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CHART OF THE DAY | Housing: Return of the Jedi?

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. 

 

"... Notwithstanding the noise (Old Wall’s Media trumpeted New Home Sales like the Return of The Jedi, and barely mentioned #GrowthSlowing in Existing ones) I have a few contextual points to make about US Housing:

 

A) Existing Home Sales make up 90% of the US Housing market (vs. New Homes at 10%)

B) A -1.6% year-over-year decline is the slowest rate of change in 23 months"

 

 

CHART OF THE DAY | Housing: Return of the Jedi? - 08.25.16 chart


Chartist Heaven

“The chartists can at times be correct.”

-Benoit Mandelbrot

 

You want to see a guy or gal in this business who does “charts” (and no fundamental research) feel like they have some serious stroke? Give them an upward sloping moving average and smash the realized volatility of whatever it is they’re chasing.

 

Been there, sometimes do that. But, as anyone who has survived bear markets knows, a Phase Transition from bearish to bullish volatility has killed many a myopic monkey in this profession; particularly if a bullish TREND in volatility is sustained.

 

There’s no doubt that, from a Style Factor perspective, price momentum (single-factor charts) matters big time right now. But, as Mandelbrot taught me, “while it may work at times, it’s not a foundation of on which to build a global risk management system.”

 

Chartist Heaven - yellen concerned

 

Back to the Global Macro Grind

 

There’s still a week or so left in your summer. I challenge you to take a small amount of time to read Chapter 1 of The (Mis)Behavior of Markets (it’s titled “Risk, Ruin, and Reward”) and refute it as poppycock. I think it’s as brilliant as fractal patterns themselves.

 

“The financial industry has developed other tools. The second-oldest form of analysis, after fundamental, is “technical.” This is a craft of recognizing patterns, real or spurious – of studying reams of price, volume, and indicator charts in search of clues to buy or sell. The language of the chartists is rich: head and shoulders, flags and pennants, triangles (symmetrical, ascending, or descending. The discipline, in disfavor during the 1980s, expanded in the 1990s as thousands of neophytes took to the internet to trade stocks.” -The (Mis)Behavior of Markets (pg 8)

 

Now, instead of the 90’s internet, they call it the cloud. And we have many more neophytes turned into perceived neuroscientists of the Perma Bull than I have ever seen in my career. Markets that don’t go down (and stay down) are Chartist Heaven!

 

So let’s not call them chartists (I think it offends them) – let’s call some of them “systematic strategies” ok?

 

Yes. That’s definitely ok because that’s the buzz in all of Alternative Asset Management right now. ‘Yeah, we love you Captain Stock Picker, but we have these guys who have a “rules-based” strategy which doesn’t really allow them to think about fundamentals.’

 

I couldn’t make this up if I tried.

 

And no, I’m not suggesting that purely quantitative strategies (as long as they are dynamic, multi-factor, and multi-duration) aren’t awesome. Especially in raging bull markets, they can crush it. I’m not saying that picking stocks, bonds, or your nose is dead either.

 

I’m just letting you know, in case you didn’t know.

 

As anyone who has worked in this business, across cycles (this is my 3rd) knows, great strategies (“systematic” or not) come and they go. The best ones get copied, levered… and then de-levered. They make geniuses of fools and fools of geniuses.

 

Back to the path of “charts” vs. fundamental research – here’s a topic for you to noodle over this morning - US Housing:

 

  1. “New Home Sales Beat” (big, on Tuesday); housing stocks (ITB) rip, to lower-highs
  2. Then (yesterday), Existing Home Sales (JUL) slowed -3.2% sequentially to DOWN -1.6% year-over-year
  3. Housing Stocks (ITB) continued lower, after failing to break-out to new highs

 

Notwithstanding the noise (Old Wall’s Media trumpeted New Home Sales like the Return of The Jedi, and barely mentioned #GrowthSlowing in Existing ones) I have a few contextual points to make about US Housing:

 

A) Existing Home Sales make up 90% of the US Housing market (vs. New Homes at 10%)

B) A -1.6% year-over-year decline is the slowest rate of change in 23 months

 

So, Ex-Oil, Ex-Earnings, Ex-GDP of 1%, and Ex-90% of Housing having negative year-over-year fundamentals… what Janet really needs to do tomorrow is pivot back to double-hawkish, like she did in May, right?

 

“But Keith, the Housing chart (ITB) looks good, bro.”

 

Yep, for now, so do “charts” of Exxon (XOM) and Chevron (CVX). But all of big cap Energy and Housing stocks in the USA are making a series of lower-highs. And that, in rate of change terms, the one of the best leading indicators of a chart not looking “good.”

 

By my quantitative signal’s scorecard (baseline 3-factor model = PRICE, VOLUME, and VOLATILITY):

 

  1. US Housing (ITB) is within 0.9% of going bearish TREND
  2. Exxon (XOM) just broke my TREND signal line
  3. Chevron (CVX) is 1.3% above my TREND signal line

 

Well, what the heck is the difference between XOM and CVX if the “charts” look barely different and you don’t do any research on Oil, Saudi Policy, their balance sheets, cash flow statements, and/or capacity to borrow to pay their dividend?

 

Sorry to go all fundamental on you at the end here. But I kind of have to. Fundamentalists can at times be correct too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.49-1.59%

SPX 2168-2190

XOP 34.65-37.90

VIX 11.15-14.33
EUR/USD 1.10--1.13
Oil (WTI) 43.09-49.07

Gold 1
Copper 2.07-2.17

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Chartist Heaven - 08.25.16 chart


The Macro Show with Keith McCullough Replay | August 25, 2016

CLICK HERE to access the associated slides. 

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


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ICI Fund Flow Survey | Defense Wins Championships

Takeaway: Investors have been net defensive for 28 weeks, including the past 5 days, in which bond flows outpaced equity by $11.1 billion.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Investors have been net defensive for 28 consecutive weeks, including the most recent 5 day period, in which total fixed income mutual fund and ETF flows outpaced equity by $11.1 billion. In the 5 days ending August 17th, equity mutual funds lost -$7.6 billion to redemptions, offset by equity ETF subscriptions of +$4.7 billion, bringing total stock product losses last week to -$2.9 billion. Meanwhile, bond mutual funds collected +$6.3 billion on top of additional bond ETF flows of +$2.0 billion, bringing total bond product flows to +$8.2 billion. Our net asset allocation chart at the bottom of this piece shows the running defensiveness by investors over the past 7 months.

 

ICI Fund Flow Survey | Defense Wins Championships - ICI1

 

In the most recent 5-day period ending August 17th, total equity mutual funds put up net outflows of -$7.6 billion, trailing the year-to-date weekly average outflow of -$4.0 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$6.3 billion, outpacing the year-to-date weekly average inflow of +$3.0 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$4.7 billion, outpacing the year-to-date weekly average inflow of +$236 million and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.9 billion, outpacing the year-to-date weekly average inflow of +$1.8 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 | Defense Wins Championships - ICI2

 

ICI Fund Flow Survey | Defense Wins Championships - ICI3

 

ICI Fund Flow Survey | Defense Wins Championships - ICI4

 

ICI Fund Flow Survey | Defense Wins Championships - ICI5

 

ICI Fund Flow Survey | Defense Wins Championships - 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 | Defense Wins Championships - ICI12

 

ICI Fund Flow Survey | Defense Wins Championships - ICI13

 

ICI Fund Flow Survey | Defense Wins Championships - ICI14

 

ICI Fund Flow Survey | Defense Wins Championships - ICI15

 

ICI Fund Flow Survey | Defense Wins Championships - 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 | Defense Wins Championships - ICI7

 

ICI Fund Flow Survey | Defense Wins Championships - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In Sector SPDR callouts, investors redeemed -$645 million or -2% from the gold GLD ETF.

 

ICI Fund Flow Survey | Defense Wins Championships - 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 | Defense Wins Championships - ICI17

 

ICI Fund Flow Survey | Defense Wins Championships - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$11.1 billion spread for the week (-$2.9 billion of total equity outflow net of the +$8.2 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 -$4.9 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 | Defense Wins Championships - ICI10 1

 


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 | Defense Wins Championships - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 

Patrick Staudt, CFA







JT TAYLOR: Capital Brief

JT TAYLOR: Capital Brief - JT   Potomac banner 2

 

"In the time of darkest defeat, victory may be nearest."

-  William McKinley

 

FOUNDATION DAMAGE: The never-ending saga continues with a new batch of emails showing Hillary Clinton and her lieutenants consistently coordinated with State Department officials and Clinton Foundation aides to reward major donors with access to the powers-that-be at State. The situation poses an extraordinary risk for ethics challenges if elected president, though Clinton continues to brush off the release as politically motivated. We don’t expect the mess to go away without answers, and the longer she lets it go, the more damage is done. Democrats may think they have November in the bag, but they shouldn’t underestimate the fickleness of the American voter. Donald Trump and Republicans, who grab much of the media’s attention, are happy to let this be the gift that keeps on giving.  

 

IMMIGRATION TRANSFORMATION: Trump’s bid for presidency was built on a promise to build a "great, great wall" along the Mexican border, have them pay for it, and deport 11 million undocumented immigrants from U.S. soil - all while portraying Mexican immigrants, as criminals and rapists. Trump is now scheduled to hold his second meeting with his new Hispanic advisory board, leaving little doubt that he will shift his longstanding views, and his hard-nosed supporters are embracing it so far, calling it a more feasible approach to deportation without undermining his mainstay position. His softening tone may be an appeal to minorities and moderates, but the message hasn’t resonated just yet. It’s still hard to see them throwing their weight behind Trump after the past 14 months of heated rhetoric.

 

SHORING UP THE BASE?: Trump may be massaging his message, but he hasn’t adjusted his campaign strategy just yet - he’s spending valuable time in states that will not provide him the votes he needs on Election Day. After canceling campaign stops in CO, NV, and OR, Trump stumped in TX and MS – two reliably red states that support him and the past nine Republican nominees. There’s money to be made in these states, but at a time when he needs to extend his reach to everyone, he’s focusing on shoring up the base. Trump craves high energy rallies and feeds off the enthusiasm, but the aforementioned stops will not put him over the top in the Electoral College and propel him into the White House. Once Labor Day hits, expect to see his camp refocus on battleground states like OH, PA, NC, and FL…but it may prove to be too late.

 

CLINTON COUNTS DOWN: Clinton’s controversy is deep-seated and misguided, don’t get us wrong, but she’s making all the right moves with 74 days left until Election Day.  We don’t see Clinton sitting down to declare regrets about her private server or quid-pro-quo relationships between her foundation donors and the State Department any time soon, as the Clinton camp thinks they can finish out the game without any severe reaction to the new emails - but that doesn’t mean there won’t be a response of some sort. Inside her camp, the team is unwilling to go on offense without evidence that the new emails and foundation allegations are hurting her, and rightfully so, because without new information and dramatic improvements in Trump’s numbers, Clinton’s camp thinks it's better off avoiding it all together. There’s also a possibility that Republicans may overplay their hand while hammering Clinton on an issue that most voters are sick of hearing about.

 

KEEPING UP WITH THE SAUDS: The OPEC rumor mill is in hyper-drive with reports that Iran is "sending positive signals" on a production freeze, and may actually attend the informal OPEC meeting as its held on the sidelines of the International Energy Forum and attended by potential crude customers. This freeze sequel is expected to end the same as April's - no agreement and no freeze. It looks to be public relations so Iran doesn't look like the bad guy after the Saudi's made comments on cooperating with other OPEC members "if necessary." In our view, it’s still too soon for any change in OPEC production policy. Saudi Arabia is more nervous about oil at $50 than $40 because they know it keeps U.S. shale alive, and they only care about declining U.S. production and need to see more of it. Iran is just eight months into ramping up exports and regaining market share, so they simply can't agree to any limits on production now, while arguments that Iranian production is plateauing will fall on deaf ears in Tehran. Add in another rumor that Iran plotted to assassinate the Saudi Ambassador to Iraq, and we don't have the makings of a productive meeting in September.

 

BROADBAND PROVIDERS SEEK NET NEUTRALITY REHEARING: Our Telecommunications-Media Policy Analyst Paul Glenchur still expects an appellate court to deny rehearing of its anti-cable/telco net neutrality ruling, putting the focus on the Supreme Court. You can read his views on the topic here.

 

INVITE | STAYING AHEAD OF THE CURVE IN DIAGNOSTICS POLICY: Please join our Healthcare Policy Analyst Emily Evans for a webinar on lab reimbursement and policy changes on September 1st, 2016 at 10:30 AM ET. You can find more information here.



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