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ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities

Takeaway: All five active equity categories continued to lose funds last week; total eq MF flow came to -$4.9 B. Meanwhile passive equity took +$2.0 B

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

The landscape between passive ETFs and mutual funds in fixed income is starting to look a lot like the landscape in equities. An inflection point is now evident in the growth rate of passive bond products versus funds starting in 3Q15 with fixed income ETFs growing through the volatility in credit and now cumulatively ahead of running net new assets in funds. The entire equity complex has shifted toward passive products for some time now making the chart below a future look at how the pie will shift in fixed income.

 

ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - Theme 1

 

Specifically during the week, the latest ICI survey again relayed this migration for the five-days ending March 30th; all five equity mutual fund categories experienced withdrawals, bringing the total equity mutual fund flow to -$4.9 billion. Meanwhile, passive equity ETFs took in +$2.0 billion.

 

In fixed income, taxable bond funds experienced a -$195 million outflow as investors continue to prefer tax-free municipal bonds, which took in +$1.4 billion last week.


ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI19

 

In the most recent 5-day period ending March 30th, total equity mutual funds put up net outflows of -$4.9 billion, trailing the year-to-date weekly average outflow of -$798 million and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$1.2 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 +$2.0 billion, outpacing the year-to-date weekly average outflow of -$1.6 billion but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$258 million, trailing the year-to-date weekly average inflow of +$2.1 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 | Fixed Income Shift Starting to Look Like Equities - ICI2

 

ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI3 3

 

ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI4

 

ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI5

 

ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - 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 | Fixed Income Shift Starting to Look Like Equities - ICI12

 

ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI13

 

ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI14

 

ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI15

 

ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - 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 | Fixed Income Shift Starting to Look Like Equities - ICI7

 

ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the long treasury TLT ETF experienced a -$415 million or -4% outflow, although it has experienced the largest inflow YTD on a percentage basis of +48%.

 

ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - 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 | Fixed Income Shift Starting to Look Like Equities - ICI17

 

ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$4.4 billion spread for the week (-$2.9 billion of total equity outflow net of the +$1.5 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 -$422 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.)

  

ICI Fund Flow Survey | Fixed Income Shift Starting to Look Like Equities - 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 | Fixed Income Shift Starting to Look Like Equities - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







Ignore the Pop: Oil Is Headed Lower

Takeaway: That 5% pop in WTI yesterday? It doesn't change our view that crude prices are headed lower.

Ignore the Pop: Oil Is Headed Lower - oil cartoon 03.29.2016

 

Wondering what to do after yesterday's big oil bounce? Below is some brief analysis and our updated risk ranges via Hedgeye CEO Keith McCullough in a note sent to subscribers today:

 

"No follow through to the +5.1% WTI day as the pop in this inverse correlation trade runs into resistance; immediate-term risk range for WTI is now $35.04-40.25 (top end of the range used to be closer to $42-43); we’ll be hosting our Q2 Macro Themes Call at 11AM EST"

 

 

On The Macro Show, McCullough added:

 

"As you can see in the chart [above], oil is starting to signal a series of lower highs. Oil would have to break out above $46 to get through our Tail risk level. The immediate term risk range is back down [$35.04-40.25]. So nevermind going to $46. It doesn't look like oil can get to $42 or $43, which used to be the top end of the immediate-term risk range.

 

That's important because US equity markets are hooked what? Other than the biotech charts yesterday, yes, markets are hooked on reflation and dollar down. Everything that Europe and Japan tried and is now failing."

 

Yes, that's how we think the movie ends.



Daily Trading Ranges

20 Proprietary Risk Ranges

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Watch Live Today 11AM ET | Q2 2016 Macro Themes Conference Call

Today at 11:00AM ET we will host our highly-anticipated Quarterly Macro Themes conference call. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and the associated investment implications.

 

CLICK HERE to watch this presentation live.

Watch Live Today 11AM ET | Q2 2016 Macro Themes Conference Call  - Slide1

 

 

 

Q2 2016 MACRO THEMES OVERVIEW:

 

#TheCycle:  With the recessionary industrial data ongoing, employment, income and consumption growth decelerating, corporate profits facing a 3rd quarter of negative growth and Commercial and Industrial  credit tightening, the domestic economic, profit and credit cycles are all past peak and continue to traverse their downslope.  We’ll update our cycle view and detail why growth slowing  – and its associated allocations – remains the call as the U.S. economy faces its toughest GDP comp of the cycle in 2Q16. 

 

#BeliefSystem: The notion that central bankers are increasingly pushing on a string is being progressively priced into global financial markets – with one lone holdout: U.S. equities. While we admire the blind faith of domestic stock market operators in Yellen’s ability to keep “the game” going, we are keen to cite specific risks that marginally dovish policy in the U.S. will fail to overcome the depths of the domestic economic, credit and corporate profit cycles.

 

#DemographyDebates: We’re entering an election season that could hugely impact markets – and probably not in a good way!  What’s the impact of a Clinton or Trump victory and how will market practitioners react?  We’ll also discuss housing and the impact of millennials and immigrants in shifting demand.  Finally, we’ll exam a recurring theme of U.S. growth slowing – what’s under the hood for earnings and inflation expectations in 2016?

 

 

CALL DETAILS

 

 

As always, our prepared remarks will be followed by a live, anonymous Q&A session. Please submit your questions to . Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.

 

Kind regards,

 

-The Hedgeye Macro Team


CHART OF THE DAY: A Prime Example of Central Planning Failure

Editor's Note: Below is a brief chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... We’ll get into much more detail on how the #BeliefSystem is breaking down in both Japan and Europe on our Q2 Global Macro Themes Call at 11AM EST, but at a basic level here were some basic rules that levered macro strategies used to get paid by:

 

  1. BOJ (Bank of Japan) prints, devalues, and prints => Yen falls => Japanese Stocks rise
  2. ECB (European Central Bank) says “whatever it takes” => Euro falls => European Stocks rip"

 

CHART OF THE DAY: A Prime Example of Central Planning Failure - 04.07.16 chart


Levered Business

“A leveraged business is much more difficult to run than a long-only business.”

-Myron Scholes

 

Myron Scholes is a Canadian who hails from up in my neck of the woods (a small town in Northern Ontario called Timmins). He’s famous in Economics circles for his Black-Scholes model (Nobel Prize in 1997) and infamous for his role at Long-term Capital Management.

 

The aforementioned quote came from his interview in Efficiently Inefficient where Lasse Heje Pederson asked him about the main takeaways from his experiences at Salomon Brothers and LTCM.

 

“It is necessary to plan for shocks and losses across positions that are held at times of shock… it’s tough because you are dealing with three things simultaneously: the assets you acquire; the business that you’re in; and how you actually finance activities.” (pg 268)

 

Back to the Global Macro Grind

 

Is the business of risk managing macro markets in what was the Golden Age of Central-Market-Planning tough? Very. Especially at this stage of the game when all of the “rules” of the #BeliefSystem start to break down, the Levered Business of carry trading gets scary.

 

Levered Business - Yellen cartoon 04.06.2016

 

We’ll get into much more detail on how the #BeliefSystem is breaking down in both Japan and Europe on our Q2 Global Macro Themes Call at 11AM EST, but at a basic level here were some basic rules that levered macro strategies used to get paid by:

 

  1. BOJ (Bank of Japan) prints, devalues, and prints => Yen falls => Japanese Stocks rise
  2. ECB (European Central Bank) says “whatever it takes” => Euro falls => European Stocks rip

 

Sound familiar? All Janet Yellen has to do at this stage of the game in the USA is Devalue The Dollar and stocks, commodities, and junk bonds, that are inversely correlated to that go straight up (to lower-highs).

 

But what if you’re short Yens and/or Euros and long Nikkei and Italy’s MIB Index, with leverage?

 

A: You’re out of business

 

Yen Bulls (there aren’t many) are lovin’ Yellen right now. While the Japanese Yen (vs. USD) is signaling immediate-term TRADE overbought at $108 (within a bullish intermediate-term TREND), what is it going to take for the BOJ at their meeting on April 28th to change TREND?

 

A: I don’t know (they don’t either)

 

In Europe this morning, overlord Draghi issued the ECB’s Annual Report and said (I couldn’t make this up if I tried), “we will not surrender.” And you know what the Euro (vs. USD) did on that?

 

A: It went down 10 basis points

 

Now if you have friends that are in the business of only being long US Equities, this is a good thing (for now). But what happens when more and more and moaarrr dovishness is needed to keep the US Dollar from going up?

 

A: Eventually the USA ends up in the same place as Japan and Europe

 

Never, Keith. ‘We are the best house in a bad neighborhood… Auto sales were strong… but now gas prices are stronger’ … or something like that will be the perma bs case. Reality is that eventually it gets to your country’s banks.

 

How does that happen?

 

  1. Central-market-planners have to keep devaluing their currencies…
  2. But they have to cut long-term interest rates to all-time lows, in doing so…
  3. Eventually, instead of ZIRP, they get NIRP (negative interest rate policy)…

 

And a lot of businesses (lots of banks) don’t make money in that scenario.

 

In other words, to keep the game going this way, Janet Yellen’s Fed will have to eventually reduce the probability of ANY rate hike to 0%, long-term Yields will break to all-time lows, and Jamie Dimon will have to try to create his own CNBC “double-bottom”, buying back stock as JPM fundamentals look the way every other bank in Japan and Europe does under a negative yield regime.

 

This is why I pivoted from bearish on Energy (XLE) to most bearish on Financials (XLF) when we did our Q1 Macro Themes Call. It’s also why I signaled “buy more” Utilities (XLU) on yesterday’s pullback.

 

Our Best Ideas are levered to the Fed coming around to our #LateCycle US economic view. If you ran a fund that was only long Utes and short Fins in 2016, you’d want leverage on that P&L too!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.69-1.81%

SPX 2025-2077
RUT 1069-1130

Nikkei 152
USD 94.01-96.04
EUR/USD 1.11-1.14
YEN 108.33-111.99
Oil (WTI) 35.04-40.25

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Levered Business - 04.07.16 chart


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