Takeaway: Hedgeye Internet & Media analyst Hesham Shaaban shares three key conclusions from Twitter's worse-than-expected earnings report.
Takeaway: Aggregate S&P 500 sales and earnings growth for the second quarter are +0.6% and -4.2% respectively.
Remember the Old Wall consensus narrative that "earnings have bottomed"?
The key callouts:
- A total of 182 of 500 companies have reported aggregate S&P 500 year-over-year sales and earnings growth for the second quarter of +0.6% and -4.2% respectively;
- 4 of 10 S&P sectors reported negative year-over-year earnings so far;
- Energy sales and earnings growth, -22.6% and -78.7% respectively;
- Information Technology sales and earnings growth, -4.3% and -12.1% respectively;
- Financials sales and earnings growth, -0.5% and -4.5% respectively;
Takeaway: Bernie or Bust; Omni-Bust?; Trump's Trusty Thumbs
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.
“You must pay the price if you wish to secure the blessing.”
BERNIE OR BUST
Bernie Sanders is certainly feeling the love from his supporters, but will it ever translate to Hillary Clinton and at what length are Sanders holdouts willing to continue their temper tantrums when they put the party at risk of losing the election? The jeering contingent of backers has been so insistent about never supporting Clinton that Sanders himself can’t even reel them in – his revolution is running amok.
Sanders formally nominated Clinton last night and his best shot to win them over is to build upon his role as Clinton’s chief surrogate now and for the remainder of the campaign. Democratic power brokers fear that these last-ditch holdouts are marring the convention, hampering unity and their general election chances; but should they be playing to the audience inside the Wells Fargo Center - or the much more critical audience of millions tuning in?
Congress longs for the day it can pass all 12 appropriations bills separately – but that will not happen this year…or anytime in the near future. The Appropriations Committees in both the House and the Senate have moved all 12 spending bills out of Committee, allowing for negotiations to proceed over recess. If successful, we could be looking at long-term funding for the government or more likely, an omnibus package – but don’t get your hopes up.
Congress could instead adopt a continuing resolution (CR) as an interim measure, providing funding for areas of the government for which specific appropriations are not adopted before the new fiscal year begins, but that would keep funding at the same level as the previous fiscal year. An omnibus package is better for economy and markets given the certainty that the government will be funded for a longer period of time, we can only hope something gets done before September 30.
TRUMP’S TRUSTY THUMBS
By day, Donald Trump is a campaigning machine – raising cash and swooping into swing states like NC and PA – but by night, he’s a twitter maniac. His blood pressure must be boiling watching primetime tv this week, because on the first night of the DNC, he lobbed insult after insult at every major speaker, with just one exception - Michelle Obama.
She didn’t mention him by name either, but she did criticize “the Manhattan businessman” for his rampant Twitter use. We thought the frequency of Trump’s 140 character games were going to diminish, and expected at least some sort of pivot from last week’s convention, but we were wrong.
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Editor's Note: Below is a Hedgeye Guest Contributor research note written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy. This column does not necessarily reflect the opinion of Hedgeye.
Last weekend’s Wall Street Journal (WSJ, July 23-24) reported that large banks are “bolstering their reserves…to prepare for an uptick in loan losses” (p. B1). The WSJ went on to note that this was part of a strategy to increase loan volume and that some banks are lowering credit score requirements and making riskier loans to increase loan volume.
This report is not surprising. The Federal Open Market Committee’s (FOMC’s) QE program incentivized lending by forcing banks to hold a massive amount of excess reserves and paying them a low interest rate to hold them. While this consequence of QE appears to be unintended, there is no reason that it should have been.
The figure below shows that nearly all of the excess reserves created by the FOMC’s massive purchase of mortgage-backed securities, agency debt, and long-term Treasuries are held by large banks. I noted in a previous CSE Perspective, here, that banks have lent aggressively during the last 7.5 years. Specifically, they made loans equal to over 70% of the loans made during the tech and real-estate booms from January 1994 to November 2007. Moreover, they made these loans despite the fact that economic growth during this period was only about 40% of that of the previous period.
Given the FACT that each dollar reduction in excess reserves supports about $9.2 dollars in total checkable deposits, the massive lending resulted in more than a doubling of the M1 money measure—a larger increase than occurred during the previous 30-years! Despite the massive increase in lending and the nearly $44 billion increase in required reserves that it produced, banks—mostly large banks—still hold $2.3 trillion in excess reserves.
Why didn’t the lending during the 1994-2007 period produce an even larger increase in the M1 money supply? Answer: Because that lending was “financed” by banks issuing large-denomination certificates of deposit (CDs), not by excess reserves. Excess reserves averaged under $2 billion during that period. Indeed, the market for large CDs has essentially vanished because large banks do not need to borrow in this market to make loans.
Banks have been aggressive in making loans because during the past 7.5 years the Fed has paid an interest rate that is significantly below the risk-adjusted rate on bank loans. The Fed paid just a quarter of a percent, 0.25%, on excess reserves until December 17, 2015, when it increased the rate to 0.50%. Banks should have made all loans that had a risk-adjusted interest rate higher than the rate the Fed paid on excess reserves. I argued that this FACT incentivized banks to make riskier loans then they would have made in the absence of QE.
Furthermore, banks could not possibly make the $23 trillion in loans and investments required to reduce excess reserves to their pre-September 2008 level. The WSJ’s article confirms my conclusion. Scarier still is the WSJ’s report that large banks are reducing their lending standards still further in an attempt to increase their loan volume. While the riskier lending that QE produced appears to have been unintended, there is no reason that it should have been. I noted on several occasions that the effect of QE on the money supply would be very large because banks would have an incentive to make loans whenever the risk-adjusted rate on loans exceeded the rate the Fed paid on excess reserves, 2009, 2012.
That banks have made such loans and are poised to make even riskier loans is just another harmful consequence of QE. For other negative consequences of QE, see Monetary Policy Insanity. Particularly troubling is the FOMC’s unwillingness to acknowledge the negative effect of QE and its reluctance to reduce the size of its balance sheet to return excess reserves to pre-September 2008 levels.
The FOMC has failed to do so in spite of the Facts that:
- As I have shown elsewhere, Bernanke’s claim (Bernanke, 2010; Bernanke, 2013) — that the largest effect of QE on long-term rates occurred because QE reduced term premiums on long-term Treasuries — is theoretically flawed;
- To reduce long-term rates QE requires financial markets be segmented along the term structure, which is in opposition to a wide body of evidence that financial markets are efficient;
- QE was motivated by the misguided belief that the recession was intensifying and wouldn’t end soon; the recession ended just 3 months later, and;
- There is no compelling evidence that QE significantly reduced long-term rates, see Requiem for a complete explanation of these points
Takeaway: Last week, equity ETFs had their largest inflow of 2016 while domestic equity mutual funds had their largest outflow.
Editor's Note: Below is a complimentary research note originally published July 21, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email email@example.com.
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Investment Company Institute Mutual Fund Data and ETF Money Flow:
The ongoing shift from the expensive, less liquid, and taxably inefficient mutual fund structure was most evident as although U.S. stocks rose in the 5-day period ending July 13th, investors put through the biggest redemption of 2016 in U.S. active equity mutual funds redeeming-$7.3 billion. International equity mutual funds were also losers giving up -$769 million in the period. Meanwhile, the reallocation to passive products continued with equity ETFs winning their largest inflow of the year with +$15.7 billion in new money last week ($8.4 billion of which went into the broad market SPY).
In light of these trends, we maintain our short call on T. Rowe Price, which has the highest percentage of large-cap strategies of the public asset managers (the main category which is moving to passive). We estimate TROW continues to overearn in the current bull market in equities but with a stubbornly high cost structure, operating margins have peaked and are now compressing. We are also cautious near-term for the company's earning's print next Tuesday the 26th.
In fixed income, almost all categories experienced inflows last week. Total bond mutual fund flows were +$6.1 billion, and fixed income ETFs took in +$4.7 billion. Only global bond mutual funds lost a small -$8 million. Additionally, investors defensively shored up +$19 billion in money market funds.
In the most recent 5-day period ending July 13th, total equity mutual funds put up net outflows of -$8.1 billion, trailing the year-to-date weekly average outflow of -$3.0 billion and the 2015 average outflow of -$1.6 billion.
Fixed income mutual funds put up net inflows of +$6.1 billion, outpacing the year-to-date weekly average inflow of +$2.4 billion and the 2015 average outflow of -$475 million.
Equity ETFs had net subscriptions of +$15.7 billion, outpacing the year-to-date weekly average outflow of -$420 million and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$4.7 billion, outpacing the year-to-date weekly average inflow of +$1.9 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:
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.
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:
Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +$8.4 billion or +4% to the broad market SPY while withdrawing -$500 million or -6% from the utilities XLU.
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.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$3.2 billion spread for the week (+$7.6 billion of total equity inflow net of the +$10.8 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 -$3.4 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.)
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:
Takeaway: Wall Street analysts overwhelmingly expect the BOJ to ease monetary policy. But does whatever the BOJ decides to do even matter?
Japan's Nikkei soared today, up +1.7%, as the country's Prime Minister Shinzo Abe announced a shockingly large fiscal stimulus package. Adding to all the shenanigans, helicopter money speculation reignited as the Wall Street Journal cited "people familiar with the matter" who said Japan was considering issuing 50-year bonds.
"... Every morning I wake up to a new headline about the next “yuuuge” fiscal stimulus package in Japan," Hedgeye Senior Macro analyst Darius Dale wrote in today's Early Look. "In a few short weeks, market expectations for the size of the post-election supplementary budget have nearly tripled from an anticipated ¥10T ($95B) to ¥28T ($260B)."
Meanwhile, the BoJ heads into its July 28-29 meeting with peak expectations of incremental monetary easing (22 of 28 analysts according to the latest Nikkei survey expect easing).
Some of that easing is already being priced-into Japanese equity and currency markets. The month-over-month performance numbers are as follows:
- Nikkei: +8.9%
- Yen (USDJPY): +3.7%
As we noted in today's Chart of the Day, "if you thought Japan's two lost decades were bad, just wait until the next ten year of what we'll affectionately term 'plunging into the abyss' happens." Japan's core consumption cohort, the 35-54 year old popultion, will decline over the next ten years. To which we ask:
Does whatever the BOJ decides to do even matter?
Bottom Line: If the policy board sticks with traditional QQE expansion, we would expect a short-lived JPY sell-off and Nikkei pop, but if the #BeliefSystem (that policymakers can prevent economic reality from occuring) in Japan was still intact then 10Y JGB Yields wouldn’t have come in by -9bps with 5Y5Y Forward Breakeven Rates declining -17bps MoM, according to our Macro team.
The #BeliefSystem is breaking down.
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.48%
SHORT SIGNALS 78.35%