Fed head Janet Yellen has called deflation "transitory." There's nothing transitory about it. In fact, deflation is pervasive; just look at the crash in commodity prices.
Wait... didn't the Fed just hike interest rates? Why are interest rates falling?
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.)
... 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:
Yesterday afternoon, McCullough advised subscribers book some gains in their Long bond (TLT) position in Real-Time Alerts.
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.
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.
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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
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.
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 email@example.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..
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.
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 poured +$1.3 billion or +12% into the energy XLE ETF.
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 +$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.)
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:
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."
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