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CHART OF THE DAY: A Look At China's Slowest Growth Rate In 7 Years

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more.

 

"... The notable “positive” economic news that came out overnight was that Chinese growth was inline at +6.7% year-over-year. This is a sequential slowdown from the 4th quarter of 2015, which grew at +6.8% y-o-y. And as we show in the Chart of the Day, this continues the ongoing trend of slowing growth in China and is the slowest quarterly growth rate in seven years."

 

CHART OF THE DAY: A Look At China's Slowest Growth Rate In 7 Years - 4 15 16 EL ben


Brouhaha

“Whoever fights monsters should see to it that in the process he does not become a monster. And if you gaze long enough into an abyss, the abyss will gaze back into you.”

-Friedrich Nietzsche

 

Last night in the Democratic debate between Hillary Clinton and Bernie Sanders, we had a good old fashioned brouhaha. The Brooklyn Brawler version of Bernie Sanders showed up and, in truly fitting fashion with the NHL playoffs just starting, dropped his proverbial mitts going after Clinton. Fortunately for Clinton and her supporters, it is too little too late.

 

As it relates to the National polls, Sanders is basically in a statistical tie with Clinton. Still, she has an almost insurmountable lead in delegate count. Currently, including super delegates, Clinton has 1,758 and Sanders has 1,069, meaning she only needs 32% of the future delegate to clinch the nomination. So inasmuch as Clinton might be feeling The Bern, her path to the nomination is almost assured.

 

On the Republican side, as we’ve known all along, the race is likely going to come down to the wire and could very well result in a contested convention. Currently, Trump has 743 delegates while Kasich and Cruz have 688 combined. To clinch the nomination ahead of the convention, Trump will need 57% of the remaining delegates. It is certainly possible that he accomplishes this, but it is also far from an easy path and if it does happen it's going to be troublesome for the GOP.

 

Even though a SuperPac led by Karl Rove is now making noise that Trump could beat Clinton, the fact remains that in head-to-head polls Clinton lambasts Trump by more than 10 points. The issue with Trump is his favorability ratings, which are, to put it simply, very unfavorable. According to a recent poll by ABC, almost 67% of the population views Trump unfavorably. Only former Klu Klux Klan leader David Duke has had higher unfavorable ratings as a Presidential candidate.

 

One thing we can all be certain of is that the political brouhaha we saw last night is only likely to accelerate heading into the general election this fall, especially if it comes down to Trump versus Clinton.

 

Brouhaha  - 4 15 16 EL

 

Back to the Global Macro Grind 

 

The notable “positive” economic news that came out over night was that Chinese growth was inline at +6.7% year-over-year. This is a sequential slowdown from the 4th quarter of 2015, which grew at +6.8% y-o-y. And as we show in the Chart of the Day, this continues the ongoing trend of slowing growth in China and is the slowest quarterly growth rate in seven years. 

 

On the truly positive side, March industrial production in China was +6.8%, which was better than consensus and a sequential increase from February. March retail sales were also better than expected at +10.7% year-over-year. The truly blow out number in the Chinese data released overnight though was on government spending. Specifically, for the month fiscal spending was up 20.1% year-over-year!

 

As we’ve seen in the U.S., governments can outspend their revenue for a long, long time, so this massive growth in government expenditures isn’t necessarily a bad thing just yet. But we should still note that fiscal revenue was up only 7.1% year-over-year and the gap between fiscal expenditures and revenue was more than $500 billion yuan for March. No matter how you slice it, that’s a lot of yuan in deficit spending.

 

Meanwhile in Japan, the central bankers are, wait for it, considering expanding ETF purchases. You know you are down a deep dark hole of central planning when the tool that your central bank is considering using is to buy more ETFs. Although, given the recent ratcheting down of growth rates in the U.S. by various regional Fed banks, perhaps the days of Janet calling up her trading desk and getting long a few $100 billion in SPOOs is not far off. (Incidentally, the Bank of Japan already owns roughly 50% of the Japanese ETF market, but who's counting.)

 

Speaking of buying equities, one leg of the bull market thesis on the U.S. stock market went away in Q1. Specifically, the number of companies buying back stock fell to the lowest level since 2012. That said, there was still more than $182 billion in announced buybacks in Q1. Unfortunately, the amount of buybacks is set to drop more dramatically in line with corporate cash flow generation, which is likely to be flat in Q2 and down in the back half of the year.

 

One area of the economy which is definitely in a full blown recession is what we commonly call the Old Wall and specifically the revenues and earnings of the traditional investment banks. This morning, Bloomberg highlighted Goldman Sachs and the story is dire. The consensus revenue estimate for Goldman for Q1 is down -37% year-over-year! 

 

This is also not a Goldman specific story by any stretch of the imagination as the revenue and earnings of its peers are on similar trajectories. In a year when politics are garnering most of the headlines, perhaps the larger watershed moment is the rapidly shrinking revenues of the Old Wall. Rest assured, though, Hedgeye continues to hire, so if you have any reformed Old Wall analysts that are looking for a transparent and accountable platform, have them email me at .

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.68-1.82%

SPX 2035-2091

VIX 13.00-19.40
USD 93.81-95.31
YEN 106.94-111.17
Oil (WTI) 38.36-43.99

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Brouhaha  - 4 15 16 EL ben


Eurozone, #CrudeOil, China

Client Talking Points

Eurozone

It’s almost daily now that we get confirmation that the #BeliefSystem (Q2 Macro Theme) in the Eurozone is broken.Eurogroup President Dijsselbloem was out yesterday in a speech at the Peterson Institute saying: “The current low interest rate environment acts as a tailwind for our economy, it supports the economy in the short run, but the effect is short-lived, it simply cannot foster a sustainable recovery if underlying structural problems are not addressed".  We remain bearish on the region, grounded by our GIP (growth, inflation, policy) model that spells Quad 4 pressure in back half of this year.

#CrudeOil

Whether it’s output cut rumors into this weekend’s meeting or declining U.S. production, the “bottom is in” headlines are at the top of commodities feeds from every major news source with WTI +40% in the last 3 mths. Looking at contract positioning shorts a crowded consensus short positioning has been washed out (crude, nat. gas, gold, silver positioning all registering z-scores >1x on a TTM basis) with money betting on a continued decline in the U.S. dollar. A supply side floor argument is a fundamental story, but not a catalyst, and we would reiterate that the credit risk priced into commodity leveraged fixed income is considered all but gone in market-price terms.   

China

The week concludes with a made-up data dump out of everyone’s favorite communist economy. Chinese GDP growth allegedly ticked down -10bps to 6.7% YoY in Q1 and the quarter allegedly ended on a positive note with Retail Sales, Industrial Production, Fixed Assets Investment, Money Supply and Total Social Financing growth all accelerating sequentially in March. While we’ve been right on our call for both the Chinese economy and Chinese yuan to avoid falling off a cliff over the intermediate-to-long term, a lot of the reprieve in Chinese capital outflows and slowing growth on the mainland has been perpetuated by a reversal of the trend of depreciation in the PBoC’s yuan fixing. But now that the U.S. dollar appears to making a series of higher-lows vs. peer currencies, we expect a meaningful increase in pressure on the CNY and CNH from here. That should propagate another bout of global deflation fears over the next 3-6 months.

Asset Allocation

CASH 64% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 26% INTL CURRENCIES 4%

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

*NEW VIDEO* The latest installment of "About Everything" w/ @HoweGeneration https://app.hedgeye.com/insights/50271 

QUOTE OF THE DAY

"Carry the battle to them.  Don't let them bring it to you.  Put them on the defensive and don't apologize for anything."

           - Harry S. Truman

STAT OF THE DAY

Wade Boggs batted .328 over the course of his 18 years in baseball but only hit 118 home runs.  


Early Look

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Cartoon of the Day: Look Out Below!

Cartoon of the Day: Look Out Below! - recession cartoon 04.14.2016

 

"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 recently.


ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015

Takeaway: Domestic stock funds have shed -$36.3B so far in '16, far worse than the first 14 weeks in 2015 which was the worst year on record.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending April 6th, domestic equity funds lost another -$5.3 billion, bringing the first fourteen weeks of 2016 to a net redemption of -$36.3 billion. This current draw down pace is far worse than the first fourteen weeks of 2015 which had totaled just $-9.8 BB, but which ended the year as the biggest annual redemption for the category in history. Additionally, the 2016 YTD withdrawal is just shy of the Financial Crisis cadence in 2008, in which domestic equity funds had lost -$39.7 billion over the same period (but the '08 cycle finished the year strongly with domestic stock subscriptions). Investors also withdrew -$555 million from international equity funds last week, bringing total equity mutual funds lost to -$5.8 billion. Meanwhile, the migration into passive funds continued with investors contributing +$7.0 billion to equity ETFs. Below is Morningstar's current count to the biggest money management complexes with exposure to the domestic stock fund category.

 

ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - Dom

 

On the fixed income side, investors made net contributions in all categories. Total bond mutual fund flows came to +$6.7 billion. Bond ETF flows were relatively weak last week, coming in at only +$240 million. Finally, money market funds lost -$27 billion to withdrawals, as the seasonality of income tax payments hit its final week.

 


ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI19

 

In the most recent 5-day period ending April 6th, total equity mutual funds put up net outflows of -$5.8 billion, trailing the year-to-date weekly average outflow of -$1.2 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$6.7 billion, outpacing the year-to-date weekly average inflow of +$1.5 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$7.0 billion, outpacing the year-to-date weekly average outflow of -$1.0 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$240 million, trailing the year-to-date weekly average inflow of +$2.0 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:

 

ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI2

 

ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI3

 

ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI4

 

ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI5

 

ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - 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 | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI12 2

 

ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI13 2

 

ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI14 2

 

ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI15 2

 

ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI16 2



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 | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI7

 

ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors made a +5% or +$631 million contribution to the technology XLK ETF.

 

ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - 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 | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI17 2

 

ICI Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI18 2



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$5.8 billion spread for the week (+$1.1 billion of total equity inflow net of the +$6.9 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 -$540 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 | Domestic Equity Mutual Funds...Worse Start Than 2015 - 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 | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







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