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5 Ugly Markets Around The Globe

5 Ugly Markets Around The Globe - Global economy cartoon 12.16.2014

 

Sure, there's always a bull market somewhere... but you won't find one in the five markets below. Each one looks especially ugly when you peel back the onion. 

1. JAPAN

 

2. Australia

 

3. Germany

 

4. Russell 2000

 

5. CRB Index (commodities)

 

 

You'll note that each one of these markets have been consistently making lower highs. The lesson here? Fairly simple. Don't blindly fish for bottoms in falling markets.


RTA Live: March 24, 2016


We Are Unafraid To Be The Bears

Takeaway: The Fed raising rates into a slowdown could be the catalyst for dollar strength. Not good for commodities and stocks.

 

In the famous scene above from the 1980s classic "Caddyshack," ace golfer Ty Webb (Chevy Chase) blindfolds himself before making a string of tremendous shots, advising his young confused-about-life caddy Danny Noonan to "be the ball."

 

Ty's point? Relax. Take a deep breath. Trust in your skill and hard work.

 

On a related note, the recent stock market "rally" doesn't mitigate our major concerns about market risk. To the contrary. As many of you already know, we're unafraid to "Be the Bears" on stocks. In light of the precarious setup in U.S. equity markets, here's what Hedgeye CEO Keith McCullough wrote in a note to subscribers earlier today.

 

"Dollar Up, Reflation Down – it’s not that complicated to understand unless you are the Fed, trying to maintain “credibility” going for another policy mistake, raising rates into a slowdown. We’ll see if they’re S&P 500 (instead of data) dependent, the 15-day correlation (machines chase it) between USD and SPX is -0.84."

 

And some related thoughts from Hedgeye Macro analyst Darius Dale. (Click to enlarge the chart.)

 

The other market tethered to moves in the U.S. dollar? Commodities.

 

As McCullough points out in today's Early Look, the two week inverse correlation between U.S. and CRB commodities index is -0.96. "Where do you think the Commodity “Bull” and/or reflation trade will be if the US Dollar Index ramps another +3% from here?" 

 

Here's a hint. Look at the chart of the CRB index below, inclusive of the recent "rally" and yesterday's drawdown on dollar strength:

 

 

Remember... Fed heads have been trumpeting U.S. economic fundamentals that look "really quite good" and lauding modest improvements in inflation and the manufacturing sector. In fact, the chorus of Fed officials getting hawkish on further interest rate increases gets stronger every day. Some are calling for rate hikes as soon as April. We think the likely outcome from here is further dollar strength (i.e. not good for commodities or stocks).

 

More data...

 

With the S&P 500 back to flat for the year, permabull pundits and financial journalists have been praising the recent "rally." Rally? Meanwhile, small cap stocks reveal an entirely different story. 

 

"We are The Bears on U.S. stocks," McCullough writes. "And we can’t understand how the Russell dropping a full -1.9% yesterday back to -5.3% year-to-date (and -17% since July) is bullish. Apparently, if no one talks about it and quotes the S&P 500, everything is fine."

 

 

No matter. We'll keep crunching the numbers.

 

What the data tells us is that U.S. growth is slowing and the Fed is hell-bent on raising rates into this slowdown. 


Daily Trading Ranges

20 Proprietary Risk Ranges

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.

PVH | Added to Short Bench. Now or in 6 Months?

Takeaway: Up 36% ahead of bad quality EPS. Buy into mgmt’s pitch if you want. But we think PVH is a short. NT timing is all that matters to us now.

We’re adding PVH to our short bench – not because this quarter was horrible at face value (EPS -14% yet Manny ‘beat expectations’), or because it’s up 36% since January. But because we think the poor quality of earnings is validation that this business is seriously growth-constrained going forward. It arguably has only one highly defendable piece of the business, and that’s CK fragrances, and even that’s been losing share in recent years. How we’re doing the math, fragrances’ $1.4bn in retail revenue accounts for about 18% of EBIT.  That leaves over 80% of earnings and cash flow that we have a tough time arguing will grow or improve margins without a meaningful capital investment. Could PVH simply do another deal? Yes, it’s possible. But to see a company with a $10bn EV and $3bn in debt do a sizable transaction so late in the economic cycle would be downright frightening. It would also validate that it’s got no game in its core business.  The key thing for us today is to drill down whether it is a short right now, or in another six months based on a) the puts and takes of the near-term model and b) how management ‘works the street’ (or at least tries to – it’s getting old) as it relates to expectations.  Regardless, there’s nothing we could hear on the call that is likely to change our long term view on this business, or the limited prospects for its brands.

 

Much more to come on this one.

 

PVH | Added to Short Bench. Now or in 6 Months? - 3 24 2016 chart1

 

PVH | Added to Short Bench. Now or in 6 Months? - 3 24 2016 chart2

 

PVH | Added to Short Bench. Now or in 6 Months? - 3 24 qcomp chart3


ICI Fund Flow Survey | DOL To Put Active Strategies DOA

Takeaway: Active equity strategies continued to struggle in the most recent survey and the forming DOL rules won't help.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending March 16th, three of five active equity mutual fund categories lost funds with large cap equity and emerging market funds seeing the biggest redemptions losing  -$1.3 billion and -$1.0 billion respectively. Meanwhile equity ETFs continued their market share advance during the week with +$3.5 billion in contributions. Fixed income allocations snapped back with total bond mutual funds and ETFs collecting +$7.3 billion as investors rebalanced from the 5 week long stock rally.

As if the active business didn't have enough challenges competing with passive ETFs to begin with, the forming Department of Labor Fiduciary rule is decidedly skewed to driving incremental growth into index products. The DOL outlines "conflicted advice" as an active mutual fund distributed by a third party (a broker dealer for example not associated with the fund family) and if those 3rd party funds underperform their benchmark then the new rule gives retail investors (in the retirement channel) the ability to pursue class action law suits against the distributors. Thus, passive ETFs or index funds stand to benefit as a way to circumvent the guidelines, as by definition they can't "underperform." Our Speaker Series call this week with Bob Litan laid out a framework for understanding this policy (see Speaker Series replay HERE). 

 


ICI Fund Flow Survey | DOL To Put Active Strategies DOA - ICI1

 

In the most recent 5-day period ending March 16th, total equity mutual funds put up net outflows of -$2.1 billion, trailing the year-to-date weekly average outflow of -$302 million and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$4.9 billion, outpacing the year-to-date weekly average inflow of +$793 million and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$3.5 billion, outpacing the year-to-date weekly average outflow of -$2.6 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$2.4 billion, outpacing the year-to-date weekly average inflow of +$2.3 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:

 

ICI Fund Flow Survey | DOL To Put Active Strategies DOA - ICI2

 

ICI Fund Flow Survey | DOL To Put Active Strategies DOA - ICI3

 

ICI Fund Flow Survey | DOL To Put Active Strategies DOA - ICI4

 

ICI Fund Flow Survey | DOL To Put Active Strategies DOA - ICI5

 

ICI Fund Flow Survey | DOL To Put Active Strategies DOA - 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 | DOL To Put Active Strategies DOA - ICI12

 

ICI Fund Flow Survey | DOL To Put Active Strategies DOA - ICI13

 

ICI Fund Flow Survey | DOL To Put Active Strategies DOA - ICI14

 

ICI Fund Flow Survey | DOL To Put Active Strategies DOA - ICI15

 

ICI Fund Flow Survey | DOL To Put Active Strategies DOA - 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 | DOL To Put Active Strategies DOA - ICI7

 

ICI Fund Flow Survey | DOL To Put Active Strategies DOA - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors withdrew -$411 million or -5% from the utilities XLU ETF last week.

 

ICI Fund Flow Survey | DOL To Put Active Strategies DOA - 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 | DOL To Put Active Strategies DOA - ICI17

 

ICI Fund Flow Survey | DOL To Put Active Strategies DOA - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$5.9 billion spread for the week (+$1.4 billion of total equity inflow net of the +$7.3 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 -$541 million (negative numbers imply more positive money flow to bonds for the week) with a 52-week high of +$20.2 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 | DOL To Put Active Strategies DOA - 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 | DOL To Put Active Strategies DOA - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







Fading Reflation

Client Talking Points

USD

Dollar Up, Reflation Down – it’s not that complicated to understand unless you are the Fed, trying to maintain “credibility” going for another policy mistake, raising rates into a slow-down. We’ll see if they’re S&P 500 (instead of data) dependent, the 15-day correlation (machines chase it) between USD and SPX is -0.84.

COMMODITIES

Dollar Up, Commodities Down – short-term inverse correlation there is even higher than with the S&P 500 at -0.96 for the CRB Index (19 commodities), so the CRB dropped -2.2% yesterday, back to -1.7% year-to-date (the new up).

RUSSELL 2000

We are The Bears on U.S. stocks and we can’t understand how the Russell dropping a full -1.9% yesterday back to -5.3% year-to-date (and -17% since July) is bullish; apparently if no one talks about it and quotes SPX, everything is fine.

 

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

Asset Allocation

CASH 69% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 5%
FIXED INCOME 21% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) hasn’t bounced as much as leveraged , high-beta resource names, but the outperformance is greatly divergent vs. both the market, and our preferred sector short in financials (XLU +12.3% YTD, S&P -0.3% YTD, XLF -4.6% YTD).

GIS

General Mills (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 during turbulent times; high market cap, low beta and liquidity. Case in point, GIS is up 7% year-to-date, versus essentially flat for the S&P 500 in 2016. We'll have an update next week after GIS reports earnings.

TLT

Long-Term Treasuries (TLT) finished +1.9% on the week. Aside from Mr. Market, the Fed downwardly revised expectations (the common lag) on Wednesday:

  • The median 2016 GDP forecast revised to +2.2% vs. +2.4% in December
  • The median 2016 PCE Inflation forecast revised to +1.2% vs. +1.6% in December
  • Median Federal Funds end-2016 rate forecast revised to 0.9% vs. +1.4% in December

From a GROWTH, INFLATION, POLICY perspective, it’s lower for longer on growth and inflation and a more dovish Fed.

Three for the Road

TWEET OF THE DAY

QUICK TAKE: How To Risk Manage Gold | $GLD https://app.hedgeye.com/insights/49900-quick-take-how-to-risk-manage-gold-gld… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

QUICK TAKE: How To Risk Manage Gold | $GLD https://app.hedgeye.com/insights/49900-quick-take-how-to-risk-manage-gold-gld… via @hedgeye

@KeithMcCullough

STAT OF THE DAY

Data obtained from Reuters shows that more than 2 million Brazilians are set to lose unemployment benefits by June.


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