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Van Sciver: The Impact of Lower Fuel Prices On The Airline Industry

 

On this morning’s edition of The Macro Show, Industrials Sector Head Jay Van Sciver discusses some of the key implications of current lower energy prices on the airline industry.

 

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ICI Fund Flow Survey | Fixed Income Flows Weakening

Takeaway: Fixed income flows remain weak in anticipation of the Fed increasing rates. Also, investors continue to flee active domestic equity.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Investors withdrew -$2.9 billion from taxable bond funds in the 5-day period ending July 8th. They also withdrew -$287 million from tax-free bond funds. Aside from a massive defensive move into fixed income in the week ending June 24th, bond fund flows have been consistently negative since early June. This is likely due to anticipation of the Federal Reserve raising rates within the next year.

 

Additionally, as we continue to point out the disaster in active domestic equity flows, investors withdrew -$2.4 billion from that asset class last week. Investors have now made domestic equity withdrawals for 19 consecutive weeks, leading to -$63.7 billion of cumulative year-do-date outflows. We maintain our Short/Avoid recommendations on the most impacted domestic equity managers, T. Rowe Price (TROW) and Janus Capital (JNS).


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI1

 

In the most recent 5-day period ending July 8th, total equity mutual funds put up net inflows of +$2.2 billion, outpacing the year-to-date weekly average inflow of +$448 million and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$4.6 billion and domestic stock fund withdrawals of -$2.4 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 outflows of -$3.2 billion, trailing the year-to-date weekly average inflow of +$2.0 billion and the 2014 average inflow of +$929 million. The outflow was composed of tax-free or municipal bond funds withdrawals of -$287 million and taxable bond funds withdrawals of -$2.9 billion.

 

Equity ETFs had net subscriptions of +$9.2 billion, outpacing the year-to-date weekly average inflow of +$2.3 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$246 million, trailing the year-to-date weekly average inflow of +$844 million 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:

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI2

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI3

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI4

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI5

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI6

 

 

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.

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI12

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI13

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI14

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI15

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI16

 

 

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:

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI7

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI8

 

 

Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the financials XLF ETF experienced strong inflows of +11% or +$2.1 billion last week. Flows to that fund are now flat for the year to date. On the other end of the spectrum, investors continued to flee the industrials XLI, withdrawing -5% or -$390 million. For the year to date, the XLI has experienced one of the worst outflows on a percentage basis of -24% or -$2.1 billion.

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI9

 

 

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.

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI17

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI18

 

 

Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$14.3 billion spread for the week (+$11.3 billion of total equity inflow net of the -$3.0 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.6 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 -$18.1 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI10

 

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:

 

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI11 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 

 

 

 

 


M –Weighing In On MayREIT

Takeaway: We don’t dispute the M REIT math. Just bc it could happen, does not mean it should.

We want to be clear about where we stand on the whole Macy’s REIT issue.

 

Up front let’s just say — it makes sense. When this became a potential issue six months ago, we removed the name from our active short list.  Note that as it relates to this week, the concept of a REIT is not new. The only new component is Starboard going activist on making it happen two days after Macy’s sold off a store in Pittsburgh.

 

We want to be crystal clear that the way to be positioned in this space into our #growthslowing Macro call is to be short KSS. There is ZERO potential for Kohl’s to be monetized as a REIT.

 

There Is Zero Real Estate Play At KSS.  The same strategy that gave KSS the upper hand in a pre-Internet era is the same one that takes away any optionality on a take out. It’s real estate is worth very little. The company owns 413 out of its 1164 stores. But they are almost entirely located in strip centers. JCP, for example, has 140 stores in ‘A’ malls (the top 300 malls in the country). KSS has less than 10.  When you look at the economics, there are 1100 regional malls, and there have been maybe 5 built over the last decade. If you are a retailer who owns a piece of that real estate (the equivalent of beachfront property – there’s simply no more being made) then you’re in luck. But there are 7,000 strip centers. They’re literally a dime a dozen. Using the same metaphor, it’s like having a beach home, but being a half-mile walk to the ocean.

 

As it relates to Macy’s there are a few considerations.  

 

1) First is that we don’t think that the property values argued by Starboard are egregious. Keep in mind that Saks recently monetized its 5th Ave store for $3.7bn. When we look at Macy’s Herald Square, Chicago, and San Francisco properties, we don’t dispute that we could be looking at $6bn+ in value right there. 

 

2) But, and this is a HUGE but…These exceedingly valuable properties are currently a massive freebie. Macy’s pays zero rent on them. Unless you want to assume that the operating company goes away — i.e. is worth zero — then Macy’s has to pay rent back to the future landlord. The more valueable the property is, the higher the rent, and the lower the margins. A $24bn value in the analysis below suggests that Macy’s would have to pay about $1.5bn in extra rent. Do you really want to cash in the crown jewel assets of an uber-cyclical and levered business, weigh it down with rent occupancy payments, potentially buy back stock (as some are arguing to us) at the top of a growth and margin cycle — only to leave Macy’s with no levers left to pull when the environment inevitably goes the other way? Yes, you’ll have sold assets at the top, but will have locked in rent at the top too.  

 

3) The CEO and CFO at M are easily the most financial savvy executives in all of retail. If doing this kind of deal made sense, we think they’d probably have done it already.  That said, CEO Lundgren has maybe a year or two before retirement, and Hoguet (CFO) has maybe a couple years more. This could potentially alter their appetite for a deal as it relates to creating a legacy. We’re just not so sure that’s the legacy they want to create.

 

4) If a deal comes to fruition, we wonder who will be on the other end? We know for a fact that there’s a market for one-off properties — like Macy’s Pittsburgh property that it monetized earlier this week. In that instance, Macy’s sold it and exited the market. It didn’t belong there. We’ve also seen instances where several stores were sold at a time. But 446 stores worth 89mm square feet and 5% of total apparel and accessory retail space in the US? We be really interested to see how liquid the market is for that kind of space.  

 

M –Weighing In On MayREIT - M realestate2


Early Look

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Initial Jobless Claims | Convergence Towards Zero

Takeaway: Within a few months the RoC in Y/Y improvement in claims will be at or near zero; another reminder that conditions are late cycle.

As we foreshadowed last week, the post-auto furlough labor environment proved more even-keeled as claims retraced their prior week bounce and have settled back into their now 16-month trend at sub-330k. 

 

Rate of change in Y/Y improvement is beginning to converge towards zero, a not unexpected dynamic as we approach the lapping of the frictional lower bound in claims. RoC in Y/Y claims slowed to -9.2% from -11% in the prior week and will likely be at or near zero within a few months. This, in and of itself, is not a sign of deterioration in the labor market, just as the worsening rate of change in going from 3 mice to 0 mice to 0 mice in the house is not a sign of things worsening. That said, it is yet another reminder that we're late cycle. Once things bottom out from a RoC standpoint it becomes a "how long" until the end proposition. 

 

On the energy side of things, there was a lagged distortion in the numbers making their usefulness not especially high. While the chart below appears to show marked improvement in the labor conditions of energy states relative to the US as a whole, this is misleading because the auto furloughs occur in non-energy states like Michigan and Ohio. Taking into account the one-week lag on the state specific data, it's clear that we're seeing an artificially positive convergence created by auto plant re-tooling and not a rebound in the energy labor market. Next week should show a more realistic representation of what's happening on the energy front. 

 

 

Initial Jobless Claims | Convergence Towards Zero - Claims18

 

 

The Data

Prior to revision, initial jobless claims fell 16k to 281k from 297k WoW, as the prior week's number was revised down by -1k to 296k.

 

The headline (unrevised) number shows claims were lower by 15k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3.25k WoW to 282.5k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -9.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -11.0%

 

Initial Jobless Claims | Convergence Towards Zero - Claims2 

 

Initial Jobless Claims | Convergence Towards Zero - Claims3

 

Initial Jobless Claims | Convergence Towards Zero - Claims4

 

Initial Jobless Claims | Convergence Towards Zero - Claims5

 

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Initial Jobless Claims | Convergence Towards Zero - Claims19

 

Yield Spreads

The 2-10 spread rose 7 basis points WoW to 172 bps. 3Q15TD, the 2-10 spread is averaging 173 bps, which is higher by 14 bps relative to 2Q15.

 

Initial Jobless Claims | Convergence Towards Zero - Claims15

 

Initial Jobless Claims | Convergence Towards Zero - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Up Dollar, Down Rates

Client Talking Points

USD

Driven higher on Down Euro – Mario Draghi taking his turn from now until Jackson Hole and there is only 1 move, and that’s to devalue; while EUR/USD -0.6% this morning to $1.08 is immediate-term oversold, you want to be shorting all-bounces in the $1.10-1.11 range. 

COMMODITIES

The other clean cut side of this risk management setup is to stay net short commodities – the CRB Index was -1.3% yesterday vs. SPX -0.07% and that’s where the alpha is on the bear side; CRB Index, Oil, Gold, Copper, etc. all bearish on all 3 of our risk management durations.

JAPAN

Another way to play this #StrongDollar Deflation (Down Yen) is long Japanese Stocks – Nikkei +0.7% overnight and +1.7% month-over-month remains our fav stock market (Euro our fav FX short).

 

**The Macro Show - CLICK HERE to watch a replay of today's edition.

Asset Allocation

CASH 55% US EQUITIES 2%
INTL EQUITIES 5% COMMODITIES 0%
FIXED INCOME 28% INTL CURRENCIES 10%

Top Long Ideas

Company Ticker Sector Duration
GIS

General Mills remains on the Hedgeye Consumer Staples Best Ideas list as a LONG. GIS has a lot of things going for it and they are going to show it in the top and bottom line this year. Over the last couple of months, the company has announced the removal of artificial colors and flavors from their cereals. More recently, they have committed to using only cage-free eggs.  Many of these small actions that management is taking are going to have a snowball effect as they go throughout FY16. Below is a list of some of the biggest things that we are looking forward to this year:

  1. Yoplait in China
  2. Gluten-Free Cheerios
  3. No artificial colors or flavors in the cereal
  4. Granola innovation / Muesli
  5. Greek Plenti / Whips
  6. Original yogurt sugar reduction
  7. Renovation on Grain Snacks
  8. Strong push on Natural & Organic products
  9. Delivering Value to consumer on brands like Totino’s and Hamburger Helper
  10. Bringing U.S. innovation International

 

PENN

Gaming, Lodging and Leisure Sector Head Todd Jordan reiterates his team's bullish high-conviction thesis on Penn National Gaming. The company remains one of our favorite names on the long side and boasts the best new unit growth story in domestic gaming. Jordan further notes that with more states releasing their June gaming revenues this past week, we feel more confident in our higher than consensus Revenue, EBITDA, and EPS estimates.

TLT

Long-term Treasury rates remain the best proxy for forward-looking growth expectations. We outline three components of secular stagnation below to explain the SAVINGS/INVESTMENT GLUT that is at the heart of the academic argument for current policy measures:

  1. Negative demographic trends globally (decline in population growth and aging population)
  2. Reduced capital intensity in leading industries (think of the capital and labor required to start Facebook over U.S. Steel)
  3. Falling relative prices of capital goods       

Three for the Road

TWEET OF THE DAY

EUROPE: we aren't short anything in Europe right now other than the Euro, but I'm getting very interested on this bounce

@KeithMcCullough

QUOTE OF THE DAY

Men acquire a particular quality by constantly acting in a particular way.

Aristotle

STAT OF THE DAY

The Clinton campaign has brought in $46,725,329.13 so far, according to its first FEC filing.


CHART OF THE DAY: Beware of Anemic Growth North of the Border

Editor's Note: The excerpt and chart below are from today's morning strategy note written by Hedgeye Director of Research Daryl Jones. Click here for more info on how you can subscribe.

 

...As we’ve been writing about recently, the next major global economic concern may well be Canada.  As the Chart of the Day shows, Canada has been undergoing, at best, anemic growth this year.   The Bank of Canada yesterday cut interest rates to 0.5%, its second rate cut of the year.  In the accompanying statement, the Bank said:

 

“Canada’s economy is undergoing a significant and complex adjustment.”

 

We agree with that assessment in spades.

 

CHART OF THE DAY: Beware of Anemic Growth North of the Border - z CHART OF DAY Blame Canada


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