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Why The 10-Year Yield May Make All-Time Lows

 

In an excerpt from The Macro Show earlier this week, Hedgeye CEO Keith McCullough responds to a subscriber’s question about whether the yield on the 10-year U.S. Treasury note will fall below 1.50%.


ICI Fund Flow Survey | 14 Weeks of Defense

Takeaway: This marks the 14th straight week in which total bond flows outpaced total equity flows. Equities lost -$7.6 B while bonds gained +$4.7 B.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Investors' allocations were again net defensive in the 5-day period ending May 11th; total equity mutual fund and ETF flows came in at -$7.6 billion, -$12.3 billion below the +$4.7 billion inflow to total bond mutual funds and ETFs. This marks the 14th straight week in which total bond flows outpaced total equity flows.

 

ICI Fund Flow Survey | 14 Weeks of Defense - ICI1

 

Domestic equity mutual funds continued their losing streak, giving up -$4.9 billion and even equity ETFs, which investors have favored in recent years, lost -$3.1 billion. However, international equity mutual funds broke their 8-week losing streak, bringing in +$430 million in contributions. Within bond funds, most categories experienced contributions last week, bringing total fixed income mutual fund flows to +$4.1 billion and bond ETF flows to +$603 million. Finally, investors shored up +$6 billion of cash in money market funds last week.

 

ICI Fund Flow Survey | 14 Weeks of Defense - ICI19

 

In the most recent 5-day period ending May 11th, total equity mutual funds put up net outflows of -$4.4 billion, trailing the year-to-date weekly average outflow of -$2.1 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$4.1 billion, outpacing the year-to-date weekly average inflow of +$2.3 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net redemptions of -$3.1 billion, trailing the year-to-date weekly average outflow of -$1.4 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$603 million, trailing the year-to-date weekly average inflow of +$1.6 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 | 14 Weeks of Defense - ICI2

 

ICI Fund Flow Survey | 14 Weeks of Defense - ICI3

 

ICI Fund Flow Survey | 14 Weeks of Defense - ICI4

 

ICI Fund Flow Survey | 14 Weeks of Defense - ICI5

 

ICI Fund Flow Survey | 14 Weeks of Defense - 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 | 14 Weeks of Defense - ICI12 2

 

ICI Fund Flow Survey | 14 Weeks of Defense - ICI13 2

 

ICI Fund Flow Survey | 14 Weeks of Defense - ICI14 2

 

ICI Fund Flow Survey | 14 Weeks of Defense - ICI15 2

 

ICI Fund Flow Survey | 14 Weeks of Defense - 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 | 14 Weeks of Defense - ICI7

 

ICI Fund Flow Survey | 14 Weeks of Defense - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors pulled -$444 million or -5% from the utilities XLU ETF last week.

 

ICI Fund Flow Survey | 14 Weeks of Defense - 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 | 14 Weeks of Defense - ICI17 2

 

ICI Fund Flow Survey | 14 Weeks of Defense - 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 -$12.3 billion spread for the week (-$7.6 billion of total equity outflow net of the +$4.7 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 -$1.6 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 | 14 Weeks of Defense - 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 | 14 Weeks of Defense - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







USD, UST 10YR and Sectors

Client Talking Points

USD

A) the USD was signaling oversold 3 weeks ago and B) now it’s signaling immediate-term TRADE overbought at 95.48 USD Index, $1.12 Euro and $110.46 Yen … so C) we think most of this move is just mean reversion combined with macro tourist storytelling/fear about a rate hike.

UST 10YR

Again, it’s where mean reversions come from that lead false narratives – the 10YR Yield was oversold at 1.70% and bounced… but A) post a GDP print of 0.5%, B) an NFP print of 163k and C) a headline CPI of 1.1% year-over-year… GROWTH has trumped (pardon the pun) inflation the entire way and we think it will again – this chart is beautifully bearish TREND on growth.

SECTORS

I don’t want to say layup (because I’m a 5.9’ hockey player who is bad at hoops), but if you have our GDP, employment, and consumption slow-down view in Q2/Q3, it’s the best spot you’ve had since DEC to buy Utilities (XLU) and short the Financials (XLF and KRE) – we can finally get long #GrowthSlowing in a bigger way now.

 

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

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/18/16 58% 2% 0% 6% 28% 6%
5/19/16 51% 5% 0% 8% 30% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/18/16 58% 6% 0% 18% 85% 18%
5/19/16 51% 15% 0% 24% 91% 18%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) remains our favorite sector on the long side as Financials (XLF) remains our favorite sector on the short side. Current global macro positioning is squarely behind a continuation in the reflation trade as evidenced by commodity leveraged credit spreads, global macro futures and options positioning, and forward-looking volatility expectations. Global macro futures and options positioning show a market that is leaning long of commodities and short of U.S. dollars. Corporate credit as a % of GDP remains at cycle highs, capital markets activity has dried up significantly, and credit extension is tightening nationwide according the most recent Fed Senior Loan Officer survey.

MCD

For some perspective on the Macro environment and why we favor companies like McDonald's (MCD), here's an excerpt from the Early Look written by Hedgeye CEO Keith McCullough:

 

Taking a step back, don’t forget where US Consumers (70% of GDP) were at this time last year:

 

  • US Employment Growth (NFP) was putting in a cycle peak
  • US Consumer Confidence was putting in a cycle peak
  • US Consumption Growth was putting in a cycle peak

 

Peak. Peak. #Peak!

 

And what happens when you start to lap the cycle peak? Well, instead of crappy Baby Boom capacity putting up mediocre (barely positive) same store sales at the peak, they look even crappier on the back side of the cycle."

 

That's why we like large-cap, low-beta, liquid companies like McDonald's in this tumultuous market environment. Case in point, earlier in the week, MCD hit an all-time high. Since we added the company to Investing Ideas, it is up almost 30%.

 

Stick with it. Restaurants analyst Howard Penney reiterates his "road to $150" call, implyling more than 15% upside from here.

TLT

Credit markets are one of the major beneficiaries (maybe the largest) of the reflation trade since February. While yield spread compression has been a positive for Long Bonds (TLT, ZROZ), a perceived monetary policy shift and a collapse in bond market volatility expectations have been a positive for Junk Bonds (JNK), but we don’t expect it to continue.

 

With growth continuing to slow alongside consensus positioning broadly, downside deflation risk is on the table. As we’ve highlighted on a daily basis, consumption growth and labor market growth peaked in Q1 2015 and both are slowing alongside a continued corporate profits slowdown. This mix:

  • Smells like incremental deflation on the margin;
  • Is a huge risk for high yield credit (JNK);

 

Did we mention TLT and ZROZ were up 4.4% and 2.1% respectively last week? Not bad with U.S. #GrowthSlowing.

Three for the Road

TWEET OF THE DAY

Despite a solid print, $WMT's global e-commerce biz was up just 7%.

That's unacceptable from where we sit.

@HedgeyeRetail

QUOTE OF THE DAY

We do not have to become heroes overnight. Just a step at a time, meeting each thing that comes up ... discovering we have the strength to stare it down.

Eleanor Roosevelt

STAT OF THE DAY

A recent report from the AFL-CIO federation of unions found that the average CEO of a company on the S&P 500 made 335 times as much money as the average production and non-supervisory worker in 2015. That’s down from 373 times as much money as 2014. 


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 78.51%

CHART OF THE DAY: Remember What Happened When The Fed Hiked In December? We Do.

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 the Fed RAISES RATES (June) into this slow-down, they’ll be the catalyst for DEFLATION (down yields) again anyway.

 

That last part is the part Consensus Macro got smoked by when they bought the Financials (XLF) and shorted “expensive” Utilities (XLU) in December 2015 on the DEC Rate Hike. The Fed drives the Dollar; the Dollar doesn’t drive the Fed."

 

CHART OF THE DAY: Remember What Happened When The Fed Hiked In December? We Do. - 05.19.16 EL Chart


Long Bond Bookie

“I’d rather be a bookie than a goddamn poet.”

-Sherman Kent

 

Barring some alliteration here and there, I’m not a goddamn poet either. I’m a Risk Manager. And when I think about risk, I think in probability and rate of change, not the consensus corner of the hedge fund community’s panic attacks.

 

When you wake up in the morning do you want someone to hold your hand and tell you what to do? Or do you have your own process and group of market practitioners like me to help augment it?

 

From his perch at the CIA during WWII and the Cold War, Sherman Kent, helped US Presidents make decisions using probability language. “If the National Intelligence agency said something is “probable”, it would mean 63-87% chance it would happen. Kent’s scheme was simple – and it greatly reduced the room for confusion.” (Superforecasting, pg 56)

 

Back to the Global Macro Grind

 

If you want to be 100% certain, there’s a bookie in the clink I can put you in touch with. His name is Madoff. If you want credibility in making Macro Calls on Wall Street, you better be right at least 63% of the time.

 

If you simply think something is “possible” (not probable)… like say a Fed “rate hike” into a slow-down… Kent “suggested the word “possible” be reserved for important matters where analysts have to make a judgment but can’t assign probability.” (pg 56)

 

“So.. you’re saying there’s a chance.”

-Dumb & Dumber

 Long Bond Bookie - dumb and dumber

 

That’s about as useful as some of these regional Fed Heads (like John Williams at the San Francisco) have been in outlining their “chance for 3-5 rate hikes” in 2016. There’s no process in that. There’s only confusion. And market confusion breeds contempt.

 

I don’t make a call on something unless I think there’s at least a 67% chance that I’m going to be right. “Where could you be wrong Keith?” Well, folks, I could be wrong on all of it. How about you? What are you going to do if I’m right on rates again?

 

Being The Bull on the Long Bond since this time last year has not been easy. I’m almost starting to feel like the Long Bond Bookie of Twitter. But, if you think I fold with Q2 consumption and employment #GrowthSlowing here, you’ll be 100% wrong on that.

 

So, let’s go right to the wood and let me reiterate what I did in Real-Time Alerts yesterday:

 

  1. COVER signal = US Retailers (XRT) which were getting pounded to new lows (still bearish TREND)
  2. BUY signal = McDonald’s (MCD) which is still my favorite Big Cap US Equity (bullish TREND)
  3. BUY signal = Utilities (XLU) which is still our favorite US Equity Sector Style (bullish TREND)
  4. SHORT signal = JP Morgan (JPM) which signaled immediate-term TRADE overbought (bearish TREND)
  5. COVER signal = Kinder Morgan (KMI) which signaled immediate-term TRADE oversold (bearish TREND)
  6. COVER signal = Encore Capital (ECPG) which signaled immediate-term TRADE oversold (bearish TREND)
  7. BUY signal = Occidental Petroleum (OXY) which signaled immediate-term TRADE oversold (bullish TREND)
  8. BUY signal = Long Bond (TLT) which remains my favorite way to play US #GrowthSlowing (bullish TREND)
  9. COVER signal = PRA Group (PRAA) which signaled immediate-term TRADE oversold (bearish TREND)
  10. SHORT signal = Regional Banks (KRE) which signaled immediate-term TRADE overbought (bearish TREND)

 

Q: “Are we clear?” –Colonel Jessup

A: “Crystal” –Kaffee

 

I didn’t build this place to play possum. I built it with no conflicts of interest – no bankers, no brokers, no bookies – so that we could bring transparency and accountability back to a profession in dire need of it.

 

I don’t make calls assuming I’m going to be right. We all get things wrong on Wall Street. But over my dead body are my subscribers going to be getting “possible” when I make a call. They are going to get probable and why.

 

Why do I think the aforementioned 10 moves were the highest probability decisions I could make yesterday?

 

  1. US GROWTH continues to slow
  2. US Consumption and Employment GROWTH slowing are more important to the Fed than CPI
  3. US INFLATION is reflating from deflationary lows – that’s not to be confused with a breakout of hyperinflation
  4. US 10yr Yields (intermediate-term, not 2-day moves) map the rate of change in GROWTH more so than INFLATION
  5. If the Fed RAISES RATES (June) into this slow-down, they’ll be the catalyst for DEFLATION (down yields) again anyway

 

That last part (5) is the part Consensus Macro got smoked by when they bought the Financials (XLF) and shorted “expensive” Utilities (XLU) in December 2015 on the DEC Rate Hike. The Fed drives the Dollar; the Dollar doesn’t drive the Fed.

 

While her rookie Dollar Debaucherers in Regional Federal Reserve offices are more “preferred outcome” dependent, what we have learned in 2016 is that Janet Yellen has been data dependent, but on a lag.

 

As #LateCycle growth slowed, she cut out 3 of the 5 hikes. If she hikes for the sake of hiking, she’ll prove that she’s not politically tied to the Democrat party. She’ll probably blow up the commodity, stock, and bond markets all at once right before the election.

 

And at that point, we all might be aspiring poets anyway.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.68-1.88%

SPX 2035-2061

NASDAQ 4

VIX 14.71-17.40
USD 93.62-95.48

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Long Bond Bookie - 05.19.16 EL Chart


The Macro Show with Keith McCullough Replay | May 19, 2016

CLICK HERE to access the associated slides.

 

 

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


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