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CHART OF THE DAY: How To Risk Manage Our Favorite Macro Positions

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.

 

"... Since Utilities (XLU) and Long-term Bonds (TLT) already signaled immediate-term TRADE oversold (lower) last week, the only big thing that I like on the long side that is signaling oversold today (i.e. it’s at the low-end of the risk range today) is Gold.

 

Gold’s immediate-term risk range is now $1215-1260. So I’d buy some at $1215 and sell some at $1260."

 

CHART OF THE DAY: How To Risk Manage Our Favorite Macro Positions - 05.25.16 EL Chart


Cartoon of the Day: Atlas

Cartoon of the Day: Atlas - growth cartoon 05.24.2016

 

Global growth continues to surprise Macro consensus to the downside.


6 Picture-Perfect Cartoons Capture Breakdown In Central Planning #BeliefSystem

Takeaway: Below are six cartoons illustrating our latest thinking on the central planning #BeliefSystem.

Our quarterly macro themes form the bedrock of our Macro team's investment conclusions. One of our most recent macro themes is the crashing central planning #BeliefSystem, in which investors lose faith in the policies of central banking bureaucrats.

1.

The notion that central bankers are increasingly pushing on a string is being progressively priced into global financial markets...

 

6 Picture-Perfect Cartoons Capture Breakdown In Central Planning #BeliefSystem - Central bankers in corner cartoon 04.20.2016 

2.

... With one lone holdout: U.S. equities.

 

6 Picture-Perfect Cartoons Capture Breakdown In Central Planning #BeliefSystem - Easy money cartoon 04.28.2016

3.

While we admire the blind faith of domestic stock market operators in Yellen’s ability to keep “the game” going...

 

6 Picture-Perfect Cartoons Capture Breakdown In Central Planning #BeliefSystem - Yellen cartoon 03.31.2016 

4.

... We are keen to cite specific risks that marginally dovish policy in the U.S. will fail to overcome the depths of the domestic economic, credit and corporate profit cycles.

 

6 Picture-Perfect Cartoons Capture Breakdown In Central Planning #BeliefSystem - hour glass cartoon

5.

The #BeliefSystem breakdown is already happening in Europe and Japan, with respective equity markets in crash mode and currencies strengthening despite easy money policies. 

 

6 Picture-Perfect Cartoons Capture Breakdown In Central Planning #BeliefSystem - Draghi Peter Pan cartoon 04.13.2016

6.

It's just a matter of time before investors loose faith in Yellen & Co. too.

 

6 Picture-Perfect Cartoons Capture Breakdown In Central Planning #BeliefSystem - central bank cartoon 04.22.2016


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Why We Remain Bearish On Junk Bonds

 

In this brief excerpt from The Macro Show earlier today, Hedgeye Macro analysts Darius Dale and Ben Ryan respond to a subscriber’s question about our views on the credit cycle and high-yield debt. 


[UNLOCKED] Why Hedgeye's Howard Penney Is Still Bearish On Shake Shack

Editor's NoteBelow is a recent institutional research note on Shake Shack (SHAK) written by Restaurants analysts Howard Penney and Shayne Laidlaw. To access our institutional research email sales@hedgeye.com.

 

Since Penney went bearish on Shake Shack in May 2015, the stock has nearly halved. "The centerpiece of our short SHAK thesis is the company’s growth strategy of planting flags around the world," they write. Apparently, things aren't going so hot. Here's an update.

 

[UNLOCKED] Why Hedgeye's Howard Penney Is Still Bearish On Shake Shack - shake shack image

 

The centerpiece of our short SHAK thesis is the company’s growth strategy of planting flags around the world. In my 20 years as a restaurant analyst, I cannot name one company that has successfully deployed this strategy. Not surprisingly, the SHAK 10-K gave us a glimpse into how hard it is to execute this strategy on a consistent basis around the world.

 

The key to long term success is to deliver a consistent product to the consumer time and time again. As you can imagine, it takes time to build a supply chain that allows for new unit growth and the ability to deliver a consistent product with long-term sustainable results. Given SHAK is just now developing its international infrastructure; it’s not surprising the global supply chain is less than developed. It’s hard to imagine the company is replicating a consistent product in all of its global markets. 

 

First, domestically, SHAK has a limited number of suppliers for their major ingredients, including beef patties, potato buns, custard, Portobello mushrooms and cheese sauce. At this point, we will remind you that it was issues with the supply chain that caused the downfall of Chipotle. According to SHAK’s 2015 10-K, there is significant concentration to its US supplier base:

  • The company purchased all of its ground beef patties from five suppliers (approximately 76% come from one supplier.) 
  • All of the potato buns are purchase directly from one supplier
  • Custard base from one supplier
  • “Shroom Burgers” from two suppliers, with approximately 67% of the Shroom Burgers supplied by one supplier;
  • ShackSauce from two suppliers, with approximately 92% of ShackSauce supplied by one supplier.

 

Internationally, they are having a different issue. Getting products with the right specification into the global market place is a challenge for the company. The international licensed Shacks import the proprietary ingredients from the United States and the European Union. Here are some of the issues the company talked about in the recently filed 10-K:

  • “For example, our proprietary blend of beef patties and/or raw materials for beef patties originate from the United States and the EU as well as Australia. In addition, our potato buns are exclusively from the United States, and other key items such as crinkle cut fries and American cheese originate within the United States or the EU. While we have established secondary supply solutions for some of these ingredients, we have not acquired secondary supplies for all of them.”
  • “Due to the long lead time and general volatility in the supply chain…we have had past and ongoing issues ensuring that timely and adequate supplies reach our Middle East Shacks.”
  • “In the Middle East, our licensee, Alshaya Trading Company W.L.L. ("Alshaya"), delegates the supply function to its own third-party logistics providers in each country in which Alshaya operates, with which we have limited and restricted communication, preventing us from exercising control or instruction over such entities.”
  • “The recent sanctions enacted by the Russian Federation on many imported ingredients from the United States, the EU and Australia have affected our Russian licensee's ability to import such ingredients to our Russian Shacks.”
  • We have given our licensee in Russia approval to utilize alternative ingredients not affected by the sanctions, but there is a risk that these substitute ingredients may be inferior in taste and quality or come from suppliers that have not been vetted for food safety and quality assurance.”
  • Our U.K. Shacks face challenges in obtaining potato buns and custard, which originate from our U.S. suppliers. While these ingredients have no trade restrictions, they must be shipped from the United States, which poses an ongoing risk of delay in supply deliveries.”
  • “Our Turkish Shacks currently import many key ingredients from both the EU and the United States. As is common in many developing markets, regulations are always subject to change which could potentially give rise to import risks should current importation legislation change. We are currently working on local Turkish alternatives to alleviate these risks in the future.”

 

Along with continued new unit growth in the existing markets the company will be opening up new markets internationally, further complicating the problem. Internationally, SHAK opened their first unit in Oman in February 2016 and will open up in South Korea later this year as well. How is it that a company the size of SHAK has the ability to execute a global growth strategy and supply customers with the product they believe they are getting?

 

The supply chain warnings in the 10-K are something that should not be looked at lightly. As we have seen from other growth restaurant companies, supply chain issues can be very disruptive to the consumer perception of the brand and profitability.


[UNLOCKED] 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.

 

[UNLOCKED] Fund Flow Survey | 14 Weeks of Defense - ICI1 large 5 24

 

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.

 

[UNLOCKED] 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:

 

[UNLOCKED] Fund Flow Survey | 14 Weeks of Defense - ICI2

 

[UNLOCKED] Fund Flow Survey | 14 Weeks of Defense - ICI3

 

[UNLOCKED] Fund Flow Survey | 14 Weeks of Defense - ICI4

 

[UNLOCKED] Fund Flow Survey | 14 Weeks of Defense - ICI5

 

[UNLOCKED] 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.

 

[UNLOCKED] Fund Flow Survey | 14 Weeks of Defense - ICI12 2

 

[UNLOCKED] Fund Flow Survey | 14 Weeks of Defense - ICI13 2

 

[UNLOCKED] Fund Flow Survey | 14 Weeks of Defense - ICI14 2

 

[UNLOCKED] Fund Flow Survey | 14 Weeks of Defense - ICI15 2

 

[UNLOCKED] 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:

 

[UNLOCKED] Fund Flow Survey | 14 Weeks of Defense - ICI7

 

[UNLOCKED] 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.

 

[UNLOCKED] 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.

 

[UNLOCKED] Fund Flow Survey | 14 Weeks of Defense - ICI17 2

 

[UNLOCKED] 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.)

  

[UNLOCKED] 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:

 

[UNLOCKED] Fund Flow Survey | 14 Weeks of Defense - ICI11


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