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INSTANT INSIGHT | How To Risk Manage The Coming Recession

INSTANT INSIGHT | How To Risk Manage The Coming Recession - tlt lowdown

 

Wait... didn't the Fed just hike interest rates? Why are interest rates falling? 

 

Good question.

 

Here's the lowdown from Hedgeye CEO Keith McCullough in a note to subscribers earlier this morning:

 

"The yield spread (10Y's - 2Y's) compressed another -2 basis points yesterday back down to a 52-week low of 122 basis points with the retreat in the long-end driving most of the compression. Into year-end, the bond market continues to price in what it has all year long... Slower-and-lower-for-longer (i.e. slower growth and lower rates)."

 

Unconvinced that growth is slowing?

 

Check out this compendium of contractionary macro data put together by Hedgeye Senior Macro analyst Darius Dale. (Please note the abundance of red.) 

 

CLICK THE IMAGE BELOW TO ENLARGE.

INSTANT INSIGHT | How To Risk Manage The Coming Recession - darius macro data

 

... Or, for good measure, watch Dale on Fox Business this morning where he discusses our economic outlook for 2016. (Spoiler alert: It's not looking good.) 

 

 

Let's not mince words. Our Macro team has been sounding the alarm on the increasing probability that the U.S. will enter a recession in 2016.

 

So... how should investors play the compression of the yield curve and coming economic slowdown? Three letters:

 

T-L-T

 

Yesterday afternoon, McCullough advised subscribers book some gains in their Long bond (TLT) position in Real-Time Alerts. 

 

INSTANT INSIGHT | How To Risk Manage The Coming Recession - tlt rta

 

Make no mistake though, McCullough is very bullish on long-term Treasury bonds. It's a linchpin for investors who subscribers to our #GrowthSlowing theme, hence the bullish green indicators above over all three of our durations, "trade," "trend" and "tail." (TLT has been a core holding in our longer-term oriented product Investing Ideas. As McCullough is fond of saying, he's "the most bullish guy on Wall Street" ... on Long bonds.)

 

In Real-Time Alerts, McCullough is simply risk managing entry and exit points in an effort to maximize returns in that core, longer-term TLT position.

 

INSTANT INSIGHT | How To Risk Manage The Coming Recession - tlt say cheese 


McCullough: The Best Way to Play the Coming Recession

In this recent excerpt from The Macro Show, Hedgeye CEO Keith McCullough explains why he’s becoming “the most bullish guy on Wall Street again.” Watch the video to see exactly what he’s so bullish on.

 

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.


Dale: This Is the 'Biggest Risk Heading Into 2016’

During this animated discussion on Fox Business' Mornings with Maria, Hedgeye Senior Macro analyst Darius Dale discusses our dour U.S. economic outlook for 2016, the coming de-FANG-ing of Facebook, Amazon.com, Netflix, and Google, and why we like large-cap stocks and the Long bond.

 

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015

Takeaway: Domestic equity is set to finish its worst year on record. Meanwhile, investors seeking safety continue to make contributions to money funds

Editor's Note: This is a complimentary research note which was originally published December 24, 2015 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

 

 

Investment Company Institute Mutual Fund Data and ETF Money Flow:

As 2015 comes to a close, domestic equity mutual funds continues to lose capital, ceding another -$7.4 billion to redemptions in the 5-day period ending December 16th. That brings the year-to-date total outflow to -$167.7 billion, $69.8 billion greater than the mean -$97.9 billion annual redemption in all data since 2007. With only a week left in the year, domestic equity mutual funds are maintaining pace in 2015 for their worst year on record.

 

Despite the aversion to domestic equity funds in 2015, investors favored international equity funds and passive equity ETFs. The former took in +$102 billion in 2015 (above the long term mean), the latter +$128.6 billion (essentially in line with the annual adoption to ETFs).

 

The rotation into passive products also affected fixed income mandates in 2015, with taxable bond mutual funds putting in a rare annual redemption of -$27.7 billion, well below the average annual subscription since 2007 of +$117.5 billion. Fixed income ETFs continued to gain share adding +$51.8 billion to assets-under-management, +$17.2 billion more than the +$34.6 billion annual average.

 

Finally, with investors seeking safety, especially in the latter half of the year, money market funds are set to end the year in positive territory, currently at +$1.0 billion in YTD subscriptions versus their -$52.2 billion average annual redemption since 2007, feeding the rise in risk assets. Money funds assets had annual inflows in 1999 and also 2005, preceding risk aversion in 2000 and 2006-2007 in front of the past two Bear Markets..

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI19 3

 

In the most recent 5-day period ending December 16th, total equity mutual funds put up net outflows of -$11.1 billion, trailing the year-to-date weekly average outflow of -$1.3 billion and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund withdrawals of -$3.6 billion and domestic stock fund withdrawals of -$7.4 billion. International equity funds have had positive flows in 41 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 -$12.0 billion, trailing the year-to-date weekly average outflow of -$297 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds contributions of +$647 million and taxable bond funds withdrawals of -$12.6 billion.

 

Equity ETFs had net subscriptions of +$8.8 billion, outpacing the year-to-date weekly average inflow of +$2.6 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net outflows of -$1.2 billion, trailing the year-to-date weekly average inflow of +$1.0 billion and the 2014 average inflow of +$1.0 billion.

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI1 large 12 29

 

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:

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI2

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI3

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI4

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI5

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - 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.

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI12

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI13

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI14

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI15

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - 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:

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI7

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors poured +$1.3 billion or +12% into the energy XLE ETF.

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - 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.

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI17

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$10.9 billion spread for the week (-$2.2 billion of total equity outflow net of the -$13.2 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 +$1.2 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.)

  

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - 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:

 

[UNLOCKED] Fund Flow Survey | Record Domestic Equity Outflows in 2015 - ICI11 






CHART OF THE DAY | Recession Watch: Earnings Breaking Down

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

 

"... We’ve highlighted the last point on corporate earnings in the Chart of the Day. As the chart shows, all recent recessions in the U.S. have been preceded by a flat lining, or declining, of corporate earnings. This has already occurred in the U.S. with earnings breaking down below its trailing twelve month average in Q2 2015."

 

CHART OF THE DAY | Recession Watch: Earnings Breaking Down - eps inflecting DJ


Sirens of the Old Wall

“We gain the strength of the temptation we resist.”

-Ralph Waldo Emerson

 

In Greek mythology, the Sirens were deadly yet beautiful creatures, who lured nearby sailors with their beautiful music to sail towards their island. According to mythology, the result of sailing towards the enchanting music and voices was inevitably ship wreck, since the island was surrounded by hidden rocks which were perilous to sail through.

 

Odysseus, the Greek King of Ithaca and the hero of Homer’s poem the Odyssey, was determined to experience the songs of the Sirens without crashing into the nearby rocks. On the advice of Circe, he had all of his sailors plug their ears with beeswax and tie him to the mast. Thus his sailors could sail the ship, without temptation, and since he was tied to the mast he was unable to steer the ship ever closer to the dangerous sirens.

 

No surprise, as the ship sailed closer to the Sirens, Odysseus reversed his orders and tried to get his men to untie him from the mast. Instead, as originally instructed, they tied him tighter, so his temptations would not overcome him and lead to a bad decision. Finally, when the ship had passed out of earshot, Odysseus signaled with his frowns that he be untied and released.

 

Like most Greek myths, there is a moral to this story. Simply put, it’s that our greatest temptations have the potential to be our greatest downfalls. As stock market operators, we are tempted daily by the magical songs of the Wall Street brokers.

 

If we are to follow the lead of Odysseus, it would be that we make sure our analysts have “bees wax” in their ears so that they remain are focused on the task in front of them and not be distracted.  Meanwhile, as portfolio managers our hands should be bound so we don’t make arbitrary buy and sell decision based on nicely packaged narratives from the Sirens of the Old Wall.

 

If only it were all that easy!

 

Sirens of the Old Wall - sirens

 

Back to the Global Macro Grind

 

One familiar common siren that sounds right about this time of year is the list of prognostications for the upcoming year. We don’t do these lists for two obvious reasons. First, markets and economies are never linear, so taking what we know today and predicting out over a year rarely makes sense. Second, the end or start of the year is simply an arbitrary time frame.

 

That said, we did do an update of our key themes and ideas headed into next year. There is nothing significant about the timing of these ideas as it relates to year-end, but on some level there is increased downtime headed into the end of the year, which gives us all a chance to review our investment perspectives.

 

Firstly, from our Macro team, the primary view, as it was for much for 2015, remains that growth will be slower than consensus is projecting for the U.S. There are a number of economic indicators which signal to us that the economy has, at best, peaked. The most notably of these are employment, consumer confidence, and corporate earnings.

 

We’ve highlighted the last point on corporate earnings in the Chart of the Day. As the chart shows, all recent recessions in the U.S. have been preceded by a flat lining, or declining, of corporate earnings.  This has already occurred in the U.S. with earnings breaking down below its trailing twelve month average in Q2 2015.

 

Secondly, our healthcare team is focused on the dramatic outperformance of healthcare company sales growth versus the broader SP500. Currently, healthcare sector sales growth is outperforming the rest of the field by almost 2.6x standard deviations. The obvious question is whether this is sustainable. According to our healthcare team this is unlikely.

 

Sales growth was pushed higher primarily because of the Affordable Care Act which produced more than 20 million healthcare users in a compressed period of time. This increase in healthcare users has been corroborated by an increase in job opening and hiring in the sector. Consistent with our #ACATaper theme, though, we think healthcare growth rates will be very challenged heading into the coming quarters, with one catalyst for this being lower than expected enrollees into the exchanges. (Click here to read Healthcare analyst Tom Tobin's summation of the #ACATaper on Investopedia.)

 

Finally, our financials team has been and continues to be very focused on the debt collectors. These companies historically have been the worst performing late cycle stocks in the financial sector, so they are poised to underperform cyclically. As well, the accounting for many of these companies is “challenging” at best, especially with the use of goodwill which tends to overstate the IRR of collection streams and the underlying flow through of net income. 

 

The other key theme that the financials team is focused on currently is shorting the Canadian banks. From a macro perspective, the drivers of this short call were related to two Canadian bubbles: energy and housing. As it relates to energy, the bubble has basically all but burst with oil trading in the $30s and no surprise the Canadian banks, just like the Canadian economy, is over-indexed to energy. 

 

On housing, simply put, the Canadian housing market on almost any metric remains wildly overvalued.  While much of this over-pricing is centered in key markets, such as Vancouver, Toronto, and Alberta, in aggregate these markets also comprise the vast majority of the mortgage exposure of the banks. Perhaps the most telling for the Canadian housing market is the long term view versus the United States.  Since 1970, the home price index in the U.S. has gone from 100 to about 900. While in Canada, home price appreciation is more than double the U.S. over that period.

 

Not sure we supplied you with any great buy ideas today, but hopefully we sounded the siren on a few to avoid. For our full update of ideas and themes, please take a look at the video below:

 

https://www.youtube.com/watch?v=4i-e-JktOpM&feature=youtu.be

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.15-2.30%

SPX 2005-2085
RUT 1107--1163

VIX 14.35-22.74
USD 97.42-99.35
Oil (WTI) 34.83-38.29

Copper 2.02-2.14

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Sirens of the Old Wall - eps inflecting DJ


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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