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This War Is It

“Sometime they’ll give a war, and nobody will come.”

-Carl Sandburg

 

Since we started Hedgeye in 2008 with a macro view that the Fed couldn’t devalue their way out of a cyclical slowdown, I can’t tell you how many times I’ve been asked how I think this all ends.

 

“This” being the grand central-planning experiment of our time.

 

You know, the one that’s based on the linear-economist premise that “shock and awe” rate cuts, bazookas, and currency devaluations can not only smooth economic cycles but raise the heavens and part the seas…

 

But what happens then the US economic cycle slows into a stiffening demographic (secular) headwind? What happens when all of the world’s growth and inflation expectations start to slow, at the same time?

 

If you didn’t know the answers to these questions, now you’re starting to know. It ends how it all started. It ends in the capitulation of the Currency War. This is it. This is the war that nobody, other than we Wall Street types, will come to fight for.

 

This War Is It - currency wars

***Catch Keith LIVE on The Macro Show at 9am ET. Click here to watch/interact.

 

Back to the Global Macro Grind

 

Got capitulation via devaluation? After Vietnam devalued the ding Dong (their currency) yesterday, Kazakhstan opted for the -23% daily-devaluation overnight. If you don’t follow Global FX, you do now.

 

“But I’m an equity guy.” Yep. Totally get it. I used to be too. Then I got crushed by the macro and decided I better do some macro before the macro did me. Interconnected risks between policy moves, currency crashes, and equities matter, big time.

 

In the last year alone, “Emerging Market” Equity outflows have almost doubled the outflows they saw during the 2008 crash. Why the 2-bagger? Because when my boy Bernanke devalued the US Dollar to its post Nixon low (2011) chart chasers rammed their asset allocation pie charts into countries that “emerged” with strong currencies on the other side.

 

In other words, the outflow is a function of the prior inflow. Chase high; puke low.

 

Now a US Equity only guy/gal should be quick to say something like “but the market is only -3% off its all-time high.” And last I checked, that was true in NOV of 2007 and MAY of 2000  too. This is what happens at cycle tops – trailing returns look awesome.

 

But then you start to see the internals (and externals) break-down, crash, and challenge all of that awesomeness. And that is precisely what you are seeing right now. From a Global Equities perspective, in the last month alone, here are some draw-downs:

 

  1. Greece -18%
  2. Russia -13%
  3. Singapore -11%
  4. Hong Kong -10%
  5. Germany -10%
  6. Turkey -9%
  7. South Korea -8%
  8. Australia -7%
  9. United Kingdom -6%
  10. USA (Russell 2000) -5%

 

And voila. There it is, the Russell (2000 stocks) is “outperforming” the rest of the global growth and inflation slowing gong show. And the SP500 is outperforming that better yet. “So” everything must be fine. Global reflation and growth must be fixin’ to rip!

 

Let’s get serious here and not make the mistakes many equity only investors did in 2000 and 2007. Let’s not ignore the growth and inflation slowing data. Let’s not close our eyes when we look at the bond market either.

 

What say you Mr. USA Bond Market?

 

  1. TREASURIES (10yr) = 2.11% this morning after dovish Fed Minutes (that reflect dovish data)
  2. JUNK = making lower-lows (4yr lows), daily, as spread risk widens (as it always does when growth slows)

 

There’s that darn combo Hedgeye keeps using, #GrowthSlowing.

 

But what does it mean when the entire edifice of central-planning and those that market asset management at its alter are promising 2x the baseline growth (GDP) that is actually occurring? *reminder, Hedgeye is at 1.4% q/q SAAR and 1.6% y/y

 

Every single perma-bull economist/strategist in the US has not only a “3-4% US GDP” forecast in the 2H of 2015, but has it mapped in excel as far as the linear-seeing-eye can fathom, into 2016 and beyond.

 

That, to put its duration in historical context, implies the greatest economic expansion since WWII. And I’m thinking less American realists sign up to come fight for an un-elected central planning war today than they did for The People back then.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.07-2.18%

SPX 2061-2090
RUT 1190-1213
VIX 13.49-15.83
USD 95.62-98.19
Oil (WTI) 40.07-42.65

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

This War Is It - Z DD Chart of the Day


The Macro Show Replay | August 20, 2015

 


Grand Central Planning

Client Talking Points

CHINA

Devaluation is what all of these people think they should do when it’s never worked; China did that (and everything else they could) but ended up with its stock market down another -3.4% overnight = right back to where all the central plannings of markets escalated – nice job.

UST 10YR

While we’re not sure if there were many uber Bond Bulls left in June, we’re happy to be here this morning – it wasn’t easy, but life isn’t either. Currently the UST 10YR is around 2.11% with next support at 2.07% as both growth and inflation slow, at the same time = Swiss 10YR is down -0.26% and the 10YR Bund is 0.60%.

EQUITIES

If you’re the growth bear (Hedgeye), you are not telling people to own most equity markets at all-time highs – in the last month alone here are the Global Equity market draw-downs: Russia -13%, Singapore -11%, Hong Kong -10%, Germany -10%, Turkey -10%, KOSPI -8%, Australia -7%, FTSE -6%, Russell 2000 -5%.

 

 

**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET CLICK HERE

Asset Allocation

CASH 64% US EQUITIES 2%
INTL EQUITIES 4% COMMODITIES 0%
FIXED INCOME 26% INTL CURRENCIES 4%

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

VIDEO: Here's How We Get $25 Oil https://app.hedgeye.com/insights/45898-mccullough-here-s-how-we-get-25-oil… via @hedgeye

QUOTE OF THE DAY

Trust men and they will be true to you: treat them greatly and they will show themselves great.

Ralph Waldo Emerson

STAT OF THE DAY

Total global expenditure on luxury goods in 2014 was $1.1 trillion.


the macro show

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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.

August 20, 2015

August 20, 2015 - Slide1

 

BULLISH TRENDS

August 20, 2015 - Slide2

August 20, 2015 - Slide3

August 20, 2015 - Slide4 

BEARISH TRENDS

August 20, 2015 - Slide5

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August 20, 2015 - Slide7

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August 20, 2015 - Slide11
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August 20, 2015 - Slide13


ICI Fund Flow Survey | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street

Takeaway: Outflows from domestic equity and fixed income continue while international equity funds continue their best year post-2007.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Investors continued recent trends last week with domestic equity and fixed income funds in redemption while international equity funds continued to win new funds at a record pace. Domestic equity mutual funds have now experienced net outflows for 24 consecutive weeks now totaling over -$93.0 billion, including the most recent week which racked up another -$2.3 billion loss. Total fixed income mutual funds and ETFs have been in outflow for 8 of the last 10 weeks, including three consecutive weeks of losses. Total fixed income products gave up -$3.7 billion in the most recent 5 day period as consternation about the direction of short term interest rates continues. Conversely, international equity mutual funds are having their best year on record, post-2007. The asset class has experienced inflows in every week so for in 2015 winning +$95.0 billion in new funds year-to-date, including the most recent week of +$3.8 billion in contributions.

 

Of these trends, we see growing domestic redemptions as the most actionable and continue to recommend shorting T. Rowe Price (TROW) stock with over 60% of its assets-under-management (AUM) in mutual funds and 85% of its AUM in domestic products (see our TROW report HERE).


ICI Fund Flow Survey | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI1


In the most recent 5-day period ending August 12th, total equity mutual funds put up net inflows of +$1.5 billion, outpacing the year-to-date weekly average inflow of +$83 million and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$3.8 billion and domestic stock fund withdrawals of -$2.3 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 -$2.7 billion, trailing the year-to-date weekly average inflow of +$1.3 billion and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds withdrawals of -$10 million and taxable bond funds withdrawals of -$2.7 billion.


Equity ETFs had net subscriptions of +$2.1 billion, trailing the year-to-date weekly average inflow of +$2.3 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net outflows of -$1.0 billion, trailing the year-to-date weekly average inflow of +$809 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 | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI2


ICI Fund Flow Survey | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI3


ICI Fund Flow Survey | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI4


ICI Fund Flow Survey | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI5


ICI Fund Flow Survey | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - 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 | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI12


ICI Fund Flow Survey | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI13


ICI Fund Flow Survey | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI14


ICI Fund Flow Survey | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI15


ICI Fund Flow Survey | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - 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 | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI7


ICI Fund Flow Survey | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the utilities XLU ETF experienced the largest percentage outflow for the week. The fund lost -6% of its assets or -$375 million to redemptions.


ICI Fund Flow Survey | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - 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 | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI17


ICI Fund Flow Survey | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$7.3 billion spread for the week (+$3.6 billion of total equity inflow net of the -$3.7 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 +$2.1 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 -$18.1 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI10 2



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 | 6 Consecutive Months and Counting...The Most Pervasive Trend on Wall Street - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 


Joshua Steiner, CFA







Cartoon of the Day: The Lowdown

Cartoon of the Day: The Lowdown - 10YR TREASURY CARTOON 08.19.2015

 

Despite some vocal naysayers, Hedgeye's process-driven macro team has been making the successful, (quite) contrarian call on bonds for quite some time now. We invite you to join us and learn more about how we can help you upgrade your investing acumen.


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