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McCullough on Fox Business: The Biggest Risks to the Markets and Economy Right Now

Hedgeye CEO Keith McCullough sits down with "Opening Bell" host Maria Bartiromo on Fox Business to discuss the biggest risks to investors right now.


ICI Fund Flow Survey - Punching a Hole in the Hull...Equity Fund Trends Taking on Water

Takeaway: The second worst outflow all year in U.S. equity funds increase our caution on T Rowe Price and Janus Capital closing out the year

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period ending September 3rd, equity fund flow trends worsened substantially with domestic stock funds putting up the second worst weekly outflow all year with $5.3 billion being redeemed from the category (only surpassed by the $8.8 billion withdrawn by investors in the first week of July). Intermediate term trends in domestic funds are now drastically negative with outflow in 18 of the past 19 weeks with over $47 billion withdrawn by investors. While mean reversion would argue for now being a good time to look at the leading equity fund managers, we point to fund flow entering the seasonally weakest part of the year in 3Q and 4Q and that the average draw down since 2007 has averaged 40 weeks with over $113 billion lost (and thus this redemption sequence in domestic funds could be on going). We continue to recommend investors avoid shares of T Rowe Price (TROW) and Janus Capital (JNS) - see our recent TROW research here.

 

 

Total equity mutual funds had outflow in the most recent 5 day period ending September 3rd with $4.0 billion being redeemed in all stock funds as reported by the Investment Company Institute. The composition of flow trends continued to be weighted towards International stock funds with a $1.2 billion inflow buffering a substantial $5.3 billion redemption in U.S. stock funds. The inflow in International funds makes it a perfect 35 for 35, i.e. inflows in all 35 weeks of 2014. Conversely however, domestic trends are very dour with now 18 of 19 weeks of outflow now totaling over $47 billion lost. The running year-to-date weekly average for all equity fund flow continues to decline and now settles at a $1.3 billion inflow, now well below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual fund flow continues to be solid with $2.4 billion coming into the asset class. The inflow into taxable products of $1.7 billion made it 28 of 30 weeks with positive flow. Municipal or tax-free bond funds put up a $661 million inflow, making it 33 of 34 weeks with positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.9 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 were mixed during the week with inflows into equity funds but redemptions in passive fixed income products. Equity ETFs put up a $5.6 billion subscription while fixed income ETFs put up a $1.5 billion outflow. The 2014 weekly averages are now a $1.7 billion weekly inflow for equity ETFs and a $895 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 $738 million spread for the week ($1.6 billion of total equity inflow versus the $869 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 $3.9 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). The 52 week moving average chart displays the declining demand for all equity products (funds and ETFs) for the safety and security of fixed income. 

 

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 - Punching a Hole in the Hull...Equity Fund Trends Taking on Water - ICI chart 1

 

 

 

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

 

ICI Fund Flow Survey - Punching a Hole in the Hull...Equity Fund Trends Taking on Water - ICI chart 2

 

ICI Fund Flow Survey - Punching a Hole in the Hull...Equity Fund Trends Taking on Water - ICI chart 3

 

ICI Fund Flow Survey - Punching a Hole in the Hull...Equity Fund Trends Taking on Water - ICI chart 4

 

ICI Fund Flow Survey - Punching a Hole in the Hull...Equity Fund Trends Taking on Water - ICI chart 5

 

ICI Fund Flow Survey - Punching a Hole in the Hull...Equity Fund Trends Taking on Water - ICI chart 6

 

 

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

 

ICI Fund Flow Survey - Punching a Hole in the Hull...Equity Fund Trends Taking on Water - ICI chart 7

 

ICI Fund Flow Survey - Punching a Hole in the Hull...Equity Fund Trends Taking on Water - 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 positive $738 million spread for the week ($1.6 billion of total equity inflow versus the $869 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 $3.9 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). The 52 week moving average chart displays the declining demand for all equity products (funds and ETFs) for the safety and security of fixed income. 

 

ICI Fund Flow Survey - Punching a Hole in the Hull...Equity Fund Trends Taking on Water - ICI chart 9 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA



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INITIAL CLAIMS - A SOFT START FOR SEPTEMBER

Takeaway: Another week of decelerating improvement in the labor market appears to be rolling August's softness into September.

Less Good, Again

Last week, we profiled the labor market data as "still good, but less good". The same could be said about this week's numbers. We're cautious to make too much out of a holiday week, but the numbers suggest a real step backward. The y/y change in NSA initial claims, our preferred measure, actually rose +2.1% this week. Only the third time that's happened YTD. That took the rolling 4-wk average to -7.2% y/y vs -8.5% in the prior week. The data is still reasonably good, but it's not as strong as what we saw in the June/July time frame. 

 

Taken in conjunction with the weak August payroll report last week, this morning's data suggests that softness is continuing into September.

 

The Data

Prior to revision, initial jobless claims rose 13k to 315k from 302k WoW, as the prior week's number was revised up by 2k to 304k.

 

The headline (unrevised) number shows claims were higher by 11k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.75k WoW to 304k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -8.5%

 

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Yield Spreads

The 2-10 spread rose 9 basis points WoW to 197 bps. 3Q14TD, the 2-10 spread is averaging 199 bps, which is lower by -22 bps relative to 2Q14.

 

INITIAL CLAIMS - A SOFT START FOR SEPTEMBER - 15

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Retail Callouts (9/11): DKS, AMZN, NKE, TGT, EBAY, WMT

Takeaway: Strength in Amazon golf biz is a bad sign for DKS. Thoughts on AAPL’s influence on Nike watch business. RH buying opportunity.

EVENTS TO WATCH

 

Thursday (9/11)

ULTA - Earnings Call: 5:00pm

 

COMPANY HIGHLIGHTS

 

RH - 2Q14 Earnings

CLICK HERE to see yesterday's note on RH's earnings.  RH remains our Best Idea Long and one of the best stories in retail.

 

NKE, AAPL - Watch

Remember the press reports noting that we should expect to see a NextGen Nike Sportswatch in 1H14 at a price point just below $400 to compete with the Adidas ($399) offering? That was set to be a meaningful upgrade from the current Nike SportsWatch, which sells for $150. But 1H14 came and went without a peep from the Nike Timing team. Why? It was clear that something was up when Nike fired its FuelBand team in April.  Apple's Tim Cook sits on Nike's Board, and Nike knew full well about Apple's iWatch plans. We're also inclined to think that Tim Cook said something to the extent of "You're going to come out with a hi-tech sportswatch that's priced $50 above what Apple is launching? That's a big mistake.".  That was probably a pretty simple decision for Nike's Mark Parker to back off that initiative, and piggyback onto the iWatch with a partnered fitness app that promotes Nike's core product in a more commercial way. 

 

Retail Callouts (9/11): DKS, AMZN, NKE, TGT, EBAY, WMT - Nike v Apple 1

 

 

DKS, AMZN, EBAY - ChannelAdvisor Golf Comp Sales

 

Takeaway: These golf trends are interesting. Amazon's growth in golf equipment is absolutely off the charts, which we think is a good barometer for the excess inventory in the channel. The time of year where most golf equipment is bought at full price is in April and May (likely not at AMZN). Then discounts pick up in June, and accelerate meaningfully as the Summer progresses. Amazon’s numbers, in particular, continue to show staggering acceleration during the summer discounting period, with 63% growth in the latest month.  This does not bode well for DKS, which is still dealing with excess inventory in golf, and is looking to reposition (and potentially exit) a large part of its golf business. As a reminder, Dick's largely serves the 'occasional' golfer, which represents an impressive 44% of golfers. Unfortunately, that group is extremely price sensitive, and accounts for only 19% of golf industry revenue. This is where Amazon competes as well.  Dick's bought Golf Galaxy at a peak in the cycle, and it is getting out at the trough -- not a winning M&A strategy. But the reality is that given the competitive dynamic, we're inclined to think that DKS will fail to participate in any upside in the golf space going forward.

 

Retail Callouts (9/11): DKS, AMZN, NKE, TGT, EBAY, WMT - 9 10 chart1

 

Retail Callouts (9/11): DKS, AMZN, NKE, TGT, EBAY, WMT - 9 11 chart3

 

 

OTHER NEWS


TGT - Target Links With Toms

(http://www.wwd.com/retail-news/mass-off-price/target-links-with-toms-7898461?module=Retail-latest)

 

  • "Target has teamed up with feel-good footwear brand Toms for a limited-time collection, Toms for Target, launching in time for the holidays. Toms matches every pair of shoes sold with a pair donated to a child in need. Toms calls the program One for One."

 

WMT - Wal-Mart’s School Supplies Are a Little More Expensive Online

(http://www.businessweek.com/articles/2014-09-10/wal-mart-s-school-supplies-are-more-expensive-online)

 

  • "Wal-Mart’s official policy is to have the same prices online as in stores, spokewoman Jaeme Laczkowski says. The difference wasn’t great: at most, a 1.8 percent premium on a $118 checkout."

 

SHLD - Fitch Cuts Sears Ratings on Cash Burn Concerns

(http://online.wsj.com/articles/fitch-cuts-sears-ratings-on-cash-burn-concerns-1410366664)

 

  • "Fitch Ratings cut its credit ratings of Sears Holdings Corp. on Wednesday to double-C from triple-C, citing the company's steep drop in profibility and its cash burn."

 

Toys ‘R’ Us holiday strategy includes online and in-store enhancements

(http://www.chainstoreage.com/article/toys-%E2%80%98r%E2%80%99-us-holiday-strategy-includes-online-and-store-enhancements)

 

  • "With just 105 shopping days left until Christmas (as of Sept. 10), Toys “R” Us outlined its holiday strategy at a preview event in New York City.  Among the highlights: free online layaway, enhanced loyalty program, improved online and in-store checkout, and two new in-store shops." 
  • "With an eye to expanding its omnichannel capabilities, Toys “R” Us is in a pilot with Google’s Shopping Express offering shoppers same-day delivery in four markets, with New York and Los Angeles added most recently. It’s also expanded in-store pick-up service to more countries and added shipping from stores to 14 countries including China." 

 

Malls launch pick-up depots to lure online shoppers

(http://www.theglobeandmail.com/report-on-business/shopping-malls-play-catch-up-to-web/article20524681/)

 

  • "In the next three to six months, SmartCentres Inc. will start testing online purchase stations in three of its Toronto-area shopping centres. Dubbed Penguin Pick-Up, after SmartCentre’s penguin corporate logo, the depots will serve retailers operating in the company’s properties and other e-commerce players which sign on to the program."

 

 


HOLX: Removing Hologic from Investing Ideas

Takeaway: We are removing Hologic from our high-conviction stock idea list.

Hedgeye is removing Hologic (HOLX) from Investing Ideas today.

 

CEO Keith McCullough believes that US small and mid cap stocks, like HOLX, are in a bubble. Additionally, Health Care sector head Tom Tobin sees some cracks in his thesis on HOLX, and says that valuation combined with a weak revenue line this quarter could be a short term negative for the shares. Tobin says he has to make some aggressive assumptions to model revenue into the company’s $630 to $640 million range. 

HOLX: Removing Hologic from Investing Ideas - Hologic Logo RGB

Tobin stresses the importance of the September Tomo Tracker results (Hedgeye proprietary data), which will be key to the company’s quarter. Additionally, subsequent months of placement data before and after the reimbursement decision in November, which is still controversial, will be THE critical data to know and watch. Tobin says that over the long term, the stock could double, though.

 

Here’s a sneak peek behind the scenes inside of Hedgeye as we were evaluating whether or not to remove HOLX from Investing Ideas. It was a debate between the coach, Keith McCullough, and the player, Tom Tobin. Tobin wrote this note below discussing HOLX:

 

[At a fund] I would be telling my PM (portfolio manager) to take down the position, but not eliminate it.

Embracing the uncertainty of how the data leans (high valuation, +performance, possible negative surprise on revenue) is the key here.

 

Player: I am sitting on some good performance, I like the long term, but I see some short term risk. Data point 1, data point 2, etc….

 

Coach: Let’s book it, what I see from my seat doesn’t look good for the name.  I hate this market and want to take down long exposure.

 

Player:  But it could double from here! Be patient, you are overreacting.  I am just covering myself by sounding an alarm.  I may be  misreading how the street will react, and there is always a chance I am being way too worried about what other people think.

 

Coach: Relax. We’ll buy it back.

 

Player: That never happens.  If I am wrong, the stock will be up and you’ll wait for a pullback that never comes and all of my research gets wasted.  I put so much into this it will be heartbreaking to see us not participate.

 

Coach:  OK.  Let’s sell half, more if it rallies into the number, less if it sells off.  Good?

 

Player: Phew, that sounds good. If they puke the quarter we can double down.  I’ll keep you posted as I update key data.


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