prev

They Can't Fix This

This note was originally published at 8am on October 24, 2014 for Hedgeye subscribers.

“The problem with the big focus on making capital cheaper… is it’s akin to fighting fire with fire.”

-Dan Alpert

 

That’s a quote from the beginning of chapter 6 of The Age of Oversupply, by Dan Alpert. The chapter was a good one titled “The Empty Toolbox” and it focuses on why central planners “can’t fix the economy.” #agreed

 

Whether you are looking at the US economy or global one slowing right now, it’s important to keep these v-bottom moves in equity markets in context. Where are they v-bottoming from? Oh, and why did they go down so hard so that they could v-bottom to begin with?

 

Our call throughout the year has been very consistent on the why – growth is slowing. And when early-cycle growth slows from multi-year highs, you short the most illiquid form of beta chasing (small cap stocks) and you buy the Long Bond.

 

They Can't Fix This - EL chart 2 

 

Back to the Global Macro Grind

 

I was at a dinner meeting in Maine last night and an entrepreneurial CEO asked me a question I’ve been asked by hundreds of non-Wall Street people in 2014: “What do you think I should do with my money right now?”

 

I’m not the beat-around-the-bush-type, so I told her exactly what I have been telling people all year:

 

  1. Sell stocks
  2. Buy bonds
  3. Raise Cash

 

As basic as this advice has been is as hard as it’s been for people to just execute on it. But, with the total return of the Long Bond (TLT) at almost +19% for 2014 (vs. the Russell 2000 down -4%), why is that?

 

A: It’s not what “everyone” is saying people should be doing.

 

That’s it. From New Hampshire to California and everywhere I’ve been this year in between. That pretty much sums it up. The response is always the same: “but can’t interest rates go up? Aren’t bonds expensive?”

 

What’s been really expensive is believing that central planners can bend gravity and deliver +3-4% economic growth. If they deliver 0-2%, “expensive” bonds are going to get more expensive, and really expensive growth stocks (think Amazon at 112x earnings) are going to continue to crash.

 

But, but… “Keith, this bounce is crazy – why can’t it keep going…”

 

If I have some iteration of that in my inbox 100x in the last 3-4 market days, I have it 1,000x. And all I do is shake my head wondering why so many refuse to take a lesson from the risk management exercise learned as the Russell  was having a -15% draw-down and the 10yr broke 2% only a week ago.

 

To review the #Quad4 deflation case that Mr. Market is effectively yelling right now:

 

  1. Bond Yields (10-30yr) in the US are crashing
  2. Oil prices are crashing
  3. Over 60% of stocks in the Russell 2000 are crashing

 

To be fair, if you didn’t have a view that all of these things would go down, you blamed ebola (and Canada) and wore them the whole way down anyway. But, if you did, you are killing it YTD and in a position to re-ramp every position you’ve had throughout the last 6 weeks of macro market volatility.

 

We’re deep into 2014 and at this stage of the season playing this game from a position of strength is entirely different than playing it from a position of weakness. If you’ve been winning, you don’t have to spend your entire day worrying about why the stock market is bouncing and bonds correcting.

 

You’ve realized that the Fed, Bank of Japan, and European Central bank have all cut to zero. You’ve also reminded yourself that 0 + 0 doesn’t equal something greater than zero – and that they can’t solve for #GrowthSlowing again.

 

In other words, they can’t fix this. Unfortunately, only a deflationary reset can.

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets – which you can get in our Daily Trading Range product as well) are now:

 

UST 10yr Yield 2.11-2.32% (bearish)

SPX 1835-1963 (bearish)

RUT 1040-1127 (bearish)

Nikkei 14503-15449 (bearish)

VIX 15.06-28.49 (bullish)

USD 85.01-86.20 (bullish)

EUR/USD 1.26-1.28 (bearish)

Yen 105.36-108.31 (neutral)

WTI Oil 79.75-82.62 (bearish)

Natural Gas 3.51-3.74 (bearish)

Gold 1226-1251 (bullish)

Copper 2.95-3.05 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

They Can't Fix This - Chart of the Day


Oil Finally Catches a Bid! (Okay, Maybe Not)

Takeaway: The reality of #Quad4 deflation is sinking in.

Well, that was quick. Oil had a brief, one-day bounce and then went straight back down again. 

Oil Finally Catches a Bid! (Okay, Maybe Not) - chart 2

 

It’s down -14% over the last month and currently down -1.50% to $77.50 today. Right now, the reality of #Quad4 deflation is sinking into the fragile psyche of those who‘ve been net long of oil carry trading since The Bernanke introduced it in 2008. The times, they are a-changin’...

 

The intermediate-term risk range is now $64-84.



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.

CLAIMS QUICK READ & THOUGHTS AHEAD OF NFP

Takeaway: NFP has a 2/3 chance of being up, not down as expected. Meanwhile, claims continue to move lower.

Handicapping Tomorrow

Two months ago we published a report (link) in conjunction with our Macro Team that looked at the predictive power of the ADP report at handicapping the NFP report. In a nutshell, roughly two-thirds of the time the directional move in ADP (i.e. better or worse sequentially) predicts the directional move in NFP. This creates an interesting opportunity in months when ADP goes one way and expectations are for NFP to go the other way. Tomorrow's NFP report represents such a set-up. ADP rose to 230k this month from 213k last month. Meanwhile, expectations are for NFP to shrink from 248k last month to 240k this month. Given that the move in ADP wasn't huge and the expectations for sequential deceleration in NFP aren't profound we wouldn't make too much of the divergence, but given how sensitive Financials are to labor figures, we feel it's worth pointing out.

 

In other news, initial jobless claims remains a juggernaut of sorts. Claims continue to put in new lows and are now at levels below those seen at the apex of the 2005/2006 economic expansion.

 

We'll leave you with the chart below, which shows both how strong the environment is today but also how risky.  

 

CLAIMS QUICK READ & THOUGHTS AHEAD OF NFP - 9

 

The Data

Prior to revision, initial jobless claims fell 9k to 278k from 287k WoW, as the prior week's number was revised up by 1k to 288k.

 

The headline (unrevised) number shows claims were lower by 10k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2.25k WoW to 279k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -19.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -20.6%

 

CLAIMS QUICK READ & THOUGHTS AHEAD OF NFP - 2 2

 

CLAIMS QUICK READ & THOUGHTS AHEAD OF NFP - 3

 

CLAIMS QUICK READ & THOUGHTS AHEAD OF NFP - 4

 

CLAIMS QUICK READ & THOUGHTS AHEAD OF NFP - 5

 

CLAIMS QUICK READ & THOUGHTS AHEAD OF NFP - 6

 

CLAIMS QUICK READ & THOUGHTS AHEAD OF NFP - 7

 

CLAIMS QUICK READ & THOUGHTS AHEAD OF NFP - 8

 

CLAIMS QUICK READ & THOUGHTS AHEAD OF NFP - 10

 

CLAIMS QUICK READ & THOUGHTS AHEAD OF NFP - 11

 

CLAIMS QUICK READ & THOUGHTS AHEAD OF NFP - 19

 

Yield Spreads

The 2-10 spread fell -1 basis points WoW to 182 bps. 4Q14TD, the 2-10 spread is averaging 185 bps, which is lower by -14 bps relative to 3Q14.

 

CLAIMS QUICK READ & THOUGHTS AHEAD OF NFP - 15

 

CLAIMS QUICK READ & THOUGHTS AHEAD OF NFP - 16

 

 

Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

 


ICI Fund Flow Survey - Taxable Bond Bleeding Stops...Damage is $36 Billion in Motion

Takeaway: Taxable bond fund outflows slowed to a trickle with just over $200 million redeemed this week. This has put $36 billion up for grabs.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

The most recent ICI mutual fund survey showed a reprieve from the drastic taxable bond fund outflows of the past 5 weeks set into motion with the portfolio manager change at PIMCO. Taxable bond redemptions slowed to just $295 million in the most recent 5 days, a far cry from the past 4 weeks where the sequence of redemptions was $21.0 billion, $4.6 billion, $5.1 billion, and $4.9 billion. The total money set into motion however tallies $36 billion, which is keeping a strong bid for BlackRock (BLK) and Legg Mason (LM) and the obvious beneficiary Janus Capital (JNS). Looking at the similar analog in 2010 of Jeff Gundlach leaving TCW, the TCW Total Return Fund shed 55% of its assets-under-management (AUM) over an 18 month period, which could put a fairly long tail on taxable bond fund money in motion in the upcoming year. The PIMCO Total Return Fund prior to the Bill Gross departure had $220 billion in AUM. Thus if the TCW/Gundlach analog were to exactly play out for PIMCO, this would put over $100 billion out into the bond sphere up for grabs with Janus having the chance to capture over $70 billion (or 70% of that redemption). We think the situation is slightly different this time with PIMCO Total Return having been managed "by committee" to begin with and the fund having put up bottom decile returns over the past 18 months. Thus with lagging performance, the recapture by Gross of his prior AUM may be problematic. In the case of TCW, we assumed that Gundlach captured 70% of the TCW outflow (with money having left to other managers as well), which puts the total net capture of his existing AUM at 39 cents on the dollar.  

 

ICI Fund Flow Survey - Taxable Bond Bleeding Stops...Damage is $36 Billion in Motion - Gundlack chart 12

 

In other survey data, U.S. equity mutual funds had another slight inflow at $1.1 billion in the most recent week, although the intermediate term trend is still very soft with outflows in 24 of the past 27 weeks. Passive fund flows via ETFs were robust again with both total equity ETFs and total bond ETFs taking in substantial new assets. One call out in the sector ETFs is that the Materials Sector SPDR (XLB), lost a whopping $1.4 billion in AUM last week. That reduced total AUM by 31% in just 5 days alone.

 

ICI Fund Flow Survey - Taxable Bond Bleeding Stops...Damage is $36 Billion in Motion - new recap

 

 

In the most recent 5 day period ending October 29th, total equity mutual funds put up inflows with $2.3 billion coming into the category according to the Investment Company Institute. The composition of the inflow was balanced with Domestic stock funds taking in a $1.1 billion subscription which matched the $1.2 billion which came into International stock funds. The two equity categories have been a tale of two cities all year however with International stock funds having had inflow in 42 of the past 43 weeks. Conversely, domestic trends have been very soft with inflow in just 15 weeks of the 43 weeks thus far year-to-date and have been drastically negative the past 6 months with just 3 weeks of inflow in the past 27 weeks. 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 $66 million last week with the distribution focused within the taxable bond fund category which lost another $295 million in the most recent 5 days. This brings the "money in motion" or the taxable outflow to over $36 billion in the past 5 weeks. Municipal or tax-free bond funds put up a $299 million inflow, making it 41 of 42 weeks with positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $881 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 strong during the week with substantial inflows in equity funds and decent subscriptions into passive fixed income products continuing to mop up the ongoing redemption in taxable bond funds. Equity ETFs put up a $13.0 billion subscription while fixed income ETFs had a $1.3 billion inflow. The 2014 weekly averages are now a $1.8 billion weekly inflow for equity ETFs and a $1.1 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 $14.0 billion spread for the week ($15.4 billion of total equity inflow versus the $1.3 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 $3.1 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 - Taxable Bond Bleeding Stops...Damage is $36 Billion in Motion - ICI chart 2

 

ICI Fund Flow Survey - Taxable Bond Bleeding Stops...Damage is $36 Billion in Motion - ICI chart 3

 

ICI Fund Flow Survey - Taxable Bond Bleeding Stops...Damage is $36 Billion in Motion - ICI chart 4

 

ICI Fund Flow Survey - Taxable Bond Bleeding Stops...Damage is $36 Billion in Motion - ICI chart 5

 

ICI Fund Flow Survey - Taxable Bond Bleeding Stops...Damage is $36 Billion in Motion - 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 - Taxable Bond Bleeding Stops...Damage is $36 Billion in Motion - ICI chart 7

 

ICI Fund Flow Survey - Taxable Bond Bleeding Stops...Damage is $36 Billion in Motion - ICI chart 8

 

Sector and Asset Class Weekly ETF and Year-to-Date Results: In specific callouts, the Basic Materials ETF (XLB) got hammered in the most recent 5 days losing 31% of its AUM or an outflow of $1.4 billion. In addition, it is interesting that the Energy Sector SPDR has still added 33% to its total AUM thus far in 2014 which could mean the blood letting in that group could continue with oil prices continuing a downward slope.

 

ICI Fund Flow Survey - Taxable Bond Bleeding Stops...Damage is $36 Billion in Motion - 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 positive $14.0 billion spread for the week ($15.4 billion of total equity inflow versus the $1.3 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 $3.1 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 Stops...Damage is $36 Billion in Motion - 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 - Taxable Bond Bleeding Stops...Damage is $36 Billion in Motion - ICI chart 11 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 


PNK 3Q 2014 CONF CALL

Takeaway: With or without a REIT spin, long term secular headwinds remain.

REIT value mostly in the stock as size of equity offering and timing of split disappoints investors. Meanwhile, an EBITDA miss is released

 

 

PNK 3Q 2014 CONF CALL - pnk

 

 

CONF CALL

  • 3Q: 1st anniversary with ASCA
  • Positive signs on revenue front, could benefit Q4
  • 3Q:  visitation and spend per visit have improved sequentially; particularly encouraging in core properties and ASCA properties.  October looks pretty good.
  • ASCA integration:  Increase in VIP play of 8% and trips increased 4%; 7% growth in top 3 tiers
  • ASCA portfolio:  REVPAR: +6%
  • Universal card integration on track for 2015
  • Marketing SS down 60bps YoY;  promotional environment across portfolio is rational and stable
  • New Orleans, Belterra Park, and Lake Charles underperformed in 3Q
  • Belterra Park:  sees some improvement but very disappointed
  • St. Louis (2 properties): grew market share to 48%  RC tied its highest quarterly share.  St. Charles table share at highest level since 2007.
  • L'Auberge Baton Rouge:  performed well.  Strong VIP play and hotel performance and controlled marketing spend helped EBITDA. 
  • Lake Charles:  all-time revenues ; flow through hampered by certain items described in earnings release
  • Macro environment better and revenues have flattened
  • Sees opportunities to reduce food and labor costs
  • Lake Charles:  low table hold and special costs
  • Belterra Park:  expect 4Q EBITDA to be better than 3Q EBITDA; expect positive EBITDA in 2015
  • $61m cost ASCA synergies at end of 3Q
  • Team retention: $1.5m accrued in 3Q; retention costs will continue through 2Q 2015 
  • New Orleans hotel:  expect to open by end of 2014; budget $20m (incurred $17m through 3Q 2014)
  • Continue to reduce leverage and expect to see continued improvements in leverage
  • Expect equity issuance in 2015; options include rights offering to existing shareholders
  • REIT:  past evaluation stage, will submit IRS private letter filing in next 45 days.  E&P purge:  <$100m through 2016.
    • OpCo will not have meaningful taxes for a substantial amount of time
  • REIT protection shareholder vote in Summer 2015 
  • REIT will have broader mandate than only gaming

 

Q & A

  • Belterra Park:  still believe there is additional revenue that they're not capturing right now.  It's an awareness issue.  If revenues don't grow in 2015, 
  • REIT: 
    • Incremental costs related to REIT:  legal/advisory work (more of a 2016 event)
    • $1bn equity issuance:  not set in stone yet but it is a conservative estimate. Dilution concerns will be addressed.  
    • IRS private letter ruling may not come until mid-2015
    • Will be a diversified REIT - not just gaming
    • Total NOLs (Federal, State and carry forwards) at end of 3Q 2014: tax shield of roughly a billion
      • $700mm ($550m + Lumiere sale) 
      • $300 goodwill
    • Expect leverage post-spin to be lower than today's levels
    • PNK calling of bonds?   Too early to comment.
    • Tax-free spin jeopardized by equity offering?  No.
  • Improvement in consumer trends:  broad-based across all regions, particularly in >$100 segment
  • Saw revenue growth in October
  • Inflection point in regional gaming?  Maybe a little early. But optimistic on early November too. 
  • Majority of bad weather impact happened in the Midwest and began in late Dec2013/January 2014.
  • Monarch casino in CO:  PNK likes what they have done with the renovations.  
  • Black Hawk market could use more rooms 

GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next