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Rising Recession And Deflation Risk: How To Play It

Takeaway: It’s getting uglier -- faster -- as consensus grapples with #Deflation and #Recession risks.

Rising Recession And Deflation Risk: How To Play It - bloomberg tril

 

Here's the latest from Bloomberg last night:

 

"At least 40 stock markets around the world with a total value of $27 trillion are in bear territory, as investors witness the worst start to a year on record."

 

No worries. Just buy the dip, right? Oh wait, that was Old Wall's pitch three weeks ago. Now that equities have plunged -9% year-to-date, today, the mantra is "sell everything."

 

That's great.

 

 

To be clear, the Hedgeye Macro team got this right before the selloff. And no, we're not getting bullish. Not yet anyway. We're still waiting for the market to fully price in our U.S. #Recession call.

 

#Patience...

 

watch this video for more on our recession call. 

 

Upon further reflection, our proprietary asset allocation model has been largely devoid of U.S. equities and Emerging market exposure for some time. Critically, we warned subscribers to bail on U.S. equities before the July/August crash when market fundamentals were breaking down.

 

Macro markets aren't looking up. Going forward, investors should be wary of the Fed rate hike ramifications. Remember, Yellen & Co. are implicitly tightening into a U.S. economic slowdown.

 

And that's perpetuating massive market volatility, as Hedgeye CEO Keith McCullough wrote in a note to subscribers this morning:

 

"In prior US economic slowdowns, the Fed would A) devalue the Dollar and B) try to smash equity market volatility but that's impossible to do when tightening into a slowdown. This perpetuates the liquidity trap and with the VIX's current risk range 22-31 that’s why equity bulls are selling every bounce – they need to take down exposure to being wrong."

 

In other words, the Fed is trying to arrest economic gravity by calling #Deflation and the preponderance of #GrowthSlowing data "transitory" while the macro market clearly disagrees.

 

A prime example? Take a look at Financials. Here's more analysis from McCullough:

 

"On the margin we said the US Financials (XLF) were one of the best non-consensus shorts in 2016 as consensus was long them on the “rate hike." Well, now the 10yr is at 1.98% and the XLF led losers again yesterday -2% to -11.9% YTD. It won’t be long before consensus is begging for no more hikes, and then a rate cut."

 

Rising Recession And Deflation Risk: How To Play It - xlf crash

 

This slow moving train wreck is bound to get more interesting.


8 Cartoons and Videos Distilling Our Contrarian Macro Calls

Takeaway: It pays to listen to Hedgeye.

Here's a quick look at where we've been and where we're going.  As you can see, our contrarian macro team continues to make some pretty epic (and accurate) calls.

 

1. July's stock market top? We called it. You know what happened after that.

8 Cartoons and Videos Distilling Our Contrarian Macro Calls - The market is going to rip cartoon 10.06.2015

 

2.  Right now we're warning about the increasing likelihood of a full-blown U.S. recession this year.

 

3. We also made the call on commodity-price #Deflation about 18 months ago... well before it was ravaging investor portfolios.

 

4. Our #SlowerForLonger (growth) call still holds true, even though the Fed went ahead and raised rates.

8 Cartoons and Videos Distilling Our Contrarian Macro Calls - Growth cartoon 06.03.2015 large  1

 

5. And, while equities have fallen (which we warned about), our favorite position, the Long Bond (TLT), is outperforming. TLT up over 5% YTD versus down -11.6% for the Russell 2000 and -8.5% for the S&P 500.

8 Cartoons and Videos Distilling Our Contrarian Macro Calls - Super TLT 10.1.14

 

6. We've also been questioning the Fed's nonsensical rate hike in the face of an economic slowdown. 

 

7. Then there's China... still having serious issues telling the truth.

 

8. But have no fear, Super Mario Draghi is here! 

 


Initial Claims | Twenty Six Thousand From the Bottom

Takeaway: The 4-wk avg of SA claims is now at 285k after steadily creeping 26k higher from the 42-year low of 259k, struck in late October 2015.

Initial Claims | Twenty Six Thousand From the Bottom - Claims1

 

Seasonally adjusted initial claims rose 10k on the week to 293k, while the 4-wk moving average rose 6.5k to 285k. That's the highest level for the 4-wk rolling average since April of last year. Broadly, the trend in claims has been 2 steps backward, 1 step forward since the low of 259k were recorded on October 24th last year. 

 

Yes, initial claims are still very low by historical standards at sub-300k, but given the emergent weakness in a host of economic data series (Industrial Production, Chicago PMI as examples), the prudent question to ask is not whether labor is still good or bad in absolute terms, but whether it's getting better or worse on the margin. In that context, the trend of rising initial unemployment insurance claims that is now 3 months old is definitely disconcerting.

 

As a reminder, we are coming up on the 23rd month of a sub-330k claims environment. The last three cylces saw claims remain below 330k for 24, 45 and 31 months (33 months on average) before the economy entered recession. That puts us 10 months from the average, 1 month from the min and 22 months from the max. The cycle is converging with the end of its historical timeline.

 

Meanwhile, energy states continue to feel the effects of falling commodity prices.  As we show in the 3 charts below, the labor market decoupling between energy states and non-energy states continues.

 

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims17

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims20

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims18

The Data

Prior to revision, initial jobless claims rose 9k to 293k from 284k WoW, as the prior week's number was revised down by -1k to 283k.

 

The headline (unrevised) number shows claims were higher by 10k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 6.5k WoW to 285k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.3% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.4%

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims2

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims3

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims4

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims5

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims6

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims8

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims9

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims11

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims19

Yield Spreads

The 2-10 spread fell -3 basis points WoW to 115 bps. 1Q16TD, the 2-10 spread is averaging 120 bps, which is lower by -17 bps relative to 4Q15.

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims15

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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HedgeyeRetail (1/21) | WMT Wage Impact Bad For KSS/TGT

Takeaway: $10 minimum wage bad for everyone. Especially KSS -- TGT a Close Second. We think you get paid on the short side of both names this year.

RH in a Recession | Black Book

It’s time to go big or go home – and we’re prepared to do both. We’re going to issue a Black Book on Monday, January 25th at 1:00 pm ET.

For Full Details CLICK HERE

 

Key Events:

Today we're attending a lunch with former FL CEO, Ken Hicks. We'll be back with any insights.

 

WMT - $10 minimum wage bad for everyone. Especially KSS -- TGT a Close Second. We think you get paid on the short side of both names this year.

(http://news.walmart.com/news-archive/2016/01/20/more-than-one-million-walmart-associates-receive-pay-increase-in-2016)

 

WMT is taking the next step up to the $10 minimum wage floor on 2/20. That's the culmination of the $2.7bn investment the company has made over the past two years to take its full-time average hourly wage up 4% to $13.38 from $12.85 in April of 2015, and the part-time hourly wage  up 12% from $9.48 to $10.58.

 

That's flowed through to the bottom line and was the biggest culprit in WMT announcing at its Analyst Day back in mid-October that it wouldn’t see FY15 earnings again until at least FY19. When all is said, self mandated wage inflation will account for -4.5% to -9% of EPS change in FY17 or 75% of the aggregate earnings decrease. That type of deleverage for a company like WMT who in the US employs 1.4mm workers and accounts for 16.5% of workers in the Food & Beverage, Health/Personal Care, Clothing, and General Merch categories that’s a game changer.
 

We've already seen WMT announce its biggest store closure ever, in an attempt to offset the wage pressure dynamics. But, what about the rest of retail? Let's use KSS as an example, there are obvious wider implications across the space, but the company's predicament is illustrative.

 

KSS currently employs 137,000 people in the US, 77% of which are part-time. Now the biggest player in the Retail space (also the largest private sector employer in the US) takes wages up 12% for the workforce lowest on the totem pole. Add to that the fact that KSS already pays 8% below WMT for floor associates. If we extrapolate the $5400 cost per employee ($2.7bn/500k employees) WMT  recognized as it raised the minimum wage of employees to $10, worst case that = 130bps of margin pressure at KSS.

 

There aren't any levers left to pull outside of store closures.

HedgeyeRetail (1/21)  |  WMT Wage Impact Bad For KSS/TGT - 1 21 2016 WMT Wage Chart 2

 

TIF - Tiffany's releases new watch collection with "New York state of mind" theme

HedgeyeRetail (1/21)  |  WMT Wage Impact Bad For KSS/TGT - 1 21 2016 chart2

(http://brummellmagazine.co.uk/tiffany/)

 

TGT - Target CEO Brian Cornell hiring 1,000 IT employees to meet growing needs

(http://www.twincities.com/business/ci_29410850/targets-youth-movement-think-urban-stores-and-apps)

 

ODP, SPLS - Staples to wait 3 more months before calling off its proposed $6.3 billion-acquisition of Office Depot

(http://www.retailingtoday.com/article/staples-office-depot-extend-merger-agreement)


NKE - NIKE, INC. REVEALS DESIGN FOR WORLD HEADQUARTERS EXPANSION

(http://news.nike.com/news/nike-inc-reveals-design-for-world-headquarters-expansion)

 

Price Chopper owner, The Golub Corp, names Scott Grimmett as president and CEO to replace Jerry Golub

(http://www.retailingtoday.com/article/supermarket-chain-names-ceo)

 

AMZN - Online seller that ship internationally seeing a big rate increase items 

(http://www.ecommercebytes.com/cab/abn/y16/m01/i21/s03)

 

PVH - PVH Corp. gets license to use MagnaReady's "self-closing" shirt technology

(http://finance.yahoo.com/news/pvh-gets-license-magnaready-patented-174721565.html)

 

-Alec Richards



ICI Fund Flow Survey | Unloading Equity

Takeaway: Investors pulled -$10.7 billion from equity mutual funds and ETFs as markets continued their rout.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Investors continued to unload equity from their portfolios in the 5 days ending January 13th as markets continued their rout, although active international mandates held up with a +$3.2 billion inflow. Domestic equity, however, continued its losing streak with another -$4.8 billion outflow. Even passive equity ETFs were hit with a -$9.1 billion outflow, -$4.9 billion of which came from the SPY. Fixed income mandates fared slightly better with a total inflow of +$574 million into mutual funds and ETFs, although the preference was for municipal bonds and passive fixed income ETFs. Lastly, investors shored up +$8 billion of cash in money funds during the week.

 


ICI Fund Flow Survey | Unloading Equity - ICI1

 

In the most recent 5-day period ending January 13th, total equity mutual funds put up net outflows of -$1.6 billion, outpacing the year-to-date weekly average outflow of -$2.0 billion but trailing the 2015 average outflow of -$1.5 billion. The outflow was composed of international stock fund contributions of +$3.2 billion and domestic stock fund withdrawals of -$4.8 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 -$526 million, trailing the year-to-date weekly average outflow of -$236 million and the 2015 average outflow of -$463 million. The outflow was composed of tax-free or municipal bond funds contributions of +$1.3 billion and taxable bond funds withdrawals of -$1.8 billion.

 

Equity ETFs had net redemptions of -$9.1 billion, trailing the year-to-date weekly average outflow of -$9.1 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.1 billion, trailing the year-to-date weekly average inflow of +$1.2 billion but outpacing the 2015 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 2015 and the weekly year-to-date average for 2016:

 

ICI Fund Flow Survey | Unloading Equity - ICI2

 

ICI Fund Flow Survey | Unloading Equity - ICI3

 

ICI Fund Flow Survey | Unloading Equity - ICI4

 

ICI Fund Flow Survey | Unloading Equity - ICI5

 

ICI Fund Flow Survey | Unloading Equity - 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 | Unloading Equity - ICI12

 

ICI Fund Flow Survey | Unloading Equity - ICI13

 

ICI Fund Flow Survey | Unloading Equity - ICI14

 

ICI Fund Flow Survey | Unloading Equity - ICI15

 

ICI Fund Flow Survey | Unloading Equity - 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 2015, and the weekly year-to-date average for 2016. 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 | Unloading Equity - ICI7

 

ICI Fund Flow Survey | Unloading Equity - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors pulled -$4.9 billion or -3% from the SPY as investors retreated from the broader domestic equity market.

 

ICI Fund Flow Survey | Unloading Equity - 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 | Unloading Equity - ICI17

 

ICI Fund Flow Survey | Unloading Equity - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$11.3 billion spread for the week (-$10.7 billion of total equity outflow net of the +$574 million inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$578 million (more positive money flow to equities) with a 52-week high of +$20.5 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 | Unloading Equity - 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 | Unloading Equity - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







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