Young Bears

“There’s no bear like an old bear.”

-Samantha Armstrong


Oh, to be a young cub again… what would consensus do to be able to go back to the April to July period of 2015 and have sold higher?


While most #LateCycle growth expectations in macro markets peaked in April, the US stock market peaked in July as US Treasury Yields were putting in their last head-fake of a “breakout.” That makes this bear market in growth expectations relatively young.


And, yes, I get the hedgie-perf-anxiety-disorder (#HPAD) that helped lead this week’s bounce to lower-highs. It is what it is – kind of like expecting GDP and the US 10yr would be > 3% in 2015. It’s entertaining to watch the storytelling of it all.

Young Bears - Lower Highs cartoon10.07.2015


Back to the Global Macro Grind


Today, at 1PM EST my research team and I will walk you through our 60 slide Q4 Global Macro Themes deck. As always, we’ll start the conference call by reviewing our most recent Q3 Macro Themes which were #timestamped in July as follows:


  1. #ConsumerCycle Slowing
  2. #SecularStagnation
  3. #EuropeSlowing


Themes 2 and 3 became clearer to consensus as the quarter played out. Most investors realize that the Slower-For-Longer case that was being priced into both the stock and bond market had plenty of confirming economic data to support it.


Theme 1 was less convincing… until the most recent US jobs report confirmed the top in the #LateCycle US Employment, that is. And, perversely, it was that rancid employment print that gave birth to this 1-week old baby bull in “reflation” expectations.


After all, there’s no bull like the Old Wall’s…


And Dollar Down (on Dovish Fed expectations post the jobs print) + Rates Down ripped both #YieldChasing and everything linked to Down Dollar Reflation (Commodities, Energy Stocks, Russia, etc.) higher.


Confusing a 1-week or 1-month old bull in “reflation” with accelerating demand was actually one of the biggest mistakes Consensus Macro made in 2015. That’s what had chart chasers buy the July top, don’t forget.


So today’s call won’t focus so much on that narrative fallacy as it will the core of what’s been our bearish growth theme all along – this young bear is about to go into her “mid-cycle” maturation process!


Just to give you a sneak-peak on why the “mid-cycle slowdown” thesis is probably as wrong as the bond market thinks it is (*note: not one of the strategists calling this a mid-cycle slowdown was calling for a slow-down of any kind 9 months ago, but they seem quite sure it’s not #LateCycle), here are our Top 3 Global Macro Themes for Q4 of 2015:

  • #SuperLateCycle (USA): Slowing growth typifies the twilight of an economic expansion and negative 2nd derivative trends are creeping in across much of the domestic fundamental data. From labor and manufacturing markets to consumer and business confidence, leading indicators are beginning to roll as the late-cycle moves past peak. We'll detail why Slower-And-Lower-For-Longer remains the call. 
  • #GlobalSlowing: With the Street, IMF, World Bank and OECD all still forecasting global growth of around 3% for 2015, we find it appropriate to reiterate our call for global growth to come in at or below half that rate. Moreover, while China's August CNY devaluation effectively made our #EmergingOutflows theme a consensus bearish cog in the global economic outlook, we do not think investors are appropriately positioned for a likely trend of negative revisions to the respective growth outlooks in the U.S., Eurozone and Japan throughout the balance of the year.
  • #Crashing: Definitive crashes have occurred across many global macro markets in recent months. Those market participants on the wrong side of growth slowing and deflation are feeling the most pain. Crashing inflation expectations are perpetuating the pain across all asset classes and sectors levered to unrealistic growth expectations (energy, industrials, materials), as well as across the high-yield bond market, commodity markets, commodity currencies. Is the U.S. equity market next in line?

After adding the SP500 (SPY) to our Best Short Ideas Short list in July (we summarize our Themes each quarter with our best long/short ideas across our TRADE, TREND, and TAIL durations), we’ll reiterate that call again today.

If you’re an intermediate to long-term investor, you should be well equipped to risk manage these intermediate-term TREND themes. If you’re more of a chase the daily emotion of the S&P Futures type of a guy/gal, I’ll give you some risk ranges for that too (no immediate-term support to 1860 SPX).


If the new bull market thesis is getting back to break-even for 2015, that’s cool. I get it. Everyone who is in the business of being perma-long growth expectations needs to start somewhere. Sort of like this bear market – she’s just getting started.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.96-2.09%

DAX 99
EUR/USD 1.11-1.13
Oil (WTI) 46.02-48.99


Best of luck out there today,




Keith R. McCullough
Chief Executive Officer


Young Bears - zzz 77

The Macro Show Replay | October 8, 2015


Japan, Spain and UST 10YR

Client Talking Points


Down Dollar (post bad jobs report, slowing ISM, etc.) = Up Yen --> developing bearish TREND in Nikkei – with many hoping “China opening up” post the break could drive the next leg of SPX squeezage. The Nikkei didn’t cooperate, failing @Hedgeye TREND resistance -1% overnight.


Spain is the best short idea in European Equities (we will review this on our Q4 Macro Themes call today at 1PM) is leading losers in Europe this morning -0.8% with no support for the IBEX to the year-to-date closing lows; in other news, Deutsche Bank news has to be bullish, because it’s so bad? Short JPM.


The bond market, once again, doesn’t care about performance issues in U.S. equities – 2.04% UST 10YR Yield with no support to 1.96% ahead of earnings season and what should be a slowing U.S. GDP report at the end of October.


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


Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Our Consumer Staples team remains positive on General Mills coming out of the 2Q15 earnings call. We have been LONG GIS for the last six months and continue to have a favorable view of the company due to the following reasons:

  • Sequential improvement in cereal
  • Growth in Natural & Organic categories
  • Snacking
  • Cost cutting initiatives
  • M&A activity



Many of the regional gaming states will release September revenues next week and as we’ve written about, they should look a lot better than August. Overall same store revenue declined 5% in August (we had predicted –2%) but most of the decline was due to the calendar and a difficult comparison. For September we are projecting an increase of 2% YoY


Our Missouri tracker is forecasting September gaming revenues to be up 3.6% YoY. This is a 6% sequential improvement from August's YoY change of -2.5%. Meanwhile, Pennsylvania slot revenues were up 4% in September. Our thesis for a sequential rebound in September remains intact. We like PENN on the long side from these levels.


It was an important couple of weeks for those who were still wrestling with our lower-for-longer views. The brevity of the macro moves post-report Friday proves just how non-consensus that call remains in a year where the S&P 500 is down -8%. The scary thing with regard to Janet’s credibility is that bad news is now being priced in as bad news. Moreover, we believe this late-cycle weakness is likely to remain ongoing.  

Three for the Road


NEW VIDEO | Here’s Why Industrials Are Up (And Why That May Be a Bearish Omen) | $XLI… via @KeithMcCullough #MARKETS



Our greatest glory is not in never falling, but in rising every time we fall.



Early goalie-pulling has become a trend in the NHL, league-wide, 18 teams had an average pull time of more than 70 seconds remaining when trailing by a goal. Between 2007 and 2011, just a single team pulled its goalie with more than 70 seconds remaining in the game, on average.

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October 8, 2015

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ICI Fund Flow Survey | Safety First

Takeaway: Amongst market volatility, investors favored passive ETFs and cash in the 5-day period ending September 30.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

As volatility picked up across asset class in the 5-day period ending September 30, most risk assets shed funds. Total equity products (mutual funds and ETFs) lost -$3.5 billion and total bond products shed -$8.1 billion. Within equity, domestic equity mutual funds finished the third quarter with a bang, losing -$7.2 billion. That was the second largest weekly outflow all quarter. Meanwhile, investors clearly favored the safety of cash, making a +$8 billion contribution to money funds. Total money funds, according to ICI, brought in +$67 billion in 3Q15, after draw downs of -$18 billion in 2Q and -$92 billion in 1Q15. 


With volatility continuing to drive investors to safety and out of risk assets, the current market environment supports our Long recommendation on money fund manager Federated Investors (see FII report) and our Short recommendations on equity managers Janus Capital and T. Rowe Price (See JNS and TROW reports).

ICI Fund Flow Survey | Safety First - ICI1

In the most recent 5-day period ending September 30th, total equity mutual funds put up net outflows of -$6.3 billion, trailing the year-to-date weekly average outflow of -$391 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$891 million and domestic stock fund withdrawals of -$7.2 billion. 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 -$8.4 billion, trailing the year-to-date weekly average inflow of +$128 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds withdrawals of -$588 million and taxable bond funds withdrawals of -$7.8 billion.

Equity ETFs had net subscriptions of +$2.8 billion, outpacing the year-to-date weekly average inflow of +$1.9 billion but trailing the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$328 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 | Safety First - ICI2

ICI Fund Flow Survey | Safety First - ICI3

ICI Fund Flow Survey | Safety First - ICI4

ICI Fund Flow Survey | Safety First - ICI5

ICI Fund Flow Survey | Safety First - 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 | Safety First - ICI12

ICI Fund Flow Survey | Safety First - ICI13

ICI Fund Flow Survey | Safety First - ICI14

ICI Fund Flow Survey | Safety First - ICI15

ICI Fund Flow Survey | Safety First - 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 | Safety First - ICI7

ICI Fund Flow Survey | Safety First - ICI8

Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the healthcare XLV lost -$831 million or -6% last week as the sector came under political scrutiny for drug price increases. Meanwhile, the consumer staples XLP saw the biggest percentage inflow of +7% or +$507 million for the week.

ICI Fund Flow Survey | Safety First - 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 | Safety First - ICI17

ICI Fund Flow Survey | Safety First - ICI18

Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$4.6 billion spread for the week (-$3.5 billion of total equity outflow net of the -$8.1 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 +$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 -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)


ICI Fund Flow Survey | Safety First - ICI10

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 | Safety First - ICI11 

Jonathan Casteleyn, CFA, CMT 



Joshua Steiner, CFA


We will host a conference call on Today, October 8 at 2:30PM ET to update our long Macau trade call, present analysis on the September numbers, discuss our updated model projections, outlook and Q3 earnings previews, and to provide a more quantitative look at the implications of a rapidly declining junket business.  As always, we will entertain questions at the end of the presentation.



LVS, WYNN, MGM, MPEL, 0027.HK, 1128.HK, 1928.HK, 2282.HK, 6883.HK, and 0880.HK



  • Update to our recent long Macau trade call
  • Hedgeye company EBITDA estimates vs the Street for Q3, 2015, and 2016
  • Revised 2015/2016 monthly market projections
  • "True" Mass trends
  • Research Topic: What happens if the junkets go away? - a more quantitative look at this topic first presented in our February 2015 Macau conference call
  • Q&A


Attendance on this call is limited. Ping  for more information

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