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Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets?

Yesterday afternoon we hosted a conference call highlighting our latest thoughts on emerging markets. Watch the replay below.

 

The key topics of discussion were as follows:

 

I) Have emerging market financial assets bottomed? Despite a broad-based rebound in EM asset prices throughout the YTD, the belief that many EM asset markets remain at/near trough valuations has some merit. In this presentation we identify and vet potential catalysts for a sustained recovery and/or another material leg down for EM capital and currency markets.

 

Conclusion: We see further downside at the primary asset class level, as well as elevated risk of material bankruptcy cycles in a number of key emerging market economies.

 

II) Are the Chinese economy, its banking system and the yuan as vulnerable to collapse as investor consensus believes? Many investors seem to be of the view that China requires a material devaluation of the RMB to stave off banking crisis and/or outright economic collapse. Some investors actually believe each of those outcomes are inevitable. In this presentation, we offer our well-researched thoughts on the viability of these views.

 

Conclusion: While we remain explicitly and overtly bearish on the Chinese economy and RMB, we believe investor consensus is far too bearish on both. Most of the analysis we’ve seen inappropriately analyzes the Chinese financial sector from the perspective of Western economies; nor does it include the full range of potential outcomes – including a secular bull market in the Chinese currency and Chinese equities.

 

III) Which countries will outperform from here? The latest refresh of our proprietary EM Crisis Risk Index will offer valuable insights as to which countries investors should overweight and underweight from here.

 

Conclusion: On the long/overweight side we like Emerging Europe (i.e. Poland, Hungary and Czech Republic), South Korea and Thailand. In terms of short/underweight candidates, we think Latin America (specifically Brazil, Mexico and Colombia), Indonesia and South Africa are most at risk for #PhaseIII of our #EmergingOutflows theme – i.e. a wave of bankruptcy cycles.

 

CLICK HERE to download the associated slide deck in PDF format (105 slides).

 

Our top-10 charts from the presentation are as follows:

 

10: Country-level credit risks:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 2

 

9: Country-level acute bankruptcy cycle risk:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 3

 

8: Summary of country-level economic and financial market risks:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 4

 

7: One (of two) credible bull cases for the Chinese yuan:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 5

 

6: Why China won’t opt for a sharp devaluation:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 6

 

5: Is the U.S. Dollar Index (DXY) moving from “net-long consolidation” to “net-short”?:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 7

 

4: Why the DXY could go down by a third to a half from here over the next 5-10 years:  

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 8

 

3: Why the DXY should go up another 20-30% from here over the next 3-5 years:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 9

 

2: Contextualizing bankruptcy cycle and valuation risks across emerging market economies:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 10

 

1: Summarizing our outlook for China and the Chinese yuan in one handy image:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 11

 

Best of luck out there risk managing downturns across these [former] “drivers of global growth”. Funny how things change with last price…

 

DD

 

Darius Dale

Director


Rates, Russia and Gold

Client Talking Points

RATES

Obviously with Industrial Production #Recession reported at -1.03% year-over-year yesterday (newsflash: JAN industrial/manufacturing data was not the “bottom”), the Fed had fundamental reason to ease … and while that surprised most, the data (not SPX futures) supports not tightening into a slow-down. This is a great time to be Long the Long Bond, Utes, and Gold! Vs. short Fins (XLF).

RUSSIA

Forget being long Oil’s chart for this last gusher towards $40 – the real juice in being long a Fed Easing (Dollar Down, Reflation Up) is going straight to the Putin vein and buying the Russian Trading System Index, +4.7% this morning and +19% in the last month! This should all end well.

GOLD

With so much whining about the SP500 “not being down much anymore”, why aren’t all the gurus long what’s actually working? Even better than Utilities (XLU) being +13.3% YTD (vs. Financials -6.2%) is long Gold +19.4%, baby! Dollar Down, Rates Down – just like in 2011, but it all happened faster this time, as growth expectations slowed.

 

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

Asset Allocation

CASH 63% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 7%
FIXED INCOME 26% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) remains the alpha generating trades in equities, year-to-date XLU is up 11.3% versus -1.1% for the S&P 500. Factor exposure is very important to us, especially when volatility is in a bullish TREND set-up and small cap, illiquid stocks continue to underperform. Here's another way to look at it:

Volatility

+ Illiquidity

+ Too many hedge funds chasing performance...

= #Pain

We continue to expect utilities to outperform the broader market given this current environment.    

GIS

This stock is not likely going to go up 20% in the next year, but we do believe it will fare better than most in the consumer staples sector, especially as we head into an economic slowdown. That's why GIS is up 5.5% year-to-date versus down -1.4% for the S&P 500.

 

In the past few newsletters we've noted the effect Walmart is having on GIS, how its Yogurt business is faring against competitors, and how the company is broadening the distribution of its top 450 SKUs. On the M&A front, barring any screaming deals in the market place we don’t see General Mills (GIS) buying anything over roughly $1 billion in sales, just given the added complexity it would cause. So they will most likely continue the string of pearls approach in the Natural & Organic/Snacking categories. This does not rule out the possibility of GIS being bought, 3G & Kraft Heinz could be getting back in the mix as well, although it seems too soon for another deal this big.

TLT

Growth and inflation continue to decelerate in the Eurozone and globally. In other words, there is very little central planners can do to stop the cycle and the inevitable deleveraging that must take place in credit Long-Term Treasuries (TLT) remains the alpha generating trade in fixed income this year. 

Three for the Road

TWEET OF THE DAY

REPLAY! MUST-SEE on HedgeyeTV | Restaurants & Consumer Staples LIVE $CMG $MCD $HAIN $DRI

https://app.hedgeye.com/insights/49748-must-see-on-hedgeyetv-restaurants-consumer-staples-live-interact

@Hedgeye

QUOTE OF THE DAY

I think that’s what competitors do: they compete, regardless of the score or situation.                                                                                               Bill Belichick        

STAT OF THE DAY

The very first St. Patrick’s Day parade took place in Boston (not Ireland) in 1737.


ICI Fund Flow Survey | Something Has To Give

Takeaway: Re-risking continued in high yield this week with a +$1.6 billion subscription, the third straight week of rebound.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Re-risking continued in high yield this week with a +$1.6 billion subscription, the third straight week of rebound which has tallied +$6.6 billion. Either U.S. high yield is a great buy currently still sitting at depressed levels or U.S. equities should be put out for sale. Historically there is a close directional relationship between stocks and non-investment grade bonds and with the substantial divergence which has unfolded since 2013, something has to give. Below we plot, U.S. high yield fund flows (orange line) which are still in a downtrend within a 5 week moving average, the high yield ETF, the JNK (in green), and the S&P 500 in magenta.

 

ICI Fund Flow Survey | Something Has To Give - Some thing has to give

 

 

In the 5-day period ending March 9th, total equity ETFs and mutual funds experienced a +$5.1 billion inflow, the equity category's largest inflow so far in 2016. The total equity subscription was mostly comprised of +$3.6 billion to equity ETFs with investors depositing +$1.7 billion to international equity mutual funds. Domestic equity funds continue to bleed out however with -$235 million reigned in by investors.

 

ICI Fund Flow Survey | Something Has To Give - ICI19

 

In the most recent 5-day period ending March 9th, total equity mutual funds put up net inflows of +$1.5 billion, outpacing the year-to-date weekly average outflow of -$123 million and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$5.9 billion, outpacing the year-to-date weekly average inflow of +$380 million and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$3.6 billion, outpacing the year-to-date weekly average outflow of -$3.2 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.7 billion, trailing the year-to-date weekly average inflow of +$2.3 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 | Something Has To Give - ICI2

 

ICI Fund Flow Survey | Something Has To Give - ICI3

 

ICI Fund Flow Survey | Something Has To Give - ICI4

 

ICI Fund Flow Survey | Something Has To Give - ICI5

 

ICI Fund Flow Survey | Something Has To Give - 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 | Something Has To Give - ICI12

 

ICI Fund Flow Survey | Something Has To Give - ICI13

 

ICI Fund Flow Survey | Something Has To Give - ICI14

 

ICI Fund Flow Survey | Something Has To Give - ICI15

 

ICI Fund Flow Survey | Something Has To Give - 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 | Something Has To Give - ICI7

 

ICI Fund Flow Survey | Something Has To Give - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +4% or +$396 million to the consumer staples XLP ETF.

 

ICI Fund Flow Survey | Something Has To Give - ICI9



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 | Something Has To Give - ICI17

 

ICI Fund Flow Survey | Something Has To Give - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$2.5 billion spread for the week (+$5.1 billion of total equity inflow net of the +$7.6 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 -$34 million (negative numbers imply more positive money flow to bonds for the week) 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 | Something Has To Give - 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 | Something Has To Give - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

CHART OF THE DAY: What To Own On US #GrowthSlowing

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.

 

"... Instead of trying to day-trade their way to fame and “I’m not down YTD” fortune, I can’t for the life of me understand why it’s been so hard for the real growth bears to put on the real positions that are earning their investors absolute returns in 2016:

  1. Gold = +19.4% YTD
  2. Utilities (XLU) = +13.3% YTD
  3. Long Bond (TLT) = +6.4% YTD"

 

CHART OF THE DAY: What To Own On US #GrowthSlowing - 03.17.16 Chart


Fed Easing

“Don’t let the sound of your own wheels drive you crazy.”

-The Eagles

 

Are you experiencing short-term #HPAD (hedgie performance anxiety disorder) or other general stress problems that a middle-aged man like me might have? Take it easy! The Fed just did.

 

“Well I’m runnin’ down the road try’n to loosen my load

I’ve got seven women on my mind

Four that want to own me, two that want to stone me

One’ says she’s a friend of mine

Take it easy – take it easy”

 

Definitely don’t let the sound of your own performance drive you crazy. The year is still young. And while Fed Easing ramped what we love (Long the Long Bond, Utilities, and Gold vs. Financials, SP500, and Russell 2000 Short), it’s time to just relax.

 

Fed Easing - bull atlas 8 ball 03.16.2016

 

Back to the Global Macro Grind

 

Did I expect the Fed to ease yesterday? Absolutely not. But I wasn’t positioned for consensus calling for a “hawkish Fed” anyway. If I was, I’d have been long the Financials (XLF closed DOWN on the day), and short Utilities (XLU) with the Demark disciples.

 

In the end, the economic cycle beats #charts. That’s been my intermediate-term Macro Themes call (and catalyst) since July.


Instead of trying to day-trade their way to fame and “I’m not down YTD” fortune, I can’t for the life of me understand why it’s been so hard for the real growth bears to put on the real positions that are earning their investors absolute returns in 2016:

 

  1. Gold = +19.4% YTD
  2. Utilities (XLU) = +13.3% YTD
  3. Long Bond (TLT) = +6.4% YTD

 

Those returns don’t include the “yield.” And yes, I realize that the only “yield” Gold has YTD is:

 

  1. +2,560 basis points over being long “rate hikes” (Financials, XLF down -6.2% YTD)
  2. +2,480 basis points over the Russell 2000 (which is -5.4% YTD)
  3. +2,020 basis points over the SP500 (which is “only down” -0.83% YTD)

 

Oh, if you put it that way…

 

Yes, take a deep breath and call the alpha being generated by understanding what the Fed is starting to acknowledge (US #GrowthSlowing just like the rest of the world’s has) what it is. It’s obvious.

 

What’s obvious? Well even ex-China-and-CAT-slowing (again in FEB-MAR), the trending economic data remains obvious:

 

  1. Industrial Production resumed its US #Recession slowing -0.5% mth/mth to -1.03% year-over-year yesterday
  2. Consumer Price Inflation (CPI) slowed -0.4% sequentially (mth/mth) to +1.0% year-over-year yesterday

What is that called when:

 

  1. Growth Slows
  2. Inflation Slows at a lesser rate (and has “transitory” accelerations off the lows)     

 

Ah, right. That’s called Quad#3 Stagflation.

 

Even today’s chart chasers will have the muscle memory to remember the beginning of the year 2011 when macro markets did almost exactly what they are doing now:

 

  1. Rate of change growth slowed in Europe, Japan, and the USA
  2. The Fed continued to devalue the Dollar in response to rate of change slowing
  3. Utilities and Gold blasted to the upside as Financials (Banks) got crushed

 

Sure. Every cyclical slow-down is different as everything that’s coming off its cycle-peak has a different narrative and set of mean-reverting risks. What’s not different this time is Wall Street begging for moarrr easing.

 

But in addition to the 3 Rate Hike Pullbacks (the new rate cuts), what can the Fed do next?

 

  1. Ease (pullback) another 2 rate hikes? (yes)
  2. Then cut rates by 25 basis points (maybe)
  3. How about cutting by 1 beep, per day, into the election?

 

Oh boy. And what happens when, instead of the effervescent 1990s economic models all of consensus continues to use in calling for 3-4% GDP, we’re in more of a 1970s type stagflation where GDP growth is +1% and slowing vs. Inflation +1% and rising?

 

= Equity Multiple Compression

 

You see, if you keep asking yourself questions that fit on the most probable path of economic outcomes, you really can just take it easy like The Eagles did when Jackson Browne and Glenn Frey released this song going into the Spring of 1972.

 

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):

 

UST 10yr Yield 1.79-1.98% (bearish)

SPX 1 (bearish)
RUT 1050-1098 (bearish)

Nikkei 161 (bearish)

DAX 93 (bearish)

VIX 14.81-20.94 (bullish)
USD 95.42-97.59 (bullish)
YEN 111.12-114.09 (bullish)
Oil (WTI) 34.86-40.26 (bearish)

Nat Gas 1.64-1.94 (bearish)

Gold 1 (bullish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fed Easing - 03.17.16 Chart


The Macro Show Replay | March 17, 2016

CLICK HERE to view the associated slides.

An audio-only replay of today's show is available here. 

 


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