prev

ICI Fund Flow Survey - Trending not Mending - U.S. Stock Funds Continue in Redemption

Takeaway: U.S. stock funds continue to be redeemed by investors with equity managers T Rowe and Janus putting up outflows in August

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period ending September 10th, U.S. equity fund flow continued dire intermediate term trends with another $1.3 billion redeemed by investors. This now makes 19 of 20 weeks of outflow heading into the seasonally soft 4th quarter which could exacerbate the ongoing trend. Our research shows that despite these already substantial losses in the U.S. equity fund category over the past 5 months which total $48 billion, that the average draw down in U.S. stock funds since 2007 has averaged 40 weeks with over $113 billion lost, so trends could continue on their downward slope. Furthermore, while this weekly report focuses solely on industry related ICI fund data, the more discreet survey by Strategic Insight which actually distills fund flow by specific manager shows that both T Rowe Price (TROW) and Janus Capital (JNS) booked outflows in the most recent survey last week. The trends specifically for T Rowe are softening with inflows of $1.2 billion for May; inflows of $734 million for June; and inflows of $267 million for July; turning to an outflow of $212 million in the latest survey for August which was disseminated last week (Strategic Insight monthly tables directly below). T Rowe Price shares continue on our Best Ideas Short list currently. 

 

ICI Fund Flow Survey - Trending not Mending - U.S. Stock Funds Continue in Redemption - SI chart 1

ICI Fund Flow Survey - Trending not Mending - U.S. Stock Funds Continue in Redemption - SI chart 2

 

Hedgeye Best Ideas TROW Research 

 

Total equity mutual funds had inflow in the most recent 5 day period ending September 10th with a $1.2 billion subscription into all stock funds as reported by the Investment Company Institute. The composition of flow trends continued to be weighted towards International stock funds with a $2.5 billion inflow buffering a $1.3 billion redemption in U.S. stock funds. The inflow in International funds makes it a perfect 36 for 36, i.e. inflows in all 36 weeks of 2014. Conversely however, domestic trends are very dour with now 19 of 20 weeks of outflow now totaling over $48 billion lost. The running year-to-date weekly average for all equity fund flow continues to decline and now settles at a $1.3 billion inflow, now well below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual fund flow continues to be stable with $1.5 billion coming into the asset class. The inflow into taxable products of $704 million made it 29 of 31 weeks with positive flow. Municipal or tax-free bond funds put up a $841 million inflow, making it 34 of 35 weeks with positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.9 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 were mixed during the week with inflows into equity funds but redemptions in passive fixed income products. Equity ETFs put up a $1.1 billion subscription while fixed income ETFs put up a $272 million outflow. The 2014 weekly averages are now a $1.7 billion weekly inflow for equity ETFs and a $862 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 $1.0 billion spread for the week ($2.3 billion of total equity inflow versus the $1.2 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 $4.0 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). The 52 week moving average chart displays the declining demand for all equity products (funds and ETFs) for the safety and security of fixed income. 

 

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 - Trending not Mending - U.S. Stock Funds Continue in Redemption - SI chart 3

ICI Fund Flow Survey - Trending not Mending - U.S. Stock Funds Continue in Redemption - SI chart 4

 

 

 

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

 

ICI Fund Flow Survey - Trending not Mending - U.S. Stock Funds Continue in Redemption - SI chart 5

 

ICI Fund Flow Survey - Trending not Mending - U.S. Stock Funds Continue in Redemption - SI chart 6

 

ICI Fund Flow Survey - Trending not Mending - U.S. Stock Funds Continue in Redemption - SI chart 7

 

ICI Fund Flow Survey - Trending not Mending - U.S. Stock Funds Continue in Redemption - SI chart 8

 

ICI Fund Flow Survey - Trending not Mending - U.S. Stock Funds Continue in Redemption - SI chart 9

 

 

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

 

ICI Fund Flow Survey - Trending not Mending - U.S. Stock Funds Continue in Redemption - SI chart 10

 

ICI Fund Flow Survey - Trending not Mending - U.S. Stock Funds Continue in Redemption - SI chart 11

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $1.0 billion spread for the week ($2.3 billion of total equity inflow versus the $1.2 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 $4.0 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). The 52 week moving average chart displays the declining demand for all equity products (funds and ETFs) for the safety and security of fixed income. 

 

 

ICI Fund Flow Survey - Trending not Mending - U.S. Stock Funds Continue in Redemption - SI chart 12 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


BAC - Removing From Best Ideas List on the Long Side

Takeaway: Valuation is no longer compelling, macro is no longer a tailwind and we're tired of waiting for Godot on normalized earnings.

We are removing Bank of America (BAC) from our Best Ideas list on the long side.

 

Prologue

After being bearish on Bank of America throughout 2011, we first turned bullish on January 19, 2012 in a research note entitled "We're Getting Bullish on Bank of America". At that time the stock was trading at $6.96. Not quite the low of $5 set a few weeks earlier, but still pretty good.

 

We formally added BofA to our "Best Ideas" list on the long side when we first launched our Best Ideas list, on February 27, 2013. By then the stock was trading at $11.30. We've had it on the Best Ideas list since then and the stock is up roughly 48% since (and 140% since our early 2012 call). Meanwhile, the S&P 500 is up ~32% since 2/27/13 and ~52% since 1/19/12. On both an absolute and relative basis BAC has been a solid long-term performer. Normally we don't leave ideas on for a year and a half, but since the thesis was steadily playing out we saw no reason to change our view.

 

Waiting for Godot

So why now, after all this time, pull the plug? There a few reasons.

 

1. Earnings. Normalized earnings remain elusive years after the term first floated circa 2011/12. Recall that in 2011 the company earned one cent per share for the whole year. In 2012 BofA earned 25 cents per share. In 2013 things started looking better with 90 cents in full year earnings, but in the first half of this year the company stumbled, earning just 14 cents on a GAAP basis (28 cents, annualized). The bigger picture, however, is that most of the core metrics at BofA have been negatively trending for the last year and a half and seem to show no signs of inflection.

 

We profile these trends in the charts below for NIM, NII, non-interest income, non-interest expense, pre-tax pre-provision net income, pre-tax income, and EPS. The punchline is that revenue, both NII and non-interest income, have been in steady decline while operating expenses have been rising. The only bright spot has been provision expense trending lower, but with reserve release compressing, this too will reverse from tailwind to no-wind and then headwind even in a benign credit environment. In other words, it's hard to see how earnings power advances from the recent run rate of  ~24 cents per quarter (average of last six quarters, excluding 1Q14 in which EPS was -$0.05) to the expected NTM rate of $0.34 when all the metrics are going the wrong way.

 

BAC - Removing From Best Ideas List on the Long Side - 1   NIM

 

BAC - Removing From Best Ideas List on the Long Side - 2   NII

 

BAC - Removing From Best Ideas List on the Long Side - 3   NON INT INC

 

BAC - Removing From Best Ideas List on the Long Side - 4   NON INT EXP

 

BAC - Removing From Best Ideas List on the Long Side - 5   PT PP NI

 

BAC - Removing From Best Ideas List on the Long Side - 6   PROV EXP

 

BAC - Removing From Best Ideas List on the Long Side - 7   RR

 

BAC - Removing From Best Ideas List on the Long Side - 8   PTI

 

BAC - Removing From Best Ideas List on the Long Side - 9   EPS

 

BAC - Removing From Best Ideas List on the Long Side - 10   EPS FWD   BACK

 

 

 

2. Macro. When we first turned bullish on BofA back in January, 2012 it was largely because we thought that (a) the company had ringfenced its mortgage liability and (b) the ECB's LTRO program would succeed in preventing Europe from sliding into the ocean. We were right on both accords as Article 77 kept the $8.5 billion settlement in place and Euribor-OIS receded back to the mid-teens bps. Several months later, it was rising home prices that became the new rallying call - a tailwind that persisted right through this Spring. 

 

Today, however, housing is a receding tailwind as the rate of home price change has been decelerating for 4 straight months now and we expect that trend to continue. Further, while there are many "hotspots" of eco/geo risk around the world (China, Ukraine, etc) the global, US banks have priced in very little discount/risk. #Asymmetric.  

 

 

3. Beta Renormalization. We added a new chapter to our bullish thesis on BAC back on March 7, 2013 when we published a note entitled "Long the Big Cap Beta Renormalization Trade". We argued that BAC, MS and C were undervalued on the basis of their capital position relative to their beta. We revisited the thesis on November 4, 2013 in our note "Banks: Capital & Volatility - A Look at the US & EU Banks With the Most Upside". At the time of the first note, BofA's 1-yr beta was just under 2. This compared with a Beta below 1 prior to the crisis, in spite of having materially increased its capital position over the ensuing time period. Our argument was simple: we though that beta would come down as the market realized risk was lower due to the permanently higher capital position. As beta came down, we argued, EVA would rise since beta is a key input in cost of capital. Finally, we have shown that EVA is very strongly correlated with price/tangible book multiples (stronger than ROE or ROTE alone). So we argued that as beta came down, the multiple to tangible book value would rise. That's exactly what happened.

 

Since our March 2013 note, BofA's beta has fallen to around 1.25 from just under 2. During that same period, the price/tangible book value multiple increased from 92% to 118%. This is a slightly smaller increase than we had originally postulated, but we think the framework worked well, overall.

 

The reason it's relevant today is that with beta back down to 1.25, this idea has largely run its course. Yes, there is likely some further reduction possible, but much of the move has already happened, as we show in the beta chart below. We also show the relative upside/downside to fair value for several of the larger banks based on our EVA fair value model. On that basis, we find that BofA is currently just about fairly valued.

 

BAC - Removing From Best Ideas List on the Long Side - bac   rolling 1yr beta for the group

 

BAC - Removing From Best Ideas List on the Long Side - bac   fair value snapshot

 

Based on this, we think it makes sense to remove Bank of America from our Best Ideas list on the long side. Please bear with us as we look for a suitable candidate to replace it.

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA


September 18, 2014

September 18, 2014 - Slide1

 

BULLISH TRENDS

September 18, 2014 - Slide2

September 18, 2014 - Slide3

September 18, 2014 - Slide4

September 18, 2014 - Slide5

 

 

BEARISH TRENDS

September 18, 2014 - Slide6 

September 18, 2014 - Slide7

September 18, 2014 - Slide8

September 18, 2014 - Slide9

September 18, 2014 - Slide10


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 18, 2014


As we look at today's setup for the S&P 500, the range is 27 points or 1.08% downside to 1980 and 0.27% upside to 2007.                                                     

                                                                          

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.03 from 2.05
  • VIX closed at 12.65 1 day percent change of -0.63%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Initial Jobless Claims, Sept. 13, est. 305k (pr 315k)
  • 8:30am: Housing Starts m/m, Aug., est. -5.2% (prior 15.7%)
  • 8:45am: Fed’s Yellen speaks in Washington
  • 9:45am: Bloomberg Consumer Comfort, Sept. 14 (prior 36.5)
  • 10am: Philly Fed Business Outlook, Sept., est. 23.0 (pr 28)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: U.S. to announce plans for auction of 3M/6M bills, 2Y/5Y/7Y notes, 2Y FRN
  • 12pm: Household Change in Net Worth, 2Q (prior $1.490t)
  • 1pm: U.S. to sell $13b 10Y TIPS in reopening
  • 5pm: Fed’s Richard Fisher speaks in Dallas

 

GOVERNMENT:

    • Senate, House in session
    • Ukraine President Petro Poroshenko meets with Obama, Congress
    • House Speaker John Boehner delivers speech on economy
    • Congress cmtes hold hearings on threat from Islamic State
    • 8am: House Intelligence cmte hearing
    • 11:15am: Defense Sec. Chuck Hagel at House Armed Services Cmte
    • 11:30am: Sec. of State John Kerry House Foreign Affairs
    • 8:15am: FDIC Chairman Gruenberg among speakers at FDIC’s Center for Financial Research/Journal of Fin. Services Research
    • 9am: Institutes of Mfg Innovation briefing w/ Sen. Brown, D-Ohio; Rep. Kennedy, D-Mass.; Rep. Reed, R-N.Y.; Commerce Secretary Pritzker on strategy for dealing with Islamic State
    • 8:30am: Sen. Energy and Natl Resources ranking member Sen. Murkowski, R-Alaska; Sen. Scott, R-S.C. conf. on energy security
    • 8:45am: Fed Chair Yellen prerecorded video: “Importance of Asset Building for Low and Middle Income Households” at Corp. for Enterprise Development’s 2014 Assets Learning Conf.
    • 10am: FERC holds monthly public meeting
    • 10am: CDC news conf. on 2014-2015 flu outlook w/ Dir. Frieden
    • 11am: House Oversight Cmte hearing on Obamacare
    • 2:15pm: Boehner speech on economy
    • U.S. ELECTION WRAP: Ad Dispute in Ga.; Polls; Cotton’s Thesis

 

WHAT TO WATCH:

  • Scotland decides on U.K. independence; vote too close to call
  • Alibaba IPO expected to price post-mkt; $66-$68/shr range
  • Bayer to float material-science unit, focuses on life sciences
  • Dresser-Rand, Sulzer in talks about potential combination
  • ECB says banks take EU82.6b in targeted long-term loans
  • SNB keeps franc ceiling of 1.20 vs euro, may step up defense
  • Ukraine President Petro Poroshenko meets with Obama, Congress
  • Sony may be cut to below investment grade at S&P
  • China home price drop spreads to more cities as demand weakens
  • Henkel agrees to buy Minnesota-based Bergquist Co.
  • German e-tailer Zalando to raise as much as $815m in Oct. IPO
  • Apple delays HealthKit software after discovering early flaw
  • Costco stores in Canada to stop accepting American Express
  • Amazon unveils new tablet lineup for kids, readers, businesses
  • U.K. retail sales climbs most in 4 months, matches est.

 

EARNINGS:

    • ConAgra Foods (CAG) 7:30am, $0.35
    • IHS (IHS) 6am, $1.44
    • Oracle (ORCL) 4:01pm, $0.64 - Preview
    • Red Hat (RHT) 4:05pm, $0.38
    • Rite Aid (RAD) 7am, $0.06
    • Tibco Software (TIBX) 4:05pm, $0.18

               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • China Opens Gold Market to Foreigners Amid Pricing Ambition
  • Brent Crude Futures Pare Loss with WTI Amid Risks to OPEC Supply
  • Silver ETP Buyers Defy Hedge Fund Exit During Slump: Commodities
  • Rebar in Shanghai Closes Near Record Low as Home Prices Weaken
  • Gold Trades Little Changed After Drop to Eight-Month Low on Fed
  • Billionaire’s Wheat Farmers Unbowed in Russia as Sanctions Bite
  • Wheat Slides With Corn on Outlook for Surging Crop Supplies
  • Cocoa Extends Gains in London to Three-Week High as Sugar Falls
  • Panama Canal Expansion in 2016 May Spur U.S. LNG Exports to Asia
  • Switzerland Imported 126.2 Tons of Gold Last Month: Swiss Data
  • Billionaire Branson’s NGO Sees CO2-Fighting Ports Gain Fivefold
  • Rubber Declines as China Home Prices Raise Demand Concerns
  • Gold Least Tempting Versus Stocks Since Lehman: Chart of the Day
  • OPEC Supply Risks Grow as Biggest Libyan Oilfield Is Halted

 

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


*SHORT SBUX CALL TODAY @11AM

Takeaway: We recently added SBUX to our Best Ideas list as a short. We’ll be hosting a call today @11AM EST to review our thesis & field questions.

CALL DETAILS:

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 174364#
  • Materials: CLICK HERE

 *SHORT SBUX CALL TODAY @11AM - 9 17 2014 1 37 09 PM

 

KEY TOPICS WILL INCLUDE:

  1. Why decelerating domestic traffic is an early sign of maturation.
  2. Reception of the new La Boulange food items (via one of our proprietary consumer surveys).
  3. Is menu complexity risking the deliverability of the “Starbucks Experience?”
  4. How the street is overestimating the digital opportunity.
  5. Why commodity prices are likely to be a headwind for the next couple of years.
  6. Approaching peak margins and why this trend is unsustainable.
  7. The biggest risks to current consensus expectations.

  

Howard Penney

Managing Director

 

Fred Masotta

Analyst


FDX: Moving To Roughly Indifferent

Overview

 

We have ‘liked’ FedEx shares since late 2012, gradually reducing our affinity as the shares have moved higher (although a bit too quickly).  With today’s gains, we will move to ‘roughly indifferent’.  Much of the undervaluation in the Express division has been recognized at this point – perhaps 2/3s, if it were possible to provide such allocations.  Management caution on 2H FY15 and static guidance may point to a softer second half.  We preferred FDX when the Express division looked like it was detracting from the market’s valuation of FDX shares.  We would look to re-enter at more attractive prices and would not short/underweight FDX shares.  We do expect FedEx to be reasonably successful with its profit improvement plan and may again be exiting too early.

 

 

Updated Sum of Parts

 

We have written a critique of this valuation methodology and recognize its flaws.  However, we continue to find it a helpful framing when explaining our views on FDX.  We present a comparison of the June 2013 SOTP table with the current one.

 

Sum of Parts in June 2013 – FedEx Express Implied Negative Valuation

(published here, odd formatting included)

 

FDX: Moving To Roughly Indifferent  - bc1

 

 

Sum of Parts Following FY1Q 2015 Results – FedEx Express Implied $15 bil Valuation

 

FDX: Moving To Roughly Indifferent  - bc2

 

 

FY 1Q 2015 Results

 

We will let others provide a detailed review of FDX’s quarter, but pull out some highlights below.

 

Express Segment Margin:  The FedEx Express margin has made progress, but still has a way to go to reach those of UPS and Deutsche Post.  We do not see a reason that FDX’s profit improvement plan (PIP) will not significantly close the gap between FDX and competitors.  That said, we think a good portion of the margin improvement is already reflected in FDX shares.

 

FDX: Moving To Roughly Indifferent  - bc3

 

 

It Isn’t Just Apple Product Launches:  Call Q&A seemed to imply that the quarter was just an Apple launch phenomena.  FedEx Express may wish it were more closely tied to iPhone launches, but the data suggest they are largely unrelated.

 

FDX: Moving To Roughly Indifferent  - bc4

 

 

Far From Outlier Results:  FY1Q 2015 was better better, but without easy comps or with unusually strong yields/volume growth.  

 

FDX: Moving To Roughly Indifferent  - bc5

 

 

Yields improved slightly, most likely because of less International Priority headwind.

 

FDX: Moving To Roughly Indifferent  - bc6

 

 

Volumes also improved, consistent with broader airfreight data.

 

FDX: Moving To Roughly Indifferent  - bc7

 

 

Ground Still Solid:  Management again commented that it won’t be satisfied with less than high-teens margins.

 

 

FDX: Moving To Roughly Indifferent  - bc8

 

 

Freight’s Highest Margin:  The best quarter since the financial crisis for FedEx Freight.

 

 

Guidance:  Management commented that the stronger FY1Q 15 was factored into guidance and implied a weaker back half relative to consensus.  Guidance may just be conservative, but guidance has been fairly on target in the last couple of years.

 

 

FedEx Investment Negatives:  When we presented FDX as a long in late 2012, we often heard its myriad investment negatives.  Many of them were true negatives, but we felt there was adequate compensation for the risks.  That offsetting compensation is less available at current prices.  Negatives include:

  • The Express business is capital intensive and historically not a great generator of free cash flow
  • FedEx Ground faces ongoing legal and regulatory challenges to its independent contractor model
  • Belly space in wide body aircraft in the Asia appears a significant challenge, FTN or not

 

 

 

 

 

 


 




Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
next