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CHART OF THE DAY: Fed Growth Predictions = Pure Poppycock

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.

 

"... Given that a recently reported GDP of 0.5% isn’t in the area code of “as expected”, I don’t think Williams has a lot of credibility as a Wall St. forecaster. But Lockhart’s Atlanta Fed actually has a “GDP Now” tracking model (that has recently had an intra-quarter standard error of 200-250 basis points!) that is NOT mixed. It’s flat out bad. So he’s “favoring” non-GDP data."

 

CHART OF THE DAY: Fed Growth Predictions = Pure Poppycock - 05.04.16 chart


Sloppy Guesswork

“Isn’t it time for such sloppy guesswork drawing to a close?”

-Phil Tetlock

 

Yesterday was a good day. The Long Bond was up big and I spent the day meeting with some of the largest hedge funds in my home state of Connecticut. I absolutely loved the debates.

 

The aforementioned quote (from a great book I’m reviewing called Superforecasting) really nails a common thread we hear from the sharpest institutional investors in the world when it comes to The Establishment’s US GDP forecasting process.

 

In one meeting in particular, the PM (who oversees an entire office of hedge fund PMs) read an excerpt from a sell-side note that said “GDP feels like it’s going to be 2.5% in Q2.” A feel? Really? I don’t feel anything in our predictive tracking algo, but we’re at 0.3%.

 

Sloppy Guesswork - GDP cartoon 05.29.2015

 

Back to the Global Macro Grind

 

Let me take that back. I do feel something. I feel really good when A) our GDP forecast is a long way from Old Wall consensus and B) consensus positioning in the SP500 (Index +E-mini futures/options contracts) is leaning as long as it has been for all of 2016.

 

Oh you bombastic Hedgeye boy, you.

 

Yep. I’m proud of both my people and process. We’ve actually been, on average, within 20-30 basis points of getting the US GDP number right for the last 5 quarters (the historical standard error in our model is 35 basis points).

 

The main reason why we’ve been so much more accurate than any other research department on accurately forecasting one of the most important factors in any economic model (growth) is that, instead of “feeling” it, we use modern-math and machines.

 

“After all, we live in an era of dazzlingly powerful computers, incomprehensible algorithms, and Big Data… isn’t it time for such sloppy guesswork drawing to a close? … The point is that if you have a well-validated statistical algorithm, use it.”

-Phil Tetlock, Superforecasting (pg 20-21)

 

While I am sure our forecasting #process will continue to evolve alongside technology and time, for now I probably sound overly confident that what we do crushes what they keep doing. With statements like this, how do you feel about it?

 

  1. “A rate hike could be appropriate, if the data is as expected.” –John Williams (San Francisco Fed Head, yesterday)
  2. The economy is offering mixed signals, but favors unemployment data.” –Dennis Lockhart (Atlanta Fed, yesterday)

 

Given that a recently reported GDP of 0.5% isn’t in the area code of “as expected”, I don’t think Williams has a lot of credibility as a Wall St. forecaster. But Lockhart’s Atlanta Fed actually has a “GDP Now” tracking model (that has recently had an intra-quarter standard error of 200-250 basis points!) that is NOT mixed. It’s flat out bad. So he’s “favoring” non-GDP data.

 

I know. I know. You’re probably saying to yourself that the Fed is obviously dovish now (US Dollar at a 16-month low, post Janet Yellen’s recent rate-cutting-of-the-hikes), so this banter from Williams, Lockhart, Bullard, etc. is just popycock and posturing.

 

I don’t disagree with that. Neither would most people I meet with.

 

In modern forecasting, we deal with everything in rate of change terms and then probability-weight surprises vs. expectations.

 

As the rate of change in the economic, profit, and credit cycle continues to slow, the probability continues to rise that the Fed’s latest of #LateCycle indicators (Employment) starts slowing at a faster pace.

 

In other words, you’re one NFP (non-farm payroll) jobs bomb away from both Trump and Sanders sounding really right on the economy.

 

I’m sure we have absolutely nothing to worry about if Trump or Sanders becomes President of the United States. But last night’s voting machine in Indiana reveals that it’s more than just Hedgeye (and the Bond Market) that gets what’s really going on in the US economy.

 

Instead of those who were “feeling” US GDP was going to be 3-4% with “falling gas prices” (last year), now they have to spin that into rising gas prices are good for US Consumer Confidence as both the conference board and Univ. of Michigan report hit new YTD lows.

 

It’s either sloppy guesswork or just the conflict of interest ridden cabal of The Establishment consensus doing what they think they have to do before it becomes obvious to The People right before The Election.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.72-1.87%

SPX 2053-2083
RUT 1101-1140

NASDAQ 4711-4844

VIX 14.26-17.83
USD 92.35-94.50

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Sloppy Guesswork - 05.04.16 chart


Cartoon of the Day: Slow Grrrrowth!

Cartoon of the Day: Slow Grrrrowth! - growth cartoon 05.03.2016NEW

 

#GrowthSlowing globally (i.e. economic gravity) can’t be fixed by a central market planning #BeliefSystem this time.


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Will the Stock Buyback Boom Go Bust?

 

In this brief excerpt from The Macro Show, Hedgeye Senior Macro analyst Darius Dale responds to a subscriber question about whether “financial engineering” can continue to prop up the stock market.


[UNLOCKED] Fund Flow Survey | Not The Longest But The Fastest

Takeaway: Domestic equity mutual funds continue on the sharpest draw down in history averaging losses of $-3.7 billion a week.

Editor's Note: This is a complimentary research note originally published April 28, 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:

 

All stock products lost funds in the 5-day period ending April 20th, totaling -$4.0 billion in withdrawals from equity mutual funds, and -$1.9 billion in redemptions from equity ETFs. The following table puts historical context around the current losing streak within domestic equity funds which is now the second longest at 60 weeks and continues to be the fastest on record with investors pulling -$3.7 billion per week.

 

[UNLOCKED] Fund Flow Survey | Not The Longest But The Fastest - ICI20

 

In the most recent 5-day period ending April 20th, total equity mutual funds put up net outflows of -$4.0 billion, trailing the year-to-date weekly average outflow of -$1.6 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$4.3 billion, outpacing the year-to-date weekly average inflow of +$1.8 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net redemptions of -$1.9 billion, trailing 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 +$1.5 billion, trailing the year-to-date weekly average inflow of +$1.8 billion but outpacing the 2015 average inflow of +$1.0 billion.

 

[UNLOCKED] Fund Flow Survey | Not The Longest But The Fastest - ICI1

 

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 | Not The Longest But The Fastest - ICI2

 

[UNLOCKED] Fund Flow Survey | Not The Longest But The Fastest - ICI3

 

[UNLOCKED] Fund Flow Survey | Not The Longest But The Fastest - ICI4

 

[UNLOCKED] Fund Flow Survey | Not The Longest But The Fastest - ICI5

 

[UNLOCKED] Fund Flow Survey | Not The Longest But The Fastest - 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 | Not The Longest But The Fastest - ICI12

 

[UNLOCKED] Fund Flow Survey | Not The Longest But The Fastest - ICI13

 

[UNLOCKED] Fund Flow Survey | Not The Longest But The Fastest - ICI14

 

[UNLOCKED] Fund Flow Survey | Not The Longest But The Fastest - ICI15

 

[UNLOCKED] Fund Flow Survey | Not The Longest But The Fastest - 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 | Not The Longest But The Fastest - ICI7

 

[UNLOCKED] Fund Flow Survey | Not The Longest But The Fastest - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the industrials XLI ETF gained +$399 million or +6% last week.

 

[UNLOCKED] Fund Flow Survey | Not The Longest But The Fastest - 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 | Not The Longest But The Fastest - ICI17

 

[UNLOCKED] Fund Flow Survey | Not The Longest But The Fastest - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$11.7 billion spread for the week (-$5.9 billion of total equity outflow net of the +$5.7 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 -$977 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 | Not The Longest But The Fastest - 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 | Not The Longest But The Fastest - ICI11


Trump's Big Night ... Hillary's Homestretch ... Harry Reid's Final Prophecy

Below is a brief excerpt from Hedgeye Potomac 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.

TRUMP'S BIG KNIGHT:

Trump's Big Night ... Hillary's Homestretch ... Harry Reid's Final Prophecy - trump flag

 

Polls show that Trump is heading for a big win in IN, as he moves closer to being the presumptive Republican nominee. Ted Cruz hopes that the alignment of Republican stars - including the tepid support of IN Governor Mike Pence - will help him pull off a victory that breaks Trump's streak.

 

John Kasich has already abandoned IN, but still looks likely to receive a sizable number of votes - especially those from anti-Trump voters who are critically needed by Cruz to put him over the top. If Trump wins big tonight, he will only need ~50% of the remaining delegates to clinch the nomination - and momentum already has propelled him to a 30+ point lead in CA.

exacerba-TED: 

Trump's Big Night ... Hillary's Homestretch ... Harry Reid's Final Prophecy - cruz cruz

 

It's not just losing primaries that has Cruz's campaign concerned - his strategy of winning the nomination on the second ballot may also be crumbling. To date, Cruz has been very successful at nabbing delegate spots for his supporters in behind-the-scenes maneuvering at state conventions, but the loyalty of these supporters once they become unpledged is increasingly being questioned.

 

Combined with his underperformance in PA, and a loss in IN - a delegate desertion would sound the death knell for Cruz's campaign even before Trump potentially hits 1237.

HILLARY'S HOOSIER HOMESTRETCH?:

Trump's Big Night ... Hillary's Homestretch ... Harry Reid's Final Prophecy - hillary clinton 222

 

For the first time in months, Hillary Clinton's campaign out-fundraised Bernie Sanders $36 million to $26 million. Sanders soldiers on and vows that there will be a contested convention, but if he loses in IN today he will be hanging by a thread, and will continue to be the thorn in Clinton's side.

 

If he can pull off a win, it will change the narrative back in his favor, especially going into KY, NE, and WV - all states that are more favorable terrain to him - but he would have to take 65 percent of the remaining delegates to clinch the nomination. A Clinton victory allows her to keep her focus on Donald Trump and the big picture, but it may come down to the bottom of the ninth tonight...

REID'S LAST WILL:

With retirement on the horizon, Minority Leader Harry Reid has expressed certainty that Democrats will retake the Senate this fall, and is confidently passing the leadership reigns over to Sen. Chuck Schumer. Despite Schumer's almost certain re-election in deep blue NY, he has gone all out on fundraising, and currently has $26 million on-hand.

 

This war chest should serve as a potent weapon for Schumer, who can funnel millions of dollars to candidates and committees - and help ensure Reid's prophecy comes true.


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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

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