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#BUBBLES: “HEDGE FUND HOTEL” EDITION (PART II)

Takeaway: We think the following 16 “hedge fund hotels” are at risk of [potential] forced selling.

Today the broad U.S. equity market (Russell 3000 Index) is down -0.7%; that’s roughly in line with the two largest one-day declines since mid-October. With the stock market finally showing some signs of deceleration after arguably the most impressive centrally planned v-bottom in U.S. stock market history, it might be safe once again for hedge fund investors to tighten up their net exposures by adding some risk on the short side.

 

One place we think you should be fishing for shorts is in the context of our #Bubbles theme, which continues to flag heightened illiquidity risk across the small-to-mid cap style factor(s) in the U.S. equity market. In the context of broadly poor performance across the hedge fund industry in the YTD, we think the following 16 “hedge fund hotels” are at risk of [potential] forced selling to the extent the redemption bug bites in the coming weeks:

 

#BUBBLES: “HEDGE FUND HOTEL” EDITION (PART II) - 12 8 2014 3 36 01 PM

 

Our screening methodology:

 

  1. Accessible: Traded on a US exchange: 14,032 stocks
  2. A known hedge fund hotel: In the top quartile of hedge fund ownership (as a percentage of float): 3,508 stocks
  3. Worth your/our time to analyze: Market cap > $1 billion: 1,309 stocks
  4. A good story that has played out to a large degree: In the top quartile of Bloomberg consensus NTM revenue revisions on a YoY basis: 246 stocks
  5. With cracks developing in the thesis: In the bottom quartile of Bloomberg consensus NTM revenue revisions on a QoQ basis: 29 stocks
  6. Hasn’t crashed yet: The percentage delta from its respective 52-week high is > -20%: 16 stocks
  1. Illiquid: The trailing 3M average daily turnover for this sample of 16 stocks is $49M. These figures compare to an average trailing 3M average daily turnover of $450M for the largest 1,000 publically traded U.S. equities by market cap.

 

When we last published this screen in our 10/16 version of this note, the list had 17 names – 8 of which were members of the energy sector. That skew towards energy has certainly contributed to the demonstrable underperformance of that basket since then.

 

Specifically, per the PORT function in Bloomberg, a basket of those 17 names on an equal-and-fixed-weight basis has posted a total return of only +411bps from 10/16 though Friday’s close; that compares to an +1136bps total return for the broader market. Remarkably, that 725bps of underperformance doesn’t even factor in today's intraday total return of -295bps for this basket.

 

#BUBBLES: “HEDGE FUND HOTEL” EDITION (PART II) - 12 8 2014 3 14 25 PM

 

#BUBBLES: “HEDGE FUND HOTEL” EDITION (PART II) - 12 8 2014 3 22 07 PM

 

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SOURCE: Bloomberg L.P.

 

Who says you can’t make money on the short side in a centrally planned up-tape?

 

Best of luck out there!

 

DD

 

Darius Dale

Associate: Macro Team


Cartoon of the Day: (Not So) Happy Meal

Cartoon of the Day: (Not So) Happy Meal - McDonalds cartoon 12.08.2014

McDonald's takes it on the chin as the fast-food giant posts its biggest domestic same-store sales drop in over a decade.


Fund Flows, Refreshed

This unlocked research note was originally published December 04, 2014 at 07:57 in FinancialsClick here to learn more about America's fastest-growing independent research firm. 

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Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period, mutual fund activity was subdued with investors continuing to prefer exchange trade funds. All ETFs took in over +$12.7 billion (both fixed income and equity) versus the total take for all mutual fund products at  just +$1.5 billion. Year-to-date, running aggregate money flow also reflects this preference for passive products with equity ETFs more than doubling the production of equity mutual funds (with $122 billion netted by equity ETFs versus just $47 billion inserted into equity mutual funds).  The battle in fixed income is more balanced with bond funds taking in $52.8 billion YTD versus fixed income ETFs’ having raised $48.5 billion. As outlined in our sector exposure table at the bottom of this note, BlackRock (BLK) and Invesco (IVZ) house the most substantial ETF exposure on a revenue basis at 44% and 19% respectively. Both stocks year-to-date have outflanked the S&P asset management index with BLK returning +15.5% and IVZ up +14.0%. The asset management group is up 9.6% thus far in 2014.

 

Fund Flows, Refreshed - ICI 12 2

 

 

In the most recent 5 day period ending November 26th, total equity mutual funds put up net outflows of $1.2 billion according to the Investment Company Institute. The composition of the outflow was sourced by domestic stock fund withdrawals of $2.0 billion versus the $869 million subscription into international stock funds. The international and domestic equity categories continue to be polarized with international stock funds having inflows in 46 of the past 47 weeks, versus domestic trends which have been very soft with inflow in just 16 of the past 47 weeks (with outflows in 30 of the past 32 most recent weeks). This data continues to be supportive of our underweight or short recommendations on the U.S. centric equity asset managers (see our research here). The running year-to-date weekly average for all equity fund flow continues to decline and now settles at a $1.0 billion inflow, now well below the $3.1 billion weekly average inflow from 2013. 

 

Fixed income mutual funds put up inflows in both categories with taxable fixed income netting $1.8 billion and municipal bond funds putting up a $769 million inflow during the week. Munis have had a solid run with subscriptions in 45 of the past 47 weeks. The 2014 weekly average for fixed income mutual funds now stands at a $1.1 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion, but still a pittance of the weekly average of +$5.8 billion in 2012 (our view of the blow off top in bond fund inflow). 

 

Aforementioned ETF results were strong during the most recent 5 days with substantial inflows into equities and decent subscriptions into passive fixed income products. Equity ETFs put up a $11.1 billion inflow which is well above the 2014 weekly average of a $2.5 billion inflow. Fixed income ETFs netted $1.5 billion in new investor funds, slightly above the year-to-date average of $1.0 billion.

 

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.   

 

Fund Flows, Refreshed - cast

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the running weekly year-to-date average for 2014 and the weekly quarter-to-date average for 4Q 2014:

 

Fund Flows, Refreshed - ICI 2

 

Fund Flows, Refreshed - ICI 3

 

Fund Flows, Refreshed - ICI 4

 

Fund Flows, Refreshed - ICI 5

 

Fund Flows, Refreshed - ICI 6

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI) and the running weekly year-to-date average for 2014 and the weekly quarter-to-date average for 4Q 2014. The third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

Fund Flows, Refreshed - ICI 7

 

Fund Flows, Refreshed - ICI 8

 

Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors bounced the energy sector with the XLE taking in +$826 million or a 9% increase in total assets for the week. In addition, Financials grabbed a bit of new investor interest with the XLF collecting +$645 million last week or a  3% increase.

 

Fund Flows, Refreshed - ICI 9 2

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $5.8 billion spread for the week ($10.0 billion of total equity inflow versus the $4.1 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 $2.6 billion (more positive money flow to equities), with a 52 week high of $17.7 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). 

 

 

Fund Flows, Refreshed - ICI 10

 

Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

Fund Flows, Refreshed - ICI 11 

 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 


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RTA Rewind: 12/8/14


MCD: Weakest U.S. Comps in Over a Decade

MCD reported dismal same-store sales for the month of November this morning, mostly missing estimates across the board:

  • Global comps -2.2% vs -1.9% estimate
  • U.S. comps -4.6% vs -2.1% estimate
  • Europe comps -2.0% vs -2.0% estimate
  • APMEA comps -4.0% vs -3.8% estimate

 

Last month, we warned that we’ve yet to see a light at the end of the tunnel signalling a true recovery.  Today, we echo that sentiment.

 

Global and U.S. comps were particularly woeful, with severe underperformance in the U.S. leading the way due in part to “strong competitive activity.”  This is the worst monthly comp McDonald’s has reported for the U.S. in over a decade.  Importantly, management lowered 4Q14 EPS guidance by $0.07-0.09 due a strengthening U.S. dollar. 

 

While Europe performed in-line with expectations, weakness in Russia, France, and Germany resulted in a -130 bps sequential decline from October.  APMEA, despite being down -4.0% for the month, was the only region to record a sequential improvement in comps on both an absolute and two-year basis as Japan and China attempt to recover from the supplier issue.  As a reminder, management previously announced this issue will negatively impact EPS by $0.07-0.10 per share in 4Q14.

 

MCD: Weakest U.S. Comps in Over a Decade - 1

 

Rhetoric was quite similar to that of a month ago, as management noted they are working to restore momentum in the U.S. by enhancing marketing, simplifying the menu, and shifting toward a more locally-driven structure to increase its relevance.  We’ve wondered in the past to what extent these changes will be made and whether or not they will be able to change the direction of the U.S. business. Though we recognize these changes will take time, November was nothing short of discouraging.  In fact, the decline in the business appears to be accelerating.

 

It will be a long road to recovery for MCD, which makes us cautious on the stock. The bull case for McDonald’s is that an activist will step in to unlock value.  But, as we opined in a note last month, the activist case for McDonald’s appears quite bleak as well.  We're staying on the sidelines, until we clearly identify a catalyst to get involved on either side of the trade.

 

While appreciating the difficulty and complexity of the situation at hand, major changes must be made – and fast.  

 

MCD: Weakest U.S. Comps in Over a Decade - 2

 

MCD: Weakest U.S. Comps in Over a Decade - 3

 

MCD: Weakest U.S. Comps in Over a Decade - 4

 

MCD: Weakest U.S. Comps in Over a Decade - 5

 

MCD: Weakest U.S. Comps in Over a Decade - 6

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


European Banking Monitor: Continued Divergence in Russian Swaps

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email 

 

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Key Takeaway:

From a risk management standpoint, we remain very focused on the rising risk of a Russian banking crisis. In a nutshell, Western sanctions are driving capital out of the country causing the Ruble to weaken. Falling oil prices are compounding the problem. The CEO of Sberbank, Russia's largest bank with 46% deposit share, said back on November 14th that if the Russian economy were to decline by more than 1.2% in 2015 Sberbank would need the State to bail it out. Sberbank's CDS tacked on another 97 bps over the week, rising to 503 bps this week.

 

Russia's GDP was most recently growing at 0.7% Q/Q annualized. Energy contributes between 20-25% of GDP and oil prices are down by ~30%. This implies a drag on GDP of -6-8% as we roll into 2015. In other words, if sanctions aren't removed and oil prices don't bounce, the Ruble should continue to lose value and Russia will need to bail out its banking system at a time when it's already hemorrhaging cash ($100bn/year) from falling oil prices. That makes for a nasty mix with US equities at/near all time highs. 

 

European Financial CDS - Swaps mostly tightened in Europe last week with an average -4.7% move.  There were a few extreme movers in the region.  Russia continued to show extreme widening WoW: +97 bps, +23.9%.  Sberbank's CDS at 503 bps flag reflects the rising risk in the Russian economy.  Portugal's Banco Espirito Santo tightened to most last week (-88 bps, -17.8%) as Portuguese authorities near a sale of a few of the collapsed bank's parts.

 

European Banking Monitor: Continued Divergence in Russian Swaps - chart1 euro financials CDS

 

Sovereign CDS – European Sovereign Swaps mostly tightened over last week. Italian sovereign swaps tightened by -10.7% (-14 bps to 115 ) and American sovereign swaps widened by 10.3% (2 bps to 18).  American CDS displayed a divergence from the stock market's (S&P 500) flat performance for the week. 

 

European Banking Monitor: Continued Divergence in Russian Swaps - chart2 sovereign CDS

European Banking Monitor: Continued Divergence in Russian Swaps - chart3 sovereign CDS

European Banking Monitor: Continued Divergence in Russian Swaps - chart4 sovereign CDS

 

Euribor-OIS Spread – The 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. The Euribor-OIS spread tightened by 0 bps to 8 bps.

 

European Banking Monitor: Continued Divergence in Russian Swaps - chart5 euribor.OIS spread

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst 


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