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Flows: Bond Pain, Equity Gain

Takeaway: Tax loss selling continued in bonds with the biggest outflow in 3 months while the combination of equity ETFs and funds had strong inflow.

This unlocked research note was originally published December 27, 2013 at 08:25 in Financials. If you like what you see here and would like to learn more about the Hedgeye Revolution click here.

 

Flows: Bond Pain, Equity Gain - flows1

 

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Total equity mutual funds experienced slight inflows for the week ending December 18th with a $433 million subscription, making it 9 of 10 weeks of total stock fund inflow. Within the total equity fund result, domestic equity mutual funds lost $2.6 billion with international equity funds posting a $3.1 billion inflow. Despite these mixed trends both categories of equity mutual funds have averaged positive flow in 2013 with an average weekly subscription of $3.0 billion weekly year-to-date, a complete reversal from 2012's $3.0 billion weekly outflow 

 

Fixed income mutual funds continued persistent outflows during the most recent 5 day period with another $8.1 billion withdrawn from bond funds, the worst outflow in 3 months. This week's draw down worsened sequentially from the $6.7 billion outflow the week prior and ongoing redemptions have now forced the 2013 weekly average for all fixed income funds to a $1.4 billion outflow, which compares to the strong weekly inflow of $5.8 billion throughout 2012

 

ETFs experienced positive trends in the most recent 5 day period, with equity products seeing heavy inflows and fixed income ETFs seeing slight inflows week-to-week. Passive equity products gained $9.9 billion for the 5 day period ending December 18th with bond ETFs experiencing a $293 million inflow. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results


 

Flows: Bond Pain, Equity Gain - caste1

Flows: Bond Pain, Equity Gain - ICI chart 2

 

 

For the week ending December 18th, the Investment Company Institute reported slight equity inflows into mutual funds with $433 million flowing into total stock funds. The breakout between domestic and world stock funds separated to a $2.6 billion outflow into domestic stock funds and a $3.1 billion inflow into international or world stock funds. These results for the most recent 5 day period compare to the year-to-date weekly averages of a $384 million inflow for U.S. funds and a running $2.6 billion weekly inflow for international funds. The aggregate inflow for all stock funds this year now sits at a $3.0 billion inflow, an average which has been getting progressively bigger each week and a complete reversal from the $3.0 billion outflow averaged per week in 2012.

 

On the fixed income side, bond funds continued their weak trends for the 5 day period ended December 18th with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $8.1 billion outflow, a sequential decay from the $6.7 billion lost in the prior 5 day period and the worst weekly outflow in over 3 months since the $9.3 billion redemption in the final week of August. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $5.6 billion, which joined the $2.5 billion outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 25 of the past 29 weeks and municipal bonds having had 29 consecutive weeks of outflow. These redemptions late in the year are likely tax loss selling related with the Barclay's Aggregate Bond index down nearly 2% in 2013, the first annual loss in 14 years. The 2013 weekly average for fixed income fund flows is now a $1.4 billion weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.

 

Hybrid mutual funds, products which combine both equity and fixed income allocations, continue to be the most stable category within the ICI survey with another $483 million inflow in the most recent 5 day period, although the past 4 weeks have been below year-to-date averages. Hybrid funds have had inflow in 27 of the past 29 weeks with the 2013 weekly average inflow now at $1.5 billion, a strong advance versus the 2012 weekly average inflow of $911 million.

 

 

Flows: Bond Pain, Equity Gain - ICI chart 3

Flows: Bond Pain, Equity Gain - ICI chart 4

Flows: Bond Pain, Equity Gain - ICI chart 5

Flows: Bond Pain, Equity Gain - ICI chart 6

Flows: Bond Pain, Equity Gain - ICI chart 7

 

 

Passive Products:

 

 

Exchange traded funds had positive trends within the same 5 day period ending December 18th with equity ETFs posting a strong $9.9 billion inflow, the fifth consecutive week of positive equity ETF flow. The 2013 weekly average for stock ETFs is now a $3.4 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.

 

Bond ETFs experienced moderate inflow for the 5 day period ending December 18th with a $293 million subscription, a deceleration from the week prior which produced a $986 million inflow for passive bond products. Taking in consideration this most recent data however, 2013 averages for bond ETFs are flagging with just a $268 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.

 

 

Flows: Bond Pain, Equity Gain - ICI chart 10

Flows: Bond Pain, Equity Gain - ICI chart 9

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 


Top Quotes from a Memorable Year

Takeaway: With our 1Q14 Macro Investment themes impending, we look back at a memorable year of uncertainty embraced via our favorite Early Look quotes

This note was originally published December 31, 2013 at 10:28 in Macro

For those that haven’t met me yet, my name is Josh Balch and I’m the newest member of the Hedgeye team.  As we look into the uncertainties of 2014, I find myself looking back at 2013 and reminiscing on the past.

 

At this time last year, I was playing hockey for Yale and never would have been able to predict with high conviction that we were going to win the school’s first Division 1 NCAA Men’s Hockey National Championship. While members of our team all had confidence and believed in each other, we also knew it was a daunting task which had not been completed by an Ivy League school since Harvard’s 1989 team.  

 

Top Quotes from a Memorable Year - yale1

 

While there is no way that we could have predicted Yale’s 1st NCAA hockey title or other even more unpredictable events from 2013, we can look forward to waking up every morning and working our butts off in order to help risk manage what Mr. Market has awaiting us in the New Year. At this time last year we were one of few research firms walking into 1Q13 as US Growth bulls and Inflation bears. This came to fruition as investors who were long growth (equities) and short gold, bonds, and MLPs found themselves having a very successful year with LOW YIELD STOCKS (up +46.9% YTD) outpacing HIGH DIVIDEND YIELD STOCKS (up +18.2% YTD) by >2.5X.

 

So, what will happen in 2014 to drive global markets?  

 

As our CEO Keith McCullough wrote in a recent Early Look, “The best prediction we can make is to proactively prepare ourselves to ‘Embrace the Uncertainty of the Game.”  In the spirit of preparation for 2014’s market game, we will be presenting our new 1Q14 Macro Themes in early January to ensure that you are proactively prepared.

 

In light of reminiscing on 2013, here are some of my favorite Early Look quotes from this year. Thank you for your service and we look forward to another memorable year.

 

Josh Balch

Hedgeye Risk Management

 

 

“If money is your hope for independence you will never have it.  The only real security that a man will have in this is a reserve of knowledge, experience, and ability.” -Henry Ford

 

“The mass of the American people are most emphatically not in the deplorable condition of which you speak.” -Theodore Roosevelt

 

“Time destroys the speculation of men, but it confirms nature.” -Cicero

 

“History tells us that the threat to prosperity is not debt but socialism.” -George Gilder

 

“All progress comes from the creative minority.” -George Gilder

 

“My reading of history convinces me that most bad government results from too much government.” -Thomas Jefferson

 

“We had invested very heavily over a very long period of time in the education of quality leaders.” -John Allison

 

“Anyone who isn’t confused doesn’t really understand the situation.” -Edward R. Murrow

 

“Unlike an inexorable, Newtonian “great machine”, the economy is not a closed system.” -Geoger Gilder

 

“Much of the profession is empirically bankrupt because it is no longer taught economic history.” -Charles Kindleberger

 

“The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital . . . the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy.” -President John F. Kennedy

 

“Ignorance more frequently begets confidence than does knowledge; it is those who know little, not those who know much, who so positively assert that this or that…”-Charles Darwin

 

“It’s imperative that the Fed begins to taper.”-Larry Fink

 

“If making money is a slow process, losing it is quickly done.”-Saikaku Ihara

 

“The great thing in the world is not so much where we stand, as in what direction we are moving.”-Oliver Wendell Holmes

 

“The Fed is the greatest hedge fund in history.” -Warren Buffett

 

“Insanity: doing the same thing over and over again, and expecting different results.” -Albert Einstein

 

“The great thing about fact based decision is that they over rule the hierarchy.” -Jeff Bezos

 

“To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of pride.” -George Soros

 

“Money is one of the shatteringly simplifying ideas of all time; it creates its own revolution.” -Paul Bohannan

 

“Before I went to jail, I was active in politics as a member of South Africa’s leading organization – and I was generally busy from 7 A.M. to midnight. I never had time to sit and think.” -Nelson Mandela

 

“The market is smarter than you will ever be, with its combined knowledge of all participants. Pay attention to the signs. Be quick to admit that you’re wrong. Don’t be afraid to miss something.” -Yra Harris, Praxis Trading

 

“Success is stumbling from failure with no loss of enthusiasm.” -Winston Churchill

 

“The greatest barrier to success is the fear of failure.” -Sven Goran Eriksson

 

“The greatest obstacle to pleasure is not pain; it is delusion.” -Lucretius

 

“Any society that would give up a little liberty to gain a little security will deserve neither and lose both.” -Benjamin Franklin

 

“A government’s first job should be to protect its citizens. But that should be based on informed consent, not blind trust.” -The Economist

 

“This story illuminates, as only great history can, not only the past but also the present.” -Richard Holbrooke

 

“One main factor in the upward trend of animal life has been the power of wandering.” -Alfred North Whitehead

 

“You hold in your hands, the future of the world.” -Raymond Poincare

 


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Top Quotes from a Memorable Year

Takeaway: With our 1Q14 Macro Investment themes impending, we look back at a memorable year of uncertainty embraced via our favorite Early Look quotes

For those that haven’t met me yet, my name is Josh Balch and I’m the newest member of the Hedgeye team.  As we look into the uncertainties of 2014, I find myself looking back at 2013 and reminiscing on the past. At this time last year, I was playing hockey for Yale and never would have been able to predict with high conviction that we were going to win the school’s first division 1 NCAA Men’s Hockey National Championship. While members of our team all had confidence and believed in each other, we also knew it was a daunting task which had not been completed by an Ivy League school since Harvard’s 1989 team.  

 

While there is no way that we could have predicted Yale’s 1st NCAA hockey title or other even more unpredictable events from 2013, we can look forward to waking up every morning and working our butts off in order to help risk manage what Mr. Market has awaiting us in the New Year. At this time last year we were one of few research firms walking into 1Q13 as US Growth bulls and Inflation bears. This came to fruition as investors who were long growth (equities) and short gold, bonds, and MLPs found themselves having a very successful year with LOW YIELD STOCKS (up +46.9% YTD) outpacing HIGH DIVIDEND YIELD STOCKS (up +18.2% YTD) by >2.5X.

 

So, what will happen in 2014 to drive global markets?  As our CEO Keith McCullough wrote in a recent Early Look, “The best prediction we can make is to proactively prepare ourselves to ‘Embrace the Uncertainty of the Game.”  In the spirit of preparation for 2014’s market game, we will be presenting our new 1Q14 Macro Themes in early January to ensure that you are proactively prepared.

 

In light of reminiscing on 2013, here are some of my favorite Early Look quotes from this year. Thank you for your service and we look forward to another memorable year.

 

Josh Balch

Hedgeye Risk Management

 

 

“If money is your hope for independence you will never have it.  The only real security that a man will have in this is a reserve of knowledge, experience, and ability.” -Henry Ford

 

“The mass of the American people are most emphatically not in the deplorable condition of which you speak.” -Theodore Roosevelt

 

“Time destroys the speculation of men, but it confirms nature.” -Cicero

 

“History tells us that the threat to prosperity is not debt but socialism.” -George Gilder

 

“All progress comes from the creative minority.” -George Gilder

 

“My reading of history convinces me that most bad government results from too much government.” -Thomas Jefferson

 

“We had invested very heavily over a very long period of time in the education of quality leaders.” -John Allison

 

“Anyone who isn’t confused doesn’t really understand the situation.” -Edward R. Murrow

 

“Unlike an inexorable, Newtonian “great machine”, the economy is not a closed system.” -Geoger Gilder

 

“Much of the profession is empirically bankrupt because it is no longer taught economic history.” -Charles Kindleberger

 

“The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital . . . the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy.” -President John F. Kennedy

 

“Ignorance more frequently begets confidence than does knowledge; it is those who know little, not those who know much, who so positively assert that this or that…”-Charles Darwin

 

“It’s imperative that the Fed begins to taper.”-Larry Fink

 

“If making money is a slow process, losing it is quickly done.”-Saikaku Ihara

 

“The great thing in the world is not so much where we stand, as in what direction we are moving.”-Oliver Wendell Holmes

 

“The Fed is the greatest hedge fund in history.” -Warren Buffett

 

“Insanity: doing the same thing over and over again, and expecting different results.” -Albert Einstein

 

“The great thing about fact based decision is that they over rule the hierarchy.” -Jeff Bezos

 

“To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of pride.” -George Soros

 

“Money is one of the shatteringly simplifying ideas of all time; it creates its own revolution.” -Paul Bohannan

 

“Before I went to jail, I was active in politics as a member of South Africa’s leading organization – and I was generally busy from 7 A.M. to midnight. I never had time to sit and think.” -Nelson Mandela

 

“The market is smarter than you will ever be, with its combined knowledge of all participants. Pay attention to the signs. Be quick to admit that you’re wrong. Don’t be afraid to miss something.” -Yra Harris, Praxis Trading

 

“Success is stumbling from failure with no loss of enthusiasm.” -Winston Churchill

 

“The greatest barrier to success is the fear of failure.” -Sven Goran Eriksson

 

“The greatest obstacle to pleasure is not pain; it is delusion.” -Lucretius

 

“Any society that would give up a little liberty to gain a little security will deserve neither and lose both.” -Benjamin Franklin

 

“A government’s first job should be to protect its citizens. But that should be based on informed consent, not blind trust.” -The Economist

 

“This story illuminates, as only great history can, not only the past but also the present.” -Richard Holbrooke

 

“One main factor in the upward trend of animal life has been the power of wandering.” -Alfred North Whitehead

 

“You hold in your hands, the future of the world.” -Raymond Poincare

 


Our New Year's Fight

This unlocked note was originally published December 31, 2013 at 08:14 in Morning Newsletter for subscribers. If you like what you see here and would like to become a subscriber click here.

“All hockey players are bilingual. They know English and profanity.”

-Gordie Howe

The big picture

Yes, it can be a profane game. We aren’t exactly politically correct when we’re all fired up playing it either. Fans call it passion. Foes call it petulance. If you catch our emotions just right, you can watch us fight – and a hockey game might just break out in the meantime.

 

It’s 37 below in my hometown of Thunder Bay, Ontario this morning. But after the World Junior Hockey tilt between Canada and the USA today, lots of little boys and girls will be tugging at their Dad’s red and white jerseys to get them suited up to play on their outdoor rinks. There is no such thing as a PTA snow day. There’s always time to play hockey.

 

While the love of a childhood game can’t be replicated in this Canadian’s craw, I wanted to thank you all for putting up with how I play this one. I’m well aware that I can be an irritating player who likes to stir the pot and start fights. But I love the game and it’s all in good competitive fun. Best of luck and health to you, your families, and firms for a fantastic 2014 Macro season.

Macro grind

As Teddy Roosevelt was coming up through the US political ranks, the Boston Evening Times wrote that “he isn’t afraid of the newspapers, and he is always ready for a fight… his aggressiveness is a great factor in a good cause.” (Doris Kearns Goodwin’s The Bully Pulpit, page 141)

 

Calling it like it is isn’t for everyone. Neither are the principles of transparency, accountability, and trust. But, as you’ll see from the World Junior Hockey Championships in Sweden today, on NFL Playoff Sunday, or in any arena of competitive life, these are the foundations of leadership. And we intend to stand by your side upholding them.

 

As I wrote yesterday, I have no idea what is going to happen wire-to-wire across the 12-month period that will be 2014. That would be like hearing Randy Carlyle (Coach of the Toronto Maple Leafs) have the hubris to predict how each and every play of tomorrow’s NHL Winter Classic versus the Detroit Red Wings will go – oh, and then predict every other game of the season after that.

 

The best prediction we can make is to proactively prepare ourselves to Embrace The Uncertainty of the game.

 

You were either long growth (as an investment style) when you had opportunities to position yourself that way in 2013, or you were not. The game always lets you in – it’s your job to realize that, and play the game that’s in front of you.

 

We won’t “predict” 2014 – we will begin with our position and start playing the game from there. There will be wins. There will be losses. And god help me if I don’t get into any Twitter fights.

 

Here’s how we are positioned on the last day of 2013 in the Hedgeye Asset Allocation Model:

 

1. Cash = 37%

2. Foreign Currency (FX) = 30% (Pound, Euro, Kiwi, etc.)

3. International Equities = 15% (Germany, Italy, Japan, etc.)

4. US Equities = 15% (Growth Equities, not Utilities)

5. Commodities = 3% (Natural Gas)

6. Fixed Income = 0% (it was 0% for 184 trading days of 2013)

 

Lets sprinkle a little color on these “allocations.” For starters, I may be a Mucker but I am not yet brain dead. Buying-the-damn-bubble #BTDB in US and International stock markets that continue to hit all-time highs is not for the faint of heart. So I have a big pad of cash.

 

Cash is cool.

 

In fact, having a nice fat asset allocation to cash beats being in bonds or something commodities that continues to crash. Never forget that Rule #1 of Risk Management is “don’t lose money” (Buffett). That starts and ends with not allocating your assets to a Fisher Price looking pie chart that keeps you in bubbles (Gold and Bonds) that are in the midst of imploding.

 

On the FX side, remember that our Top Global Macro Theme for Q413 was called #Eurobulls. Pivoting from bullish to bearish on the US Dollar like we did from Q313 to Q4 means it’s a lot easier to have a big asset allocation to other currencies. The British Pound is popping to a fresh YTD high this morning of $1.652 versus USD. That and the Euro remain in Bullish Formations @Hedgeye.

 

When I think about asset allocation, I don’t ignore the concept of diversification. While allocating to cash is a risk managed choice, so is capping my max allocation to any asset class at 33% of my total net wealth. That’s precisely the number I invested into Hedgeye in 2008 and going to 30% international FX right here and now (i.e. 91% of my max conviction to an asset class) is the same.

 

Some people call going to 90-100% of your max “conviction.” And while it’s really important for me to communicate where my investment convictions are (and where they are changing), don’t confuse that with what I have the highest conviction in of all – our process.

 

Thank you again for providing me and my teammates an opportunity to play this game out loud and in front of you every day. Making mistakes out on the proverbial ice for all our fans and foes to see has helped expedite our learning and maturation process immensely. The day I stop learning how to get better at this game is the day I’ll realize it’s time to retire. God willing, I have a lot of years in me yet.

  • CASH: 37%
  • US EQUITIES: 15%
  • INTL EQUITIES: 15%
  • COMMODITIES: 3%
  • FIXED INCOME: 0%
  • INTL CURRENCIES: 30%

Our levels

Our immediate-term Global Macro Risk Ranges are now (with bullish or bearish TREND in parenthesis):

 

UST 10yr Yield 2.94-3.06% (bullish)

SPX 1823-1861 (bullish)

VIX 11.84-14.91 (bearish)

 

Best of luck out there today, and Happy New Year!

KM

 

Keith R. McCullough
Chief Executive Officer

 

Our New Year's Fight - cod


Embrace Uncertainty

Client Talking Points

CHINA

Most of Asia is closed. But Chinese stocks closed up +0.88% to close out the year in the bottom portion of our Global Equities League table at down -3.9% year-to-date. Why? Simple. #GrowthSlowing. That was the call there. Get the slope of growth correct, and it's easier to get country asset allocations correct.

UST 10YR

Here we are at 2013 year end and US 10 year yield will go out at its year-to-date highs. So much for the whole #RatesRising is going to "kill the stock market" thing. Instead, the growth expectations embedded in a +4.12% GDP print perpetuated all-time highs for growth investing (to be sure - US growth stocks, not Gold or bonds).

POUND

The British Pound is still our favorite currency in the world. It is tracking to new highs here this morning at $1.652 versus the US Dollar. And while it is immediate-term TRADE overbought within its $1.63-1.65 risk range, this is breaking out of a 65 year base, don’t forget! Keep calm, carry on...

Asset Allocation

CASH 37% US EQUITIES 15%
INTL EQUITIES 15% COMMODITIES 3%
FIXED INCOME 0% INTL CURRENCIES 30%

Top Long Ideas

Company Ticker Sector Duration
FXB

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

Its been a great year – thanks for putting up with me and best of luck and health to u, your families, and firms in 2014 @KeithMcCullough

QUOTE OF THE DAY

"When the fight begins within himself, a man's worth something." -Robert Browning

STAT OF THE DAY

Gold futures retreated 28% this year to $1,201.60 an ounce, poised for the first loss since 2000 and the biggest since 1981. Meanwhile, investors pulled $38.6 billion from gold funds this year, the most in data going back through 2000, according to EPFR Global, a research company.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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