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[UNLOCKED] Fund Flow Survey | Comping the Tantrum

Takeaway: High yield bond funds took in $3.6 billion in new funds last week, the best 5 days since the Taper Tantrum of '13.

Editor's Note: This is a complimentary research note which was originally published March 10, 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 March 2nd, high yield bond funds took in $3.6 billion, the second consecutive week of subscriptions after a 10 week drawdown where over -$28 billion was redeemed from the category. The substantial high yield subscription last week was the best 5 day period for high yield bond funds since July 24th, 2013 where in the middle of the Taper Tantrum, investors drew the line and stepped in to buy $5.1 billion in non-investment grade credit in the 29th week of that year. We caution for optimism however as an across cycle view, using a 5 week moving average, continues to relay the down trend for non-investment grade bonds. Below we outline the 5-week moving average of ICI's new high yield bond category against the price of crude oil which is still driving consternation for investors despite a slight bear market rally in oil.

 

[UNLOCKED] Fund Flow Survey | Comping the Tantrum - taper

 

Muni bonds and bond ETFs continue to be the real story in fixed income land with tax free issues taking in +$934 million, their 22nd consecutive week of subscriptions now totaling over $20 billion. Passive fixed income ETFs are also seeing substantial demand with another +$2.7 billion take this week, their 11th consecutive weekly inflow aggregating to +$24.3 billion.

 

Lastly, cash is king again according to ICI with money funds taking in +$26 billion in the past 5 days, a combination of risk aversion and tax season receipts. Year-over-year however, 2016 has now aggregated to a running total of +$44.8 billion having moved into money funds versus the -$60.1 billion drawdown that money funds experienced in the first 9 weeks of 2015. This cash moving back to the sidelines supports our Best Ideas long rating on Federated Investors (FII).


[UNLOCKED] Fund Flow Survey | Comping the Tantrum - ICI1 normal 3 14

 

In the most recent 5-day period ending March 2nd, total equity mutual funds put up net inflows of +$45 million, outpacing the year-to-date weekly average outflow of -$301 million and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$4.1 billion, outpacing the year-to-date weekly average outflow of -$238 million and the 2015 average outflow of -$475 million.

 

Equity ETFs had net redemptions of -$44 million, outpacing the year-to-date weekly average outflow of -$4.0 billion but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$2.7 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:

 

[UNLOCKED] Fund Flow Survey | Comping the Tantrum - ICI2

 

[UNLOCKED] Fund Flow Survey | Comping the Tantrum - ICI3

 

[UNLOCKED] Fund Flow Survey | Comping the Tantrum - ICI4

 

[UNLOCKED] Fund Flow Survey | Comping the Tantrum - ICI5

 

[UNLOCKED] Fund Flow Survey | Comping the Tantrum - 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 | Comping the Tantrum - ICI12

 

[UNLOCKED] Fund Flow Survey | Comping the Tantrum - ICI13

 

[UNLOCKED] Fund Flow Survey | Comping the Tantrum - ICI14

 

[UNLOCKED] Fund Flow Survey | Comping the Tantrum - ICI15

 

[UNLOCKED] Fund Flow Survey | Comping the Tantrum - 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 | Comping the Tantrum - ICI7

 

[UNLOCKED] Fund Flow Survey | Comping the Tantrum - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +$1.1 billion or +4% to the SPDR Gold ETF and +$283 million or +5% to the industrials XLI ETF.

 

[UNLOCKED] Fund Flow Survey | Comping the Tantrum - 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 | Comping the Tantrum - ICI17

 

[UNLOCKED] Fund Flow Survey | Comping the Tantrum - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$6.8 billion spread for the week (+$1 million of total equity inflow net of the +$6.8 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 +$130 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 | Comping the Tantrum - 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 | Comping the Tantrum - ICI11 


McCullough: Beware the Reflation Trade Risk

In this brief excerpt of The Macro Show earlier today, Hedgeye CEO Keith McCullough discusses this week’s Fed meeting, the recent reflation trade bounce and takes a deep dive into commodities markets.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

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5 (Ugly) Charts To Show Your Broker

Takeaway: Despite the recent bounce in equities, a number of key equity markets are down precipitously.

5 (Ugly) Charts To Show Your Broker - Bear crossing cartoon 09.29.2015

 

The recent bounce in equities raises a number of important questions.

 

  • Is global growth slowing? (Even the IMF seems to think so.)
  • Can central planners bend or smooth economic gravity? (Nope. Just ask the BOJ or ECB...)
  • Will a sustained rally in the price of oil send stocks higher? (Iran says it's unlikely.)

 

With none of these concerns truly abating, let's put the recent "rallies" in perspective. Here are five charts of key indexes, the respective drawdowns from the 2015 and the necessary returns just to get back to breakeven. This should raise a few red flags. Bear in mind, we're not even addressing the myriad recessionary data points here.

 

Russell 2000 down -16% since July.

To get back to breakeven must be up 19%.

 

 

South Korea's Kospi Down -12% since April.

To get back to breakeven must be up 14%.

 

 

Germany's DAX down -19% since April. 

To get back to breakeven must be up 23%.

 

 

Italy's FTSE MIB index down -21.3% since July.

To get back to breakeven must be up 27%. 

 

 

CRB Index of commodities down -26% since May.

To get back to breakeven must be up 35%.

 

 

careful out there...


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REPLAY: Jim Rickards and Keith McCullough on HedgeyeTV | Why Gold Is Going To $10,000

Bestselling author Jim Rickards sits down with Hedgeye CEO Keith McCullough to discuss his new book “The New Case for Gold” and why a cocktail of factors makes it more critical than ever for investors to protect their portfolios with gold. 

 

 


RH | Membership Program Goes Live

Takeaway: New Grey Card went live Sunday. Different from AMZN Prime/Costco model, but clear value proposition & democratizes interior design services.

The company didn't put out a press release this morning, but the new RH rewards program went live to customers on Sunday. Called the Grey Card -- the key feature is 25% off all orders for a $100 annual fee. There are other benefits associated with the card: early access to sale events, preferred financing (w/ an RH Credit Card), and 10% savings on sale items. But the key benefit (outside of the discount), we think is access to RH's in-house Interior Designers at no additional cost.

RH | Membership Program Goes Live - 3 14 2016 1 

There are few examples in retail of a customer funded membership program. The two obvious corollaries are Amazon Prime and Costco, which offer benefits in the form of free shipping and low prices to encourage customer loyalty. But, the Grey Card from RH is not that. Instead, it's a democratization of the interior design services.

 

Under the old RH Trade Sales membership agreement, interior designers were offered 20% off all non-sale purchases. With the new membership model -- non-RH interior designers are offered free membership to the Grey card. For the ~60% of purchases that come from customers who do not use external interior design services, the new membership model allows for the same type of services at a steep discount to the current market rate. Not only does it up the customer service element of the equation, but it also allows RH interior designers to up-sell RH product across every room of the house.

 

Over the near term -- there is little doubt that the shift in promotional posture will make quarterly top-line results choppy as customers adjust to the new value proposition and the company laps meaningful promotional events. But, if we look at it over a slightly longer duration we think it will a) allow RH to get valuable insight on customer behavior as it analyses customer buying behavior through membership rewards data, and b) allow the company to smooth out the demand curve which will allow for greater efficiency from the vendor network and supply chain.

RH | Membership Program Goes Live - RH tradesales 2

 

There is still a ton left unanswered as it relates to the rewards program, and we expect the company to speak to the initial reads on the program when it reports numbers/provides guidance at the end of the month.

 

Additional details…

  • Value proposition: The value proposition from a $100 subscription fee is clear and up front for anyone looking at a big ticket item. That's reflected in the pricing on the company's website (and we assume in store) where the ticket price and membership price are clearly displayed on every item.
  • Small Ticket: The breakeven point on a rewards membership is $401 for the customer, so for the marginal customer only interested in bath towels and sheets there is little incentive to drive incremental purchases. But consider that a bedding set (composed of a duvet cover, sheets, and pillow cases) costs $707 at the advertised price. When we factor in the 25% discount and add back the subscription fee we get to an 11% discount. These types of transactions don't move the needle when RH is selling $4000 couches, but it may limit new customers looking to the brand at more accessible price points now without a promotional sweetner.

RH | Membership Program Goes Live - 3 14 2016 3

  • Not a secondary revenue stream: We think the customer base within the rewards segment will shift meaningfully from year to year. Furniture is an event driven purchase and due to the replacement cycle doesn’t lend itself to an Amazon prime esque annual subscription model. At checkout for the Grey Card there is a box that needs to be checked to allow RH to automatically renew the membership after the first year has expired. That all but eliminates the multi-year subscription members.

A Review Of Recent "Rallies" and What's Really Been Working

Takeaway: Did the permabulls nail this? Utilities are up 11.3% (on U.S. growth slowing) and Financials (a rate hike proxy) are down -5.6% this year.

A Review Of Recent "Rallies" and What's Really Been Working - bull riding cartoon 08.26.2015

 

Most bears are positioned bullish now - and the underwater bulls, well, they're always bullish.

 

"After 2-3 weeks of being royally squeezed, I’m doubling down on everything we’ve been saying for 8 months," Hedgeye CEO Keith McCullough wrote this morning in a note to subscribers. McCullough continues: 

 

"Everything we’ve been saying” includes not being long small caps and/or junk bonds – Russell 2000 only +0.5% last week (yes, I can take a lot more pain than that) to -4.3% YTD and -16.1% since we went broadly bearish on US stock market beta in July."

 

Permabulls can call recent bounces from the 2016 lows whatever they like. But ask them to pull the chart back a bit further and explain this uncomfortable reality.  

 

 

Another point. Investors have expressed their lack of conviction in stock rallies all year. On up days, volume is either flat or declining. That's not exactly bullish. 

 

 

To be sure, there have been some clear winners and losers in 2016. Take a look at our favorite Long/Short sectors. Long Utilities (XLU), a U.S. growth slowing proxy, is up 11.25% this year. Meanwhile, our short Financials (XLF) call, for rate hike skeptics, has also worked out nicely, down -5.6%. Neither of those are consensus or fits any bullish narrative.

 

Here's the chart:

 

A Review Of Recent "Rallies" and What's Really Been Working - year to date sectors

 

We also like Long Bonds (TLT), up 5.6% year-to-date.

 

"With the 10yr +10bps last week to 1.98%, now it’s go time (again) for the Long Bond and Utilities (XLU) bulls who are having a great year vs. “Long Financials During Rate Hike Cycle” view  (XLU +11.3% YTD vs XLF -5.6%); is the Fed going to be hawkish this week? I think so – but so does everyone else; I think rates and Financials drop on the “news” like they did post rate hike."

 

 

Don't believe all the storytelling.


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