"Unlike many strategists (who missed calling the cycle top in US Consumption, Employment, and Profits last year), we have stayed with The Cycle call we’ve had all along here in Q2," Hedgeye CEO Keith McCullough wrote today.
In this brief exchange on The Macro Show, Hedgeye Demography Sector Head Neil Howe and CEO Keith McCullough discuss how global markets are closing in on a critical monetary policy exhaustion end point. “Why don’t people accept that?” Howe asks. “[Central bankers] can’t do anymore!”
Below is a brief excerpt from our Potomac Research Group colleague and Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. For more information on how you can access our institutional research please email firstname.lastname@example.org.
Washington gossipmongers are out in full force - speculating on a calculated bid for the presidency by Speaker Paul Ryan. Ryan would certainly be a formidable opponent to the Democratic candidate in the fall, but jockeying for the top spot isn't high on his list.
It's not Ryan's style to upend a political process, and we believe that if this scenario were to come to fruition, it would be similar to the path he walked to the speakership. Currently, there aren't many qualified, well-vetted alternatives who could be a unifying force besides Ryan - leading us to believe that if an open convention occurs and multiple ballots ensue, he could be the chosen one.
Many have labeled last week as Donald Trump's worst yet - and that charge may be validated if he loses today's primary in WI. The Badger state was Trump's to lose given the similar dynamics to other victories he's notched - one with many blue-collar Democrats and disaffected voters, that also allows independents to vote. Although Trump is trailing Ted Cruz by a small margin, it's becoming clear that his antics are not serving him well with WI Republicans - in particular Republican women.
The combination of his comments on abortion, shaming of Heidi Cruz on Twitter, foreign policy missteps, the Lewandowski incident - the list goes on - have led us to believe that he is no longer the "Teflon Donald." Trump is likely to snatch defeat from the jaws of victory tonight - exposing weaknesses in his campaign and a failure to make the pivot to acting more presidential.
We believe that no matter the outcome, Trump and Sanders' impact on the presidential election process will be felt for years to come. Both candidates have exposed the grip the establishment has on our system. On the Democratic side we have the superdelegate system designed to prevent anti-establishment, iconoclastic candidates from winning the nomination.
On the Republican side, we are witnessing the very beginning of backroom deals for delegates - in a collaborative effort to block Trump from the nomination. The voters are becoming aware of this flawed system where the election may indeed slip away from the people, and transforming into one controlled by party leaders - we think calls for the eventual dissolution of the superdelegate system and restructuring of the delegate selection process are not far behind.
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Takeaway: We added CME to Investing Ideas on the long side on 3/24.
We recently completed a granular, deep dive study demonstrating that all classes of volatility including equity, fixed income, and FX have been managed lower by a U.S. Central Bank engineering a historically abnormal quantitative easing policy over the past 7 years.
What does this mean and what are the implications? Well, with Quantitative Easing over (for now) and the Federal Reserve on a rate hiking policy path (for now), for the first time in a long time there is a reason to hedge bond and equity exposure. CME is one of the few venues that allows both institutional and retail investors to do exactly that. The company manages the entire Treasury futures curve and also most of the equity index futures in the U.S.
In this late cycle economic environment, CME Group (CME) has a solid earnings trajectory. The exchange continues to benefit from all 3 legs of the exchange stool including incremental volatility; incremental participants coming into its markets; and also new product introduction. Over the course of the next 12 months, we think the earnings opportunity will jump and the path to more than $5 per share in earnings will become more obvious. (Note: Our earnings target is over +15% ahead of the Street.)
Along the way, CME should continue to issue its variable year-end dividend of up to $1 billion (near $3 per share or a 3.1% yield on this distribution alone). In an environment that has entered into an earnings recession (2 consecutive quarters of negative Y/Y earnings results for the S&P 500), the exchange's results are accelerating to the upside. This large cap company currently sits on our Best Ideas list as a Long with solid earnings growth and a defensive business that thrives on incremental volatility across asset classes.
There looks to be a forming secular case that energy hedging from a commercial standpoint is receding as, historically, E&P enterprises have not hedged at low commodity prices. This is showing up in lower energy trader counts in the CFTC bi-monthly data. Conversely, financial traders counts are growing and what was a “lost decade” in financial activity (from 2000-2010 during the Financial Crisis) should be a boon for fixed income and equity hedging, which benefits CME. Thus, from a secular standpoint the more financially oriented CME will outflank the more energy dependent Intercontinental Exchange from an activity and trader growth stand point.
Takeaway: The only thing crashing more than markets in Japan and Europe is faith in central planners. Is the U.S. next?
The #BeliefSystem that central-market-planners in Japan and Europe can levitate stock markets continues to crash…
According to Reuters, "Bank of Japan Governor Haruhiko Kuroda stressed on Tuesday his readiness to expand monetary policy still further, saying that market moves would be key factors the central bank would examine in deciding when and how it might next expand stimulus."
So... how about those "market moves?"
Some analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers this morning:
"Japan big rip higher in the Yen to immediate-term overbought at 110 (vs USD) smoked Japanese stocks again, -2.4% Nikkei taking the crash from the July US Equity market high of 2015 to -24.6% - negative yields is not working in Japan or Europe (DAX down -2.4% and -22.6% since last year’s top)"
Take a look at the strength of the Yen versus the Dollar, a move in direct opposition to the BOJ's intent:
The latest "jig is up" moment for central planners came in India. The Reserve Bank of India cut interest rates to a five year low... and (surprise!) the Bombay Stock exchange fell.
The evidence is piling up. Global central bankers around the world can't fight economic gravity. But how about the U.S. and the Fed?
On that front, Hedgeye CEO Keith McCullough has been pretty candid about what he thinks. Watch the video below:
Takeaway: Passive equity ETFs took in +$5.4B while all active equity categories lost funds. Additionally, HY bond subscriptions slowed.
Editor's Note: This is a complimentary research note originally published March 31, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email email@example.com.
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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).
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.
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:
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.
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:
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.
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.
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.)
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:
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