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DM Asia/Emerging Markets Investment Strategy Update

***The roundup below is an example of our data-driven internal research process. Specifically, it helps our team contextualize the key economic releases and policy developments occurring across Developed Asia and Emerging Market economies on a daily basis. To the extent you'd like to be BCC'ed on such emails please shoot us a quick note and we'll add you to the list.***

 

 

In Australia, Commonwealth Bank became the second bank to lift mortgage rates in as many weeks. Speculation ensued that the RBA may be forced to add to their -50bps of rate cuts in the YTD, which weighed on the AUD. Does the RBA risk quashing household consumption growth – which is accelerating on a trending and sequential basis – in hopes of stimulating industrial production and inflation? Recall that headline CPI and PPI are structurally depressed, as is core CPI, which is decelerating on a trending and sequential basis. All told, we've been [admittedly lazily] short the AUD since introducing the thesis in mid-2012 and have yet to encouter a fundamental reason to cover given that we remain "mid-cycle" from the perspective of the bull market in U.S. dollars that is being perpetuated by the G-3 monetary policy divergence theme we authored in 4Q14.

 

DM Asia/Emerging Markets Investment Strategy Update - Australia Economic Summary

 

DM Asia/Emerging Markets Investment Strategy Update - DM Asia Idea Flow Monitor

 

In Brazil, the stench of stagflation continues to force BCB’s hand, as evidenced by their decision to leave their benchmark SELIC rate unchanged. Recalled that we discussed these dynamics earlier this week, when we highlighted the structurally depressed nature of Brazilian economic growth and structurally elevated nature of Brazilian inflation. To make matters worse, the deepening nature of their political crisis only adds to the consternation experienced by investors. We continue to view Brazil as a structural short and to the exent you are looking for a non-consensus way to play a bounce in reflation assets [to lower-highs], we strongly suggest you look elsewhere (i.e. Russia). CLICK HERE for more details.

 

DM Asia/Emerging Markets Investment Strategy Update - Brazil Economic Summary

 

In Mexico, the latest reading of household consumption growth accelerated to a near 10Y-high, preserving the trending and sequential acceleration in this sector of the Mexican economy. With exports and industrial production trending higher, business confidence and consumer confidence trending lower and various metrics of inflation structurally depressed, one could argue that Mexico is in the “sweet spot” of post-crisis equity investing – solid growth with no threat of policy tightening. This dynamic is being confirmed in the marketplace, with the WoW moves in the MEXBOL and MXN (+0.8% and -1.2%, respectively) corroborating the associated YTD deltas (+3% and -11.1%, respectively).

 

DM Asia/Emerging Markets Investment Strategy Update - Mexico Economic Summary

 

Best of luck out there today,

 

DD

 

Darius Dale

Director


The Macro Show Replay | October 22, 2015

 


CHART OF THE DAY: The #Valeant Gong Show Hosted By Bill #Ackman

 

CHART OF THE DAY: The #Valeant Gong Show Hosted By Bill #Ackman - 10.22.15 EL chart

 

Editor's note: This is an excerpt from today's Early Look written by Hedgeye CEO Keith McCullough discussing Valeant Pharmaceuticals' recent shenanigans:

 

  1. A really “smart” management team levers up a company and pitches financial engineering to Wall Street
  2. “Activist” rich-boy-wonder Bill Ackman calls Valeant the next “Berkshire Hathaway” and takes a 20-30% (?) position
  3. Stock crashes (on fundamentals) and Ackman pumps to CNBC that he bought another “2 million shares”

 

And the stock bounces +10% … for an hour.

 

CLICK HERE to access Healthcare analyst Tom Tobin's prescient institutional research report on Valeant. If you’d like to learn more about our institutional research offerings please ping sales@hedgeye.com.


Crony Crashalists

“Early in life I had noticed that no event is ever correctly reported in a newspaper.”

-George Orwell

 

That’s an important observation. Especially since most “newspapers” in this day and age lean left on economic and market matters, someone either needs to show us the truth, or we need to find it for ourselves.

 

Since I’m not much of a socialist, I had no exposure to Orwell’s writings until my English professor @Yale had me read The Road To Wigan Pier. It’s a 1937 non-fiction book and it resonated with me as it documented living his blue collared life in northern England.

 

“Orwellian” ideals resonated with many during a depression. My 1970s-1980s northern Canadian life wasn’t depressing. We didn’t have Ferraris and beg for central planning. We didn’t consider ourselves part of a “class” either. We just worked hard and lived.

 

Crony Crashalists - z hock

 

Back to the Global Macro Grind

 

Fast forward 8 decades and wow have things changed. Maybe if I moved my family back to Thunder Bay, Ontario I’d feel differently. But the probability of that happening is low. And the probability of my having to deal with socialism in America is rising.

 

On that rate of change score, here’s a fascinating study that one of our sharpest clients sent me earlier this week titled “One Third of Millenials View Socialism Favorably.” 

 

The bigger takeaway for me was that only 39% of Millenials viewed American Capitalism favorably.

 

Put another way (and who knows if this article is true to begin with), it’s probably safe to say that most Millenials don’t know what the difference between socialism and capitalism is anyway. That’s just sad.

 

But, given the socialization of what used to be free-market risks and the crony-crashalism you see in US markets (and the manic media that promotes it) every day, do you blame our youngest generation for being confused?

 

What kind of example are we providing them when we have gong-shows like Valeant Pharmaceutical (VRX) crashing yesterday?

 

Gonger? Yes. How else would you describe something like this:

 

  1. A really “smart” management team levers up a company and pitches financial engineering to Wall Street
  2. “Activist” rich-boy-wonder Bill Ackman calls Valeant the next “Berkshire Hathaway” and takes a 20-30% (?) position
  3. Stock crashes (on fundamentals) and Ackman pumps to CNBC that he bought another “2 million shares”

 

And the stock bounces +10% … for an hour.

 

2 million shares X $100 stock (was at $260/share 2 months ago) = $200 million dollars X 10% = $20M/hr for Ackman

 

And then CNBC runs the Valeant (VRX) view that someone (not Ackman) was “manipulating the stock”?

 

Oh great. This must be the “capitalism” (or hourly wage inflation?) that self-avowed socialists like Bernie Sanders are disgusted with. Being a free-market capitalist, who believes in a meritocracy (as opposed to preferential treatment for the “elite”), I am too.

 

Now that I got that off my chest, let’s pivot to the newsiest Global Macro event of the day – the European Central Market Planning meeting in Malta.

 

Yes. Malta – as in the gorgeous southern European island in the Mediterranean Sea. God’s visible socialist hand must have had this venue very much in mind when he was thinking of putting these people on earth to save us from the “capitalists.”

 

  1. EURO – vs. USD is trading flat day/day at $1.13 and will need a big time Draghi Devaluation event to break $1.11
  2. European Bond Yields are trading flat to up this morning in anticipation that Draghi may not deliver the #cowbell
  3. European Stocks are trading side-ways as they await the next central plan

 

Great. Isn’t this just great?

 

I really have nothing else to tell you this morning (hence the socialist/capitalist diatribe). Nope, sorry. I wasn’t living large at a tiki bar on a Maltese beach last night getting inside info on what the ECB will say today. So I have no “edge.”

 

Instead, I’ll be back to you after the newsy event as that’s all we non-crony-crashalists of the gridiron can do.

 

Our immediate-term Global Macro Risk Ranges are now (with our intermediate-term TREND research views in brackets):

 

UST 10yr Yield 1.98-2.09% (bearish)

SPX 1 (bearish)
RUT 1131--1158 (bearish)
DAX 98 (bearish)
VIX 14.74-20.22 (bullish)
USD 94.06-95.45 (neutral)
EUR/USD 1.12-1.14 (neutral)
YEN 118.55-120.90 (bullish)
Oil (WTI) 44.06-46.90 (neutral)

Nat Gas 2.36-2.55 (bearish)

Gold 1150-1190 (bullish)
Copper 2.30-2.40 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Crony Crashalists - 10.22.15 EL chart


ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk

Takeaway: Investors continued to build cash on the sidelines with a +$29 billion contribution to money funds over the past 2 weeks.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Investors continued to play defense in the 5-day period ending October 14th. Money funds gained another +$10 billion, bringing the 4Q15TD total inflow to +$29 billion following the +$54 billion build in money funds in 3Q15. We are entering the seasonally strongest period for money fund growth with a +3.7% average balance build at industry leader Federated Investors since 2007. Long term, active products were bifurcated last week with active equity funds seeing redemptions of -$1.4 billion versus passive stock ETFs which won +$4.4 billion in new business. Both sides of the bond aisle won new business with +$2.4 billion in active bond funds with passive fixed income ETFs winning +$2.0 billion.

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - chart 19

 

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


ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI1

 

In the most recent 5-day period ending October 14th, total equity mutual funds put up net outflows of -$1.5 billion, trailing the year-to-date weekly average outflow of -$404 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund withdrawals of -$28 million and domestic stock fund withdrawals of -$1.4 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 inflows of +$2.4 billion, outpacing the year-to-date weekly average inflow of +$40 million and the 2014 average inflow of +$926 million. The inflow was composed of tax-free or municipal bond funds contributions of +$617 million and taxable bond funds contributions of +$1.8 billion.

 

Equity ETFs had net subscriptions of +$4.4 billion, outpacing 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 +$2.0 billion, outpacing the year-to-date weekly average inflow of +$1.2 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 | Investors Seeking Safety, Shunning Active Equity Risk - ICI2

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI3

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI4

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI5

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - 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 | Investors Seeking Safety, Shunning Active Equity Risk - ICI12

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI13

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI14

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI15

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - 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 | Investors Seeking Safety, Shunning Active Equity Risk - ICI7

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors poured +$688 million or +11% into the industrials XLI ETF while drawing -$101 million or -5% from the materials XLB.

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - 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 | Investors Seeking Safety, Shunning Active Equity Risk - ICI17

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$1.5 billion spread for the week (+$3.0 billion of total equity inflow net of the +$4.5 billion 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 +$1.5 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 | Investors Seeking Safety, Shunning Active Equity Risk - 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 | Investors Seeking Safety, Shunning Active Equity Risk - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







KMI | Poor Results and a Massively Overvalued Stock

KMI is Worth $10 – $13/sh……With every quarter’s results we are more convinced that KMI is massively overvalued.  We see no reason why fair value for this Company isn’t in the range of 9x – 10x current EV/EBITDA, or $10 - $13/sh (on $7.2B of annualized EBITDA and $42.5B of net debt).  KMI is a capital intensive, cyclical conglomerate with low-to-no growth and an over-levered balance sheet.  In our opinion the MLP go-go days of valuing this company based upon its dividend/distribution are behind us – this market is smartening up and KMI longs have a hard lesson to learn yet.

 

3Q15 Results A Little Soft……KMI posted 3Q15 results shy of consensus expectations: adjusted EPS of $0.16/sh vs. consensus $0.18; EBIT of $1.10B vs. consensus $1.17B; and EBITDA of $1.80B vs. consensus $1.83B.  FCF in the quarter was $144MM or $0.07/sh.  The dividend declared was as expected at $0.51/sh.  For the YTD 2015, KMI has declared dividends equal to ~4x its FCF and ~3x its adjusted EPS.  In the quarter EBIT was (9)% YoY and EBITDA was (1)% YoY.  Over the last year KMI has negative EBITDA growth despite spending around $1B of CapEx per quarter and making $3.5B of acquisitions.

 

KMI Reduces 2016 Dividend Growth Guidance; Unclear on Long-Term Dividend Growth Guidance……Just over a year after consolidating its MLPs, KMI announced that it is reducing its 2016 dividend growth guidance to a range of +6% – 10%, from the prior +10% annual CAGR through 2020.  On the call KMI’s management team was rambling and reeling in response to several questions regarding long-term dividend growth – at this stage it seems uncertain and highly dependent on where the stock price is.  One of the more amusing aspects of the conference call (there were many) was KMI management bemoaning, on the one hand, the high dividend yield causing financing problems, and on the other, the stock being undervalued.  If the stock were truly cheap then the logical move would be to eliminate the dividend and use that cash to repurchase shares…  Why not?

 

Mysterious New Financing Vehicle Coming Soon and That’s Not Good……Someone must be telling KMI management that the stock has traded poorly this year because of an equity overhang...  Yesterday KMI announced that it has found a new source of equity capital that will eliminate the need for new common KMI shares between now and mid 2016.  We speculate that it could be some equity investment from Rich Kinder himself (with other insiders and/or big holders?) with a special dividend feature (thinking something like a special class of shares that has a dividend below the common dividend for X years before converting to common).  Investors should be wary of such a last-ditch effort to save a broken model.

 

Other Items of Note……

  • Every segment will miss the 2015 budget even after including the acquired EBITDA from Hiland and the Vopak terminals that were not contemplated in the budget.
  • Numerous pockets of fundamental weakness in steel and coal terminals, G&P volumes, liquids pipelines volumes, CO2 volumes, and oil E&P volumes (oil production in 3Q15 was (2)% YoY and below plan in every field).
  • KMI took a $387MM impairment charge on the Goldsmith oil field; KMI bought the field in 2013 for $280MM.
  • KMI issued $1.3B of common equity in 3Q15, taking YTD 2015 equity issuance up to $3.9B.  KMI shareholders have been diluted by more than they’ve received in dividends so far this year.

-  

I’m on the road in London this week so am keeping this recap short and to the key points.  Stay tuned for more after we get the 10-Q in the next couple weeks…  And it may be coming time to do another deep dive presentation on KMI – it’s been too long!

 

 

Kevin Kaiser

Managing Director



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