As Hedgeye CEO Keith McCullough has repeatedly reiterated, what the Fed's quantitative easing actually did was "pay the few and crushed the many."
Below is a brief excerpt from Potomac Research Group Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning.
Republicans are voting today in both AZ and UT, with divergent results expected in the two neighboring states. Politically polarized AZ should be considered safe ground for Donald Trump, where his hard-line stance on immigration is bread and butter to the state's conservative crowd, but Ted Cruz has a superior organization and it's a closed primary which work to his favor. The real test is whether Cruz can capture over 50% of the vote in UT -- winning over Mormons who loathe Trump as well as all 40 delegates -- and not ceding too much ground to the frontrunner.
Bernie Sanders and Hillary Clinton will also be competing in AZ and UT, as well as in ID. Sanders' best shots are in UT and ID, where a whiter demographic and caucus-style primaries have been working in his favor, but Sanders has spent much more time and money trying to overcome Clinton's advantage in much more diverse AZ. In a sign of confidence (or arrogance?) Clinton detoured to Washington to address the AIPAC conference and continues her focus on the general election.
All eyes were back on Trump at yesterday's AIPAC conference as he shared the stage with Clinton, Cruz and John Kasich. Trump ditched his off-script speaking style and shifted to a prepared -- and more substantive -- speech reading from a teleprompter for the first time since his announcement last June and refuting Clinton's claims of indecision when it comes to his views on Israel. The softer-toned speech by Trump as well as an editorial board meeting at the Washington Post, a press conference at the Trump Hotel and a meeting with the a number of key Republican Senators and Congressmen have all the makings of pivot with the intent of quelling the concerns of the establishment in its backyard. Or maybe he came down with Potomac fever. Let's see how long this lasts...
Majority Leader McConnell ruled out consideration and confirmation of Judge Garland under a President-elect Clinton scenario during a lame duck session of Congress this fall, but we still believe that his hand may be forced. Democrats are looking to keep the spotlight on the vacancy at every turn -- with Veep Biden set to deliver a speech calling out Republicans later this week. We're hearing that Trump also plans to weigh in with his list of potential SCOTUS nominees soon -- potentially capping off a week where the frontrunner looks to shed his bombastic rhetoric and display a more even-keeled, disciplined and...presidential tone.
Takeaway: Re-risking continued in high yield this week with a +$1.6 billion subscription, the third straight week of rebound.
Editor's Note: This is a complimentary research note originally published March 17, 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:
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.
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.
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:
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 +4% or +$396 million to the consumer staples XLP 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 -$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.)
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:
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
Takeaway: When the Chief Cheerleader (Economist) of the National Association of Realtors says the data is weak, you know you have a problem.
Investors bullish on U.S. housing are setting themselves up for disappointment.
"Existing Home Sales were down -7.1% sequentially and decelerated to +2.2% YoY in February. We’ve known for over a month that February was going to be soft as EHS recoupled to PHS so the print was of little surprise," Hedgeye Housing analysts Josh Steiner and Christian Drake wrote in a recent institutional research note.
Steiner and Drake point out that sales grew +2.2% year over year in February but the extra day in the period provided a +3.5% benefit. Net of the extra leap day, EHS were actually down -1.4% Y/Y.
Even Lawrence Yun (NAR’s chief economist) had a sober assessment: “[The February decline] was meaningful...”
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On The Macro Show this morning, Drake added that housing trends don't get easier from here. The Pending Home Sales data is up against some steep comps from last April and May:
Home prices lag the volume of sales so bottom line, with volume declining, Steiner and Drake conclude, "We expect HPI trends to flat-line and begin to roll as we move through 1H16, representing an addition fundamental headwind for housing related equities."
In case you haven't seen it yet, here's our recent 2-minute video explaining, "Why We're Bearish On Housing."
***To access Steiner and Drake's institutional Housing research ping email@example.com.
Takeaway: Falling volume? Historically low volatility? Not exactly bullish signals. (And we won't even mention the worsening economic picture.)
Spellbound investors staring at the price-action on the Dow each day are missing key fundamentals breaking down underneath the surface. As Hedgeye CEO Keith McCullough wrote in a note sent to subscribers this morning, buying equities on lower highs and no volume ... well, that's a fool's errand:
"The relationship between volume and volatility (relative to price) remains core to how I model trending risks – as they chased the charts to another lower-high (price) yesterday (SPX), total US Equity Volume (including dark pool) was -13% vs. its 1 month average as front month equity VIX held the 12-14 level it held during JUL and OCT."
Check out the chart below. A sub-14 VIX? Not exactly a bullish signal.
Takeaway: NKE might be the best long-term idea we can find, but there are some serious short-term factors that will cause big buying opportunities.
Conclusion: We think that Nike is perhaps the best idea in retail as EPS more than doubles to nearly $5/shr, which is huge for a large cap name that is already operating at peak margins. The company should add $10bn in revenue over 4-years from e-commerce alone, which should take gross margins at least 5-points higher, past the 50% mark (a level most never thought achievable). But this transformation will also make its Futures model obsolete, and we think it’s a matter of time before it’s no longer reported to the Street. That won’t happen today. But we’ll inch closer as each quarter passes and earnings surprises on the upside, while the order book goes the other way. That’s going to create some fantastic buying opportunities. Though the Olympics and slightly better FX should help order levels and the company’s outlook, we’d rather wait for a point where there is some critical misunderstanding of the company’s growth and financials to make a ‘step in and buy before the event’ call. That does not exist today.
We like a lot more about Nike than we don’t, and the story is arguably more investable than ever. This company and story have become extremely complex, but the basic building blocks of what we like can be placed in the following buckets
a) Investing at a greater rate than ever in its product engine resulting in an arsenal that even its strongest competitors can’t replicate
b) Changing up the manufacturing paradigm for the first time in 40 years (initially what most of us know as FlyKnit – but this will change soon), which not only creates margin and working capital opportunities, but also gets Nike even closer to market (i.e. it will get 2-3 months out in an industry that is locked into a 5-6 month order window).
c) Dropping its attitude of deference and respect for the traditional footwear retailing channel, and getting the right product into the hands of the right consumers regardless of the poor growth and real estate decisions made by Nike’s traditional wholesale channel over the past 20 years.
Put these together, and we think that you’re looking at an incremental $10bn in sales at a 70% gross margin (vs $31bn in sales at a 47% margin today). When all is said and done, we think that gets you to almost $5 in EPS in four years versus the $1.85 it earned last year. Yes, earnings should more than double in 4-years for a large cap name with stable growth, a bullet proof balance sheet ($3/sh in cash), 75%+ share in some of its core businesses, dominant positioning in a global duopoly, and a structural advantage that could potentially never be overcome (i.e. what Google has over Yahoo). Does it make sense to us that Nike is trading at an all time high price and multiple? Of course it does. But that doesn’t mean it’s expensive – at least for someone that follows our train of thought.
Now, please allow me to talk out of the risk management side of my mouth. This name might look ridiculously expensive for a person with a very short (TRADE) duration, who is only looking in the rear-view. They’ll see peak margins, a peak 30x multiple, and a futures growth rate (THE key stock driver) that has been running at a double digit rate for the past 10 quarters with a risk to reversion to a longer-term mean of 7-9%. Tack on short interest that is running at just 1.1% of the float (basically nonexistent), and the simplest roll in futures could send this name tumbling.
The question then is when will PWC recommend to Nike that they stop reporting futures altogether. We think that is a near mathematical certainty. But, will Nike do so during a quarter when they are crushing it on every metric – including futures? Or will it happen in response to an otherwise ugly futures number that is the result of the wholesalers (like FL) tapping out on their ability to order more product because that part of the business is in a decline? Nike always talks about playing offense. Let’s see if they do it right this time. We’re not worried about a change happening with tonight’s print. But a change should definitely be in the works.
Until then, this is a name for long term investors to buy on red as futures numbers revert.
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