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ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns

Takeaway: Investors made the first contribution to taxable bonds in 15 weeks, although only a modest +$107 million.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending February 17th, taxable bond funds saw their first inflow in 15 weeks, although only a modest +$107 million. Also within bonds, fixed income ETFs took in +$2.9 billion. That amount included +$448 million in contributions to the long duration Treasury TLT fund, which has now increased year-to-date assets by an astounding +$3.0 billion or +44%. Meanwhile, investors continue to exit equity mutual funds and ETFs, drawing down another -$4.1 billion from the category, even during a week with declining volatility. International equity funds, however, were the exception within total equity products, taking in +$1.0 billion, as the category continues to experience stable inflows. Finally, investors seeking safety shored up +$8 billion in money market funds as the move to build cash is accelerating.


ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI1

 

In the most recent 5-day period ending February 17th, total equity mutual funds put up net outflows of -$1.2 billion, trailing the year-to-date weekly average outflow of -$1.0 billion but outpacing the 2015 average outflow of -$1.5 billion. The outflow was composed of international stock fund contributions of +$1.0 billion and domestic stock fund withdrawals 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 5 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net inflows of +$964 million, outpacing the year-to-date weekly average outflow of -$873 million and the 2015 average outflow of -$475 million. The inflow was composed of tax-free or municipal bond funds contributions of +$857 million and taxable bond funds contributions of +$107 million.

 

Equity ETFs had net redemptions of -$2.9 billion, slightly better than the year-to-date weekly average outflow of -$4.4 billion but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$2.9 billion, outpacing the year-to-date weekly average inflow of +$2.4 billion and 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:

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI2 2

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI3

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI4

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI5

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - 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 | Small Reprieve from Taxable Drawdowns - ICI12

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI13

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI14

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI15

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - 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:

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI7

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: With Treasury inflows trending, the long duration Treasury TLT ETF took in another +$448 million or +5% last week. Also, the utilities XLU fund took in +$469 million or +6%.

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - 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 | Small Reprieve from Taxable Drawdowns - ICI17

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$8.0 billion spread for the week (-$4.1 billion of total equity outflow net of the +$3.9 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 +$475 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.)

  

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - 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 | Small Reprieve from Taxable Drawdowns - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







CHART OF THE DAY: New Home Sales Throw Up A Brick

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to learn more.

 

"... Brick!: New Home Sales threw up a brick to start 2016, falling to -5.2% YoY and marking the slowest pace of growth and the 1st negative year-over-year print since June of 2014. The median price of New Homes declined -5.7% MoM and decelerated to -4.5% YoY – the 1st consecutive months of YoY decline since 2011. Further, sales growth was 0% or negative across all price tiers for the first time since the 2014 trough.

 

Yes, the outsized decline in the West region (weather impact) was likely a distortion that resolves higher but I also didn’t hear anyone call out the 100% YoY gain in the Northeast (weather benefit) as a positive distortion. NHS is the most volatile housing series there is and carries a large standard error with significant subsequent revisions so we don’t take an overly convicted view of any single month in isolation but as the Chart of the Day below shows, the multi-month trend across New Home Sales and Starts has been one of slowing."

 

CHART OF THE DAY: New Home Sales Throw Up A Brick - 2 25  New Home Sales   Starts Wave


Number 2

“Bear Markets are like buttholes. Everyone has one and they all stink”

 

It took me four hours to commute home from work yesterday.

 

When I got home my basement was partially flooded and my daughter had just finished taking a #2 …. Next to the toilet.

 

She then proceeded to clog the toilet (a new toilet I installed just two days earlier mind you) with paper, underwear, tile spacers and sandpaper.

 

Oh, and the whole family is sick, again.

 

That about sums up the market day as well.  

 

Number 2 - Earnings cartoon 11.03.2015

 

Back to the Global Macro Grind …

 

Yesterday saw the yield spread compress back inside 100 bps, New Home Sales drop -9.2% and the February Services PMI fall into contraction at 49.8.

 

With what do you chase that shot of domestic morosity?

 

With a -6.4% drop in Chinese equities, a willingness to lend Japan money for 40 years (as in Four Zero!) for less than 1%, a new negative low in 10Y JGB’s and an admission that the “global recovery has weakened further” and a call for “bold action” out of the IMF of course.

 

Let’s quickly contextualize the data and preview today’s durable goods figures and tomorrow’s income and spending data for January.

 

Dude, Don’t Be Such A Flatliner!: The yield curve flattens as the economy slows with policy and/or liquidity management driving the short-end higher and defensive positioning and/or discounting of lower future growth/inflation driving the long end lower. A yield curve flattening to inversion also carries the distinction of throwing off zero false positive vis-à-vis recession signaling over the last 7-cycles. Lower lows in the yield spread ≠ the bond market pricing in “escape velocity”.

 

Brick!: New Home Sales threw up a brick to start 2016, falling to -5.2% YoY and marking the slowest pace of growth and the 1st negative year-over-year print since June of 2014. The median price of New Homes declined -5.7% MoM and decelerated to -4.5% YoY – the 1st consecutive months of YoY decline since 2011. Further, sales growth was 0% or negative across all price tiers for the first time since the 2014 trough. Yes, the outsized decline in the West region (weather impact) was likely a distortion that resolves higher but I also didn’t hear anyone call out the 100% YoY gain in the Northeast (weather benefit) as a positive distortion. NHS is the most volatile housing series there is and carries a large standard error with significant subsequent revisions so we don’t take an overly convicted view of any single month in isolation but as the Chart of the Day below shows, the multi-month trend across New Home Sales and Starts has been one of slowing. 

 

Honey, does this PMI print make me look contractionary?: Amazingly, the Markit Service Sector PMI falling into contraction for the 1st time since the recession got almost zero media coverage yesterday. Services Consumption represents ~65% of household spending and ~45% of GDP and has hereto been held out as the bullish foil for the ongoing industrial recession. The ISM Services Index has shown a similar trend – slowing in each of the last 3 months and, at the current index reading of 53.5, sits at its lowest level since the polar vortex lows of February 2014.   

 

Today is a gift that’s why they call it the present … Unless you’re part of the domestic and global industrial complex in which case today = last month = last year and you continue to try to sit in the back of the room and hope you don’t get called on by the Brofessor of Bearish Macro Realities. Headline Durable Goods growth has been negative in 9 of the last 11 months, Durable Goods Ex-Defense & Aircraft (i.e. the stuff the average household buys) has been negative in each of the last 8 months, Core Capital Goods orders have been negative for 11 consecutive months and forward Capex Plans as measured by the Fed Regional Surveys continue to make new lows. Durable and Capital Goods will receive the gift of easy comps in the coming months and should improve sequentially but it’s hard to argue sequential improvement off the worst month-over-month print (last month was -5.0% MoM) in years as a catalyst. 

 

Tomorrow – “It’s Friday and you ain’t got #2 to do” …. except analyze PCE data: Tomorrow’s Income and Spending data for January will serve as a nice case study in duration sensitivity. The sum of aggregate hours growth and hourly earnings growth from the January NFP data imply a sequential acceleration in aggregate income growth in the official release tomorrow morning. If the savings rate ticks down from its current multi-year high it will drive a sequential acceleration in consumption growth and all will be well as virgin Keynesian unicorns graze blissfully in fertile, manicured fields of accelerating aggregate demand. Month-to-month oscillations don’t, however, obviate the reality of the cycle. Income growth, employment growth, consumption growth, consumer confidence and corporate profits all peaked in 4Q14/1Q15. No, income and consumption growth will not go to 0% this month or next month or the following month but the slope of the Trend line will remain negative … and that is the investible point.  

 

Monday: Monday’s are the worst, literally – incidence of heart attack and death follow a weekly pattern with the peak occurring on Monday as stress around the ensuing work week reaches its coronary crescendo. This Monday we’ll get the Pending Home Sales data for January which will provide the cleanest read on sales activity in the existing market. We are now in month 7 of decelerating sales activity and think the trend continues to slow as we traverse peak comps in April/May with very real risk of negative Y/Y growth. If the historical relationship holds we would expect to see HPI (home price growth) follow that demand trend on a lag.

 

2016 has been a #2 market for global equities and the internal plumbing in credit markets is getting increasingly brittle. At present, we continue to think fiduciary feasance = less chasing of low volume rallies and more pro-active Risk Managing for a potential flush. 

 

Best of luck out there today,

 

Christian B. Drake

U.S. Macro Analyst

 

Number 2 - 2 25  New Home Sales   Starts Wave


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The Macro Show Replay | February 25, 2016

 


Hedgeye Invites You to Iran Oil Dinner (3/3/16 at 6PM ET)

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Hedgeye Invites You to Iran Oil Dinner (3/3/16 at 6PM ET)  - HE Oil Dinner


Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom

Takeaway: Capital markets businesses are starting to turn down signified by JPM and this cyclical stock "looks" cheap only on trailing results.

  "When you expect things to happen...strangely enough they happen." - J.P. Morgan

 

Most of the JP Morgan Investor Day this week was backward looking with the bulk of the presentation spent on an annual recap of the Corporate and Investment Bank (CIB) in 2015. The most relevant data however was the simple reference to running 1Q16 activity trends which are down -25% year-over-year. While there was no deconstruction of the drivers of this slack, our data suggests a 30-40% decline in underwriting, with a negative 5-10% start for M&A (described as "holding well" by the CIB Head). JP Morgan matters with top 3 share across the board in capital markets.

 

Global M&A announcements have started down mid-single digits in January and February with U.S. announcements more volatile having putting up a solid January, up 42% year-over-year, with a forming -20% decline for February. The across cycle look at merger activity shows the new 2015 zenith having taken out the '07 highs, with even the slight decline to start 2016 looking like a massive slough off. We think this slow start to the year turns into an intermediate term trend and that the M&A advisory group will be comping negatively throughout 2016. The main culprit at his juncture is the backup of corporate credit costs which are maintaining levels, some 100 basis points higher across Moody's most widely referenced indices. Historically, M&A has comped down by -20% with a 100 basis point back up in credit, which implies an M&A market just starting a more substantial decline.

 

On the asset management side, headwinds persist with a stubbornly high U.S. dollar and risk aversion for EM assets. The Chinese Yuan devaluation now appears to be driving the depreciation in the MSCI Emerging Markets index and with the outlook for the Chinese currency weak at best considering capital flight and slowing growth, the situation warrants caution.

 

Like most cyclical stocks, Lazard "looks" cheapest at market tops as its earning downturn is just getting started versus at market bottoms when the company is underearning and shares "look" expensive (but they are actually great early cycle longs). We have earnings flat at $2.80 for 2016 and 2017 which we capitalize at 8-9x for a fair value of $25. However in a 1 Emerging Market type downcycle, Lazard asset management with ~50% of its asset-under-managments in EM credit and equity will cause LAZ stock to overcorrect and spit off more downside (substituting current day China for Thailand in '97 in running out of FX reserves to support its currency and plugging in Venezuela or the Ukranine for Russia's '98 default). 

 

The update on 1Q16 trends from JP Morgan matters as a top 3 player in most business lines in capital markets:

Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - Chart 13   JPM share

 

The flattish start to global M&A for 2016 looks like a massive decline being that M&A activity put in its high water mark in the middle of last year. In addition to "comping the comp" as we move further into the year, M&A activity will be battling volatility and the fundamental change in corporate credit costs:

Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - chart revised

Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - chart 15   global announcements

 

U.S. activity had a solid January but is putting in a slump in February. Historically, U.S. activity is 60% of global announcements.:

Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - chart 16   US announcements

 

 The inflection in corporate credit costs hasn't normalized which pressures funding costs and M&A synergies:

Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - chart 6   credit inflection

 

 And the year-over-year change in credit costs (inverted - left scale) does drive the growth or decay of M&A volume:

Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - chart 7   yoy credit

 

 Every 100 bps of credit cost expansion has historically depressed M&A by -20%. Currently, the four quarter moving average of corporate credit has backed up by 25 bps, essentially confirming the -4-6% start for global M&A:

Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - chart 8   scatter plot

 

 Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - chart 9   4 quarter moving average

 

And although the firm will have a strong 1Q16 report (the company advised on 6 of the 10 largest deals in 2015 but only closed 1 of them during the year), the stock discounts the revenue environment 3 quarters ahead of time:

Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - chart 2  discounting

 

Lazard stock is a great early cycle performer but kicks off decidedly negative returns at the end of cycle:

Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - chart 1   Early Cycle

 

 The rising volatility environment is not good for cyclicals as the VIX (inverted right scale) historically pushes the stock down:

Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - chart 5   VIX stock

 

 On the asset management side, non-local Lazard Asset Management strategies regress closely to EM markets which means their exposure is understated:

Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - chart 10   non local linear

 

 And the debasement of the Chinese Yuan (inverted scale) is down driving EM market returns:

Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - chart 11   chinese yuan v mxef

 

 The last EM down cycle created redemption rates of between ~ negative 2-5% in 2002-2004 versus the +2% organic growth in LAZ asset management to finish 2016:

Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - chart 12   down cycle

 

We hear alot from investors that the stock "is as cheap as its ever been" however like a true cyclical, the best time to buy shares is when it is underearning early in the cycle (note 20x LAZ earnings multiple in 2009-2010). LAZ is overearning currently coming out of the M&A boom of 2014-2015:

Lazard (LAZ) | Cheap at the Top...Expensive at the Bottom - Valuation 

 

 

LAZ - Hiring in Restructuring, Chairman Bullish From Davos

LAZ - Value Trap - Best Ideas BlackBook

LAZ - As Good As It Gets

 

Please let us know of questions,

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


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