Earlier today we hosted a conference call to discuss the recent addition of ZOES to our Best Ideas list on the long side. This is a name in which we see upside to $68 per share versus downside to $25 per share over the next three years.
Takeaway: Oil prices are now down over ~50% from June of last year which has surprised…. Well, pretty much everyone.
"The main purpose of the market is to make fools of as many men as possible."
- Bernard Baruch
A quick trip down Memory Lane:
Back in October, people said there was a “price floor” because it was uneconomical for “high cost” U.S. Shale Producers to produce below $80/barrel...
In November, people said there was a price floor because OPEC was going to cut production...
Then in January, people said there was a price floor because oil rigs were being idled at a rapid pace...
The one thing clear now is that the world has learned a thing or two about oil production now that we are in the $50/barrel range:
3. OPEC’s main focus is to keep market share. Cutting production risks the possibility of end-user customers finding a new producer to source crude oil. Market share is key for keeping “swing producer” status. OPEC has already been consistently losing this share since its “oh-so-powerful” status during the 1970s embargo years when they had a 50%+ share in global markets.
4. Aggregate production levels can increase even with rigs coming offline at a rapid pace. Oil companies will sideline lower-producing rigs in more mature oil fields and produce more from their best rigs on the most lucrative acreage in tough times of low prices.
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Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Oil clearly likes a weaker dollar which has helped support prices over the last month. The USD is near flat with WTI gaining ~6% over the same period. We outlined the importance of this relationship (and all commodities for that matter) in our Q2 2015 Themes Call yesterday. This will continue to be our biggest indicator for the forward-looking direction of commodities prices.
On the supply side, relative slowdowns in domestic production, declining crude imports from OPEC, and a continuation in inventory build suggests that the demand side of the equation is weak at best.
After the API reported a +12.2MM Barrel increase yesterday evening, the DOE reported the 13th consecutive week of aggregate inventory build (+10.9MM barrels). Cushing inventories increased for the 18th consecutive week (+1.2MM barrels).
On the domestic production front, an absolute top is materializing...
However, most importantly with respect to our process, top-down macro (futures prices) will continue to lead. Supply/demand adjustments happen on a significant lag (Is there a hypothetical price floor of any relevance to day-to-day changes in futures prices? No.)
Of the major plays, sequential production increases are expected to turn delta negative in Bakken, Eagle Ford, and Niobrara in April.
Collectively, these 3 regions account for over 60% of domestic production:
April EIA projections (m/m% change):
Reported production levels for March indicate a marginal m/m increase in the major crude producing regions (left column of first chart).
The second column in that first chart indicates that operating rigs are continuing to ramp on increasing output. Production per rig is accelerating m/m with rig count cut in half since the end of October.
The second chart is production weighted rate of change (m/m% change * [production as a % aggregate production from major plays]). On a 3 and 6-month basis, we’re still +5% and 10% respectively.
The absolute production slowdown is a meaningful transition for the forming of price support from a fundamental perspective, but as always the daily macro moves will continue to generate the risk management signals directing our tactical asset allocation and positioning.
Takeaway: The 2nd worst week of the year punctuated the end of the 1st quarter for U.S. equity fund managers.
This note was originally published April 02, 2015 at 08:58.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Weak domestic equity mutual fund trends accelerated to finish the first quarter experiencing their second largest weekly withdrawal of 2015 in the 5-day period ending March 25th with a -$4.5 billion redemption. This brings the first 12 weeks of the year to a -$5.4 billion redemption compared to +$15.7 billion over the same period in 2014. This -$21.1 billion spread between YTD '15 and the comparable period in 2014 is worrisome because seasonally since 2007, the first quarter has been the best period for equity fund products with patterns declining linearly through out each respective year.
Other fund flows during the week were also defensive with equity ETFs putting up a marginal +$446 million inflow, offset by strong total bond flows of +$4.9 billion (+$2.5 billion into bond funds and +$2.4 billion into fixed income ETFs) with investors also parking +$17 billion in money market funds. We are still cautious on the domestic equity fund managers especially T. Rowe Price and Janus Capital as these stock are on our Best Ideas list as Short/Avoid. (See our latest TROW and JNS research). Alternatively our recommended Long exposure stands with alternative asset manager Och Ziff (see our OZM research here), a stock which trades without an incentive multiple currently, and also defensive money fund manager Federated Investors (see our FII research).
In the most recent 5 day period ending March 25th, total equity mutual funds put up net outflows of -$1.1 billion according to the Investment Company Institute, trailing the year-to-date weekly average inflow of +$1.6 billion and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$3.3 billion and domestic stock fund withdrawals of -$4.5 billion. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 15 weeks of positive flows over the same time period.
Fixed income mutual funds put up inflows of +$2.5 billion, trailing their year-to-date weekly average inflow of +$2.7 billion but outpacing their 2014 average inflow of +$929 million. The inflow was composed of +$1.8 billion of contributions to taxable funds and +$727 million of contributions to tax-free or municipal bond funds. Munis have had a solid run with subscriptions in 51 of the last 52 weeks.
Equity ETFs took in +$446 million, trailing the year-to-date weekly average inflow of +$1.9 billion and the 2014 weekly average inflow of +$3.2 billion. Fixed income ETFs took in +$2.5 billion, outpacing the year-to-date weekly average inflow of +$1.5 billion and the 2014 weekly average inflow 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.
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 weekly average for 2014 and the weekly quarter-to-date average for 1Q 2015:
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), the weekly average for 2014, and the weekly quarter-to-date average for 1Q 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:
Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR exchange traded funds, the consumer staples XLP continued to experience outflows, losing -$501 million or -6% last week, putting the year-to-date NAV loss at -12%. The Financials Sector SPDR (the XLF) continued its 2015 struggles losing another -2% on the week for a 13% loss year-to-date.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$5.6 billion spread for the week (-$700 million of total equity outflow net of the +$4.9 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.4 billion (more positive money flow to equities), with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$15.5 billion (negative numbers imply more positive money flow to bonds for the week).
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:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
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