We wish you a wonderful and prosperous new year filled with abundance, joy, and success. May 2015 be your best year yet!
This note was originally published at 8am on December 18, 2014 for Hedgeye subscribers.
“The two most powerful warriors are patience and time.”
In case you didn’t know that I’m not a fan of centrally planned markets and economies, now you know. My long-term risk management call remains that any asset price inflation that is based on perma-planning will end in some form of a deflationary shock.
And while I know everything is rainbows and puppy dogs these days in the US economy (it’s going to “de-couple” from all of Global Macro markets, but bounce when they do!)… even the most avid perma bull on global growth should note that the Top 5 Stories on Bloomberg this morning have everything to do with central planners bailing markets out of the “everything is awesome” narrative.
Janet Yellen leads headlines this morning, followed by Mario Draghi (Europe), Shinzo Abe (Japan), a Swiss dude you probably don’t know (Switzerland cut interest rates to negative), and, of course, Vlad – as in Putin. Other than what went violently wrong in markets in the 1st two weeks of both October and December, what could possibly go wrong? #Patience, Risk Managers. Patience.
Back to the Global Macro Grind…
Away from her ridiculous comment that the crash in Oil is “transitory” (she can’t call bubbles, but she can call crashes… boil the oceans, part the heavens, etc.), I must give Janet Yellen props for having the #patience to wait until year-end to cut her forecasts (again).
This is big news for Hedgeye as the Fed, once again, effectively agrees with our core macro call that:
- Growth is slowing
- Inflation is slowing
I recapped the sell-side forecasts for you on Tuesday. Here are the Fed’s for 2015:
- GDP Growth cut from 3.5% to 3.0%, lowering the range to 2.6-3.0%
- Inflation cut from 2.2% to 1.9%, lowering the range to 1.0-1.6%
Notwithstanding that the Fed’s forecasts on growth and inflation have been wrong 60-70% of the time since Bernanke/Yellen took over the central planning bureau, the point here isn’t about good or bad – it’s about better or worse.
One of my Partners here @Hedgeye (Josh Steiner) coined that one-liner… and since I’m a rate of change guy, I like it. It’s simply another way to say the same thing. I don’t care much about absolutes – I care about the slope of the line. Is it slowing or accelerating?
Clearly, both locally and globally, the rate of change in both growth and inflation expectations are slowing. That’s why US, German, and Japanese bond yields continue to fall. That’s also why FX, High Yield, Commodity, and Equity Volatilities continue to accelerate.
“So” (Janet said that every other sentence yesterday, proving she’s in the tank with #OldWall groupthink), now that most things Global Macro have corrected (and bounced) again, what do we do next?
- As Long-term Risk Managers (Long-term Investors, I know you like that term!) we want to have #patience
- From Oil to Energy stocks, to EM and High Yield, we want you to recognize that #Deflation’s Dominoes take time
What we don’t want you to do is very straightforward:
- Don’t chase high, and freak out low
- Don’t believe the Fed’s forecasts (front-run them)
That’s it – just #FadeBeta (when the non-consensus view on growth and/or inflation is the most probable one).
Don’t be a Consensus Macro perf chaser who gets stimulated above the 50-day moving monkey and depressed below it. That is not going to make you a warrior of the alpha generating gridiron. No Sirs and Madames. That is going to make you mentally weak.
I don’t do weak. And I don’t do drawdown risk either. If I can proactively prepare you for it, that is…
If you nailed every 50 handle whip-around in spooz perfectly for the last 2 weeks, congratulations. We had a great year here, so send me your docs and I might give you some of my money to manage. If you did not, and stayed the course of patient, dynamic asset allocation:
- You sold some of your long duration bonds at 2.03% on the 10yr
- You bought some #Quad4 US Equity Exposure (Healthcare or Utilities were 1-2 for us this week)
- You shorted more Burning Yens and Euros high, against a net long US Dollar FX asset allocation
I didn’t have to nail every US stock market move to get that right in our asset allocation model. I just had to have the patience to not buy the November highs in US stocks and/or get shaken out of my Long Bond and US Dollar allocations on the recent November pullbacks.
Patience and time. They work in risk management as well as your best long term ideas do. Be a powerful warrior versus the tyranny of centrally planned momentum chasing consensus.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.03-2.19%
WTI Oil 52.49-59.91
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: Investors have favored passive over active this year. Passive equity put up its largest inflow in the 52-week period.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
With a $25.3 billion inflow to the SPY, we again highlight investors' favoring passive over active this year, especially in equity. In the first chart below, the spread between cumulative flows in equity ETFs versus equity mutual funds drastically widened in the five days ending December 22nd. Equity ETFs have taken in $157 billion in 2014 versus equity mutual funds' $32.7 billion inflow. As outlined in our sector exposure table at the bottom of this note, BlackRock (BLK) and Invesco (IVZ) house the most substantial ETF exposure on a revenue basis at 44% and 19% respectively. Both stocks year-to-date have outflanked the S&P asset management index on a total return basis with BLK returning +15.4% and IVZ up +11.3%. The asset management group is up 9.4% thus far in 2014.
In the most recent 5 day period ending December 22nd, total equity mutual funds put up net outflows of $2.4 billion according to the Investment Company Institute. The outflow was composed of domestic stock fund withdrawals of $1.1 billion and international stock fund withdrawals of $1.4 billion. The international and domestic equity categories have been polarized this year with international stock funds having inflows in 48 of the past 51 weeks, versus domestic trends which have been very soft with inflow in just 16 of the past 51 weeks. The running year-to-date weekly average for all equity fund flow continues to decline and now settles at a $641 million inflow, well below the $3.1 billion weekly average inflow from 2013.
Fixed income mutual funds put up outflows of $3.0 billion with $3.3 billion of outflows from taxable funds and $329 million of inflows into tax-free funds. Munis have had a solid year with subscriptions in 49 of the past 51 weeks. The 2014 weekly average for fixed income mutual funds now stands at a $729 million weekly inflow, an improvement from 2013's weekly average outflow of $1.3 billion, but still a pittance of the weekly average of +$5.8 billion in 2012 (our view of the blow off top in bond fund inflow).
ETF results were markedly strong; equity ETFs put up their largest inflow in the past 52 weeks: $29.3 billion, well above the the 2014 weekly average of a $3.1 billion inflow. Fixed income ETFs, put up a $2.0 billion inflow, above the year-to-date average of a $1.1 billion inflow.
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:
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:
Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the SPY took the majority of inflows with $25.3 billion (13%) in net contributions. The Energy XLE experienced the second biggest gain, taking in $1.4 billion (13%).
The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $27.9 billion spread for the week ($26.9 billion of total equity inflow versus the $990 million outflow from 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 $2.1 billion (more positive money flow to equities), with a 52 week high of $27.9 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).
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:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
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On December 18, the Hedgeye Retail Team hosted a Black Book call on the athletic apparel and footwear space. Sector Head Brian McGough explains how his opinion of athlete endorsements has evolved (which is particularly relevant given $UA's recent signing of Andy Murray) and reveals what Under Armour needs in order to become the next Nike.
This institutional conference call focused on Athletic footwear and apparel space. Specific names included Nike (NKE), Adidas (ADDYY), UnderArmour (UA), Foot Locker (FL), Hibbett (HIBB), Dick's Sporting Goods (DKS), and Finish Line (FINL) - which collectively offer up a good mix of LONGS and SHORTS.
Takeaway: Pending Home Sales grew 80 bps on a month-over-month basis, which brings the year-over-year growth rate to +4.1% vs. +2.1% last month.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Today's Focus: November Pending Home Sales Index
The National Association of Realtors (NAR) today released its Pending Home Sales Index for the month of November.
Pending Home Sales increased +0.8% MoM (vs. -1.2% prior), accelerating to +4.1% on a year-over-year basis. Home Sales increased across all regions with YoY growth accelerating across each as well. Compares continue to ease from here.
EHS Acceleration? PHS is a leading indicator for EHS with an R-square of 0.86+ between the two series (lagged 1-month) over the history of the data. Thus, the EHS release is typically uneventful as both the direction and magnitude of change in existing sales is well-telegraphed by the Pending Home Sales report a month earlier.
However, we’ve seen rising volatility/divergence between EHS & PHS on a month-to-month basis since the series troughed in March. Summarily, and as the 1st chart below illustrates, EHS began to diverge from the more modest gains in PHS in September and October. We posited that unless PHS saw a significant positive revision or showed material acceleration, reported gains in EHS would likely retreat.
We saw this materialize in November with reported EHS dropping -6.1% sequentially, falling below the gain in PHS and taking the cumulative gain from trough to +7.4%. Now the setup has essentially reversed with the balance of risk for EHS to the upside with cumulative growth in PHS at a premium to EHS and showing incremental strength in November.
RoC Improvement..Early Evidence: A core (albeit simple) underpinning to our positive view on housing for 2015 is the progressively easier demand comps as we traverse the peak negative impact of rates/weather/credit tightening into 2H15. We are seeing early evidence of 2nd derivative improvement with Pending Home Sales rising +4.1% YoY in November, marking a 3rd straight month of positive growth (following 11-months of neg. growth) and accelerating 200bps vs. the +2.1% growth reported last month. In the intermediate term, demand compares continue to ease into February with Dec-Feb comps of -8%, -9%, -10%, respectively.
About Pending Home Sales:
The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.
The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.
Joshua Steiner, CFA
Christian B. Drake
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