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Bubbly: SP500 Levels, Refreshed

Takeaway: I might consider chasing the mo-mo on the upside, if the fundamental research view supported it – but it doesn’t.

POSITION: 11 LONGS, 10 SHORTS @Hedgeye

 

If the buck wasn’t burning and #InflationAccelerating wasn’t slowing US growth, I wouldn’t be selling on immediate-term TRADE overbought signals. Consensus hasn’t acknowledged the inflation impact on 2014 growth (yet), and I like that.

 

To call it a bubble isn’t a big deal. I called it a bubble when I was buying it all of last year (remember: #BTDB – buy-the-damn-bubble). What else would you call the all-time highs in prices?

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE overbought = 1888
  2. Immediate-term TRADE support = 1864
  3. Intermediate-term TREND support = 1805

 

In other words, why would you buy an overbought price if you have 4% mean reversion downside to the TREND line of 1805? I might consider chasing the mo-mo on the upside, if the fundamental research view supported it – but it doesn’t.

 

Let’s see if 1864 holds. Then we reset.

 

KM

 

Keith McCullough

Chief Executive Officer

 

Bubbly: SP500 Levels, Refreshed - SPX


ICI Fund Flow Survey, Refreshed

Takeaway: Equity mutual funds had $4.9 billion in inflow this week, in-line with the YTD average but bond inflow trends were higher than the '14 mean.

Editor's Note: This research note was originally published March 06, 2014 at 08:28 in Financials. For more information on you can subscribe to Hedgeye, please click here

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent week, equity mutual funds had another solid inflow albeit just inline with the year-to-date averages with bonds funds showing improving subscriptions, well above the year-to-date mean.

 

ICI Fund Flow Survey, Refreshed - Wall Street

 

Total equity mutual funds produced another strong week of inflow with $4.9 billion of net subscriptions, a slight deceleration from the $5.8 billion inflow the week prior. The $4.9 billion inflow had a domestic bend during the most recent 5 day period, with $3.1 billion flowing into domestic equity funds and $1.8 billion flowing into international stock funds. The 2014 running weekly average inflow for equity mutual funds is now $4.9 billion, an improvement from the $3.0 billion weekly average inflow for 2013. 

 

Fixed income mutual funds also had net inflows during the 5 day period ending February 26th with $2.3 billion flowing into all fixed income funds. The breakout of improving bond fund inflow amounted to $1.6 billion into taxable products and a $667 million inflow into tax-free or municipal products, the 7th consecutive week of inflow into munis after 33 consecutive weeks of outflow. The 2014 weekly average for fixed income mutual funds now stands at a $751 million weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion but 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 mixed trends during the week, with a strong week of subscriptions in stock ETFs with $5.8 billion in net inflow with bond ETFs experiencing flat-ish trends with just $458 million of inflow. The 2014 weekly averages are now a $2.2 billion weekly outflow for equity ETFs and a $2.1 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 $8.0 billion spread for the week ($10.8 billion of total equity inflow versus the $2.7 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 $7.0 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Continued strong equity mutual fund inflow trends currently support our favorite long idea in the sector, T Rowe Price (TROW) which should benefit with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the emerging trends on the institutional side of the industry which is experiencing inflow into fixed income and outflow in equities (see our Legg report here).

 

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, Refreshed - ICI

 

 

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

 

 

ICI Fund Flow Survey, Refreshed - ICI chart 2 png

 

ICI Fund Flow Survey, Refreshed - ICI chart 3 png

 

ICI Fund Flow Survey, Refreshed - ICI chart 4 png

 

ICI Fund Flow Survey, Refreshed - ICI chart 5 png

 

ICI Fund Flow Survey, Refreshed - ICI chart 6 png

 

 

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

  

 

ICI Fund Flow Survey, Refreshed - ICI chart 7 png

 

ICI Fund Flow Survey, Refreshed - ICI chart 8 png

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $8.0 billion spread for the week ($10.8 billion of total equity inflow versus the $2.7 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 $7.0 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 

 

 

ICI Fund Flow Survey, Refreshed - ICI chart 9 png 

 

 

Continued strong equity mutual fund inflow trends currently support our favorite long idea in the sector, T Rowe Price (TROW) which should benefit with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the emerging trends on the institutional side of the industry which is experiencing inflow into fixed income and outflow in equities (see our Legg report here).

 

 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

MACAU: GOOD 1ST WEEK

A strong start to March with average daily table revenues (ADTR) of HK$1,206 million per day, up 16% from the comparable period last year.  Weekly ADTR should slow throughout the month.  Last year, ADTR declined 7% sequentially in each of the following weeks of March.  For the full month of March, we are projecting YoY of GGR (includes slots) growth of 13-17%, a deceleration from the combined YoY growth rate of 24% for January/February.  Underlying fundamentals remain just as strong, however, as the 1 and 2-yr comps for March are more difficult, +25% and 24%, respectively.

 

Market shares carry little weight this early in the month but WYNN and Galaxy are off to a great start.  

 

MACAU: GOOD 1ST WEEK - macau1

 

MACAU: GOOD 1ST WEEK - macau2


Just Charts: XLP Screens Bullish

Consumer Staples mildly underperformed the broader market last week, rising +0.7% versus the S&P500 at +1.0%. XLP is down -0.7% year-to-date.

 

From a quantitative set-up the sector moved to bullish immediate term TRADE and intermediate term TREND durations this week, our language for a bullish medium term sector outlook. This is a material change compared to year-to-date in which it has traded bearish TRADE and TREND.

 

Just Charts: XLP Screens Bullish  - chart12

 

We continue to believe that the sector is facing numerous headwinds, including:

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.4x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months, but expanded to -28.5 versus -28.6 in the prior week

Just Charts: XLP Screens Bullish  - chart11

Just Charts: XLP Screens Bullish  - chart13

 

There are a number of companies presenting at consumer conference this week (more below).  If you missed our Best Idea Call on Lorillard on March 4th you can click below for a replay:

 

Podcast: CLICK HERE

Presentation: CLICK HERE

 

***A supplemental expert report on menthol by a top Washington, DC law firm involved in tobacco public policy is available by request***

 

 

Top 5 Week-over-Week Divergent Performances:


Positive Divergence:  LO +8.0%; BNNY +5.9%; HAIN +5.5%; RAI +5.4%; BF/B +5.1%

Negative Divergence:  NUS -8.6%; HLF -2.8%; SJM -2.5%; NWL -2.5%; AVP -1.9%

 

 

Last Week’s Research Notes

 

Recent News Flow

 

RAI & LO - last Monday, RAI was rumored to be interested in acquiring LO. The rumor sent LO’s stock soaring.  As we discussed in our Best Idea Call on Lorillard, we’re uncertain if the deal would go through given anti-trust concerns.  A combined RAI + LO would own 67% of the U.S. menthol market, and make it the second largest U.S. tobacco company, behind PM.

 

Over the weekend there were also rumors that BAT may buy the 58% of RAI it doesn’t already own. We think the uptick in news flow in the tobacco space is additive to our fundamental long call on LO.

 

BF/B – Brown Foreman reported Q3 earnings on 3/5, beating consensus estimates of $0.75 by 7 cents, and top-line met consensus at $1.08B.

 

 

Events This Week (in EST):

 

Wednesday (3/12)

RBC Capital Markets Consumer & Retail Conference:  ENR (8:30am); CPB (8:30am); RAI (11:30am)

Goldman Sachs Agribusiness Conference:  BG (11:30am); SAFM (1:50pm); TSN (2:50pm)

UBS Global Consumer Conference:  DPS (8:50am)

Bank of America Merrill Lynch Consumer & Retail Conference:  HAIN (11am)

 

Thursday (3/13)

RBC Capital Markets Consumer & Retail Conference:  TSN (8am); BNNY (9am); HAIN (10am); NWL (11am)

UBS Global Consumer Conference:  CL (8:50am)

 

Matt Hedrick

Food, Beverage, Tobacco, and Alcohol

 

Howard Penney

Household Products

 

(o)

 

 

Quantitative Setup

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

 

 

BUD – trying to breakout back above its TREND line of 105.21 resistance but not getting it done – rally to lower-highs has been on weak volume signals too

Just Charts: XLP Screens Bullish  - chart1

 

DEO – looks a lot like BUD, but worse; bearish TREND resistance firmly intact up at 127.21

Just Charts: XLP Screens Bullish  - chart2

 

KO – still one of the ugliest big cap quantitative setups in America; TREND resistance remains intact up at 39.81

Just Charts: XLP Screens Bullish  - chart3

 

PEP – beta chase was on @Pepsi last week, but on really weak volume signals; stock would need to close > 82.29 to go bullish TREND

Just Charts: XLP Screens Bullish  - chart4

 

GIS – our risk management signal sniffed this one out when it signaled a bearish to bullish TREND reversal 3 weeks ago; what was TREND resistance is now support at 49.58

Just Charts: XLP Screens Bullish  - chart5

 

MDLZ – solid breakout confirming bullish TREND this week; stock needs to hold 34.04 for it to remain bullish TREND

Just Charts: XLP Screens Bullish  - chart6

 

KMB – still the best looking combined quant/research setup on this list; TREND support firmly intact down at 105.49

Just Charts: XLP Screens Bullish  - chart7

 

PG – almost looks as bad as KO (which is really bad); @Hedgeye TREND resistance = 81.05

Just Charts: XLP Screens Bullish  - chart8

 

MO – starting to improve from the thralls of bearishness in early FEB; if the stock can hold 36.39, it has a shot at going bullish TREND in our model

Just Charts: XLP Screens Bullish  - chart9

 

PM – does not look at all like MO; bearish TREND is pervasive for PM (resistance = 83.67)

Just Charts: XLP Screens Bullish  - chart10


Poking the Bear

Client Talking Points

CHINA

Even the Chinese can’t make up numbers that are less than awful at this point. The Shanghai Composite went down -2.9% overnight to -5.5% for 2014 year-to-date. But look on the bright side: that beats Japan’s Nikkei which is down -7.1% YTD.

RUSSIA

Simply said, Vladimir Putin’s currency and stock markets are crashing. Just look at the Russian Trading System which is down another -0.5% this morning. All told, it’s been down -24% since October and down -19.7% YTD. The writing is on the wall.

UST 10YR

The 10-year yield of 2.79% this morning has failed to confirm a bond yield breakout above Hedgeye’s TREND (3 months or more) resistance of 2.81%. The payroll print was fun, but the 3 month TREND in payrolls is bearish and, more importantly, the forward looking NSA Jobless Claims series (rolling year-over-year) has now been on a negative slope for 8 consecutive weeks.

Asset Allocation

CASH 20% US EQUITIES 6%
INTL EQUITIES 12% COMMODITIES 18%
FIXED INCOME 24% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
FXB

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.

LVS

Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike. The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet. The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%. And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

CRB Commodities Index +9.6% YTD vs Dow -0.7% as inflation slows US consumption growth @KeithMcCullough

QUOTE OF THE DAY

"The most beautiful thing we can experience is the mysterious.” -Albert Einstein

STAT OF THE DAY

The amount of global debt has soared over 40% to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates. The $30 trillion increase from $70 trillion between mid-2007 and mid-2013 compares with a $3.86 trillion decline in the value of equities to $53.8 trillion, according to the Bank for International Settlements and data compiled by Bloomberg. (Bloomberg)


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