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Dispelling Another Wall Street Fairy Tale: "Global Demand Has Bottomed"

Takeaway: Evidence of #GrowthSlowing? Japanese and German equity markets are tumbling and the 10yr/2yr Treasury yield spread is pancaking.

Dispelling Another Wall Street Fairy Tale: "Global Demand Has Bottomed" - growth escalator cartoon 04.29.2016

 

We've been hearing for a while now, from various pundits and prognosticators, that "global demand has bottomed." The problem with that argument is that it just isn't born out by the facts. 

 

Setting aside that economic indicators around the world are rolling over, simply looking at the massive drawdowns in global equity markets could satisfy even a casual observer's curiousity that all is not well.

 

Here's analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"I know. When trying weave the “global demand has bottomed” narrative about US stocks, you have to ex-out things like Japanese and German Equities (and their bond yields hitting all time lows) – small details I’m sure, but both Nikkei and DAX down another -1% today and down -20% and -19%, respectively, from last year’s highs."

 

Take a look at the Nikkei...

 

 

And Germany's DAX...

 

 

Clearly, global demand has not bottomed...

 

Here's the most obvious #GrowthSlowing indicator. The 10yr to 2yr Treasury yield spread is pancaking, with the yield on the 10yr at 1.669% this morning.

 

Dispelling Another Wall Street Fairy Tale: "Global Demand Has Bottomed" - yield spread 6 9 16

 

More to be revealed.

 

(FYI: Our biggest Macro call, Long Bonds (TLT) is breaking out to new highs today.)


Daily Market Data Dump: Thursday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Thursday - equity markets 6 9

 

Daily Market Data Dump: Thursday - sector performance 6 9

 

Daily Market Data Dump: Thursday - volume 6 9

 

Daily Market Data Dump: Thursday - rates and spreads 6 9

 

Daily Market Data Dump: Thursday - currencies 6 9


CHART OF THE DAY: When US Corporate Profit Growth Is Negative S&P 500 Does This...

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.

 

"... As you know, 100% of the time that US corporate profits slow to negative (year-over-year), the SP500 has had a draw-down (crash) of 20% or more. We’re about to see the 3rd consecutive quarter of a US #ProfitRecession. And Q3 of 2016 will probably be the 4th."

 

CHART OF THE DAY: When US Corporate Profit Growth Is Negative S&P 500 Does This... - 06.09.16 EL Chart


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Reflation's Shadow

“You see a shadow moving in the long grass – should you worry about lions?”

-Phil Tetlock

 

I guess it depends if you are in Thunder Bay, Ontario (it could be a wolf or a bear), NYC, or Africa…

 

In an excellent excerpt from Superforecasting titled Probability For The Stone Age, Phil Tetlock reminds us that “it was remarkably late in history, arguably as late as the 1713 publication of Bernoulli’s Ars Conjectandi, before the best minds started to think seriously about probability. Before that, people had no choice but to rely on the tip-of-your-nose perspective.” (pg 137)

 

Sadly, over 300 years later, I wouldn’t say the Old Wall’s “blue chip” forecasters have evolved much. I hear a lot about how GDP “feels like it could be 2.5%.” Then again, this comes from people who were “feeling” like it was 4% only six months ago. I can assure you that I feel absolutely nothing about the numbers that run through our predictive tracking algos.

 

Reflation's Shadow - 4  growth cartoon 03.02.2016

 

Back to the Global Macro Grind

 

Let’s start with some questions I asked the CFA Society at a lunch in Pittsburgh yesterday (Go Pens!):

 

  1. JOBS: given that the rate of change in US Non-Farm Payroll growth TRENDS toward negative 100% of the time after putting in its cycle-peak, is the probability rising or falling that the US labor market is doing what it always does at the end of a cycle?
  2. RATE HIKES? With US #EmploymentSlowing, does the Federal Reserve have it in its non-SP500-dependent mandate to be raising rates as that slowing labor and consumption data is reported?
  3. USD: If both the US Dollar and US Interest Rates go DOWN, every day, pricing in that the answer to question #1 Is YES and the answer to question #2 Is NO, can all assets priced in Dollars ramp to infinity and beyond?

 

Answer to question #3: possibly.

 

But in probability speak, possible is not the same word as probable. This isn’t my first bubble reflation chasing rodeo. Every 5-7 years of my 17 year career on Wall Street, I’ve been told that the US stock market just cannot go down, for real, ever again.

 

If both US and Global Growth continues to slow, it’s much more probable that US Equities crash from here (greater than 20% draw-down from its cycle-peak) than they go to infinity because “this time is different.”

 

As you know, 100% of the time that US corporate profits slow to negative (year-over-year), the SP500 has had a draw-down (crash) of 20% or more. We’re about to see the 3rd consecutive quarter of a US #ProfitRecession. And Q3 of 2016 will probably be the 4th.

 

During stagflation (Quad3) in Q3, can the US equity market see multiple expansion?

 

  1. Anything is possible
  2. But the probable answer is no

 

Why? Because the probable answer starts with what probability theorists call Frequency Theory. Most of the time when nominal growth slows while inflation is accelerating, profits get squeezed and multiples compress on that.

 

Now if you’re long Bernanke’s Bubbles again (i.e. Reflating the mother of all Commodity and Cost of Living Inflations), the market is telling you that you can (once again) get paid on that. How?

 

  1. Late cycle employment and consumption growth slows
  2. The Fed hurries to protect asset inflation via Dollar Devaluation
  3. In Dollars, you get paid by Reflation’s Shadow

 

I know. If you’re just looking at a 50-day moving monkey, most things Reflation (Commodities, Energy Stocks, Emerging Markets, etc.) look like they can outrun any lion right now. The 3 month performance (price) charts are breaking out the bananas. It’s a party, baby!

 

But, god forbid you are a longer-term investor, you pull back those same charts to 5, 15, and 30 year charts, and you’ll see that you might be the monkey hanging out by the tall grass line somewhere in Africa.

 

This, of course, has happened 100% of the time in my carreer. And the non-fiction bubble reflation story goes something like this:

 

  1. 1 #TheCycle peaks and there was one mother of a Q1-Q2 rally to lower-highs in Tech Stocks
  2. 2007-2008 #TheCycle peaks there was one mother of a Q1-Q2 rally in everything levered to Consumer/Housing
  3. 2015-2016 #TheCycle peaks and there’s been one mother of a rally in Commodity Inflation

 

Is it demand or is it the Fed? (i.e. the Dollar)

 

I realize that some big EM like Brazil has its own political story, but does Russia? Both China and Europe continue to slow as Japan falls somewhere inside its own economic abyss (Nikkei and DAX -1% this a.m. and -19-20% from last year’s cycle peak).

 

How about the divergence between 2 big 2011-2012 Bernanke Bubbles that imploded – Oil vs. Copper?

 

  1. Oil (WTI) is up +41% in the last 3 months, but is still down -12% year-over-year
  2. Copper is down -7% in the last 3 months, and remains in crash mode -23% year-over-year

 

Ok. So Energy stocks (XLE +15.0% YTD) look almost as awesome as Utilities (XLU +16.2% YTD), but is that because Oil’s volatility (OVX) has crashed from 80 in FEB to 35 in JUN? Or is that because everything demand is awesome again and suppy will never come back?

 

I’ve been much more vocal on the Long Utilities (XLU) vs. Short Financials (XLF) view than I have been on being long Reflation and that’s basically because it was an easier call to make that growth would slow than it was that being right on #GrowthSlowing would get people to chase Reflation Charts that have been blowing investors up for 3 years.

 

I don’t think of this as a mistake yet (this “bull” only started in MAR/APR). I’m actually thinking of it as an opportunity. While I haven’t been short Energy this year (we were last year with our #StrongDollar Deflation call), I haven’t been long it either.

 

Do I buy something that I’ve initially missed (that’s already had a huge move) that doesn’t have global demand behind it?

 

Maybe.

 

I have no problem buying or selling anything, don’t forget. If Energy stocks (XLE, XOP, OIH, etc.) are about to put on a 6-12 month move (higher) from here, it’s my job not to miss that inasmuch as it’s my job not to get sucked into the allure of its momentum.

 

Maybe it’s a bull. Maybe it’s a bear. Maybe it’s a lion.

 

I just don’t want to end up becoming the monkey in Reflation’s Shadow.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.64-1.78%

SPX 2082-2121

RUT 1139-1195
USD 93.15-94.87
Oil (WTI) 47.78-51.37

Gold 1
Copper 2.02-2.11

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Reflation's Shadow - 06.09.16 EL Chart


ICI Fund Flow Survey | Continuing to Run from Equity

Takeaway: The trend of defensiveness continued last week, although to less of an extreme, with bond flows outpacing equity by $2.2 billion.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

The trend of defensiveness continued last week, although to less of an extreme. Total mutual fund and ETF bond flows outpaced equity by $2.2 billion in the 5-day period ending June 1st. All active equity categories lost funds, amounting to a -$6.4 billion outflow for total equity mutual funds. However, investors did contribute +$5.7 billion to passive equity ETFs, the first contribution to that category in four weeks. Meanwhile, defensiveness continued to prevail with +$1.9 billion in contributions to total bond mutual funds. The -$1.1 billion outflow from global bonds was the only fixed income mutual fund withdrawal last week. Also, bond ETF flows were mildly negative at -$456 million. Allocations to money funds during the week were flat, a trend we are watching closely after the biggest annual inflow into cash products last year in 2015 since 2008.


ICI Fund Flow Survey | Continuing to Run from Equity - ICI19

 

In the most recent 5-day period ending June 1st, total equity mutual funds put up net outflows of -$6.4 billion, trailing the year-to-date weekly average outflow of -$2.5 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$1.9 billion, trailing the year-to-date weekly average inflow of +$2.3 billion but outpacing the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$5.7 billion, outpacing 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 outflows of -$456 million, trailing the year-to-date weekly average inflow of +$1.4 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 | Continuing to Run from Equity - ICI2

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI3

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI4

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI5

 

ICI Fund Flow Survey | Continuing to Run from Equity - 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 | Continuing to Run from Equity - ICI12

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI13

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI14

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI15

 

ICI Fund Flow Survey | Continuing to Run from Equity - 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 | Continuing to Run from Equity - ICI7

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +$299 million or +4% to the industrials XLI ETF last week.

 

ICI Fund Flow Survey | Continuing to Run from Equity - 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 | Continuing to Run from Equity - ICI17

 

ICI Fund Flow Survey | Continuing to Run from Equity - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$2.2 billion spread for the week (-$689 million of total equity outflow net of the +$1.5 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 -$2.1 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 | Continuing to Run from Equity - 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 | Continuing to Run from Equity - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







The Macro Show with Neil Howe Replay | June 9, 2016

CLICK HERE to access the associated slides.

 

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


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