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Cartoon of the Day: Red October?

Cartoon of the Day: Red October? - OctoBEAR cartoon 10.01.2015

 

Below is an excerpt from today's Early Look by Hedgeye CEO Keith McCullough:

 

...“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.”

 


CAG | IN THE BEGINNING

ConAgra Foods (CAG) is on our Hedgeye Consumer Staples Best Ideas list as a LONG.

 

In the note we wrote (CLICK HERE to view) adding CAG to the Best Ideas list, we highlighted some of the key phrases CEO Sean Connelly used at the shareholder meeting last week.  At the time, it occurred to us those phrases were important indications that the changes CAG was embarking on were going to be significant.  Today’s press release was a significant step forward for CAG and Sean did not disappoint on delivering on bold new changes.    

 

SEAN M. CONNOLLY – “Embrace bold change”

 

HEDGEYE - Moving the HQ to Chicago is a BOLD change!

 

SEAN M. CONNOLLY – “More focused company”

 

HEDGEYE – Consolidating the consumer food businesses is a big step forward in the right direction and will allow for greater innovation leading to accelerating growth.

 

SEAN M. CONNOLLY – “The Company also announced the relocation of its headquarters to Chicago, Ill. beginning in the summer of 2016, approximately 700 employees will be located in the new offices in the city’s Merchandise Mart, including the company’s senior leadership team and certain functions of the Consumer Foods business, which are currently located in Omaha, Neb. and Naperville, Ill.

 

HEDGEYE – CAG needed a wakeup call, moving the HQ to Chicago is a bold move to send a message to the workforce that change is underway and the employee’s need to “embrace” the move.  Omaha and Naperville aren’t exactly a hotbed for top tier talent. Being in Chicago will allow them to compete for employees with other top tier companies.  Also, consolidating the consumer food business in Chicago is a clear indication of where the company is headed.  The next logical step is to cut SKU’s and shrink the branded portfolio in order to focus on the core brands. 

   

SEAN M. CONNOLLY –  “Bold action”

 

HEDGEYE – Eliminating 30% of the workforce is a big number and a massive undertaking.

 

SEAN M. CONNOLLY – “The restructuring is expected to result in the elimination of approximately 1,500 positions or approximately 30% of the company’s global office-based workforce.”

 

HEDGEYE – The overarching theme from today’s press release is that CAG will look significantly different in 12-18 months.  We believe that this will also mean significantly improved profitability and increased shareholder returns.

 

SEAN M. CONNOLLY –  “Disciplined and focused”

 

HEDGEYE – As expected, cost cutting takes center stage.

 

SEAN M. CONNOLLY – “Cost savings of approximately $200 million are expected to be derived from a combination of lower headcount and non-headcount costs which will be achieved by aggressively embracing zero-based budgeting, simplifying organizational structure by increasing spans of control and reducing layers, and outsourcing technology and back office functions to improve scalability. Additionally, the company expects to realize approximately $100 million of efficiency benefits from enhancements to trade spend processes and tools.”

 

HEDGEYE – There are some classic buzzwords like zero-based budgeting (ZBB) in this part of the release.  Strangely, we would have been disappointed if they left this part out.  The cost cutting will benefit the numbers in FY2017, which now makes FY16 a rebuilding year.  With one month of 2QFY16 in the record books, we are close to the six month window of opportunity.  We have a tendency to be early with our HIGH CONVICTION TAIL calls in the Consumer Staples space and the six month window is a key metric.  

    

SEAN M. CONNOLLY – “To stay competitive we must change”

 

HEDGEYE – Changes are good and today was not an easy day.

 

SEAN M. CONNOLLY – “We are making difficult, but necessary, decisions to enhance productivity, drive standardization and enhance flexibility to deliver improved profitability. And through our organization redesign, we will better harness the power of our front line by deploying our talent against our largest opportunities for future growth and value creation.”

 

HEDGEYE – Getting behind a company that has been through many restructurings can be challenging.  The world and the environment for food manufacturers is shifting to a new paradigm.  The old guard at CAG embarked on a multi-year process to shift the company to be a dominant private label manufacturer back in 2011 when it failed to acquire Ralcorp.  The company successfully bought Ralcorp in January 2013.  Needless to say that was the beginning of the end to CAG as we once knew it.    

 

SEAN M. CONNOLLY – “Pledged to be transparent”

 

HEDGEYE – The proof is still in the pudding.

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.

 


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%

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


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







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