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[UNLOCKED] Fund Flow Survey | Active Equity Bleeding

Takeaway: Passive equity ETFs took in +$5.4B while all active equity categories lost funds. Additionally, HY bond subscriptions slowed.

Editor's Note: This is a complimentary research note originally published March 31, 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:

The migration from active equity funds to passive ETFs was especially pronounced in the 5-day period ending March 23rd. All five active equity mutual fund categories experienced net redemptions, summing to a -$2.1 billion loss. Meanwhile, equity ETFs drew +$5.4 billion in subscriptions. This ongoing migration is one of the main reasons TROW, which is committed to active only strategies, should underperform going forward. We are hosting a call today at 11 AM to detail the TROW short case (invite here). The best grossing passive products year-to-date have been defensive in nature including the SPDR Gold Trust and the iShares Aggregate Bond and long dated 20 Year+ Treasury ETF. Conversely, net redemptions are being led by WisdomTree's two largest funds, the Hedged Japan (DXJ) and the Hedged Europe (HEDJ) product, as the newest rounds of QE in each geography is resulting in risk aversion and not risk taking (see our latest WETF note here).

 

[UNLOCKED] Fund Flow Survey | Active Equity Bleeding - ETF flow YTD large

 

Fixed income had another week of big inflows. Total fixed income mutual funds and ETFs took in +$5.8 billion, slightly less than the previous week due in part to high yield subscriptions slacking down to +$420 million from +$1.5 billion in the previous week. We believe the recent inflows into high yield are a temporary phenomenon.


[UNLOCKED] Fund Flow Survey | Active Equity Bleeding - ICI1

 

In the most recent 5-day period ending March 23rd, total equity mutual funds put up net outflows of -$2.1 billion, trailing the year-to-date weekly average outflow of -$455 million and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$4.7 billion, outpacing the year-to-date weekly average inflow of +$1.1 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$5.4 billion, outpacing the year-to-date weekly average outflow of -$1.9 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.2 billion, trailing the year-to-date weekly average inflow of +$2.2 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 | Active Equity Bleeding - ICI2

 

[UNLOCKED] Fund Flow Survey | Active Equity Bleeding - ICI3

 

[UNLOCKED] Fund Flow Survey | Active Equity Bleeding - ICI4

 

[UNLOCKED] Fund Flow Survey | Active Equity Bleeding - ICI5

 

[UNLOCKED] Fund Flow Survey | Active Equity Bleeding - 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 Equity Bleeding - ICI12

 

[UNLOCKED] Fund Flow Survey | Active Equity Bleeding - ICI13

 

[UNLOCKED] Fund Flow Survey | Active Equity Bleeding - ICI14

 

[UNLOCKED] Fund Flow Survey | Active Equity Bleeding - ICI15

 

[UNLOCKED] Fund Flow Survey | Active Equity Bleeding - 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 | Active Equity Bleeding - ICI7

 

[UNLOCKED] Fund Flow Survey | Active Equity Bleeding - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +$160 million or +7% to the materials XLB ETF this week.

 

[UNLOCKED] Fund Flow Survey | Active Equity Bleeding - 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 Equity Bleeding - ICI17

 

[UNLOCKED] Fund Flow Survey | Active Equity Bleeding - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$2.6 billion spread for the week (+$3.2 billion of total equity inflow net of the +$5.8 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 -$485 million (negative numbers imply more positive money flow to bonds for the week) with a 52-week high of +$20.2 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 Equity Bleeding - 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 Equity Bleeding - ICI11 


CHART OF THE DAY: What's The Catalyst For A Stock Crash?

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. 

 

"... How the heck could that ever happen? It’s impossible that the #BeliefSystem could ever break down, isn’t it? Other than US corporate profits being negative for 2 consecutive quarters (which has always equated to a > 20% decline), what is your catalyst, Keith??”

 

A: The Cycle"

 

CHART OF THE DAY: What's The Catalyst For A Stock Crash? - 04.05.16 Chart


Cartoon of the Day: Crash Test Investors

Cartoon of the Day: Crash Test Investors - Europe Japan cartoon 04.04.2016

 

Japan's Nikkei is down -23% from its 2015 high. Meanwhile, in European equities, drawdowns from last year's peak range from -13% to -28%.


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The Case For Shorting Lazard | $LAZ

In this one-minute excerpt from The Macro Show, Hedgeye Financials analyst Jonathan Casteleyn highlights the key short catalyst for shares of Lazard and explains why the company is a compelling short.

 

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About Everything: A Perfect Storm of Trends Points to Less Interest In "Things"

Takeaway: The industrial economy’s struggles reflect a perfect storm of trends— all pointing toward less interest in things.

Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses why manufacturers and retailers should prepare for the possibility that “goods” aren’t coming back anytime soon. And, even when (and if) the industrial sector emerges from its long-term atrophy, the underlying framework of the “old economy” will look entirely different than what we see today. 

 

About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" - z sto

WHAT’S HAPPENING

 

Worldwide, the goods-producing sector is in trouble.

 

Ever since the Great Recession, global trade has struggled to keep up with GDP—something it used to beat easily. Over the last two years, the global manufacturing PMI has been steadily sinking.

 

About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" - neil chart 1

 

The U.S. PMI has been under 50.0 for five of the last six months. Globally, both output and new orders are decelerating—for example in China, where manufacturing has been contracting for 13 straight months.

 

And what about commodity and producer prices? They’ve been tanking. Amazingly, the PPI in just about every major economy has been stuck in deflation since the summer of 2014. 

 

About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" - neil chart2

 

Goods are being lapped by services.  The services sector—encompassing activities like media, software, health care, and finance—has posted just one month of contraction over the past two years.

 

About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" - callout box

 

The decline of goods and the rise of services, of course, is a long-term trend that began many decades ago in the high-income world. U.S manufacturing employment peaked in 1979 and has mostly been declining ever since. Yet there was a brief respite following the Great Recession, especially here in the United States. Now, however, the goods sector is once again under assault. 

 

About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" - neil chart 3

 

Let’s take a look at some of the new forces that may be driving it down.

WHY IT’S HAPPENING: DRIVERS

 

The China slowdown

Up until 2014, China’s voracious appetite for more industrial capacity, housing, and infrastructure was propping up raw material prices and goods production worldwide. In its heyday, China was consuming roughly half of the world’s supply of just about every industrial input—from steel and copper to cement trucks and construction cranes. No longer.

 

Urbanization & Extended Familes

Over the last decade, U.S. rural counties have been depopulating and core urban areas have been growing much faster than historical trend. A rising share of Millennials are ditching their cars, flocking to cities, and starting out their careers in cramped apartments with limited space. More than a quarter of 18- to 34-year-olds live in their parents’ homes and don’t need to buy their own household goods.

 

Growth of the sharing economy

Old computers and furniture no longer get thrown in the trash, but now enjoy a second life thanks to services like Craigslist and eBay. Platforms like Uber and NeighborGoods allow people to find and use items they want without buying them.

 

“Experiences” as the new form of conspicuous consumption

In the old days, we bought expensive things to affirm their social status. Nowadays, we can buy expensive experiences and curate them on social media. We can thereby define ourselves more by what we do than by what we own. This trend has taken on new meaning with Millennials, who would much rather go out to dinner or attend a music festival than purchase the latest handbag or golf club.

 

About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" - neil chart 4

 

Digital unicorns

Thanks to monumental advances in IT capabilities and infinite returns to scale, entrepreneurs can now start a profitable company without spending much at all on physical capital (or even on employees). Think Google, Uber, and Amazon. The whole concept of “book value” assets is becoming antiquated.

 

Demographic change

Aging societies (I’m looking at you, Europe and East Asia) no longer require capital-widening investment. A contracting working-age population no longer needs new factories—or even new houses. Moreover, the retired elderly are the least likely to spend on things and the most likely to spend on services (starting with health care and personal care). What’s more, they receive their benefits from taxes on young people—who historically are the most likely to want to buy things.

BROADER IMPLICATIONS

 

Falling commodity prices are hammering developing countries. Major players in Latin America and Sub-Saharan Africa have entered a “tailspin.” If this decline is indeed the new normal, poor commodity-exporting countries will have to turn to human capital—like India and the Philippines, which are turning their fluency in English to open up new service  opportunities for the working class.

 

U.S. retailers are updating their playbooks. Companies from Urban Outfitters to REI are turning their stores into “experiences” with fun diversions and top-notch customer service. Others, like Home Depot and Lowe’s, are expanding into new markets (home services, in this case). And e-tailers like eBay and Bonobos are going high-touch with new brick-and-mortar outlets.

 

The U.S. economy is encountering an imbalance between the buying of private things (which is weakening) and the backlog of demand for public things like infrastructure (which is growing). It was the G.I. Generation’s commitment to building a new public infrastructure in the 1930s, ‘40s, and early ‘50s, which enabled the booming “affluent society” in subsequent decades. America may be ready for a reboot.

TAKEAWAY

 

Manufacturers and retailers should prepare for the possibility that “goods” aren’t coming back anytime soon. Even when (and if) the industrial sector emerges from its long-term atrophy, the underlying framework of the “old economy” will look entirely different than what we see today. 


[UNLOCKED] Early Look: The Taming of Profits

Editor's Note: The Early Look below was written by Hedgeye CEO Keith McCullough one week ago. It crystallizes many of our current thoughts about the precarious macro setup and why we think U.S. equities are in trouble. Click here to get it delivered in your inbox weekday mornings.

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“No profit grows where no pleasure is taken.”

-William Shakespeare

 

And, generally speaking, no multiple expansion grows when there’s no corporate profit growth. Rather than The Taming of the Shrew (i.e. where that Shakespeare quote comes from), USA is seeing The Taming of Profits.

 

No, I’m not talking about the taming of US stock market profits and/or returns (i.e. the ones that were negative in 2015 and mostly negative for 2016 YTD) – I’m simply talking about US Corporate Profits, which were reported to have remained in #Recession on Friday.

 

No worries. We’ll probably be the only ones on Wall St. writing about it this morning. If only the bulls of the 2015 peak warned you that Q415 corporate profits would slow another -540 basis points sequentially (vs. Q3 when they first went negative) to -10.5% year-over-year.

 

[UNLOCKED] Early Look: The Taming of Profits - recession cartoon 02.22.2016

 

Back to the Global Macro Grind

 

As Darius Dale wrote to our Institutional clients on Friday, you have to go all the way back to the depths of the 2008 Financial Crisis (Q408) to find a worse year-over-year decline in US Corporate Profits.

 

“More importantly, Q4 marked the 2nd consecutive quarter of declining corporate profit growth… such occurrences have been proceeded by stock market crashes in the subsequent year for at least the past 30 years (5 occurrences).”

 

Since Q4 ended on December 31st (they haven’t been able to centrally plan a change in the calendar dates yet), has anyone considered why we just saw the worst 6 week start to a stock market year ever? Yep, it’s the Profit vs. Credit Cycle (within the Economic Cycle), stupid.

 

Ok. If you’re not stupid, but really super smart and still blaming “the algos and risk parity funds” for the AUG-SEP and DEC-FEB US stock market declines, but giving them 0% credit for the JUL, OCT, and MAR decelerating volume bounces… all good, Old Wall broheem, all good.

 

Many who missed the economic cycle slowing from its peak (and the commensurate profit #slowing and credit cycles that always come along with such a rate of change move) will blame the US Dollar for that.

 

They, of course, wouldn’t have blamed Ben Bernanke devaluing the US Dollar to a 40 year low for the all-time high in SP500 Earnings (2015) though. That would be as ridiculous as blaming the machines and corporate buy-backs for market up days.

 

Last week the US Dollar came back, and the “reflation” trade didn’t like that. With the US Dollar Index +1.2% on the week:

 

  1. The Euro (vs. USD) fell -0.9% on the week to +2.8% YTD
  2. The Yen (vs. USD) fell -1.4% on the week to +6.3% YTD
  3. The Canadian Dollar (vs. USD) fell -2.0% on the week to +4.3% YTD
  4. Commodities (CRB Index) fell -2.4% on the week to -2.3% YTD
  5. Oil (WTI) fell -4.1% on the week to -1.3% YTD
  6. Gold fell -2.5% on the week to +15.3% YTD

 

Yeah, I know. Those 5 things are just the things that have immediate-term inverse correlations of 79-99% vs. the US Dollar, but there’s this other big thing called the SP500 that now has an immediate-term (3-week) inverse correlation of -0.80 vs. USD too.

 

Imagine that. Imagine the machines stopped chasing the hope that the Fed fades on their rate hike plan, the US dollar gets devalued (again), and all of America keeps arguing about the “inequality” gap having nothing to do with Fed Dollar Policy?

 

You see, when you devalue the purchasing power of a human being:

 

A) Almost everything they need to buy to survive goes up in price as the value of their currency falls

B) A small % of human beings (i.e. us) get paid if they own the asset prices we are “reflating”

 

And if you’re not a human being (i.e. you’re a US corporation) and your profits are falling, all you have to do is lever the company up with “cheap” US debt, buy back the stock with other people’s money, lower the share count, and pay yourself on non-GAAP earnings per share.

 

#America

 

While small/mid cap US Equities reverted to their bear market mean last week (Russell 2000 down -2.0% on the week and -16.7% since US Corporate Profits peaked in Q2 of 2015), so did a few other US Equity Market Style Factors that had had a big 1-month bounce:

 

  1. High Beta stocks were -2.0% on the week
  2. High Leverage (Debt/EBITDA) stocks were -1.9% on the week
  3. High Short Interest stocks were -1.7% on the week

*Mean performance of Top Quintile vs. Bottom Quintile (SP500 companies)

 

At the same time, Consensus Macro positioning remained what most US stock market bulls would have to admit they want/need from here (Down Dollar => Up Gold, Commodities, and Oil):

 

  1. Net LONG position in USD (CFTC futures/options contracts) was -2.16x standard deviations vs. its TTM average
  2. Net LONG positions in Gold and Oil held 1yr z-scores of +2.45x and +1.33x, respectively

 

In other words, in the face of both the economy and profits slowing, Wall St. wants to go back to that ole story of Burning The Buck, I guess. It’s sad and it probably won’t work… but, as Shakespeare went on to say about profits and pleasures, “study what you most affect.”

 

Our immediate-term Global Macro Risk Ranges are now:

 

SPX 1983-2061
RUT 1060-1107
USD 94.68-97.01
Oil (WTI) 36.06-42.91

Gold 1208-1275

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

[UNLOCKED] Early Look: The Taming of Profits - 3 28 Profits Down  Stocks Down Slide 39


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