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WisdomTree (WETF) | The Kuroda Kicker?

Takeaway: While the BoJ cut overnight lending rates into negative territory last week, DXJ assets improved only marginally.

No investable turn yet

While a single day doesn't make a trend, the Bank of Japan's move to negative overnight lending rates last week was hardly a stop gap in the ongoing slippery slope in fund flows at WisdomTree's Japan Hedged equity fund (DXJ). The +$19 million inflow last Friday into the DXJ following that BoJ announcement failed to markedly improve trends and the WisdomTree product still put in the worst month in its history losing -$967 million in the first month of '16 following the -$887 million outflow in December. Zooming out, these redemptions have resulted in DXJ's AUM falling from a high of $18.7 billion on June 8th, 2015 to $12.7 billion as of last week with competing hedged products continuing to pick up share. The DXJ lost another 2 points of market share through the end of the first month of 2016 with the 87% share from the beginning of December 2015 receding to 85% at the end of January 2016 (with iShares continuing to pick up incremental AUM).

 

WisdomTree (WETF) | The Kuroda Kicker? - Recolored 1

 

WisdomTree (WETF) | The Kuroda Kicker? - 2 DXJ AUM 2

 

WisdomTree (WETF) | The Kuroda Kicker? - 4 JPY AUM Share

 

MEANWHILE IN EUROPE...SLIGHTLY BETTER SLEDDING

Meanwhile the rate of change in fund flows at WisdomTree's hedged Euro product, the HEDJ, bounced off of December lows. While January still resulted in redemptions of -$814 million following December's 2015 loss of -$1.9 billion, total AUM is still headed in the wrong direction. The past several months have brought HEDJ’s AUM down to $15.3 billion from its August 5, 2015 high of $22.3 billion. Similar to its Japanese counterpart, HEDJ is losing share on the margin to competitors, with iShares and Deutsche Bank now totaling 14% of the market at the end of January 2016.

 

WisdomTree (WETF) | The Kuroda Kicker? - Recolored 5

 

WisdomTree (WETF) | The Kuroda Kicker? - 6 HEDJ AUM 2

 

WisdomTree (WETF) | The Kuroda Kicker? - 7 EUR AUM Share

 

Less bad for now but we need more evidence

Bigger picture, our research shows that industry hedged equity products are dependent on substantial dollar strength to provide value, and with only a marginal rise year-to-date, the U.S. dollar's ascent is stalling from several perspectives (namely a 3 sigma move on a 10 year timeframe and also at its historical +20% year-over-year real rate of change). In addition, the U.S. dollar in all but one instance has historically declined after initial Fed Fund rate increases (with the sole exception being the move in 1988).

 

 

 

WisdomTree (WETF) | The Kuroda Kicker? - 3 DXY 2

 

WisdomTree (WETF) | The Kuroda Kicker? - 10 2

 

WisdomTree (WETF) | The Kuroda Kicker? - JC roc us dollar 

 

 

The DXJ and HEDJ outflows contributed to overall firm redemptions of -$1.7 billion in January 2016, off of December lows but a far cry from +$4.0 billion in January last year. While the stock has discounted these current trends having dropped substantially from year-end, shares are far from any relative value yet. WETF still sports a 22.4x forward 12-month multiple on Street estimates of $0.54 per share. The asset management group trades currently at 14.1x '16 numbers which means that either WETF trends have to substantially improve or the stock still has meaningful downside. The stock remains on our Best Ideas list as a Short.

 

WisdomTree (WETF) | The Kuroda Kicker? - Recolored 8

 

WisdomTree (WETF) | The Kuroda Kicker? - 9 PE

 

 

WisdomTree (WETF) - More Questions Than Answers - We Remain Short 

WisdomTree (WETF) Black Book Presentation - Not So Smart Beta 

 

 

 

Please let us know of questions,

Jonathan Casteleyn, CFA, CMT 

 



Joshua Steiner, CFA

 

 

 


#Crash Mode

Client Talking Points

RUSSELL 2000

One of the signals that remained in #crash mode yesterday (> 20% decline from bubble peak) was the Russell. It has no immediate-term support to the low-end of the 981-1,032 risk range (sell high end of range, cover low) – both the ISM of 48.2 (4th straight month of contraction) and Fed Loan Officer Survey’s keep #Recession probability rising.

EUROPE

Too bad both the Draghi devaluation move (and the Japanese negative rates one) only gave those stock markets 2-day rallies. Straight down again for the DAX, IBEX, and MIB Index (all are in #crash mode with Spain leading the draw-down at -27.4% from its 2015 bubble peak) #EuropeSlowing.

OIL

Wow is chasing charts getting painful to watch – straight back down this week for WTI (down -6.6% yesterday and down another -2.3% this morning with no support to the low-end of the risk range at $27.62). Draghi and Kuroda Devaluation moves are Dollar #Deflation ones; UST Yield Spread (10s/2s) 113 basis points is flattest curve of the cycle.

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 59% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 2%
FIXED INCOME 25% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
XLU

After a busy week of domestic data, you probably don’t need us to tell you that growth continues to slow. Despite the short-covering squeeze in energy stocks, Utilities (XLU) closed out January as the only sector in positive territory (+5%), other than Consumer Staples which eeked out a +0.5% gain. It was an awful start to the year for the S&P 500 (-5%). Don’t expect +10% of relative outperformance every month, but if you stuck with us on this trade, you’re in much better shape than most.

GIS

GIS remains one of our top Long ideas in the consumer staples space. As we have continued to say it boasts style factors that are ideal in turbulent times; high market cap, low beta and liquidity.

 

Recently, General Mills has been attacked by Chobani commercials, claiming that Yoplait yogurt contains the same ingredients used in pesticide. GIS filed a false advertising lawsuit against Chobani demanding that they stop showing that commercial because it could be detrimental to sales. GIS just got word that a federal judge has barred Chobani from continuing the ad campaign. This is a win for GIS, but it is unclear right now if there was any damage done to the brand. At this time we do not believe it had any serious impact on the company. We will keep you informed of any material information regarding this lawsuit as it moves forward.  

TLT

Long-Term Treasuries (TLT) continues to preserve capital against the slow-moving trainwreck in Junk Bonds (JNK). Week-over-week, 10-year bond yields crashed 13 basis points to 1.92%. That helped lift the best play on U.S. growth slowing (TLT) by 0.85% on the week as credit spreads continued to widen (JNK gained +0.76% on the week, underperforming TLT marginally on a relative basis).

Three for the Road

TWEET OF THE DAY

$HAIN core US business is in a free fall...

@HedgeyeHWP

QUOTE OF THE DAY

You will either step forward into growth, or back into safety.

Abraham Maslow                                      

STAT OF THE DAY

70% of fatal avalanches take place within four days of another avalanche.


INSTANT INSIGHT | Taylor: 'The Iowa Vote Is A Referendum On Donald Trump's Candidacy'

Ahead of tonight's Iowa caucuses, we thought we'd bring you a few key insights from Potomac Research Group Senior Analyst JT Taylor. Below is a brief excerpt from Taylor's "Morning Bullets" sent to PRG institutional clients each morning. 

 

Enjoy!

 

INSTANT INSIGHT | Taylor: 'The Iowa Vote Is A Referendum On Donald Trump's Candidacy' - trump

 

"TRUMPING THE COMPETITION?: The Iowa vote will be a referendum on Donald Trump's candidacy; if Trump can convert his massive crowds into turnout at the caucus tonight, then he should notch his first victory. Those hoping for a lot of Trump no-shows will probably be disappointed. He's been at the top of the polls for six (!) full months now, and one shouldn't doubt the enthusiasm. The last Des Moines Register poll released over the weekend showed Trump leading Ted Cruz by five percent, and higher turnout will be to his benefit, not Cruz's. 

 

A win in Iowa would turn the Trump phenomenon into cold reality. In the event he wins Iowa, establishment-wing Republicans worry he'll have enough momentum to roll on through NH and then the Super Tuesday primaries with almost triple the number of delegates than anyone else. Cruz would be the most immediately hurt -- but what could he or the other candidates do to dent Trump in return? Cruz, meanwhile, has made a late shift towards attacking Marco Rubio in ads, rather than the frontrunner." 

 

For more insights from Taylor watch the video below:


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Cartoon of the Day: Headstand

Cartoon of the Day: Headstand - Fed cartoon 02.01.2016

 

"At this point, it is difficult to judge the likely implications of this volatility," said Fed Vice Chairman Stanley Fischer today. No it's not. Our Macro team has been calling U.S. #GrowthSlowing for a year and a half now.


Who Do You Trust? Hedgeye's Macro Team Or The Atlanta Fed?

Takeaway: There is an increasing likelihood the U.S. slides into a recession in 2016.

Who Do You Trust? Hedgeye's Macro Team Or The Atlanta Fed? - Fed grasping cartoon 01.14.2015

 

So... the Atlanta Fed just put out their first estimate for Q1 2016 GDP. Their call? 1.2%. As you can see below, we don't agree with that. 

 

Who Do You Trust? Hedgeye's Macro Team Or The Atlanta Fed? - gdp estimate

 

Let's just state for the record here that Hedgeye's Macro team has nailed the last five GDP reports.

 

Five.

 

The Atlanta Fed? Well ... not so much. In October, it was suggesting Q4 2015 GDP would be almost 3%. That was ratcheted way back. Its final estimate was 1.0% versus the advanced estimate of 0.7%. 

 

Who Do You Trust? Hedgeye's Macro Team Or The Atlanta Fed? - gdp fed q4

 

To be fair, the Atlanta Fed has done a better job than the supposed "blue chip" consensus forecasters on Wall Street. That's the truth...

 

Who Do You Trust? Hedgeye's Macro Team Or The Atlanta Fed? - wall street 4q15

 

Still, the Fed is clearly missing something. Fed Vice Chairman Stanley Fischer said today at the Council on Foreign Relations:

 

“At this point, it is difficult to judge the likely implications of this [financial market] volatility. If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States."

 

It's not difficult actually. We have a lot of evidence that suggests to us that the U.S. economy is headed for a recession in Q1 or Q2 of 2016. In fact, we've got a 73-slide institutional Macro deck on it (click here, here and here for a taste). 

 

No matter. We'll stick with our process that's nailed U.S. #GrowthSlowing for the past year and a half.

 

Stick with us. We'll keep you a step ahead of consensus


Back To Reality: A Short-Lived Bounce, BOJ Nonsense & Our Top Macro Ideas

Takeaway: Last Friday’s month-end markup and Japanese central-market-planning was day-trading fun. Back to reality.

Back To Reality: A Short-Lived Bounce, BOJ Nonsense & Our Top Macro Ideas  - ball drop cartoon 12.31.2015

 

"After the best month in Hedgeye history, we're off to a nice start in February."

-Hedgeye CEO Keith McCullough this morning

 

Most Wall Street firms can't say they called the bubble high in U.S. stocks back in July. Nor can they say that they started sounding the alarm bells *again* after the modest rebound from August lows.

 

We can.

 

 

Despite last week's month-end "rally," stocks have been hammered. The S&P 500 was down -5.1% in January ... the worst start to the year since 2009. We've been outspokenly bearish. We haven't changed our views. And we continue to see about 10% downside.

 

Dissecting last week's rally, a short-sighted Wall Street cheered the Bank of Japan's announcement it would pursue a "negative interest rate policy." Okay. Here's analysis from McCullough in a note to subscribers this morning:

 

"... The Yen smashed on the “negative yield” panic by the Japanese on Friday. Good for a 2-day Nikkei lift to lower-highs, but what's next with the Nikkei -7% YTD? All Japanese, European, and Chinese FX panic means is more #Deflation, in Dollars."

 

The BOJ's manic policy decision is rippling through global bond markets...

 

Back To Reality: A Short-Lived Bounce, BOJ Nonsense & Our Top Macro Ideas  - bond yields

 

"... Ten-year yields around the world crushed by Japan doing more of what hasn’t worked for decades – JGB 10yr = 0.04%! German 10yr = 0.31%, Swiss 10yr -0.31% – US Long Bond (TLT) remains our favorite Macro long idea alongside USD and Utilities (XLU)."

 

 

Q: How do you play Wall Street's end-of-month exuberance?

A: Fade the storytelling.

 

This remains the winning risk management strategy.

 

Back To Reality: A Short-Lived Bounce, BOJ Nonsense & Our Top Macro Ideas  - spy rta

 

Cheers!

 


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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.

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