Keith's Macro Notebook 6/26: COMMODITIES COPPER UST 10YR

ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish

Takeaway: The retail mutual fund complex continues to position away from equities with the ETF market or the institutional market doing the opposite

Investment Company Institute Mutual Fund Data and ETF Money Flow:


In the most recent 5 day period, aggregate bond funds including both taxable and tax free products netted another $4.1 billion in new investor subscriptions. Conversely, the combined equity mutual fund complex shed almost $1 billion in outflows with significant domestic equity outflows offset by a slight international equity fund inflow. The broad take away is that the U.S. retail investor has been retrenching for most of the first half of the year (with 19 consecutive weeks of taxable bond inflows and 23 consecutive weeks of tax-free or muni bond inflows). Interestingly however, equity ETF flows last week were the best in all of 2014 with a robust $11.2 billion coming into passive equity products versus a significant $3.8 billion outflow in bond ETFs. We think this reflects stronger institutional demand for equities with non-retail firms allocating into the stocks at current levels despite the strong run this cycle with institutional investors also positioning for more pain in fixed income over a longer term perspective with significant outflows this week. 


Total equity mutual funds put up a modest outflow in the most recent 5 day period ending June 18th with $913 million coming out of the all stock category as reported by the Investment Company Institute. The composition of the $913 million redemption continued to be weighted towards domestic equity funds with $2.1 billion coming out of domestic stock funds which was offset by a $1.2 billion inflow into international products. This outflow within domestic equity funds has become an intermediate term trend with now the eighth consecutive week of outflow in the category. The aggregate redemption of $913 million for the recent five day period was below the year-to-date average for equity funds of a $2.4 billion inflow, which is now running below the $3.0 billion weekly average inflow from 2013. 


Fixed income mutual fund flows had a solid week of production with the aggregate $4.1 billion that came into the asset class besting the 2014 running year-to-date average inflow of $2.1 billion. The inflow into taxable products of $3.7 billion was the 19th consecutive week of positive flow and the inflow into municipal or tax-free products of $419 million was the 23rd consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.1 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 created the tale of two tapes with equity ETFs putting up the strongest week of production all year offset by weak passive bond flows. Equity ETFs experienced a 2014 best $11.2 billion inflow, while fixed income ETFs suffered a $3.8 billion redemption. The 2014 weekly averages are now a $1.5 billion weekly inflow for equity ETFs and a $980 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 $9.9 billion spread for the week ($10.2 billion of total equity inflow versus the $350 million 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 $6.9 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). 


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 - Retail Investors are Defensive - Institutions are More Bullish - ICI chart 1



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


ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart2


ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart3


ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart4


ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart5


ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart6



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


ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart7


ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart8



Net Results:


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $9.9 billion spread for the week ($10.2 billion of total equity inflow versus the $350 million 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 $6.9 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). 


ICI Fund Flow Survey - Retail Investors are Defensive - Institutions are More Bullish - ICI chart9 




Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA


Takeaway: Still no sign of negative inflection from the claims data. We remain bullish on unsecured lenders.

"For as this appalling ocean surrounds the verdant land, so in the soul of man there lies one insular Tahiti, full of peace and joy, but encompassed by all the horrors of the half-known life. God keep thee! Push not off from that isle, thou canst never return!" - Herman Melville, Moby Dick



The labor market appears to be the "insular Tahiti" Melville speaks of, surrounded by an appalling ocean of miserable data. Evidence continues to mount that the consumer is getting increasingly squeezed on the back of rising costs (commodities +11.6% YTD) and stagnant wages (personal income is +1.9% YTD). What's an investor to do?


Our take is that investors should stick with claims as their weathervane. It's been a prescient indicator of turning points, marking both the top and bottom of the last cycle clearly and in a timely manner.  


Along those lines, rolling initial jobless claims (NSA) were 9.0% lower than at the same point last year, which was in-line with the trend over the past 5 weeks (-9.8%, on average). The 9.0% improvement marks a slight deterioration vs the prior week's 10.1% improvement but isn't anything we'd get overly excited about.


One of our best long ideas remains Capital One (COF). The new new on Capital One is that credit card industry loan growth is showing early signs of accelerating (April and May data were much stronger than expectations). So long as credit quality is not degrading investors should increase the multiple they'll pay for Capital One's earnings in recognition of the accelerating loan growth. This morning's initial claims data shows there is no reason to worry about credit data for now so we're sticking with the idea.   



The Data

Prior to revision, initial jobless claims fell 0k to 312k from 312k WoW, as the prior week's number was revised up by 2k to 314k.


The headline (unrevised) number shows claims were lower by 2k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 2k WoW to 314.25k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -9.0% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -10.1%































Yield Spreads

The 2-10 spread fell -6 basis points WoW to 208 bps. 2Q14TD, the 2-10 spread is averaging 221 bps, which is lower by -18 bps relative to 1Q14.







Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

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Retail Callouts (6/26): BBBY RH WSM PIR WMT HBI LULU



Thursday (6/24)

NKE - Earnings Call: 5:00pm


Friday (6/25)

FINL - Earnings Call: 8:30am




BBBY - 1Q14 Earnings

Newsflash…BBBY misses yet again. What's interesting to think of is the bifurcation in results of some of the major home furnishings companies over the past month. RH comped 18% and WSM 10% -- both of these companies beat materially, and sell roughly half of their product online (the greatest percentage in all of retail sans AMZN). BBBY and PIR both missed and guided down. They both generate less than 10% in sales online. Go figure.

 Retail Callouts (6/26): BBBY RH WSM PIR WMT HBI LULU - Chart 1 6 26 2014


HBI - HanesBrands to Acquire DBApparel, the Leading Intimate Apparel and Underwear Company in Europe, to Leverage Its Innovate-to-Elevate Strategy and Global Supply Chain



"DBA is a leading marketer of intimate apparel, hosiery and underwear in Europe, new geography for Hanes. The all-cash transaction would be accretive to adjusted earnings per share in the first 12 months after closing, including an estimated $0.25 of adjusted EPS excluding actions in 2015. With the realization of full benefits in three to four years, the acquisition would add, on an annual basis, more than $875 million in net sales, approximately $125 million in adjusted operating profit excluding actions, and approximately $1.00 in adjusted EPS excluding actions."

"Hanes’ transaction offer values DBA at €400 million on an enterprise basis (approximately $550 million at current exchange rates), or approximately 7½ times EBITDA. Hanes intends to fund the acquisition with cash on hand and third-party borrowings. The post-synergy multiple is expected to be less than 4 times EBITDA. The acquisition could close as soon as the third quarter 2014."


Takeaway: The company is two months away from anniversarying its acquisition of Maidenform -- which in itself has been a home run -- and it's already doing another deal. We can beat the company up for obfuscating weakness in the core business by doing deals…but that's really irrelevant. The fact is that this is a great deal for HBI, it gets the international exposure it needs, and it got it done at 7.5x EBITDA -- before synergies. This should be accretive almost immediately, regardless of what the company guides. This stock is headed higher.


Fast Retailing - Uniqlo Eyeing India for Manufacturing



"Fast Retailing Co. Ltd.’s Uniqlo brand is considering sourcing garments in India, according to a statement from the Indian government."

"Fast Retailing chairman, president and chief executive officer Tadashi Yanai met with Indian Prime Minister Shri Narendra Modi on Wednesday, the Indian government said in a brief statement on its Web site. “[Uniqlo] aims to source garments from India,” the government said."


Takeaway: Fast Retailing is still the leading candidate to buy Lululemon.


WMT - Walmart wins China labour dispute



"A Chinese arbitration panel has dismissed a landmark suit brought against Walmart by a chapter of the country’s official trade union, ending a three-month dispute that galvanised labour activists across China."

"The panel dismissed worker demands for additional compensation after the world’s largest retailer closed their store in Changde, Hunan province, in March as part of a broader restructuring of its China operations."


Takeaway: This might be Walmart's biggest international victory -- ever.


ADS - Adidas's World Cup, So Far: Record Sales and One Ugly Bite



"Herbert Hainer, chief executive officer of Adidas Group, held a press conference in Germany on Tuesday to brag about the company’s sales, so far, from its sponsorship of the 2014 World Cup. Adidas, he said, would “definitely achieve” its goal of selling $2.7 billion in soccer gear this year. He went on, in a not-so-subtle jab at rival Nike, to proclaim the company’s “outstanding position as the clear No. 1 in football globally.”

"On the other side of the Atlantic, at the Estadio das Dunas in Natal, Brazil, Uruguayan striker Luis Suarez was about to create a marketing headache for the brand. During the 79th minute of the must-win match for Uruguay, Suarez apparently bit Italy’s Giorgio Chiellini on the shoulder. To make matters worse for Adidas, many of the company’s World Cup promotions depict Suarez with his mouth wide open."


Takeaway: This was a defensive press conference. Hainer's stock is hitting a new 52-week low. Adidas is great at defensive PR. Not so good at playing offense.




LULU - Survey: L.L. Bean tops in online customer service for May



"L.L. Bean had the overall best customer service performance in May, the second time the retailer has topped the list in the past three months."

"Looking at all companies included in Stella Benchmarks, the following companies were best overall performers within the five service areas measured:"

• Phone: & Lululemon (tied)

• Email: Lululemon

• Chat:

• Shipping: Hautelook

• Returns/Refunds: Mr Porter





"EBay CEO John Donahoe took to the stage at this month's 10th annual Internet Retailer Conference & Exhibition in Chicago to discuss what he calls the "commerce revolution"."

"The term applies to the many ways consumers shop for products today, including going into a store to buy a product, browsing retail sites during work hours, making a purchase from a tablet while watching television at home, etc."

"For too long, Mr. Donahoe said, retailers have seen various shopping behaviors through their own eyes — in channel terms — rather than seeing it from the consumer's vantage point. "Consumers," he said, "just want to shop.""


BKS - Barnes & Noble Agrees to Spin Off Nook Unit as Sales Decline



"Barnes & Noble Inc. (BKS), facing declining sales at both its bookstore chain and Nook electronic-reader business, plans to split them into separately traded companies to improve performance."

"The spinoff will be completed by the first quarter of next year, New York-based Barnes & Noble said today in a statement."


Stalemate Over Garment Factory Safety in Bangladesh



"Eight times now, the European-dominated Accord on Fire and Building Safety in Bangladesh — a group of more than 150 retailers and brands — has forced the temporary closing of garment factories after its inspectors found dangerous conditions."

"But from the time the inspections began, tensions have been growing between the Accord and the Bangladeshi apparel industry, resulting in an impasse over a recent attempt to shutter what the Accord considers an unsafe factory building that houses Florence Fashions. And this time, as on several previous occasions, the Bangladeshi government has aligned with a garment manufacturer opposed to having its factory closed, even temporarily."


EBAY - EBay names IBM exec to lead enterprise business


"EBay Inc. said Tuesday that it hired former International Business Machines Corp. executive Craig Hayman to lead its enterprise business."

"Mr. Hayman spent 15 years at IBM IBM -0.10%   , helping oversee the technology giant’s industry cloud solutions and other businesses, eBay EBAY +0.08%    said in a news release. He also spearheaded deals to buy more than a dozen companies while building a partner network, the company said."

"“A longtime customer of IBM, eBay Enterprise’s fulfillment centers, drop-ship and Ship-from-Store capabilities are unique in helping retailers better serve their customers,” Mr. Hayman said in a release. “I am honored to be part of the team and join this purpose driven company, which is enabling commerce on a global scale.”"


Hickey Freeman Revamps N.Y. Store



"“It’s a celebration of American artisanship.”That’s the way Doug Williams, chief executive officer of W Diamond Group, described the revamped and reenergized Hickey Freeman store whose long-awaited renovation was completed late Sunday night."

"“We started this process in 2011, then with the HMX bankruptcy, it was put on hold. But as soon as W Diamond acquired the assets, we started back up again,” he said."



Client Talking Points


In other news, as the USD declined yesterday, commodities hit a fresh year-to-date high – CRB Commodities Index = 313, or +11.8% year-to-date; it’s a lot easier being long inflation and the slower growth it derives than the Russell 2000.


One of the few commodities that hasn’t ripped in 2014 is now signaling a potential bearish to bullish @Hedgeye TREND reversal; our breakout line = $3.10/lb, so watch that closely; almost every fund we speak to thinks this is a supply short.


UST 10YR Yield -5 basis points for the week (-16% year-to-date) as the U.S. growth slowing data continues to support the case for downward dog bond yields; our predictive tracking algorithm for 2014 GDP is now tracking toward +1.3%; Q2 can only be better than a horrendous Q1, but Q314 GDP setting up to be a mess.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


Barney & Janet dont get this > Carney Says Housing Is ‘Biggest Risk’ as BOE Acts on Market

@Keith McCullough    


“Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible.”

- John Maynard Keynes


It has been 48 trading days since the S&P 500 has had a +/- 1% day, this has only happened 1 other time in 2 decades.

CHART OF THE DAY: Creative Accounting at $UAL

CHART OF THE DAY: Creative Accounting at $UAL - 77


Hedgeye industrials sector head Jay Van Sciver on United Airlines: 


“By our estimates, the underlying UAL operations have generated a cumulative loss over the past two years. Further, UAL has burned over $1.4 billion in free cash flow, defined as Cash Flows from Operating Activities - Net Capital Expenditures, in the last two calendar years. As the high cost U.S. major since AMR's bankruptcy-related cost cuts, we expect UAL to struggle to improve its operations relative to competitors. In our view, it is relative costs that matter. We expect UAL to continue to underperform lower cost airlines.  


This is just the tip of the proverbial iceberg.

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