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Editor's Note: This comes from a research note Hedgeye CEO Keith McCullough sent to subscribers Friday. If you're serious about stepping up your market game we encourage you to take a look at our offerings.
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While the macro narrative on why bond yields rallied to lower-long-term highs (again) remains malleable, the data is not.
When strategists tell you “inflation is breaking out – so bond yields are going higher,” send them these 3 charts. To be clear, bottoms are processes, not points. And all we’re seeing is a reflation of one mother of a #deflation risk.
If the Fed makes a mistake and raises rates (Dollar Up, Commodities Smoked), they’ll perpetuate #deflation and a corporate profit slow-down in #LateCycle sectors that have already lost pricing power.
- 1st chart = Headline and Core YoY
- 2nd chart = Goods vs Services, YoY
- 3rd Chart = Energy – MoM & YoY
Click to enlarge
Takeaway: The first 5 months of 2015 for domestic equity mutual funds have had the worst start to any annual period since 2012 (and worst than 2008).
This note was originally published June 11, 2015 at 11:50 in Financials. For more information on our various products and how you can subscribe click here.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Equity ETF flows and taxable bond mutual fund flows were strong last week at +$7.3 billion and +$2.0 billion respectively. Meanwhile, domestic equity and tax-free bond funds continued their losing streaks, although munis were basically flat at just a -$2 million redemption (although now totaling 5 straight weeks of outflows). Domestic equity mutual funds however continue to be the biggest loser in weekly surveys with another -$4.2 billion taken back by investors during the most recent 5 days. As depicted in the chart below, the asset class has now lost a total of -$45.7 billion in the first 23 weeks of 2015, the weakest start to a year since 2012 (and a worst start than 2008).
Overall, demand for total equity products (mutual funds and ETFs) outweighed that for total bond as investors reacted to the recent grind higher in yields; total equity flows net of total bond flows were +$4.2 billion.
In the most recent 5-day period ending June 3rd, total equity mutual funds put up net outflows of -$882 million, trailing the year-to-date weekly average inflow of +$606 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$3.3 billion and domestic stock fund withdrawals of -$4.2 billion. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 10 weeks of positive flows over the same time period.
Fixed income mutual funds put up net inflows of +$2.0 billion, trailing the year-to-date weekly average inflow of +$2.2 billion but outpacing the 2014 average inflow of +$929 million. The inflow was composed of tax-free or municipal bond funds withdrawals of -$2 million and taxable bond funds contributions of +$2.0 billion.
Equity ETFs had net subscriptions of +$7.3 billion, outpacing the year-to-date weekly average inflow of +$1.9 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$245 million, trailing the year-to-date weekly average inflow of +$1.1 billion and the 2014 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 year-to-date average for 2015:
Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.
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 year-to-date average for 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 callouts, the long treasury TLT continued to bleed funds. It lost another -$314 million or -7% in net withdrawals last week.
Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$4.2 billion spread for the week (+$6.4 billion of total equity inflow net of the +$2.3 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 +$1.5 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 -$13.1 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