
#InflationAccelerating: Across the globe, reported inflation readings are poised to accelerate from post-crisis lows as easy comps, a commodity base effect and accelerating wage pressures all come to a head in the first quarter of 2014. Moreover, the reemergence of inflation as a core macro risk threatens to materially alter the investment landscape going forward.
#GrowthDivergences: Looking to the U.S., Europe, China and Japan, we see the heavyweights of the world economy diverging from an economic growth perspective as some countries and/or regions are much further along in the economic cycle than others. We highlight those divergences and identify which countries and/or regions you want to be allocating assets to at the start of the year.
#FlowShows: in Q1 we expect a continuation of fund flows out of fixed income and into equities: the "Queen Mary" has indeed turned, aided by the Fed's decision to begin tapering.
WATCH THE MACRO THEMES TEASER VIDEO
Client Talking Points
One of our themes is already playing out in Asian versus European Equities. In other words... #GrowthDivergences. After another rough market ride last night, here’s the year-to-date score for Asian Equity majors: China -4.2%, KOSPI -3.3%, Nikkei -2.5%. Not pretty. Meanwhile Denmark and Austria +4.7%.
Eurozone sentiment just tagged the 100 line in December (that's a new high) versus 98.5 in November. At the same time, the EUR/USD held our Hedgeye TREND support of $1.35 like a champ. We will review our bullishness on European growth at 11am during our Q1 Macro Themes call. It's undeniable at this point that European economic data continues to accelerate.
Right on time... the taper and bubble talk in the Fed Minutes (all hawkish on the margin) are driving the short end of the curve to new 3 month highs. We're seeing 0.42% 2-year Treasury yield this morning. Meanwhile, there's no resistance on the 10-year yield to 3.05% ahead of the jobs report.
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Top Long Ideas
Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.
We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Three for the Road
QUOTE OF THE DAY
"Success or failure is caused more by mental attitude than by mental capacity." - Walter Scott
STAT OF THE DAY
T-Mobile added 4.4 million customers in 2013 -- its biggest growth in eight years. The company says it's proof its "uncarrier" strategy -- aimed to upend the mobile industry -- is working after only 8 months. In Q4 T-Mobile added 1.6 million new subscribers, bringing its total customer base to nearly 47 million people. (CNN)
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Takeaway: The last week of '13 spelled continued solid money flow into equities at the expense of bonds; Net flow was $13 B, above the avg of $7.8 B.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Total equity mutual funds experienced solid inflows for the week ending December 31st with $6.0 billion flowing into stock funds. Within the total equity fund result, domestic equity mutual funds gained $3.3 billion, the most positive result in 7 weeks, with international equity funds posting a $2.6 billion inflow. Including these year ending trends, equity mutual funds averaged a solidly positive reversal in 2013 with an average weekly inflow of $3.0 billion for the year compared to 2012's weekly average outflow of $3.0 billion.
Fixed income mutual funds continued persistent outflows during the most recent 5 day period and ended 2013 with another $2.8 billion withdrawal from bond funds. This week's draw down was a sequential improvement from the $3.4 billion lost the week prior but was still worse than the 2013 weekly average which finished at a $1.5 billion outflow for 2013. This year end average for 2013 compared to the strong weekly inflow of $5.8 billion for fixed income throughout 2012.
ETFs experienced broadly mixed trends in the most recent 5 day period, with equity products seeing heavy inflows and fixed income ETFs seeing slight outflows week-to-week. Passive equity products gained $4.5 billion for the 5 day period ending December 31st with bond ETFs experiencing a $224 million outflow. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results.
The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a $13.5 billion spread for the week ($10.5 billion of total equity inflows versus over $3.0 billion in fixed income outflows). This was almost double the 2013 weekly average of a $7.8 billion spread but was well off of the largest weekly spread of $30.9 billion and the smallest equity/debt weekly spread of -$9.2 billion (negative numbers imply a net inflow into bonds for the week).
For the week ending December 31st, the Investment Company Institute reported solid equity inflows into mutual funds with $6.0 billion flowing into total stock funds. The breakout between domestic and world stock funds separated to a $3.3 billion inflow into domestic stock funds and a $2.6 billion inflow into international or world stock funds. These results for the most recent 5 day period compare to the year-to-date weekly averages of a $451 million inflow for U.S. funds and a running $2.6 billion weekly inflow for international funds. The aggregate inflow for all stock funds this year now sits at a $3.0 billion inflow, an average which has been getting progressively bigger each week and a complete reversal from the $3.0 billion outflow averaged per week in 2012.
On the fixed income side, bond funds continued their weak trends for the 5 day period ended December 31st with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $2.8 billion outflow, a sequential improvement from the $3.4 billion lost in the prior 5 day period but worse than the year-to-date weekly average outflow of just $1.5 billion for bond funds. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $404 million (although this outflow was the best result in 13 weeks), which joined the $2.4 billion outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 27 of the past 32 weeks and municipal bonds having had 32 consecutive weeks of outflow. These redemptions late in the year are likely tax loss selling related with the Barclay's Aggregate Bond index down nearly 2% in 2013, the first annual loss in 14 years. The 2013 weekly average for fixed income fund flows is now a $1.5 billion weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.
Hybrid mutual funds, products which combine both equity and fixed income allocations, continue to be the most stable category within the ICI survey with another $1.0 billion inflow in the most recent 5 day period, although the past 6 weeks have been below year-to-date averages. Hybrid funds have had inflow in 30 of the past 32 weeks with the 2013 weekly average inflow now at $1.5 billion, a strong advance versus the 2012 weekly average inflow of $911 million.
Exchange traded funds had mixed trends within the same 5 day period ending December 31st with equity ETFs posting a strong $4.5 billion inflow, the seventh consecutive week of positive equity ETF flow. The 2013 weekly average for stock ETFs is now a $3.5 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.
Bond ETFs experienced moderate outflows for the 5 day period ending December 31st with a $224 million redemption, an improvement from the week prior which lost $1.0 billion but well below the year-to-date average of a slight weekly inflow. Taking in consideration this most recent data however, 2013 averages for bond ETFs are flagging with just a $234 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.
The net spread of all equity products including mutual fund and ETF flow tallied a $10.5 billion total inflow into all equity products in the most recent 5 day period which compared to a total fund and ETF result for fixed income of a negative $3.0 billion outflow for the week ending December 31st. Thus the net of equity minus fixed income production totaled a $13.5 billion spread in favor of equity products. This compared to the 2013 weekly average of a positive $7.8 billion spread to equities but was well off of the weekly high during last year of $30.9 billion and the weekly low of -$9.2 billion (negative numbers favor fixed income products).
With net weekly spreads continuing to favor equity products with a rising 52 week linear trend line and a favorable setup for stocks versus bonds into the beginning of this year, our favorite long asset management idea remains T Rowe Price (TROW), the manager with industry leading stock fund performance to potentially gather outsized net new assets.
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
TODAY’S S&P 500 SET-UP – January 9, 2014
As we look at today's setup for the S&P 500, the range is 25 points or 0.68% downside to 1825 and 0.68% upside to 1850.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.57 from 2.56
- VIX closed at 12.87 1 day percent change of -0.39%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: BoE seen maintaining benchmark interest rate at 0.5%
- 7:30am: Challenger Job Cuts y/y, Dec. (prior -20.6%)
- 7:30am: RBC Consumer Outlook Index, Jan. (prior 49.7)
- 7:45am: ECB seen maintaining benchmark rate at 0.25%
- 8:30am: ECB’s Draghi holds news conference
- 8:30am: Init. Jobless Claims, Jan. 4, est. 335k (pr 339k)
- 9:45am: Bloomberg Consumer Comfort, Jan. 5 (prior -28.7)
- 10am: Freddie Mac mortgage rates
- 10:30am: EIA natural-gas storage change
- 11am: Fed to purchase $600m-$900m in 2024-2031 sector
- 1pm: U.S. to sell $13b 30Y bonds in reopening
- 1:30pm: Fed’s George speaks in Madison, Wis.
- 8pm: Fed’s Kocherlakota speaks in Minneapolis
- 10am: House Financial Services panel holds hearing on Federal Reserve’s quantitative easing program
- 10am: House Natural Resources Cmte meets on administration’s coal policies
- 11:30am: House Speaker John Boehner holds media briefing
- 2pm: President Obama delivers remarks on anti-poverty proposals
WHAT TO WATCH:
- U.S. regulators said to weigh Volcker exemption for TruPS CDOs
- Dec. U.S. comp. sales hurt by weak holidays, traffic
- McKesson said to offer raised Celesio bid of EU23.50/share
- JPMorgan’s Madoff prosecution case deferred by U.S. judge
- CFTC ready to push interest-rate swaps to trading platforms
- Samsung plans Galaxy S5 by April w/possible eye-scan security
- Murdoch’s 21st Century Fox abandons Australia stock listing
- Apple agrees w/Samsung to mediator in attempt to settle suit
- American Express to appeal $5.7b settlement on swipe fees
- J&J to appeal China ruling to revoke diabetes-strip trademark
- BlackRock traded using nonpublic data, investigation shows
- Disney-Fox bid to end Aereo TV threat nears top court action
- IBM carves out $1b new unit for ‘Jeopardy’ champ Watson
- Euro-area economic confidence increases more than forecast
- UBS weighing spinoff of investment banking unit: Mediobanca
- China’s Pangang paid for stolen DuPont secrets: prosecutors
- Novartis accused of paying kickbacks to boost Exjade sales
- Currency chiefs tell N.Y. Fed probes may change practices
- China vehicle sales surpass 20m as smog chokes cities
- Kraft helps lead 6.4t calorie cut in Obama health pledge
- Acuity Brands (AYI) 8:52am, $0.85 - Preview
- Alcoa (AA) 4:03pm, $0.06 - Preview
- Barracuda Networks (CUDA) Aft-Mkt, $0.00
- Family Dollar (FDO) 7am, $0.69 - Preview
- Jean Coutu (PJC/A CN) 7am, C$0.28
- PriceSmart (PSMT) 4:10pm, $0.73
- Progress Software (PRGS) 4:15pm, $0.41
- Supervalu (SVU) 7am, $0.14 - Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI Crude Rebounds From Six-Week Low Before ECB Rate Decision
- Copper Touches Two-Week Low on Speculation Fed to Cut Stimulus
- Corn Pile Biggest Since 1994 as Crop Overwhelms Use: Commodities
- Wheat Harvest in India Reaching 100 Million Tons Widens Surplus
- Natural Gas Drops Third Day on Forecasts for Warmer U.S. Weather
- Raw Sugar Spread Trades at Record Discount as Surplus Weighs
- Corn Trades Near Three-Year Low as World Supplies Seen Building
- Gold Holds After Biggest Drop in a Week as Traders Weigh Demand
- Rebar Falls to Seven-Month Low as China Producer Prices Decline
- World Food Prices Rose in December on Dairy Surge, UN Data Show
- Oil-Tanker Recovery Trails Market With U.S. Export Ban: Freight
- Colombia Bans Coal Loading by 2nd-Biggest Producer Drummond
- Warm Weather Reduces Risk to Eastern Europe Winter Gas Supplies
- Palm Imports by India Climbing as Farmers Retain Bean Supply
The Hedgeye Macro Team
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