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Proactively Prepare

Client Talking Points

JAPAN

Unlike the slow-volume squeeze U.S. equity beta had off those crashy FEB lows, Japan really sucked wind throughout Q1. The Nikkei closed down for 3 straight days to end the quarter right back in crash mode (-20% since the bubble highs in Global Equities of July 2015) – we remain bearish (short) Japan and one of its ETF manufacturers (DXJ and WETF).

EUROPE

Forget Q2’s prospects for one more day, Europe was flat out ugly for Equity Bulls too – Spain leads losers this morning -1.5% and is in a race with Italian stocks for biggest draw-down from 2015 highs (both -25%!); they’re totally not into the Yellen Dollar Devaluation (Euro Up) thing; #GrowthSlowing in Europe remains our fundamental call there.

QQQ

We finally added QQQ to the short side (yesterday in Real-Time Alerts) – having missed shorting the Nasdaq at the beginning of Q1, we’ll have to enter the game with it already -2.7% YTD. Plenty of markups in consensus long ideas from the 2013-2015 ramp in growth stocks; heading into Q2 (we have Street low U.S. growth forecasts), we’re shorting growth (QQQ) vs. our core Long slow-growth macro ideas (TLT + XLU + GLD).

 

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

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 24% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
CME

CME Group (CME) put up a decent fourth quarter earnings print with a slight revenue and earnings beat. Not that we put much weight on what happened last quarter but trends into the new operating period are looking even better. The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, at over 111 million contracts.

 

Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials.

GIS

We continue to like General Mills (GIS) as one of the best large cap names in the packaged food space. With that being said, the third quarter was not without its noise surrounding the numbers; Green Giant divestiture, Walmart clean store policies, foreign currency exchange, and grain merchandising just to name a few, muddied the waters. But digging through the noise, this is a business that is truly turning a corner. When they set sail on fiscal year 2016 back in June of 2015, we knew this was not going to be an easy ship to turn towards success. Now, with many key product platforms turning (through strong product innovation and renovation) in the right direction and operational improvements implemented through cost savings initiatives, GIS is on the cusp of success. We will be measuring this success by realization of sustained top line growth in the low single digit range.

TLT

In our model the second quarter is the toughest compare on both GDP and U.S. corporate profits so we want to be very careful going into that and be positioned defensively. Stay long Long-Term Treasuries (TLT).

 

While small/mid cap U.S. Equities reverted to their bear market mean last week (Russell 2000 down -2.0% on the week and -16.7% since US Corporate Profits peaked in Q2 of 2015), so did a few other US Equity Market Style Factors that had had a big 1-month bounce:

  1. High Beta stocks were -2.0% on the week
  2. High Leverage (Debt/EBITDA) stocks were -1.9% on the week
  3. High Short Interest stocks were -1.7% on the week

Three for the Road

TWEET OF THE DAY

NEW VIDEO: #Millennials Gone Mild: The Investing Implications https://app.hedgeye.com/insights/50012-millennials-gone-mild-the-investing-implications… @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

The smallest deed is better than the greatest intention.

John Burroughs  

STAT OF THE DAY

Spotify raised $1 billion in convertible debt from TPG,  Dragoneer, and clients of Goldman Sachs. TPG and Dragoneer get to convert the debt to equity at a 20% discount of whatever share price Spotify sets for an eventual IPO. And if it doesn’t IPO within the next year, that discount goes up 2.5% for every additional six months.


FL | Nike Found Its Ceiling

Takeaway: Nike officially hit a ceiling at FL. Neutral event for NKE. Super bearish for FL.

Here’s a bearish chart for FL, and based on our conversations with investors over the past few days, this one’s squeaking past the goalie. 

In Foot Locker’s 10K, the company disclosed that the percent of its purchases from Nike went DOWN in 2015 to 72% from 73% a year earlier. A whopping 1%, you say? Does this REALLY matter? Yes. And here’s why…

1) The share gain for Nike from 50% to 73% has been the primary driver of FL’s gravity-defying earnings recovery. Nothing that Foot Locker sells drives more traffic and boosts ASP more than something with a Swoosh on it.

2) We think that Nike will add $10bn in online sales by 2020, and that’s off a base of $32bn. How we do the math, Brick&Mortar sales are likely to be down every year – unless industry sales grow in excess of 6% (and that only happens when we’re at the peak of a cycle). And let’s keep in mind that it’s not only Nike that is shifting online.

3) At the same time Nike’s percentage showed that 73% is likely the ceiling at Foot Locker, we actually saw FL’s Footwear Ratio go up 300bp to 82%. So it sold more footwear, but less of it was Nike (thank you Steph Curry/UA)

4) FL bulls might argue that the company still comped well with less Nike going through the pipe. Yes, that’s true. But in the US, FL comps last year went from ‘low DD’ in ’14 to ‘high singles’ in ’15. We’ll call that a 300-500bp slowdown in comps, with just  100bp less in Nike product as a percent of total. What happens if (when) the Nike ratio goes down to a healthier (but still unhealthy) 60%? FL comps are solidly negative in that scenario – there’s really no way around it. With no square footage growth, peak gross margins, higher investment in SG&A and capex to compete against its vendors, this could easily cost FL 1,000bp in RNOA, $2-$3 in EPS, and 40% of its market cap.

 

FL remains at the top of our Best Ideas Short list.

 

FL Showed Us The Nike as % of Total Purchases Have a Ceiling in Low 70s. That’s Bearish From Here.

FL | Nike Found Its Ceiling - 3 31 2016 chart1

 

People Think that Ken Hick’s Owns FL’s Recovery. He Was Good. But Nike Was Better.

FL | Nike Found Its Ceiling - 3 31 2016 chart2


CHART OF THE DAY: Our Freshest Idea On The Short Side

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. 

 

"... I shorted it in Real-Time Alerts yesterday and here’s why:

  1. We have the most bearish forecast on Wall Street for US Growth for Q2
  2. I want to be short High-Beta, High-Multiple, Over-Owned Growth in Q2
  3. My immediate-term TRADE signal said short some within its developing bearish @Hedgeye TREND"

 

CHART OF THE DAY: Our Freshest Idea On The Short Side - 03.31.16 chart


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Drawing Trends

“Trends. Trends are what you’re looking for.”

-David Harding

 

With some CTAs and Quants having a good run here to kick off 2016, last night I reviewed an excellent interview Lasse Heje Pedersen did with long-time British math/science/markets man, David Harding, who runs Winton Capital Management in London. Since I love studying other people’s #process, I was particularly interested in how Harding came up with his:

 

“I was looking at long strings of numbers going up and down and drawing charts. I was trained as a scientist, and I had learned a lot in my physics degree about methods of analyzing data… and I couldn’t help but wonder if this could be applied to these time series. I spent two years in the mid-80s drawing charts by hand every day which is a very laborious process. That certainly gave me a lot of time to look at time series. When you press a button on your computer and a chart appears, you don’t interact with the data in a very detailed way. Whereas if you draw these graphs day by day by hand, you reflect on the empirical nature of the data more deeply.” -Efficiently Inefficient (pg 226)

 

Writing it down – day by day, by hand. Now that is my type of #process! I’m hardly David Harding, but this is precisely what I believe to be one of my advantages vs. our competition in the Macro-Strategist space. I have written down every relevant number, every market day, of my professional life. I know the time series of market prices, deeply. But I believe that only gets me prepared for game time. How I play the game from there is entirely more challenging.

 

Back to the Global Macro Grind

 

The most causal intermediate-to-long-term TREND (not to be confused with 3-6 week bounces in US equity centric charts) in all of Global Macro has been #GrowthSlowing from its 1H 2015 peak.

 

Drawing Trends - Growth cartoon 06.03.2015 large  1

 

If you have friends in our profession who don’t quite get this yet, give them 3 pieces of paper and have them draw what Long-term US Treasury (and Global Sovereign) Bond Yields have done on a 6, 12, and 18 month duration, then connect the dots.

 

My dots, not to be confused with the erroneous Fed forecast “dots” of what didn’t happen, are the dots you can draw on a time-series of data that identifies lower-highs and lower-lows. Those are called Bearish TRENDs @Hedgeye.

 

*A Bullish TREND @Hedgeye = upside down of that = Higher-lows, Higher-highs (across intermediate-term to long-term durations)

 

While it may be more challenging for your friends to see this in the mother of all navel-gazing “charts” (Dow Bro), the Bearish TREND in a wider sample size of stocks (Russell 3000) is obvious. That peaked when the US GDP & Profit Cycle did in Q2 2015.

 

Not to be confused with the obvious, the Bearish @Hedgeye TREND in the following major Global Equity Indexes is VERY obvious:

 

  1. Japanese Stocks (Nikkei down another -0.7% overnight and -19.7% since July 2015)
  2. German Stocks (DAX down another -0.6% this morning and -19.4% since April 2015)
  3. Italian and Spanish Stocks (MIB and IBEX both down -24-25% since their 2015 #bubble highs)

 

Bubbles? Yes. We were the only firm to identify many market things in 2015 as bubbles (see hashtag #Bubbles @Hedgeye Global Macro Themes call from Q4 2014 for timestamps) after being one of the most vocal US #GrowthAccelerating bulls in 2013.

 

What former bullish TREND bubbles have imploded?

 

  1. Commodities
  2. Emerging Markets
  3. China
  4. IPOs
  5. MLPs
  6. Junk Bonds
  7. Ackman
  8. Etc.

 

Oh, right. If you go back to the middle of February 2016 (I know, it was so long ago and shouldn’t be considered a bearish TREND anymore, Ex-Energy, right?), the weekly closing low for the Russell 2000 was 971.

 

Q: What was its % crash/decline from its all-time #bubble high of July 2015?

A: -25%

 

Right in line with where Europe’s ugliest country indexes are right now – isn’t that ironic? Not at all. Since the rate of change in US #GrowthSlowing should mostly affect the securities (debt or equity) most levered to a US (not Chinese or Russian) domestic slow-down, the Russell has drastically underperformed her International Sister, the SP500.

 

To be fair to the CTAs and Quants who don’t really do fundamental research and focus mostly on shorter-term price-momentum, it’s a lot easier to chase charts higher (or press them lower) after they’ve started moving than it is to call tops and bottoms.

 

As long-time readers of my rants know, tops and bottoms are processes, not points. And I humbly submit you need both a long-cycle fundamentals research AND a quantitative signaling process (multi-duration) to consistently identify them.

 

Just to give you my freshest idea on that front – how about shorting the Nasdaq (QQQ)?

 

Since I missed making the short call on the QQQ in July of 2015 (I said short SP500 and Russell instead), and the Nasdaq is -6.7% from that #Bubble peak, I missed the 1st part of the move. But I don’t want to miss the next one.

 

I shorted it in Real-Time Alerts yesterday and here’s why:

 

  1. We have the most bearish forecast on Wall Street for US Growth for Q2
  2. I want to be short High-Beta, High-Multiple, Over-Owned Growth in Q2
  3. My immediate-term TRADE signal said short some within its developing bearish @Hedgeye TREND

 

While your friends are doodling on long-term time-series, ask them if someone were to be right on US #GrowthSlowing at an accelerating rate in Q2, if they’d want to be buying QQQs at their 1st trending series of lower-highs since 2008?

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.79-1.90%

SPX 1
RUT 1068-1118

NASDAQ 4

Nikkei 161

DAX 99

VIX 13.02-19.92
Oil (WTI) 36.70-40.22

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Drawing Trends - 03.31.16 chart


ICI Fund Flow Survey | Active Equity Bleeding

Takeaway: Passive equity ETFs took in +$5.4B while all active equity categories lost funds. Additionally, HY bond subscriptions slowed.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

The migration from active equity funds to passive ETFs was especially pronounced in the 5-day period ending March 23rd. All five active equity mutual fund categories experienced net redemptions, summing to a -$2.1 billion loss. Meanwhile, equity ETFs drew +$5.4 billion in subscriptions. This ongoing migration is one of the main reasons TROW, which is committed to active only strategies, should underperform going forward. We are hosting a call today at 11 AM to detail the TROW short case (invite here). The best grossing passive products year-to-date have been defensive in nature including the SPDR Gold Trust and the iShares Aggregate Bond and long dated 20 Year+ Treasury ETF. Conversely, net redemptions are being led by WisdomTree's two largest funds, the Hedged Japan (DXJ) and the Hedged Europe (HEDJ) product, as the newest rounds of QE in each geography is resulting in risk aversion and not risk taking (see our latest WETF note here).

 

ICI Fund Flow Survey | Active Equity Bleeding - ETF flow YTD

 

Fixed income had another week of big inflows. Total fixed income mutual funds and ETFs took in +$5.8 billion, slightly less than the previous week due in part to high yield subscriptions slacking down to +$420 million from +$1.5 billion in the previous week. We believe the recent inflows into high yield are a temporary phenomenon.


ICI Fund Flow Survey | Active Equity Bleeding - ICI1

 

In the most recent 5-day period ending March 23rd, total equity mutual funds put up net outflows of -$2.1 billion, trailing the year-to-date weekly average outflow of -$455 million and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$4.7 billion, outpacing the year-to-date weekly average inflow of +$1.1 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$5.4 billion, outpacing the year-to-date weekly average outflow of -$1.9 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.2 billion, trailing the year-to-date weekly average inflow of +$2.2 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 | Active Equity Bleeding - ICI2

 

ICI Fund Flow Survey | Active Equity Bleeding - ICI3

 

ICI Fund Flow Survey | Active Equity Bleeding - ICI4

 

ICI Fund Flow Survey | Active Equity Bleeding - ICI5

 

ICI Fund Flow Survey | Active Equity Bleeding - 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 | Active Equity Bleeding - ICI12

 

ICI Fund Flow Survey | Active Equity Bleeding - ICI13

 

ICI Fund Flow Survey | Active Equity Bleeding - ICI14

 

ICI Fund Flow Survey | Active Equity Bleeding - ICI15

 

ICI Fund Flow Survey | Active Equity Bleeding - 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 | Active Equity Bleeding - ICI7

 

ICI Fund Flow Survey | Active Equity Bleeding - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +$160 million or +7% to the materials XLB ETF this week.

 

ICI Fund Flow Survey | Active Equity Bleeding - 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 | Active Equity Bleeding - ICI17

 

ICI Fund Flow Survey | Active Equity Bleeding - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$2.6 billion spread for the week (+$3.2 billion of total equity inflow net of the +$5.8 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 -$485 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 | Active Equity Bleeding - 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 | Active Equity Bleeding - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA








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