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November 27, 2015

 

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INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.29 2.18 2.23
SPX
S&P 500
2,025 2,109 2,088
RUT
Russell 2000
1,139 1,203 1,188
COMPQ
NASDAQ Composite
5,018 5,182 5,116
NIKK
Nikkei 225 Index
19,287 20,049 19,786
DAX
German DAX Composite
10,826 11,384 11,320
VIX
Volatility Index
13.92 20.11 15.19
DXY
U.S. Dollar Index
99.19 100.21 99.83
EURUSD
Euro
1.04 1.07 1.06
USDJPY
Japanese Yen
122.02 123.73 122.58
WTIC
Light Crude Oil Spot Price
40.18 43.64 43.20
NATGAS
Natural Gas Spot Price
2.21 2.39 2.29
GOLD
Gold Spot Price
1,060 1,080 1,070
COPPER
Copper Spot Price
1.98 2.16 2.04
AAPL
Apple Inc.
111 120 118
AMZN
Amazon.com Inc
635 688 675
PCLN
Priceline.com Inc.
1,213 1,312 1,240
VRX
Valeant Pharmaceuticals International, Inc.
66.61 95.40 87.45
DIS
Walt Disney Co.
115 122 118
MCD
McDonald's Corp.
110 115 113

 

 


CHART OF THE DAY: Wall Street Projections Are As Bad As The Fed's

 

CHART OF THE DAY: Wall Street Projections Are As Bad As The Fed's - 11.27.15 EL chart

 

Editor's Note: Below is a brief excerpt from today's Early Look written by Hedgeye's Director of Research Daryl Jones. Click here to subscribe.

 

"... Now we certainly give money managers credit for being savvier, as it relates to the markets, than most members of the Federal Reserve, but the Chart of the Day shows that their “projections” may be almost as inaccurate as the Fed. As the chart highlights, in September 2014, the last time investors were selling Treasuries at this rate, it was basically at the peak in 10-year yield. So the moral of the story is: only turkeys sell at the lows."


Don’t Be a Turkey

“The 50-50 rule: Anytime you have a 50-50 chance of getting something right, there’s a 90% probability of getting it wrong.”

-Andy Rooney

 

Over the the Thanksgiving break, we stock market operators use only one rule of thumb. Related to Rooney's quote above, we assign a 50-50 chance of falling asleep after the second helping of turkey. In reality, that sneaky critter tryptophan turns that 50 – 50 chance into a more than 90% probability of sleep.

 

In fact though, the rule of thumb that eating turkey leads to sleep is really just a fallacy. Take it from our good friends at Wikipedia:

 

“A common assertion in the US is that heavy consumption of turkey meat results in drowsiness, due to high levels of tryptophan contained in turkey. However, the amount of tryptophan in turkey is comparable to that contained in most other meats. Furthermore, post-meal drowsiness may have more to do with what is consumed along with the turkey, carbohydrates in particular. It has been demonstrated in both animal models and humans that ingestion of a meal rich in carbohydrates triggers release of insulin. Insulin in turn stimulates the uptake of large neutral branched-chain amino acids (BCAA), but not tryptophan (an aromatic amino acid) into muscle, increasing the ratio of tryptophan to BCAA in the blood stream. The resulting increased tryptophan ratio reduces competition at the large neutral amino acid transporter (which transports both BCAA and aromatic amino acids), resulting in more uptake of tryptophan across the blood–brain barrier into the cerebrospinal fluid (CSF). Once in the CSF, tryptophan is converted into serotonin in the raphe nuclei by the normal enzymatic pathway. The resultant serotonin is further metabolised into melatonin by the pineal gland. Hence, this data suggests that "feast-induced drowsiness"— or postprandial somnolence — may be the result of a heavy meal rich in carbohydrates, which indirectly increases the production of sleep-promoting melatonin in the brain.”

 

That is a long winded way of saying: when it comes to blindly accepting conventional wisdom, don’t be a turkey!

 

Don’t Be a Turkey - FED cartoon 11.25.2015

 

Back to the Global Macro Grind...

 

In the cartoon above, from our illustrious cartoonist Bob Rich, we highlight the ongoing dilemma being contemplated by investors. Are the most recent data points hawkish or dovish? If so, what will the Fed do next? The bigger question of course is whether we are all just being turkeys with this continued myopic Fed focus.

 

It is more than a rule of thumb to suggest that any future shift in rates by the Fed should be based on their economic outlook, the problem with the economic projections of the Fed is that there isn’t a 50/50 chance they are correct. In fact, there is a more than 90% probability they are wrong.

 

The range of GDP projections from the members of the Federal Reserve started the year at 2.6 – 3.0% GDP growth. Just six months later in June, those projections were down at 1.8 – 2.0%. Now certainly we get better than most that making economic projecting is challenging in the best of times, but from the mid-point that is a more than 30% change in the projection in just six months. As my thirteen year old niece would say . . . #OMG!

 

Still despite the proven inaccuracy of Fed projections, the consensus view remains that the Fed will raise rates in December. According to a Bloomberg report out this morning, investors are selling U.S. government bond ETFs at the fastest pace in 14 months. As well, money managers withdrew $4.1 billion from U.S. fixed-income funds in November, the most since September 2014.

 

Now we certainly give money managers credit for being savvier, as it relates to the markets, than most members of the Federal Reserve, but the Chart of the Day shows that their “projections” may be almost as inaccurate as the Fed. As the chart highlights, in September 2014, the last time investors were selling Treasuries at this rate, it was basically at the peak in 10-year yield. So the moral of the story is: only turkeys sell at the lows.

 

In China this morning, the turkeys are seemingly coming home to roost with equity markets getting clobbered down almost 6% across the board. The cause du jour of this sell off is a broad, and likely overdue, crackdown on Chinese brokerages. The primary concern is CITIC Securities, which is being investigated by the Chinese version of the SEC for a supposed inflation of its derivatives business by a mere $1 trillion yuan (or $165 billion for those of you who are counting in U.S. dollars). 

 

To add a bit of fuel to the sell-off in Chinese equities, the only piece of economic data released was, not to mince words, abysmal. Specifically, industrial profits came in for September at -4.5% year-over-year. Given that data point, we probably shouldn’t be surprised that Chinese nickel producers announced today that they are reducing production in 2016 by 20%. But, hey, maybe more stimulus will help?

 

Things obviously aren’t great in China, but then there is Japan. According to recent government data, the Japanese work force could fall from 64 million in 2014 to 56 million in 2030, a decline of over 8 million people. In other news, the U.S. Federal Reserve is projecting inflation will accelerate in Japan over the next decade. (That’s a joke!).

 

Contemplating Japan and China reminds us of one of our favorite quotes from the Oracle of Omaha:

 

“Only when the tide goes out do you realize who’s been swimming naked.”

 

Indeed.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.18-2.29%

SPX 2025-2109

VIX 13.92-20.11

USD 99.11-100.21
Oil (WTI) 40.18-43.64

Gold 1060-1080

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research 

 

Don’t Be a Turkey - 11.27.15 EL chart


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McCullough: How To Stay Ahead Of Consensus Right Now

 

In this brief excerpt from a recent Investing Ideas ‘Macro Overlay,’ Hedgeye CEO Keith McCullough explains how to position your portfolio ahead of the Fed’s potential December rate hike. McCullough also reflects on Wall Street’s worst macro calls of the year.

 

Subscribe to Investing Ideas today for access to our full list of longer term ideas.

 

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The Macro Show Replay | November 27, 2015

 


ICI Fund Flow Survey | ~$250 Billion Dollar Divergence

Takeaway: Investors favored passive ETFs last week, continuing the trend that has brought 2015 ETF inflows to +101B versus fund redemptions of -$143 B

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Investors pulled funds from almost all risk categories in the 5-day period ending November 18th. Total equity mutual funds lost -$4.9 billion, including another -$4.5 billion outflow from domestic stock funds. Fixed income mutual funds lost -$3.0 billion with investors continuing to flee the taxable bond category on fears of a rate hike. Meanwhile, investors favored passive ETFs, contributing +$1.5 billion and +$1.9 billion to equity and fixed income ETFs, respectively.

 

The chart below shows that the ongoing shift out of active domestic equity funds to passive U.S. equity ETFs year-to-date which has produced -$143.4 billion in outflows versus the +$101.1 billion that has been reinvested into ETFs over the same period. We recommend a short position in shares of T. Rowe Price as a way to express this ongoing shift (see our TROW reports). TROW's organic growth rate has been steadily dropping and what was once a double digit growth rate is moving to flat at best with our estimates calling for negatives growth through 2016. TROW funds still perform strongly however the shift out of the mutual fund structure is just too pervasive for the company to make the Street's still rosey expectations.


ICI Fund Flow Survey | ~$250 Billion Dollar Divergence - ICI19

 

ICI Fund Flow Survey | ~$250 Billion Dollar Divergence - TROW chart

 

In the most recent 5-day period ending November 18th, total equity mutual funds put up net outflows of -$4.9 billion, trailing the year-to-date weekly average outflow of -$773 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund withdrawals of -$438 million and domestic stock fund withdrawals of -$4.5 billion. International equity funds have had positive flows in 44 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 -$3.0 billion, trailing the year-to-date weekly average inflow of +$161 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond fund contributions of +$649 million and taxable bond fund withdrawals of -$3.6 billion.

 

Equity ETFs had net subscriptions of +$1.5 billion, trailing 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 inflows of +$1.8 billion, outpacing the year-to-date weekly average inflow of +$1.1 billion and the 2014 average inflow of +$1.0 billion.

 

ICI Fund Flow Survey | ~$250 Billion Dollar Divergence - ICI1

 

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 | ~$250 Billion Dollar Divergence - ICI2

 

ICI Fund Flow Survey | ~$250 Billion Dollar Divergence - ICI3

 

ICI Fund Flow Survey | ~$250 Billion Dollar Divergence - ICI4

 

ICI Fund Flow Survey | ~$250 Billion Dollar Divergence - ICI6 2

 

ICI Fund Flow Survey | ~$250 Billion Dollar Divergence - 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 | ~$250 Billion Dollar Divergence - ICI12

 

ICI Fund Flow Survey | ~$250 Billion Dollar Divergence - ICI13

 

ICI Fund Flow Survey | ~$250 Billion Dollar Divergence - ICI14

 

ICI Fund Flow Survey | ~$250 Billion Dollar Divergence - ICI15

 

ICI Fund Flow Survey | ~$250 Billion Dollar Divergence - 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 | ~$250 Billion Dollar Divergence - ICI7

 

ICI Fund Flow Survey | ~$250 Billion Dollar Divergence - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the materials XLB ETF ceded -4% or -$94 million to redemptions in the 5-day period ending November 18th.

 

ICI Fund Flow Survey | ~$250 Billion Dollar Divergence - 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 | ~$250 Billion Dollar Divergence - ICI17

 

ICI Fund Flow Survey | ~$250 Billion Dollar Divergence - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$2.3 billion spread for the week (-$3.4 billion of total equity outflow net of the -$1.1 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 +$963 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 | ~$250 Billion Dollar Divergence - ICI10 2

 


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 | ~$250 Billion Dollar Divergence - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







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