ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling

Takeaway: Equity funds posted their 3rd consecutive robust week with bond funds outflowing again - we also highlight our favorite idea TROW

Investment Company Institute Mutual Fund Data and ETF Money Flow:


Total equity mutual fund flow for the week ending November 6th was a robust $9.0 billion, the fourth best week in all of 2013. Domestic equity mutual fund flow was $5.4 billion, an acceleration from the week prior with world equity funds collecting $3.6 billion in new investor capital. Total equity mutual fund trends in 2013 now tally a $3.0 billion weekly average inflow, a complete reversal from 2012's $3.0 billion weekly outflow 


Fixed income mutual funds continued persistent outflows during the most recent 5 day period with another $4.3 billion withdrawn from bond funds. This week's draw down worsened sequentially from the $4.1 billion outflow the week prior which has now forced the 2013 weekly average for all fixed income funds to an $885 million outflow which compares to the strong weekly inflow of $5.8 billion throughout 2012


ETFs experienced declining weekly subscriptions in the most recent 5 day period, with both equity and fixed income ETFs seeing declining flows week-to-week. Passive equity products lost $4.9 billion for the 5 day period ending November 6th, a sequential weekly reversal from an inflow the week prior, with bond ETFs experiencing a $74 million inflow, also a sharp deceleration from the week before. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results


ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 1



For the week ending November 6th, the Investment Company Institute reported the 4th best week in 2013 for equity inflows with over $9.0 billion flowing into total equity mutual funds. The breakout between domestic and world stock funds separated to a $5.4 billion inflow into domestic stock funds and a $3.6 billion inflow into international or world stock funds. Both results for the most recent 5 day period within stock funds were above the 2013 weekly averages, with the domestic stock fund 2013 weekly mean at just a $552 million inflow and world stock funds having averaged a $2.5 billion weekly inflow during 2013. The aggregate inflow for all stock funds this year now sits at a $3.0 billion inflow, an average which has been getting progressively bigger each week and a complete reversal from the $3.0 billion outflow averaged per week in 2012.


On the fixed income side, bond funds continued their weak trends for the 5 day period ended November 6th with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $4.3 billion outflow, a sequential deterioration from the $4.1 billion lost in the 5 day period prior. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $3.5 billion, which joined the $833 million outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 18 of the past 23 weeks and municipal bonds having had 23 consecutive weeks of outflow. While the sharp outflows that marked most of the summer and the start of the third quarter have moderated, the appetite for bonds has hardly rebounded. The 2013 weekly average for fixed income fund flows is now a $885 million weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.


Hybrid mutual funds, products which combine both equity and fixed income allocations, continue to be the most stable category within the ICI survey with another $1.3 billion inflow in the most recent 5 day period. Hybrid funds have had inflow in 19 of the past 21 weeks with the 2013 weekly average inflow now at $1.6 billion, a strong advance versus the 2012 weekly average inflow of $911 million.



ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI revised chart 2 final

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 2 revised

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 4

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 5

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 6



Passive Products:



Exchange traded funds produced weak trends within the same 5 day period with equity ETFs posting a $4.9 billion outflow, a sequential decline from the strong $8.7 billion subscription the week prior. The 2013 weekly average for stock ETFs is now a $3.2 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.


Bond ETFs managed an slight inflow for the 5 day period ending November 6th with a $74 million subscription, also a sequential decline from the week prior which netted a $551 million inflow for passive bond products. Taking in consideration this most recent data, 2013 averages for bond ETFs are flagging with just a $303 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.



ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 7 revised

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 8 revised



Hedgeye Asset Management Thought of the Week - TROW is Historically Cheap:


Our favorite asset management stock continues to be T Rowe Price which has one of the highest exposures to equity products (mutual funds and separately managed accounts) in the investment management industry. TROW drives 83% of its revenues from equity products and directly benefits from the emerging reversal in equity fund flows from redemptions last year in 2012, to subscriptions and inflows this year in 2013. T Rowe shares have always traded at an industry premium on a forward P/E basis because of its high cash balance ($1.6 billion in cash on its balance sheet), strong free cash flow generation ($1.2 billion of free cash flow generation for 2014), and no debt, however shares currently are the cheapest they have been relative to the rest of the asset management group in 3 years. Currently TROW shares fetch just a 12% premium to a group average forward P/E (a 3 year low) versus a 23% average premium since 2010. We estimate that the current institutional outflow that TROW is experiencing from a handful of sovereign Asian wealth funds has compressed the stock's valuation but being that this issue is not a systemic situation, we would expect TROW shares to unwind this discount and appreciate versus the rest of the industry.


ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 9



Jonathan Casteleyn, CFA, CMT







Joshua Steiner, CFA



A New Idea

“Where is the knowledge we have lost in information?”

-T.S. Eliot


That’s the opening quote from the latest book I cracked open on an airplane this week – The Idea Factory, by Jon Gertner. I did 3 cities (Kansas City, Denver, and Minneapolis) in 3 days and came up with a new idea for the next crisis – prayer.


Whether you like it or not; whether you have realized that the Fed completely missed its opportunity to taper or not; whether you agree that the US government is getting dumber with market and economic information or not – newsflash:  it doesn’t matter.


All that matters today is what the next un-elected-central-planner-in-Chief-of-your-hard-earned-currency thinks. While hope is not a risk management process, many still hope Janet Yellen won’t be as “dovish” as Bernanke. If she walks and quacks like a dove, she’s not a hawk. She will redefine a new species of accountability ducking doves.


Back to the Global Macro Grind


In textbook Fed front-running form, the US stock market got a leak intraday yesterday as to what Yellen was going to say and ripped to another new all-time high. Gold and Bonds went up too. Everyone was a winner!


But who is everyone?


I think we all know the answer to that question. And this, sadly, is not a new idea in the world either. Marxist/Socialist political regimes have plundered The People across centuries. The power of information is no longer in entrepreneurial ideas, it’s in having insider knowledge on the next central plan.


Since Obama didn’t get the asymmetric risks embedded in Obamacare, there’s less than a 1% chance he will be in the area code of comprehending the long-term TAIL risks associated with the Bernanke Bond Bubble. But don’t worry about that, for now. Buy the damn bubble (#BTDB), and pray you aren’t the one without a chair when the music stops.


I’m not kidding, as my Canadian sniffer caught a downwind leak of the Yellen’s pending plan, I:

  1. Bought Bonds (TLT)
  2. Bought Gold (GLD)
  3. Bought Utilities (XLU)

In other words, I bought everything that I was short for the better part of the last year on my other 2013 New Idea that the Fed was going to finally get out of our way (and taper).


Do you think I’m crazy? I do.


In fact, I spread a full 1/3 of the Hedgeye Asset Allocation across 4 asset classes at 8% each. Crazy Eights!

  1. Commodities 8%
  2. Fixed Income 8%
  3. International Equities 8%
  4. US Equities 8%

With a little dovish leaky-peaky from the boys who worked for and/or hang with Dudley’s Goldman boys at the New York Fed (I believe they are all old and young boys, but don’t quote me on that), why not roll the bones? Spreading our bets around a casino where everyone wins takes down our “VAR” too!


People who don’t make money in down markets love to talk about “Black Swans”, but they have yet to make it a known known to The American People that this eventual bond market crash isn’t a TAIL risk at all. Our risk management process considers it a rising probability in 2014-2015.


And what are all the poor souls who are long the PIMCO “total return” fund going to do when they realize that it was lathered up with the a sub-asset “class” within the Bernanke Bond Bubble that people won’t be able to get out of (MBS)?


Or was the plan always that the New York Fed was going to buy the Bond Bull Lobby time to get out? Was the plan to change the goal posts every time non-linear economies surprise these central planners’ forecasts? Evidently, it was.


So pull up a seat. Meet your maker -Janet Yellen - the Mother of All Doves. She’ll outline why, despite the USA running +2.84% GDP in Q313, that her unaccountable definition of the economy is “far from potential.”


She’ll make up some new rules. She’ll look real serious about it too. Because when her MBS (mortgage backed security) bond bubble pops, this is going to be very serious. That’s why my best New Idea is recommending prayer.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.66-2.82%


VIX 12.12-14.46
USD 80.43-81.39

Pound 1.59-1.61

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


A New Idea - Chart of the Day


A New Idea - Virtual Portfolio


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$KSS Misses Big, McGough Nails It

Kohl's (KSS) shares are deep in the red this morning after a bad earnings miss. Hedgeye Retail Sector Head Brian McGough nailed this call. Check out video below. Go to the 3:10 mark for his take on Kohl's. 


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The Casino Regulatory Authority of Singapore (CRA) has fined MBS S$337,500 and RWS S$190,000.  The authority said the fines are for breaches of social safeguard measures that it detected for the period of May 1, 2012 to December 31, 2012.


By law, the two companies need to keep certain groups of Singapore citizens and permanent residents from entering its casinos, including those without valid entry levies, those banned from entering the casinos by an exclusion order, and those under 21 years of age.



Paradise Entertainment, the supplier of gambling equipment in Macau, said it expects sales to grow at least 35% in 2014 as casino operators plan to buy more electronic table games to boost their profitability.  Casino companies are ordering more electronic equipment and replacing lower-yielding betting tables with new games that allow more players to bet simultaneously, Chairman and Managing Director Jay Chun said.  The new games would aid revenue next year when no new casino is scheduled to open, added Chun, who expects “strong replacement and new orders.”  Paradise expects sales for its slot machines to rise above 40% next year.


Paradise Entertainment's biggest clients include Sands China, SJM Holdings and MPEL.  Paradise Entertainment also manages the Kam Pek Paradise casino under the license of SJM.  Located next to Casino Lisboa, Kam Pek Paradise casino has 37 gaming tables, more than 900 live multi-game machines and over 300 slot machines.  It aims to operate two more casinos in the Chinese city, Chun said, without disclosing details.


The company currently accounts for 20% of the slot machine market in Macau and 60% of the electronic live table games market.



Macau government expects revenue of MOP115.5 billion (US$14.4 billion) from the special gaming tax in 2014.  The sum is 25% more than budgeted for 2013.  The government tends to make conservative predictions about the growth of the gaming industry.  Its revenue from the special gaming tax this year will probably be greater than the amount it expects to get next year.  The proposed budget for next year envisages total revenue of MOP153.6 billion, 14% more than budgeted for this year, and spending of MOP77.6 billion, 6% less.



Visitor arrivals in package tour surged by 26.0% YoY to 944,188 in September 2013.  Visitors in package tour mostly came from Mainland China (759,272), with 272,532 from Guangdong Province, followed by Taiwan (56,789); Hong Kong (35,650); and the Republic of Korea (35,610).


There were 98 hotels and guesthouses operating at the end of September 2013, providing 27,807 guest rooms, up by 6.7% YoY.  The average length of stay of guests held stable as September 2012, at 1.3 nights.

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