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Takeaway: Ahead of a dovish FOMC statement, crude oil is appropriately testing its TREND line of resistance. Longer-term, however, we remain bearish.
Q: "Was curious if you have a theory on why seems to be strong while the DXY has held in there pretty well. Has the set up changed where you might get more bullish on oil?"
A: The setup hasn’t changed from our perspective. We definitely think a lot of this rally in oil is a function of what has quickly become a semi-consensus narrative on the buy-side – i.e. the Druckenmiller “dollar decoupling” view. He’s been right thus far in the YTD, as the inverse correlation has essentially dissipated:
Oil is still broken quantitatively, but our intermediate-term TREND line of resistance of $57.54 is definitely within striking distance:
To the extent this squeeze overcomes that level and decides to test the next probable mean reversion zone, there’s a lot of risk to manage between last price ($55.95) and our long-term TAIL line of resistance of $72.12 – 29% that is!
While crude oil would still be broken from a long-term perspective on any price below $72, it’s hard for any investor to be short for a move like that, which is probably why short positions in the futures and options markets dropped -10.6% WoW in the most recent reporting period. Anyone who shorted crude around its YTD lows is likely being forced to cover on any semblance of a developing bullish narrative.
To that tune, our recent discussions with investors suggest there is a sizeable contingent of investors who believe the eventual [negative] supply response will prove to be sustainably bullish for crude prices, but we do not buy that narrative. We actually think domestic production growth will actually start to re-accelerate then, given how sharply it decelerated in recent months. E&Ps are in the business of producing crude oil; they can’t sit on the sidelines in perpetuity.
When does the pain trade on crude end? We continue to view the 4/29 FOMC statement as a catalyst for immediate-term dollar debasement and reflation plays like energy and emerging market assets are definitely front-running what we think will be a dovish statement, on the margin, in light of the recent trend of disappointing economic data.
- Keith discussed this dynamic in last Friday’s Early Look: http://app.hedgeye.com/m/rBF/aQSyH1/i-love-debate.
- Additionally, I was on Fox Business yesterday morning juxtaposing this multi-duration (i.e. TRADE vs. TREND) view: http://video.foxbusiness.com/v/4172381727001/retail-sales-rise-in-march---/?playlist_id=3166411554001#sp=show-clips.
From there, we think the DXY trades higher into the summer months as our policy divergence theme carries on. Neither Draghi nor Kuroda will allow the USD to sustain a series of lower-highs vs. the EUR and JPY, respectively.
Long live the currency war,
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Takeaway: 1Q15 domestic equity flows came in lower than 1Q07, 1Q10, 1Q11, 1Q13, and 1Q14. This is a bad sign.
This note was originally published April 09, 2015 at 08:21 in Financials. For more information on our services and how you can subscribe click here.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
The total year-to-date outflow from domestic equity funds increased by nearly two thirds to -$8.8 billion as of April 1st from -$5.4 billion as of March 25th. This asset class is doing especially poorly this year. From 2007 through 2014, excluding 2008, domestic equity funds lost -$68.6 billion per year on average. However, even with those outflows, average first-quarter domestic equity flows were neutral. On the other hand, as we show in the chart below, this year's Q1 flow sits -$8.8 billion below the ex-2008 average of +$26 million. Post-2006, the only years that had worse domestic equity outflows in the first quarter were 2008 at -$41.0 billion, 2009 at -$27.3 billion, and 2012 at -$19.2 billion. By the end of those years, investors had pulled -$157.0, -$40.6, and -$167.9 billion, respectively, from domestic equity funds. Given the asset class' year-to-date outflows in what is usually the best quarter of the year, things do not look so rosy for domestic active managers. Our most actionable ideas in the asset management group continue to be to avoid or short the equity asset managers Janus Capital and T Rowe Price and also to begin legging into defensive money fund manager Federated Investors (see our deep dive Black Book here).
Other fund flows during the week were also defensive with equity ETFs putting up outflows of -$5.8 billion, including -$10.5 billion in withdrawals from the SPY. We are still cautious on the domestic equity fund managers especially T. Rowe Price and Janus Capital as these stocks are on our Best Ideas list as Short/Avoid. 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, defensive money fund manager Federated Investors (see our FII research), and defined contribution retirement plan advisor Financial Engines (see our deep dive FNGN Black Book).
Also of note, investors redeemed -$47 billion from money market funds last week, which seems to have been because of seasonal tax payments.
In the most recent 5 day period ending April 1st, total equity mutual funds put up net outflows of -$1.6 billion according to the Investment Company Institute, trailing the year-to-date weekly average inflow of +$1.3 million and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$1.8 billion and domestic stock fund withdrawals of -$3.3 billion. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 13 weeks of positive flows over the same time period.
Fixed income mutual funds put up outflows of -$1.3 billion, trailing their year-to-date weekly average inflow of +$2.4 billion and their 2014 average inflow of +$929 million. The outflow was composed of +$96 million of contributions to tax-free or municipal bond funds and -$1.4 billion of withdrawals from taxable bond funds. Munis have had a solid run with subscriptions in 51 of the last 52 weeks.
Equity ETFs experienced redemptions of -$5.8 billion, trailing the year-to-date weekly average inflow of +$1.3 billion and the 2014 weekly average inflow of +$3.2 billion. Fixed income ETFs took in +$1.7 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:
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:
Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the SPY experienced a significant -$10.5 billion or -5% withdrawal. Additionally, the consumer staples XLP continued to bleed funds, giving up -$785 million or -9% in redemptions last week.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$7.7 billion spread for the week (-$7.3 billion of total equity outflow net of the +$418 million 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 +$1.2 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).
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
Client Talking Points
The CPI number for March across the Eurozone came in at +0.1% and in Germany it came in at +0.3%. This gives ECB President Mario Draghi a lot of data cover to continue this policy of Quantitative Easing and burning the Euro. Our immediate-term risk range for the Euro is 1.04-1.08.
The Greek Finance Minister Varoufakis is traveling to Washington to meet with Obama, he is traveling with the lawyer who helped Greece restructure its debt in 2012. They will meet with Obama tomorrow followed by a meeting on Friday with ECB President Mario Draghi, U.S. Treasury Secretary Lew, Italian Finance Minister Padoan and IMF officials. The next catalyst is the upcoming Eurogroup meeting on April 24th. European Commission Vice President Dombrovskis told the Handelsblatt that next Friday's Eurogroup meeting will not approve aid and will only look at the progress of talks.
China reported a GDP number of +7%, this is the slowest quarterly year-over-year growth in 5 years. A National Bureau of Statistics official commented that it will be important to keep the property market steady; the economy is likely to remain under pressure in Q2 as destocking, clearing over capacity could take time; and they will be prioritizing stable growth, jobs and profitability.
|FIXED INCOME||30%||INTL CURRENCIES||8%|
Top Long Ideas
Manitowoc (MTW) is splitting the business into two companies. While the crane business receives the most attention in part due to its cyclicality and because they are well, more noticeable, Manitowoc’s other business, Foodservice equipment, is the larger of the two in terms of operating income (60% vs. 40% for Cranes). Several indicators are pointing towards upward momentum for MTW’s Foodservice business. Restaurant same store sales have benefitted since the drop in oil prices. Furthermore, an indicator by the National Restaurant Association, RPI Capital Expenditures Index, has surged recently in part due to lower fuel prices driving restaurant traffic and restaurant owners’ outlook.
iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. The housing data was again strong in the latest week with Pending Home Sales, HPI and Purchase Demand all accelerating to close out March. Pending Home Sales rose +3.1% sequentially in February with signed contract activity up a remarkable +12% YoY, taking the index to a new 19-month high. Mortgage Purchase Applications – the most real-time, high frequency housing demand indicator - rose +5.7% WoW on the back of last week’s +4.9% advance and accelerated to +7.6% on a year-over-year basis. HPI: The Case-Shiller 20-city series showed home prices grew +4.6% year-over-year in January. A stabilization/inflection in home price growth is important as housing related equity performance tracks the slope of home price growth strongly.
It was another week of declining long-term yields getting you paid on the long-side of Low-volatility Long Bonds (TLT). To reiterate our view over the longer-term, we pin a good chance the U.S. Dollar will reach new highs ($120 anyone?) with the probably of long-term Treasury yields reaching all-time lows very much in play.
Three for the Road
TWEET OF THE DAY
Despite the ramp into fixed income ETFs they only have 7% market share against bond mutual funds (more gains to come) http://www.bloomberg.com/news/articles/2015-04-14/bond-liquidity-desperation-sends-record-cash-into-etfs-worldwide
QUOTE OF THE DAY
Logic will take you from A to B. Imagination will take you anywhere.
STAT OF THE DAY
In general, the White House estimates that women get paid 77 cents on the dollar compared to men.
Editor's Note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye Director of Research Daryl Jones. Click here to subscribe today.
In today's Chart of the Day, we highlight Chinese GDP growth going back five years by quarterly y-o-y growth. As you can see, this is the slowest growth in that time period. The direction is very clearly that of a long term deceleration mode.
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