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ICI Fund Flow Survey | The Trillion Dollar Bet

Takeaway: Investors contributed to both risk asset classes last week but contributed more to bonds than equities, favoring measured risk.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Risk assets rebounded across the board in the 5-day period ending October 21st, signaling a temporary reduced level of worry in the marketplace. However, the +$6.0 billion net flow into total bond products (both mutual funds and ETFs) outpaced the +$3.3 billion inflow into total equity products, as investors still favored the relative safety of bonds over stocks. Only domestic equity mutual funds and hybrid mutual funds experienced redemptions last week with all other categories seeing new subscriptions as investors looked again to put money to work.

 

Additionally, money funds continued to rebuild balances, gaining another +$1 billion in contributions last week, bringing the 4Q15 total inflow to +$30 billion. This trend supports our Long recommendation on leading money fund manager Federated Investors (see our FII report). The long running equity bull market has been sourced by money coming off the sidelines and out of money funds which is why a late stage setup in equities should unwind the constant 6 year draw down in cash products. While cash balances in 3Q15 and 4Q15TD have started their seasonal rebuild with +$54 billion and +$30 billion moving back into the category, we note the substantial run in the S&P 500 has resulted in 20 out of 36 quarterly outflows in industry related cash products, with over $1.1 trillion being redeemed. As equities enter 2016 and beyond and into the late stages of this current economic expansion, this is the opportunity for leading money fund managers including Federated, BlackRock, and Legg Mason.

 

ICI Fund Flow Survey | The Trillion Dollar Bet - z chart1

 

In the most recent 5-day period ending October 21st, total equity mutual funds put up net inflows of +$1.5 billion, outpacing the year-to-date weekly average outflow of -$357 million and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$1.6 billion and domestic stock fund withdrawals of -$70 million. International equity funds have had positive flows in 46 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 +$3.1 billion, outpacing the year-to-date weekly average inflow of +$113 million and the 2014 average inflow of +$926 million. The inflow was composed of tax-free or municipal bond funds contributions of +$405 million and taxable bond funds contributions of +$2.7 billion.

 

Equity ETFs had net subscriptions of +$3.3 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 +$2.8 billion, outpacing the year-to-date weekly average inflow of +$1.2 billion and the 2014 average inflow of +$1.0 billion.

 

ICI Fund Flow Survey | The Trillion Dollar Bet - z black red

 

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 | The Trillion Dollar Bet - ICI2

 

ICI Fund Flow Survey | The Trillion Dollar Bet - ICI3

 

ICI Fund Flow Survey | The Trillion Dollar Bet - ICI4

 

ICI Fund Flow Survey | The Trillion Dollar Bet - ICI5

 

ICI Fund Flow Survey | The Trillion Dollar Bet - 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 | The Trillion Dollar Bet - ICI12

 

ICI Fund Flow Survey | The Trillion Dollar Bet - ICI13

 

ICI Fund Flow Survey | The Trillion Dollar Bet - ICI14

 

ICI Fund Flow Survey | The Trillion Dollar Bet - ICI15

 


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 | The Trillion Dollar Bet - ICI7

 

ICI Fund Flow Survey | The Trillion Dollar Bet - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors redeemed -$420 million or -5% from the industrials XLI ETF while contributing +$436 million or +4% to the energy XLE.

 

ICI Fund Flow Survey | The Trillion Dollar Bet - ICI9



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$1.2 billion spread for the week (+$4.8 billion of total equity inflow net of the +$6.0 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 +$1.6 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 -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | The Trillion Dollar Bet - 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 | The Trillion Dollar Bet - ICI11 


MACAU: OCTOBER NOT SO GOLDEN

CALL TO ACTION

We’ve had a long Macau call on since late September but we fear the end of that trade is near. October was certainly better than September (seasonally adjusted) but it did trail off after Golden Week. High hold benefited the market, otherwise the YoY decline would’ve had a 3 in front of it rather than the actual 28% drop. The incremental data points for Macau Studio City will likely be negative, casting doubt on ROIs of the new Cotai properties and whether new supply will drive incremental visitation/GGR growth. Looking at November, we think the month is off to a sluggish start and our GGR forecast for the month of a 31% decline is larger than October’s and worse than Street expectations of a mid-20s drop. Finally, our 2016 EBITDA estimates remain well below the Street. Keep a trade a trade has been our mantra on Macau for the past several weeks and it looks like a good time to book profits.

 

We will be hosting a Macau call on Friday Nov 6th at 11AM to present more analysis on the October numbers, our model projections and outlook, and a new research topic. Please contact your Hedgeye salesperson for more details.

 

 Please see our detailed note: 

http://docs.hedgeye.com/HE_Macau_11.4.15.pdf

 


HOWARD PENNEY ON THE MACRO SHOW THIS MORNING TALKING FOOD

This morning we were on Hedgeye's The Macro Show talking about Restaurant stocks. We gave an overview of the earnings season to date and touched on a few things to look at in Q4 and 2016.

 

Watch the replay below:


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Timber... Still A Long Way To Fall for Kinder Morgan | $KMI

Takeaway: If you still own shares of Kinder Morgan, we suggest you tread very carefully.

In case you missed it... Barron’s ran a story with the headline below over the weekend. The story prominently features the analysis of Hedgeye Energy analyst Kevin Kaiser. Of course, Kaiser has been a longtime bear on Kinder Morgan (KMI) and a vocal critic of the dangers of MLPs.

 

Barron’s writer Andrew Bary calls Kaiser, “the company’s most outspoken critic.” We won't disagree with his assessment. 

 

Timber... Still A Long Way To Fall for Kinder Morgan | $KMI - z barrons headline

 

Here’s an excerpt::

 

“… Hedgeye’s Kaiser takes issue with investors’ dividend focus: ‘You need to look at other metrics because the dividend is an arbitrary number that is not representative of what the company actually earns.’

 

The company is expected to net 70 cents a share this year, based on generally accepted accounting principles. With a tax shield related to the MLP purchases last year, the cash earnings may top $1 a share. So Kinder Morgan’s current dividend could be about twice its cash earnings and more than three times its free cash flow, as defined by cash flow from operations, less all capital expenditures.”

 

Timber... Still A Long Way To Fall for Kinder Morgan | $KMI - 11 3 2015 kmi bary

 

Kaiser’s original short call on Kinder Morgan came on 8/2/2013 when shares traded for almost $39. Yesterday, KMI closed at $27.51 per share. In other words, the stock is down 30% since Kaiser’s call. 

 

Contrast Kaiser’s steadfast thinking with Wall Street's perma-bulls, who are increasingly hedging their bets. In the Barron’s story, writer Andrew Bary singles out Credit Suisse MLP analyst John Edwards as a “longtime Kinder bull.”

 

While we wouldn’t say Mr. Edwards has swung around to our dour outlook on the stock just yet, at a minimum, he's at least pulling his expectations down from the stratosphere. Following KMI’s disappointing Q3 earnings, Edwards cut his rating on the stock to "Neutral" from "Outperform." He also lowered his price target to $39 from $52.

 

It's a start!

 

The stock was up 3.4% yesterday, rebounding from its 15% tumble after the company reported lackluster earnings.  

 

Timber... Still A Long Way To Fall for Kinder Morgan | $KMI - Kinder Morgan

 

We're obviously not buying the bounce

 

In a recent note to subscribers, Kaiser reiterated his short call and explained why he continues to peg fair value for KMI in the range of 9x to 10x current EV/EBITDA, or $10-$13 per share.

 

In other words, at least 50% downside from here.

 

Bottom line: Kaiser has been warning about the dangers of MLPs for a long time now. Check out this laundry list of 8 MLP short calls he's made and how they have fared here. If Kaiser is right again, it doesn’t bode well for Kinder Morgan shareholders.

 

Timber... Still A Long Way To Fall for Kinder Morgan | $KMI - 11 4 2015 kmi prop

 

***If you’d like to learn more about how you can subscribe to Kevin Kaiser’s research as well as our other institutional research, please email sales@hedgeye.com.


Purchase Apps | October = Underwhelming

Takeaway: Post-TRID October has been underwhelming as mortgage purchase apps track ~5% below both August and 3Q15 levels of activity.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

Purchase Apps | October = Underwhelming - Compendium 110415

 

Today's Focus: MBA Mortgage Applications

 

Purchase Demand declined -0.6% week-over-week while decelerating -300 bps to +19.3% year-over-year.

 

The latest weekly data is largely uneventful but, on the margin, the last three weeks of October have seen a modest pullback in activity relative to both September and recent quarter averages.  Excluding the weeks immediately prior to and post TRID implementation, purchase demand in October is tracking -5.6% and -4.5% relative to August and the 3Q15 average (see 1st chart below).  Given the progressively easier back half comps, growth has remained solid and steady on a year-over-year basis at ~+20% YoY.    

 

Meanwhile, rates on the 30Y FRM contract moved back above 4%, rising +3bps in the latest week as the bond market bid both the short and long end higher in response to the rhetorically hawkish commentary out of the FOMC October meeting. At current levels, rates are in-line with the 2015 average of 4.02% and below the 4.35% average for 2014.  

 

 

Purchase Apps | October = Underwhelming - Purchase 2015 Monthly

 

Purchase Apps | October = Underwhelming - Purchase 2013v14v15

 

Purchase Apps | October = Underwhelming - Purchase   Refi YoY

 

Purchase Apps | October = Underwhelming - Purchase Index   YoY Qtrly

 

Purchase Apps | October = Underwhelming - Purchase LT

 

Purchase Apps | October = Underwhelming - Purchase YoY

 

Purchase Apps | October = Underwhelming - 30Y FRM

 

 

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


Big FICC Fade Signal

Client Talking Points

FX

Post another nasty #Deflation print out of the Eurozone (PPI -3.1% year-over-year vs. -2.6% last), the EUR/USD is down -0.4% and is finally signaling immediate-term TRADE oversold vs. an overbought U.S. Dollar Index into the U.S. jobs report.

OIL

WTI went squirrel yesterday vs. the correlation machines (up with the USD up), but it is also signaling immediate-term TRADE overbought alongside Energy Equity Beta (XOP and XLE).

RATES

For the umpteenth time this year, the UST 2YR Yield is in this 0.75-0.80 zone and signals overbought on “they’re gonna raise rates” – you’re one more bad jobs report away from 0.59% 2YR and 1.98% 10YR. FYI – we are staying with that call.

 

**Tune into The Macro Show at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 61% US EQUITIES 6%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 33% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

Last week was a big week for McDonald’s (MCD), as they reached the inflection point we were predicting. Post earnings, the next catalyst for the stock is going to be the November 10th analyst meeting.

 

The meeting will be an opportunity for management to shed more light on the progress of all day breakfast, additional G&A cuts and the potential of doing a REIT. Our Restaurants team remains bullish on the name, and they look forward to giving you some material updates after the meeting.

RH

Restoration Hardware (RH) shares gained 5.8% this past week. The margin story here is explosive. Margins were sitting below 10% on Friday, and we think they will be above 16% in 3 years. The key reason is that expense leverage on these new properties is like nothing we’ve ever seen (i.e. RH pays only 10% more for square footage that’s 300% larger).

 

In addition, the company does not have to proportionately grow its sourcing organization with the growth in its store base OR its category expansion.

 

Our estimate is that the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we’re getting to a stock in excess of $300.

TLT

Our forecasts for domestic economic growth continue to be more accurate than the consensus. We anticipate economic growth will get a lot worse from here. That is why you want to own long-term bonds (TLT, EDV).

  • Real GDP growth slowed to 1.5% on a quarter-over-quarter seasonally adjusted basis. That was actually right at the top end of our range going into it (remember that the mainstream Q/Q annualized number is unpredictable)
  • On the Y/Y numbers, growth decelerated for a 2nd straight quarter to 2.0% from +2.7%
  • Consumption growth was a huge contributor to the number vs. the manufacturing side of the economy which continues to slow. However, take a look at the important chart below. We’re already past peak consumption growth. Consumption growth was positive on an absolute basis but remained rate of change negative with Q3 representing the 2nd quarter of deceleration off of the Q1 2015 peak
  • Both residential and nonresidential Investment decelerated sequentially and inventories contributed almost -1.5% bps to the headline number
  • Personal Income decelerated to +0.1% for Sep vs. +0.3% in August. The expectation was for a +0.2% print
  • Personal spending decelerated to +0.1% from +0.4%. The expectation was also for +0.2% print.
  • Core PCE printed flat at +1.3% Y/Y for Sep. vs. Aug. on a Y/Y basis. That number missed expectations for a +1.4% print

Three for the Road

TWEET OF THE DAY

Bad food sells. I get it.  Bad food layered with years of price increases doesn’t, kind of like.......  (fill in the blank)

@HedgeyeHWP

QUOTE OF THE DAY

There is more to life than increasing its speed.

Mahatma Gandhi

STAT OF THE DAY

The national average for a gallon of gasoline dropped 1.1 cents during the past week to $2.18 a gallon, according to GasBuddy. That’s about 11 cents lower than one month ago and 79 cents less than one year ago. AAA puts the national average at $2.19.


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