CLICK HERE to access the associated slides.
CLICK HERE to access the associated slides.
Takeaway: We added ZROZ to Investing Ideas on the long side on 3/11.
THE HEDGEYE EDGE
Our bigger picture cycle work helps contextualize the shorter-term asset price moves within their longer-term trends. Having a multi-duration process centered around the rate-of-change in Growth, Inflation, Policy (GIP Model) is a calculated and tested process.
In other words, we have a repeatable, math-driven process that prevents day-to-day market emotions from getting the best of us. That’s the name of the game if you’re a long-term investor looking to protect your wealth and remain sane in this volatile market environment.
Right now, our model flagged the third consecutive quarter of growth slowing to close out Q4 2015. Aside from a modest acceleration in Q1 of 2016, that model has the U.S. economy tracking squarely in QUAD 4 heading into Q2 (growth and inflation decelerating). Long-term Treasuries have repeatedly been the most telling signal of longer-term growth expectations.
INTERMEDIATE TERM (TREND)
Only longer-term investors who have been right on the direction of longer-term growth and inflation have been on the right side of long-term Treasuries, which outperform in a growth slowing environment.
Regardless of various attempts by policymakers to influence currencies and rates, if growth continues to surprise to the downside, the long end of the curve will continue to discount forward looking growth expectations. ZROZ is the most sensitive way to express this view with the discounting of longer-term cash flows.
LONG TERM (TAIL)
Slower for longer on growth has equated to relative outperformance for buy-and-hold investors in long-term sovereign bonds. One of the largest headwinds to our consumption-based economy (~70% of GDP) for the next several years is unfavorable demographic trends. The U.S. economy’s core spending group (35-54 year olds) is projected to contract through 2019. That fits with our big picture calls on U.S. growth slowing and hence lower for longer rates to the benefit of ZROZ.
ONE-YEAR TRAILING CHART
Hedgeye CEO Keith McCullough wrote in this morning's Early Look:
"... On cyclical stuff that has been crashing for 1-3 years, we’re “off the lows”, bros! And the Fed is going to be hawkish about that on Wednesday because:
- Deflation In Commodities has had another short-term “reflation” (isn’t that “transitory” btw?)
- Late Cycle Employment reports (while slowing in rate of change terms) are still “good”
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Takeaway: What to watch on the election 2016 campaign trail.
Below is an excerpt from Potomac Research Group Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning.
ALL ROADS LEAD TO...OHIO:
Having picked the eventual winner in every election since 1960, Ohio continues to be the linchpin of the presidential race. It is poised to play a unique role yet again. With Marco Rubio waning in FL, the establishment's hopes of halting Donald Trump's march hinge on John Kasich winning his home state. The components for a Kasich victory there are much more feasible there than they are for Rubio in FL: Kasich just won an election there two years ago in a landslide, has very high approval ratings, and has run a positive campaign throughout this race. Rubio on the other hand, has faces a different scenario altogether. His approval ratings are now under water and he hasn't run a state-wide election in four years. Not to mention that neither FL Governor Rick Scott nor formal rival Jeb Bush have deigned to endorse him.
SUPER TUESDAY -- TAKE III:
This is the last time the goalposts will move (we hope) -- after tomorrow the possible trajectories for the Republican delegate race will narrow significantly. If Trump sweeps, game over. If Kasich wins Ohio or Rubio wins Florida then the math gets much trickier for Trump to win the nomination outright. If Trump loses both OH and FL, fasten your seatbelts because we'll likely be headed to a contested convention in Cleveland.
HOW ABOUT US?
We know we've been guilty of focusing on FL and OH as make or break, winner-take-all states with 165 delegates in play, but there are three other states up for grabs tomorrow that deserve just a little attention with 193 proportional delegates at stake -- NC, MO and IL. While Rubio is frantically criss-crossing his home state and Kasich following suit in his, Ted Cruz is selectively targeting voter-rich suburbs and pockets of evangelicals and mainstream conservatives in the "orphan" states looking to capitalize on the vacuum and take home a win, or at least a respectable portion of the delegates.
Takeaway: Please note we are removing Wayfair from Investing Ideas (short side) today.
"While our Retail Sector Head Brian McGough still likes Wayfair as a short idea, it's not at the top of my list right now," says Hedgeye CEO Keith McCullough. "I'm trying to make room for some new/fresh short ideas."
Here's the bearish case on Wayfair from McGough's original stock report on the company:
- "Wayfair has considerably higher penetration in its TAM (total addressable market) than people believe. People – including Management, are using numbers like $200bn-$300bn as an addressable market. That’s just flat-out wrong. We’ve done extensive research on this one, and when all is said and done, we think that the end market is no more than $30bn."
- "Wayfair has about 10% share of its market. That’s 2-3x the share of players like RH and IKEA. There’s absolutely no reason why this should be the case."
- "... Wayfair sells furniture and home goods. The purchasing process for a consumer durable like a set of bunk beds, for example, almost always includes in-store visits as well as online research... But you can’t touch and feel the seven million items sold by Wayfair before you buy. In fact, our research suggests that W’s target consumer has a ‘blind buy’ threshold of around $750. That’s well below the prices listed for furniture sold on its websites."
- "While it might take a while, we think that Wayfair is ultimately headed to zero."
Takeaway: High yield bond funds took in $3.6 billion in new funds last week, the best 5 days since the Taper Tantrum of '13.
Editor's Note: This is a complimentary research note which was originally published March 10, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email email@example.com.
* * * *
Investment Company Institute Mutual Fund Data and ETF Money Flow:
In the 5-day period ending March 2nd, high yield bond funds took in $3.6 billion, the second consecutive week of subscriptions after a 10 week drawdown where over -$28 billion was redeemed from the category. The substantial high yield subscription last week was the best 5 day period for high yield bond funds since July 24th, 2013 where in the middle of the Taper Tantrum, investors drew the line and stepped in to buy $5.1 billion in non-investment grade credit in the 29th week of that year. We caution for optimism however as an across cycle view, using a 5 week moving average, continues to relay the down trend for non-investment grade bonds. Below we outline the 5-week moving average of ICI's new high yield bond category against the price of crude oil which is still driving consternation for investors despite a slight bear market rally in oil.
Muni bonds and bond ETFs continue to be the real story in fixed income land with tax free issues taking in +$934 million, their 22nd consecutive week of subscriptions now totaling over $20 billion. Passive fixed income ETFs are also seeing substantial demand with another +$2.7 billion take this week, their 11th consecutive weekly inflow aggregating to +$24.3 billion.
Lastly, cash is king again according to ICI with money funds taking in +$26 billion in the past 5 days, a combination of risk aversion and tax season receipts. Year-over-year however, 2016 has now aggregated to a running total of +$44.8 billion having moved into money funds versus the -$60.1 billion drawdown that money funds experienced in the first 9 weeks of 2015. This cash moving back to the sidelines supports our Best Ideas long rating on Federated Investors (FII).
In the most recent 5-day period ending March 2nd, total equity mutual funds put up net inflows of +$45 million, outpacing the year-to-date weekly average outflow of -$301 million and the 2015 average outflow of -$1.6 billion.
Fixed income mutual funds put up net inflows of +$4.1 billion, outpacing the year-to-date weekly average outflow of -$238 million and the 2015 average outflow of -$475 million.
Equity ETFs had net redemptions of -$44 million, outpacing the year-to-date weekly average outflow of -$4.0 billion but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$2.7 billion, outpacing the year-to-date weekly average inflow of +$2.4 billion and 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 contributed +$1.1 billion or +4% to the SPDR Gold ETF and +$283 million or +5% to the industrials XLI ETF.
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 negative -$6.8 billion spread for the week (+$1 million of total equity inflow net of the +$6.8 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 +$130 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:
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