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[video] Keith's Macro Notebook 2/18: USD JAPAN NATURAL GAS


ICI Fund Flow Survey, Refreshed

Takeaway: An historic week within ETFs with record outflows in equities and record inflows into bonds...trends unchanged within mutual funds

Editor's note: This research note was originally published February 13, 2014 at 08:13 in Financials. For more information on how you can subscribe to Hedgeye click here.

Investment Company Institute Mutual Fund Data and ETF Money Flow

 

ICI Fund Flow Survey, Refreshed - iceflows2

 

In the most recent week, we saw a continuation of the tale of two tapes with equity inflow and fixed income outflow in mutual funds (retail) and a record reallocation within more institutionally based ETFs with record outflows in stock ETFs and record inflows into bond ETFs.

 

Total equity mutual funds experienced another week of inflow as the lagged effect of fund flow chasing performance from last year has been strong enough to offset near term worries about emerging markets. For the week ending February 5th, equity mutual funds had $1.8 billion of inflow, a deceleration from the $5.4 billion inflow the week prior but none-the-less a positive inflow in a tough macro news flow week. The $1.8 billion subscription for the week however was below the running year-to-date weekly average inflow of $4.3 billion for stock funds in 2014. 

 

Fixed income mutual funds conversely had net outflows during the most recent 5 day period, a continuation from the negative performance of 2013. In the week ending February 5th, total fixed income mutual funds experienced a $2.8 billion outflow, which broke out into a $3.0 billion redemption in taxable bonds and a $146 million inflow into tax-free bonds, the fourth straight week of inflow for munis. The 2014 weekly average for fixed income mutual funds now stands at a $75 million weekly outflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in the bond market).

 

ETFs, a more institutionally oriented product, reflected the nascent risks in emerging markets and weaker U.S. economic data with record outflows in stock ETFs and conversely record inflows in fixed income ETFs. Stock ETFs lost a weekly record $27.4 billion in the 5 day period ending February 5th, the biggest weekly outflow in our data set spanning 18 months of information. Bond ETFs conversely booked the biggest weekly inflow in our information from Bloomberg putting up a $14 billion subscription. The 2014 weekly averages considering this latest data are now a $7.9 billion weekly outflow for equity ETFs and a $2.8 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 negative $36.7 billion spread for the week (-$25.5 billion of total equity outflows versus the $11.1 billion inflow within fixed income; positive numbers imply inflows for stocks; negative numbers imply inflows for bonds). The 52 week moving average has been $6.5 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) with this week setting the 52 week low of equity/debt weekly spread of -$36.7 billion (negative numbers imply a net inflow into bonds for the week). 

 

While the short term fund flow picture is showing drastic volatility with this week's historic outflow in ETFs, we highlight that the longer term picture within the mutual fund market continues to relay a rebound in stock funds to the detriment of fixed income funds. Looking at top line gross sales of all equity funds on a monthly basis, shows the continued trajectory higher to new record highs since 2007 through the end of last year. According to ICI data, all equity funds grossed $159 billion in sales in December 2013, a new high in all available data from 2007. Conversely, fixed income mutual funds continue to book lower highs in sales after peaking in early 2013. The most recent sales tallies in December (as January 2014 totals aren't available yet) amounted to $92 billion, well off the all-time high of $118 billion in fixed income monthly sales in January 2013. While net flows (what the industry normally focuses on) can be volatile on a short term basis, top line sales totals will eventually wash out short-term inflow or outflow and hence are a better indicator of which products have the most momentum. Thus these top-line sales trends still relay incrementally stronger demand for equities over fixed income in mutual funds for now.

 

 

ICI Fund Flow Survey, Refreshed - ICI chart 15

 

 

 

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

 

 

ICI Fund Flow Survey, Refreshed - ICI chart 2

 

ICI Fund Flow Survey, Refreshed - ICI chart 3

 

ICI Fund Flow Survey, Refreshed - ICI chart 4

 

ICI Fund Flow Survey, Refreshed - ICI chart 5

 

ICI Fund Flow Survey, Refreshed - ICI chart 6

 

 

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

  

 

ICI Fund Flow Survey, Refreshed - ICI chart 7

 

ICI Fund Flow Survey, Refreshed - 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 negative $36.7 billion spread for the week (-$25.5 billion of total equity outflows versus the $11.1 billion inflow within fixed income; positive numbers imply inflows for stocks; negative numbers imply inflows for bonds). The 52 week moving average has been $6.5 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) with this week setting the 52 week low of equity/debt weekly spread of -$36.7 billion (negative numbers imply a net inflow into bonds for the week). 

 

 

ICI Fund Flow Survey, Refreshed - ICI chart 16

 

 

While the short term fund flow picture is showing drastic volatility with this week's historic outflow in ETFs, we highlight that the longer term picture within the mutual fund market continues to relay a rebound in stock funds to the detriment of fixed income funds. Looking at top line gross sales of all equity funds on a monthly basis, shows the continued trajectory higher to new record highs since 2007 through the end of last year. According to ICI data, all equity funds grossed $159 billion in sales in December 2013, a new high in all available data from 2007. Conversely, fixed income mutual funds continue to book lower highs in sales after peaking in early 2013. The most recent sales tallies in December (as January 2014 totals aren't available yet) amounted to $92 billion, well off the all-time high of $118 billion in fixed income monthly sales in January 2013. While net flows (what the industry normally focuses on) can be volatile on a short term basis, top line sales totals will eventually wash out short-term inflow or outflow and hence are a better indicator of which products have the most momentum. Thus these top-line sales trends still relay incrementally stronger demand for equities over fixed income in mutual funds for now.

 

 

ICI Fund Flow Survey, Refreshed - ICI chart 14

 

ICI Fund Flow Survey, Refreshed - ICI chart 13

 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 


Burning Currencies

Client Talking Points

US DOLLAR

The Dollar was down another -0.7% last week and is trying hard to bounce this morning as the Japanese take their turn trying to torch the Yen. The Hedgeye TAIL risk is back on now from a Down Dollar, Up Commodities #InflationAccelerating perspective. Macro matters.

JAPAN

Ahhh... that smell of Burning Yen! The whole -0.46% of it versus the US Dollar got the Nikkei a +3.1% rip back to -8.9% year-to-date. Note the Nikkei VIX (volatility) is tracking around 30 now. I’m sure playing pachinko is fun too, but this FX versus Equity correlation whip wears on people after a while.

NAT GAS

Note to the omnipotent folks at the Federal Reserve: whatever you do, do not say there’s inflation in your world, ever. Take a look at Natural Gas. Boom. It is ripping another +5.2% higher to $5.48. That's up +29.7% year-to-date as the CRB and Gold continue to beat all US major equity indices at +4.7% and +9.6% year-to-date.

Asset Allocation

CASH 49% US EQUITIES 0%
INTL EQUITIES 6% COMMODITIES 15%
FIXED INCOME 15% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
FXB

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.

DRI

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.

Three for the Road

TWEET OF THE DAY

COMMODITIES: CRB Index and Gold +4.7% and +9.9% YTD vs Dow -2.5% #InflationAccelerating @KeithMcCullough

QUOTE OF THE DAY

Inflation is the one form of taxation that can be imposed without legislation.

-Milton Friedman

STAT OF THE DAY

Soros Fund Management has doubled up a bet that the S&P 500 is headed for a fall. Within Friday’s 13F filings news was the revelation that the firm increased a put position on the S&P 500 ETF by 154% in Q4, compared with Q3. The value of that holding, the biggest position in the fund, has risen to $1.3 billion from around $470 million. It now makes up a 11.13% chunk of all reported holdings.


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 80.28%
  • SHORT SIGNALS 78.51%

The 4% Economy?

“Most successful pundits are selected for being opinionated, because it’s interesting, and the penalties for incorrect predictions are negligible.  You can make predictions and a year later people won’t remember them.” 

-Daniel Kahneman

 

Last night I gave the keynote presentation at the Trader’s Expo at the Marriot Marquis in Times Square.   Prior to giving the speech, I walked around the conference floor and heard a lot of stories of trading systems that would generate ten bagger returns, some that had triple digit positive performance last year, and so on.  Clearly, the exhibitors needed to grab people’s attention in order to engage in a sales discussion.

 

Frankly, compared to some of the presentations, I’m guessing my presentation on the U.S. economy was a tad boring.  In my presentation, I gave a quick update on our Q1 Themes and the view that economic growth in the U.S. may be slower than consensus expectations in 2014.   Rightfully so, my prognostication, if you want to call it that, raised some questions.

 

The 4% Economy? - dj

 

The first question related to the cover of Barron’s this weekend which heralded the potential return of 4% growth in an article titled, “Why the Economy Could Grow by 4%”.  The article was, in effect, an interview with a group called Applied Global Macro Research (AGMR), and to be fair they sounded like thoughtful guys, who are clearly an outlier with a 4% growth projection for the U.S. economy.

 

The question poised to me related to how the Hedgeye view differed from the view on the cover of Barron’s.  My response was simple: housing.  The economists from AGMR expect housing to be a massive tailwind.  In the long run, we get their thesis, but in the short run we see headwinds to housing and this more tepid view on the U.S. economy may, sadly, keep us off the cover of Barron’s this year.

 

Back to the Global Macro Grind . . .

 

Speaking of housing, I wanted to touch on a few points that make us incrementally more cautious:

  • Mortgage Purchase Applications - This point is highlighted in the Chart of the Day, but at a reading of 171.5 in the MBA purchase index, we are now -22% below the May 2013 peak.  Mortgage applications are a direct leading indicator of home purchases and this implies that home purchase are likely to fall a commensurate amount from the peak;
  • Pending Home Sales – We view housing as a giffen good and our demand driven model was fairly accurate in modeling the acceleration in housing activity.  Alongside the decline in purchase apps, pending home sales are down ~9% year-over-year, which is decidedly negative for forward home price appreciation if price continues to follow the slope of demand;
  • Home Price Deceleration - Corelogic home price data show that after last year’s parabolic rise, home price growth has now decelerated for 3 consecutive months; and
  • Qualified Mortgages - The new “QM” (Qualified Mortgage) rules that went into effect in January tighten standards and increase culpability for both lenders and servicers.   Tighter lending standards will be a drag on aggregate housing activity on the margin – particularly for 1st time home buyers and others with irregular incomes.  First time home buyers are ~35% of the market.  

In the long run, the housing recovery likely does have legs given the nature of the massive over build and then years of inventory drawdown, but in the short run the headwinds noted above will be important to monitor.  The caveat to any view of housing, either negative or positive, is that interest rates will be the biggest driver and if interest rates head meaningfully lower from here (hard to believe that will happen  if the taper is in) then our cautious view on housing would likely become more positive.

 

Speaking of becoming more positive, and I’m not saying we are just yet, but Merrill’s Global Fund Manager Survey came out this weekend and had some interesting contrarian data points.  First, cash levels have risen from 4.5% to 4.8%, the highest since July 2012.  Second, emerging markets and global energy allocations are at record lows, while global bank allocations are at record highs.  Finally, global staples allocations are at the lowest levels since September 2003 (ahead of CAGNY). 

 

It is difficult to put too much credence in a set of data we didn’t create or collect ourselves, but it is certainly worth noting the extremes in the Merrill survey.   Much easier to discern is the market based indicators of inflation, which continue to percolate.   An extreme example of commodity based inflation domestically is natural gas, which is up almost 30% for the year-to-date.

 

Less extreme is the pervasive use of natural gas in the domestic U.S. economy.  According to the Energy Information Administration, there is almost 25 million MMcf used domestically on an annual basis.  If my math is correct that is an almost ~$125 billion input cost into the U.S. economy every year, which is split broadly between heating, residential use and industrial use. 

 

The bottom line is that if one of the key commodity input costs into the U.S. economy is up almost 30% in the year-to-date that, my friends, is inflationary.  Although perhaps not quite as bad to the economy, even worse is that a coffee addict like myself has to endure Arabica coffee bean prices up 10% this morning!

 

Our immediate-term Risk Ranges are now:

 

SPX 1 

VIX 11.89-15.95

USD 80.02-80.76 

Brent 107.99-110.51 

Gold 1 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The 4% Economy? - Chart of the Day

 

The 4% Economy? - Virtual Portfolio


February 18, 2014

February 18, 2014 - Slide1

BULLISH TRENDS

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BEARISH TRENDS

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February 18, 2014 - Slide13


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