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[UNLOCKED] Fund Flow Survey | Bottom Fishing

Takeaway: Investors made more aggressive allocations last week with domestic equity having its first inflow in 19 weeks.

Editor's Note: This is a complimentary research note which was originally published February 11, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

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Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending February 3rd, investors made more aggressive allocations than they have in recent periods, drawing down -$4 billion of cash and making contributions to domestic and international equity mutual funds. Domestic equity funds experienced their first inflow in 19 weeks with investors contributing +$2.3 billion to U.S. stock funds. Additionally, international equity funds took in +$5.7 billion, their largest weekly subscription since April 2015. Passives continue to be a source of funds however with equity ETFs losing another -$8.8 billion (over $3.0 billion of this redemption was in the S&P 500 SPDR this week). In fixed income, fear abounds with taxable bond funds having its worst week in 5 with -$5.5 billion being withdrawn. Municipal bonds continued their winning streak, taking in +$1.2 billion, making it 18 straight weeks of tax-free inflows. Fixed income ETFs gained +$1.9 billion.


[UNLOCKED] Fund Flow Survey | Bottom Fishing - ICI1 large 2 16

 

In the most recent 5-day period ending February 3rd, total equity mutual funds put up net inflows of +$8.1 billion, outpacing the year-to-date weekly average outflow of -$917 million and the 2015 average outflow of -$1.5 billion. The inflow was composed of international stock fund contributions of +$5.7 billion and domestic stock fund contributions of +$2.3 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 6 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net outflows of -$4.3 billion, trailing the year-to-date weekly average outflow of -$1.6 billion and the 2015 average outflow of -$463 million. The outflow was composed of tax-free or municipal bond funds contributions of +$1.2 billion and taxable bond funds withdrawals of -$5.5 billion.

 

Equity ETFs had net redemptions of -$8.8 billion, trailing the year-to-date weekly average outflow of -$5.6 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.9 billion, trailing the year-to-date weekly average inflow of +$2.6 billion but outpacing the 2015 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 2015 and the weekly year-to-date average for 2016:

 

[UNLOCKED] Fund Flow Survey | Bottom Fishing - ICI2

 

[UNLOCKED] Fund Flow Survey | Bottom Fishing - ICI3

 

[UNLOCKED] Fund Flow Survey | Bottom Fishing - ICI4

 

[UNLOCKED] Fund Flow Survey | Bottom Fishing - ICI5

 

[UNLOCKED] Fund Flow Survey | Bottom Fishing - 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 | Bottom Fishing - ICI12

 

[UNLOCKED] Fund Flow Survey | Bottom Fishing - ICI13

 

[UNLOCKED] Fund Flow Survey | Bottom Fishing - ICI14

 

[UNLOCKED] Fund Flow Survey | Bottom Fishing - ICI15

 

[UNLOCKED] Fund Flow Survey | Bottom Fishing - 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 2015, and the weekly year-to-date average for 2016. 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 | Bottom Fishing - ICI7

 

[UNLOCKED] Fund Flow Survey | Bottom Fishing - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors made large withdrawals from industrials and materials. The industrial XLY ETF lost -$277 million or -5% to redemptions. The materials XLB lost -$113 million or -6%.

 

[UNLOCKED] Fund Flow Survey | Bottom Fishing - ICI9 2



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 | Bottom Fishing - ICI17

 

[UNLOCKED] Fund Flow Survey | Bottom Fishing - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$1.6 billion spread for the week (-$774 million of total equity outflow net of the -$2.4 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 +$724 million (more positive money flow to equities) with a 52-week high of +$20.5 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 | Bottom Fishing - 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 | Bottom Fishing - ICI11 


HedgeyeRetail (2/17) | Upcoming Earnings SIGMAs - Not Positive

Takeaway: Here are SIGMAS for the companies reporting earnings over the next 24 hours. Every single one of them is bad.

Here are SIGMAS for the companies reporting earnings over the next 24 hours. Every single one of them is bad.

 

WMT - Believe it or not, WMT is actually the prettiest of all the charts. Three of the past four quarters had down margins, and the sales/inventory spread is in decent shape. That said, once WMT gets to the point of 'easy comparisons' on the operating margin line, it will fail to 'comp the comp'. Due to investment in virtually every area of its business, margins should be down for at least another 2 years -- with or without a recession.

HedgeyeRetail (2/17)  |  Upcoming Earnings SIGMAs - Not Positive - 2 17 2016 chart1

 

JWN - Here's a consensus short if there ever was one. Short interest has gone from 6% to a cycle high of 19% since Nov. It's probably warranted, however. JWN is the only department store that did not come out and preannounce weak holiday sales, and there's no reason to think that it bucked the negative trend put up by its peers. Furthermore, e-commerce numbers -- based on our analysis -- look horrible. And this matters a lot to JWN with e-comm at 21% of sales, vs peers at 10%. Furthermore, margins have been down, and inventories outgrowing sales for eight consecutive quarters -- and that was during an otherwise solid business cycle. While this is a crowded short, the consensus is likely directionally right on this one over a Trade and Trend duration.

HedgeyeRetail (2/17)  |  Upcoming Earnings SIGMAs - Not Positive - 2 17 2016 chart2

 

CAB - This chart looks to us like Q3 is Cabela's center of gravity. It consistently tries to pull away into a better place on the SIGMA, but it ends right back in Q3. In the upcoming quarter, it goes up against that lone data point on the far right-hand side of the chart. We're not quite sure the Street is appropriately prepared for risk to the downside.

HedgeyeRetail (2/17)  |  Upcoming Earnings SIGMAs - Not Positive - 2 17 2016 chart3

 

LZB - This is perhaps the ugliest chart. People tend to think that Quadrant 3 is the worst -- which is technically true. But the market usually recognizes Q3 more fully. In Quadrant 2, margins are still positive, but inventories are building, and management is likely clinging to hope that sales will rebound before dropping a bomb and taking down guidance. Good, proactive management teams usually revert immediately to Quad 4 (upper left) by way of lowering price and clearing the balance sheet. Everyone else reverts to Q3, and potentially stays there for a very long time (look at JWN chart above).

HedgeyeRetail (2/17)  |  Upcoming Earnings SIGMAs - Not Positive - 2 17 2016 chart4

 

DSW - DSW acquires Ebuys, an online off-price footwear retailer with N.A. presence, for $62.5mm

(http://investors.dswshoe.com/2016-02-17-DSW-Inc-to-Acquire-Ebuys-Inc)

 

Our Take: The DSW model is not scalable. When you rely on getting mass quantities of off-price fashionable shoes in a spectrum of colors and sizes that consumers actually want, it gets increasingly difficult to 'go-big' in growing the core. We generally don’t like deals, and have not analyzed this one. But at face value, this one actually makes sense.

 

AMZN - Amazon readies launch of own-label fashion brands

(http://www.drapersonline.com/news/amazon-readies-launch-of-own-label-fashion-brands/7004885.article)

 

Our Take: Amazon has been selling apparel forever. It's simply been horrible at it. The private label brand makes a ton of sense to us for one reason -- mid-lower income consumers, people who have a body shape that makes them uncomfortable shopping in a store, and MOST IMPORTANTLY, penetrating non-US markets that are not as 'premium brand focused' as we are in the US.

HedgeyeRetail (2/17)  |  Upcoming Earnings SIGMAs - Not Positive - 2 17 2016 chart5

 

RL - Ralph Lauren brings piece of supply chain in-house to manage distribution

(http://www.wsj.com/articles/ralph-lauren-to-bring-management-of-distribution-site-in-house-1455662903)

 

W - Wayfair.com Names Sharif Sleiman Vice President of Supply Chain and Operations

(http://investor.wayfair.com/investor-relations/press-releases/press-releases-details/2016/Wayfaircom-Names-Sharif-Sleiman-Vice-President-of-Supply-Chain-and-Operations/default.aspx)

 

KSS - Kohl's completes construction on 4,000-sq.-ft. showroom in Manhattan to show off 'latest fashions'

(http://www.chainstoreage.com/article/schimenti-constructs-kohls-showroom)

 

AMZN - Amazon acquires Indian payments processor as it expands into growing Indian Ecomm segment

(http://www.reuters.com/article/us-emvantage-m-a-amazon-com-idUSKCN0VP1JN)

 

AMZN - Foursquare is partnering with Delivery.com to offer grocery delivery through mobile app

(http://www.retailingtoday.com/article/foursquare-will-pick-groceries)

 

PLCE - Former Children's Place CEO Ezra Dabah launches Kidpik after controversial split with the company

(http://www.crainsnewyork.com/article/20160216/TECHNOLOGY/160219954/former-childrens-place-ceo-is-back-and-this-time-he-wants-to-make)

 

AdiBok - Black Yeezy Boost 350 pre-orders close in 22 minutes on Adidas' app

(http://footwearnews.com/2016/focus/athletic-outdoor/adidas-confirmed-app-reservations-closed-yeezy-boost-350-black-193272/)

 

NKE - Nike converting NBA All-Star weekend pop-up store into permanent Jordan brand retail location in Toronto

(http://solecollector.com/news/jordan-brand-306-yonge-toronto-store/)


RTA Live: February 17, 2016

 


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CHART OF THE DAY: Warren Buffett, Kinder Morgan, & Why Cheap Stocks Gets Cheaper

CHART OF THE DAY: Warren Buffett, Kinder Morgan, & Why Cheap Stocks Gets Cheaper  - 02.17.16 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 learn more.

 

"... Not to be confused with a pig, value trap, or a zero, that’s what Buffett calls the “intrinsic value” of a company. In Berkshire Hathaway’s 1989 Annual Report, Buffett reminded us that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Amen brother.

 

Realizing that a lot has changed since Berkshire was buying smaller, under-covered, under-valued companies in the 1970s (when the SP500’s P/E was 7-8x), our all-star intrinsic deteriorating-cash-flow analyst, Kevin Kaiser, would love to interview Buffett on where his recent investment in Kinder Morgan (KMI) fits within his aforementioned definition of 'fair.'"


Intrinsic Mistakes

“It’s the discounted value of the cash that can be taken out of a business during its remaining life.”

-Warren Buffett

 

Not to be confused with a pig, value trap, or a zero, that’s what Buffett calls the “intrinsic value” of a company. In Berkshire Hathaway’s 1989 Annual Report, Buffett reminded us that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Amen brother.


Realizing that a lot has changed since Berkshire was buying smaller, under-covered, under-valued companies in the 1970s (when the SP500’s P/E was 7-8x), our all-star intrinsic deteriorating-cash-flow analyst, Kevin Kaiser, would love to interview Buffett on where his recent investment in Kinder Morgan (KMI) fits within his aforementioned definition of “fair.”

 

To be clear, ex-his-partisan politics, I have a great deal of respect for The Oracle of Omaha. I wrote my senior thesis @Yale on what I loved about his bottom-up investment strategy. Today though, I’m reminded of what his forefather, Benjamin Graham, taught us: “it’s a great mistake to imagine the intrinsic value is as definite and determinable as is the market price.”

 

Intrinsic Mistakes - buffett

 

Back to the Global Macro Grind

 

If you have an excel spreadsheet, some Old Wall consensus forecasts, and a calculator, you can pretty much imagine-up any “valuation” for a company that you want. The #1 risk to slapping a multiple on your cash flow number is that you are using the wrong multiple on the wrong number.

 

Imagine, God forbid, that you were one of these “value” guys who has been buying Energy stocks for the last 2 years on the premise that they were “cheap.” You could have bought the entire Energy (XLE) ETF in Q2 of 2014 at $97 (pre a -45% crash) assuming that the “cash that can be taken out of the business” was going to have $90-120 Oil implied in its cash flow margin…

 

You could have bought all of Kinder Morgan (KMI) at $42/share at this time last year too.

 

Since Kaiser didn’t sleep-over at my place last night and I don’t have access to his immediate-term thoughts on the Buffett purchase (hockey players are close, not that close), I’ll show you how a proxy for the right cash flow number looks in the commodity #Deflation Risk space – earnings. Here’s where year-over-year revenues and earnings are on a reported basis Q4 to-date:

 

  1. ENERGY (23 of 50 S&P companies have reported) = Sales -33%, EPS -74%
  2. BASIC MATERIALS (24 of 27 companies have reported) = Sales -16%, EPS -18%
  3. INDUSTRIALS (58 of 65 companies have reported) = Sales -7%, EPS -4%

 

I know, I know. If you “back out” those 142 companies from the SP500, “earnings aren’t that bad.” Notwithstanding that I didn’t hear one long-only fund manager ex-out the “earnings are great” narrative at $110 oil, you get how wrong numbers can be.

 

Income statement earnings and “cheap P/E multiples”, don’t forget, tell you next to nothing about:

 

A)  A company’s Debt Leverage (Balance Sheet)

B)  Credit Risk Profile, Covenants, etc.

C)  And/or where their profits are in terms of the cycle

 

That’s why we cyclical bears love shorting “cheap” stocks. When the profit-cycle slows and the credit-cycle deteriorates – newsflash: “cheap” gets a lot cheaper.

 

This is where buying a levered company at a “wonderful price” gets really dangerous. You can ask Carl Icahn about his purchases of #Deflation Risk companies like Freeport McMoran (FCX) and Chesapeake (CHK) about that. He’s Trump’s macro guy though!

 

Back to the intimate relationship that the PROFIT CYCLE shares with the CREDIT CYCLE:

 

  1. In the aggregate, 389 companies in the SP500 have now reported their respective 4th quarters
  2. Aggregate SALES are down -4.2% and EARNINGS are down -6.7%
  3. Only 3 of 10 S&P SECTORS have positive year-over-year EARNINGS growth

 

As a friendly reminder to those chasing US Equities (again) on another slow-volume Liquidity Trap bounce (Total US Equity Market Volume was -8% vs. its 1-month average yesterday)… every time US corporate PROFITS go negative (year-over-year) for 2 consecutive quarters, the SP500 has a greater than 20% crash/decline.

 

Currently the SP500 is -11.0% from its all-time #bubble high (July 2015), so the least bearish case I can give you this morning is SP (= 20% draw-down from peak). So, instead of trying to find some emotional value in what the S&P Futures are doing, I suggest you watch profits and credits today. Not doing so will continue to be, as Ben Graham called it, a “great mistake.”

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.60-1.84%

SPX 1
RUT

NASDAQ 4155-4517

VIX 21.11-29.04
USD 95.07-97.89
Oil (WTI) 26.01-31.22

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Intrinsic Mistakes - 02.17.16 chart


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