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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


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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One Of Our Best Calls YTD

 

In this brief excerpt from The Macro Show today, Hedgeye Senior Macro analyst Darius Dale discusses our macro team’s call to remove the Industrials and Energy sector as top short ideas while adding short Financials.


Cartoon of the Day: Reality Check

Cartoon of the Day: Reality Check - Math   Myth cartoon 03.30.2016

 

"Since Q4 ended on December 31st (they haven’t been able to centrally plan a change in the calendar dates yet), has anyone considered why we just saw the worst 6 week start to a stock market year ever? Yep, it’s the Profit vs. Credit Cycle (within the Economic Cycle), stupid," Hedgeye CEO Keith McCullough wrote in a recent Early Look.


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