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Connecting The Dots

“Connecting the dots and solving a problem by being exposed to more ideas.”

-Gary Klein

 

That’s how cognitive psychologist Dr. Gary Klein opens a fantastic chapter that he titled “Connections” in one of the better #behavioral books I have read since Thinking, Fast And Slow (Kahneman) – it’s called Seeing What Others Don’t.

 

That is the goal, after-all. Why else would you work in this profession? I may not run money anymore (= conflict of interest with you, our subscribers), but I wake up at this godforsaken hour every morning with one goal – trying to see something that consensus hasn’t.

 

For me, “connecting the dots,” is a repeatable process. On 2 hand-written pages in my notebook, I write down market prices, volumes, volatilities, etc. (every day, for 16 years), then I try to connect trades, trends, and themes - i.e. let Mr. Macro Market tell me what to do.

 

Connecting The Dots - z z notebooks

*** Click here to join Keith live this morning at 9:00am ET on The Macro Show.

 

Back to the Global Macro Grind

 

The #process is actually becoming simpler as I add more people and parts. My experience in building Hedgeye for the last 7 years has exposed me to an entirely new generation of thinking. I’ll be forever thankful to my millennial teammates for that.

 

Admittedly, to the more qualitative research crowd, I can be agitating. But #NoWorries, they agitate me too. We’re all just random participants in a dynamic and non-linear ecosystem anyway. Mr. Market doesn’t care what you think about the Apple-Hermes watch.

 

What he (or she) did care about yesterday was this thing that AAPL has though – from a Style Factoring perspective, it’s called US Equity Market Beta:

 

  1. SP500 had a nasty intraday reversal, closing -1.5% on the day, taking its current correction back to -8.8%
  2. Russell2000 continued lower alongside most things beta, taking its draw-down to -11.4% from YTD high
  3. Apple (AAPL) down -1.9% on “we’re gonna sell lots of new products” day, remains bearish TREND @Hedgeye
  4. Biotech (IBB) down -2.2% after failing at TREND resistance (draw-down -13.6% from its all-time #Bubble high)
  5. Oil & Gas Stocks (XOP) down -2.7% and are down -36% from where people chased the “reflation” trade in Q2

 

While these are all different flavors of US Equity Beta Bets, they’ve all been quite painful to be levered-long of during both a top-down growth and inflation slow-down and a bottom-up revenue and earnings one.

 

This is where both the market and I completely disagree with the Lee Cooperman case that this bear developing in the US Equity Market is all about everything but the fundamentals. Connect the dots man – being long Linn Energy (LINE) during #Deflation?

 

Back to the most over-owned stock in human history (in market cap and manic media news-flow terms), newsflash: “Apple is relatively cheap” @WSJ (today). Really? I didn’t know that. What does the company do again? Right. It’s got big cap beta.

 

Particularly in developing bear markets (born out of economic and profit cycle peaks = 2000, 2007, 2015) never underestimate the power of the alpha turning into beta.

 

Japanese stocks are “cheap” (have been for decades). And they recently generated a lot of alpha for Global Equity managers who are long/short (overweight/underweight) other big cap equity markets. But now all that alpha is turning into an equity beta risk. Why?

 

  1. Mr. Market signaled get out of Nikkei on bounces (so we did)
  2. The causal and correlating factor for Japanese Stocks to go down is the Yen going up
  3. If the Fed comes our way on “no rate hike” in SEP = Dollar Down à Yen Up

 

No Lee, that has nothing to do with the machines. So don’t blame them. It has everything to do with connecting the macro dots. Moving along the line items in my notebook, that brings me to what they call the Fed’s “dots” this morning:

 

  1. Fed Fund Futures on a SEP hike have dropped back down to 30% (Mr. Market’s vote on probability of a rate hike)
  2. Larry Summers is still lobbying to be Hillary’s boy with “5 Reasons Why” the Fed shouldn’t hike
  3. Hilsenrath (Fed man @WSJ) is implying the Fed may or may not hike in SEP #thanks

 

Sadly, this means the Fed has NOT yet decided on next week’s rate move and are literally watching the S&P Futures to make a game-time decision about a player (the US economy) that is clearly injured in Q3 GDP slowing terms.

 

Shall we blame risk parity people for that? Confusion, my non-linear friends, breeds contempt in markets. It also perpetuates volatility. And this brings me all the way back to the #1 disconnect between Hedgeye’s forecast for 2015-2016 that isn’t yet consensus:

 

#LateCycle Growth Slowing (globally and locally)

 

From Steve Einhorn (Cooperman’s long-time macro strategist at Omega Advisors) who said on July 20th, 2015 (literally the day AAPL put in its all-time peak at $133) that there’s “still quite a while to go” to almost every consensus economist in the league… the “dots” on both their growth expectations and returns continue to be pushed out.

 

And if you want to connect your own dots on that very basic reality (497 of 500 S&P Companies have reported Q2 = Down -3.5% Revenues, Down -2.2% Earnings), take Einhorn/Omega’s word for it: “fundamentals largely determine how the stock market does.”

 

I’m thanking my notebook and team for seeing that.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.11-2.24%

SPX 1
RUT 1116-1175
Nikkei 17,108-19,137
VIX 21.86-31.70
EUR/USD 1.11-1.13
Oil (WTI) 41.44-48.41

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Connecting The Dots - z app l ll  ll 09.10.15 chartvf


The Macro Show Replay | September 10, 2015

 


Japan, Oil and Treasuries

Client Talking Points

JAPAN

Neither did a follow through day on what looked like a classic bear-market bounce in Japanese stocks; Nikkei -2.5% overnight in what was an ugly session for Asian Equities – all the Fed has to do is no SEPT hike and the Dollar Down --> Yen Up --> Nikkei Down pattern repeats.

OIL

Oil seems to like the idea of no SEPT hike (new bull market catalyst = “higher gas prices”), +0.8% this morning  to $44.48 with a risk range that finally implies a higher-low of support > $41/barrel WTI; if the Fed fights Fed Fund futures and hikes into the slow-down, we expect every “reflation” trade to get blasted.

UST 10YR

The UST 10YR tapped 2.24% resistance yesterday and quickly backed off to 2.18% as U.S. Equities had another huge intraday reversal – it’s sad, but the Fed is still probably sitting there trying to make a game-day decision (on an injured economy) based on what SPY does – here’s the 3 month setup into the event.

 

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

Asset Allocation

CASH 65% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 5%
FIXED INCOME 30% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

The franchisees voted YES on the proposal to launch All Day Breakfast nationwide at all 14,318 U.S. locations. This is a very important, monumental move by CEO Steve Easterbrook. It will define his legacy as the CEO that changed McDonald's (and the rest of the industry) for many years to come. In 2016, if MCD (with all day breakfast and an improved value message) can drive same-store sales up by 5%, the system will generate $1.9bn in incremental system-wide sales. 

 

As noted in our survey we released on July 27th, it is evident that All Day Breakfast (ADB) will be a game changer for the company. Breakfast is the single most requested item by McDonald’s customers. Listening to the customer is a tried and true way to succeed.

PENN

Following our recent visit to Plainridge and meetings with senior management, we reiterate our positive Penn National Gaming thesis.  Stability in regional markets provides good earnings visibility while expected strong contributions from Plainridge and Jamul next year should provide a nice 2 year growth story.

 

Regional gaming likely cooled off in August following a strong July.  While that could provide some consternation as the states begin releasing August gaming revenues later this week, the YoY slowdown is more related to quantitative factors rather than the health of the regional gaming customer.  September should quickly provide evidence of that.

TLT

The labor market peaks late cycle and the trend in key employment data suggest things are going from great to good (marginal changes matter). The ADP employment report showed a sequential acceleration, printing +190K vs. +185K in July. But to be clear, this series peaked at over +200K additions in the first couple of months of 2015. Initial jobless claims bottomed about six weeks ago. The trend in that series is moving back to the all-important 300K level. While the headline NFP number was a bomb on Friday, printing +173K for Aug. vs. estimates for +215K, the trend is also turning. This series also peaked back in February on a YoY rate-of-change basis.

 

Why do we point to all of this growth-slowing data? Because it’s meaningful.

  • As we have mentioned repeatedly Central Banks take a reactionary policy response to the data. The market is becoming more efficient at getting in front of policy the longer we venture into this modern-day central policy experiment
  • When forward-looking growth expectations are taken down, the back end of the Treasury curve flattens (this is good for TLT and EDV)
  • In reaction to more dovish policy monetary policy measures, the market likes gold over dollars coming out of central policy events

Three for the Road

TWEET OF THE DAY

McCullough: 1987 Redux? https://app.hedgeye.com/insights/46254-mccullough-mccullough-1987-redux… via @KeithMcCullough

#markets #stocks $SPY $VIX $QQQ

@Hedgeye

QUOTE OF THE DAY

Doing what you like is freedom. Liking what you do is happiness.

Frank Tyger

STAT OF THE DAY

According to a Reuters estimate based on the monarchy's interests in its key investment vehicle, royal estates and its trove of treasures, the British monarchy has nominal assets worth about 22.8 billion pounds ($34.8 billion).

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

September 10, 2015

September 10, 2015 - Slide1

 

BULLISH TRENDS

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BEARISH TRENDS

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ICI Fund Flow Survey | A Blip Up for Domestic Equity Funds

Takeaway: Domestic equity funds experienced their first contribution in 27 weeks, but 2015 remains the worst year on record for the asset class.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending September 2nd, domestic equity funds experienced a +$1.8 billion contribution, the first positive flow to the asset class in 27 weeks. International equity funds also rebounded modestly with a +$191 million addition after last week's first registered redemption all year. Investors sourced the funds from bond products and money market funds. Taxable bond funds, tax-free bond funds, and money market funds gave up -$5.8 billion, -$510 million, and -$16.0 billion respectively, as fixed income markets have also been volatile.

 

Even with last week's contribution, domestic equity funds remain at a -$106.3 billion total outflow for 2015, -$20.5 billion worse at the same point in 2012 and -$41.8 billion worse than the same point in 2008. 2008 and 2012 are the second and third worst years on record after the current running 2015 period for domestic equity flows. 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 continues to be our Short/Avoid proxy on these trends (see our TROW report HERE).


ICI Fund Flow Survey | A Blip Up for Domestic Equity Funds - ICI1


In the most recent 5-day period ending September 2nd, total equity mutual funds put up net inflows of +$2.0 billion, outpacing the year-to-date weekly average outflow of -$190 million and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$191 million and domestic stock fund contributions of +$1.8 billion. International equity funds have had positive flows in 47 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 -$6.3 billion, trailing the year-to-date weekly average inflow of +$635 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds withdrawals of -$510 million and taxable bond funds withdrawals of -$5.8 billion.


Equity ETFs had net subscriptions of +$7.4 billion, outpacing the year-to-date weekly average inflow of +$2.0 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$6.5 billion, outpacing the year-to-date weekly average inflow of +$1.0 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 | A Blip Up for Domestic Equity Funds - ICI2


ICI Fund Flow Survey | A Blip Up for Domestic Equity Funds - ICI3


ICI Fund Flow Survey | A Blip Up for Domestic Equity Funds - ICI4


ICI Fund Flow Survey | A Blip Up for Domestic Equity Funds - ICI5


ICI Fund Flow Survey | A Blip Up for Domestic Equity Funds - 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 | A Blip Up for Domestic Equity Funds - ICI12


ICI Fund Flow Survey | A Blip Up for Domestic Equity Funds - ICI13


ICI Fund Flow Survey | A Blip Up for Domestic Equity Funds - ICI14


ICI Fund Flow Survey | A Blip Up for Domestic Equity Funds - ICI15


ICI Fund Flow Survey | A Blip Up for Domestic Equity Funds - 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 | A Blip Up for Domestic Equity Funds - ICI7


ICI Fund Flow Survey | A Blip Up for Domestic Equity Funds - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +$7.2 billion or +5% to the S&P 500 SPY ETF on higher confidence in the U.S. market following positive GDP data and dovish comments from Fed President William Dudley.


ICI Fund Flow Survey | A Blip Up for Domestic Equity Funds - 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 | A Blip Up for Domestic Equity Funds - ICI17


ICI Fund Flow Survey | A Blip Up for Domestic Equity Funds - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$9.2 billion spread for the week (+$9.3 billion of total equity inflow net of the +$158 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 +$1.9 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 | A Blip Up for Domestic Equity Funds - 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 | A Blip Up for Domestic Equity Funds - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 


Joshua Steiner, CFA







Cartoon of the Day: The Noose

Cartoon of the Day: The Noose - Fed tightening cartoon 09.09.2015

"I maintain that if the Fed hikes into a slowdown (they haven't since Volcker), markets could crash," Hedgeye CEO Keith McCullough recently wrote.


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