prev

CHART OF THE DAY | FYI: Employment Growth Peaked In Feb 2015

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. 

 

"... if NFP (non-farm payrolls) ramps to a rate-of-change acceleration ABOVE last year’s peak growth rate (+2.3% year-over-year NFP growth), my conviction on US #GrowthSlowing could fall below 66%, but would have to TREND that way."

 

CHART OF THE DAY | FYI: Employment Growth Peaked In Feb 2015 - 05.05.16 EL Chart


Play The Game You're In

“This American world was not made for me.”

-Alexander Hamilton

 

I’ve been hearing a lot of whining lately. That tends to happen when people aren’t winning. It’s not the attitude that I put up with as a coach. But, especially in non-contact activities, it’s a consensus attitude that winners should capitalize on.

 

For Big Government, Big Bailout, central-market-planning apologists, Alexander Hamilton has made quite the come-back on the American pop-culture scene. He’s currently crushing it on Broadway. People in Washington must love the guy too.

 

That doesn’t surprise me. More and more people in America think that more government is the answer to #GrowthSlowing again.

 

The aforementioned ‘give up because it’s not going your way’ quote comes from a book I finished reading on my vacation called Revolutionary Characters. The author, Gordon Wood, questions whether Wall Street leans Hamiltonian or Jeffersonian:

 

“Most present-day Republicans, for all their enthusiasm for Hamilton’s vision of a powerful military machine, do not want a Leviathan state that manages the economy and taxes people. So for the foreseeable future Hamilton seems to have few friends among those who would use The Founders to further their political causes.” (pg 123)

 

Play The Game You're In - alexander hamilton

 

Back to the Global Macro Grind

 

As opposed to whining about what many on Wall Street continue to beg for (Fed Intervention, Dollar Devaluation, Debt Monetization, Levered Buybacks, etc.), I say we just deal with it and play the game we’re in. There’s a lot of money to be made.

 

After being devalued by a “dovish Fed” to 16 month lows last week, the US Dollar spent the last few days wreaking havoc on whoever chased the highs of the “reflation” trade in April.

 

The way we played this in Real-Time Alerts was as follows:

 

  1. Friday – SELL signals in Oil and Copper
  2. Monday – BUY signal in US Dollar (cover Oil)
  3. Tuesday – COVER signal in Copper
  4. Wednesday – SELL signal in USD, COVER signal in SPY; Buy Signal in Energy (XLE)

 

Oh you little day-trader, you. Not really. I’m just signaling how I’m reading and reacting to the game in real-time. In late April and early May, I’m seeing the game as well as I did in late December, early January (after not seeing the game very well at all in March).

 

But it’s really NOT ok to speak openly about making good shots and bad shots, is it? This isn’t a game where everyone is striving for excellence like say, professional golf, where players can bluntly tell you they’re playing great or terrible, is it?

 

Since our performance as a profession has become so bad, we’ve almost reduced ourselves to a level of mediocrity that can only be considered a massive market and mind share opportunity. I say whoever stops whining and starts winning is going to crush it.

 

Back to why I made the decisions I made yesterday:

 

  1. US DOLLAR – could easily get smoked back to YTD lows on a bad jobs report tomorrow
  2. SPY (SP500) – tapped the low-end of my immediate-term risk range yesterday (top-end of the range = 2079)
  3. Energy (XLE) – like SPY, signaled immediate-term TRADE oversold yesterday and is a Down Dollar call too

 

Q: “Where could you be wrong Keith?”

A: On all of it

 

If I didn’t think I was going to be right, why would I waste my time A) signaling what I did and B) reiterating it this morning? I spent some time on The Macro Show yesterday discussing how I think about probability-weighting my decisions:

 

  1. If I think the probability of something happening is 33% or less, I do nothing
  2. If I think the probability of something happening is 66% or higher, I usually do something

 

In the Superforecasting book I’ve been citing as of late, Phil Tetlock makes the case that human beings naturally have 3 options: Yes, No, or Maybe. Since I don’t do maybe, I like to boil it down to Yes or No.

 

In other words, when I make a decision I have a confidence interval that is A) better than a coin toss and B) better than most people’s batting averages in the league. That doesn’t mean I’m going to be right. It simply sets a standard to be right.

 

A better question you can ask me on where I “could be wrong” is: since you have at least a 66% chance implied in hitting the button on that call, what are the Top 3 things that wouldn’t give you 99% conviction?

 

That way I can separate the risks to the position I take into a more tangible set of “thirds thinking” of the Top 3 ways I could be wrong. For example, if the Top 3 ways I can be wrong are highly unlikely, I’ll have Madoff type conviction = 99%

 

If you want these percentages to be 100% accurate, you’re missing my point entirely. This game is non-linear, so there is no super-secret calculation for conviction. However, there is a consistent #process here to calibrate my conviction.

 

In both tone and #timestamps, I’d be hard pressed to find my greatest loather in life who wouldn’t acknowledge that our highest conviction Global Macro idea for the last 6 months has been #GrowthSlowing.

 

While some sequential head-fake data points in the last 3 months have been “bullish”, most of them have mean reverted back to intermediate-term TREND bearish. Of the Top 3 things where I could be wrong from here, #EmploymentSlowing is one of them.

 

In other words, if NFP (non-farm payrolls) ramps to a rate-of-change acceleration ABOVE last year’s peak growth rate (+2.3% year-over-year NFP growth), my conviction on US #GrowthSlowing could fall below 66%, but would have to TREND that way.

 

There’s a difference. That’s why the data matters inasmuch as every decision you make during every market day does. You have to play the game you’re in, not the one you are positioned for.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.73-1.86%

SPX 2040-2079

NASDAQ 4

VIX 14.60-17.81
USD 92.01-94.38
Oil (WTI) 42.34-46.63

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Play The Game You're In - 05.05.16 EL Chart


USD, Oil and Sectors

Client Talking Points

USD

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). The 90-day inverse correlation between the 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.

OIL

Oil had a big bounce up +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 us here – short-term range bound with long-term TAIL risk in that $46-47 range.

SECTORS

Our favorite sector had another good day yesterday (Utilities +1.2% in a down tape to +14.0% year-to-date), and we added Energy (XLE) on the long side (for a trade) on that SPY/XLE immediate term oversold signal; on a bad jobs print (Dollar Down, Rates Down). We think both positions can work; on a “good” print, we’ll be wrong - still like Financials and Tech on the short side.

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 58% US EQUITIES 4%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 28% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
GIS

Please note we are removed General Mills (GIS) from Investing Ideas (long side) on Monday. Hedgeye CEO Keith McCullough wrote in Real-Time Alerts: "While I like GIS from a Style Factor perspective (it did its job last week, closing up in a down tape - doing its job again this a.m. +1%), it's:

A) Signaling a series of lower-highs from a long-term perspective

B) Not as well loved by my analyst team (Penney and Laidlaw)

 

While we still like the long-term story, the stock’s performance in 2016 has been nothing short of spectacular. Year-to-date GIS is up +7.8% versus +1.3% for the S&P 500. The company’s 3Q15 performance was mixed with the company missing on revenues and beating on EPS with the benefit of cost cutting.

 

That being said, there are a number of one-time items impacting volume growth that should self-correct in 4Q16 and FY17. GIS is currently trading at 13.9x EV / NTM EBITDA an all-time high for the company. Looking past GIS, the entire Consumer Staples space feel like there is a Safety Trade/ZBB/M&A bid underneath the entire group. We maintain our long-term bullish stance on GIS, but given the rapid acceleration to all-time highs in the YTD period, a correction is inevitable.

MCD

In a recent note to Real-Time Alerts subscribers, Hedgeye CEO Keith McCullough asked rhetorically, "What to buy?" "On pull backs to the low-end of my immediate-term risk range, I'd be buying more:

1. Long-duration Bond Exposures (TLT, ZROZ, EDV, etc)

2. Low-Beta Big Cap Stocks With Safe Yields (MCD, GIS, NKE, etc.)

3. Gold (GLD)"

 

McDonald's (MCD) has all the style factors we like for these turbulent markets, which explains why it's up 27% since we added it to Investing Ideas in August. Stick with it here.

TLT

Despite the weak U.S. GDP print, growth is very unlikely to rebound here in Q2. Don't get caught up in residual seasonality hopium. The confluence of steepening base effects amid the trending deterioration in economic momentum support our GIP Model forecast of a continued deceleration in the YoY growth rate of real GDP from +1.9% in 1Q16 to +1% in 2Q16E. The latter growth rate translates to +0.3% on a QoQ SAAR basis, which is up from our previous forecast of -0.5% (a lower base rate implies a smaller delta to get to the same numbers, all things being equal).

 

Assuming Q1 isn’t revised in any material way, our forecast for 1H16E is represents the slowest pace of domestic economic growth on a multi-quarter basis since 2H12. Any downside surprises from there will surely translate to renewed recession fears.” Giddy up for continued #GrowthSlowing!

 

The good thing about each of our active Macro positions (i.e. TLT, ZROZ, XLU and JNK) is that each of them typically works on an absolute return basis when growth slows.

Three for the Road

TWEET OF THE DAY

Explaining How We've Been So Accurate on GDP https://app.hedgeye.com/insights/50717-mccullough-why-our-gdp-forecasts-are-so-accurate

@KeithMcCullough

QUOTE OF THE DAY

Kites rise highest against the wind.

Winston Churchill       

STAT OF THE DAY

A report from Oceans Beyond Piracy group shows a total of 32 seafarers had been kidnapped so far this year compared with 15 in 2015.


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.

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







investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

next