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ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities

Takeaway: Taxable bonds have just put up their 17 consecutive week of inflow assisted by tax-free inflows at 21 consecutive weeks.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period, fund flow in both asset classes was painfully lackluster with both fixed income and equity flow below the year-to-date averages. However the quarter-to-date trends for 2Q14 greatly favor fixed income with $20.0 billion flowing into the total bond category thus far in the quarter versus just $6.8 billion that has flowed in all equity funds. This is highlighted by 17 consecutive weeks of inflow into taxable bonds assisted by 21 consecutive weeks of inflow into tax-free fixed income funds.

 

Total equity mutual funds put up a modest inflow in the most recent 5 day period ending on June 4th with $2.1 billion coming into the all stock category as reported by the Investment Company Institute. The composition of the $2.1 billion subscription continued to be weighted towards international equity funds with $3.2 billion coming into international stock funds which was offset by a $1.1 billion outflow in domestic products. This outflow within domestic equity funds has become an intermediate term trend with now the sixth consecutive week of outflow in the category. The aggregate subscription of $2.1 billion for the recent five day period was below the year-to-date average for equity funds of a $2.6 billion inflow, which is now running below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual fund flows also had a lackluster week of production ending June 4th, with just $1.1 billion flowing into all fixed income funds. This interest level was a deceleration from the $2.0 billion that came into bond products the week prior, however the inflow into taxable products was the 17th consecutive week of positive flow and the inflow into municipal or tax-free products was the 21st consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.0 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). 

 

ETFs had a stronger showing than mutual funds last week with both equity and bond products experiencing inflows above the 2014 year-to-date average. Equity ETFs experienced a decent $4.5 billion inflow, while fixed income ETFs put up a $1.3 billion subscription. The 2014 weekly averages are now a $765 million weekly inflow for equity ETFs and a $1.2 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 $4.1 billion spread for the week ($6.6 billion of total equity inflow versus the $2.4 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 $7.0 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. 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 - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 1

 

 

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

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 2

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 3

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 4

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 5

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 6

 

 

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

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 7

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 8

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $4.1 billion spread for the week ($6.6 billion of total equity inflow versus the $2.4 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 $7.0 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). 

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 9 

 

 

Quarter-to-date trends for 2Q14 greatly favor fixed income with $20.0 billion flowing into the total bond category thus far in the quarter versus just $6.8 billion that has flowed in all equity funds. This is highlighted by 17 consecutive weeks of inflow into taxable bonds assisted by 21 consecutive weeks of inflow into tax-free fixed income funds. These trends continue to support our favorite long amongst the traditional asset managers, Legg Mason (see Hedgeye LM research here).

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 10

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


LEISURE LETTER (06/12/2014)

Tickers: 0027:HK, MGM, RCL, WYN

EVENTS

  • Thurs June 12: Bally Systems User Conference Mohegan Sun
  • Thurs June 12: Blackstone Investor Day 
  • Thurs June 12: AC May revs released 2pm
  • Wed-Thurs June 18-19:  Hedgeye Cruise survey (pre-CCL F2Q)
  • Thurs June 19: LA May revs released

COMPANY NEWS

Galaxy Entertainment Group 0027:HK – on April 8th of this year, the Company applied for trademark registration for ‘Broadway Hotel and Casino,’ ‘Broadway Casino,’ ‘Broadway Hotel,’ ‘Broadway,’ ‘Broadway Resort’ and ‘Broadway Cotai.’ That application was only published in the Official Gazette on June 4. It is widely believed, if granted, Galaxy will use the "Broadway" name for Phase 2 of Galaxy in Cotai that is scheduled to open in 2015.

Takeaway: Seems like an interesting marketing spin, especially since SCL markets the foreign locations via Venetian and Parisian, why not Broadway? 

 

MGM (McClatchy Tribune) the Massachusetts Gaming Commission voted unanimously to allow MGM Resorts build casino in Springfield.  The Commission will meet for a final vote and award tomorrow, Friday June 13th.  MGM Springfield is planning 3,000 slot machines, 100 table games, 250 hotel rooms and eight restaurants.  The gaming commission indicated that it was willing to be flexible on the actual date it awards the casino to prevent triggering an estimated $200 million in fees and construction obligations that could be undermined by a petition drive to scuttle casinos in Massachusetts.

Takeaway:  This case is going MGM's way as we wait for the final wording on the fee payment conditions.

 

RCL – announced new entertainment offerings for Quantum of the Seas with a focus on music and executed through a "futuristic, technology-driven approach" which will include a unique Drum wall of 136 drums, a vocal percussion jacket, a violin dress as well as the world's largest harp plus the Broadway show, Mamma Mia!

Takeaway: A unique way to appeal to and increase the younger demographic

 

WYN – CEO Geoffrey A. Ballotti sold 3,899 shares of stock on Monday, June 9th at an average price of $75.00 and now directly owns 107,771 shares.

Takeaway: Still more insider selling in the hospitality industry.

INDUSTRY NEWS

Japan Gaming Expansion (Reuters) earlier today, a Japanese opposition politician on Thursday submitted a set of demands to ruling party lawmakers who are proposing a bill to legalize casino gambling, pushing back much-awaited parliamentary debate to next Wednesday at the earliest. Pro-casino lawmakers had aimed to begin debate in the lower house this week - before the end of the regular parliament session on June 22 - and carry the bill over into an expected session in the autumn when they would aim for its passage.

Takeaway: More political talk to reduce hype over passage of casino bill this year.

 

Macau Airport – the airport operator, Macau International Airport Co Ltd, posted results for 2013, which included a 12% increase in total passengers to 5,027,170 and 48,950 aircraft movements.

Takeaway: A long term positive mostly driven on incremental low-cost carrier route additions.

 

Singapore May negative REVPAR (STR) - preliminary numbers show Singapore May REVPAR declined 1.3% YoY in May.

Takeaway: Singapore continues to operate in a tough demand environment

MACRO

China May New Loans - May new Yuan loans were CNY870.8 billion versus consensus expectations of CNY750 billion and CNY774.4 billion in April.

Takeaway: On the margin, a positive.

 

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

 


Retail Callouts (6/12): LULU, TGT

Takeaway: Chip’s comments likely were directed at a Board that fired his choice CFO. TGT dividend hike very ill-timed – should have waited for CEO.

COMPANY NEWS

 

LULU - lululemon athletica inc. issues statement

(http://investor.lululemon.com/releasedetail.cfm?ReleaseID=854202)

 

  • "The lululemon Board of Directors and management team have been consistently focused on enhancing shareholder value and will continue to take actions to achieve this objective. The Board's commitment to the value and reputation of the lululemon brand and the constant focus by the Board and management on the Company's mission and core values is critical to enhancing long-term shareholder value."
  • "The Board is overseeing lululemon's strategy to strengthen the Company's foundation, focus its product engine on innovation, and accelerate sustainable and controlled global expansion. By leveraging its design-led roots, strengthening its supply chain and providing an exceptional guest experience, we are confident that lululemon, under new CEO Laurent Potdevin's leadership, will provide guests with the high-quality, technical products they know and love and create value for shareholders."
  • "Contrary to Mr. Wilson's assertions, lululemon's Board members are aligned with the Company's core values and possess the necessary expertise to successfully lead lululemon forward."

 

Takeaway: Something caused Chip to fly off the handle - odds are it was the Board's decision to push Currie out the door. This is still very much Chip's management team and there's no doubt he hand picked Potdevin as the new CEO. The management team in place may be good enough for a company doing $1bil in revenues, but we question how it could manage a $4-$5 billion business. If this is the case and the Board is pushing for real change - then this is a name that we can get behind.

 

TGT - Target Corporation Declares Regular Quarterly Dividend

(http://investors.target.com/phoenix.zhtml?c=65828&p=irol-newsArticle&ID=1939160&highlight=)

 

  • "The board of directors of Target Corporation has declared a quarterly dividend of 52 cents per common share. The dividend is payable September 10, 2014 to shareholders of record at the close of business August 20, 2014."

 

Takeaway: Not a huge surprise that TGT increased its dividend. For now the company's cash priorities are as follows: 1) invest in the business, 2) support the divided, and 3) fund share repo. But it's hard to get behind TGT's use of cash with a shadow executive committee in the C-Suite. When a new CEO is hired, he's going to have his own plan on how to fix the business and it will be expensive. And, its not like this company isn't levered. It would probably be more prudent for the company to tighten the purse strings in anticipation of big changes to the organization. No CEO who will be in spending mode will ever want to inherit a recently (and significantly) increased dividend. Not a prudent decision by the Board.

 

OTHER NEWS

 

TGT - Target Shareholders Back Board

(http://www.wwd.com/retail-news/mass-off-price/target-shareholders-back-board-7726168?module=hp-retail)

 

  • "Despite a call last month from advisory firm Institutional Shareholder Services to oust seven of the company’s 10 directors, the full board was reelected at the company’s annual meeting in Dallas Wednesday. Shareholders also voted down a proposal requesting the board have an independent chairman and approved a proposal to revise compensation packages."

 

BEBE - bebe stores, inc. Announces CEO Transition

(http://investorrelations.bebe.com/press-release/other/bebe-stores-inc-announces-ceo-transition)

 

  • "Bebe stores, inc. today announced that Steve Birkhold has resigned as Chief Executive Officer of bebe stores, inc. effective today. Concurrently, the Board of Directors has appointed Jim Wiggett, currently Chief Executive Office of Jackson Hole Group, as Interim Chief Executive Officer of bebe. "
  • "Mr. Wiggett has been providing advisory services to the Company for the past five years. He joins the bebe team with close to 40 years of retail, merchandising, and business experience. Prior to founding the Jackson Hole Group, a strategic consulting group, Mr. Wiggett held a number of executive positions, with several high-profile companies, most recently Moet Hennessy Louis Vuitton (LVMH). As Executive Vice President at LVMH, Mr. Wiggett provided leadership to the 10 operating companies within the Select Distribution Group and consulting support to many of the non-retail organizations."

 

NKE, UA, ADS.DE - Sports Apparel Market Expects Uptick From World Cup

(http://www.wwd.com/menswear-news/sportswear/sports-apparel-market-expects-uptick-from-world-cup-7726361?module=hp-business)

 

  • "Much like the players on the pitch, Adidas, Nike and Puma will be flexing their marketing muscles and competing for excellence and visibility, each in their own way. 'Brazil is an $11 billion [sports apparel] market, the fourth largest in the world, following the U.S., China and Japan,' said Alexis Frick, a researcher with Euromonitor International, adding that over the past few years the country has experienced a growth rate of 14 percent, 'something developed countries can only dream of.' No surprise then that for global sports brands, Brazil, with an estimated population of 200 million, is a strategic battleground, 'and football presents the largest opportunity.'"

 

PVH - PVH Corp. Licenses Warner's, Olga Brands

(http://www.wwd.com/markets-news/intimates-activewear/pvh-corp-licenses-warners-olga-brands-7725484)

 

  • "PVH Corp. has signed a licensing agreement with Vandale Industries Inc. to design, produce and market women’s shapewear, sleepwear, loungewear, robes, sports bras and athleticwear for the U.S. and Canadian markets bearing the Warner’s and Olga intimates nameplates. The deal includes subbrands Simply Perfect by Warner’s, Blissful Benefits by Warner’s and Body Heaven by Warner’s."
  • "The license runs through 2017. Deliveries of these product categories are scheduled to begin in February for spring."

 

EBAY - EBay Launches Full-Price Designer Shops

(http://www.wwd.com/retail-news/direct-internet-catalogue/ebay-launches-full-price-designer-shops-7721563?module=hp-featuredstories)

 

  • "EBay Inc. is cozying up to designer brands — and trying to shed once and for all the lingering perception that it’s just an auction site."
  • "The e-commerce and payment giant will today unveil Designer Collective at ebay.com/designercollective, a current-season, full-price shopping destination with 16 American-based brands, including Calvin Klein, Nicole Miller and Elie Tahari. EBay worked with the brands to build storefronts within the Designer Collective portion of its main Web site."

 


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VIX, OIL & INDIA

Client Talking Points

VIX

We repeat the front month VIX has never held below 10 – NEVER is a very long time. Watch that line of complacency. If you take a look at the long term chart of the VIX this morning you will see what we mean. The last time the VIX hit this level was actually January of 2007. Thereafter, volatility made a steady climb before peaking in October 2008 at ~60.

OIL

Oil price is ripping to the upside. What you have is called TAIL risk to the upside and TAIL risk to the downside on U.S. growth. Our immediate-term risk range for WTIC Oil is 103.21-105.67, we remain bullish trend.

INDIA

Fantastic news in India regarding their success with rate hikes. Inflation is under control. India had the only stock market that was really up. Strong currency, strong policy equates to stronger policy and stronger consumption.

Asset Allocation

CASH 15% US EQUITIES 0%
INTL EQUITIES 10% COMMODITIES 20%
FIXED INCOME 30% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

LM

Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road

TWEET OF THE DAY

$LULU CFO is out. I couldn’t care less what the comp is. This is so positive. What a great event to get more bullish on.

@HedgeyeRetail

QUOTE OF THE DAY

“Order and simplification are the first steps towards mastery of a subject”

-Thomas Mann

STAT OF THE DAY

The World Cup has been held every four years since 1930 with the exception of 1942 and 1946, when it was canceled because of World War II. This will be the 20th World Cup.



Pay It Forward

“For of those to whom much is given, much is required.”

- President John F. Kennedy

 

Last night Keith and I took a private car service into Manhattan to watch the New York Rangers play the Los Angeles Kings in the fourth game of the Stanley Cup Finals.   Clearly, given such an experience, there is no doubt we are among the fortunate in this fine nation.

 

While most of you that are reading this have worked hard to achieve your position, we have all also received a helping hand along the way.  That helping hand may have been from a mentor, from a coach, or just being born somewhat lucky.  But, regardless, we all now have the opportunity to give back.

 

In the spirit of #PayingItForward, Hedgeye has formed a non-for-profit called Hedgeye Cares, which will be dedicated to giving back to charities in Connecticut.  Our inaugural event will be the 2014 Hedgeye Cares Golf Challenge to be held on September 16th at the Great River Golf Club in Milford, CT.   The proceeds from this event will go to Bridgeport Caribe Youth Leaders (BCYL).

Pay It Forward - Pay it forward chart1

BCYL is non-profit based in Bridgeport, CT, one of the more economically disadvantaged cities in Connecticut, and provides athletic and enhanced educational opportunities to youths aged 5 to 18 to whom much has not been given.   Currently, the program provides opportunities for some 500 kids in the Bridgeport area and we will be focused on expanding that number.

 

We hope you will consider joining us for a golf outing on September 16th and if you aren’t a golfer and or cannot make the event, we hope that you will consider sponsorship or auction donations and join us in #PayingItForward.  Details can be found here.

 

Back to the Global Macro Grind...

 

Speaking of giving, the Kings actually gave the Rangers a fighting chance last night by losing 2 -1, so the Stanley Cup Finals return to the City of Angels this Friday.  On some level, the Rangers have already exceeded expectations by winning last night.  Specifically, of the 320 NBA, MLB or NHL teams that have found themselves up 3 – 0 in a seven game series, 65% have gone on to win the next game and close out the series.

 

In terms of coming back and winning the entire series from a 3 – 0 deficit, it has only happened four times in 171 opportunities in the NHL.  For you math geeks, that equates to right around a 2.3% chance of overcoming a three game deficit.  So is a comeback probable? No. But as they say, hope springs eternal.

 

Speaking of probabilities, as equity investors we can be pretty sure that volatility on the SP500, as measured by the VIX, won’t stay below 11 for long.   Pull back a long term chart of the VIX on your Bloomberg this morning and you will see what we mean.   The last time the VIX hit this level was actually January of 2007. Thereafter, volatility made a steady climb before peaking in October 2008 at ~60.

 

So as investors, feel free to bet that VIX will go lower from here, but practically that is about as likely as Iran, Honduras, or Costa Rica winning the World Cup.  According to Oddshark.com, the odds on that are more than 1500 – 1.  Math doesn’t always work, just ask California Chrome, but over time life is much simpler when we play the odds.

 

Speaking of odds, the likelihood is high that many of us wouldn’t have bet on a Eurozone Industrial production number that came in well ahead of expectations this morning.   According to my colleague Ben Ryan:

 

“Industrial Production printed much stronger than expected (five-month high) for April with strength in energy and non-durable goods production which increased +2.5% and +2.1% respectively. Month-over-month, seasonally-adjusted industrial production increased +0.8%, beating expectations of +0.5%. Note that March was downwardly revised to -0.4%, so April’s increase follows a pretty bad number."

 

Following a bad number or not, that is the kind of number that we macro analysts underline with a big green highlighter (green being bullish) in our notebooks.

 

Even as European data continues to get better on the margin, we remain cautious, to say the least at current VIX levels, on the U.S. economy.  In the Chart of the Day, we’ve highlighted our U.S. GDP summary table going back two years to March 2012.

 

The key takeaway from this table is that healthcare spending was critical in supporting GDP in the 1st quarter.  With the census bureau’s release of the 1Q14 QSS survey yesterday, that estimate of healthcare spending saw a sharp negative reversal. 

 

According to my colleague Christian Drake:

 

Services consumption was the singular source of strength in the 1Q14 GDP report and most of that was from Healthcare Services which contributed +1.01% to GDP – that estimate of accelerating healthcare consumption just got revised to negative growth which will take the final GDP estimate for 1Q down to -2.0% plus or minus. 

 

The net-net of this is that the final estimate of 1Q GDP (June 25th) will be (even more) dismal and GDP is likely to miss the ever bullish consensus expectations for full year 2014.  When combined with increasing uncertainty in the 2014 mid-term elections, see Eric Cantor, we may just have an opportunity for you equity bears to #PayItForward in the coming months.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.44%-2.67%

SPX 1

RUT 1138-1178

VIX 10.74-13.34

USD 80.31-80.95

Gold 1 

 

Keep your head, stick on the ice and belief in the Rangers,

 

Daryl G. Jones

Director of Research 

 

Pay It Forward - chart of the day


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