prev

INSTANT INSIGHT | What's Really Driving Oil Prices

INSTANT INSIGHT | What's Really Driving Oil Prices - oil fallen and can t get up

 

Following yesterday's 4.5% pop in the price of oil on OPEC production freeze speculation, we're back to fundamentals this morning (a.k.a. stronger U.S. dollar pushing prices lower).

 

So where do we go from here? Below is analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"Another fun ramp to an immediate-term overbought signal (on an oversold USD signal) finds resistance, USD bounces, and Oil sells off -1.7% this am; OVX (oil volatility) is signaling nowhere near the end of this bear market in Oil (OVX = 48 with an immediate-term risk range of 44-53)"

 

In a recent Early Look, McCullough noted that Commodities (CRB Index) have an inverse correlation (30-day duration) of -0.88 vs. the US Dollar. That's what's driving commodity prices and oil today. 

 

If you are trying to read the OPEC tea leaves, however, watch our Hedgeye colleague and Potomac Research Group's Senior Energy analyst Joe McMonigle in the video below. 

 

 

Today, Saudi Arabia's Oil Minister downplayed the prospect of oil producers taking action saying "Forget about this topic." Furthermore, Iranian oil minister Bijan Zanganeh announced that he does not even plan to attend the Doha meeting.

 

Sound familiar?

 

McMonigle has been arguing for a while now that speculation about an OPEC oil production freeze is just talk, since Saudia Arabia and Iran's true intentions are what really matter. Here are links to other videos and research notes via McMonigle:


FINANCIALS SENTIMENT SCOREBOARD - JP Morgan and Money Centers...Not So Money

Takeaway: JPMorgan (JPM) still has extremely bullish sentiment according to our quantitative screen of Financials.

This morning we're flagging JPMorgan, Bank of America, and Citigroup (Scores: 94) as shorts on sentiment. All three bulge bracket/money center banks have the highest sell side ratings combined with low levels of short interest which historically have made them underperformers according to our score.

 

We are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.

 

The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  

 

We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.

 

Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.

 

The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 

 

FINANCIALS SENTIMENT SCOREBOARD - JP Morgan and Money Centers...Not So Money - SI1

 

FINANCIALS SENTIMENT SCOREBOARD - JP Morgan and Money Centers...Not So Money - SI2

 

FINANCIALS SENTIMENT SCOREBOARD - JP Morgan and Money Centers...Not So Money - SI3

 

The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”

 

Let us know if you would like to receive a copy of our black book, which explains this system and its applications.

 

BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   

 

SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 

 

 

FINANCIALS SENTIMENT SCOREBOARD - JP Morgan and Money Centers...Not So Money - Absolute 12 mo

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


[UNLOCKED] Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities

Takeaway: All five active equity categories continued to lose funds last week; total eq MF flow came to -$4.9 B. Meanwhile passive equity took +$2.0 B

Editor's Note: This is a complimentary research note originally published April 7, 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:

 

The landscape between passive ETFs and mutual funds in fixed income is starting to look a lot like the landscape in equities. An inflection point is now evident in the growth rate of passive bond products versus funds starting in 3Q15 with fixed income ETFs growing through the volatility in credit and now cumulatively ahead of running net new assets in funds. The entire equity complex has shifted toward passive products for some time now making the chart below a future look at how the pie will shift in fixed income.

 

[UNLOCKED] Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI 4 13 Theme 1

 

Specifically during the week, the latest ICI survey again relayed this migration for the five-days ending March 30th; all five equity mutual fund categories experienced withdrawals, bringing the total equity mutual fund flow to -$4.9 billion. Meanwhile, passive equity ETFs took in +$2.0 billion.

 

In fixed income, taxable bond funds experienced a -$195 million outflow as investors continue to prefer tax-free municipal bonds, which took in +$1.4 billion last week.


[UNLOCKED] Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI19

 

In the most recent 5-day period ending March 30th, total equity mutual funds put up net outflows of -$4.9 billion, trailing the year-to-date weekly average outflow of -$798 million and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$1.2 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 +$2.0 billion, outpacing the year-to-date weekly average outflow of -$1.6 billion but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$258 million, trailing the year-to-date weekly average inflow of +$2.1 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 | Fixed Income Shift Starting to Look Like Equities - ICI2

 

[UNLOCKED] Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI3 3

 

[UNLOCKED] Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI4

 

[UNLOCKED] Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI5

 

[UNLOCKED] Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - 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 | Fixed Income Shift Starting to Look Like Equities - ICI12

 

[UNLOCKED] Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI13

 

[UNLOCKED] Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI14

 

[UNLOCKED] Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI15

 

[UNLOCKED] Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - 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 | Fixed Income Shift Starting to Look Like Equities - ICI7

 

[UNLOCKED] Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the long treasury TLT ETF experienced a -$415 million or -4% outflow, although it has experienced the largest inflow YTD on a percentage basis of +48%.

 

[UNLOCKED] Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - 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 | Fixed Income Shift Starting to Look Like Equities - ICI17

 

[UNLOCKED] Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$4.4 billion spread for the week (-$2.9 billion of total equity outflow net of the +$1.5 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 -$422 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 | Fixed Income Shift Starting to Look Like Equities - 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 | Fixed Income Shift Starting to Look Like Equities - ICI11 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

CHART OF THE DAY: Why We Signaled Short Oil & Gas Stocks In RTA

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.

 

"... A) Mostly all of Consensus Macro missed calling the long-term breakout in USD (and commensurate commodity #Deflation)

    B) But, on shorter-term durations, consensus is right back in the saddle now, Short USD and Long Oil

    C) And this is happening as both the Long-term support for USD is holding inasmuch as long-term resistance for Oil is

 

So… in addition to keeping shorts on (in Real-Time Alerts) where Earnings Season is our catalyst, maybe what I should do is just buy Dollars, short Oil & Gas Stocks (XOP), turn off my screens for a week…"

 

CHART OF THE DAY: Why We Signaled Short Oil & Gas Stocks In RTA - 04.13.16 chart


HP 12C Trading

“I traded in between classes. I used a lot of pay phones on campus.”

-Ken Griffin

 

Of the many great interviews Lasse Heje Pedersen did in a must-read book for your investing library, Efficiently Inefficient, the one he did with Citadel’s Founder and CEO, Ken Griffin, ranks amongst the best.

 

I love learning about successful people in this profession. Getting insight into how they initially thought about building their #process is most interesting to me. Griffin started running money ($265,000) out of his Harvard dorm room in September of 1987.

 

“I had a satellite dish on top of my dorm room… back then all the decisions were made using paper and pencil and trying to approximate where I thought the bonds should trade based upon cash flow differentials, creditworthiness, and the inherent call protection of the bond… When I was in class, I’d have my HP 12C calculator, a scrap of paper, and think through information in my head and make decisions.” (Efficiently Inefficient, pg 288)

 

HP 12C Trading - earnings cartoon 04.12.2016

 

Back to the Global Macro Grind

 

Oh boy do I love my HP 12C.

 

These days, ex a few near the old battle axes who sit with me on the Hedgeye Research Desk (Tom Tobin and Todd Jordan), it’s hard to find the weaponry of these old school calculators. Sometimes the millennials mock that we use them. But we’re cool with that.

 

If you left me on an island (with no internet connection), here’s what I’d need to make market decisions:

 

  1. Notebooks
  2. Pens (I do not like pencils)
  3. HP 12C (with supply of batteries)

 

Oh, and cold beers … and a pay phone (1 call per day at the market close – closing price, volume, and volatility data = #critical).

 

That way I could build my own time-series by hand and not have to stress myself out, staring at screens all day long, trying to handicap what a bunch of machines are going to do to daily and weekly performance chasers.

 

Just so you know where my head is at, I’m actually heading out (with all 4 of our kids) on vacation this morning.

 

When taking “time” away from the screens, the real things that matter to me are my levels on intermediate-to-long-term durations. Within what I call our TRADE/TREND/TAIL model, what I’m talking about are:

 

  1. Intermediate-term TRENDS (3 months or more)
  2. Long-term TAILs (3 years or less)

 

While meeting with Institutional Investors in Boston for the last two days, I found myself answering the question “where could you be wrong?” using my long-term TAIL risk levels (slide 63 of the Q2 Macro Themes deck):

 

  1. US Dollar Index long-term TAIL support = 93.07
  2. Crude Oil (WTI) long-term TAIL resistance = $45.44
  3. SP500 long-term TAIL resistance = 2066
  4. US Equity Volatility long-term TAIL support = 11.71

 

These “levels” are dynamic (constantly changing as price, volume, and volatility data does), but the general levels on long-term durations don’t change much relative to something like my immediate-term (TRADE) risk range.

 

From a longer-term risk management perspective, what’s most interesting to me in macro right now is that:

 

A) Mostly all of Consensus Macro missed calling the long-term breakout in USD (and commensurate commodity #Deflation)

B) But, on shorter-term durations, consensus is right back in the saddle now, Short USD and Long Oil

C) And this is happening as both the Long-term support for USD is holding inasmuch as long-term resistance for Oil is

 

So… in addition to keeping shorts on (in Real-Time Alerts) where Earnings Season is our catalyst, maybe what I should do is just buy Dollars, short Oil & Gas Stocks (XOP), turn off my screens for a week…

 

While that might sound crazy to many who are fighting for their short-term performance lives right now, I think it’s crazier to think all that’s been imploding for the last 2-3 years has “bottomed” because some single-factor simple-moving-average in a chart has.

 

Crazy is as crazy does, I guess. After all, I’m still the guy using his HP 12C.

 

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):

 

UST 10yr Yield 1.68-1.82% (bearish)

SPX 2030-2077 (bearish)
RUT 1082-1122 (bearish)

NASDAQ 4 (bearish)

Nikkei 152 (bearish)

DAX 9 (bearish)

VIX 13.01-19.03 (bullish)
USD 93.77-95.35 (bullish)
EUR/USD 1.12-1.14 (neutral)
YEN 106.96-111.42 (bullish)
Oil (WTI) 37.09-43.11 (bearish)

Nat Gas 1.91-2.07 (bearish)

Gold 1 (bullish)
Copper 2.05-2.17 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

HP 12C Trading - 04.13.16 chart


Up Dollar = Down Yen, Down Euro

Client Talking Points

YEN

What a difference a -0.6% decline in the Yen (vs. USD) makes = +2.8% bear market bounce in Nikkei (which is still -22% since #TheCycle peaked in July of 2015). All of macro correlating to what FX does right now (has nothing to do with EPS Season).

OIL

Another fun ramp to an immediate-term overbought signal (on an oversold USD signal) finds resistance, USD bounces, and Oil sells off -1.7% this morning. OVX (oil volatility) is signaling nowhere near the end of this bear market in Oil (OVX = 48 with an immediate-term risk range of 44-53).

FINANCIALS

What’s “priced in”? We’ll see. But selling all rallies (at the top-end of the risk range) in Financials has been awesome in 2016 and we expect it will continue to be as the very obvious bull run in the Long Bond (Down Yields) and Utilities (XLU +13.2% YTD vs. XLF -5.9%) continues.

 

*Tune into The Macro Show with Internet & Media analyst Hesham Shaaban live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 65% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 5%
FIXED INCOME 25% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's (MCD) hit another all-time high last week. As we continue to reiterate, the company has all the style-factors that we like – high market cap, low beta and liquidity. Stick with it.

 

We are going to be looking at a much different company 1-3 years from now. Urgency has been instilled from the top down by new CEO Steve Easterbrook. He wants more speed and is encouraging people to get things done faster. The food and experience provided to the customer will greatly improve over the coming months as “Experience the Future” is implemented across the system. It won’t be instantaneous though, as MCD has a lot of work to do around changing the perception to bring back customers it may have lost.

 

Things like All Day Breakfast, responsibly sourced ingredients, and bringing back the value proposition will lead to increased sales and customer satisfaction. While this company is too big to be completely fixed overnight, management has the right plans in place. We are confident in where they are headed.

CME

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.

TLT

We outlined our expectation and outlook moving into Q2 last Thursday in our quarterly macro themes presentation for institutional clients. The first of the three themes was labeled #TheCycle:

 

With the recessionary industrial data ongoing, employment, income and consumption growth decelerating, corporate profits facing a 3rd quarter of negative growth and Commercial and Industrial credit tightening, the domestic economic, profit and credit cycles are all past peak and continue to traverse their downslope. With this cyclical backdrop, the U.S. economy faces its toughest GDP comp of the cycle in 2Q16”….

 

The takeaway is that the economy faces a difficult GDP comp (growth rate) in Q2 within the continued late-cycle slowdown. 

Three for the Road

TWEET OF THE DAY

VIDEO: ‘We Are Vigilantly Bearish On Corporate Earnings & Junk Bonds’ https://app.hedgeye.com/insights/50248-mccullough-we-are-vigilantly-bearish-on-corporate-earnings-junk-bo… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Great spirits have always encountered violent opposition from mediocre minds.

Albert Einstein  

STAT OF THE DAY

The U.S. Superyacht Association estimates that the annual cost for operating a 180-foot yacht is $4.75 million, roughly an annual expense of about 10% percent of the yacht’s original cost.


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

next