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ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam

Takeaway: Although equity inflow was stronger than fixed income inflow during the week, the positive rate of change is stronger in bonds

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent week, equity mutual funds had another solid inflow albeit just inline with the year-to-date averages with bonds funds showing improving subscriptions, well above the year-to-date mean:

 

Total equity mutual funds produced another strong week of inflow with $5.3 billion of net subscriptions, a slight acceleration from the $4.9 billion inflow the week prior. The $5.3 billion inflow had an international fund bias during the most recent 5 day period, with $3.4 billion flowing into international equity funds and $1.9 billion flowing into domestic stock funds. The 2014 running weekly average inflow for equity mutual funds is now $4.9 billion, an improvement from the $3.0 billion weekly average inflow for 2013. 

 

Fixed income mutual funds also had net inflows during the 5 day period ending March 5th with $3.7 billion flowing into all fixed income funds. The breakout of improving bond fund inflow amounted to $2.9 billion into taxable products and a $756 million inflow into tax-free or municipal products, the 8th consecutive week of inflow into munis after 33 consecutive weeks of outflow. The 2014 weekly average for fixed income mutual funds now stands at a $1.0 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).

 

ETFs had mixed trends during the week, with a strong week of subscriptions in stock ETFs with $8.8 billion in net inflow with bond ETFs experiencing a sharp $7.2 billion outflow, the biggest bond ETF withdrawal in our 18 month data set. The 2014 weekly averages are now a $978 million weekly outflow for equity ETFs and a $1.0 billion weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $17.7 billion spread for the week ($14.2 billion of total equity inflow versus the $3.5 billion outflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.4 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Continued positive equity mutual fund inflow currently supports our long recommendation on T Rowe Price (TROW) which benefits from this trend with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the nascent trends on the institutional side of the industry, which is seeing a shift in asset allocation into fixed income and alternatives as pensions de-risk away from equities  (see our Legg report here).

 

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.   

 

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 1

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 2

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 3

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 4

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 5

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 6

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 7

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

  

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 8

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 9

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $17.7 billion spread for the week ($14.2 billion of total equity inflow versus the $3.5 billion outflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.4 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 

 

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 11 

 

 

Continued positive equity mutual fund inflow currently supports our long recommendation on T Rowe Price (TROW) which benefits from this trend with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the nascent trends on the institutional side of the industry, which is seeing a shift in asset allocation into fixed income and alternatives as pensions de-risk away from equities  (see our Legg report here).

 

 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 


Not Good

Client Talking Points

USD

The world woke up this morning to new year-to-date lows for the U.S. Dollar. Monetarily or fiscally, it’s clear the U.S. has no policy to protect the purchasing power of its People. Down Dollar, Down Rates is a flat out policy to inflate asset prices, and its slowing real (inflation adjusted) growth. Not good.

GOLD

Well, Gold loves the Down Dollar, Down Rates -> Stagflation expectation. It’s up another +0.4% this morning to +14.1% year-to-date with the Dow down YTD and SP500 treading hard to stay up for the year. This is definitely not what growth investors want to see.

SECTORS

From an S&P Sector Style perspective, unless you are long Utilities (XLU), Healthcare (XLV) or Materials (XLB) - i.e., long slow-growth-inflation, and short the consumer stocks - this is not where you want the major index performance divergences tracking into Q1 end. Utilities being up +6.1% year-to-date is pretty much the same thing as being long Gold. What we’re looking at is the same playbook as Q1 of 2011.

Asset Allocation

CASH 34% US EQUITIES 6%
INTL EQUITIES 7% COMMODITIES 13%
FIXED INCOME 20% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
FXB

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

TREASURIES: 10yr 2.73% straight down since the jobs rpt as #InflationAccelerating slows US growth @KeithMcCullough

QUOTE OF THE DAY

"A stumbling block to the pessimist is a stepping-stone to the optimist." - Eleanor Roosevelt

STAT OF THE DAY

Cornerback Darrelle Revis and the New England Patriots have reached agreement on a one-year, $12 million deal, according to league sources. Revis still needs to pass his physical and sign his contract. Once he does, it will continue Revis' reign as the NFL's highest paid cornerback and gives the Patriots the player they needed to replace cornerback Aqib Talib, who unexpectedly bolted for the Denver Broncos late Tuesday night. (ESPN)


BYD/CZR: POKER STARS

Online gaming is off to a famously slow start but NJ was never going to be that material, by itself. We care about poker share.


 

More people probably know that the New Jersey online business is off to a slower start than do people in New Jersey who even know online gambling even exists.  Polls indicate very little awareness of online gambling in New Jersey. That puts the paltry $10m of February online gaming revenue in perspective.  Marketing will improve awareness and grow revenues but the impact to New Jersey leaders BYD and CZR will never be more than some additional pocket change.  The future is interstate poker.  That’s why we’re paying more attention to Poker market share than online $s.

 

According to the latest poll, only 3% of New Jersey residents who are gamblers in Atlantic City actually have gambled online.  State awareness is atrocious and that explains the chart below:

 

BYD/CZR: POKER STARS - ac111

 

So why do we care more about online Poker share?  Poker is probably the only form of gaming that will go national, either through interstate compacts or, finally, federal legislation.  At the end of the day, it’s all about player liquidity, and the first movers in the most populous state with online poker will have a huge competitive advantage.  New Jersey is a real state in terms of population vs Nevada and Delaware, the only other 2 states with legalized online gambling.  As can be seen in the following chart, Borgata (BYD/MGM) leads with CZR (World Series of Poker) a close 2nd. These are the leaders as we head into the slow process of nationalizing online poker

 

BYD/CZR: POKER STARS - ac2


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Back To The Future

“The future is here. It’s just not evenly distributed yet.”

-William Gibson

 

While you might think it’s 1999. It’s not, yet. According to the Wall Street Journal yesterday, 74% of companies that have come public in the last 6 months don’t make money. So it’s not the mother of all bubbles, yet – because in 2000, that percentage was 80%.

 

The aforementioned quote comes from the beginning of chapter 1 of a fantastic book I reviewed in the Early Look a few years ago titled, The World in 2050Four Forces Shaping Civilization’s Northern Future, by Laurence C. Smith.

 

My defense partner, Daryl G. Jones, will be hosting Mr. Smith on an Institutional Conference Call at 1PM EST today. Please ping if you’d like access. Global water shortages and NORCs (Northern Rim Countries) will be focus topics, not Candy Crush’s pending $7 billion dollar back-to-the-future-bubble IPO.

 

Back To The Future - earth

 

Back to the Global Macro Grind

 

The Dow Jones Index is -1.4% YTD and Gold is ripping (+14.1% YTD). The US Dollar is being burnt to a crisp (fresh YTD lows) this morning too. Calling the froth in the US equity market (companies trading at 20x revenues with no earnings) is getting easier, by the day.

 

But have no fear, the future of America is here.

 

And it’s definitely not evenly distributed. That’s why the politicians who have devalued America’s currency are focused on whining about the “inequality” that their policies created. That’s what Policies to Inflate do. They pay the bailed out banker who is bringing Crush public, and they pulverize the poor.

 

But everyone reading this rant is rich, right? So just suck it up and buy inflation protection (TIP) or Gold (GLD) or anything that looks like a bond (Utilities, XLU) as you try to keep up with Elmer Fudd’s pesky wabbit (inflation).

 

But, but, the SP500 rallied into the close yesterday (on no-volume), and is up +1% YTD:

  1. Yep, who cares?
  2. It was led by Utilities (XLU) which ripped a +1.3% move for the home team on the day (+6.1% YTD)
  3. And Consumer Discretionary (XLY) stocks closed down -0.15% to -0.16% YTD

That’s right, “Duck Wabbit, Duck!”

 

You can go back to the future and remind yourself that this happened in both Q1 of 2008 and 2011. If you’re American, your economy is now the rabbit. You have to burn your savings and just buy whatever you can that will inflate at a faster rate.

 

Cool, eh? Go flip a house before prices crash again.

 

Larry Smith will walk through the nonsense of all this groupthink on our conference call today, but here’s the upshot about civilizations who starve long-term investment for the sake of short-term-pay-me-now-Kinder-Morgan-dividend pops….

  1. They create unintended consequences (i.e. underinvestment in long-term fixed capital projects that have positive ROIC)
  2. Which, in turn, create shortages in critical capacity
  3. Which then perpetuate #InflationAccelerating

I know, paying $2.89 for a bottle of water isn’t inflationary. Eat an iPad.

 

And if you’re not into the whole Republican/Democrat, Nixon-Carter, Burning Buck and US Debt Monetization thing, move to a country that gets what both Reagan and Clinton did – like New Zealand!

 

BREAKING NEWS: New Zealand Raises Key Rate to Become 1st Developed Nation To Tighten

 

Love that.

 

Oh, and the New Zealand stock market must have gotten crushed on #RatesRising, right?

 

Nope:

  1. New Zealand raised rates on savings accounts with a +25 beep bump to 2.75% on its base rate
  2. The New Zealand Kiwi (it’s currency) strengthened alongside interest rates
  3. The New Zealand stock market closed UP on the day to +7.9% YTD

So why bang your head against a wall trying to call the Dow “cheap” when its down YTD and you can buy a country’s currency and stock market that is emulating the best of the best in American pro-growth 1980s and 1990s policy history?

 

As Marty (Michael J. Fox) said in Back To The Future, “maybe you weren’t ready for that… but your kids are going to love it.”

 

Our immediate-term TRADE risk ranges across Global Macro are now as follows:

 

UST 10yr Yield 2.60-2.80%

SPX 1

VIX 13.18-15.75

USD 79.31-80.11

Brent 106.37-110.44

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Back To The Future - NZD

 

Back To The Future - rt7


Double Bubble Trouble

This note was originally published at 8am on February 27, 2014 for Hedgeye subscribers.

“Double, double toil and trouble. Fire burn, and cauldron bubble.”

-William Shakespeare

 

They say Shakespeare wrote Macbeth sometime between 1603-1607. But my contacts tell me he could have written it in 2007. The prescience of his dark tragedy would have been a big call for CNBC.

 

But, from an economic forecasting and risk management perspective, what has really changed since late 2007? On mute, I can still see the same old broken sources telling me that the future slopes of growth and inflation are going to be what they were in the prior twelve months. Huh?

 

It’s brilliant really. To get paid to forecast the weather on a 6-12 month lag, that is.

 

All the while, the anti-consensus fires begin to burn as the next macro risk starts to bubble. What do I think right now? I think that US inflation can absolutely double in 2014; double, double, cut US GDP in half, and there will be trouble.

 

Double Bubble Trouble - bub

 

Back to the Global Macro Grind

 

Turning bearish might sound like it comes right out of Scene 1 of Macbeth. I’m in my dark man-cave, I’m wearing jorts beside a boiling cauldron and three witches. Thunder strikes as my arthritic hockey knuckles pound the keyboard. “Thrice the brinded cat hath mew’d!”

 

Seriously. Let’s get real here. All the boys know that my first creative writing paper in the English department @Yale was given back to me with the word “ungradable.” While I may have only had upside from there, I have no business writing you poetry this morning.

 

Back to the call. If I boil down our entire US macro view right now to “inflation doubles, and growth gets cut in half” what does that mean? 

  1. #InflationAccelerating – US Consumer Price Inflation (headline) goes from 1% y/y to 2%
  2. #GrowthSlowing – US GDP growth gets cut in half from our #GrowthAccelerating call high of +4.12% in Q314

So easy a Mucker can do it.

 

I’ve been on the road seeing some really smart and really successful customers of ours in NYC and Connecticut for the last few days and the feedback to our call is:

  1. “You’re the only strategist hammering on #InflationAccelerating right now”
  2. “When do you think it will matter?”

While I think it will matter a lot more as the year progresses, we are quickly approaching the ides of March… and with the US stock market still down for the YTD, I’d argue it already matters. It already matters.

 

Gold is ripping (up again this morning to +11% YTD), and plenty of bonds (and/or stocks that look like bonds; Utilities +7% YTD) are crushing consumption growth stocks too. That’s where this call really matters – from both a sector and investment style perspective.

 

To be clear, my being bearish on inflation’s impact on the slope of US growth expectations doesn’t mean I am universally bearish on every asset class you can buy.  My asset allocation model is basically the opposite of what it was on this day in February of 2013:

  1. Long Commodities
  2. Long Foreign Currencies vs the US Dollar
  3. Long Fixed Income
  4. Net Long European Equities
  5. Net Short Japanese Equities
  6. Net Short US Equities

As you know, I’m big on process. So you shouldn’t be surprised about my re-positioning. As we move towards what we call “Quadrant 3” in our GIP (Growth, Inflation, Policy) risk management process, all I’m doing here is what the playbook tells me to do.

 

Any monkey can be long something. Over 90% of #OldWall ratings aren’t sell. So when I whip up the bearish brew, I get that people care more about how that might taste than telling them to buy Twitter (we still think you should be short that btw).

 

So when I say I’m “Net Short US Equities”, there are a few explicit positions you can see on that front:

  1. More US equity SHORTS than LONGS in #RealTimeAlerts
  2. Short Consumer and Financials (XLY, XLP, and XLF) vs long Healthcare and Energy (XLV and XLE)

If you think it’s a low-stress life to be publicly publishing my research team’s Best Short Ideas in a market that is just coming off its all-time highs, think again. The venom we’ve received (from non-customers) on short ideas like Kinder Morgan (KMI) and Nationstar (NSM) is real.

 

But I like it.

 

“Swelter’d venom sleeping got,

Boil thou first i’ the charmed pot”

 

Ah, the poetry of it all. I’m looking forward to seeing how the market reacts to its first big slowdown in US GDP tomorrow morning.

 

Our immediate-term Macro Risk Ranges are now (our Daily Top 12 ranges are in our Daily Trading Range product). We’ll be hosting a Flash Call on Brazil at 11AM EST today. Please ping sales@Hedgeye.com if you’d like access.

 

UST 10yr 2.64-2.80%

SPX 1825-1852

Nikkei 14260-15164

EUR/USD 1.36-1.38

Brent 108.18-110.69

Gold 1321-1351

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Double Bubble Trouble - UNITED STATES

 

Double Bubble Trouble - Virtual Portfolio


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