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CHART OF THE DAY: This Economic Indicator Has Been Negative For 9 Straight Months

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.

 

"... I have been very serious about #GrowthSlowing for almost a year now. And guess what? It continues to slow.

 

After I saw yesterday’s recessionary US Industrial Production report for May of -1.4% year-over-year, being long stocks into the Fed going dovish (again), I knew I was getting too cute. So I sold into strength. I don’t like playing from a position of weakness."

 

CHART OF THE DAY: This Economic Indicator Has Been Negative For 9 Straight Months - 06.16.16 chart


I'm Out (again)

“I don’t miss it at all. I’m glad I’m out.”

-Larry Bird

 

I was able to stay long US Equity Beta for half of a trading day. That was uncomfortable. So I’m out.

 

Seriously? Yes. I have been very serious about #GrowthSlowing for almost a year now. And guess what? It continues to slow.

 

After I saw yesterday’s recessionary US Industrial Production report for May of -1.4% year-over-year, being long stocks into the Fed going dovish (again), I knew I was getting too cute. So I sold into strength. I don’t like playing from a position of weakness.

 

I'm Out (again) - paranoid bull 01.28.2016

 

Back to the Global Macro Grind

 

Don’t go all “holding period” on me now. This has nothing to do with being “short-term” vs. long-term. There isn’t one daily strategy note you read that has been more resolute in calling the long-term cycle (both ways) than Hedgeye Risk Management.

 

Yes, we help you risk manage the short and intermediate-term within the context of long-term economic, profit, and credit cycles. No, I don’t chase short-term charts. I stay with #TheCycle call. What if you’ve done that for a year now?

 

  1. LONG BOND (TLT) is up +15.3% (ex-coupon payments) vs. June 16, 2015
  2. US EQUITY BETA (SP500) is down -1.2% vs. June 16, 2015

 

And if you’re truthful about what’s happened from #TheCycle high (Q2 2015) you’ll see that plenty of classic Late Cycle #crashes have occurred in many US Equity Exposures, with the latest being Consumer Credit (see charts of SYF, COF, etc. for details).

 

In addition to the Global Demand has not “bottomed” data point on US Industrial Production and Producer Prices (PPI for May showed ZIRP pricing power at -0.1% year-over-year), in our research meeting yesterday, our Financials Sector Head, Josh Steiner, explained the latest from one of the largest private label credit card issuers in the world, Synchrony Financial (former GE Capital).

 

As PMs who are long the stocks can see, the “consumer is good” credit card exposures like Synchrony (SYF) and Capital One (COF) have crashed -28-30% from where you could have owned them (at the peak of the employment cycle) in July of 2015.

 

Why am I calling this out? (hint: more confirmation that we’re right on #TheCycle)

 

  1. US Employment is slowing at an accelerating rate
  2. US Consumer Credit is deteriorating at an accelerating rate
  3. US Income and Consumption growth is slowing passive aggressively in kind

 

And most stocks that have US domestic exposure (don’t blame China and Brexit for these, Janet) to these 3 Late Cycle factors are some of the worst places you could have had your money while Energy stocks have been rallying from 3 year lows.

 

My daily Real-Time Alerts don’t matter like our call on #TheCycle does. Unlike most people we compete with, I’m just trying to be 100% transparent with my every thought and move, across durations.

 

“What matters far more to superforecasters than Bayes’ Theorem is Bayes’ core insight of gradually getting closer to the truth by constantly updating in proportion to the weight of the evidence.” (Superforecasters, pg 171)

 

So yeah, I’m serious. My ½ day holding period was due to both cyclical and consumption data changing. Remember the catalysts I gave you yesterday?

 

  1. The Fed (she went dovish and equities turned red on that into the close)
  2. Brexit (what if they do exit?)
  3. Mean Reversion and performance chasing

 

That last one goes both ways. If I think about my immediate vs. intermediate-term (TRADE vs. TREND) risk range for the SP500, A) they are very different and B) trying to “time” a TRADE is looking at a tree instead of the probable forest:

 

  1. SP500 immediate-term TRADE risk range = 2055-2095
  2. SP500 intermediate-term TREND risk range = 1

 

In other words, while I was listening to Janet muddle and bumble about taking down the dots (again), the SP500 was at 2083 with 12 handles (+0.6%) of immediate-term upside and 144 handles (-6.9%) of intermediate-term downside.

 

Then I wake up this morning (again, “constantly updating in proportion to the weight of evidence”) to the simple truth that Chinese, Japanese, and European Stock markets continue to crash alongside Global Sovereign Bond Yields.

 

Do my eyes deceive me? Or is this poppycock case from perma equity bulls that the world hasn’t been slowing from its cycle peak last year simply annoy me at this point? (China -45%, Italy -32%, Japan -26%, Germany -23%, etc. from 2015 highs)

 

Maybe… just maybe… that’s why Janet Yellen said she’d consider “helicopter money” yesterday. When she said, “there might be a case for fiscal-monetary coordination”, the US stock market said huh?

 

Only a few weeks ago, Janet Yellen and her Regional Fed Heads were saying they’d “probably raise rates” in June or July… and now we need to consider helicopters? What changed?

 

My answer to that (and why I’m out on owning US Equity beta) is that nothing changed. The Federal Reserve is finally coming to terms with what we’ve been writing about all along. The #BeliefSystem that central bankers can stop #TheCycle from slowing is breaking down.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.53-1.67%

SPX 2055-2095

NASDAQ 4

Nikkei 151

DAX 9

VIX 16.70-22.65
USD 93.23-95.22
Oil (WTI) 47.01-49.67

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

I'm Out (again) - 06.16.16 chart


JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2
''You know nothing for sure...except the fact that you know nothing for sure.''

— JFK

TRUMP’S TRIPLE THREAT: It’s been exactly one year since Donald Trump announced his candidacy for president and through many highs and more lows than anyone ever expected, he finds himself on the ropes again. Seven out of ten Americans give Trump unfavorable marks beating out Hillary Clinton’s high negatives by a healthy margin - and Clinton is now up 8-12 points over Trump in the general election. Negative views of Trump are rising among a number of groups, jumping by double digits among liberals and conservatives, and among both Republican women and Democratic men. Even Republican leadership is scratching their heads and dodging questions regarding the presumptive nominee as the Republican party image faces historic lows. Trump faces major challenges on three fronts: Clinton and the Dems, the media, and his fellow Republicans. He now has one month left to win over the Republicans and stanch the bleeding as the threat of a three-headed monster will be too difficult to overcome this fall.

 

SLOW BERN: In the beginning, few believed Bernie Sanders was a serious challenger to Clinton, but when the dust settled, Sanders won 23 primaries and more than 12 million votes, all while energizing progressives with calls for a political uprising. Sanders, who has spent most of his political career on the sidelines, is now a major symbol and is expected to play a feature role at July’s convention. He’s vowed to help Clinton defeat Trump and shepherd his supporters her way - but don’t forget to read the terms and conditions. Sanders will take his time before endorsing while aggressively pushing his leftist policy agenda to Clinton, party leaders and convention power brokers.

 

CLINTON’S COMFORT ZONE: Despite her success, Clinton ran a rather uneven primary failing to understand and then extinguish the Sanders threat from the onset. Her victory speech after CA marked a turning point and now, on top of an multi-million dollar advertising assault, robust voter turnout, and her prudent response to the tragedy in Orlando, Clinton is becoming more comfortable with her message and her measured attacks on Trump. She’s engaging the people and opening up more on the trail - but still needs to inject much-needed confidence back into party, win over Independents and doubtful voters.

 

NO LEAVE FOR UNIONS: After months of speculation, union leaders across America are voicing confidence that their groups will stay blue in this year’s election. Trump has labeled himself  a labor-loving Republican, courting unions aggressively with tirades against trade agreements and immigration – two things that sit well with blue-collar voters – but has never fully connected. Though some union leaders have reservations about Clinton, they just don’t see the groundswell toward Trump. There’s no way to predict what individual union members will decide in the privacy of the voting booth, but local leaders often hold the key to their groups’ interests and they’re pointed right at Clinton.

 

BREXIT: A week remains until the June 23rd “Brexit” referendum with recent polls shifting towards the “Leave” camp. However, we maintain our view that the Remain camp will ultimately prevail. See: research note and expert call with Alex Nicoll. We believe the downside economic risks (even if exaggerated by the party line) combined with a hefty percentage of undecided voters (that we suspect will marginally sway towards a Remain tally) will push the vote to Remain. In the last days, the Remain camp has loudly re-engaged the conversation for a special “Brexit budget” aimed at filling a £30bn hole in public finances by increasing the basic rate of income tax from 20% to 22%, with top earners’ share rising by 3pp to 43%. More fear-mongering? Maybe… but we don’t suspect the island nation to vote Brexit.

 

ELECTION PREVIEW WITH SCOTT REED: With the fight for the White House heating up, we’ll talk with Scott Reed, one of Washington’s top political strategists, to gather his views on who will be the next President of the United States, the upcoming party conventions, and the highly competitive Senate and House races this fall. The call will take place next Tuesday, June 21st at 11:00 AM EDT. You can find the dial-in information here.

 

HUNTED: THE F-35 PROGRAM AT FARNBOROUGH: On Friday, June 17th at 11:00 EDT, our Senior Defense Policy Advisor LtGen Emo Gardner will host a call for investors regarding the first ever appearance of the F-35 at the world’s most important aerospace show, the Farnborough International Airshow, July 11-17.


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ICI Fund Flow Survey | Hallmarks of a Phase Transition

Takeaway: Total equity products are averaging a weekly redemption of -$3.4 billion versus fixed income which is bringing in +$3.9 billion per week.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending June 8th, Large Cap and Emerging Markets were the only active equity categories to have net contributions. Large Cap took in meager +$346 million and Emerging Markets gained +$130 million, however losses in the other categories brought total equity mutual fund flows to -$3.8 billion. Meanwhile, active fixed income flows came in strongly at +$5.0 billion. Global bonds, with a -$755 million outflow, was the only fixed income category to experience a net withdrawal. In passive ETFs, bond inflows of +$2.9 billion slightly outpaced equity ETF contributions of +$2.3 billion. The year-to-date scorecard is telling with total equity products (including ETFs) shedding -$3.4 billion versus all fixed income product which is averaging +3.9 billion in subscriptions (lead by tax-free munis with a +1.2 billion weekly average inflow).

 


ICI Fund Flow Survey | Hallmarks of a Phase Transition - ICI1

 

In the most recent 5-day period ending June 8th, total equity mutual funds put up net outflows of -$3.8 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 +$5.0 billion, outpacing the year-to-date weekly average inflow of +$2.5 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$2.3 billion, outpacing the year-to-date weekly average outflow of -$895 million but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$2.9 billion, outpacing the year-to-date weekly average inflow of +$1.5 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 | Hallmarks of a Phase Transition - ICI2

 

ICI Fund Flow Survey | Hallmarks of a Phase Transition - ICI3

 

ICI Fund Flow Survey | Hallmarks of a Phase Transition - ICI4

 

ICI Fund Flow Survey | Hallmarks of a Phase Transition - ICI5

 

ICI Fund Flow Survey | Hallmarks of a Phase Transition - 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 | Hallmarks of a Phase Transition - ICI12

 

ICI Fund Flow Survey | Hallmarks of a Phase Transition - ICI13

 

ICI Fund Flow Survey | Hallmarks of a Phase Transition - ICI14

 

ICI Fund Flow Survey | Hallmarks of a Phase Transition - ICI15

 

ICI Fund Flow Survey | Hallmarks of a Phase Transition - 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 | Hallmarks of a Phase Transition - ICI7

 

ICI Fund Flow Survey | Hallmarks of a Phase Transition - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +$537 million or +4% to the health care XLV ETF and +$331 million or +4% to the long treasury TLT ETF.

 

ICI Fund Flow Survey | Hallmarks of a Phase Transition - 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 | Hallmarks of a Phase Transition - ICI17

 

ICI Fund Flow Survey | Hallmarks of a Phase Transition - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$9.4 billion spread for the week (-$1.5 billion of total equity outflow net of the +$7.9 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 -$2.4 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 | Hallmarks of a Phase Transition - 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 | Hallmarks of a Phase Transition - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







Cartoon of the Day: For The Birds...

Cartoon of the Day: For The Birds... - Fed birdbrain cartoon 06.15.2015

 

"Fed 'data dependence' or absolute mediocrity in forecasting?" Hedgeye CEO Keith McCullough wrote following today's FOMC statement. "The Fed was hawkish in December, dovish in March and April, hawkish in May and now dovish again in June."


McCullough: My Response To Today’s Fed Statement

 

In this special HedgeyeTV presentation, Hedgeye CEO Keith McCullough explains why “the Fed is not trying to protect the American people and their cost of living. It wants to keep the financial market bubbles that they created intact.”


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