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The War On Active Management - Part 2

Takeaway: Lipper is reporting another -$4B in outflows from U.S. equity mutual funds while passive equity funds took in another +$4.3B WoW.

The war on active management continues with U.S. equity beta trouncing most strategies YTD.

 

This morning, Lipper is reporting another -$4B in outflows from U.S. equity mutual funds while passive equity funds took in another +$4.3B WoW. We’ve written extensively about the upside capitulation we’re seeing in the SPX futures and options data and via the reversal in style factor performance – which itself reeks of a massive career-risk driven chase.

 

With high beta stocks up +19% and Utes down -30bps since the June 27th Brexit v-bottom, we’re again starting to see opportunity on the long side of lower-for-longer strategies for those investors who’ve missed the big move.

 

Take a look at the style factor breakdown below:

 

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***Editor's Note: The snippet above is from a note written by our Macro team and sent to subscribers this morning. Click here to learn more.


CHART OF THE DAY: Doh! A Closer Look At Faulty Fed Forecasts

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more. 

 

"... In the Chart of the Day, we show the course of Federal Reserve GDP projections over the course of the last years. As the chart shows, they have been down and to the right. For those newish to reading charts, that means that growth has been gradually slowing and so the Fed's projections have been coming in."

 

CHART OF THE DAY: Doh! A Closer Look At Faulty Fed Forecasts - 2 dj


Generals Eat Last

"If your actions inspire others to dream more, learn more, do more and become more, you are a leader."

-John Quincy Adams

 

The team at Hedgeye has been waxing a bit philosophically the last few weeks. That happens when we get away from the office, and get a chance to read and reflect. Today the topic is leadership and a book we've been recently reading called, "Leaders Eat Last: Why Some Teams Pull Together And Others Don't".

 

In Rio, the Olympic Games have so far provided some classic case studies of individual leadership. The Games also provide examples of just the opposite. Front and center in the "lacking leadership" department is the group of American swimmers who feigned a robbery to cover up a drunken fight at a gas station.

 

But this all begs the question: how should leaders act and conduct themselves?

 

The premise of the book is that for teams to succeed, leaders need to foster an environment where people matter first and foremost. So much so that hiring, according to the book, should be akin to adopting a child into your family.

 

One chapter of the book is actually devoted to the idea of having a policy in which your employees are given lifetime employment. The premise here is that hiring becomes incredibly rare and every employee is highly vetted. On the flip side, they can't be fired (with the exception being some criminal or unethical act), so if they aren't performing they must be coached, moved around or trained to improve.

 

As former Marine Corp Lieutenant General George Flynn wrote in the introduction (and no doubt the two retired Generals on our team would agree):

 

"When leaders inspire those they lead, people dream of a better future, invest time and efort in learning more, do more for their organizations and along the way become leaders themselves. A leader who takes care of their people and stays focused on the well-being of the organization can never fail. My hope is that afer reading this book readers will be inspired to always eat last."

 

Indeed.

 

Back to the Global Macro Grind

 

Generals Eat Last - trump 45

 

In the current Presidential race in the U.S., leadership of sorts is on display. In what JT Taylor, the Managing Director from our Washington office, is calling Groundhog Day, nominee Trump has brought in a new set of advisors and is executing another pivot. Interestingly, the new CEO of Trump's campaign is Steven Bannon of Breitbart news fame and as JT writes:

 

"Known as a devil-may-care conservative, Bannon's populist and nationalist sympathies reflect his longstanding disgust with both major parties, which perfectly outlines his overall objective - disrupt the narrative. Bannon has been floating around the campaign for a while now, and is expected to be an expansion of Trump's mind and values."

 

So, in essence the pivot is to double down on "Trump". Bannon certainly has his work cut out for him as with less than 90 days left in this race, Trump is trailing in poll aggregates by about 6 points, which, depending on who you ask, gives him about 20% chance of winning. The larger question that looms is whether the Republicans can maintain control of the Senate ... More on that and its implications in coming weeks.

 

Staying with the topic of leadership, New York Fed head William Dudley came out yesterday reaffirming his view that growth will be stronger in the second half. As a result, he and presumably by extension the FOMC, believe we are getting closer to raising rates. Talk about Groundhog Day! The Fed has nothing on Trump.

 

In the Chart of the Day, we show the course of Federal Reserve GDP projections over the course of the last years. As the chart shows, they have been down and to the right. For those newish to reading charts, that means that growth has been gradually slowing and so the Fed's projections have been coming in.

 

The market, of course, continues to largely track growth. As an example, the U.S. 10-year Treasury yield is trading at 1.55% down from 2.27% at the start of the year. But even the venerable Alan Greenspan joined in the chorus by suggesting the Fed should raise rates in recent days. Perhaps we will see the interest "river card" on August 26th when FOMC Chair Yellen speaks in Jackson Hole.

 

Interestingly, this chatter of an imminent rate hiking is not dissimilar from the chatter surrounding the Fed about a year ago. Unfortunately, not only did a hike not appear, but rates have declined dramatically since then. Maybe, as they say though, this time will be different.

 

No levels today. 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Generals Eat Last - 2 dj


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The war on active management continues...

Client Talking Points

Flows

The war on active management continues with U.S. equity beta trouncing most strategies YTD. This morning, Lipper is reporting another -$4B in outflows from U.S. equity mutual funds while passive equity funds took in another +$4.3B WoW. We’ve written extensively about the upside capitulation we’re seeing in the SPX futures and options data and via the reversal in style factor performance – which itself reeks of a massive career-risk driven chase. With high beta stocks up +19% and Utes down -30bps since the June 27th Brexit v-bottom, we’re again starting to see opportunity on the long side of lower-for-longer strategies for those investors who’ve missed the big move.

Spain

The tangled mess that is Spanish politics continues to evolve. The latest… Acting PM Rajoy has called a confidence vote for August 31st. While he may get the support of centrist party Ciudadanos, it appears he’d need the Socialist Party (PSOE) to abstain from the vote to win – and the Socialists say they will not abstain!  Our call for #EuropeImploding remains intact.

Russia

German Chancellor Angela Merkel said there is no reason to lift EU sanctions against Russia as Moscow has not fulfilled all of its commitments under the Minsk peace plan. Expect political risk to remain heightened as the East vs West faceoff remains!

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
8/18/16 54% 3% 3% 10% 18% 12%
8/19/16 54% 3% 3% 10% 18% 12%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
8/18/16 54% 9% 9% 30% 55% 36%
8/19/16 54% 9% 9% 30% 55% 36%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
GLD

See update on TLT below.

TLT

Eurozone GDP, reported Friday, signaled more of the same, stagnation. With that being said there were small but marginal Euro tailwinds against a U.S. retail sales report and PPI release that was likely dovish on the margin (USD -~20bps on Friday and -~60bps on the week). 

 

In line with our #EuropeSlowing theme, Q2 preliminary GDP slowed across the Eurozone to +0.3% vs. +0.6% in the prior quarter and +1.6% Y/Y for Q2 which was flat on a rate of change basis from Q1.

Looking at specific country results:

  • German (0.4% vs 0.7% sequentially) GDP accelerated to +1.8% Y/Y from +1.6% which was probably a minor Euro FX tailwind
  • Italian GDP came in at +0.7% Y/Y which was a deceleration from +1.0% in Q1
  • Greece GDP accelerated to contraction again, printing a measly -0.1% Y/Y from -1.3% in Q1

The Southern Eurozone states continue to implode.

UUP

Recall that a strong retail sales report for June, driven by a positive trend in goods consumption, was a large contributor to our GDP revision for Q2. The headline number, for June, was up +0.6% sequentially with the sequential acceleration in the control group accelerating +7.2% (annualized).

 

Friday’s retail sales report was a different story, and probably a dovish data point for the USD on the margin :

  • The control group printed flat sequentially, +0.0%
  • Retail sales ex. auto and gas printed -0.3% sequentially

Next to retail sales, July headline producer prices decelerated -0.4% vs. +0.5% in June sequentially and -0.2% Y/Y vs. +0.3% Y/Y in June. PPI ex. food and energy came in at 0.0% sequentially vs. +0.4% in June and +0.7% Y/Y from +1.3% in June. #Deflation  

Three for the Road

TWEET OF THE DAY

Cartoon of the Day: All Aboard? app.hedgeye.com/insights/53201… cc @KeithMcCullough $SPY $QQQ $DJIA #Stocks pic.twitter.com/SvAvk8Ggi7

@Hedgeye

QUOTE OF THE DAY

“A man may die, nations may rise and fall, but an idea lives on. Ideas have endurance without death.”

-John F. Kennedy

STAT OF THE DAY

Tom Brady has 428 touhcdowns in the NFL heading into this season.


The Macro Show with Retail Analyst Alec Richards Replay | August 19, 2016

CLICK HERE to access the associated slides.

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


JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2

 

“Accomplishment will prove to be a journey, not a destination.”

                               - Dwight D. Eisenhower

 

GROUNDHOG DAY: We forewarned that you’d be hearing about the Donald Trump pivot and now he’s taken the first step by issuing his regrets for not “choosing the right words,” but we don’t buy it just yet - he’s had the same attitude for quite some time now and he’s proved to be anything but status quo. The hiring of his new campaign chief will only enhance that, further confirming he intends to embrace the combative style of campaigning he believes won him the Republican nomination – we expect an onslaught of smashmouth campaign ads and raucous rallies to follow. On the other hand, Trump did topple an impressive roster of candidates during his primary season by embracing…well, himself. You could find the five best campaign managers in the history of presidential campaigns and give them each a turn behind the wheel of the Trump campaign and he’d still find a way to steer the wagon. Fasten your seatbelts people.

 

MAIL CALL: Inboxes on Capitol Hill are full of unread Clinton emails having received the Clinton-FBI interview notes. The Republican caucus is now sifting through pages of detailed summaries, inspecting every nook and cranny for a smoking gun. You could see this coming from a mile away - it’s an election year and Republicans are slipping and have little to show on the accomplishment front for the past seven months. No new findings are expected, but the House Judiciary Committee plans to press the FBI in next month on allegations that Clinton committed perjury. As we’ve seen in the past, Republicans do have a tendency to overextend, and while it truly does deserve a vetting, let’s hope it doesn’t supplant the duties of Congress (pass a budget).

 

SCORCHED EARTH POLICY?: Freshly-minted Campaign Chair Steve Bannon’s mission is almost perfectly aligned with Trump’s – he’s a rabid fighter, enraged by Washington and Wall Street insiders, the Republican establishment and the Clintons. Known as a devil-may-care conservative, Bannon’s populist and nationalist sympathies reflect his longstanding disgust with both major political parties, which perfectly outlines his overall objective - disrupt the narrative. Bannon has been floating around the campaign for a while now, and is expected to be an expansion of Trump’s mind and values. With the Republican party also in his crosshairs, the Trump campaign may widen the gap between themselves and the party, and run their campaign however they may choose.

 

FISH OR CUT BAIT: Usually a campaign shakeup this late in the game shows a struggling candidate righting the ship, but not here - more Trump is expected, and the move is irking Republicans. A letter, signed by more than 120 Republicans, warned the RNC that Trump is a threat to House and Senate seats, and the RNC should refocus resources to down-ballot races instead. The RNC is standing by Trump…for now, and won't make a decision until the fall. Not wasting any time, Republican PACs are investing heavily in down ticket races, while ignoring the presidential campaign. With the final leg of the election kicking off after Labor Day weekend, the RNC will need to make a final decision – keep him or toss him back in the water. Either way, the party is likely to feel the repercussions for cycles to come.

 

JOHNSON’S DILEMMA: Libertarian candidate Gary Johnson may be watching the debates from home next month as the rules commission released the five polls they will use to decide the participants for the three presidential debates. Third party candidates, like Johnson and Jill Stein, should be content with the choices as they’ve been included in all recent pollings, but the inclusion of all third parties could hurt Johnson, even as he climbs in the polls...When Stein is left out of the polls, Johnson isn’t far off the 15% bar - he hits 12%. But in the most recent polls Johnson comes in between 8% and 10%, while Stein boasts 5%. Johnson performs worse with Stein in the mix, and in the hunt for 15%, every point counts.

 

FCC TARGETS RATE CUTS FOR ENTERPRISE DATA LINES: Our Telecommunications-Media Policy Analyst Paul Glenchur shared his insight on the upcoming FCC rules on special access and how they could boost CLECs and wireless carriers while dampening cable enterprise revenue growth. You can read his piece here.

 


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