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Millennials Gone Mild: The Investing Implications

 

In this complimentary edition of “About Everything,” Hedgeye Demography Sector Head Neil Howe discusses the sweeping behavioral changes of Millennials (“Generation Yawn”) compared to prior generations, and spells out what it all means for investors and companies around the globe.


What Investors Missed Hanging On Yellen's Every Word

Takeaway: Stick with what has worked all year: Gold, Utilities, Long Bonds (and short the Fed's forecast.)

What Investors Missed Hanging On Yellen's Every Word - Yellen cartoon 03.17.2015

 

Omnipotent (dovish?) Fed head Janet Yellen yesterday said the opposite of her hawkish regional Fed talking heads who made the Old Wall media rounds last week. So, naturally, USD/Rates smoked, reflation rallies!

 

However, what really matters is not Janet Yellen's every last word but economic fundamentals, which continue to slow. According to Hedgeye CEO Keith McCullough:

 

"As opposed to v-bottoms on the SPY short-side, the long side has been easy YTD – as #GrowthSlows, Fed Easing has pounded the 10yr down to 1.81% this morning (2yr just went from 0.90% to 0.77% in less than a week on Fed Head confusion) and Utilities (XLU) continued to lead the way on yesterday’s Yellen Ramp, closing up another +1.5% = +14.3% YTD XLU."

 

 

How about those sectors? Take a look:

 

What Investors Missed Hanging On Yellen's Every Word - sectors macro

 

There's more...

 

"Heck, why buy Utes on Yellen turn-tailing dovish when you can go right to the vein and buy Gold? It was +3% yesterday (vs. Financials barely up at +0.18% XLF #terrible) to +17% YTD leading most things in absolute return space which I highly doubt will be trumpeted more than “the S&P is up” (+0.5% YTD) all day today (into month-end markups)"

 

 

So here's what's working:

 


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


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[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.

 

*  *  *  *

 

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


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."


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