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).
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.
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).
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.
Please let us know of questions,
Jonathan Casteleyn, CFA, CMT
Client Talking Points
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.
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.
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.
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Top Long Ideas
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 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.
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...
QUOTE OF THE DAY
You will either step forward into growth, or back into safety.
STAT OF THE DAY
70% of fatal avalanches take place within four days of another avalanche.
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.
"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:
Takeaway: There is an increasing likelihood the U.S. slides into a recession in 2016.
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.
Let's just state for the record here that Hedgeye's Macro team has nailed the last five GDP reports.
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%.
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...
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.
Risk Managed Long Term Investing for Pros
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.