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INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK?

Takeaway: Auto furloughs and holidays make the usefulness of this morning's data debatable. That said, the June Challenger data on energy is notable.

Initial jobless claims rose by 15k to 297k in the latest week, though it appears to be due at least partly to the dual volatility of the July 4th holiday and summer auto furloughs, as unadjusted claims in Michigan more than doubled while those from Ohio were up 50%. We'll reserve judgement until we see the next few weeks of data.

 

 INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims4

 

The chart below shows that indexed claims in energy heavy states fell in the week ending June 27th while rising for the country as a whole. The spread between the two series tightened from 24 to 15.  

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims18

 

Meanwhile, courtesy of our Macro team, the chart below shows the Challenger job cuts announced for June running at close to zero for the energy sector for the first time in 7 months. Meanwhile, the total ex-energy climbed slightly in June. 

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims20

 

The Data

Prior to revision, initial jobless claims rose 16k to 297k from 281k WoW, as the prior week's number was revised up by 1k to 282k.

 

The headline (unrevised) number shows claims were higher by 15k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.5k WoW to 279.5k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -10.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -12.6%

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims2

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims3

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims5

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims6

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims7

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims8

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims9

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims10

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims11

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims19

 

Yield Spreads

The 2-10 spread fell -9 basis points WoW to 165 bps. 3Q15TD, the 2-10 spread is averaging 170 bps, which is higher by 12 bps relative to 2Q15.

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims15

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets

Takeaway: In the wake of Greek drama, investors pulled funds almost indiscriminately and parked cash in money market funds last week.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Investors reacted to Greek drama in the 5-day period ending July 1st by pulling funds from all asset classes except for international equity mutual funds and parking +$13 billion in money market funds. The withdrawals included -$5.5 billion of outflows from active domestic equity mandates, the 18th consecutive weekly outflow from the asset class. Active domestic equity has now lost -$61.3 billion in withdrawals in 2015, pushing 2015 year-to-date outflows lower than 2012. By this time in 2012, domestic equity funds had lost -$58.9 billion. This now makes 2015 the worst fund flow year for domestic equity from 2007 onward. We maintain our Short/Avoid recommendations on the most impacted domestic equity managers, T. Rowe Price (TROW) and Janus Capital (JNS).

 

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI1

 

In the most recent 5-day period ending July 1st, total equity mutual funds put up net outflows of -$3.4 billion, trailing the year-to-date weekly average inflow of +$369 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$2.1 billion and domestic stock fund withdrawals of -$5.5 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 outflows of -$2.4 billion, trailing the year-to-date weekly average inflow of +$2.2 billion and the 2014 average inflow of +$929 million. The outflow was composed of tax-free or municipal bond funds withdrawals of -$861 million and taxable bond funds withdrawals of -$1.5 billion.

 

Equity ETFs had net redemptions of -$4.3 billion, trailing the year-to-date weekly average inflow of +$2.1 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net outflows of -$268 million, trailing the year-to-date weekly average inflow of +$867 million 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 | Greek Drama Prompted a Flock to Money Markets - ICI2

 

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI3

 

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI4

 

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI5

 

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI6

 

 

Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI12

 

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI13

 

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI14

 

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI15

 

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI16

 

 

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 | Greek Drama Prompted a Flock to Money Markets - ICI7

 

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI8

 

 

Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors defensively contributed +8% or +$365 million to the long treasury TLT ETF. Additionally, the industrial XLI ETF experienced withdrawals of -$334, -5% of its market cap.

 

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI9

 

 

Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI17

 

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI18

 

 

Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$5.1 billion spread for the week (-$7.7 billion of total equity outflow net of the -$2.7 billion 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 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 -$18.3 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Greek Drama Prompted a Flock to Money Markets - ICI10

 

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 | Greek Drama Prompted a Flock to Money Markets - ICI11 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 

 

 

 

 


China, Europe and Oil

Client Talking Points

CHINA

Well-timed centrally planned market bounce by the Chinese (if you A. aren’t allowed to sell and/or B. could go to jail for doing so, that’ll work) – they called sellers “hostile short sellers”, but we have a feeling the guys without high-school educations aren’t that sophisticated. The Shanghai Composite Index bounced +5.8%, it only needs another +37% to get back to 1-month breakeven. 

EUROPE

Greek banks are now closed until Monday (the stock market too) – and, again, that’s clearly one way for central planners of risk to stop markets from going down - #halt them! We care a lot more about levels here in the DAX, CAC, IBEX (and way too bullish 2nd half 2015 European growth estimates) than the “off the lows moves”.

OIL

WTI Oil bounced +1.1% but is still down -16% since the May “inflation is back” highs. If you’re looking for compromise in Europe, we think that = Down Euro, Up Dollar, Down Oil (down Junk Bonds, EM, etc.) so keep this ongoing #deflation of the reflation in focus – bounces have been selling opportunities.

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET with Director of Research Daryl Jones and Macro Analyst Ben Ryan.

Asset Allocation

CASH 49% US EQUITIES 4%
INTL EQUITIES 9% COMMODITIES 3%
FIXED INCOME 30% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
KATE

We’re all-in on Kate Spade at current levels. The Hedgeye Retail team believes that comps are accelerating into the double digits in 2H, and we think that KATE’s margin guidance for this year will prove conservative. Ultimately, we think that numbers this year are 10% too low – a delta that widens to 20%+ next year, and to 50%+ by 2018 when we think KATE has $2.50 to $3.00 in earnings power. Using decelerating multiples as growth accelerates and the P&L matures gets us 50%+ upside in a year and a 2-3-bagger by 2018.

PENN

Our Gaming, Lodging and Leisure team reiterates its high-conviction thesis on Penn National Gaming. PENN remains one of our favorite names on the long side. It maintains the best new unit growth story in domestic gaming. PENN's property in Massachusetts has had an excellent start. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.

TLT

The Hedgeye Growth, Inflation, Policy (GIP) model is signaling a move into QUAD 3 for the second half of 2015. This is a set-up for the domestic economy where growth is slowing and inflation is accelerating. We reiterate our intermediate to long-term bullish bias on long-duration Fixed Income and gold. Our back-testing results cast a favorable outlook for Long-Term Treasuries, REITs, and Gold with a favorable set-up as seen in the first three charts below. When growth is slowing (QUAD 3 and QUAD 4), long term rates tend to move lower.  The logic is simple:

  • #GrowthSlowing: As growth slows, a revision in forward-looking growth expectations manifest in lower yields
  • #InflationAccelerating: Commodity prices have made a significant move off of the 2015 lows as seen in the last chart below, and we expect the follow-through to play out in Q3 inflation readings. CPI readings track the commodity price sample used in chart #4 below very closely and CPI compares are easy in 2H 2015 vs. more difficult GDP comps (QUAD 3)       

Three for the Road

TWEET OF THE DAY

VIDEO: A Demographic 'Train Wreck' In China https://app.hedgeye.com/insights/45106-mccullough-a-demographic-train-wreck-in-china… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

No man will make a great leader who wants to do it all himself or get all the credit for doing it.

Andrew Carnegie

STAT OF THE DAY

81% of MCD restaurants are franchised, with a goal to move to a 90% franchise system. MCD receives two payments from franchisees, Royalty (~4% of sales) and Rent (~9% of sales, when MCD owns the real estate).


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CHART OF THE DAY: Here's What #LateCycle Looks Like YTD

Editor's Note: This is a brief excerpt and chart from today's morning strategy note written by Hedgeye CEO Keith McCullough. Click here to learn more about subscribing.

*  *  *  *  *

...One of my Canadian buddies (and top competitors) was nice enough to acknowledge that yesterday and throw in the towel on the “reflation and global growth is back – so buy the Industrials and Financials” call.

 

Cheers to that and the following YTD returns at the sub-sector level for classic #LateCycle S&P sectors:

 

  1. Energy Stocks (XLE) -8.1% YTD
  2. Industrials (XLI) -5.5% YTD
  3. Financials (XLF) -2.3% YTD

CHART OF THE DAY: Here's What #LateCycle Looks Like YTD - z 07.09.15 Chart


Don't Halt!

“Don’t halt before you are lame.”

-English Proverb

 

The ole English proverb had that one right, didn’t it?

 

At one point yesterday (lunch time on the East Coast), Greek, Chinese, and US stocks were all halted, at the same time. And I’m sure it was just the risk manager in me, but I couldn’t for the life of me understand how that was bullish.

 

Notwithstanding that the tail-wagging-the-dog on all of this is called Global #GrowthSlowing, US equity traders were in no mood to have NYSE’s management team leave them hanging on the #halt. Old Wall boys, that was lame.

Don't Halt! - HALT cartoon 07.08.2015

 

Back to the Global Macro Grind

 

After they un-halted the darn thing (NYSE – New York Stock Exchange) the selling continued, tagging the SP500 with one of its worst 1-day drops in a year, -1.7%.

 

The almighty 200-day Moving Monkey snapped and the SP500 moved to -0.6% YTD amidst a -3.9% correction from the all-time closing highs of 2130. #OhSnap!

 

After “High-Beta” as a Style Factor led last week’s decline (High Beta SP500 stocks -2.3% last week vs. Low Beta +0.5%), they went right after that beta (again) into yesterday’s bell with the following 3 moves falling fastest:

 

  1. Oil & Gas Stocks (XOP) -3.7%
  2. Biotech Stocks (IBB) -2.9%
  3. Semis (SMH) -2.6%

 

So much for guys nailing it buying “cheap Oil & Gas stocks” that are levered to #deflation. In risk management speak, those are called “negative divergences” (i.e. they were down more than the market bogey was).

 

Reality is that no matter what you think about Greece or some guy losing his right hand for putting in a sell order in China today, the internals of the US stock market have looked a lot worse than the bogey (SP500) for some time now.

 

One of my Canadian buddies (and top competitors) was nice enough to acknowledge that yesterday and throw in the towel on the “reflation and global growth is back – so buy the Industrials and Financials” call.

 

Cheers to that and the following YTD returns at the sub-sector level for classic #LateCycle S&P sectors:

 

  1. Energy Stocks (XLE) -8.1% YTD
  2. Industrials (XLI) -5.5% YTD
  3. Financials (XLF) -2.3% YTD

 

In that order, what are the catalysts to get those “underweights” in your portfolio to stop contributing to YTD relative  performance vs. the bogey (SP500 -0.6% YTD)?

 

  1. Down Euro? Nope. That = #StrongDollar, Down Oil/Gas, Down Levered Energy Tickers
  2. #SecularStagnation? Nope. China, Europe, and USA slowing all at the same time in 2H 2015
  3. How about a rate hike? Nope. Fed Fund futures just smashed that SEP “rate hike” trade

 

Oh, right. That Fed policy thing happened too yesterday where the Fed Minutes revealed more of what you already know – and that’s that Greece, China, Jobs, #Deflation (any or all of them really) #halt rate hike rhetoric, in a hurry.

 

If all you did after last week’s US Jobs Report (right before it Fed Funds Futures were implying a 40% probability of a SEP rate hike, today that’s back down to 10% with the UST 10yr at 2.23%) was:

 

  1. Downshift to Low-Beta Stocks (sell high-beta, buy low-beta)
  2. Buy Treasury Bonds (any duration)
  3. Buy stocks that look like bonds (Utilities, REITS, etc.)

 

You’ve absolutely crushed it this week. And we salute you for making that risk managed pivot.

 

If, instead, you’re betting on:

 

  1. A big breakout in the Euro (Down Dollar)
  2. Reflation and Global growth accelerating
  3. And a rate hike in September

 

I sincerely wish you the best of luck.

 

But, fair warning: if you are an analyst and/or PM working on a multi-PM platform, your boss might just #halt your adding to that position as centrally-planned-markets continue to try to bounce “off the lows.”

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views) are now:

 

UST 10yr Yield 2.18-2.32% (bearish)

SPX 2035-2075 (bearish)
RUT 1 (bearish)
Nikkei 192 (bullish)
VIX 16.65-20.76 (bullish)
USD 95.74-97.42 (bullish)
EUR/USD 1.09-1.12 (bearish)
YEN 120.85-122.97 (bearish)
Oil (WTI) 50.34-55.38 (bearish)

Nat Gas 2.63-2.78 (bearish)

Gold 1150-1185 (neutral)
Copper 2.44-2.59 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Don't Halt! - z 07.09.15 Chart


The Macro Show Replay | July 9, 2015

 


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

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