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ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income

Takeaway: The 12 week moving averages continue to improve within fixed income products versus equities which are losing momentum

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent week, slightly positive fixed income trends outflanked weakened domestic equity trends which is leading to noticeably improving bond flows on a 12 week basis. Despite the slope of the line improvement near term in fixed income however, quarter-to-date flows still greatly favor equity funds which continues to support our long recommendation of T Rowe Price:

 

Total equity mutual funds produced a slight net inflow during the most recent 5 day period with domestic fund outflows offset by international equity inflows. Domestic stock funds lost $267 million in the week ending March 26th, an improvement from the $3.8 billion redemption the week prior but none-the-less the second consecutive week of outflow in U.S. stock funds. The total stock fund category however was bolstered by the $1.5 billion that flowed into international stock mutual funds which netted to a positive result for the category during the week. Despite the choppy trends, the 2014 running weekly average inflow for equity mutual funds is now $4.0 billion, still an improvement from the $3.0 billion weekly average inflow for 2013. 

 

Fixed income mutual funds trends decelerated from the week prior but none-the-less continued on a more positive path than weakening equity trends. The breakout of steadying bond fund inflow amounted to $1.2 billion into taxable products and a $49 million inflow into tax-free or municipal products. The inflow into taxable products in the week ending March 26th was the 7th consecutive week of positive flow and the inflow into municipal or tax-free products was the 11th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.8 billion weekly inflow, 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 bond fund inflow).

 

ETFs experienced volatile trends during the week, with a moderate decline in stock ETF trends with $5.5 billion in net redemptions with bond ETFs experiencing a slightly inflow of $447 million for the 5 day period. The 2014 weekly averages are now a $108 million weekly inflow for equity ETFs and a $886 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 negative $6.0 billion spread for the week ($4.2 billion of total equity outflow versus the $1.7 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 $7.1 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 -$37.4 billion (negative numbers imply more positive money flow to bonds for the week). 

 

With the first quarter of the 2014 in the books, the running total of equity and fixed income funds continues to favor the stock side of the ledger. Total equity mutual fund flow (domestic and international) amounted to $49 billion quarter-to-date, over double the $21 billion that has come into all bond funds (taxable and tax free products), so despite the short term momentum in bond funds, the equity category is still better for now. These quarterly totals continue to support our long recommendation in shares of T Rowe Price (TROW), which we estimate will have the best results in the upcoming earnings season.

 

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 - 12 Week Averages Continue to Improve in Fixed Income - ICI chart1

 

 

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

 

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart2

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart3

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart4

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart5

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart6

 

 

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

  

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart7

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart8

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $6.0 billion spread for the week ($4.2 billion of total equity outflow versus the $1.7 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 $7.1 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 -$37.4 billion (negative numbers imply more positive money flow to bonds for the week). 

 

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart9 

 

 

With the first quarter of the 2014 in the books, the running total of equity and fixed income funds continues to favor the stock side of the ledger. Total equity mutual fund flow (domestic and international) amounted to $49 billion quarter-to-date, over double the $21 billion that has come into all bond funds (taxable and tax free products), so despite the short term momentum in bond funds, the equity category is still better for now. These quarterly totals continue to support our long recommendation in shares of T Rowe Price (TROW), which we estimate will have the best results in the upcoming earnings season.

 

 

ICI Fund Flow Survey - 12 Week Averages Continue to Improve in Fixed Income - ICI chart11

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 


The Best (Economic) News of the Week

Client Talking Points

OIL

The best economic news of the week is Oil continuing to break down. In case you missed it, Oil is diverging big time versus food inflation. Both Brent and WTIC remain below our long-term TAIL risk lines of $108.42 and $100.32, respectively. Brent is more decisively broken than WTI in our model.

RUSSIA

Well, what do you know? Putin power gets limp in the face of falling oil prices. #GoodNews. Meanwhile, Russian stocks are back to signaling a negative divergence versus both Europe and Global Equities this week. Tough sledding for the RTSI which is down -0.9% this morning to -16% year-to-date.

10YR

The 10-year yield tested my intermediate-term TREND resistance of 2.81% yesterday and has so far failed this morning. This clearly makes tomorrow’s U.S. jobs report all the more important. Expectations are high, so a miss could give you 10 to 15 basis points of immediate-term downside in the 10-year yield. We’re watching this closely.

Asset Allocation

CASH 22% US EQUITIES 6%
INTL EQUITIES 12% COMMODITIES 20%
FIXED INCOME 20% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

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

Stay with the process folks - buy the low end of range, sell the high @KeithMcCullough

QUOTE OF THE DAY

"I never panic when I get lost. I just change where it is I want to go." - Rita Rudner

STAT OF THE DAY

Doctors in Britain were paid £38.5 million by drugmakers last year, slightly less than 2012, according to new data underscoring the links between the pharmaceutical industry and prescribers. Industry payments to doctors have come under increased scrutiny following a number of scandals over sales practices, notably in the United States, and concerns that such ties could put commercial interests ahead of the best outcome for patients. (New York Times)


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

LEISURE LETTER (04/03/2014)

TICKERS:  GLPI, NYNY, HOT

 

EVENTS TO WATCH:  UPCOMING EARNINGS / CONFERENCES / RELEASES

 

Friday, April 4

  • March NFP report

 

Tuesday-Thursday, April 8-10

  • Mid-America Gaming Congress (Columbus, OH)

 

Wednesday, April 9

  • SHO Investor Day

 

Thursday, April 10

  • HST Investor Day

 

COMPANY NEWS

GLPI - announced that Curtis Magleby has joined the Company as Senior Vice President of Corporate Development.  Mr. Magleby will be responsible for the identification and acquisition of gaming assets across the United States.  

TAKEAWAY:  GLPI hires a former banker and capital markets professional to lead the acquisition effort.  Given the cycle, we'd expect acquisitions announcements in 90-120 days. 

  

NYNY - Empire Resorts, Inc. announced it commenced a rights offering for approximate gross proceeds of $15,390,000. Empire granted, at no charge to the holders of record of its common stock and Series B Preferred Stock on March 31, 2014, the record date for the rights offering, one non-transferable subscription right for each 15 shares of common stock owned, or into which the Series B Preferred Stock is convertible, as more fully described in the prospectus supplement relating to the rights offering. Each subscription right will entitle the holder to purchase one share of common stock at a subscription price of $6.25 per share. 

TAKEAWAY:  Building capital for what purpose? 

 

HOT - announced Achim Lenders, is the company’s new vice president for its Global Food and Beverage division. More than 2,000 F&B venues will fall under his purview.  Lenders was most recently in a similar role for Hyatt Hotels Corp. He will oversee the alignment and development of Starwood’s multibillion- dollar global food and beverage strategy, reporting to John Peyton, the company’s senior vice president for global initiatives.

TAKEAWAY:  Sounds to us like a focus on costs and margins across the "other hotel revenue" segment.  

 

INDUSTRY NEWS            

Malaysia and another PR nightmare - following the unsolved disappearance of Malaysia Airlines flight 370, armed kidnappers raided a dive resort in Malaysia’s eastern state of Sabah late on the night of April 2 and left with a 28 year-old female Chinese tourist and a Filipino hotel employee. 

TAKEAWAY:  We would not be surprised to see decreased tourist interest in Malaysia and greater Indonesia, which would be a negative for hotels in the region. 

 

Las Vegas named to final 6 for RNC convention - Las Vegas is one of six cities that have made the next cut as judged by a 13-member site selection committee that heard bidder presentations last month in Washington.  Besides Las Vegas, cities still in are Dallas, Kansas City, Denver, Cleveland and Cincinnati while Phoenix and Columbus, Ohio, were eliminated. The RNC indicated a site decision is expected in late summer or in the fall. The party is considering the weeks of June 27 or July 18 for the 2016 convention.

TAKEAWAY:  As we said last month and we continue to believe Las Vegas is the 3:2 favorite.

 

Palm Hotel Las Vegas - to close Moon Nightclub for a new, not yet revealed, nightlife concept.  

TAKEAWAY:  Properties need to constantly reinvent to keep the buzz alive, which in turn, keeps patrons visiting = $$.

 

A hotel merger - very quietly and nearly dismissed as an April Fool’s joke, we hear hotel chatter that a merger between Four Seasons Hotels and Fairmont Raffles Hotels International is in the works.  We also read that Prince Alwaleed bin Talal, has suggested such an event.  The Prince’s Kingdom Holding has major equity interests in both hotel firms. 

TAKEAWAY:  While both private, M&A would be good for the lodging stocks. 

 

Hotel M&A 

  • FCH: Felcor sold Doubletree Suites in Charlotte for $37MM. Average price per key (APPK): $178k
  • Holloway Lodging Corporation has sold the Holiday Inn Express(R) hotel located in Kamloops, BC. Holloway realized cash proceeds from the sale of $8.9 million, representing a cap rate of approximately 7.6%. APPK: $119k
  • Carey Watermark Investors acquires Hyatt Place Austin Downtown for $87MM. APPK: $294k 
  • In 2013, $16.9 billion in hotel transactions occurred in the United States, according to the Hotel Transaction Almanac, a report from STR Analytics. This represents an increase of nearly $4.0 billion in asset trades compared to the US$13.0 billion that occurred in 2012.

 

MACRO

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.

TAKEAWAY:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.



The Art of Selling

“Selling is hard to teach because it is about what exists in your head and what goes on in your whole life.”

- Mrs. Shibata, the top salesperson at Dai-ichi Life in Japan

 

The quote above come from Philip Delves Broughton’s 2012 book “The Art of the Sale.”  In his book, Broughton studies the most successful habits of some of the best sales people across various industries worldwide – from a Moroccan man who sells carpets and tiles in a bazaar, to some of the world’s most famous actors and musicians, to the top saleswoman at Japanese life insurance Dai-ichi Life, to Steve Jobs making the complex simple with Apple’s revolutionary products.   

 

Selling is an art and there is no singular way to be successful at the art of persuasion.  Often times the same tactics fail to work consistently; hard work, persistence, patience, charisma, knowledge, perceptiveness and having extremely good product are all qualities that allow for the subjects in the text to find success selling.

 

The Art of Selling - handshake2

 

The biggest take-away is learning by observing.  Incorporating the best practices of others, while simultaneously discarding the negatives, helps us all optimize our daily processes in the never-ending, impossible, pursuit of perfection.

 

Whether we realize it or not, we are all selling something on a daily basis – pitching an idea to your PM, convincing your current or potential investors why your investment strategy is going to be most effective, or getting your kids to eat their daily serving of fruits and vegetables.  Many of our actions are “non-sales selling” practices – i.e. motivating & moving others.

 

So get out there and make a sale today.

 

Back to the Global Macro Grind...

 

In the interest of saving myself the embarrassment of providing my macro thoughts, I’ll leave you with three of our current, non-consensus investment ideas:

 

Long Brazil (BRL; EWZ) - Stealth call by the (self-proclaimed) best dressed member of the Hedgeye team, macro analyst Darius Dale; The Brazilian real is up +3.1% Mom and the EQZ ETF is up +12.8% MoM.  Our macro team makes calls on the slope of line, and in Brazil’s case, we believe the Growth/Inflation/Policy fundamentals are going from really bad to less – similar to Indonesia last year.  Depressed valuations and bombed-out prices make this an interesting market to get involved in if you think US monetary policy is getting easier, at the margins, like we do. 

 

After being the bears in 2013 and heading into 2014, we think EM capital and currency markets are poised to continue outperforming their developed market counterparts over the intermediate-term. In Brazil specifically, the World Cup and upcoming elections are two significant and underappreciated catalysts that could be very positive from both a macroeconomic and investor sentiment perspective.

 

Short C.H. Robinson Worldwide (CHRW) - This is a rare structural short with low barriers to entry with the advent of lower cost technology solutions creating an increase in the competitive landscape in 3rd Party Logistics.  We expect both margin and multiple compression to cut CHRW in half.  Sector Head Jay Van Sciver is presenting our black book tomorrow at 11am EST. 

 

Long Legg Mason (LM) – Legg is positioned as a prime beneficiary of pension fund flows out of equities and into fixed income with assets over-indexed to both institutional and fixed income exposure at 71% and 55% respectively relative to peers. We estimate half of the $1T in equity exposure outflows to be reallocated towards fixed income as institutional pension funds look to capture higher re-investment rates. With favorable style factors (i.e. high short interest and bearish sentiment), the highest free cash flow yield in the sector, and discounted multiple, LM continues to be one of our top longs.

 

Upcoming Events at Hedgeye:

 

Short CHRW – Tomorrow 11am est.

Long HOLX – Monday 4/7 11am est.

Q2 Macro Themes – Tuesday 4/8 1pm est.

Please email for access.

 

Covering some of the top investors on the West Coast, I have the privilege of learning from some of the top non-consensus thinkers in our industry.  It’s fun to learn from all of you on a daily basis, while hopefully helping you make some money in the process!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.67-2.82%

SPX 1

VIX 12.77-14.72

USD 79.41-80.32

Gold 1

 

The best defense is a good offense,

 

Ryan Fodor

Associate, Sales

 

The Art of Selling - Chart of the Day

 

The Art of Selling - Virtual Portfolio


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