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Newsflash, Captain Stock Picker: Mr. Macro Is In Charge

On today's edition of The Macro Show, Hedgeye CEO Keith McCullough answers a subscriber’s question on what institutional investors are most bearish on following meetings in New York City this week.

 

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CHART OF THE DAY: Buy Stocks Right Now? Best of Luck!

Editor's Note: This is a chart and brief excerpt from this morning's Early Look written by Hedgeye CEO Keith McCullough. Subscribe today and get ahead of consensus. Or don't. It's your money.

 

CHART OF THE DAY: Buy Stocks Right Now? Best of Luck! - z cod 10.01.15 chart

 

...[I]f neither economic growth nor revenue/earnings growth is your catalyst to “buy stocks” here in Q4 and you’re just buying them on “sentiment”, I wish you nothing but the best of luck.

 

Remember, I’m just your Teddy Bear now. I’m not going with the position bulls are in. And I’m not going away.


Teddy Bears

“Bears need people. People need bears.”

-Pam Brown

 

I found that quote this morning on ‘I Love Teddies.Com.’ I think it’s cute. Don’t you like it?

 

Unlike the dogs that were stocks (ex-Utilities) in Q3, Teddies.Com wasn’t one of the companies (like FogDog.Com) that we brought public when I worked under the Frank Quatrone #Bubble machine at First Boston in the late 1990s.

 

That’s when I started working on Wall Street. Since, I’ve traversed (and, luckily, shorted) 3 massive US stock market bubbles (2000, 2007, and 2015). It’s a generational thing. Perma bulls need people like me (when I go bearish). People need bears.

Teddy Bears - Bubble bear cartoon 09.26.2014

Back to the Global Macro Grind

 

“So”, the Old Wall will say. “Worst quarter for stocks in 4 years… and now everyone is bearish, so you need to buy” (provided that the stock market went up in the day prior #MustChaseGreen).

 

Roger that.

 

While I can’t, for the life of me, find an epic stock market bubble that peaked (2000 or 2007), then priced it all in within 3 months of the all-time peak, this constant wrangling of my teddy bear ears should be expected.

 

After all, “it’s different this time.”

 

Now that we’ve reached three of the most important catalysts of the year (in terms of our bearish case on both Global and US Growth), let’s start Q4 with a reminder of what those are:

 

  1. Q3 2015 GDP #GrowthSlowing to a range of 0.1-1.5% (reported at the end of OCT)
  2. Q3 Earnings Season (especially for the Financials, which I expect to lead on the downside in Q4)
  3. Q4 is the toughest “comp” (comparative base period for year-over-year growth) of the year

 

A growth bull who, ostensibly, has been averaging down and taking up his gross exposure to #Bubbles crashing for the last 3 months might say that all of this got “priced in” in 7 Biotech trading days. I disagree.

 

It might take another week (think OCT 1987) or another year to price in economic reality.

 

And, unless the data changes vs. the path we’ve laid out, the 10.1% and 15.1% draw-downs from their all-time #bubble peaks (current SPX and Russell draw-downs) is a far cry from pricing in that Consensus Macro is bearish enough.

 

Sentiment obviously matters. I don’t disagree with that. There is a -226,000 net short position in S&P Index + Emini futures/options contracts right now to support that consensus has shifted from bullish to bearish.

 

But, again, having not been positioned for #Deflation and #GrowthSlowing to begin with, are they Bearish Enough?

 

If you have disagreed with me the whole way down. That’s fine. That’s what makes a market. If you disagree with me after a +1.9% SP500 bounce “off the lows”, that’s fine too.

 

If you want to be bullish (from here), why not get with the program and invest in what’s working?

 

  1. Long Bond! The 10yr Treasury Yield actually fell on yesterday’s stock market “bounce” = 2.05% last
  2. Utilities (XLU) had a fantastic Q3 on both a relative and absolute basis, and remain under-owned
  3. How about Gold and Oil? Both crushed owning High-Beta, Small Cap US stocks in September

 

While I can’t get on board with Long Oil (yet), I’m definitely getting there on Gold. Since #GrowthSlowing eventually drives A) Bond Yields Lower and B) Fed Dovishness (Down Dollar), I think Mr. Macro Market smells what I do on that front.

 

“So” for all your US stock market friends who are sentiment experts (God gave them “gut” feelings) but don’t do macro, ask them if long-term sentiment is more bearish on:

 

  1. Long-Term Bonds
  2. Gold
  3. Apple

 

Alex, my Canadian friend, I’ll take “what is the most overowned equity sentiment stock in human history”, for a premium-access seat @Hedgeye’s Macrocosm Conference (invites going out this week to the Top 100 macro minds we can find on the buyside – NOV 18th).

 

And yes, I signaled “cover” on AAPL yesterday in Real-Time Alerts because it was signaling immediate-term TRADE oversold at $109-110. But don’t confuse that with the next bull market. Intermediate-term TREND resistance remains intact at $119.

 

“So” (sorry, had to use it again), if neither economic growth nor revenue/earnings growth is your catalyst to “buy stocks” here in Q4 and you’re just buying them on “sentiment”, I wish you nothing but the best of luck.

 

Remember, I’m just your Teddy Bear now. I’m not going with the position bulls are in. And I’m not going away.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.02-2.14%

SPX 1
RUT 1070-1128
EUR/USD 1.10-1.14
Oil (WTI) 43.91-47.11

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Teddy Bears - z cod 10.01.15 chart


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD

Takeaway: With renewed economic worries after the Fed delayed its rate hike, investors pulled funds from both equity and bonds while shoring up cash.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending September 23rd, investors made net withdrawals from both total equity mutual funds and ETFs, which lost -$1.5 billion, and total bond mutual funds and ETFs, which lost -$778 million. Meanwhile, market participants shored up +$14 billion in money market funds during the week. This defensive reallocation came as the Fed's decision not to raise rates sparked fresh worries over the state of the economy and uncertainty about central bank policy going forward. One trend that has been consistent recently is this build of cash on the sidelines. Total money funds, according to ICI, has amassed a +$45 billion balance quarter-to-date after draw downs of -$18 billion in 2Q and -$92 billion in 1Q15. We continue to favor money fund manager Federated Investor (FII) as a Long position (see FII report) with emerging conservatism by investors and avoiding or Shorting the equity managers, Janus Capital and T. Rowe Price (See JNS and TROW reports).


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI1


In the most recent 5-day period ending September 23rd, total equity mutual funds put up net inflows of +$2.3 billion, outpacing the year-to-date weekly average outflow of -$229 million and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$2.2 billion and domestic stock fund contributions of +$87 million. International equity funds have had positive flows in 46 of the last 52 weeks while domestic equity funds have had only 11 weeks of positive flows over the same time period.


Fixed income mutual funds put up net outflows of -$1.8 billion, trailing the year-to-date weekly average inflow of +$354 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds contributions of +$628 million and taxable bond funds withdrawals of -$2.4 billion.


Equity ETFs had net redemptions of -$3.9 billion, trailing the year-to-date weekly average inflow of +$1.8 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$973 million, trailing the year-to-date weekly average inflow of +$1.1 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 | Cash is King; +$45 BB Build in Money Markets QTD - ICI2


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI3


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI4


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI5


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - 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 | Cash is King; +$45 BB Build in Money Markets QTD - ICI12


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI13


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI14


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI15


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - 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 | Cash is King; +$45 BB Build in Money Markets QTD - ICI7


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors pulled -$7.5 billion or -4% from the broad-market SPY last week as the Fed's decision not to raise rates sparked fresh fears over the state of the economy. Meanwhile, investors sought the safety of treasury bonds, contributing +5% or +$303 million to the long treasury TLT ETF.


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - 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 | Cash is King; +$45 BB Build in Money Markets QTD - ICI17


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$742 million spread for the week (-$1.5 billion of total equity outflow net of the -$778 million 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 +$1.5 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 -$18.8 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - 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 | Cash is King; +$45 BB Build in Money Markets QTD - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 


Joshua Steiner, CFA







The Macro Show Replay | October 1, 2015

 


Long Bond Marches On

Client Talking Points

PMIs

Slower-for-longer, reiterated across Asia and Europe overnight with Japan’s PMI slowing to 51.0; China 49.8; Spain 51.7 (vs. 53.2 last month); Italy 52.8 (vs. 53.8 last month); France and Germany = 50.6 & 52.3 – all better than the U.S. (Chicago) PMI plunge to a recessionary 48.7 (vs. 54.4 last)!

RUSSELL 2000

The Russell 2000 bounced yesterday, but is still down  -15.1% from its #Bubble peak and very much signaling that a crash type draw-down (greater than 20%) is in play like you’ve seen from Hong Kong to Germany. This reiterates that you need to get liquid on rallies, avoiding small cap/high beta.  

UST 10YR

UST 10YR Yield was actually down on the day yesterday and down again this morning to 2.05%. We’re one more slowing U.S. jobs report away from a 1-handle; risk range on the 10YR continues to signal lower-highs (2.14% resistance) with all-time lows in play.

 

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

 

  

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 8%
FIXED INCOME 22% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald’s clearly continues to be well-liked by our Restaurants research team and is a near perfect fit into our macro team’s current "style factor" preferences. This stock is high cap with a low-beta, coupled with a company turnaround story that is currently well underway. We believe this stock will do well through this tumultuous time in the market.

 

As previously mentioned, the company has all day breakfast starting on October 6. We anticipate this development as not only driving increased visits from existing customers, but also new customers that maybe don’t wake up early enough to get breakfast by 10:30am (or simply just people that enjoy eating breakfast items outside of the morning!)

PENN

As Sector Head Todd Jordan notes, "PENN should benefit from the release of state gaming figures over the next few weeks. Recall that August was weaker than many thought. While we predicted this particular slowdown, our model is showing a sharp September rebound.

 

September revenues should rebound and serve as a catalyst for the stock going into Q3 earnings. On the research side we have not altered our views of PENN’s long term growth story. We continue to see more upside from current price levels.  

TLT

Is the U.S. economy still showing signs of a cyclical slowdown? Yes.  If you, like us, remain skeptical on the said policy path from our omnipotent central planners, and you believe growth continues to slow, then we respectfully submit that you sit on your GLD and TLT allocations.

 

3 GDP comps are difficult. And, once the data comes out, we think expectations will be downwardly revised again. In other words, wait for yet another Fed punt on a 2015 hike.

Three for the Road

TWEET OF THE DAY

NEW VIDEO | Eye on The #Election Vol. 1: Fondness Fading for #Trump and #Hillary https://app.hedgeye.com/insights/46627-eye-on-the-election-vol-1-fondness-fading-for-trump-and-hillary… via @HedgeyeDJ cc @KeithMcCullough

@Hedgeye

 

 

QUOTE OF THE DAY

One important key to success is self-confidence. An important key to self-confidence is preparation.

Arthur Ashe

STAT OF THE DAY

Apple announced that it sold a record 13 million iPhone 6s and 6s Plus handsets over launch weekend, breaking last year’s record of 10 million.


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