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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

 

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


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Disease Of Expectations

“Because I and my companions suffer from a disease of the heart which can be cured only with gold.”

-Hernan Cortes

 

Not to be confused with the disease of begging central-market-planners for more currency devaluation (punishes the many) in exchange for short-term asset inflation (pays the few), that’s how the boys back in the day used to think about pillaging populations for Gold.

 

“In 1519, Hernan Cortes and his conquistadors invaded Mexico, hitherto an isolated human world. The Aztecs, as the people who lived there called themselves, quickly noticed that the aliens showed an extraordinary interest in a certain yellow metal.”

 

Since the Aztecs were used to paying for things with cocoa beans and cloth, “the Spanish obsession with gold thus seemed inexplicable” (Sapiens, pg 173). Ah, what idiots those Aztecs must have been. They totally wouldn’t have understood QE either.

 

Disease Of Expectations - Fed Up cartoon 03.22.2016

 

Back to the Global Macro Grind

 

I believe that our profession is fighting a serious mental disease. I spent all of yesterday going from meeting to meeting in NYC and eventually, most meetings devolved into why stocks can’t go down because the Fed has an extraordinary interest in keeping them up.

 

‘Yeah Keith, we hear you Brofessor… you say it’s The Cycle… but if you’re right then the Fed is definitely going to bail out markets and go to Qe4, aren’t they? Why not? Seriously, think about everything the Fed can still do – they’re already going dovish…’

 

Sadly, at that point in the conversation (trust me, I have a lot of reps when it goes that way!), I immediately agree with the client and say, “absolutely – they can do anything they want to do – they can make it really big and super you-ge.”

 

That is core to the #BeliefSystem.

 

And, by the way, in going to “negative yields” (after 90-100 TRILLION Yen in money printing, per year, AND buying stocks) in Japan, and QE + buying corporate bonds in Europe, you know what their hoped-for stock market inflations are doing this morning?

 

  1. Japanese Stocks (Nikkei) down another -2.4%, taking their #crash since July’s (2015) high to -24.6%
  2. German Stocks (DAX) down another -2.4% this morning, taking their #crash since April’s high to -22.6%
  3. Italian Stocks (MIB Index) no bid, -1.8% this morning, taking their #crash from last year’s high to -28.1%

 

Q: Do you know what the range on the SP500 would be on a -23% to -28% #crash?

A: SPX 1

 

So, I’m “reducing my price target” (since everyone asks me for one!) to that range, down from a prior target of 1704 (which would be a -20% decline from the all-time closing #Bubble high of July = 2130).

 

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

 

Oh, am I teasing you? Not on the probability of 1704 then 1640 then 1533 rising (SP500). Just a little tickler for you ahead of our Q2 Macro Themes Call that we’ll host at 11AM EST on Thursday (ping for access).

 

In other news this morning, here’s how our Q1 Macro Ideas are doing (hint: I’m doubling down on them in Q2):

 

  1. Long-term US Treasury Yields dropping to 1.73% on the 10yr, only 5 basis points away from the Q1 low
  2. Utilities (XLU) are +14.6% YTD and primed to outperform Financials (XLF) -5.6% today with rates crashing
  3. Gold is +1.4% this morning to +16.2% YTD

 

Why didn’t the masters of the super smart alpha generating universe go all 16th century on their investors and ramp up their Gold holdings? “Believe me”, the spread on GLD vs. Valeant is super huge and really really smart. You need a really big brain for it.

 

According to the FT, Q1 report cards weren’t as good as yours was. Apparently 19% of mutual funds beat their benchmark in Q1. That was their worst quarter since 1998. Only 6% of “Growth” fund managers beat their bench (worst performance since 1991).

 

Many are suffering from a disease of expectations (either they’re too bullish on growth and/or always too bullish because they think the Fed can do something to replicate growth via asset inflation when they’re wrong) which can only be cured by performance.

 

So, instead of whining about where the SP500 is (which you don’t need an active manager to buy for you), I say they better get on board with our Best Long Ideas, Macro Exposures, and Style Factors, before it’s too late.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.71-1.85%

SPX 2018-2077
RUT 1069-1130

Nikkei 151

DAX 9

VIX 13.01-19.45
USD 94.11-96.06
Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Disease Of Expectations - 04.05.16 Chart


#BeliefSystem Crash

Client Talking Points

JAPAN

Big rip higher in the Yen to immediate-term overbought at 110 (vs USD) smoked Japanese stocks again, -2.4% Nikkei taking the crash from the July U.S. Equity market high of 2015 to -24.6% - negative yields is not working in Japan or Europe (DAX down -2.4% and -22.6% since last year’s top).

OIL

What went up to a lower-high and failed @Hedgeye TREND resistance of $46/barrel came straight back down – an 11% drop in the last week in WTI should back the machines off from chasing Energy related charts; risk range now = $35.09-38.64.

VIX

Forcing yourself NOT to buy/cover U.S. Equities at VIX 12-14 has saved/made you a lot of absolute and relative return since that July #Bubble High and that just happened again; FT with a long-only performance article this morning citing only 6% of Growth managers beating their bench in Q1 (worst since 1991).

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough, Demography analyst Neil Howe and Macro analyst Darius Dale live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 67% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 23% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's (MCD) hit an all-time highs last week. "They can't chase Energy Charts today, so they're just dog-piling into our long calls on GIS and MCD," wrote Hedgeye CEO Keith McCullough on Friday.

 

We've said it before, McDonald's has all the style factors that we like during these turbulent macro market times; high market cap, low beta and liquidity. The stock is up 7.5% this year beating the S&P 500 by more than 600 bps. In August 2015, Restaurants analyst Howard Penney wrote that "2015 will be the last time this stock is below $100."

CME

CME Group (CME) stock is among the small cohort of financial companies that benefit from volatile markets. With the exchange's open interest continuing to expand, which will drag trading volume higher, CME Group is one of the few lower beta longs that will hold up relatively better in the current environment.

 

The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, at over 111 million contracts. Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials.

TLT

Non-Farm payroll additions came in over +200 again (+215K to be exact) and private sector wage growth was also “good,” increasing +4.2% year-over-year on Friday. We’re most concerned with "better" or "worse" from a rate of change perspective. The non-farm payroll number is "less good" (i.e. "worse") from a year-over-year rate-of-change perspective. Growth in non-farm payrolls peaked in February 2015 at +2.3% year-over-year and the trend since then has been one of decline (+2.0% Y/Y for March 2016). And private sector salary and wage growth peaked on a year-over-year percent change basis in December of 2014.

 

We remain bullish on Long Bonds (TLT and ZROZ), Utilities (XLU) and short Junk Bonds (JNK). We expect more alpha after what was a great Q1, as the back-end of the Treasury curve continues to get flatter regardless of Fed rate hikes. We were alone in that camp, in December, when we first told you that a rate hike was in fact good for long-duration Treasury bonds. Stick with what's worked.

 

Here's the Q1 2016 Scorecard (data through 3/31):

  • TLT +8.3%
  • XLU +14.7%
  • JNK +1.0%
  • versus S&P 500 +0.7%

Three for the Road

TWEET OF THE DAY

About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" https://app.hedgeye.com/insights/50098-about-everything-the-immaterial-world … via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

You can be comfortable or you can be courageous. But you cannot be both.

D.Partridge

STAT OF THE DAY

32% of international students studying in the U.S. in 2015 were from China.


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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