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What To Watch Ahead Of Friday's Jobs Report: U.S. Dollar & Oil

What To Watch Ahead Of Friday's Jobs Report: U.S. Dollar & Oil - Jobs report cartoon 06.04.2015

 

"We're seeing very short-term oversold signals in US Equity Beta yesterday (see Real-Time Alerts for details)," Hedgeye CEO Keith McCullough wrote this morning in a note sent to subscribers this morning. Here's more from McCullough:

 

"One of the main reasons for the oversold SPY signal was the super-short term overbought signal in USD (2 USD up days rocked reflation beta, but on a bad jobs report tomorrow, USD can easily retrace to 16 month lows); 90-day inverse correlation b/t SPY and USD is -0.62, so it’s not the layup that buying oil/energy stocks has been (higher correlation), but it’s there."

 

 

Digging deeper into oil...

 

"Big bounce +3.3% on Dollar Down move as WTI holds the low-end of our immediate-term $42.34-46.63 risk range and that’s all it’s signaling to me here – short-term range bound with long-term TAIL risk in that $46-47 range."

 

 

Ahead of Friday's down Dollar jobs report, that's why McCullough sent out the buy Energy (XLE) signal in Real-Time Alerts late yesterday.

 


The Macro Show with Keith McCullough Replay | May 5, 2016

CLICK HERE to access the associated slides.

An audio-only replay of today's show is available here.


ICI Fund Flow Survey | International Equity Funds Weakening Now Too

Takeaway: International equity mutual funds, a long standing divergent from soft domestic equity trends are starting to weaken now too.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

While the long standing weakness in domestic equity mutual funds continued during the week with another -$5.5 billion redemption, international equity mutual funds are now looking worse for wear with 7 straight weeks of outflows including the latest survey's -$2.4 billion outflow for the category. For the better part of this cycle, international equity funds have been positive contributors to asset management complexes as the #1 performing market every year over the past 25 years has been abroad and with financial planners evolving to global total return strategies, foreign stock mutual funds trends have been stable (only in 2008 did international stock funds have redemptions). With nearly 2 months of consecutive redemptions however and a 2016 weekly average down over -40% year-over-year from 2015, this once stalwart category is weakening. International stock fund flows (shown in orange below as a 5 week moving average) tend to track performance of the MSCI World Index and Franklin Resources (BEN) closely tracks both flows and market returns as the manager with the biggest exposure to both foreign stock and bond assets-under-management.

 

 

ICI Fund Flow Survey | International Equity Funds Weakening Now Too - 1 Theme

 

In fixed income, all bond mutual funds put up their largest inflow of the year last week, taking in +$8.3 billion as investors headed for the safety of fixed income in the actively managed space. With tax season payments winding up and incremental risk aversion during the week, investors also shored up +$10 billion in money market funds. The best performing traditional asset management stock year-to-date is Federated Investors (FII), the leading public money fund manager with 8% share of the money market industry.

 

ICI Fund Flow Survey | International Equity Funds Weakening Now Too - ICI1

 

In the most recent 5-day period ending April 27th, total equity mutual funds put up net outflows of -$7.9 billion, trailing the year-to-date weekly average outflow of -$1.9 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$8.3 billion, outpacing the year-to-date weekly average inflow of +$2.2 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$4.8 billion, outpacing the year-to-date weekly average outflow of -$676 million and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$70 million, trailing the year-to-date weekly average inflow of +$1.7 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 | International Equity Funds Weakening Now Too - ICI2

 

ICI Fund Flow Survey | International Equity Funds Weakening Now Too - ICI3

 

ICI Fund Flow Survey | International Equity Funds Weakening Now Too - ICI4

 

ICI Fund Flow Survey | International Equity Funds Weakening Now Too - ICI5

 

ICI Fund Flow Survey | International Equity Funds Weakening Now Too - 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 | International Equity Funds Weakening Now Too - ICI12

 

ICI Fund Flow Survey | International Equity Funds Weakening Now Too - ICI13

 

ICI Fund Flow Survey | International Equity Funds Weakening Now Too - ICI14

 

ICI Fund Flow Survey | International Equity Funds Weakening Now Too - ICI15

 

ICI Fund Flow Survey | International Equity Funds Weakening Now Too - 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:

 

ICI Fund Flow Survey | International Equity Funds Weakening Now Too - ICI7

 

ICI Fund Flow Survey | International Equity Funds Weakening Now Too - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors pulled a whopping -$672 million from the XLP consumer staples ETF, -7% of the fund's market cap.

 

ICI Fund Flow Survey | International Equity Funds Weakening Now Too - 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 | International Equity Funds Weakening Now Too - ICI17

 

ICI Fund Flow Survey | International Equity Funds Weakening Now Too - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$11.5 billion spread for the week (-$3.1 billion of total equity outflow net of the +$8.3 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 -$1.2 billion (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 | International Equity Funds Weakening Now Too - ICI10 2

 


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 | International Equity Funds Weakening Now Too - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







Hedgeye Statistics

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

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.49%

Domestic Economic Growth Won’t Not Be Bad in Q2

Takeaway: Domestic economic growth is set to surprise investors to the downside in 2Q16.

With the advent of the latest key high-frequency economic data (namely Consumer Confidence, Auto Sales and ISM Surveys for the month of April), our predictive tracking algorithm is forecasting U.S. real GDP growth of +1.1% YoY for 2Q16E. This translates to a headline (read: QoQ SAAR) growth rate of +0.5%. This represents a sequential slowdown from what is likely to be an upwardly revised headline growth rate of ~0.7% for 1Q16 per the advent of the Construction Spending and Trade Balance data for March.

 

Despite the marginal improvement over our previous estimates of +0.5% and +0.3% for 1Q16A and 2Q16E, respectively, the deltas highlighted above still represent the  slowest multi-quarter growth rate of real GDP since the two quarters ended 4Q12.

 

Whether or not asset markets have priced this pending reality in is not the point of this note (but to be clear, we do not think they have). The point of this note is to highlight the divergence between our estimates and those of Macro Consensus. Specifically:

 

  • Bloomberg Consensus currently sees Q2 GDP coming in at +2.3% on a headline basis, which is unchanged since mid-March and 4.6 times our forecasted growth rate +0.5%.
  • The Atlanta Fed’s GDPNowcast currently sees Q2 GDP coming in at +1.7%, which is down -10bps on a WoW basis and 3.4 times our forecasted growth rate of +0.5%.

 

Domestic Economic Growth Won’t Not Be Bad in Q2 - 2Q16E

 

So what makes our model so different? Well for one, it starts with our approach.

 

Specifically, our forecasts target YoY deltas (from which we interpolate QoQ SAAR estimates that we highlight for comparison’s sake only), while the linear economists of legacy sellside shops appear hell-bent on forecasting a borderline un-model-able number (i.e. headline GDP). That might explain why the GDP forecasts of Bloomberg Consensus and the Atlanta Fed have registered average intra-quarter peak tracking errors of 152bps and 246bps, respectively, over the trailing five years.

 

Domestic Economic Growth Won’t Not Be Bad in Q2 - Bloomberg Consensus GDP Tracking Error

 

Domestic Economic Growth Won’t Not Be Bad in Q2 - Atlanta Fed GDP Tracking Error

 

In addition to being rather difficult to model, we’ve detailed ad nausea why the QoQ SAAR growth rate of real GDP is, at best, noise and, at worse, often misleading in the context of the underlying growth rate of the economy. Refer to our 9/2 Early Look titled, “Do You QoQ?” for more details.

 

Going back to our process, what makes the way we model GDP so differentiated from Macro Consensus is two-fold:

 

  1. Stochastic (us) vs. Econometric (them): Our GIP Model employs a top-down approach that uses trailing momentum and volatility in the GDP series itself as inputs to determine a range of probable outcomes. Contrast this with traditional econometric models that anchor on reported high-frequency data to “build” a singular GDP estimate from the bottom-up. In conjunction with the Bayesian inference process highlighted below, we are able to have reasonable estimates for GDP growth up to four quarters out, as opposed to econometric models whose accuracy is severely limited on an out-quarter basis due to a lack of reported high-frequency data. As a result, we tend to spot critical inflections in the trending momentum of the economy 3-6 months ahead of Macro Consensus.
  2. Bayesian (us) vs. Frequentist (them): Our GIP Model employs a Bayesian inference process that uses base effects as inputs to determine the direction and magnitude of adjustments from the base rate (i.e. the prior reported growth rate) with the output being a singular growth estimate that falls within the aforementioned range of probable outcomes. Our Bayes factor is the incorporation of a predictive tracking algorithm that guides our estimate to the most appropriate level within (or sometimes outside of) the aforementioned range on an intra-quarter basis. Contrast this with the Frequentist approach employed by Macro Consensus which typically defaults stock estimates of +2.5%, +3.0% or, worse, +4.0% and adjusts from there according to reported high-frequency data.

 

The juxtaposition above might sound overly complicated, but we can assure you it’s not. It is, however, a total grind measuring and mapping the gamut of key high-frequency data in differential terms – but, hey, someone’s got to do it!

 

Domestic Economic Growth Won’t Not Be Bad in Q2 - U.S. Economic Summary Table

 

In summary, we reiterate our call for growth to slow here in Q2, which, in conjunction with a deceleration in reported CPI, should put the U.S. economy squarely in deflationary #Quad4 for the quarter. What happens to the USD and energy prices from here will determine whether or not real GDP growth recovers into the hawkish #Quad2 or spills over into the stagflationary #Quad3 in 3Q16E.

 

Domestic Economic Growth Won’t Not Be Bad in Q2 - UNITED STATES

 

Time will tell on that front; we see no need to make that determination now with so much hanging in the balance from the perspective of investors' asymmetric positioning in the futures and options markets right around our key risk management levels:

 

Domestic Economic Growth Won’t Not Be Bad in Q2 - EXTREME SENTIMENT MONITOR

 

Domestic Economic Growth Won’t Not Be Bad in Q2 - DXY

 

Domestic Economic Growth Won’t Not Be Bad in Q2 - WTI Crude Oil

 

Lastly, there seems to be renewed chatter about residual seasonality and how that has the potential to artificially inflate GDP growth in the current quarter. Don’t mistake that chatter for anything other perma-bull hopium. Recall that we decisively slammed the door shut on the residual seasonality debate in our 4/28 research note titled, “Finally, Some Differentiated Thoughts on Q1 GDP…”.

 

The key takeaway is that there will be no residual seasonality this time around for a variety of reasons – not the least of which was historically warm weather in Q1. Refer to the second half of the aforementioned note for more details.

 

Best of luck out there,

 

DD

 

Darius Dale

Director


Cartoon of the Day: Red, White & Blew It

Cartoon of the Day: Red, White & Blew It - Fed cartoon 05.04.2016

 

“A rate hike could be appropriate, if the data is as expected," San Francisco Fed Head John Williams remarked yesterday. As Hedgeye CEO Keith McCullough wrote in today's Early Look, "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 Street forecaster."


A Chipotle Brand Survey Update (via CivicScience) | $CMG

Editor's Note: Below is a complimentary institutional research note written by Hedgeye Restaurants analysts Howard Penney and Shayne Laidlaw. In it, they discuss the findings of a recent CivicScience brand survey regarding Chipotle Mexican Grill (CMG) and what it tells investors about the damage to the brand following the E. coli outbreak earlier this year. To read our Restaurant team's research ping sales@hedgeye.com.

 

A Chipotle Brand Survey Update (via CivicScience) | $CMG - chipotle 2

 

Prior to the start of the earnings season we highlighted proprietary CivicScience brand survey data on two of our favorite names, LONG Panera and SHORT Chipotle

 

Looking at the previous notes on PNRA and CMG, the CivicScience brand survey data pointed to improving trends at Panera, supporting our LONG position and called for continued troubles at Chipotle, supporting our SHORT case.  As both companies reported earnings, the PNRA trends remain positive and Chipotle remained negative.  At this point, we intend to publish on more company’s making further use of the CivicScience data set.  We felt, at this point it is important for everyone to understand who or what CivicScience is.

 

Quite simply, CivicScience is a survey company.  Their technology, which traces its roots to Carnegie Mellon University, allows them to ask anything they want, to anyone they want, in huge numbers, extremely fast.  This context is important because we can use the platform for quick-turn-around questions (to test an investment hypothesis we may have) and will typically see results in a few hours – with history and context.

 

Here’s how CivicScience’s process works: Through partnerships with hundreds of media companies, they embed questions inside the kinds of fun polls and quizzes you see on websites and social networks everywhere you look. CivicScience has cataloged nearly a billion responses since 2011 on thousands of topics. They’ve tracked the popularity of hundreds of brands, media consumption, technology usage, shopping behavior, and most of the key consumer trends affecting the markets. They mine all of that data, constantly, for patterns and correlations.  Importantly, due to the scale and diversity of their data sources and the fact that they are reaching real consumers, their results are scientifically-valid and appear very reliable.

 

At Hedgeye, we are now taking that data and correlating it with management commentary and brand performance to see where we can isolate discrepancies in market perception and stock prices.  While we don’t take advantage of it, the company even provides data feeds, via API, for some quant funds.    

 

To that end we are publishing the latest Chipotle brand survey, which asks consumers: How much do you like to eat at Chipotle?  The results are showing minor improvements in the trends, but not enough for us to change our short thesis. Our previous survey included the early days of 2Q16 (1,197 responses), now, as we are moving further into 2Q16 we have received 3,051 responses and are getting a better picture of the true sentiment for the brand.

  1. The “I don’t like it” crowd is up 700bps from 18% in 4Q15 to 25% in 2Q16, declining slightly sequentially from 1Q16.
  2. The “I like it” is still down roughly 100bps from 4Q15 to 17% of responses, seeing a sequentially recovery from 1Q16. Importantly this answer has significantly decreased from our initial note which showed people that said “I like it” rose aggressively to 21%.
  3. “I love it” responses were sequentially flat from 1Q16 to 2Q16, which was better than our early read which indicated a deceleration in people saying “I love it”.
  4. The “I don’t have a strong opinion” is down 700bps from 4Q15 to current levels as consumers have become more opinionated on the brand.

 

A Chipotle Brand Survey Update (via CivicScience) | $CMG - chipotle survey

 

Although the survey is showing sequential improvement in consumer opinions towards the brand, the steep rise in people saying “I don’t like it” cannot be over looked. As we continue to work through 2Q16, we will update you monthly on how the trends are evolving.


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