Oil (WTI) smoked for another -5.9% drop yesterday and -0.27% today, taking its epic deflation to -43.3% year-over-year.
We are moving United Natural Foods (UNFI) to the Hedgeye Consumer Staples LONG bench.
We have ridden the wave on this name, going long at ~$49 (Black Book HERE) up to ~$55, and now down sharply to ~$37. We will be the first ones to admit that we did not time this trade correctly, misjudging the Whole Foods (WFM) effect, the overall natural and organic category going more mainstream, and the slowing center of store. At ~$49 UNFI was trading at 2008 recession levels, what we called a “generational opportunity,” at the time that was an accurate portrayal. Markets change, and we have to change with them. One may ask; why aren’t you moving it to the SHORT side? If it wasn’t a generational opportunity at $49, we definitely believe it is below $37, but we need to see a few things play out before gaining confidence in the long-term trajectory of UNFI.
UNFI is still a great company, with a solid management team. The market is changing around them; natural and organic is now mainstream and available in more locations besides just the natural channel (WFM) and the center of store is struggling as consumer reach for more fresh items. UNFI must learn to change with this market and we are confident they are working towards that. They still maintain one of the largest portfolios of natural and organic products and provide a differentiated, value-add service that their customers appreciate and need. Bottom line is that the TAIL story is still in tacked, but there will be some near term turbulence as we are seeing today.
1Q16 EARNINGS RESULTS
For all intents and purposes this was an ugly quarter, one that included a top and bottom line miss, with a full year 2016 guide down. Net sales for 1Q16 were $2.08 billion versus consensus estimates of $2.09 billion. Operating income decreased 7.7% YoY to $53.9 million, this also missed consensus expectations of $60.5 million, was heavily impacted by a $2.8 million restructuring charge related to the loss of the Albertsons contract. Adjusted diluted EPS for the quarter was $0.63, coming short of consensus estimates of $0.68 by $0.05.
Management appeared especially cautious on the call, as they called 2016 a transitional year for the company. They continuously pointed out the competitive nature of the industry, and the troubles with the center of store. Management appeared wary of top line growth as they reposition the business to appeal to current consumer trends of fresh, perimeter food items and ethnic gourmet.
Management guided the full year down, revenue is now expected to be in the range of $8.4 to $8.6 billion versus previously announced guidance of $8.5 to $8.7 billion. Earnings per diluted share are now expected to be $2.73 to $2.84 versus previously announced guidance of $2.80 to $2.93.
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Takeaway: The CRB Index is down -23% year-to-date.
It looks like the October “reflation” call was just as bad as the July one – global growth continues to slow. What has become clear is how largely misunderstood deflation has been over the last 18 months. We’ve entered the most painful part of a crash in inflation expectations – the capitulation.
The CRB Index made-lower-lows -23% YTD yesterday and Oil/Copper had only bounced +0.7% and +0.2% respectively this morning, before both headed lower.
Here are a few of the components within the CRB Index that were crashing yesterday:
Aren’t epic deflations and crashes fun? And don't confuse today's mixed trading as a bottom for deflation.
But, ex-all-of-it, “price stability” seems to be tracking right at the Fed’s target!
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In this excerpt of The Macro Show this morning, Hedgeye CEO Keith McCullough pulled up charts of crashing equity markets around the world and took Wall Street to task for its nonsensical bullish stock market thesis that “Ex-Energy the stock market looks good.”
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Takeaway: Almost all active categories had withdrawals last week, including -$3.5 B from domestic equity funds. Meanwhile, equity ETFs gained +$8.0 B.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Fund flows in the 5-day period ending November 25th were similar to the week prior. Investors again pulled funds from almost all actively managed risk categories, as the rotation into passive products continued. Total equity mutual funds lost -$3.9 billion with total fixed income mutual funds shedding -$2.7 billion for the week. Meanwhile, investors contributed +$8.0 billion and +$670 million to equity and fixed income ETFs, respectively.
A broader look at the ongoing damage from passives against the active industry outlines the continued growth trajectory of ETFs. Passive ETFs have garnered 55% of cumulative investment flow since 2007 taking in over $1.4 trillion versus all long-term mutual fund products of $1.1 trillion (both stock and bond funds). The damage on the equity side specifically is most notable with international and domestic equity funds having lost -$281 billion since '07 versus the over $1.0 trillion inflow for equity ETFs over the same time frame. The divergence this year is running near another +$150 billion for passives with active equity outflows at -$39 billion (running domestic equity fund flows for '15 are -$147 billion netted against international funds with a +$107 billion contribution) and equity ETFs taking in +$109 billion in the first 11 months of the year. With only 13% total market share against total fund products, the ETF structure has plenty of additional share to gain.
In the most recent 5-day period ending November 25th, total equity mutual funds put up net outflows of -$3.9 billion, trailing the year-to-date weekly average outflow of -$840 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund withdrawals of -$369 million and domestic stock fund withdrawals of -$3.5 billion. International equity funds have had positive flows in 43 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 -$2.7 billion, trailing the year-to-date weekly average inflow of +$100 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds contributions of +$642 million and taxable bond funds withdrawals of -$3.3 billion.
Equity ETFs had net subscriptions of +$8.0 billion, outpacing the year-to-date weekly average inflow of +$2.3 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$670 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:
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.
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:
Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +$135 million or +6% to the materials XLB ETF, more than replacing the prior week's -$94 million withdrawal.
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.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$6.2 billion spread for the week (+$4.2 billion of total equity inflow net of the -$2.0 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 +$968 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.)
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:
Takeaway: We've been repeatedly warning about style factor risk to small cap stocks.
The Russell 2000 took another beating yesterday. It was the most recent fallout in an already tough year. The small-cap index is down 3% year-to-date but is in correction mode from its 2015 high.
The Russell’s poor performance in 2015 is worth probing because it's crash actually exemplifies much of what Hedgeye has warned subscribers about all year. In yesterday’s Chart of the Day, Hedgeye CEO Keith McCullough walked readers through the style factors that have worked so far in 2015.
Style factors also explain why Russell 2000 stocks are crashing from their 2015 highs. Here’s McCullough’s analysis from a note sent to subscribers this morning:
“The Russell 2000 moved back into double-digit correction mode yesterday (-10.1% since July’s all-time #Bubble high) as small cap, leverage, and high beta continue to some of the worst Style Factors to be long during a #LateCycle slow-down that’s driven by #Deflation expectations.”
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