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Keith's Macro Notebook 4/8: Euro | Oil | Rates


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

OIL: Quick Check-in With the U.S. Production Machine

Oil clearly likes a weaker dollar which has helped support prices over the last month. The USD is near flat with WTI gaining ~6% over the same period. We outlined the importance of this relationship (and all commodities for that matter) in our Q2 2015 Themes Call yesterday. This will continue to be our biggest indicator for the forward-looking direction of commodities prices.

  • We shorted oil (via ETF OIL) yesterday into the close on the overbought signal and booked a quick gain on the open this morning, covering for a +2.2% gain short-side.
  • Record production from the Saudis in March (10.3MM B/D) suggests they’ll keep the foot on the gas pedal moving forward. We will continue to trade oil with a bearish bias in real-time alerts.
  • The TREND Line of resistance up at $57 would have to be tested and breached for us to rework our view:

OIL: Quick Check-in With the U.S. Production Machine - levels chart


On the supply side, relative slowdowns in domestic production, declining crude imports from OPEC, and a continuation in inventory build suggests that the demand side of the equation is weak at best.


After the API reported a +12.2MM Barrel increase yesterday evening, the DOE reported the 13th consecutive week of aggregate inventory build (+10.9MM barrels). Cushing inventories increased for the 18th consecutive week (+1.2MM barrels).


OIL: Quick Check-in With the U.S. Production Machine - DOE and Cushing inventory delta


OIL: Quick Check-in With the U.S. Production Machine - cushing storage


On the domestic production front, an absolute top is materializing...


However, most importantly with respect to our process, top-down macro (futures prices) will continue to lead. Supply/demand adjustments happen on a significant lag (Is there a hypothetical price floor of any relevance to day-to-day changes in futures prices? No.) 


OIL: Quick Check-in With the U.S. Production Machine - supply lags


Of the major plays, sequential production increases are expected to turn delta negative in Bakken, Eagle Ford, and Niobrara in April.

Collectively, these 3 regions account for over 60% of domestic production:

April EIA projections (m/m% change):

  • Eagle Ford: -58bps
  • Bakken: -64bps
  • Niobrara: -1.3%

Reported production levels for March indicate a marginal m/m increase in the major crude producing regions (left column of first chart).


The second column in that first chart indicates that operating rigs are continuing to ramp on increasing output. Production per rig is accelerating m/m with rig count cut in half since the end of October.  


The second chart is production weighted rate of change (m/m% change * [production as a % aggregate production from major plays]). On a 3 and 6-month basis, we’re still +5% and 10% respectively.


OIL: Quick Check-in With the U.S. Production Machine - US Crude production


OIL: Quick Check-in With the U.S. Production Machine - Production Weighted Delta


The absolute production slowdown is a meaningful transition for the forming of price support from a fundamental perspective, but as always the daily macro moves will continue to generate the risk management signals directing our tactical asset allocation and positioning. 


Ben Ryan






[UNLOCKED] ICI Fund Flow Survey | Dull Thud to End 1Q for Domestic Equity Fund Flows

Takeaway: The 2nd worst week of the year punctuated the end of the 1st quarter for U.S. equity fund managers.

This note was originally published April 02, 2015 at 08:58.

Investment Company Institute Mutual Fund Data and ETF Money Flow:


Weak domestic equity mutual fund trends accelerated to finish the first quarter experiencing their second largest weekly withdrawal of 2015 in the 5-day period ending March 25th with a -$4.5 billion redemption.  This brings the first 12 weeks of the year to a -$5.4 billion redemption compared to +$15.7 billion over the same period in 2014.  This -$21.1 billion spread between YTD '15 and the comparable period in 2014 is worrisome because seasonally since 2007, the first quarter has been the best period for equity fund products with patterns declining linearly through out each respective year.  


[UNLOCKED] ICI Fund Flow Survey | Dull Thud to End 1Q for Domestic Equity Fund Flows - ICI chart12


[UNLOCKED] ICI Fund Flow Survey | Dull Thud to End 1Q for Domestic Equity Fund Flows - ICI chart13


Other fund flows during the week were also defensive with equity ETFs putting up a marginal +$446 million inflow, offset by strong total bond flows of +$4.9 billion (+$2.5 billion into bond funds and +$2.4 billion into fixed income ETFs) with investors also parking +$17 billion in money market funds.  We are still cautious on the domestic equity fund managers especially T. Rowe Price and Janus Capital as these stock are on our Best Ideas list as Short/Avoid.  (See our latest TROW and JNS research). Alternatively our recommended Long exposure stands with alternative asset manager Och Ziff (see our OZM research here), a stock which trades without an incentive multiple currently, and also defensive money fund manager Federated Investors (see our FII research).


[UNLOCKED] ICI Fund Flow Survey | Dull Thud to End 1Q for Domestic Equity Fund Flows - ICI 1


In the most recent 5 day period ending March 25th, total equity mutual funds put up net outflows of -$1.1 billion according to the Investment Company Institute, trailing the year-to-date weekly average inflow of +$1.6 billion and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$3.3 billion and domestic stock fund withdrawals of -$4.5 billion.  International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 15 weeks of positive flows over the same time period.


Fixed income mutual funds put up inflows of +$2.5 billion, trailing their year-to-date weekly average inflow of +$2.7 billion but outpacing their 2014 average inflow of +$929 million. The inflow was composed of +$1.8 billion of contributions to taxable funds and +$727 million of contributions to tax-free or municipal bond funds.  Munis have had a solid run with subscriptions in 51 of the last 52 weeks.


Equity ETFs took in +$446 million, trailing the year-to-date weekly average inflow of +$1.9 billion and the 2014 weekly average inflow of +$3.2 billion. Fixed income ETFs took in +$2.5 billion, outpacing the year-to-date weekly average inflow of +$1.5 billion and the 2014 weekly average inflow of +$1.0 billion.


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 weekly average for 2014 and the weekly quarter-to-date average for 1Q 2015:


[UNLOCKED] ICI Fund Flow Survey | Dull Thud to End 1Q for Domestic Equity Fund Flows - ICI 2


[UNLOCKED] ICI Fund Flow Survey | Dull Thud to End 1Q for Domestic Equity Fund Flows - ICI 3


[UNLOCKED] ICI Fund Flow Survey | Dull Thud to End 1Q for Domestic Equity Fund Flows - ICI 4


[UNLOCKED] ICI Fund Flow Survey | Dull Thud to End 1Q for Domestic Equity Fund Flows - ICI 5


[UNLOCKED] ICI Fund Flow Survey | Dull Thud to End 1Q for Domestic Equity Fund Flows - ICI 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), the weekly average for 2014, and the weekly quarter-to-date average for 1Q 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:


[UNLOCKED] ICI Fund Flow Survey | Dull Thud to End 1Q for Domestic Equity Fund Flows - ICI 7


[UNLOCKED] ICI Fund Flow Survey | Dull Thud to End 1Q for Domestic Equity Fund Flows - ICI 8


Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR exchange traded funds, the consumer staples XLP continued to experience outflows, losing -$501 million or -6% last week, putting the year-to-date NAV loss at -12%. The Financials Sector SPDR (the XLF) continued its 2015 struggles losing another -2% on the week for a 13% loss year-to-date.


[UNLOCKED] ICI Fund Flow Survey | Dull Thud to End 1Q for Domestic Equity Fund Flows - ICI 9



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$5.6 billion spread for the week (-$700 million of total equity outflow net of the +$4.9 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.4 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 -$15.5 billion (negative numbers imply more positive money flow to bonds for the week).


[UNLOCKED] ICI Fund Flow Survey | Dull Thud to End 1Q for Domestic Equity Fund Flows - ICI 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:


[UNLOCKED] ICI Fund Flow Survey | Dull Thud to End 1Q for Domestic Equity Fund Flows - ICI 11 



Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA




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LEISURE LETTER (04/08/2015)


headline news  

April - VIP gaming promoters predict that Macau GGR in April will be less than the MOP20 billion the government is hoping for each month, Macao Daily reports.


The Chinese-language newspaper quotes one unidentified junket operator as saying the prospects for the VIP gaming market are opaque. The source said the slowing of growth in the mainland economy and central government policy were reducing gaming revenue in Macau.


The newspaper quotes another unidentified junket operator as saying the value of the VIP gaming market is now one-third of what it was at its peak.


Takeaway: Less than MOP20 billion suggests a fall of at least 36% YoY for April GGR. Indeed, the weak 1st week in April indicates it may look that way.


MGM - MGM China has agreed in principle with its lenders to amend and restate its Hong Kong Dollar denominated senior credit facilities agreement expanding the facility by $1 billion and extending the maturity by 18 months.  The amended and extended facilities will consist of a US$1.55 billion equivalent term loan, an increase from the previous $550 million term loan and US$1.45 billion equivalent revolving credit facility.  The facilities will amend and restate the existing US$2 billion credit facilities of MGM China Holdings Limited, in their entirety, and extend the term of those facilities to April, 2019.


The amended facilities will bear interest at a fluctuating rate per annum based on HIBOR plus a margin, initially set for a six month period at 1.75% per annum, but thereafter the margin (in the range of 1.375% to 2.50% per annum) will be determined by the company's leverage ratio.


Takeaway: MGM China needed this $1bn expansion of credit to fund its Cotai project amid a deteriorating demand environment.


LVS - A sampan that runs on a canal in the Marina Bay Sands shopping mall tipped over with guests in it on Sunday. It is the first time such an incident has happened since the sampan ride came into operation in 2010.


A spokesman for Marina Bay Sands told The Straits Times that the water in the canal is shallow, and that assistance was "immediately rendered" to the affected guests.



Macau Legend - The New Macau Association (ANM) says that the Land, Public Works and Transport Bureau (DSSOPT) plans to raise the height limit and to relax the density restrictions for new buildings to be built at the Fisherman’s Wharf. The association said that the plan runs counter to the government’s desire to protect world heritage sites.


ANM argues that these decisions are in conflict with the Cultural Institute’s suggestion about the area’s height limit of 60 meters, which was made last year. The association urged the government to extend the public notice period and to revise the Chief Executive’s instructions – which were issued in 2008 – to restrict the heights of buildings in the buffer areas surrounding the Guia Lighthouse. According to this regulation, part of the Fisherman’s Wharf is limited in height to 90 meters, while the other part cannot exceed 60 meters 



China LotSynergy - one of its units has won a bid to supply software to Henan Sports Lottery Administration Centre in mainland China for use in the sale by telephone of lottery tickets. The subsidiary, Beijing Huacai Yingtong Technology Co Ltd, is involved in the research and development of lottery systems and equipment.


The unit will provide “system project planning, software design and development and system testing services” to Henan Sports Lottery. It will also connect the system to the National Sports Lottery Administration Centre.



Paradise- South Korean gaming operator Paradise Co Ltd said sales from its casino business division decreased 11.6% in 1Q 2015 to KRW133.3 billion (US$122.2 million). The drop was caused by sales from table games, which were down 12.9% YoY, to KRW124.6 billion. Sales from machine games jumped 12.2% YoY to KRW 8.8 billion. Table drop decreased by 22.7% YoY in 1Q 2015 to KRW 1.1 trillion. 

Takeaway: Is this a hiccup or are Chinese high rollers starting to move elsewhere?


NCLH - Due to a technical issue with the ship’s ABB-manufactured Azipod propulsion system, Norwegian Star’s 15-day Panama Canal cruise, scheduled to depart on April 12 from Los Angeles, has been canceled. Passengers on the canceled cruise will receive a full refund and a 50% future cruise credit. 



CCL - Costa Cruises is promoting a money-back satisfaction guarantee for passengers who book a cruise by May 31. The concept is novel on the Italian market, though it's been done by sister brand Carnival Cruise Line stateside. 



RCL - is seeking shareholder approval for a delisting of shares on the Oslo Stock Exchange. The election of eight directors, including a newcomer, will also be considered at the company's annual meeting on May 28 in Miami. In addition, the proxy has a shareholder proposal that would require the company to take steps to increase diverse representation, inclusive of gender, race and ethnicity, on the board and assess the effectiveness of these efforts. Currently Royal Caribbean has one woman director; the race and ethnicity of its directors are not specified.



Singapore Visitation - For the 1st two months of 2015, overall visitation to Singapore have declined 5.5% YoY.  Indonesian visitors -largest visitor segment- tumbled 16% YoY in Jan-Feb. Malaysian visitors also fell 7%.. Mainland Chinese visitors dropped 3% in Jan-Feb; due to the CNY shift, a sharp drop in January (-25%) was offset by 17% growth in February.


LEISURE LETTER (04/08/2015) - 3

Takeaway: Weak Malaysian/Indonesian currencies may have contributed to the decline, which will pressure Singapore mass gaming volumes. 


Singapore Changi Airport visitation - February visitors was up 0.3% YoY. 


LEISURE LETTER (04/08/2015) - 2


LRT - The Transportation Infrastructure Office (GIT) has slammed the contractor responsible for building the depot superstructure of the Taipa section of the Light Rail Transit (LRT), blaming delays in the construction process on the contractor’s apparent inaction.

Takeaway: No point shifting blame. Get this project done.


Package tours - Travel agents are now arranging package tours for mainlanders that take in Macau and places over the border in Guangdong, Business Daily reports. The newspaper quotes the Macau International Chartered Tourist Guide Association and Macau Travel Industry Council as saying this is meant to make up for a decline last month in demand among mainlanders for package tours that take in Macau and Hong Kong.


It quotes the tour guide association’s president, Wu Wai Fong, as saying: “The negative image mainland visitors have of Hong Kong since the recent protests against mainland shoppers and parallel traders have really impacted the package tour business.”

Takeaway: Package tour visitors to Macau have been robust. This initiative may help even more.


March Regional revenues

Illinois: -6%

Ohio SSS: -4%

Detroit: -1%

Takeaway: Illinois and Ohio are coming in-line with our projections for March


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

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RTA Live: April 8, 2015

Hedgeye CEO Keith McCullough will answer your questions about Real-Time Alerts live today at 10:00AM ET. 




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