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OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate

Takeaway: WTI moved above and held its TREND line of resistance in the last week. We now look to the USD for more directional clarity.

Below we outline the quantitative signals and less importantly the fundamental story that supports the counter-TREND move in oil since the Fed’s March 18th meeting.

 

Without a near-term central-planning catalyst we view Friday’s non-Farm payrolls report as a key indicator for the direction of the USD which is near testing its intermediate-term TREND level of support at $93.12. Inverse correlations to commodities have also reverted to more normalized levels over the near-term, making the direction of the currency in the aftermath of Friday’s report telling for developing a more finite view on oil prices.

If you didn’t have a chance to view this morning’s macro call live or catch up with the Early Look commentary from KM, it’s worth a read as we verbally debated the meaning of the extended counter-TREND moves in commodities, the dollar, and interest rates:

 

"From SEP 2014 to FEB 2015, Oil Volatility (OVX) went from 17 to 63 = +270%.

From FEB 2015 to now, OVX dropped from 63 to 36 = -42%."

Hedgeye Macro Show  

 

With WTI moving above its own TREND resistance level, our risk ranges remain very wide over the intermediate-term with the shorter-term market signals more confirming of a move higher. The market signals that have accompanied the move higher are similar to the November-January signals that accompanied the move lower.

Specifically, oil is making a series of higher lows and higher highs in the last several weeks on healthy volumes and tighter ranges, or compressing volatility (both realized and implied). Since March 17th (pre-Fed meeting), here’s how the signals shake-out:

  • Price: Positive daily returns skewed to the upside
  • Volume: Ratio of Green Day Volume/Red Day Volume= 1.2
    • 22 days of positive returns: 832,903 ADTV (Contracts)
    • 11 Days of Negative Returns: 699,022 ADTV (Contracts)
    • Volatility: historical volatility has compressed along with OVX despite healthy volumes (See the link to our Slide Deck and Commentary from April 24th below).     

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - WTI Levels

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - USD Levels

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - USD correls

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - WTI HVG

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - Skew

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - Implied vol

 

On April 24th we blasted a video and slide deck outlining these conflicting signals in more detail:

1) Conflicting quantitative signals in oil markets (Against our bearish call)

2) The importance of yielding to top-down macro over the push-and-pull of global supply/demand narratives. The replay link and slide deck are included below.

Audio

Slides  

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On the fundamental side of global energy markets we re-iterate that supply/demand adjustments will continue to smooth on a lag. Although much lower on the compendium of important factors to our process, the fundamental supply/demand picture DOES suggest more support for oil prices than it did in January:

  1. Domestic crude production has gone from a linear increase, to decelerating, to now topping IN REACTION to a financial market fueled sell-off (Note below that the supply/demand picture is not that much different than it was last summer). The extra YY incremental barrels are without a doubt fueled by the U.S. shale boom, making the U.S. production slowdown a meaningful psychological catalyst supporting prices.
  2. Crude oil rigs in service, albeit not a proxy for production, are 42% of the October highs (679 vs. 1609).
  3. Last week was the first inventory flush in Cushing since the end of November and this week marked the first aggregate inventory flush since January 2nd

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - Global Production Monitor

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - U.S. Production Delta

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - Crude production table

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - Production vs. WTI Price

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - Production vs. Rig Count

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - DOE crude Inventories

 

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Oil prices will continue to move up and down and back again but all-in-all our historical cycle suggests anchoring on the direction of major currency moves is the most-sound tools for developing the right bias to risk manage the longer duration moves in commodities. Friday’s jobs report will be an important jobs report and one the Federal Reserve will be watching closely.

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - cycle

 

 

Ben Ryan

Analyst

 

 

 

 

 


Cartoon of the Day: Petro Surprise!

Cartoon of the Day: Petro Surprise! - Oil cartoon 05.06.2015

"To be clear, my mistake wasn’t being short Oil for this entire move up (we covered commodity shorts ahead of an easier Fed and #LateCycle Labor reports, for a trade)," Hedgeye CEO Keith McCullough wrote this morning. "It wasn’t being long it at $100 either. It was in not being long it from $45 to $62. My main mistake there was that I didn’t think Oil’s Volatility was going to compress almost as fast as it exploded to the upside." 


Get The Dollar Right (And You’ll Get A Lot Of Other Things Right ... Like #Oil)

Editor's Note: This is an excerpt from today's morning research. Click here to learn more and to subscribe to America's fastest-growing independent research firm.

*  *  *  *  *  *  *

Oil experienced an epic 6 month crash, then rally. Right now, the inverse correlation between Oil and the U.S. Dollar is screaming (yes, we know that supply and demand narratives help too…) with USD signaling immediate-term lower-highs and Oil higher-lows into this US jobs report. Bad jobs report = USD bearish, Oil bullish.

Get The Dollar Right (And You’ll Get A Lot Of Other Things Right ... Like #Oil) - z 100 ben

 

Speaking of the Dollar, the Russell 2000 does not like Down Dollar. That makes sense to me as the “tax cut” from lower gas prices is, well, getting cut! This is going to be a problem for an economic narrative that even Janet Yellen has been forced to acknowledge recently (#StrongDollar, Down Oil, Stronger Consumption).

 

The Russell 2000 in the midst of a -4.7% correction. Overlay that with the USD and you’ll get the point.

 

As I spelled out in today’s Morning Newsletter, my intermediate-term TREND price deck for Oil is now $42.06-$69.03.

Get The Dollar Right (And You’ll Get A Lot Of Other Things Right ... Like #Oil) - z OIL


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MACAU CONF CALL: FRIDAY AT 11AM

We will host a conference call on Friday, May 8th at 11:00AM ET to discuss the latest Macau data, our outlook on the market and the stocks and the presentation of a new, original research topic.

 

 

RELEVANT TICKERS INCLUDE:

LVS, WYNN, MGM, MPEL, 0027.HK, 1128.HK, 1928.HK, 2282.HK, 6883.HK, and 0880.HK.

 

 

DISCUSSION POINTS

  • Details behind April's 39% GGR decline
  • Discussion of base mass trends
  • The impact of Mass re-classifications
  • Revised 2015 monthly market projections
  • 1Q comparative analysis
  • Hedgeye company EBITDA estimates vs the Street (LVS, WYNN, MGM, MPEL, and Galaxy Entertainment) 
  • Research Topic: Does stock market investing impact Macau gambling?

 

CALL DETAILS

Attendance on this call is limited. Please note if you are not a Tier 1 or 2 subscriber to our Gaming, Lodging, and Leisure research there will be a fee associated with this call. Ping for more information.


WEN: Making All the Right Moves

Takeaway: WEN is on our Investment Ideas list as a long.

Good Quarter, Better Announcements

Wendy’s reported 1Q15 results this morning, delivering a top line miss ($466.2 million vs $472.8 million estimate) and a bottom line beat ($0.06 vs $0.05 estimate).  Company owned same-store sales of +2.6% fell short of the +3.1% consensus estimate, while franchise same-store sales of +3.4% surpassed the +2.6% consensus estimate.

 

In addition to solid operating results, management announced several new initiatives in this morning’s press release.  The company announced its intent to sell off its non-core bakery operations in May 2015, provided an update on its debt refinancing to be completed by June 1 and its newly announced intent to return net proceeds of approximately $1.1 billion to shareholders via share repurchase (~27% of equity value), and revealed plans to provide updated guidance on June 3 to reflect these initiatives.

 

We continue to like Wendy’s on the long side, given its willingness to transform the business model to a leaner, more efficient machine.  The newly pending sale of its non-core distribution business supports this stance and should allow for greater sourcing flexibility, enhance focus on the core business, and eliminate future bakery capital expenditures.  As a whole, Wendy’s new operating model will deliver more predictable earnings growth, higher EBITDA margins, and higher earnings quality, while requiring less capital outlay.  The sell-side will continue to overlook the story here, until they no longer can.

 

Side Note: Is Panera Paying Attention?

We recently called PNRA out as the next activist target, given its recent underperformance and seeming inability to turn around the operations of the business in a reasonable amount of time.  Our number one suggestion for fixing Panera was to sell off non-core assets.  Panera currently produces and distributes its fresh dough through a leased fleet of temperature controlled trucks owned and operated by the company.  The proceeds from the sale could be redeployed back into the business or returned to shareholders.  Both options are more attractive than owning this low margin non-core business.  Contact if you’d like to access our recent Black Book on the name.

 

What We Liked in Wendy’s 1Q15 Print

  • Bottom line beat
  • Strong franchise comps
  • North America company owned restaurant margin improved 160 bps y/y
  • Adjusted EBITDA margin improved 360 bps y/y due to increased royalties & income and a reduction in G&A
  • Debt refinancing on schedule for June 1, with the intent to return net proceeds to shareholders through share repurchases
  • Plan to divest non-core bakery operations in May 2015
  • Lowered 2015 capex outlook by $15 million to $250-260 million
  • Lowered 2015 food inflation outlook from 4% to 1.5% given lower than anticipated beef prices
  • Raised company restaurant margin outlook to 16.5-17% to reflect easing commodity prices
  • Planned update from the company on June 3

 

What We Didn’t Like in Wendy’s 1Q15 Print

  • Top line miss
  • Disappointing company comps
  • Revised company operated comp outlook from 3% to 2.5-3%

WEN: Making All the Right Moves - 1

 

WEN: Making All the Right Moves - 2


ICI Fund Flow Survey | Exodus from Domestic Equity Funds

Takeaway: Active domestic equity managers continued to bleed assets while active international mandates continue to see solid subscriptions.

This note was originally published April 30, 2015 at 12:23 in Financials. For more information on how you can subscribe to our various products click here.

ICI Fund Flow Survey | Exodus from Domestic Equity Funds - z exit

Investment Company Institute Mutual Fund Data and ETF Money Flow:

The exodus from active domestic equity managers shows no sign of abating. In the past 2 weeks, the active domestic equity category experienced its biggest net withdrawal of 2015 (of -$5.7 billion last week), which has been followed by another substantial withdrawal in the most recent week (in the 5 days ending April 22nd) of -$3.4 billion. The first 16 weeks of 2015 have now tallied -$19.1 billion in redemptions in the active domestic equity category compared to +$20.0 billion in the first 4 months of 2014. We remain cautious on the active equity manager space and maintain our short/avoid recommendation on Janus Capital and T Rowe Price. Conversely, investors have used at least a portion of their domestic equity redemptions to make contributions to international equity funds, which had their largest inflow in 119 weeks of +$6.5 billion this week.


ICI Fund Flow Survey | Exodus from Domestic Equity Funds - z steiner

 

In the most recent 5-day period ending April 22nd, total equity mutual funds put up net inflows of +$3.1 billion, outpacing the year-to-date weekly average inflow of +$1.2 billion and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$6.5 billion and domestic stock fund withdrawals of -$3.4 billion. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 10 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net inflows of +$3.8 billion, outpacing the year-to-date weekly average inflow of +$2.3 billion and the 2014 average inflow of +$929 million. The inflow was composed of tax-free or municipal bond funds contributions of +$683 million and taxable bond funds contributions of +$3.1 billion.

 

Equity ETFs had net subscriptions of +$3.2 billion, outpacing the year-to-date weekly average inflow of +$1.8 billion and matching the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$2.2 billion, outpacing the year-to-date weekly average inflow of +$1.6 billion and the 2014 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 year-to-date average for 2015:

 

ICI Fund Flow Survey | Exodus from Domestic Equity Funds - ICI 2 2

 

ICI Fund Flow Survey | Exodus from Domestic Equity Funds - ICI 3

 

ICI Fund Flow Survey | Exodus from Domestic Equity Funds - ICI 4

 

ICI Fund Flow Survey | Exodus from Domestic Equity Funds - ICI 5

 

ICI Fund Flow Survey | Exodus from Domestic Equity Funds - 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 year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

ICI Fund Flow Survey | Exodus from Domestic Equity Funds - ICI 7 2

 

ICI Fund Flow Survey | Exodus from Domestic Equity Funds - ICI 8

 

Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors withdrew -$714 million or -4% from the XLF Financials ETF. Conversely, investors contributed +$662 million or +5% to the XLE Energy ETF on expectations for an energy price rebound.

 

ICI Fund Flow Survey | Exodus from Domestic Equity Funds - ICI 9

 

 

Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$290 million spread for the week (+$6.3 billion of total equity inflow net of the +$6.0 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 +$1.1 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 -$15.5 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Exodus from Domestic Equity Funds - 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:

 

ICI Fund Flow Survey | Exodus from Domestic Equity Funds - ICI 11 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 

 

 

 

 


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