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ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk

Takeaway: Investors continued to build cash on the sidelines with a +$29 billion contribution to money funds over the past 2 weeks.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Investors continued to play defense in the 5-day period ending October 14th. Money funds gained another +$10 billion, bringing the 4Q15TD total inflow to +$29 billion following the +$54 billion build in money funds in 3Q15. We are entering the seasonally strongest period for money fund growth with a +3.7% average balance build at industry leader Federated Investors since 2007. Long term, active products were bifurcated last week with active equity funds seeing redemptions of -$1.4 billion versus passive stock ETFs which won +$4.4 billion in new business. Both sides of the bond aisle won new business with +$2.4 billion in active bond funds with passive fixed income ETFs winning +$2.0 billion.

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - chart 19

 

With investors continuing to seek safety, the current market environment supports our Long recommendation on money fund manager Federated Investors (see FII report) and our Short recommendations on active equity managers Janus Capital and T. Rowe Price (See JNS and TROW reports).


ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI1

 

In the most recent 5-day period ending October 14th, total equity mutual funds put up net outflows of -$1.5 billion, trailing the year-to-date weekly average outflow of -$404 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund withdrawals of -$28 million and domestic stock fund withdrawals of -$1.4 billion. International equity funds have had positive flows in 46 of the last 52 weeks while domestic equity funds have had only 11 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net inflows of +$2.4 billion, outpacing the year-to-date weekly average inflow of +$40 million and the 2014 average inflow of +$926 million. The inflow was composed of tax-free or municipal bond funds contributions of +$617 million and taxable bond funds contributions of +$1.8 billion.

 

Equity ETFs had net subscriptions of +$4.4 billion, outpacing the year-to-date weekly average inflow of +$1.8 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$2.0 billion, outpacing the year-to-date weekly average inflow of +$1.2 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:

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI2

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI3

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI4

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI5

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - 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 | Investors Seeking Safety, Shunning Active Equity Risk - ICI12

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI13

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI14

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI15

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - 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 | Investors Seeking Safety, Shunning Active Equity Risk - ICI7

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors poured +$688 million or +11% into the industrials XLI ETF while drawing -$101 million or -5% from the materials XLB.

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - 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 | Investors Seeking Safety, Shunning Active Equity Risk - ICI17

 

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$1.5 billion spread for the week (+$3.0 billion of total equity inflow net of the +$4.5 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 -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Investors Seeking Safety, Shunning Active Equity Risk - 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 | Investors Seeking Safety, Shunning Active Equity Risk - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







KMI | Poor Results and a Massively Overvalued Stock

KMI is Worth $10 – $13/sh……With every quarter’s results we are more convinced that KMI is massively overvalued.  We see no reason why fair value for this Company isn’t in the range of 9x – 10x current EV/EBITDA, or $10 - $13/sh (on $7.2B of annualized EBITDA and $42.5B of net debt).  KMI is a capital intensive, cyclical conglomerate with low-to-no growth and an over-levered balance sheet.  In our opinion the MLP go-go days of valuing this company based upon its dividend/distribution are behind us – this market is smartening up and KMI longs have a hard lesson to learn yet.

 

3Q15 Results A Little Soft……KMI posted 3Q15 results shy of consensus expectations: adjusted EPS of $0.16/sh vs. consensus $0.18; EBIT of $1.10B vs. consensus $1.17B; and EBITDA of $1.80B vs. consensus $1.83B.  FCF in the quarter was $144MM or $0.07/sh.  The dividend declared was as expected at $0.51/sh.  For the YTD 2015, KMI has declared dividends equal to ~4x its FCF and ~3x its adjusted EPS.  In the quarter EBIT was (9)% YoY and EBITDA was (1)% YoY.  Over the last year KMI has negative EBITDA growth despite spending around $1B of CapEx per quarter and making $3.5B of acquisitions.

 

KMI Reduces 2016 Dividend Growth Guidance; Unclear on Long-Term Dividend Growth Guidance……Just over a year after consolidating its MLPs, KMI announced that it is reducing its 2016 dividend growth guidance to a range of +6% – 10%, from the prior +10% annual CAGR through 2020.  On the call KMI’s management team was rambling and reeling in response to several questions regarding long-term dividend growth – at this stage it seems uncertain and highly dependent on where the stock price is.  One of the more amusing aspects of the conference call (there were many) was KMI management bemoaning, on the one hand, the high dividend yield causing financing problems, and on the other, the stock being undervalued.  If the stock were truly cheap then the logical move would be to eliminate the dividend and use that cash to repurchase shares…  Why not?

 

Mysterious New Financing Vehicle Coming Soon and That’s Not Good……Someone must be telling KMI management that the stock has traded poorly this year because of an equity overhang...  Yesterday KMI announced that it has found a new source of equity capital that will eliminate the need for new common KMI shares between now and mid 2016.  We speculate that it could be some equity investment from Rich Kinder himself (with other insiders and/or big holders?) with a special dividend feature (thinking something like a special class of shares that has a dividend below the common dividend for X years before converting to common).  Investors should be wary of such a last-ditch effort to save a broken model.

 

Other Items of Note……

  • Every segment will miss the 2015 budget even after including the acquired EBITDA from Hiland and the Vopak terminals that were not contemplated in the budget.
  • Numerous pockets of fundamental weakness in steel and coal terminals, G&P volumes, liquids pipelines volumes, CO2 volumes, and oil E&P volumes (oil production in 3Q15 was (2)% YoY and below plan in every field).
  • KMI took a $387MM impairment charge on the Goldsmith oil field; KMI bought the field in 2013 for $280MM.
  • KMI issued $1.3B of common equity in 3Q15, taking YTD 2015 equity issuance up to $3.9B.  KMI shareholders have been diluted by more than they’ve received in dividends so far this year.

-  

I’m on the road in London this week so am keeping this recap short and to the key points.  Stay tuned for more after we get the 10-Q in the next couple weeks…  And it may be coming time to do another deep dive presentation on KMI – it’s been too long!

 

 

Kevin Kaiser

Managing Director



LULU | CEO IS ON THE BLOCK NEXT

Takeaway: LULU’s decision to eliminate the role of Chief Product Officer and its current occupant makes all the sense in the world to us.

LULU’s decision to eliminate the role of Chief Product Officer and its current occupant, Tara Poseley, makes all the sense in the world to us. Is it because the product in the store looks horrible right now? No. But the company’s lack of a coherent operating plan combined with her consistent inability to prevent competitors from closing the gap in LULU’s core business makes this decision a no-brainer to us.  

 

While Poseley might well deserve to be sacked, we think that this is really a precursor to CEO Laurent Potdevin getting ousted. Whether he’s making moves to deflect blame and buy some time, or he genuinely thinks these moves will reaccelerate growth – it all really ends the same way – with Potdevin being shown the exit in CY2016.

 

For starters, a company doesn’t fire its Chief Product Officer when business is just so darn good. Yes, she was hired during the tenure of a lame duck CEO, but it goes without saying that the Board (almost identical to the Board who ousted Chip with the exception of the two Advent members) had a big hand in bringing her in a month and half before hiring Laurent Potdevin to steer the ship.

 

Posely had been tasked with picking up the pieces after the company’s Luon fiasco in early 2013 that led to the ouster of then CEO, Christine Day, and Chief Product Officer, Sheree Waterson. Now that position has been eliminated (a nice way of saying Posely was fired) for the newly created position of Creative Director who will oversee both Men’s and Women’s product design. That position will be filled by Lee Holman who joined the company as SVP of Women’s Design in the fall of 2014. Holman was previously VP of Apparel Design at Nike, and when he joined LULU, the company did not even deem it worthy of a press release, just a mention in passing on a conference call. At the time he was considered a low-ish profile hire. Has that much changed in a year? Probably not.

 

The company was in the 7th inning of reworking its go to market calendar and product engine which was set to be completed and rolled out in 1Q16. Safe to say at this point that will at least be pushed out by a minimum of 12 months as Holman and newly created but yet to be filled Chief Supply Chain Officer look to put a stamp on the process improvements.

 

The company had been guiding to 300bps of merchandise margin recovery in 2016 due to improvements in the go-to-market calendar – specifically from lower air freight, improved raw material management, and better product costing. We think its safe to assume that that benefit will be pushed as well.

 

Bottom line, this stock was at $40 a year ago, and there’s no reason it can’t get there again. We think there’s a better chance of $12 downside from today’s $52 than $5 up. If the stock doesn’t trade down on this immediately, we’ll get louder on it as a short. There’s more bad news to come.

 

09/10/15 11:42 AM EDT

LULU | IN SEARCH OF TAIL

 

Takeaway: This qtr was a mess due to factors far beyond financials. LULU isn’t articulating a cogent plan – bc it probably doesn’t have one.

 

There’s one major reason why we think this LULU quarter was a huge let down -- and it’s not that inventories were up 23 days while Gross Margins missed by 200bps. Nor is it that LULU added $62mm in revenue year over year, but generated $1mm less in EBIT.  It’s the reality that this company does not know what it wants to be. Virtually every statement out of management on the call had to do with near-term tactical branding, marketing and product plans. All that is fine. It matters on some level – and definitely matters to small scale moves in the stock in the coming quarters. But that’s what we call TREND (in HedgeyeSpeak that translates to 2-3 quarters out – the near-term modeling horizon). This is where LULU lives, unfortunately.

 

But LULU needs a change of address. This is an extremely powerful brand in a solid, yet increasingly competitive, space. LULU needs to not only be a great brand, but a great company. Then and only then will it be a great stock. We think management is coasting on the power of the brand, by tweaking a legacy operating plan, blindly opening stores, and hoping that nothing else goes wrong. Hope, however, is not a profitable growth process.

 

LULU needs to live in the TAIL (which we define as 1-3 years). What we need for real wealth creation with this stock is for a clear, concise strategy that insiders rally around and are paid handsomely to implement. People need to look to $4.00 in earnings power, and believe in it. It’s that same strategy that would result in its CEO standing up and saying things that will make Nike, UnderArmour and Athleta quake in their boots (which used to be the case) – not that they are using ‘Sports Psychology on the Pant wall’.  Unfortunately, we truly think that LULU does not have a proactive process to grow its business.

 

Does The Company Have A Long Term Plan?

Somebody, please, ask virtually anyone in the company if they know their market share in stores and online within an hour’s drive of each store. [Note: our math shows it ranges from 2.5% (Long Island) to 26.7% (Burlington Vt) -- ping us if you want the data]. We don’t think they’ll tell you – because they probably don’t know.

 

How can a CEO stand up and give credible growth and profitability targets without knowing these basic building blocks?  How can they articulate why they don’t have a wholesale model – something that could be a home run for LULU (i.e. sell where the consumer shops)?  Even the CFO, who we have/had high hopes for, hasn’t created his own identity with the Street – as he’s following the same script of his predecessor who was pushed out.

 

All we get from the company as it relates to strategic initiatives are 1) Brand, 2) Community, 3) Innovation, and 4) Guest Experience.  The only quantified metric is that LULU will return to a 55% gross margin – something that we don’t think is realistic without meaningful backing by the balance sheet (i.e. more capex to boost profitability). But more importantly, the market is highly unlikely to pay for a passive goal to return to peak profitability when LULU is in a different stage of its growth cycle.

 

This is a great Brand, for the time being. We really want to get behind this story due to the potential that can be unlocked. But without the backing of a great company – we think this stock is going anywhere but up. We’re glad we pulled the plug in March.

 

 


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REPLAY | SELL SPAIN CONFERENCE CALL

Earlier today we held a conference call with special contributor Daniel Lacalle to discuss Spain’s economy, stock market, and political outlook.

 

AUDIO REPLAY: CLICK HERE

MATERIALS: CLICK HERE

 

Key take-ways from the call include:

  • Hedgeye’s quantitative outlook on Spain shows its equity index, the IBEX 35, broken across our intermediate term TREND and long term TAIL levels, a bearish signal in our model.
  • Hedgeye’s Growth, Inflation, and Policy (GIP) model shows the Spanish economy in Quad 3 for the remainder of the year – an indication of growth slowing as inflation accelerates, another bearish signal in our factoring process.
  • Spain’s fiscal imbalances remain, with the sovereign debt load near 100% of GDP and a deficit above the 3% target. Politically the government looks poised to tack on spending and issue limited market reforms.
  • Key indicators like Manufacturing Production, IP, PMIs (Manufacturing and Services), Consumer and Economic Confidence, Retail Sales, and Housing indices are all turning over/declining over recent months.
  • A key tell on the health of the Spanish economy is its largest trading partner, France, which is seeing growth go in the wrong direction.
  • Do not confuse ECB President Mario Draghi’s agenda to expand QE with growth, as it will have little impact on the real Spanish economy.
  • There’s high probability that Spanish elections this year (December 20th) result in a narrow win by the PM Rajoy’s ruling Conservative (PP) party, but with a coalition build that includes the Socialists. Expect Spain to revert to its 2008 “ways” when labor market reforms were halted. This is very negative! 
  • As growth slows as debt expands with high unemployment and a rigid labor market, and no prospect for a QE-led recovery, a dangerous cocktail is brewing that could drive economic fundamentals much lower.

REPLAY | SELL SPAIN CONFERENCE CALL - Spain pain


Cartoon of the Day: Monkey Business

Cartoon of the Day: Monkey Business - Long financials cartoon 10.21.2015

 

"But, if you “back out IBM” … and Industrials and Financials … and you don’t back out that Energy Stocks are the best performing S&P Sector Style to be long for Q4 (OCT) to-date at +11.2%, you should be making a ton of sense to your clients," jokes Hedgeye CEO Keith McCullough in today's Early Look.


BREAKING: Bill Ackman Wishes He Could Hop In Doc Brown's DeLorean And Go Back In Time

In case you didn’t know, today is Back to the Future Day. That of course would be October 21, 2015, the fateful date to which Marty McFly and Doc Brown time-travel in 1989’s Back to the Future Part II to save Marty’s children.

 

 

On a related note, our hunch here at Hedgeye is combative hedge fund manager Bill Ackman wishes he could hop in Doc Brown's DeLorean and travel back in time to a date well before his hedge fund, Pershing Square Capital disclosed its mammoth 5.7% stake in Valeant Pharmaceuticals (VRX) which incidentally constitutes a whopping 19% of Pershing Square’s portfolio.

 

(Continue reading below for our Healthcare analyst Tom Tobin’s detailed report on VRX.)

 

The stock is getting absolutely hammered today — it’s down as much as 40% — after Citron Research released a note comparing the drug maker to Enron. Ackman has lost billions on his Valeant bet.

 

Whoops.

 

Now, we’re just speculating here... but we wager Ackman would also like to take back some words he let slip back in May at the Sohn Investment Conference . That’s where he called Valeant “a very early-stage Berkshire [Hathaway].”

 

BREAKING: Bill Ackman Wishes He Could Hop In Doc Brown's DeLorean And Go Back In Time - 10 21 2015 ackman

 

How dare he insult Mr. Buffett’s legacy!

 

We’ve long been skeptical about the stock and had considered reshorting earlier in the year, but clearly missed that opportunity when the stock was trading closer to $300.  We issued our Valeant Black Book on July 22, 2014 laying out the short case and calling out what we considered to be an unsustainable business model.

 

That said, we’re proud our Healthcare analysts alerted subscribers to the many “underappreciated risks” we saw in the stock.

 

From the report:

 

“Valeant is operating what we believe is an unsustainable business model of serial acquisitions and underinvestment, fueled by debt, that will continue to lead to deterioration in the ongoing business.”

 

BREAKING: Bill Ackman Wishes He Could Hop In Doc Brown's DeLorean And Go Back In Time - 10 21 2015 tobin 

 

Here's a brief update on our thinking from Hedgeye Healthcare analyst Andrew Freedman:

 

“It was only a matter of time before Valeant’s debt-fueled acquisition binge would come to an end.  If you look at what the underlying assets are worth and subtract the debt, you get an equity value that is closer to $20. 

 

We spent the better part of six months researching Valeant, and there were no shortage of red flags. To name a few: Alternative pharmacy channels, inventory accounting on the Aesthetics assets, FDA investigations, price increases and questionable organic growth rates…

 

Trying to reconstruct the financials of Valeant’s business was near impossible given the acquisitions/divestitures and number of reclassifications… a huge part of the long thesis was a “Trust Me” story with management and that didn’t cut it with us.” 

 

BREAKING: Bill Ackman Wishes He Could Hop In Doc Brown's DeLorean And Go Back In Time - 10 21 2015 ron

 

CLICK HERE to access Tobin's institutional research report on Valeant.

 

(If you’d like to learn more about our institutional research offerings please ping sales@hedgeye.com.)


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