prev

Federated Investors FII | The Dog Days of Summer are a Saint Bernard - Best Idea Long

Takeaway: Money fund yields are making their most buoyant move all year, already up 5 basis points or +38% over 2Q15 averages.

  • Money funds yields are putting in their fastest ascent in 2015 with an already 5 basis point or +38% increase thus far in 3Q from the second quarter. Our short yield tracker of LIBOR, 3 Month Treasuries, and Reverse Repos registered 18.0 basis points over night, closing in on close to a +40% move higher from the 13.0 basis point average of 2Q15. Simply put, the market is not waiting for the long waited announcement of the plight of the Fed Funds rate and is instead moving higher quickly.
  • We calculate that for every basis point increase in our short yield proxy that Federated nets an additional penny or $0.01 per share in quarter earnings. While most of Federated's biggest money fund portfolios have 40 days of duration within their holdings, the blend to higher yielding portfolios is underway. Longer term we see Federated normalized earnings opportunity at between $2.43-$2.63 per share and with the Street at $2.22 for 2016/2017, we continue to see positive risk/reward.
  • In combination with improved profitability as yields move higher, we remind investors that money fund balances should also increase into the back half of the year. With tax season now out of the way which historically has pulled down money fund balances in the first and second quarters, money funds are soon to be entering the fourth quarter which has averaged a +3.7% increase sequentially since 2008. Federated stock is one of only two asset management stocks up for the year (Wisdom Tree is up +57% in '15 with Federated up +4.0%, with the rest of the sector now down year-to-date). FII stock still screens as one of the lowest rated in our proprietary Sentiment Monitor (see latest report HERE) with 8.9% short interest and low sell side sentiment. With a 2.9% dividend yield and improving fundamentals in the money fund business, the stock continues on our Best Ideas list as a Long position. We estimate fair value at $42 per share.

Not waiting one Minute (Fed). Money fund yields are bolting substantially higher in 3Q already up 5 basis points or +38% from 2Q averages:

 

Federated Investors FII | The Dog Days of Summer are a Saint Bernard - Best Idea Long - chart 1 yields

Federated Investors FII | The Dog Days of Summer are a Saint Bernard - Best Idea Long - final proxy chart

 

While investors will have to wait for current spot rates to blend into quarterly averages, duration is very short in these portfolios. Within 39 days, higher spot yields will blend into quarterly averages:

 

Federated Investors FII | The Dog Days of Summer are a Saint Bernard - Best Idea Long - chart 3 duration

 

We calculate that every 1 basis point of average increase in yields is $0.01 or a penny per share in incremental quarterly earnings:


Federated Investors FII | The Dog Days of Summer are a Saint Bernard - Best Idea Long - EPS sensitivity

 

Our short rate proxy and FII's money fund fee waivers continue to maintain a very robust R-squared at 0.89:

 

Federated Investors FII | The Dog Days of Summer are a Saint Bernard - Best Idea Long - chart 4 regression

 

In addition to rising yields, money funds are now out of the seasonally weak tax season and onto the back half of the year where historically balances have grown for the industry. Thus the company will enjoy the double leverage of improving profitability and higher fund balances:

 

Federated Investors FII | The Dog Days of Summer are a Saint Bernard - Best Idea Long - chart 6 seasonality

 

 

Money Fund Yields are Yellin'

Bearishness Starting To Thaw

FII - Hedgeye Knows a Hockey Stick When it Sees One

Baby Steps But Headed in the Right Direction

Federated - Hedgeye Best Ideas Long Black Book

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 

 


China, #Deflation, UST 10YR

Client Talking Points

China

After telling the world “volatility in the Chinese stock market is over”, central planners got tagged with a -6.2% drop in the Shanghai Comp overnight – rest of Asia slowing, faster, too – in the last month: Taiwan -9.6%, Singapore -8.8%, Thailand -8.3%

#Deflation

Reflation (and high beta, high leverage, style factors) helped US equities bounce off last Wednesday’s lows, but were right back in the soup this morning with both WTI and Copper making fresh 3-month lows – and the Fed is going to “hike” into this? 

UST 10YR

With a yield of 2.14% this morning does the round trip and then some – so what the market is telling you is that even if the Fed does hike into a slowdown, probability is rising that growth and inflation slow at a faster pace – I remain bullish on the Long Bond.

Asset Allocation

CASH 59% US EQUITIES 3%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 25% INTL CURRENCIES 7%

Top Long Ideas

Company Ticker Sector Duration
MCD

"We are very bullish on McDonald’s," says Restaurants Sector Head Howard Penney. "We like where this company is going. We like the new CEO and the changes they’re making."

 

Penney notes that there are a lot of things going on inside the company which we can’t see that are extremely meaningful to where this company will be in 12-18 months.

 

"I’ve said this a dozen times recently, but 2015 will be the last year McDonald’s trades at an average price below $100," he says. 

PENN

"As we predicted, regional gaming revenues surged in July which gives us confidence in our Q3 EPS estimate of $0.23, which is $0.04 above the Street," writes Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan. "We continue to like Penn National Gaming here due to stable regional gaming trends, better than expected quarterly and annual earnings, and the Plainridge and Jamul contribution to PENN’s two-year growth story."

TLT

The set-up for the September FOMC meeting is as follows:

  1. The Fed runs the risk of tightening into a late-cycle slowdown which could ultimately flatten the yield curve (BULLISH for TLT, EDV, VNQ).
  2. Slower growth and deflationary headwinds are acknowledged and the can is kicked on a rate hike which should also be good for bonds. Until growth inflects positively, you’ll see TLT in our investment conclusions as the yield curve is the best proxy for forward looking growth expectations. 

Three for the Road

TWEET OF THE DAY

Reminder: the @Hedgeye Macro Show is being moved to 9am today-Thurs of this week to accomodate @KeithMcCullough's apprearce on @FoxBusiness

@HedgeyeDDale

QUOTE OF THE DAY

“I didn’t get over 1300 walks without knowing the strike zone.”

           -Wade Boggs

STAT OF THE DAY

With a 719–477–45 record as of the conclusion of the 2014 football season, West Virginia University ranks 14th in victories among NCAA FBS programs, as well as the most victories among those programs that never claimed nor won a National Championship.


CHART OF THE DAY: Consensus Is Bear'd Up On Stocks

Editor's Note: The chart below was featured in this morning's Early Look written by Hedgeye CEO Keith McCullough. Click here for more information on how you can become a subscriber.  

 

CHART OF THE DAY: Consensus Is Bear'd Up On Stocks - z darius Chart of the Day


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.

Messy Process

“It’s a messy process that involves doing a few things at once.”

-Patrick Lencioni

 

That was a solid leadership quote from a popular book I’m flipping through called The Advantage – “Why Organizational Health Trumps Everything In Business.”

 

Cheesy? Yes. Hence the flipping! But with the summer of 2015 coming to an end, I’m clearing my book shelf for what should be a scintillating September. Infrequently in my career have both complacency and short interest been so high.

 

Complacency: yesterday’s Total US Equity Market Volume (including dark pool) continued to crash (-26% vs. its 1yr average). Short Interest? I’ll get into how I look at that in the grind.

Messy Process - Volume cartoon 08.12.2014

 

Back to the Global Macro Grind

 

But first, since I’m getting back into the swing of things this morning, allow me to review a few critical #process points that make my risk management conclusions less messy:

 

  1. VOLUME – when price is rising on A) decelerating volume and B) rising volatility, that’s bearish
  2. OPTIONS – one key way we measure “short interest” is via non-commercial futures and options contracts

 

It’s taken me almost 17 years to refine the price/volume/volatility signal – and while I continue to refine it (and will until I retire), I feel as good as I’ve ever felt about our ability to #FadeBeta.

 

“Fading beta” means (sometimes) taking the opposite side of a market’s daily direction. This typically happens (in Real-Time Alerts) when PRICE is hitting either the low or high end of my immediate-term TRADE risk range.

 

You can also “fade options” activity by measuring the z-score of Global Macro positions. What I mean by that is buying/covering a market when A) PRICE = low-end of the range and B) the net SHORT position = high end of its range.

 

If you did that in US Equities (at last week’s lows), well done. Here’s how the net SHORT positions piled up:

 

  1. SP500 (index + Emini) net SHORT position was -146,132 contracts (that’s a 1yr z-score of -1.79x)
  2. Russell 2000 net SHORT position was -38,214 contracts (that’s a 1yr z-score of -0.47x)

 

In other words, after growth, inflation, revenue/earnings, etc. data slowed (at an accelerating rate both locally and globally) in July, US stocks corrected, and Consensus Macro players got shorter, lower, instead of getting longer.

 

Then, the no-volume (squeeze) bounce. And voila!

 

Inclusive of the Russell 2000 bouncing +1.6% off that 1205 AUG low last week (it was -7% from its YTD high prior to the bounce), last week’s US stock market bounce featured Style Factors that had been leading the market lower for a month:

 

  1. LEVERAGE – High Debt/Enterprise Value Stocks were +1.2% after being -3.6% in the month prior
  2. BETA – High Beta Stocks (another style factor) were +1.0% after being -5.6% in the month prior

 

And you saw some no-volume follow through on the same yesterday as well with High Beta Biotech (IBB) Stocks leading the day at +2.1% as the Russell 2000 added 1.0% to that bounce from 1205 to 1225.

 

But what’s next?

 

Well, if high-debt-leverage to commodity #Deflation and high-beta levered to too-high-growth-expectations got Consensus Macro run over after chasing their May-June 2015 highs, I think we have to ask ourselves what’s changed this morning?

 

In perpetually monitoring that, the Top 3 Things in my notebook this morning are as follows:

 

  1. CHINA – after telling the world “volatility in the Chinese stock market is over”, central planners got tagged with a -6.2% drop in the Shanghai Comp overnight – while mainstream isn’t on this, the rest of Asia is slowing, faster, too – in the last month: Taiwan -9.6%, Singapore -8.8%, Thailand -8.3%, Indonesia -7.0%, South Korea -5.8%
  2. #DEFLATION – “reflation” (and high beta, high leverage, style factors) helped stocks bounce off last Wednesday’s lows, but are right back in the soup this morning with both WTI (Oil) and Copper making fresh 3-month lows
  3. UST 10YR – yield of 2.14% this morning does the round trip (from June) – so what Mr. Macro Market is telling you is that even if the Fed does hike into a Q3 slowdown, probability is rising that growth and inflation slows faster in Q4!

 

Yes, my #process involves doing more than a few things at once. It’s taken me a long time and a lot of mistakes to get it to where it is now. No, it’s not perfect. But it sure beats the messy macro “process” of chasing charts (i.e. last price).

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.10-2.20%

SPX 2071-2109
RUT 1198-1231
Oil (WTI) 41.04-43.58
Copper 2.28-2.38

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Messy Process - z darius Chart of the Day


The Macro Show Replay | August 18, 2015

 


August 18, 2015

August 18, 2015 - Slide1


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next