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The Central Planning #BeliefSystem Continues To Break Down

Takeaway: A bitter reality check is around the corner for easy-money addicted investors.

The Central Planning #BeliefSystem Continues To Break Down - bear cartoon 01.26.2016

 

About a month or so ago, hawkish regional Fed heads made the mainstream media rounds (see Fork-Tongued Fed Needs To Get Its Story Straight), talked up the U.S. economy and called for three or more rate hikes this year. Then, a week later, a dovish Yellen dialed back the rhetoric, sounding a cautionary tone on the economic outlook, while reiterating the headwinds we faced would "gradually dissipate."

 

Investors, addicted to easy-money and Fed soothsaying, took these dovish comments in stride, jamming equity markets higher, while the U.S. dollar weakened and rate hike expectations all-but evaporated. Notice, in the table below, the implied rate hike probability for this year doesn't get above 50% again until December:

 

The Central Planning #BeliefSystem Continues To Break Down - fed rate hike prob

 

Following that line of thinking, A few questions:

 

  • What happens when U.S. economic growth and S&P 500 company earnings brush up against the toughest comps of the cycle in Q2 and Q3?
  • Will U.S. investors finally spiral back to reality, understanding that the Fed's impotent monetary tool kit has failed to arrest economic gravity?

 

We continue to believe it is going to get nasty in equity markets... 

 

Click video below to watch.

 

Evidence?

 

The central planning #BeliefSystem is already breaking down in Japan where, since the announcement of negative interest rates in January, the Nikkei has declined in fairly short order while the yen has strengthened.

 

The exact opposite of what they intended.

 

The Central Planning #BeliefSystem Continues To Break Down - nikkei yen

 

It's worth noting that central planners are keenly aware of this macro market breakdown. Over the weekend, BOJ governor Haruhiko Kuroda told the Wall Street Journal:

 

“If excessive [yen] appreciation continues, that could affect not just actual inflation, but even the trend in inflation through its impact on business confidence, business activity, and even through inflation expectations."

 

Kuroda reiterated "if necessary to achieve 2% inflation target" the BOJ would "not hesitate to take further easing measures."

 

Okay.

 

But what makes him so sure anything the BOJ does will actually work?

 

stay tuned. 


Eye on NY Primary: Trump Momo... Bye-Bye Bernie?

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 sales@hedgeye.com.

BYE-BYE BERNIE?

Eye on NY Primary: Trump Momo... Bye-Bye Bernie? - bernie sanders bye

 

Today's contest in NY is a critical make or break moment for Bernie Sanders - and if Hillary Clinton wins big (10% +)- Sanders' nomination dreams all but evaporate. If the race is closer than expected, the narrative then favors Sanders, his crusade continues unabated and he becomes more than a serious challenger.

 

Despite being a progressive blue state where Sanders has roots, Clinton's political experience in her adopted state provides her an edge, and has helped her to hyper-localize issues. Sanders has attempted to retool his national message for NY, but it's too little too late to match Clinton's in-state infrastructure and strategy of tailoring ads and messaging down to each media market and borough.   

IF I CAN, MAKE. IT. THERE...

Eye on NY Primary: Trump Momo... Bye-Bye Bernie? - trump cruz

 

Donald Trump will win NY's primary today - the only question is by how much. A big win (55%+) would allow him to sweep almost all of NY's delegates, whereas winning less than 50% of the vote would mean sharing a handful delegates with both John Kasich and Ted Cruz.

 

There are five Northeastern states next on the map, and tonight's results will determine if Trump goes into them with the big 'mo' - or if he will be harried by his competitors and anti-Trump groups along the way. We're betting on the former. Cruz just wants the second half of April and the Northeastern primaries to be over.

CHECK & BALANCE

Yesterday, the SCOTUS justices were divided in their oral arguments with regard to executive actions made by President Obama on illegal immigration in 2014 - leading to the deferred deportation of nearly five million immigrants. The actions have sparked opposition from 26 states, who argue that the president had overstepped his executive role.

 

A split-decision - due to the current vacant seat - would leave the matter in a temporary injunction - as decided by a lower court and likely passing the issue to the next Administration, and dealing a blow to President Obama. 


Cruise Liner Earnings: What We’re Most Focused On

 

In this brief excerpt from The Macro Show this morning, Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan highlights the key issues his team is most focused on right now as we enter earnings season. 


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4 Videos On Why We Remain Bearish

Takeaway: We'll say it again ... Risk happens slowly at first, then all at once.

4 Videos On Why We Remain Bearish - Bubble bear cartoon 09.26.2014  1

So... why are we bearish on U.S. equities?

 

The brief videos below lay out much of our case. For starters, we believe this recent reflation rally will prove short-lived, due to the fact corporate profits have fallen two consecutive quarters (a rather bearish historical harbinger) and we don't think central bankers can successfully arrest economic gravity.

 

1. Game Over. Central Bankers Can’t Do Anymore

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!”

 

2. McCullough: S&P Earnings Confront ‘Toughest Comps In U.S. History’

Hedgeye CEO Keith McCullough crystalizes an enormous risk facing the U.S. stock market right now in this brief excerpt from The Macro Show today.

 

3. Dale: 'What Are You Buying'

In this excerpt from The Macro Show, Hedgeye Senior Macro analyst Darius Dale discusses the recent reflation rally and provides critical context about why we remain bearish.

 

4. Beware the Reflation Trade Risk

In this brief excerpt of The Macro Show earlier today, Hedgeye CEO Keith McCullough discusses this week’s Fed meeting, the recent reflation trade bounce and takes a deep dive into commodities markets.


[UNLOCKED] 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.

Editor's Note: This is a complimentary research note originally published April 14, 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:

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.

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - Dom  normal

 

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.

 


[UNLOCKED] 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:

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI2

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI3

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI4

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI5

 

[UNLOCKED] 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.

 

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

 

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

 

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

 

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

 

[UNLOCKED] 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:

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI7

 

[UNLOCKED] 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.

 

[UNLOCKED] 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.

 

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

 

[UNLOCKED] 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.)

  

[UNLOCKED] 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:

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI11 


CHART OF THE DAY | Emerging Markets: 'A Sucker's Bet'

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more.

 

"... But what is clear, however, is that investors have had ample opportunity to sell into every “face-ripping” short squeeze to lower-highs across the spectrum of emerging market assets over the past ~5Y – of which there have been many – as highlighted by the Chart of the Day below."

 

CHART OF THE DAY | Emerging Markets: 'A Sucker's Bet' - Chart of the Day 4 19


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