Central bankers have become concerned about recent tumult in financial markets. They should be. Macro markets continue to signal economic growth is slowing.
Takeaway: The U.S. economy is slowing, despite what the Fed says.
In case you missed it, their forecast for Q1 2016 came in at 2.6% today.
That's well above rosey Wall Street consensus estimates of 2.1% and stands in stark contrast to Hedgeye's latest (revised) forecast... 0.6%.
For the record, our Macro team has nailed the last five GDP reports.
Then there's the Atlanta Fed's own track record... You'll recall that Q4 2015 GDP came in at 0.7%. Back in October, the Fed's estimate for Q4 2015 GDP was almost 3%. That was ratcheted way back to a final estimate of 1.0%.
Part of the inaccuracy of Atlanta Fed's model is methodological. Here's Hedgeye U.S. Macro analyst Christian Drake:
"The GDPNow model is never accurate in the early part of a quarter - that’s because it’s a tracking model and uses reported data for the quarter to drive the estimate. At the beginning of the quarter it is largely interpolation and estimates, which subsequently get revised as the actual data comes in.
We don’t even have January data yet across a number of material series which means the Atlanta Fed model has incorporated zero actual data across many of the expenditure types in the 1Q16 estimate so far."
Hedgeye Senior Macro analyst Darius Dale adds even if there is a "sequential acceleration by the time Q1 GDP is reported... that would not be unlike 2Q 2000 and 2Q 2008 (both #SuperLateCycle head-fakes)."
The broader point here is that our Macro team reiterates its #GrowthSlowing theme per the preponderance of economic data that is rolling over of late and in spite of the Q1 2016 GDP number.
If we're right and historical precedence (per 2Q '00 and 2Q '08) is our guidepost, stay away from equities. As Dale points out, back then "You could've bought all the stocks you wanted en route to peak-trough decline on the order of -49.1% and -56.8%, respectively (S&P 500)."
Takeaway: Europe needs a strong dollar to prop up their stock markets.
A few interesting insights via foreign exchange markets. As Hedgeye CEO Keith McCullough pointed out to subscribers this morning:
"The strong recovery day for the US Dollar yesterday after holding 94 @Hedgeye TREND support during the 2 week correction – rest of the world’s equities (Europe and Japan in particular need #StrongDollar as their stock markets aren’t working unless their FX weakens) – can Draghi break the Euro down to $1.05 vs USD in March? Doubt it."
That's why European markets are up today. The Euro is weakening.
For the record, the DAX has tumbled -25% from it's 2015 high.
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Takeaway: Investors made more aggressive allocations last week with domestic equity having its first inflow in 19 weeks.
Editor's Note: This is a complimentary research note which was originally published February 11, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email firstname.lastname@example.org.
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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.
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:
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.
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:
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%.
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.
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.)
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:
Takeaway: Here are SIGMAS for the companies reporting earnings over the next 24 hours. Every single one of them is bad.
Here are SIGMAS for the companies reporting earnings over the next 24 hours. Every single one of them is bad.
WMT - Believe it or not, WMT is actually the prettiest of all the charts. Three of the past four quarters had down margins, and the sales/inventory spread is in decent shape. That said, once WMT gets to the point of 'easy comparisons' on the operating margin line, it will fail to 'comp the comp'. Due to investment in virtually every area of its business, margins should be down for at least another 2 years -- with or without a recession.
JWN - Here's a consensus short if there ever was one. Short interest has gone from 6% to a cycle high of 19% since Nov. It's probably warranted, however. JWN is the only department store that did not come out and preannounce weak holiday sales, and there's no reason to think that it bucked the negative trend put up by its peers. Furthermore, e-commerce numbers -- based on our analysis -- look horrible. And this matters a lot to JWN with e-comm at 21% of sales, vs peers at 10%. Furthermore, margins have been down, and inventories outgrowing sales for eight consecutive quarters -- and that was during an otherwise solid business cycle. While this is a crowded short, the consensus is likely directionally right on this one over a Trade and Trend duration.
CAB - This chart looks to us like Q3 is Cabela's center of gravity. It consistently tries to pull away into a better place on the SIGMA, but it ends right back in Q3. In the upcoming quarter, it goes up against that lone data point on the far right-hand side of the chart. We're not quite sure the Street is appropriately prepared for risk to the downside.
LZB - This is perhaps the ugliest chart. People tend to think that Quadrant 3 is the worst -- which is technically true. But the market usually recognizes Q3 more fully. In Quadrant 2, margins are still positive, but inventories are building, and management is likely clinging to hope that sales will rebound before dropping a bomb and taking down guidance. Good, proactive management teams usually revert immediately to Quad 4 (upper left) by way of lowering price and clearing the balance sheet. Everyone else reverts to Q3, and potentially stays there for a very long time (look at JWN chart above).
DSW - DSW acquires Ebuys, an online off-price footwear retailer with N.A. presence, for $62.5mm
Our Take: The DSW model is not scalable. When you rely on getting mass quantities of off-price fashionable shoes in a spectrum of colors and sizes that consumers actually want, it gets increasingly difficult to 'go-big' in growing the core. We generally don’t like deals, and have not analyzed this one. But at face value, this one actually makes sense.
AMZN - Amazon readies launch of own-label fashion brands
Our Take: Amazon has been selling apparel forever. It's simply been horrible at it. The private label brand makes a ton of sense to us for one reason -- mid-lower income consumers, people who have a body shape that makes them uncomfortable shopping in a store, and MOST IMPORTANTLY, penetrating non-US markets that are not as 'premium brand focused' as we are in the US.
RL - Ralph Lauren brings piece of supply chain in-house to manage distribution
W - Wayfair.com Names Sharif Sleiman Vice President of Supply Chain and Operations
KSS - Kohl's completes construction on 4,000-sq.-ft. showroom in Manhattan to show off 'latest fashions'
AMZN - Amazon acquires Indian payments processor as it expands into growing Indian Ecomm segment
AMZN - Foursquare is partnering with Delivery.com to offer grocery delivery through mobile app
PLCE - Former Children's Place CEO Ezra Dabah launches Kidpik after controversial split with the company
AdiBok - Black Yeezy Boost 350 pre-orders close in 22 minutes on Adidas' app
NKE - Nike converting NBA All-Star weekend pop-up store into permanent Jordan brand retail location in Toronto
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