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EDV: We Are Removing Vanguard Extended Duration ETF From Investing Ideas

Takeaway: Please note we are removing Vanguard Extended Duration ETF from Investing Ideas

Today, Hedgeye CEO Keith McCullough added PIMCO 25+ Year Zero Coupon U.S. Treasury ETF (ZROZ) to the short side of Real-Time Alerts. The reasoning also lays out why we're taking EDV off Investing Ideas: 

 

"With the 10yr UST Yield pulling back to 2.23% today (you could have been plugged shorting the Long Bond like consensus did on the recent jobs report at 2.39%), I'm getting an immediate-term TRADE overbought signal (within a bullish intermediate-term TREND) in ZROZ. 

 

With the Fed hell bent on raising into a slow-down, we have to risk manage the risks associated with that. They have no idea on the economy (forecasts on growth have been wrong 70% of the time since Bernanke's un-elected reign). So the risk, is their forecast."

 

EDV: We Are Removing Vanguard Extended Duration ETF From Investing Ideas - Fed forecast cartoon 11.13.2015


INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO

Takeaway: Claims are behaving as we expected with the year-over-year change trending towards zero and energy states worsening on the margin.

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims20

 

As we come to the end of '15, jobless claims both in aggregate and for the energy states separately, are behaving as we have modeled.  Year-over-year improvement continues to converge towards zero as the level of claims backs up off of the low but remains within its frictional floor below 330k (for 21 months now). We continue to point out that the last three cycles saw claims sit below 330k for 24, 45 and 31 months before the economy entered recession, putting us 12 months from the 33-month average.

 

Additionally, energy state claims are worsening versus the country as a whole as many energy companies are set to experience the pain of their price hedges rolling off around year-end. The spread between those two indexed series in our chart below has widened for 10 weeks in a row. That includes the most recent week, ending November 7, when the spread widened from 28 to 31. 

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims18 2

 

The Data

Initial jobless claims fell 5k to 271k from 276k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3k WoW to 270.75k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.7% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.0%

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims2

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims3

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims4

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims5

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims6

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims7

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims8

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims9

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims10

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims11

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims19

 

Yield Spreads

The 2-10 spread fell -8 basis points WoW to 140 bps. 4Q15TD, the 2-10 spread is averaging 143 bps, which is lower by -10 bps relative to 3Q15.

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims15

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


What If Consensus Is ‘Dead Wrong’ on Economic Growth And We’re Right?

 

In this excerpt from The Macro Show this morning, Hedgeye Macro analyst Darius Dale responds to a subscriber’s question about the stock market hitting new highs yesterday on the possibility of a Fed rate hike. He also explains the danger in believing the Fed and Old Wall’s rosy economic forecasts.  

 

 

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.


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McCullough: 'The Data Is Unequivocally Bearish'

In a spirited debate on Fox Business' Mornings With Maria today, Hedgeye CEO Keith McCullough and Recon Capital’s Kevin Kelly square off on Fed policy, McDonald’s and whether the U.S. is headed for a recession in 2016. 

 


ICI Fund Flow Survey | Barbelling

Takeaway: Investors allocated +$5.9B more to equity than bonds last week and also defensively shored up +$12B in cash.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending November 11th, investors tip toed out into equities and shored up cash, contributing +$3.1 billion to total equity products (mutual funds and ETFs) while withdrawing -$2.8 billion from total bond proxies (mutual funds and ETFs). Within equities, investors continued to pull capital from active domestic mutual funds, withdrawing -$2.4 billion last week which have now amounted to a total drawdown of -$139.9 billion so far in 2015 (the worst start to a year for domestic equity funds in all ICI data). Meanwhile, investors also shored up +$12 billion of cash in money market funds, continuing the trend of inflows in the second half of 2015. This brings cumulative 4Q15TD money market flows to +$45 billion, following the 3Q15 inflow of +$54 billion. We continue to like the cash management space and out of favor Federated Investors (see our FII report) on a combination of positive balance builds and profitability improvements in the business for '16/'17.

 

ICI Fund Flow Survey | Barbelling - ICI1 2

 

In the most recent 5-day period ending November 11th, total equity mutual funds put up net outflows of -$1.3 billion, trailing the year-to-date weekly average outflow of -$701 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$1.1 billion and domestic stock fund withdrawals of -$2.4 billion. International equity funds have had positive flows in 45 of the last 52 weeks while domestic equity funds have had only 8 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net outflows of -$686 million, trailing the year-to-date weekly average inflow of +$230 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds contributions of +$314 million and taxable bond funds withdrawals of -$1.0 billion.

 

Equity ETFs had net subscriptions of +$4.4 billion, outpacing the year-to-date weekly average inflow of +$2.2 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net outflows of -$2.1 billion, 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 | Barbelling - ICI2

 

ICI Fund Flow Survey | Barbelling - ICI3

 

ICI Fund Flow Survey | Barbelling - ICI4

 

ICI Fund Flow Survey | Barbelling - ICI5

 

ICI Fund Flow Survey | Barbelling - 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 | Barbelling - ICI12

 

ICI Fund Flow Survey | Barbelling - ICI13

 

ICI Fund Flow Survey | Barbelling - ICI14

 

ICI Fund Flow Survey | Barbelling - ICI15

 

ICI Fund Flow Survey | Barbelling - 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 | Barbelling - eq

 

ICI Fund Flow Survey | Barbelling - 2 ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the industrials XLI and utilities XLU ETFs experienced significant outflows of -$707 million or -10% and -$514 million or -8%, respectively.

 

ICI Fund Flow Survey | Barbelling - ICI9 2



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 | Barbelling - 2 ICI17

 

ICI Fund Flow Survey | Barbelling - 2 ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$5.9 billion spread for the week (+$3.1 billion of total equity inflow net of the -$2.8 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 +$922 million (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 | Barbelling - 2 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 | Barbelling - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







How Bad Is It?

Client Talking Points

HOUSING

Headline Hijinks yesterday as neither the notable decline in Housing Starts nor the remarkable rise in Purchase Applications were as they appeared.  While Total Housing Starts declined -11%, single-family construction activity dipped just -2.4% off of cycle highs, single-family permits made a new 8-year high and the rise in multi-family permits suggests the decline in multi-family starts (-25% MoM) which weighed on the headline in October will reverse. The +12% week-over-week rise in Mortgage Purchase Applications, meanwhile, was the product of statistical adjustment noise in the holiday week (Veteran’s Day) and some measure of purchase pull-forward alongside rising rates.  Looking to next week, we expect a sequential decline in EHS as existing sales play catch-up to the trend in Pending Sales.

#GROWTHPROXIES

Fresh cycle lows in copper and iron ore are not a good sign for global growth… How bad is it? The China Iron & Steel Association said it expects steel output to drop -2.9% in 2016. That’s not a small inflection considering China’s mills produce half of global output. Former chief economist of Rio Tinto had this to say about continuing deflationary headwinds: “There’s about 300MM tons (~40% of Chinese production) of surplus capacity (in steel refining) that needs to not just be shut down, it needs to be bulldozed.” The deflation continues..

CHINA

Shanghai and Shenzhen closed up 1.4% and 3.1%, respectively, on the heels of a solid handoff from a strong U.S. close. Economic fundamentals continue to take a back seat in China with the unofficial MNI PMI reading slipping to 49.9 in NOVT from 55.6 in OCT. This is in line with crashing rail freight traffic growth and is also corroborated by a sequential slippage in the growth rates of industrial production, fixed assets investment, foreign direct investment, total social financing, as well as various measures of supply and demand in the Chinese property market in the month of OCT. Offsetting these “downside pressures” – which President Xi reiterated yesterday – is a sharp reversal of capital outflows that coincided with the IMF’s tacit decision to include the CNY in its vaunted SDR basket. Moreover, Beijing has taken to capital controls to help it accomplish its goal of exchange rate stability. While capital controls have rarely – if ever – been proven successful at staving off long-term currency depreciations, they can and will continue to be a short-sellers worst nightmare from the perspective of the consensus short on the Chinese yuan. Specifically, the PBoC’s verbal guidance to onshore banks to cull their offshore lending practices has made it more expensive than ever to borrow and sell short the yuan. The “Bejing Put” remains the #1 reason we aren’t in the Chanos camp on China; Chinese official can and will do what the half to do to ensure a relatively stable downshift in growth – if there even is such a thing.

 

**Watch The Macro Show replay - CLICK HERE

Asset Allocation

CASH 61% US EQUITIES 4%
INTL EQUITIES 3% COMMODITIES 0%
FIXED INCOME 28% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
MCD

Restaurants Sector Head Howard Penney attended MCD's investor meeting in New York City early last week. His takeaway from the meeting was that it was "very very bullish" for investors. Expectations were high, but CEO Steve Easterbrook came to NYC with big changes which have ultimately exceeded those expectations. "The big smile on Steve Easterbrook's face when talking about the current quarter was very telling," Penney writes. "He could not hide the enthusiasm." MCD increased the dollar value returned to shareholders by $10 billion. Penney and his team still see +30% upside from here.

RH

Restoration Hardware (RH) shares got caught up in the tumultuous selloff of other high-end retailers. But we're still bullish on RH. Here's why. RH Tampa has just opened. That makes 4 new Full Line Design Galleries in 90 days. And all will be open before the start of holiday shopping season and just in time to house the new product lines RH Modern and Teen. Add up the four stores and we’re looking at about 210k square feet. That alone represents about 25% growth in square footage.

 

When all is said and done, we still think this company has $11 in earnings power 4-years out, which is nearly double the consensus. We remain convinced that the debate should not be ‘if or when’ the stock hits $115, but rather is it going to $200 or $300? We’ll be looking at an earnings CAGR of 40-50% over five years. What kind of multiple does that deserve? 20x? 25x? 30x? We’d argue the higher end.

TLT

It was a nasty end to the week for the “growth is back” bulls. It was an equally nasty end to the week in equity markets. The S&P 500 was “going to all-time highs” Tuesday before retreating over 3% from Wednesday to Friday.

 

With continued data-driven confirmation that growth is slowing:

  • PPI (producer price index) printed -1.6% Y/Y for October
  • On a m/m basis, PPI declined -0.4% 
  • Declines in the energy component certainly bring the index lower, but PPI ex. Food and energy only printed +0.1% Y/Y which is ugly

Three for the Road

TWEET OF THE DAY

Rubio Versus The Fed https://app.hedgeye.com/insights/47625-rubio-versus-the-fed… via @hedgeye cc @KeithMcCullough #MarcoRubio #economy #Fed #Yellen

@Hedgeye

QUOTE OF THE DAY

The wise man should be prepared for everything that does not lie within his control.

Pythagoras

STAT OF THE DAY

North Dakota’s portion of the Bakken produced 1.11 million barrels a day in September, down 1.1% from the same month a year ago, according to state data. Drillers have been forced to idle 67% of the rigs that were in the region last year.


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