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FLASHBACK | Cartoon of the Day: Out of Gas

Takeaway: This cartoon was originally published April 14.

FLASHBACK | Cartoon of the Day: Out of Gas - Out of gas 04.14.14

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Fund Flows, Refreshed

Takeaway: The combination of taxable and tax-free bond fund flow had the best week all year versus very light equity fund flows.

Editor's Note: This research note was originally sent to subscribers on May 15, 2014 by Hedgeye’s Financials analyst Jonathan Casteleyn. Follow Jonathan on Twitter @HedgeyeJC.

 

Fund Flows, Refreshed - 2

 

ICI Mutual Fund Data and ETF Money Flow

 

In the most recent 5 day period, the combination of taxable and tax-free bond funds had the best week all year with $5.5 billion in inflow, well above the running year-to-date average of $1.9 billion. Conversely, equity funds had a very light inflow of just $754 million, well below the year-to-date average of $3.3 billion

 

It was an anemic week for equity mutual fund and ETF trends. Total equity mutual fund flows experienced slight relief w/w, improving sequentially from a net outflow last week, but still producing a tally well below the 2014 year-to-date weekly average. The $754 million that flowed into all equity mutual funds during the most recent 5 day period ending May 7th was split between a $2.0 billion outflow from domestic equity funds and $2.7 billion inflow into international equity funds. This outperformance from foreign equity products has been consistent over the past two years; international stock fund inflow has averaged $2.6 billion per week thus far this year, on par with 2013's $2.6 billion inflow, while domestic fund trends have averaged an inflow of just $770 million thus far in '14 and $451 million inflow in '13. The 2014 running weekly average inflow for all equity mutual funds is now $3.3 billion, only a slight improvement from the $3.1 billion weekly average inflow from 2013. 

 

Conversely, fixed income mutual fund flows accelerated notably on a w/w basis. For the five day period ending May 7th, $5.5 billion flowed into all fixed income funds, as opposed to last week's much weaker $931 million inflow. The improvement in bond fund flow this week was the result of $4.4 billion that flowed into taxable products and $1.1 billion that flowed into tax-free or municipal products. The inflow into taxable products this week was the 13th consecutive week of positive flow and the inflow into municipal or tax-free products was the 17th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.9 billion weekly inflow, a vast improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 

 

Exchange traded funds (ETFs) had polarized trends this week, with a substantial weekly redemption in equity ETFs and a solid week for bond ETFs. Equity ETFs experienced an $8.7 billion outflow w/w, while Fixed Income ETFs experienced $3.0 billion in inflows. The previous week saw a $4 billion inflow into stock ETFs and a $818 million inflow into bond ETFs. The 2014 weekly averages are now a $385 million weekly inflow 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 negative $16.4 billion spread for the week ($8.0 billion of total equity outflow versus the $8.5 billion inflow 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 $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

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. 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.   

 

Fund Flows, Refreshed - chart11

Fund Flows, Refreshed - chart12

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product

 

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Fund Flows, Refreshed - 3

 

Fund Flows, Refreshed - 4

 

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Fund Flows, Refreshed - 6

 

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

 

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Fund Flows, Refreshed - 8

 

Net Results

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $16.4 billion spread for the week ($8.0 billion of total equity outflow versus the $8.5 billion inflow 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 $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Fund Flows, Refreshed - 9.2 

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Monday Mashup: Darden Sells Red Lobster

Investment Ideas

The table below lists our current Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.

 

Monday Mashup: Darden Sells Red Lobster - 1

 

BLMN: We removed Bloomin’ Brands from the Investment Ideas list as a short on Wednesday, after our bearish thesis largely played out.  We’ve relegated it to the Watch List and will look for another entry on the short side at a better price.  FY15 estimates are still too aggressive.

Recent Notes

05/12/14  Monday Mashup: BOBE Replay, JACK Reports

05/14/14  BLMN: Closing Best Idea Short

05/15/14  BOBE: Asset-Light Is Right

05/16/14  DRI: Twice-Cooked, Half-Baked

Events This Week

05/20/14  RRGB Earnings Call 10am EST

05/20/14  COSI Annual General Meeting

05/22/14  FRSH Earnings Call 5pm EST

05/22/14  MCD Annual General Meeting 9am EST

05/22/14  DENN Annual General Meeting 9am EST

05/22/14  IRG Annual General Meeting 10am EST

05/22/14  TXRH Annual General Meeting

05/22/14  PLKI Annual General Meeting

05/22/14  RRGB Annual General Meeting

Chart of the Day

Following last week’s news that the management and board of Darden decided to push forward with the sale of Red Lobster despite shareholder requests to hold a Special Meeting to discuss the matter, we thought it’d be interesting to pull up the company’s ROIIC (return on incremental invested capital) chart.  In our view, ROIIC is one of the most important metrics for restaurant companies and tends to tell the true, underlying capital allocation story.  Returns have been deteriorating rampantly since early 2011, signaling to us a material case of mismanagement.

 

Monday Mashup: Darden Sells Red Lobster - chart2

Recent News Flow

Monday, May 12th

  • RRGB announced plans to open its newest restaurant in the Phoenix Metropolitan area on Monday, May 26.
  • WEN is celebrating National Salad Month by partnering with actress Molly Sims to host its third #NewSaladCollection contest.

Tuesday, May 13th

  • MCD UBS upgraded its PT to $120, citing comp improvement in the U.S.
  • KKD announced current President and CEO James Morgan will become Executive Chairman on June 1st.  At this time, former PZZA President and COO, Tony Thompson, will become the new President and CEO of Krispy Kreme Doughnuts.
  • PLKI appointed VP of Finance Tony Woodward as Interim CFO, effective May 23rd, as they continue their search for a permanent replacement for the departing Melville Hope III.

Wednesday, May 14th

  • DRI Starboard Value sent a letter to Darden’s board demanding they call a Special Meeting in a timely fashion.  In the letter, Starboard highlighted how the company has been misleading shareholders.
  • BWLD held the grand opening of its first PizzaRev franchise in Hopkins, MN, making it the first PizzaRev restaurant outside of the California market.
  • JACK initiated a $0.20 quarterly cash dividend.

Thursday, May 15th

  • CMG launched its “Cultivating Thought” author series, a new program featuring original essays by renowned authors, comedians and thought leaders designed to help tell the company’s unique story.  The stories are told on both Chipotle cups and bags and features the work of Michael Lewis, Sarah Silverman and others.
  • PZZA After losing President and COO Tony Thompson to KKD, Papa John’s promoted Senior VP of Global Operations, Steve Ritchie, to COO.  Ritchie has been with Papa John’s in various roles for the past 18 years.

Friday, May 16th

  • DRI In a move that shunned shareholders, Darden announced the sale of Red Lobster to Golden Gate Capital for $2.1 billion.  Darden will receive after tax proceeds of $1.6 billion from the sale, of which approximately $1 billion will be used to retire outstanding debt with the remainder being used to fuel a new share repurchase program.  If you recall, the overwhelming majority of voting shareholders requested a Special Meeting to discuss a potential Red Lobster sale.  Instead, at a $1.6 billion after tax profit, the board decided to push forward with a sale and give away the Red Lobster business for free. Darden expects the sale to close in early 1QF15.
  • WEN announced a $0.05 quarterly cash dividend.
  • CMG Word came out from Credit Suisse that Chipotle is already taking mid-single digit price increases in order to offset rising food costs.  The firm notes these actions have been met with little resistance and reiterated its $640 PT.

U.S. Macro Consumption

The XLY (0.1%) slightly underperformed the SPX (0.0%) last week.  Both casual dining and quick service stocks, in aggregate, underperformed the broader XLY index.  

 

Monday Mashup: Darden Sells Red Lobster - 3

 

Monday Mashup: Darden Sells Red Lobster - 4

 

The Hedgeye U.S. Consumption Model reverted back to bearish formation, flashing red on 7 out of 12 metrics.

 

Monday Mashup: Darden Sells Red Lobster - 5

XLY Quantitative Setup

From a quantitative perspective, the sector remains bearish on an intermediate-term TREND duration.

 

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Casual Dining Restaurants

Monday Mashup: Darden Sells Red Lobster - 7

 

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Quick Service Restaurants

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Howard Penney

Managing Director

 

Fred Masotta

Analyst

 


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European Banking Monitor: Credit Risk Widens Substantially

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - Swaps were notably widener in Europe last week but remain modestly tighter month-over-month.  Greek banks, which have seen their swaps tighten steadily for months now widened sharply. 

 

European Banking Monitor: Credit Risk Widens Substantially - chart 1 european financials CDS

 

Sovereign CDS – Sovereign swaps widened last week. Italian sovereign swaps widened by 11% (11 bps to 113) and Portuguese sovereign swaps widened by 18% (27 bps to 180).

 

European Banking Monitor: Credit Risk Widens Substantially - chart 2 Sovereign CDS

 

European Banking Monitor: Credit Risk Widens Substantially - chart 3 Sovereign CDS

 

European Banking Monitor: Credit Risk Widens Substantially - chart 4 sovereign CDS

 

Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 2 bps to 19 bps.

 

European Banking Monitor: Credit Risk Widens Substantially - chart 5 Euribor OIS Spread

 

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 

 


Just Charts: Slow Growth Yield Chasing Remains The Rage

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 1

 

Consumer Staples mildly underperformed the broader market last week, falling -0.52% versus the S&P500 at -0.03%. XLP is up 3.0% year-to-date vs the SPX at 1.6%.

 

Earnings Calls (in EST):

Monday (5/19):  CPB (8:30am)

Wednesday (5/21):  HRL (9am)

 

BMO Capital Markets Farm To Market Conference (in EST):

Wednesday (5/21):  TSN (8am); SAFM (9am); HAIN (11am); SMG (1:30pm); HRL (4pm)

 

For the last 2+ months, XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 2

 

The Hedgeye U.S. Consumption Model has shown steady improvement over the past three weeks, with 5 of the 12 metrics flashing green.

 

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Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

 

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.6x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (recently rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, and fell to 34.9 versus 37.1 in the prior week

Just Charts: Slow Growth Yield Chasing Remains The Rage - 4

 

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Top 5 Week-over-Week Divergent Performances:

Positive Divergence:  DF 5.8%; MNST 5.3%; STZ 4.6%; DEO 4.5%; BNNY 4.0%

Negative Divergence:  RDEN -26.8%; PG -2.5%; POST -2.2%; LNCE -1.9%; ENR -1.8%

 

 

Last Week’s Research Notes

 

Quantitative Setup

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

 

BUD – remains bullish TREND as it carried most of the slow-growth-big-cap-low-beta style factors the market is chasing right now; TREND support = $106.65

 

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DEO  - finally joins the slow-growth-low-beta party, breaking out above TREND line resistance of $125.93

 

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KO – same as BUD – the market’s style factor appetite for an equity with these characteristics changed in April; TREND bullish, $34.79 support

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 9

 

PEP – looks just like KO right now; bullish intermediate-term TREND with $83.71 TREND support

 

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GIS  - still one of the best looking names on this list; TREND support = $51.44

 

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MDLZ – big TREND breakout on big volume in the early part of May #confirmed; TREND support building a big base at $35.59

 

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KMB – if I had to buy one name on this sector on the open this week, it would probably be KMB; TREND support = $108.65

 

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PG – doesn’t look as solid as BUD, KO, and PEP (as it broke its immediate-term TRADE line last week); TREND support of $80.0

 

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MO  - slow-growth-yield-chasing remains the rage; bullish intermediate-term TREND breakout from March intact, support = $37.92

 

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PM – no change as the bearish to bullish TREND reversal of the last 6 weeks is confirmed; TREND support = $83.91

 

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Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst



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