The Fed-induced bubble in financial markets has undoubtedly made the rich richer while its easy money policies have devalued the purchasing power of average Americans.
Takeaway: Stronger Together...; Worth More Than A Bucket Of Warm Spit?; Trump Stump;
Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email firstname.lastname@example.org.
“The ballot is stronger than the bullet.”
In a long-awaited and highly-anticipated speech, Bernie Sanders delivered an impassioned endorsement of Hillary Clinton while she rallied the crowd with the message that Democrats are unified and ready to take on Donald Trump in the fall. In the end, Sanders has much to feel good about – he’s helped shape the most progressive platform in Democratic party history.
The remaining question is whether or not the Clinton-Sanders relationship will actually blossom, and if she will be able to fully win over his supporters - many of whom are still reeling that he left the race before the convention.
This may be the year where the veep selections carry more weight than in years past - dating back to JFK’s critical pick of LBJ. Trump’s decision could be a make or break moment for legions of Republicans and undecided party leaders. The push to unify and reassure has Trump seriously considering Governors Mike Pence and Chris Christie, former House Speaker Newt Gingrich, and Senator Jeff Sessions.
Clinton on the other hand, faces a much different situation. Her progressive moves within the party platform have helped her make progress with the wing she would most likely need help from and appears to be shifting her focus to VA Senator Tim Kaine, Labor Secretary Thomas Perez, and now Admiral James Stavridis. Title courtesy of VP John Nance Garner.
Trump continues to surprise - now adding Senate Majority Leader Mitch McConnell to his growing list of convention speakers - all to be announced later today. McConnell, who will attend as a delegate and a speaker, endorsed Trump shortly after he clinched the nomination in early May, but has since kept his distance given the steady drumbeat of Trump’s controversies. McConnell’s participation is another step in the right direction for Trump, but he still lags in winning over other key party types - including his main primary rivals.
Takeaway: A closer look at CFTC futures and options positioning reveals that consensus remains rather long the S&P 500.
Below is analysis from our Macro team in a note sent to subscribers earlier this morning:
"As we highlighted on The Macro Show yesterday, the CFTC net futures and options positioning in the S&P was already long 58K contracts moving into this week, or +1.68x on a TTM z-score basis (and that’s positioning through last Tuesday). With the low volume melt-up moves from Fri-Tues (S&P +2.6%) , expect an even longer consensus position at the end of this week.
Go ahead and buy all time-highs on peak cycle forward multiples (and that’s assuming the consensus expectation for a major corporate profit turnaround) in a crowded long position, but we’re going to sit it out."
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Takeaway: The housing bubble in Australia is bad news for the country's big banks.
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Last week, Hedgeye Financials Sector Head Josh Steiner held an institutional call discussing Australia’s housing bubble, and why now is the time to short Australian Banks.
The country’s big four banks: CommBank (CBA), National Bank (NAB), Westpac (WBC) and Australia & New Zealand Banking Group (ANZ) are holding the bag on this developing mess. With over 60% of their loan books in residential mortgages, there’s basically nowhere to hide.
Here are some noteworthy highlights from Steiner’s call:
Contrary to popular belief, the primary driver accounting for approximately 30% of the Australian GDP is building, selling, and financing property, not mining which only accounts for around 8% of GDP. 60-70% of the market being bought with interest-only mortgages; this model only works when property prices continue to go up, as Americans may painfully remember.
An important tenet of Steiner’s demand slowing call rests on the assumption that Chinese demand for foreign property investment will slow in 2016 vs 2015, and then slow further in 2017. Part of this has to do with the coming credit storm and pace of FX reserve drawdown.
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Takeaway: Hedgeye Potomac analyst Joe McMonigle called Saudi Arabia and Iran's plans to ramp oil production despite all the "freeze" talk.
Oil prices tumbled -4% today following an IEA report that OPEC oil production hit an eight-year high last month. This news comes six months after discussions between OPEC and non-OPEC countries to "freeze" production fell apart.
Hedgeye Potomac Senior Energy analyst Joe McMonigle saw it coming. (Click here to read his prescient research note written back in March.) Here's what he said:
"We continue to see no chance of a production cut at this time and maintain our thesis that Saudi Arabia believes its market share policy is winning."
Take a look at the OPEC oil production chart below from Bloomberg. As you can see, Saudi Arabia and Iran have been ramping up production just as McMonigle predicted.
Takeaway: As money continues to flow out of Equity ETFs, fixed income and defensive sectors like Utilities and Gold have been the primary beneficiary.
And the picture painted isn't pretty for equity bulls.
Here's fund flow analysis via our Macro team in a note sent to subscribers earlier this morning:
"Year-to-date stock ETF flows are -$31.6 billion redemption, which would be the worst year on record for the category through the beginning of our data set which starts in 2013. On the active management side, it’s worse - active equity mutual funds have lost over twice as much with withdrawals now totaling -$72.8 billion in 2016 – everyone is long equity beta through automated asset allocations – scary stuff!"
Take a look at the chart below which show net money flows to Equity (less Fixed Income) funds with detailed analysis from our Financials team:
"The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$16.7 billion spread for the week (-$17.1 billion of total equity outflow net of the -$377 million outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is -$3.0 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.)"
Meanwhile, massive year-to-date inflows continue to flood into our favorite Macro call like Utilities (XLU), Gold (GLD) and Long Bonds (TLT). Again, here's our commentary from our Financials team:
"Fixed income mutual funds also experienced withdrawals losing -$2.4 billion last week, however, bond products have averaged +$2.2 billion in new funds per week on the active fund side with fixed income ETFs raising +$1.5 billion per week thus far in '16. Finally, defensive investors shored up +$15 billion of cash in money market funds last week as summer risk aversion picked up."
Below is the sector and asset class weekly and year-to-date ETF breakdown:
All things considered, with equity markets tapping all-time highs, its worth asking:
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