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Do up your chin straps!

Client Talking Points

YEN

Post “negative yields” and the infinity-QE comments, the Yen has ramped and yields have crashed – this is the opposite of what central planners want (Down FX, Down Rates = Inflating Stocks) – Up Currency + Down Rates = #Deflation

Equities

Globally, crashing now – and in Europe the Up Euro + Down Rates example of #Deflation looks very obvious – DAX is down the least this am, -2.7% taking its crash to -29% from the 2015 top – Italy continues to implode, down another -4.5%.

10 Year

Our favorite liquid long idea remains the Long Bond – 10 year tagging 1.62% in the US this morning (our call is for lower-all-time lows on the long-end of the curve) - Yield Spread (10s/2s) crushed to new lows at 98bps wide – reiterating our fav Equity Sector Short (US Financials) on that.

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 13%

Top Long Ideas

Company Ticker Sector Duration
XLU

The bond market understands #GrowthSlowing. So do Utilities (XLU), which is why XLU is leading S&P sub-sector performance in 2016. XLU is up +7.6% versus down -8.0% for the S&P 500. Stick with it on the long side.  

GIS

GIS remains one of analyst Howard Penney's top Long ideas in the Consumer Staples space. As we have continued to say, it boasts style factors ideal in turbulent times; high market cap, low beta and liquidity. While GIS is down year-to-date, it's held up very well against the broader stock market. GIS is down -4% versus down -8% for the S&P 500 in 2016.

TLT

Down go growth expectations and down goes the yield curve. That's the latest from Macro markets last week and it plays right into our long Long-Term Treasuries (TLT) and short Junk Bonds (JNK) Investing Ideas.

 

The UST 10YR Yield declined another -9 basis points last week which helped boost TLT +1.1% on the week. In a healthy environment, bonds as an asset class go up in tandem, but JNK lost -0.9% on the week despite a falling yield curve. That’s because we’re NOT in an “all is good” environment. Credit spreads widen in turbulent times. This widening is the alpha-generating opportunity in long TLT, short JNK.

Three for the Road

TWEET OF THE DAY

World-Renowned Demographer Neil Howe Joins Hedgeye app.hedgeye.com/insights/49035… @HoweGeneration @KeithMcCullough

QUOTE OF THE DAY

"To be THE MAN, you gotta beat THE MAN! Woooooooooo!

-Ric "Nature Boy" Flair

STAT OF THE DAY

Ric "Nature Boy" Flair has won 16 world championships


ICI Fund Flow Survey | Bottom Fishing

Takeaway: Investors made more aggressive allocations last week with domestic equity having its first inflow in 19 weeks.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending February 3rd, investors made more aggressive allocations than they have in recent periods, drawing down -$4 billion of cash and making contributions to domestic and international equity mutual funds. Domestic equity funds experienced their first inflow in 19 weeks with investors contributing +$2.3 billion to U.S. stock funds. Additionally, international equity funds took in +$5.7 billion, their largest weekly subscription since April 2015. Passives continue to be a source of funds however with equity ETFs losing another -$8.8 billion (over $3.0 billion of this redemption was in the S&P 500 SPDR this week). In fixed income, fear abounds with taxable bond funds having its worst week in 5 with -$5.5 billion being withdrawn. Municipal bonds continued their winning streak, taking in +$1.2 billion, making it 18 straight weeks of tax-free inflows. Fixed income ETFs gained +$1.9 billion.


ICI Fund Flow Survey | Bottom Fishing - ICI1

 

In the most recent 5-day period ending February 3rd, total equity mutual funds put up net inflows of +$8.1 billion, outpacing the year-to-date weekly average outflow of -$917 million and the 2015 average outflow of -$1.5 billion. The inflow was composed of international stock fund contributions of +$5.7 billion and domestic stock fund contributions of +$2.3 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 6 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net outflows of -$4.3 billion, trailing the year-to-date weekly average outflow of -$1.6 billion and the 2015 average outflow of -$463 million. The outflow was composed of tax-free or municipal bond funds contributions of +$1.2 billion and taxable bond funds withdrawals of -$5.5 billion.

 

Equity ETFs had net redemptions of -$8.8 billion, trailing the year-to-date weekly average outflow of -$5.6 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.9 billion, trailing the year-to-date weekly average inflow of +$2.6 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 | Bottom Fishing - ICI2

 

ICI Fund Flow Survey | Bottom Fishing - ICI3

 

ICI Fund Flow Survey | Bottom Fishing - ICI4

 

ICI Fund Flow Survey | Bottom Fishing - ICI5

 

ICI Fund Flow Survey | Bottom Fishing - 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 | Bottom Fishing - ICI12

 

ICI Fund Flow Survey | Bottom Fishing - ICI13

 

ICI Fund Flow Survey | Bottom Fishing - ICI14

 

ICI Fund Flow Survey | Bottom Fishing - ICI15

 

ICI Fund Flow Survey | Bottom Fishing - 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 | Bottom Fishing - ICI7

 

ICI Fund Flow Survey | Bottom Fishing - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors made large withdrawals from industrials and materials. The industrial XLY ETF lost -$277 million or -5% to redemptions. The materials XLB lost -$113 million or -6%.

 

ICI Fund Flow Survey | Bottom Fishing - ICI9 2



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 | Bottom Fishing - ICI17

 

ICI Fund Flow Survey | Bottom Fishing - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$1.6 billion spread for the week (-$774 million of total equity outflow net of the -$2.4 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 +$724 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 | Bottom Fishing - 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 | Bottom Fishing - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







Markets Are Crashing And Wall Street Should Be Ashamed

Takeaway: As equity markets crash, Wall Street credibility is at an all-time low.

Markets Are Crashing And Wall Street Should Be Ashamed - bull drinking 01.08.2016

 

If you're following Old Wall and its media, you're getting smoked this year. If you're following the non-consensus macro team here at Hedgeye you're not. We called it. That's the reality.

 

Perma-bull Wall Street credibility is crashing just about as hard as global equity markets...

 

 

Meanwhile, back at home, the Russell 2000 is a certified train wreck.

 

 

We called all of this back in July. 

 

So while Wall Street flounders, we've nailed a number of huge macro calls in 2016, like long Utilities (XLU), short Financials (XLF). XLF is down -14.9% versus XLU up +7.5%.

 

 

We have been for some time now, the most bullish firm on Wall Street on Long Bonds (TLT). Since we added TLT to Investing Ideas in August 2014, TLT has beat S&P 500 by a wide margin. It's up +16% versus down -4% for the S&P 500.

 

Talk about alpha.

 

 

The market is slowly but surely pricing in the increasingly likely probability of a U.S. recession. That's been our Macro call since the beginning of this year. Until a few weeks ago, no Old Wall economist had even muttered the "R" word, especially from those mainline labor economists at the Fed. That's slowly changing.

 

One final point on Wall Street. Lying to people about the economy for your own compensation purposes is fundamentally un-American.

 

Stick with us. This thing Is just getting started.


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

The Macro Show Replay | February 11, 2016

 


TWTR | Bad Guide, Better Story (4Q15)

Takeaway: Weak print and worse 1Q guide, but much improved mgmt narrative on a bombed-out stock. Our short is likely played out.

KEY POINTS

  1. 4Q15 = LACKLUSTER: We were expecting a decent beat on what appeared to be a sandbagged 4Q guide.  However TWTR only produced inline revenue; largely due to a sharp sequential surge in Data Licensing revenue.  Ad revenues missed consensus estimates, with growth decelerating to 48% y/y from 60% in 3Q15.  Auto-play may also be emerging as more of headwind than tailwind since surging ad engagements are coming at the expense of a sharp deceleration in CPE, and potentially user retention since auto-play's lower CPE also means TWTR needs to introduce a disproportionately higher number of ads into the users' feed to drive a comparable level of revenue growth vs. its legacy ad products.
  2. BAD GUIDE, BETTER STORY: TWTR guided light for 1Q16, but it actually looks much worse if we break it down by segment.  If we assume 1Q16 Data Licensing is flat q/q in 1Q16, then the 1Q guide implies ad revenue decelerating to ~37%, which is below the rate that consensus was assuming for any quarter in 2016, particularly 1Q16 (50%).  However, mgmt didn’t provide annual guidance, and the sell-side didn't press them on it since mgmt improved its narrative by shifting the focus almost entirely toward prioritizing the user.  We believe this would be the smarter move since its long-term prospects are currently limited given its heightened cumulative user churn (see 2nd note below for detail).
  3. SHORT LIKELY PLAYED OUT: We were looking at this print as somewhat of a binary event since mgmt's approach to 2016 guidance was going to determine how much longer we were going to stick with the short.  However, mgmt essentially removed that catalyst.  The stock is holding up after hours despite the light 1Q guide, which we suspect is partly due to mgmt’s improved narrative, but also because of bombed out sentiment, especially following LNKD's print.  We’ll be monitoring where consensus 2016 estimates trend from here, but more likely that not, our short has run its course. 

TWTR | Bad Guide, Better Story (4Q15) - TWTR   Auction 4Q15

TWTR | Bad Guide, Better Story (4Q15) - TWTR   Ad Engagement vs. Pricing 4Q15 

 

See notes below for supporting analysis and recent thoughts.  Let us know if you have any questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA


@HedgeyeInternet 

 

 

TWTR | Thesis Refresh (2016)

01/26/16 08:11 AM EST

[click here]

 

TWTR: The Crossroads  (User Survey: n=7,500)
08/25/15 07:48 AM EDT
[click here

 

TWTR: What the Street is Missing
05/19/14 09:09 AM EDT
[click here]

 


CHART OF THE DAY | Fed Can't Arrest Economic Gravity: New Lows For Inflation Expectations

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. 

 

"... Now with:

  • Inflation expectations making lower lows (5Y Breakevens = 0.94% last, lowest since May 2009) … and the trend similar across the major sovereigns
  • 10Y Yields:  Down another -5pbs this morning to  1.61% (lowest since the 2012 all-time lows)
  • Yield Spread (10’s-2’s):  98bps last and breaching 1.0% to the downside for the 1st time since 2007
  • U.S. High Yield Yields and Spreads making higher highs
  • Investment grade spreads making higher highs
  • High Yield Energy Debt making higher highs (yielding 20.21% as of yesterday’s higher high)
  • Lending Standards tightening and domestic Loan Demand falling  (latest Senior Loan Officer Survey)
  • Eurodollar futures are now pricing the probability of negative rates in the U.S. by 2017 at 17% (up from 2% at the start of the year)"

 

CHART OF THE DAY | Fed Can't Arrest Economic Gravity: New Lows For Inflation Expectations - inflation expectations


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%
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