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CHART OF THE DAY: There Goes The Fed's Credibility

 

CHART OF THE DAY: There Goes The Fed's Credibility - 01.28.16 Chart

 

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... That is why the #Deflation & #GrowthSlowing bears won (again) yesterday. To summarize:

 

  1. The Fed continues to be a pro-cyclical version of a Labor Economist (Overweight #LateCycle employment data)
  2. The Fed continues to call something that’s been pervasive (#Deflation) “transitory”
  3. And, as a result, the Fed continues to be behind the curve, lagging both real-time economic data and market moves" 

 


Reputational Bubbles

“Reputation is a bubble which man bursts when he tries to blow it for himself.”

-Someone Observing The Old Wall

 

So a short, aging, Wall St. guy from the CT burbs (with 4 kids) walks into a room with 2 strapping younger dudes…

 

That is my professional life. And no, I’m not the young buck who walks in looking like Cam Newton (Darius). I’m the fatter version of a former me who is on Day 7 of a roady, covering 4 cities (New York, Boston, San Francisco, and Los Angeles) trying to keep up with these guys.

 

The meetings go great. We have this crazy contrarian thing called the time-series of economic data that augments this other thing called our macro opinion. We are The Bears. Raging. We get that. We also get that our reputation will hinge on whether or not we overstay our welcome.

 

Reputational Bubbles - bears in car cartoon 01.21.2016

 

Back to the Global Macro Grind

 

Do you think, for more than 3 seconds, that I don’t want to call the bottom? Seriously. I have spent almost 17 years trying to understand, respect, and measure tops and bottoms.

 

Lesson #1: Both tops and bottoms are processes, not points.

 

As the legendary Paul Tudor Jones taught us, it’s the last part of the macro move that makes the most fools out of us. In fractal math, we’d call that the last 1/3 of the move. It’s where the “value” guy buys too early, and the bear covers too soon. (both BUY orders)

 

Lesson #2: Be there for the last 1/3 of the move (SELL bounces).

 

So, no matter where your “market” opinion has been over the last 18 months, here we are. There are no excuses. There is no finger pointing. Our reputations will be won or lost by the decisions we make next. This is not a charitable exercise. This is Wall Street.

 

Lesson #3: Stop opining. Give me the wood.

 

And since I’ve done that for 7 straight marketing days, I will do that (again) on the 8th day. I’ll put my reputation on the line and keep pressing our best call – the probability of a US #Recession is rising (not falling). Consensus isn’t yet Bearish Enough.

 

As a result, the Reputational Bubble that is popping is that of an un-elected and un-accountable bureaucracy called The Federal Reserve. Until Bernanke’s legacy of linear forecasters embrace the non-linearity of it all, one of the most obvious risks remains their forecast.

 

That is why the #Deflation & #GrowthSlowing bears won (again) yesterday. To summarize:

 

  1. The Fed continues to be a pro-cyclical version of a Labor Economist (Overweight #LateCycle employment data)
  2. The Fed continues to call something that’s been pervasive (#Deflation) “transitory”
  3. And, as a result, the Fed continues to be behind the curve, lagging both real-time economic data and market moves

 

No, the Fed wasn’t “dovish enough” in their statement. Newsflash: they are still hawkish and in “rate hike” mode. And it’s going to take at least another 3-6 months for them to catch up to our economic view. That’s the bull case!

 

Our Top 3 Macro Theme Ideas on the long side remain:

 

  1. Long US Dollars (UUP)
  2. Long The Long Bond (TLT)
  3. Long Utilities (XLU)

 

Our Top 3 Macro Theme Ideas on the short side remain:

 

  1. Russell 2000 and SP500
  2. Junk Bonds (JNK)
  3. Financials (XLF)

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.96-2.06%

SPX 1
RUT
USD 98.64-99.63
Oil (WTI) 28.01-32.98

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Reputational Bubbles - 01.28.16 Chart


ICI Fund Flow Survey | Bear Market in Taxable Bonds

Takeaway: Taxable bond funds are on the verge of setting new cyclical lows as fear spreads in corporate credit.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

The ICI taxable bond category is a broad bucket which includes both government and corporate fixed income however what is undeniable is the continued and dramatic slough off in taxable bond fund flows in concert with the decline in demand for U.S. high yield credit. The 4-week moving average of ICI taxable bonds is threatening to set new cycle lows as non-investment grade bond performance threatens to take out 2008 price levels. 

 

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - JNK   Taxable bond flows

 

Net fund flows to bonds continued in the 5 days ending January 20th according to ICI with a -$6.6 billion outflow from equity mutual funds and ETFs and a +$1.4 billion inflow to net bond products making for a -$8.0 billion spread between equities and fixed income (negative numbers imply inflow into bonds). Interest in bonds this week was relegated solely to municipals with a +$1.0 billion subscription into the tax-free category and a +$3.2 billion inflow into fixed income ETFs (in continuation of a vehicle shift from mutual funds into passive ETFs in bonds). Taxable bonds lost another -$2.9 billion this week as investors avoided credit. Within equities, outflow continued in domestic mutual funds with another -$4.9 billion redemption this week, bringing the cumulative losses in the current streak of outflows to -$188.6 billion. With volatility remaining elevated, we expect these defensive trends to continue.

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - ICI19

 

In the most recent 5-day period ending January 20th, total equity mutual funds put up net outflows of -$3.8 billion, trailing the year-to-date weekly average outflow of -$2.6 billion and the 2015 average outflow of -$1.5 billion. The net redemption was composed of international stock fund contributions of +$1.1 billion offset by domestic stock fund withdrawals of -$4.9 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 7 weeks of positive flows over the past year.

 

Fixed income mutual funds put up net outflows of -$1.9 billion, trailing the year-to-date weekly average outflow of -$807 million and the 2015 average outflow of -$463 million. The outflow was composed of tax-free or municipal bond funds contributions of +$1.0 billion and taxable bond funds withdrawals of -$2.9 billion.

 

Equity ETFs had net redemptions of -$2.8 billion, outpacing the year-to-date weekly average outflow of -$7.0 billion but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$3.3 billion, outpacing the year-to-date weekly average inflow of +$1.9 billion and the 2015 average inflow of +$1.0 billion.

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - 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 2015 and the weekly year-to-date average for 2016:

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - ICI2

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - ICI3

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - ICI4

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - ICI5

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - 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 | Bear Market in Taxable Bonds - ICI12

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - ICI13

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - ICI14

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - ICI15

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - 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 | Bear Market in Taxable Bonds - ICI7

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - ICI8

 


Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors seeking safety poured +$817 million or 11% into the long treasury TLT ETF.

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - ICI9 3



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 | Bear Market in Taxable Bonds - ICI17

 

ICI Fund Flow Survey | Bear Market in Taxable Bonds - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$8.0 billion spread for the week (-$6.6 billion of total equity outflow net of the +$1.4 billion 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 +$549 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 | Bear Market in Taxable Bonds - 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 | Bear Market in Taxable Bonds - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







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The Macro Show Replay | January 28, 2016

 


The Most Important Factors Impacting Healthcare Right Now | VIDEO REPLAY

watch the replay below

 

Hedgeye's rock-star Healthcare Team was live in the studio discussing Hospital Corporation of America (HCA), Hologic (HOLX) and Zimmer-Biomet (ZBH), and fielding questions from viewers.

 

They reviewed the following:

  • An Update on 4Q15 Earnings & the Key Drivers of HCA, AHS, HOLX
  • Will the Upside in Ortho Continue?
  • CBO, #ACATaper’s Exchange Enrollment Forecast 

McCullough: My Thoughts On Today's Fed Statement

Editor's Note: This is abridged commentary from Hedgeye CEO Keith McCullough following today's Fed statement.

 

McCullough: My Thoughts On Today's Fed Statement - z rubble

 

The decaying foundation of the already shaky Old Wall edifice took another major hit today. Make no mistake, it is crumbling fast ... brick by brick. The reality is that very few market pundits (or TV channels for that matter) prepared you for where you are today.

 

That’s a statement of fact. 

 

My message? Stick with the 2.0 sources. Stick with the risk managers that warned you and helped you protect your hard earned capital. After all, if you've completely missed the mark on the last 7 months of this move, why would anyone trust you'll get the next 7 days?

 

Now... where do we come in?

 

Here's what I said in real-time just after the FOMC statement.

 

...Here's what happened.

 

McCullough: My Thoughts On Today's Fed Statement - s p

 

So, what exactly happened today? For starters, this FOMC statement was nowhere near as "dovish" as people we speak to were thinking it might be. In other words, our unelected central planners at the Fed didn't remove their "transitory" view of #Deflation (despite it being pervasive). This keeps the US Dollar strong and deflation intact.

 

The Fed is in a box. So, keep doing what we have had you doing. That means buy US Dollars, buy the Long Bond (TLT), and sell stocks.

 

Here's what we said following the last Fed decision:

  1. USD would rise
  2. 10yr Yield would fall
  3. Stocks would fall

As the tape showed today, there is very low probability that any of those 3 Big Macro Trends above changed at all today.

 

This has been one of the worst January's ever for US stocks and it will likely end that way. By our calculus, "ever" remains a very long time. And while it may seem like a joke, Old Wall is begging for easing now. 

 

I don't know how much longer The People will stand for Old Wall and its Media lying to them... but wow. Old Wall Consensus on the US economy is a certified train wreck. The truth is not that hard to see at this point, unless you’re compensated to be willfully blind to it.

 

Rest assured of one thing: we will never bow down to the conflict of interest of Old Wall or its media.

 

Never.

 

This Old Wall is coming down.

 

 


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