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Fork-Tongued Fed Needs To Get Its Story Straight

Takeaway: Hawkish? Dovish? Fed needs to get it together.

Fork-Tongued Fed Needs To Get Its Story Straight - Fed cartoon 02.23.2015

 

IS IT JUST US OR IS RECENT FED COMMENTARY TRULY BIZARRE?

 

As Hedgeye CEO Keith McCullough points out in this morning's Early Look:

 

"Following the Fed’s “transparent communication process” can really trip up a Fed follower:

  1. Two weeks ago, Yellen cuts via taking out the rate hikes = #Dovish
  2. Then, for all of last week, her Regional Talking Fed Heads talked up “April and June” rate hikes = #Hawkish
  3. Then she pivots incrementally dovish vs. her teammates’ hawkishness yesterday?" 

 

Here's a look at some recent (i.e. last week!) HAWKISH regional Fed head statements:

  • Atlanta Fed head Dennis Lockhart said U.S. economic growth has "sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings, possibly as early as the meeting scheduled for end of April." (3/21)
  • Philadelphia Fed head Patrick Harker said "I think we need to get on with... This economy is really quite resilient to a lot of the headwinds (including the strong dollar).... I am not a two (rate) rise person... I'd rather see [more hikes this year]." (3/22)
  • San Francisco Fed head John Williams said the U.S. economy is “looking great” and the Fed would raise rates faster were it not for global factors. “All else equal, assuming everything else is basically the same and the data flow continues the way I hope and expect, then April or June would definitely be potential times to have an increase in interest rates." (3/21)
  • St. Louis Fed head James Bullard said a case could be made for rate hike in April, sounding a hawkish tone. "The odds that we will fall somewhat behind the curve have increased modestly... We are going to get some [inflation] overshooting here in the relatively near term that might cause the committee to have to raise rates more rapidly later on." (3/23)
  • Chicago Fed head Charles Evans said U.S. economic fundamentals are "really quite good," citing improving manufacturing activity. (3/22)

 

Okay... So how exactly do we reconcile these statements with Janet Yellen yesterday saying "caution" about further rate hikes is "especially warranted"?

 

Fork-Tongued Fed Needs To Get Its Story Straight - Fed grasping cartoon 01.14.2015 normal

 

The answer might come from the Atlanta Fed's own GDP forecast. The hatchet has been taken to that measure in the past month, cut from 2.7% in February to 0.6% earlier this week.

 

Holy smokes.

 

Here's a key snippet from Yellen's prepared remarks yesterday:

 

"On balance, overall employment has continued to grow at a solid pace so far this year, in part because domestic household spending has been sufficiently strong to offset the drag coming from abroad. Looking forward however, we have to take into account the potential fallout from recent global economic and financial developments, which have been marked by bouts of turbulence since the turn of the year.

 

For a time, equity prices were down sharply, oil traded at less than $30 per barrel, and many currencies were depreciating against the dollar. Although prices in these markets have since largely returned to where they stood at the start of the year, in other respects economic and financial conditions remain less favorable than they did back at the time of the December FOMC meeting.

 

In particular, foreign economic growth now seems likely to be weaker this year than previously expected, and earnings expectations have declined. By themselves, these developments would tend to restrain U.S. economic activity. But those effects have been at least partially offset by downward revisions to market expectations for the federal funds rate that in turn have put downward pressure on longer-term interest rates, including mortgage rates, thereby helping to support spending.

 

For these reasons, I anticipate that the overall fallout for the U.S. economy from global market developments since the start of the year will most likely be limited, although this assessment is subject to considerable uncertainty."

 

 

Yellen also said deflationary pressures on oil prices were "transitory" and the headwind of a stronger dollar would "gradually dissipate." 

 

In other words, Yellen intimates, no worries. But hang on...

 

  • Yellen mentioned the word "risk" 19 times during her speech yesterday
  • Uncertainty was referenced 5 times (the title of the speech, "The Outlook, Uncertainty, and Monetary Policy"
  • Or how about this acknowledgement of the risks embedded in the Fed's overly-optimistic forecast: "If such downside risks to the outlook were to materialize, they would likely slow U.S. economic activity... For these reasons, the FOMC must watch carefully for signs that the economy may be evolving in unexpected ways."

 

As we have pointed out before, the phrase "downside risk" is Fedspeak for "I think I probably should lower my forecast, but I'm not sure yet."

 

Whatever the Fed heads say, our #LowerForLonger (rates) and #SlowerForLonger (growth) calls continue to carry the day. 

 

Fork-Tongued Fed Needs To Get Its Story Straight - Slower for longer cartoon 09.25.2015


[UNLOCKED] 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.

 

Editor's Note: This is a complimentary research note originally published March 24, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

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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). 

 


[UNLOCKED] 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:

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI2

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI3

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI4

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI5

 

[UNLOCKED] 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.

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI12

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI13

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI14

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI15

 

[UNLOCKED] 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:

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI7

 

[UNLOCKED] 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.

 

[UNLOCKED] 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.

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI17

 

[UNLOCKED] 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.)

  

[UNLOCKED] 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:

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI11 


CHART OF THE DAY: The Final Tally Is In! Earnings Season Sucked

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.

 

"... Shifting gears, not that profit or credit cycles matter when the Janet waives her “dovish” day-trader wand, but Earnings Season officially ended yesterday and here’s the summary:

  1. SP500 (500 of 500 companies have reported) aggregate SALES down -4.0%
  2. SP500 aggregate EPS down -6.9%
  3. SP500 Sectors saw 6 of 10 report NEGATIVE earnings growth
  4. “Ex-Energy” (i.e. 40 of the 500 companies), there are still 460 companies!
  5. Industrials (65 companies) and Financials (90) companies had EPS of -5.9% and -5.4%, respectively"

 

CHART OF THE DAY: The Final Tally Is In! Earnings Season Sucked - 03.30.16 chart


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

Cartoon of the Day: Whack!

Cartoon of the Day: Whack! - oil cartoon 03.29.2016

 

Oil is getting knocked around again today, down another -2.4%, despite Fed head Janet Yellen reiterating that declining crude prices are "transitory."


BREAKING: Fed Is Still Out To Lunch (Here's How To Play It)

BREAKING: Fed Is Still Out To Lunch (Here's How To Play It) - Yellen cartoon 11.11.2015

 

BREAKING... Believing the Fed's serially optimistic economic forecasts remains the biggest risk to investors.

 

Today, Fed head Janet Yellen said "caution" about further rate hikes was "especially warranted." While she was speaking, Treasury yields continued their downward descent. 

 

Here's where we're at. The Fed continually dials back rate hike expectations and thereby jawboning Long Bond yields lower. The 10-year Treasury yield currently sits at 1.82%, 45 basis points below where it started at the beginning of the year. 

 

BREAKING: Fed Is Still Out To Lunch (Here's How To Play It) - 10yr treasury

 

Q: Who warned you?

A: Hedgeye

 

The dovish Fed commentary confirmed what we have long known. It was a mistake to raise rates in December and interest rates will have to stay #LowerForLonger to prop up an already flimsy economy. (Reminder: Wall Street's "top strategists" predicted the 10-year Treasury yield will end the year between 2.5% and 3.5%. We'll see about that.) 

 

As Hedgeye CEO Keith McCullough likes to say, it still pays to be "the most bullish guy on Wall Street" on Long Bonds (TLT). Take a look at the performance of TLT year-to-date versus the S&P 500:

 

BREAKING: Fed Is Still Out To Lunch (Here's How To Play It) - tlt v sp

 

What else has worked this year? Other Hedgeye Long calls...

 

  • Gold (GLD) up 16.6% year-to-date
  • Utilities (XLU) up 13.4% year-to-date

(*Not exactly macro market expressions of confidence in the Fed's "all is good" mantra, huh?)

 

And if you think things get easier from here for Yellen & Co. don't hold your breath. As McCullough wrote in today's Early Look:

 

"We’re reiterating that the US economic and profit cycle won’t even have a chance of putting in a rate of change (cycle) bottom until Q2 which, candidly, won’t be reported until Q3."

 

Let's set aside for a second the fact that the Atlanta Fed's own Q1 2016 GDP forecast released yesterday just plunged 200 bps in the past month to a paltry 0.6%. It's our contention that as the developing corporate profit and industrial recession gets priced into the market (aka economic data continues to roll over), long-only equity investors can expect a lot more pain from here. 

 

stick with what's been working all year.


The Airbnb Impact On Hotels & Timeshare

 

Hedgeye’s Gaming, Lodging, and Leisure team hosted a presentation recently to introduce our proprietary Airbnb listings/price tracker and discuss the Airbnb impact on the lodging and timeshare space.


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