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[UNLOCKED] Fund Flow Survey | Something Has To Give

Takeaway: Re-risking continued in high yield this week with a +$1.6 billion subscription, the third straight week of rebound.

Editor's Note: This is a complimentary research note originally published March 17, 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:

 

Re-risking continued in high yield this week with a +$1.6 billion subscription, the third straight week of rebound which has tallied +$6.6 billion. Either U.S. high yield is a great buy currently still sitting at depressed levels or U.S. equities should be put out for sale. Historically there is a close directional relationship between stocks and non-investment grade bonds and with the substantial divergence which has unfolded since 2013, something has to give. Below we plot, U.S. high yield fund flows (orange line) which are still in a downtrend within a 5 week moving average, the high yield ETF, the JNK (in green), and the S&P 500 in magenta.

 

[UNLOCKED] Fund Flow Survey | Something Has To Give - Some thing has to give large

 

 

In the 5-day period ending March 9th, total equity ETFs and mutual funds experienced a +$5.1 billion inflow, the equity category's largest inflow so far in 2016. The total equity subscription was mostly comprised of +$3.6 billion to equity ETFs with investors depositing +$1.7 billion to international equity mutual funds. Domestic equity funds continue to bleed out however with -$235 million reigned in by investors.

 

[UNLOCKED] Fund Flow Survey | Something Has To Give - ICI19

 

In the most recent 5-day period ending March 9th, total equity mutual funds put up net inflows of +$1.5 billion, outpacing the year-to-date weekly average outflow of -$123 million and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$5.9 billion, outpacing the year-to-date weekly average inflow of +$380 million and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$3.6 billion, outpacing the year-to-date weekly average outflow of -$3.2 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.7 billion, trailing the year-to-date weekly average inflow of +$2.3 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 | Something Has To Give - ICI2

 

[UNLOCKED] Fund Flow Survey | Something Has To Give - ICI3

 

[UNLOCKED] Fund Flow Survey | Something Has To Give - ICI4

 

[UNLOCKED] Fund Flow Survey | Something Has To Give - ICI5

 

[UNLOCKED] Fund Flow Survey | Something Has To Give - 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 | Something Has To Give - ICI12

 

[UNLOCKED] Fund Flow Survey | Something Has To Give - ICI13

 

[UNLOCKED] Fund Flow Survey | Something Has To Give - ICI14

 

[UNLOCKED] Fund Flow Survey | Something Has To Give - ICI15

 

[UNLOCKED] Fund Flow Survey | Something Has To Give - 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 | Something Has To Give - ICI7

 

[UNLOCKED] Fund Flow Survey | Something Has To Give - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +4% or +$396 million to the consumer staples XLP ETF.

 

[UNLOCKED] Fund Flow Survey | Something Has To Give - 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 | Something Has To Give - ICI17

 

[UNLOCKED] Fund Flow Survey | Something Has To Give - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$2.5 billion spread for the week (+$5.1 billion of total equity inflow net of the +$7.6 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 -$34 million (negative numbers imply more positive money flow to bonds for the week) 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 | Something Has To Give - 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 | Something Has To Give - ICI11 


Are You Still Bullish On U.S. Housing?

Takeaway: When the Chief Cheerleader (Economist) of the National Association of Realtors says the data is weak, you know you have a problem.

Are You Still Bullish On U.S. Housing?  - housing

 

Investors bullish on U.S. housing are setting themselves up for disappointment.

 

"Existing Home Sales were down -7.1% sequentially and decelerated to +2.2% YoY in February.  We’ve known for over a month that February was going to be soft as EHS recoupled to PHS so the print was of little surprise," Hedgeye Housing analysts Josh Steiner and Christian Drake wrote in a recent institutional research note.

Click to enlarge.

Are You Still Bullish On U.S. Housing?  - existing home sales 

 

Steiner and Drake point out that sales grew +2.2% year over year in February but the extra day in the period provided a +3.5% benefit.  Net of the extra leap day, EHS were actually down -1.4% Y/Y

 

Even Lawrence Yun (NAR’s chief economist) had a sober assessment“[The February decline] was meaningful...”

 

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On The Macro Show this morning, Drake added that housing trends don't get easier from here. The Pending Home Sales data is up against some steep comps from last April and May:

 

Are You Still Bullish On U.S. Housing?  - pending home sales

 

Home prices lag the volume of sales so bottom line, with volume declining, Steiner and Drake conclude, "We expect HPI trends to flat-line and begin to roll as we move through 1H16, representing an addition fundamental headwind for housing related equities."

 

In case you haven't seen it yet, here's our recent 2-minute video explaining, "Why We're Bearish On Housing."

 

***To access Steiner and Drake's institutional Housing research ping sales@hedgeye.com.


Dow Bros Oblivious to Deteriorating Fundamentals

Takeaway: Falling volume? Historically low volatility? Not exactly bullish signals. (And we won't even mention the worsening economic picture.)

Dow Bros Oblivious to Deteriorating Fundamentals - Volume cartoon 08.12.2014

 

Spellbound investors staring at the price-action on the Dow each day are missing key fundamentals breaking down underneath the surface. As Hedgeye CEO Keith McCullough wrote in a note sent to subscribers this morning, buying equities on lower highs and no volume ... well, that's a fool's errand:

 

"The relationship between volume and volatility (relative to price) remains core to how I model trending risks – as they chased the charts to another lower-high (price) yesterday (SPX), total US Equity Volume (including dark pool) was -13% vs. its 1 month average as front month equity VIX held the 12-14 level it held during JUL and OCT."

 

Dow Bros Oblivious to Deteriorating Fundamentals - volume 3 21

 

Check out the chart below. A sub-14 VIX? Not exactly a bullish signal.

 

Dow Bros Oblivious to Deteriorating Fundamentals - vix 3 22

Caution ahead.


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NKE | CHANGE

Takeaway: NKE might be the best long-term idea we can find, but there are some serious short-term factors that will cause big buying opportunities.

Conclusion: We think that Nike is perhaps the best idea in retail as EPS more than doubles to nearly $5/shr, which is huge for a large cap name that is already operating at peak margins. The company should add $10bn in revenue over 4-years from e-commerce alone, which should take gross margins at least 5-points higher, past the 50% mark (a level most never thought achievable). But this transformation will also make its Futures model obsolete, and we think it’s a matter of time before it’s no longer reported to the Street. That won’t happen today. But we’ll inch closer as each quarter passes and earnings surprises on the upside, while the order book goes the other way. That’s going to create some fantastic buying opportunities. Though the Olympics and slightly better FX should help order levels and the company’s outlook, we’d rather wait for a point where there is some critical misunderstanding of the company’s growth and financials to make a ‘step in and buy before the event’ call. That does not exist today.

 

DETAILS

We like a lot more about Nike than we don’t, and the story is arguably more investable than ever. This company and story have become extremely complex, but the basic building blocks of what we like can be placed in the following buckets

a) Investing at a greater rate than ever in its product engine resulting in an arsenal that even its strongest competitors can’t replicate

b) Changing up the manufacturing paradigm for the first time in 40 years (initially what most of us know as FlyKnit – but this will change soon), which not only creates margin and working capital opportunities, but also gets Nike even closer to market (i.e. it will get 2-3 months out in an industry that is locked into a 5-6 month order window).

c) Dropping its attitude of deference and respect for the traditional footwear retailing channel, and getting the right product into the hands of the right consumers regardless of the poor growth and real estate decisions made by Nike’s traditional wholesale channel over the past 20 years.

 

Put these together, and we think that you’re looking at an incremental $10bn in sales at a 70% gross margin (vs $31bn in sales at a 47% margin today). When all is said and done, we think that gets you to almost $5 in EPS in four years versus the $1.85 it earned last year. Yes, earnings should more than double in 4-years for a large cap name with stable growth, a bullet proof balance sheet ($3/sh in cash), 75%+ share in some of its core businesses, dominant positioning in a global duopoly, and a structural advantage that could potentially never be overcome (i.e. what Google has over Yahoo).  Does it make sense to us that Nike is trading at an all time high price and multiple? Of course it does. But that doesn’t mean it’s expensive – at least for someone that follows our train of thought.

 

Now, please allow me to talk out of the risk management side of my mouth. This name might look ridiculously expensive for a person with a very short (TRADE) duration, who is only looking in the rear-view. They’ll see peak margins, a peak 30x multiple, and a futures growth rate (THE key stock driver) that has been running at a double digit rate for the past 10 quarters with a risk to reversion to a longer-term mean of 7-9%. Tack on short interest that is running at just 1.1% of the float (basically nonexistent), and the simplest roll in futures could send this name tumbling.

 

Two considerations

  • The first is that the Olympics this summer will definitely boost Nike’s order book. Now…if the futures rate STILL rolls over despite the Olympics, then Houston has a problem. Unlikely. But a strong consideration.
  • Second is that if we’re right, which we obviously think we are, then we’re going to see more than half of growth come from DTC channels – as we saw last quarter when Nike proved to be its own biggest growth engine for the first time in history. But think about it…If we see a $50 wholesale order that used to show up on the order book (futures) all of a sudden turn into a $100 fully consolidated sale through Nike DTC (online, retail), then we’ll have sales, margins and earnings going higher, but futures going lower. This is critical, as when this trend hits critical mass, we’re likely to see Nike start to consistently beat earnings and cash flow, but miss on an increasingly arbitrary statistic known as Futures.

 

The question then is when will PWC recommend to Nike that they stop reporting futures altogether. We think that is a near mathematical certainty. But, will Nike do so during a quarter when they are crushing it on every metric – including futures? Or will it happen in response to an otherwise ugly futures number that is the result of the wholesalers (like FL) tapping out on their ability to order more product because that part of the business is in a decline?  Nike always talks about playing offense. Let’s see if they do it right this time. We’re not worried about a change happening with tonight’s print. But a change should definitely be in the works.

 

Until then, this is a name for long term investors to buy on red as futures numbers revert. 


CHART OF THE DAY: Our High Conviction Call? The Cycle Slows

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.

 

"... Sure, we’ve seen some episodic hope that components of the most cyclical part of The Cycle (Energy, Commodities, Industrials, etc.) have slowed at a lesser rate.

 

But post last week’s Chinese and US Industrial Production (IP) data for FEB slowing again (US IP slowed to -1.03% year-over-year), hope is not an intermediate-to-long-term risk management #process."

 

CHART OF THE DAY: Our High Conviction Call? The Cycle Slows - 03.22.16 Chart


Are You Relaxed?

“Do I live a more relaxed life?”

-Harari

 

“Nowadays, I can dash off an email, send it half way around the globe, and receive a reply a minute later. I’ve saved all that trouble and time, but do I live a more relaxed life?”

 

That was an important question I started to think about the other day while I was reading Yuval Noah Harari’s Best Seller, Sapiens. “We have invented countless time-saving devices that are supposed to make life more relaxed…” (pg 87)

 

But do they? Maybe it’s just me, but there is absolutely nothing relaxing about watching people being blown up this morning in Brussels and, at the same time, watching others race to tweet and trade macro markets on it “being priced in.” #Sad

 

Back to the Global Macro Grind

 

I’m not going to ask you for your time this morning. I’m going to ask you to do this for yourself. Stop what you are racing to reply to via text. Stop being imprisoned by your inbox. And just take some time to breathe and think about what you are doing.

 

Are You Relaxed? - meditation

 

Thanks.

 

If you didn’t just shut everything off and start thinking about where the world’s rates of change is going next, I’ll keep you entertained for the next 5 minutes of your time. Let’s start with a very basic question:

 

Q: From an economic, profit, and credit cycle perspective, what’s really changed in the last month?

 

A: The Cycle

 

Yep. That’s it really. Since I didn’t ask what’s happened to “stocks” (I realize your monthly-reporting-period of manic return chasing matters but that wasn’t what I was asking about), the answer is very obvious. The Cycle continues to slow.

 

Sure, we’ve seen some episodic hope that components of the most cyclical part of The Cycle (Energy, Commodities, Industrials, etc.) have slowed at a lesser rate.

 

But post last week’s Chinese and US Industrial Production (IP) data for FEB slowing again (US IP slowed to -1.03% year-over-year), hope is not an intermediate-to-long-term risk management #process.

 

How about on the latest parts of the cycle?

 

  1. US CONSUMER – 2-year comp for US Retail Sales slowed (again as real consumption growth peaked in 1H of 2015 – and US Consumer Confidence (after peaking in Q1 of 2015) hit new #LateCycle lows too
  2. HOUSING – post the worst rate of change report for Pending US Home Sales (2 weeks ago), Existing Home Sales for FEB (reported yesterday) dropped -7.1% month-over-month (despite the weather) to -1.4% year-over-year
  3. HEALTHCARE – as pricing, capacity utilization, margins, and relative earnings growth all put in their 2015 peaks, Healthcare stocks (XLV -6.7% YTD) have turned out to be the worst performing sector in the SP500 in 2016

 

I know. I know. I shouldn’t have mentioned the “stocks.” Sorry about that. I was being too short-term there for a second. For intermediate-to-long-term investors, getting The Cycle (fully loaded – economic, profit, and credit) right is what matters most.

 

Isn’t it fascinating though that most consensus economists that missed the industrial/cyclical #Recession call altogether are now quite confident about the recovery?

 

Forget the consumer-cyclicals like Autos and Housing (both of those cycles peaked in OCT 2015) for a second and look at a 1 and 5 year chart of the Industrials (XLI):

 

  1. The Industrial Stocks (XLI) doubled (up +100%) from their 2011 lows
  2. Then put in a cycle peak (as rate of change of growth peaked) between Q4 2014 and Q1 2015
  3. And effectively crashed from there in expectations terms (XLI -18%) from Q115 to FEB 2016

 

Then a +15% v-bottom bounce in the last month and everything global demand, energy, charts, etc. is off to the races again? Talk about some super short-term #HPAD (hedgie performance anxiety disorder) there. Wow.

 

Since I don’t have to make excuses for being the short-term chart chaser (I made Industrials one of our favorite S&P Sector Shorts in Q1 of 2015 #timestamped) and I’ve preferred the Financials (XLF) as a favorite short in Q1 of 2016, I’m thinking:

 

A) I might need to make Industrials (XLI) a “fav short” again for Q2 2016…

B) Or should I be thinking it’s more obvious to short Housing (ITB) from here?

 

Since my highest conviction call is The Cycle (slowing), this is going to be a tough one for me. I really like the Financials (XLF) on the short side, so it’s going to be hard to take that off for Industrials or Housing (or Utilities and Gold off the long side).

 

But I do believe that my being less consensus-manic in the last 6-18 months has bought me some serious time to think this through. So I’ll relax and get back to you on that, maybe in a few weeks.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.80-1.98% (bearish)

SPX 1
RUT 1055-1109
EUR/USD 1.09-1.13
Oil (WTI) 36.08-42.53

Gold 1 (bullish)

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Are You Relaxed? - 03.22.16 Chart


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