Takeaway: Bond fund outflows continue with a substantial $9 billion out of fixed income against a marginal, albeit positive inflow into stocks
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Equity mutual fund inflow slowed to a trickle or just $300 million for the week ending August 28th, down from the $1.3 billion inflow the week prior but remaining positive
Fixed income mutual fund outflows remained substantial with a $9.1 billion withdrawal by investors, a slight decline from the $11.1 billion draw down last week but remaining at out-sized levels
Within ETFs, both equity and fixed income exchange traded fund money flow was negative for the week ending August 28th with just over $1.0 billion coming out of passive equity products and over $900 million coming out of passive bond products although both outflows were improvements from the week prior
For the week ending August 28th, the Investment Company Institute reported softening equity mutual fund flow trends, albeit positive flow trends, and continuing out sized withdrawals in fixed income mutual funds. Total equity fund flow totaled just a $300 million inflow which broke out to a $1.3 billion inflow into international equity products and a $1.0 billion outflow in domestic stock funds. These trends were a softening from the prior week's total equity fund inflow of $1.3 billion. Despite this deceleration in stock fund flows, the year-to-date weekly average for 2013 now sits at a $2.6 billion inflow for total equity mutual funds, a substantial improvement from the $3.0 billion outflow averaged per week in 2012.
On the fixed income side, outflow trends continued at exaggerated levels for the week ending August 28th with the aggregate of taxable and tax-free bond funds combining to lose $9.1 billion in fund flow, the fourth biggest weekly draw down in 2013 in what now has become the biggest bond withdrawal in the history of the ICI data. The taxable bond category specifically shed $6.2 billion in the most recent period versus the $7.3 billion loss last week. Tax-free or municipal bonds continued their sharp outflow trends losing another $2.9 billion in the week ending August 28th, continuing its trend from last week which experienced a $3.7 billion outflow. Franklin Resources (BEN) continues to have the most exposure in our coverage group to declining Municipal bond trends with over 10% of its assets-under-management in the tax-free category. The 2013 weekly average for fixed income fund flow has now drastically declined from 2012, now averaging a $136 million weekly outflow this year, a far cry from the $5.8 billion weekly inflow averaged last year.
Hybrid funds, or products that combine both fixed income and equity allocation, continue to be the most stable category bringing in another $1.1 billion in the most recent weekly period. The year-to-date weekly average inflow for hybrid products is now $1.6 billion for '13, almost a 100% increase from 2012's $911 million weekly average.
Passive Products - Slight Outflows Across the Board:
Both categories of exchange traded funds experienced redemptions by investors for the week ending August 28th. Equity ETFs lost $1.0 billion, rebounding from the biggest equity ETF outflow in 5 years of over $12.0 billion last week and only the 10th negative week in the 35 weeks of 2013. Despite this week's outflow, 2013 weekly average equity ETF trends are averaging a $3.0 billion weekly inflow, an improvement from last year's $2.2 billion weekly inflow average.
Bond ETFs also had soft trends in the most recent weekly period losing over $900 million in fund flow. This outflow was a slight improvement from last week's $2.3 billion withdrawal and has now forced the 2013 weekly average to just a $284 million inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow from 2012.
HEDGEYE Asset Management Thought of the Week - The Shift Change is On:
For investors that are still defiant that an asset allocation rotation has not started need to look no further than the weekly money flow trends since the start of May. While equity mutual fund and ETF inflow on a weekly basis has slowed from the usual seasonally fast start to the year, stock fund flow has remained solidly positive through the most recent week to end the summer. Conversely, fixed income mutual fund and ETF trends on a weekly basis have taken a sharp turn for the worse and are now in massive weekly redemption through the most recent week.
Up until the week ending May 22nd this year, fixed income fund and ETF products were averaging over a $5.9 billion weekly inflow. Since the end of May however, fixed income trends have cascaded down sharply and since the 3rd week of May have averaged a massive $8.5 billion outflow. While the single week of June 26th represented the biggest weekly bond outflow in history of over $31 billion is skewing the weekly average on the margin, fixed income trends have been persistently negative on a weekly basis since the end of May. On the flip side, equity trends have been consistently positive albeit slowing into the summer period. For equity mutual funds and stock ETFs, weekly flow trends have been averaging a $3.2 billion inflow since May 22nd after averaging a $7.3 billion inflow weekly prior to the Fed's "tapering" comments before the week ending May 22nd this year. While all fixed income dollars drawn down are not being replanted one-for-one back into the equity markets, we do estimate that over time the reallocation from fixed income and into cash and money markets will continue to fuel a slow turn from the generational 30 year run in bonds into higher investor asset allocation into stocks.
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
“Wealth actually springs from the expansion of information and learning.”
And here we were all thinking that innovation, growth, and wealth depended on what the Fed says next. Silly boys and girls of Keynesian academic dogmas we are sometimes…
In Chapter 5 of Knowledge & Power (pg 38), George Gilder nails something my Canadian craw has had a hard time articulating to both my partisan Democrat and Republican friends:
“Believing that a weaker dollar is just the thing to spur a sluggish economy… they miss the consequent devaluation of all the assets of the country… abashed by Ivy League expertise, the great peril of establishment Republicans from the time of both Bushes… all cherish the illusion that leading Yale, Harvard, and Princeton economists possess vital wisdom about the economy. They generally don’t. Their preoccupation with static macroeconomic data blinds them to the actual life and dynamics of entrepreneurship.”
Back to the Global Macro Grind…
To learn (from new information channels) or not to learn, remains the question. Those of us building businesses on the back of our own risk capital actually have no other choice. It’s all about learning.
How quickly can we learn from our mistakes, biases, and dogmas? How flexible are we in implementing the constant change that we need in order to be successful? How readily do we dismiss perceived wisdoms for our visions of that change?
Sounds like the process of economic maestros in the Republican and Democrat parties, no? How about the “economists” of the #OldWall who Bush and Obama lovers cite as having “blue chip estimates” on the economy, markets, and #EOW (end of the world) risks?
On January 1st, 2013 here were #OldWall’s year-end (2013) forecasts for the SP500 and US GDP:
Now, to be fair, most buy-siders who get it would call Parker a perma-bear and Lee a perma-bull, so to see their views diverge is no surprise. What was surprising to me was that the most bullish guy on #OldWall (Tom Lee) wasn’t in the area code of what we call Bullish Enough.
Fast forward to this past weekend’s Barron’s forecasts (don’t laugh), here are the “revised” #OldWall forecasts:
All these Keynesian “certainty” models do is anchor on the most recent SPX high and GDP report. Christie and Clinton better sign all these dudes up to advise them alongside Larry Summers (whose economic forecasting track record rivals Parker’s).
Stop it. I’m not trying to be mean. I’m an ex-athlete who is humbly trying to be one of your coaches. I’m just a little voice of annoyance in your ear so that you don’t get run over (I’ve never had a great coach who didn’t make me want to punch him every once in a while, fyi).
As a country (and a profession), after the mother of all global economics crises, what have we learned? Mr. Market helps us all learn in a hurry. Here are the main lessons of 2013:
And that makes sense because, as the score board shows, even the most bullish of perma bulls weren’t Bullish Enough on US GDP Growth at the beginning of the year. Bears have been fighting the #GrowthAccelerating data since December. The best growth data of the 2013 (JUL-AUG) has coincided with the highest 10yr bond yields. That’s not Mucker’s genius. That’s just called an economic cycle.
Now you might say that the sell-side is “too bullish” because:
But, if you are me, you’re saying who cares?
The consensus “forecast” by the sell-side only matters when it’s way outside of what your process says could happen. That’s already happened this year. Old News. The new news is that #OldWall’s latest forecast isn’t a forecast – it’s literally the last report:
At the same time:
And that’s all I have to say about that.
Our immediate-term Risk Ranges are now (you can get all 12 Big Macro ranges in our new Daily Trading Range product):
UST 10yr Yield 2.74-2.94%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
After a long steep climb, the MPEL engine may be slowing down.
We're still positive on Macau so it’s difficult to be negative on MPEL. However, MPEL’s recent share losses in the Junket segment are a little disconcerting and could continue. Moreover, MPEL’s Mass share could be at risk as Sands Cotai Central begins its push into Premium Mass next year. So while not negative, it’s probably safe to say we've pushed MPEL to the bottom half of attractive Macau operators, behind LVS, MGM, and Galaxy.
As seen in the following chart, MPEL’s 3 month average Rolling Chip share has fallen almost 200bps from its May high. We do think it is possible that some of the drop could be conversion of Junket players to Direct VIP and Premium Mass. Indeed, MPEL’s Mass share has held up well and VIP Revenue share (which includes Direct Play) has dropped 160bps - less than its Junket volume decline.
However, our research indicates that competitive forces are probably playing a bigger role. From the next chart, it appears that Galaxy, SJM and Wynn have gained the most share since May. Galaxy recently moved 12 Junket tables from the Grand Waldo to the much more alluring Galaxy Macau. We’re pretty sure Galaxy was able to attract at least one new junket. Galaxy may also be offering a more attractive junket credit package. We know SJM added a few new junkets this year as did Wynn.
In the future, LVS could be the market share gainer MPEL should fear, not only in Premium Mass but also in VIP. With conservative COO David Sisk out of the picture, look for more aggression on the Junket side in terms of credit and commission advancement packages. We already know that Sands Cotai Central will be opening new Premium Mass facilities which should grow the market but also take share from the Cotai Premium Mass leader, MPEL’s City of Dreams.
If Macau keeps growing in the mid to high teens rate, all the Macau stocks should do well. Our view is that after a long and strong run, a few fundamental risks could derail MPEL’s momentum. Other Macau stocks such as LVS look more protected, and thus attractive, at this point.
TODAY’S S&P 500 SET-UP – September 5, 2013
As we look at today's setup for the S&P 500, the range is 25 points or 0.61% downside to 1643 and 0.90% upside to 1668.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.