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Cartoon of the Day: Sleep Walking

Takeaway: No matter what anyone says, it is not different this time.

As Hedgeye CEO Keith McCullough noted earlier today, it's been 48 trading days since the S&P 500 has had a +/- 1% day. That's only happened one other time in two decades.

 

Meanwhile, Volatility (VIX) is up over +17% from its June 18th low.

 

No, it's not different this time.


Cartoon of the Day: Sleep Walking - S P walking 6.26.2014

 


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Initial Claims: 'Insular Tahiti'

Takeaway: Still no sign of negative inflection from the claims data.

This is an excerpt of a research note published earlier today.

"For as this appalling ocean surrounds the verdant land, so in the soul of man there lies one insular Tahiti, full of peace and joy, but encompassed by all the horrors of the half-known life. God keep thee! Push not off from that isle, thou canst never return!" - Herman Melville, Moby Dick

 

The labor market appears to be the "insular Tahiti" Melville speaks of, surrounded by an appalling ocean of miserable data. Evidence continues to mount that the consumer is getting increasingly squeezed on the back of rising costs (commodities +11.6% YTD) and stagnant wages (personal income is +1.9% YTD). What's an investor to do?

 

Initial Claims: 'Insular Tahiti' - InsularTahiti 3

 

Our take is that investors should stick with claims as their weathervane. It's been a prescient indicator of turning points, marking both the top and bottom of the last cycle clearly and in a timely manner.  

 

Along those lines, rolling initial jobless claims (NSA) were 9.0% lower than at the same point last year, which was in-line with the trend over the past 5 weeks (-9.8%, on average). The 9.0% improvement marks a slight deterioration vs the prior week's 10.1% improvement but isn't anything we'd get overly excited about.

 

The Data

Prior to revision, initial jobless claims fell 0k to 312k from 312k WoW, as the prior week's number was revised up by 2k to 314k.

 

The headline (unrevised) number shows claims were lower by 2k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 2k WoW to 314.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -9.0% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -10.1%

 

Initial Claims: 'Insular Tahiti' - 2

 

Initial Claims: 'Insular Tahiti' - 6

 

Initial Claims: 'Insular Tahiti' - 7

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 

Jonathan Casteleyn, CFA, CMT

203-562-6500

jcasteleyn@hedgeye.com


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ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish

Takeaway: The retail mutual fund complex continues to position away from equities with the ETF market or the institutional market doing the opposite

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period, aggregate bond funds including both taxable and tax free products netted another $4.1 billion in new investor subscriptions. Conversely, the combined equity mutual fund complex shed almost $1 billion in outflows with significant domestic equity outflows offset by a slight international equity fund inflow. The broad take away is that the U.S. retail investor has been retrenching for most of the first half of the year (with 19 consecutive weeks of taxable bond inflows and 23 consecutive weeks of tax-free or muni bond inflows). Interestingly however, equity ETF flows last week were the best in all of 2014 with a robust $11.2 billion coming into passive equity products versus a significant $3.8 billion outflow in bond ETFs. We think this reflects stronger institutional demand for equities with non-retail firms allocating into the stocks at current levels despite the strong run this cycle with institutional investors also positioning for more pain in fixed income over a longer term perspective with significant outflows this week. 

 

Total equity mutual funds put up a modest outflow in the most recent 5 day period ending June 18th with $913 million coming out of the all stock category as reported by the Investment Company Institute. The composition of the $913 million redemption continued to be weighted towards domestic equity funds with $2.1 billion coming out of domestic stock funds which was offset by a $1.2 billion inflow into international products. This outflow within domestic equity funds has become an intermediate term trend with now the eighth consecutive week of outflow in the category. The aggregate redemption of $913 million for the recent five day period was below the year-to-date average for equity funds of a $2.4 billion inflow, which is now running below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual fund flows had a solid week of production with the aggregate $4.1 billion that came into the asset class besting the 2014 running year-to-date average inflow of $2.1 billion. The inflow into taxable products of $3.7 billion was the 19th consecutive week of positive flow and the inflow into municipal or tax-free products of $419 million was the 23rd consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.1 billion weekly inflow, an 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). 

 

ETF results created the tale of two tapes with equity ETFs putting up the strongest week of production all year offset by weak passive bond flows. Equity ETFs experienced a 2014 best $11.2 billion inflow, while fixed income ETFs suffered a $3.8 billion redemption. The 2014 weekly averages are now a $1.5 billion weekly inflow for equity ETFs and a $980 million 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 $9.9 billion spread for the week ($10.2 billion of total equity inflow versus the $350 million 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 $6.9 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 - Retail Investors are Defensive - Institutions are More Bullish - ICI chart 1

 

 

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

 

ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart2

 

ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart3

 

ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart4

 

ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart5

 

ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart6

 

 

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

 

ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart7

 

ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart8

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $9.9 billion spread for the week ($10.2 billion of total equity inflow versus the $350 million 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 $6.9 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 - Retail Investors are Defensive - Institutions are More Bullish - ICI chart9 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


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