Takeaway: Both mutual funds and ETFs flagged fixed income inflows for the first week of the year with outflows across the board in equities.
This note was originally published January 16, 2014 at 08:03 in Financials. Click here for more information on how you can begin subscribing to Hedgeye research.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Total equity mutual funds experienced moderate outflows for the first week of 2014 with $646 million flowing out of stock funds for the week ending January 8th. Within the total equity fund result, domestic equity mutual funds lost $3.3 billion, the biggest outflow in a month, with international equity funds posting a $2.7 billion inflow. This weekly loss of $646 million now serves as the running 2014 average and compares to the solid equity inflows experienced in 2013 which put up a $3.0 billion inflow per week.
Fixed income mutual funds broke their dour stretch of 14 consecutive weeks of outflow with the first net subscription last week in three and a half months. In the week ending January 8th, total fixed income mutual funds produced a $2.6 billion inflow which broke out into a $2.9 billion inflow into taxable bonds and a $347 million outflow in tax-free bonds. This week's $2.6 billion inflow now serves as the 2014 weekly average which is an improvement for now against the 2013 weekly average in fixed income of a $1.5 billion outflow.
ETFs experienced mixed trends but essentially followed the direction of mutual funds with an outflow in passive equity funds and an inflow into bond ETFs. Stock ETFs lost $1.3 billion for the 5 day period ending January 8th with bond ETFs experiencing a $778 million inflow.
The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $5.4 billion spread for the week ($1.9 billion of total equity outflows versus $3.4 billion in fixed income inflows - negative numbers imply inflows for bonds). This result was the best week for total fixed income in 17 weeks and compared to the 52 week average of a $7.3 billion spread (positive spread to equities) but was well off of the 52 week high of $30.9 billion (positive spread to equities) and the smallest equity/debt weekly spread of -$9.2 billion (negative numbers imply a net inflow into bonds for the week).
We estimate that the strong return for stocks to end 2013 and the negative return for bonds to end last year may be resulting in an institutional re-balance to start 2014. In a hypothetical 60/40 portfolio of stocks/bonds, the returns in the broader averages of 30% in the S&P 500 and a negative 2% for the Barclay's Aggregate Index would mean an institutional portfolio would need to sell 6% of its stock holdings and buy 6% more in bonds, which may account for the year-to-date start in the asset classes (bonds outperforming stocks to start '14) with then mutual fund and ETF flows chasing this performance.
For the week ending January 8th, the Investment Company Institute reported moderate equity outflows from mutual funds with $646 million flowing out of total stock funds. The breakout between domestic and world stock funds separated to a $3.3 billion outflow from domestic stock funds and a $2.7 billion inflow into international or world stock funds. These results for the most recent 5 day period now serve as the year-to-date average for 2014 being they are the first week of the New Year and compare to the 2013 results of a $451 million average weekly inflow into domestic funds and a $2.6 weekly subscription into international or world funds for a total of a $3.0 billion weekly inflow average for last year.
On the fixed income side, bond funds broke their streak of 14 consecutive weeks of outflow for the 5 day period ended January 8th, with inflows into bond products for the first time in over 3 months. The aggregate of taxable and tax-free bond funds booked a $2.6 billion inflow, the first net weekly inflow since the $1.7 billion that came into bond fund the week ending September 25th. Taxable bonds carried the load with a $2.9 billion inflow, which was net against another outflow in municipal or tax-free bonds of $347 million. Intermediate term trends in fixed income are still negative with taxable bonds having had outflows in 27 of the past 33 weeks and municipal bonds having had 33 consecutive weeks of outflow.
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 $880 million inflow in the most recent 5 day period, although the past 6 weeks have been below the recent 52 week average for 2013 of $1.5 billion per week. Hybrid funds have had inflow in 31 of the past 33 weeks.
Exchange traded funds had mixed trends within the same 5 day period ending January 8th but essentially followed the asset allocation flows within mutual funds last week. Equity ETFs posted a weak $1.3 billion outflow in the most recent 5 day period, breaking a streak of 7 consecutive weeks of positive equity ETF flow. The 2014 weekly average for stock ETFs is now this recent $1.5 billion outflow, which compares to last year's $3.4 billion weekly average inflow.
Bond ETFs experienced moderate inflows for the 5 day period ending January 8th with a $778 million subscription, an improvement from the week prior which lost $224 million and now also an improvement from the new annual comparison of a $234 million weekly inflow for 2013. Bond ETF trends have been perfectly mixed over the past 10 weeks, with 5 weeks of inflow and 5 weeks of outflow.
The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $5.4 billion spread for the week which favors fixed income ($1.9 billion of total equity outflows versus $3.4 billion in fixed income inflows - negative numbers imply inflows for bonds). This result was the best week for fixed income in 17 weeks and compared to the 52 week moving average of a $7.3 billion spread (positive spread to equities) but was well off of the 52 week high of $30.9 billion (positive spread to equities) and the smallest equity/debt weekly spread of -$9.2 billion (negative numbers imply a net inflow into bonds for the week).
We estimate that the strong return for stocks to end 2013 and the negative return for bonds to end last year may be resulting in an institutional re-balance to start 2014. In a hypothetical 60/40 portfolio of stocks/bonds, the returns of the broader averages of 30% in the S&P 500 and a negative 2% for the Barclay's Aggregate Index would mean an institutional portfolio would need to sell 6% of its stock holdings and buy 6% more in bonds which may account for the year-to-date start in the asset classes (bonds outperforming stocks to start '14) with then mutual fund and ETF flows chasing this performance.
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
Takeaway: The intermediate and long-term dynamics remain very favorable, though the short-term setup appears balanced between positive & negatives.
Summary: On a short-term basis, we see improvement and decline in roughly equal measures, while over the intermediate term there remains the trend is clearly toward improvement by a ratio of two to one. The same can be said for the long-term, where improvement is outstripping decline by a ratio of four to one.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 3 of 13 improved / 3 out of 13 worsened / 7 of 13 unchanged
• Intermediate-term(WoW): Positive / 8 of 13 improved / 4 out of 13 worsened / 1 of 13 unchanged
• Long-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged
1. U.S. Financial CDS - The week saw big improvement in mortgage insurers MTG and RDN, furthering their m/m trend of improvement. The big banks were modestly tighter, on average, continuing their trend over the past month as well.
Tightened the most WoW: MTG, RDN, AGO
Widened the most WoW: WFC, MET, CB
Tightened the most WoW: AON, MBI, AGO
Widened the most/ tightened the least MoM: AXP, WFC, XL
2. European Financial CDS - The most recent week saw swaps widen nominally in Europe's banking system, but the bigger takeaway remains the still-substantial tightening on a m/m basis.
3. Asian Financial CDS - Indian banks continue their see-saw trend of late, this time tightening by 11-22 bps w/w. Meanwhile, on a m/m basis the Chinese banks continue to widen, rising by 24-28 bps. Japanese banks are mixed, though, on balance, unchanged on a m/m basis.
4. Sovereign CDS – Sovereign swaps mostly tightened last week with the exception of Japan where they rose 2 bps. Portuguese sovereign swaps tightened by -7.6% (-22 bps to 269 ) and U.S. sovereign swaps were unchanged. Overall, the trend of ongoing improvement in European sovereign risk profiles continues.
5. High Yield (YTM) Monitor – High Yield rates fell 8.3 bps last week, ending the week at 5.83% versus 5.91% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1850.
7. TED Spread Monitor – The TED spread was unchanged last week at 20.4 bps.
8. CRB Commodity Price Index – The CRB index rose 1.3%, ending the week at 278 versus 275 the prior week. As compared with the prior month, commodity prices have decreased -1.1% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – The Euribor-OIS spread was essentially unchanged at 12 bps last week. 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.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 1 basis point last week, ending the week at 2.77% versus last week’s print of 2.76%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Markit MCDX Index Monitor – Last week spreads tightened -6 bps, ending the week at 77 bps versus 83 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.
12. Chinese Steel – Steel prices in China fell 0.8% last week, or 27 yuan/ton, to 3,419 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread tightened to 245 bps, -4 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.6% upside to TRADE resistance and 1.4% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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Client Talking Points
With the Wall Street Journal's Jon Hilsenrath passing along the "super duper" secret information that the Fed isn’t one and done on the whole #taper thing, the US Dollar and Rates are up this morning (versus down Friday, which meant stocks down). You already know that I like the Fed tapering. It's long overdue. Yes - it's bearish for bonds and bullish for stocks (see our #FlowShows Macro Theme for Q114).
The 10-Year Treasury yield is up 3 basis points this morning to 2.85% after testing and holding our Hedgeye TREND support of 2.76%. Higher-lows are bearish form bonds, but the broader breakout to higher-highs in yields over 3.05%? It isn’t in the cards. Yet.
Well, Gold certainly loved the down bond yield move last week (and year-to-date for that matter) and does not like bond yields up this morning. This is how Gold is trading... with rates. The risk range is now $1220-1267 with the 10-year yield range of 2.76-2.89%, immediate-term.
|FIXED INCOME||0%||INTL CURRENCIES||27%|
Top Long Ideas
Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.
Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.
We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.
Three for the Road
QUOTE OF THE DAY
"Confidence comes not from always being right but from not fearing to be wrong." - Peter T. McIntyre
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