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[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown

Takeaway: Investors slammed domestic equity mutual funds with -$12 billion in redemptions, the worst week for the asset class in over 4 years.

Editor's Note: Below is a complimentary research note which was originally published November 12, 2015 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending November 4th, investors slammed domestic equity mutual funds with -$12.1 billion in redemptions, the largest weekly draw down from the asset class in more than 4 years. Domestic equity mutual funds have now lost -$137.5 billion in withdrawals so far this year, worse than 2008 redemptions over the same period, making 2015-to-date the worst year on record for the asset class.

 

Meanwhile, investors favored passive equity mandates, making +$6.1 billion in contributions to equity ETFs. Fixed income ETFs did not fare as well with -$1.2 billion in redemptions. However, fixed income mutual funds more than made up for that redemption with +$2.6 billion in contributions.

 

As we approach a possible rate hike in December, the following chart provides perspective on how the last fed rate hike cycle starting in late June 2004 affected fund flows for investment grade and high yield fixed income mutual funds. As yields rose and attracted investors, IG fixed income experienced net inflows in all but three months between July 2004 and June 2007, taking in a cumulative +$128.9 billion. High yield flows were not as consistent and were in fact negative for a good portion of the 2004-2007 rate-hike cycle. However, with consistently positive inflows after Fed Funds stabIlized, high yield funds came to a cumulative +$3.1 billion inflow for the period of July 2004 through June 2007. If the Fed does hike rates in December, we expect it to be a clear positive for investment grade bond managers as investors should gravitate to the combination of higher yields and relative safety of investment grade issues.

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI20 3

 

In the most recent 5-day period ending November 4th, total equity mutual funds put up net outflows of -$12.5 billion, trailing the year-to-date weekly average outflow of -$688 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund withdrawals of -$461 million and domestic stock fund withdrawals of -$12.1 billion. International equity funds have had positive flows in 45 of the last 52 weeks while domestic equity funds have had only 9 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net inflows of +$2.6 billion, outpacing the year-to-date weekly average inflow of +$251 million and the 2014 average inflow of +$926 million. The inflow was composed of tax-free or municipal bond funds contributions of +$496 million and taxable bond funds contributions of +$2.1 billion.

 

Equity ETFs had net subscriptions of +$6.1 billion, outpacing the year-to-date weekly average inflow of +$2.1 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net outflows of -$1.2 billion, trailing the year-to-date weekly average inflow of +$1.2 billion and the 2014 average inflow of +$1.0 billion.

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI1 large  1

 

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:

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI2

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI3

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI4

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI5

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - 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.

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI12

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI13

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI14

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI15

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - 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:

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI7

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors made significant contributions of +$1.3 billion or +7% to the financials XLF ETF. Meanwhile, the utilities XLU ETF lost -$382 million or -6% in redemptions.

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - 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.

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI17

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$7.8 billion spread for the week (-$6.4 billion of total equity outflow net of the +$1.4 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 +$1.0 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.)

  

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - 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:

 

[UNLOCKED] Fund Flow Survey | Active Meltdown...-$12 Billion Drawdown - ICI11 

 



RTA Live: November 17, 2015

 

 


REPLAY: Healthcare Q&A with Tom Tobin | $ZBH $AHS $XLV

in case you missed it

Hedgeye Healthcare Analysts Tom Tobin and Andrew Freedman discuss some key takeaways from a recent conversation they had with an Orthopedic Surgeon and the implications for Zimmer Biomet Holdings (ZBH).

 

The team also provides updates to their short thesis on AMN Healthcare Services (AHS).

 

WATCH THE REPLAY HERE

 


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P | Changing Its Tune (Strategic Update Call)

Takeaway: P basically conceded that its recent actions are hedges against Web IV, but also implied that a big risk to our short thesis isn't imminent

KEY POINTS

  1. CHANGING ITS TUNE: P hosted a call yesterday following the annonucement of its planned acquisition of certain Rdio assets, but the purpose of the call was to discuss the direction of the company moving forward.  P is diversifying away from its ad-supported model through ticketing and a harder push in the subscription market.  Mgmt also essentially admitted that the acquisitions of both Ticketfly and Rdio's assets are hedges against the Web IV outcome.  In short, P is trying to pitch another story to the street before the WebIV decision is out.   
  2. DIRECT DEALS AREN'T IMMINENT: P also suggested that it aiming to enter the interactive market (e.g. Spotify), but doesn't expect it will be able to offer an interactive product until late 2016.  That likely also means that a direct non-interactive license isn't imminent either; mitigating a big risk to our short thesis of P announcing a direct license agreement alongside the Web IV decision (or shortly after).  That said, P will likely be saddled with what we expect to be considerable increase in statutory royalty rates for at least the first half of 2016.  There's also no guarantee P will get favorable terms on any direct deal (or even deals with each of the majors) given that P has waited till the 11th hour to try to smooth things over with the labels following a historically contentious relationship.
  3. BUT STILL MISGUIDED? P suggested that it doesn't plan to scale back its Local Radio Advertising push in the event of an adverse Web IV decision.  Maybe P is waiting for the Web IV decision before publicly conceding that it will be deemphasizing its ad-supported model.  Given that P's viability in a post Web IV world will be dependent on its cash reserves, we're not exactly sure how P is actually planning to sustain that effort after committing 80% of its current cash to acquisitions and the pre-1972 settlement, while onboarding Rdio's employees at the same time.  Collectively, these actions suggest P is expecting a Web IV defeat, and is preparing to blow up its model.  P has committed too much capital to assume its recent actions are just a hedge.

 

See charts and notes below for supporting detail/analysis on P's model and Web IV.  Let's us know if you have any questions or would like to discuss further.

 

Hesham Shaaban, CFA


@HedgeyeInternet 

 

P | Changing Its Tune (Strategic Update Call) - P   Cash   Commitments 2

P | Changing Its Tune (Strategic Update Call) - P   pre 1972

P | Changing Its Tune (Strategic Update Call) - P   Web IV fallout 1

P | Changing Its Tune (Strategic Update Call) - P   Web IV fallout 2

P | Changing Its Tune (Strategic Update Call) - P   Cost structure slide

 

 

P: Can We Still Be Friends? (3Q15)

10/23/15 08:14 AM EDT

[click here]

 

P: It's All About the Benchmarks (Web IV)
10/02/15 12:22 PM EDT
[click here]

 

P: Fool's Gold (Web IV)
09/21/15 02:05 PM EDT
[click here]

 

P: Losing the Critical Debate? (Web IV)
04/08/15 08:53 AM EDT
[click here]

 


CHART OF THE DAY: A Picture Which Should Give Perma Bulls Pause

CHART OF THE DAY: A Picture Which Should Give Perma Bulls Pause - 11.17.15 EL chart

 

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe.

 

"... Darius Dale and I were doing the rounds, seeing sharp Institutional Investors in Boston yesterday, when what was looking like another flat to down day for US stocks turned into some rip roaring fun to the upside.

 

It’s a good thing they bounced them. That was the 1st real up day (albeit on slowing volume – see Chart of The Day for details on Total US Equity Market Volume being -12% vs. its 1yr average) for the US stock market in the last 9."


Macrocosm

“The economic mechanisms of an efficiently inefficient market are fundamentally different from those of neo-classical economics.”

-Lasse Heje Pedersen

 

That’s a mouthful, but it makes a lot more sense than the bill of linear-economics goods I was sold in college. I’m looking forward to debating real-world market practitioners at our inaugural Global Macro conference tomorrow in Stamford, CT – it’s called Macrocosm.

 

The principles of neo-classical economics are fun to consider, mainly because they’re so easy to disprove. Pedersen’s book, Efficiently Inefficient, is a great primer on the fundamental differences between econ PhD dogmas and real world markets.

 

Does capital structure matter? How about funding frictions and liquidity constraints? When do you need to be aware of phase transitions in economic, profit, and credit cycles? These are all questions we non-linear people will be considering at Macrocosm.

 

Macrocosm - z macrocosm pic

 

Back to the Global Macro Grind

 

Darius Dale and I were doing the rounds, seeing sharp Institutional Investors in Boston yesterday, when what was looking like another flat to down day for US stocks turned into some rip roaring fun to the upside.

 

It’s a good thing they bounced them. That was the 1st real up day (albeit on slowing volume – see Chart of The Day for details on Total US Equity Market Volume being -12% vs. its 1yr average) for the US stock market in the last 9.

 

With the SP500 +1.5% on the day, the real pin-action (beta chasing) was in that good ole “reflation” trade:

 

  1. Oil (WTI) popped +3.1% on the day after collapsing another -7.9% last week
  2. Energy Stocks (XLE) proceeded to ramp +3.3% > 2x the SPY move in turn
  3. Utilities (XLU), the only major S&P Sector to close up last week, closed +1.7% too

 

What was it that drove this ramp? Was it NY Fed Head Bill Dudley turning tail saying the Fed doesn’t really have to raise rates in DEC due to “well below target inflation.”

 

Macrocosm - reflation cartoon 10.13.2015  2

Click here to join Hedgeye CEO Keith McCullough live on The Macro Show at 9am. 

 

Was it a bird or a plane? Was it simply that US and European Equity markets signaled immediate-term TRADE oversold into Friday’s close? Or some combination of all of the above?

 

I’m pretty sure it wasn’t another set of US Retailers (XRT) missing numbers yesterday (Dillard’s (DDS) down -15% on the Friday/Monday “low gas prices” combo – and Urban Outfitters (URBN) seeing US demand being so bad that they’re buying a pizza chain).

 

No, I couldn’t make up that pizza-pivot if I tried. That stock is going to keep crashing today.

 

Copper is still crashing this morning too, down another -0.4% to $2.10, taking its YTD and 6-month #Deflations to -26% and -28%, respectively. But we really shouldn’t talk about that when we can be debating how Qe4 is going to drive the next bull market in Energy.

 

Seriously, that’s on the table.

 

That was the main contention in our client debates yesterday – the line of questioning went something like this:

 

  1. “So, let’s just say you’re right and the probability is rising of a US recession by mid-2016…
  2. And let’s assume that the Fed isn’t dumb enough to keep raising into a slow-down…
  3. Wouldn’t you guys being right on the economy mean the Fed needs to start easing again?”

 

Yep. Why not?

 

Oh, right. There’s that thing called the US Presidential election where:

 

  1. If the US is dropping below 1.5% GDP growth (towards 0.4% - Hedgeye’s low-end scenario for Q4 to be reported in Q1)
  2. The probability rises that a Republican could win…
  3. And if that Republican contender is anti-Federal Reserve, how does Janet (a Democrat) go to Qe4 during the debates?

 

Well. Since she’s un-elected, I hope everyone realizes that she can have the “courage to act” however she damn well pleases. That said, this whole central-planning catalyst calendar is going to get really gnarly if she tries going there.

 

Remember that if/when the Fed pivots back to dovish from pretend-hawkish, they have to tell the American People why they are doing that. Say it with me now – Super #LateCycle Growth Slowing

 

In other news, neo-classical linear economists still have +3-4% US GDP growth forecasts for 2016.

 

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):

 

UST 10yr Yield 2.17-2.36% (bearish)

SPX 2020-2073 (bearish)
RUT 1139--1167 (bearish)

NASDAQ 4 (bullish)

Nikkei 181 (bullish)

DAX 101 (neutral)

VIX 16.59-20.25 (bullish)
USD 97.99-100.08 (bullish)
EUR/USD 1.05-1.07 (bearish)
YEN 121.53-123.99 (bearish)
Oil (WTI) 39.79-43.55 (bearish)

Nat Gas 2.23-2.40 (bearish)

Gold 1070-1101 (bearish)
Copper 2.08-2.20 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Macrocosm - 11.17.15 EL chart


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