An audio-only replay of today's show is available here.
Takeaway: Domestic stock funds have shed -$36.3B so far in '16, far worse than the first 14 weeks in 2015 which was the worst year on record.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
In the 5-day period ending April 6th, domestic equity funds lost another -$5.3 billion, bringing the first fourteen weeks of 2016 to a net redemption of -$36.3 billion. This current draw down pace is far worse than the first fourteen weeks of 2015 which had totaled just $-9.8 BB, but which ended the year as the biggest annual redemption for the category in history. Additionally, the 2016 YTD withdrawal is just shy of the Financial Crisis cadence in 2008, in which domestic equity funds had lost -$39.7 billion over the same period (but the '08 cycle finished the year strongly with domestic stock subscriptions). Investors also withdrew -$555 million from international equity funds last week, bringing total equity mutual funds lost to -$5.8 billion. Meanwhile, the migration into passive funds continued with investors contributing +$7.0 billion to equity ETFs. Below is Morningstar's current count to the biggest money management complexes with exposure to the domestic stock fund category.
On the fixed income side, investors made net contributions in all categories. Total bond mutual fund flows came to +$6.7 billion. Bond ETF flows were relatively weak last week, coming in at only +$240 million. Finally, money market funds lost -$27 billion to withdrawals, as the seasonality of income tax payments hit its final week.
In the most recent 5-day period ending April 6th, total equity mutual funds put up net outflows of -$5.8 billion, trailing the year-to-date weekly average outflow of -$1.2 billion and the 2015 average outflow of -$1.6 billion.
Fixed income mutual funds put up net inflows of +$6.7 billion, outpacing the year-to-date weekly average inflow of +$1.5 billion and the 2015 average outflow of -$475 million.
Equity ETFs had net subscriptions of +$7.0 billion, outpacing the year-to-date weekly average outflow of -$1.0 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$240 million, trailing the year-to-date weekly average inflow of +$2.0 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:
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.
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:
Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors made a +5% or +$631 million contribution to the technology XLK ETF.
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.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$5.8 billion spread for the week (+$1.1 billion of total equity inflow net of the +$6.9 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 -$540 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.)
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:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
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"I really don’t think that the introduction of the negative interest rate backfired or caused the yen to appreciate and stock markets to decline in Japan... If anything, I can say that if we didn’t introduce the QQE with the negative interest rate, financial markets in Japan would have been even worse.”
That's BOJ head Haruhiko Kuroda, during a speech at Columbia University yesterday. Kuroda continued reiterating that the BOJ "will not hesitate to take additional easing measures in terms of three dimensions — quantity, quality and the interest rate — if it is judged necessary."
Here's analysis from our Macro team in a note sent to subscribers this morning:
"The Japanese yen’s -1% decline to the mid-109’s on the USD cross in the WTD has been good for a major squeeze higher in the Nikkei this week. Today’s massive +3.2% rally puts the index up +6.9% WTD with one more day of trading to go.
In a speech at Colombia University yesterday, BoJ Governor Haruhiko Kuroda doubled down on NIRP by highlighting how it “boosts the effects of existing policy measures by directly pushing down the short-end of the yield curve”. Despite this week’s spectacular gains, the Nikkei more-or-less remains in crash mode down -19.3% from its peak last June and we think it’ll take more than jawboning to perpetuate a series of lower-highs in the yen and higher-lows in the Nikkei from here.
We expect the pressure of decelerating trends across headline, core and producer price inflation – as well as long-term breakeven rates – to cause the BoJ to add to its easing measures at its April 27-28 meeting. Will additional easing in Japan be met with additional repudiation of the central planning #BeliefSystem, or will Japan simply export this growing lack of faith to U.S. markets via a stronger dollar?"
Below is a brief excerpt from our Potomac Research Group colleague and Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. For more information on how you can access our institutional research please email firstname.lastname@example.org.
ALL VOTES LEAD TO ROME?:
NY is Hillary Clinton's Northeastern firewall, but like many of her other firewalls, the Bern found a way to jump it - and enthusiasm for him was more than validated by last night's crowd of 27,000 in NYC. Sanders had started to gain momentum, and was trending up in the polls - but Clinton has pulled out all of the stops, and his momentum statewide stalled. The surest sign of a Sanders loss is that he is following through with his scheduled trip to the Vatican after participating in tonight's Brooklyn debate. If he thought he was anywhere close to pulling off an upset victory he would be spending those two days in Rome, NY instead.
Following a big win for the anti-Trump movement in WI, their efforts heading into NY have lost as much steam as Cruz's campaign. Perhaps knowing a defeat was inevitable, the anti-Trump aligned PACs haven't spent any money on ads in NY. Whether it's a calculated decision or not, it may be a mistake - even slight resistance and microtargeting (a Cruz mainstay) in select Congressional districts could substantially decrease how many delegates Trump wins in NY, and at this point a mere 20 extra delegates could be the make or break for a first ballot Trump victory.
KEEPING AT ARM'S LENGTH:
With preparations and plotting for the Republican convention in full effect, prominent Republicans across the party are declaring they will not attend as a number of them are facing competitive races this fall. NH Senator Kelly Ayotte and NC Senator Richard Burr have suggested they will skip the event - keeping out of the unpredictable spotlight or being tied to Donald Trump or Ted Cruz - reaffirming what a number of our political sources having been telling us for weeks: Republican incumbents are running intensely localized campaigns that more resemble those vying to be sheriff than Washington power brokers.
Takeaway: What do declining corporate profits mean for U.S. equities?
It's shaping up to be a nasty quarter for corporate profits.
In a note sent to subscribers earlier this morning, the Hedgeye Macro team provides some early insights on how earnings season is shaping up thus far:
"It’s early in earnings season, but we got an early look at tough comps in commodity land (Monsanto and Agrium have both comped down double digits on top and bottom line). Alcoa fired 1,000 people globally in the process.
One of the key call-outs in our macro deck was that S&P 500 companies face tough comps for Q1 and Q2 (8 of 10 sectors comped higher in Q1 2015), with the flow through sparking the big question: with forward-looking earnings being taken down, what multiple will the market slap on declining forward looking expectations?"
For more, in the video below, Hedgeye CEO Keith McCullough explains why "we are vigilantly bearish on corporate earnings and junk bonds" while tearing down the latest permabull narrative that a weaker U.S. dollar will lead to “widespread earnings beats.”
What does it all mean investors?
If the ugly earnings picture holds, Q1 will be the third consecutive quarter of negative corporate profits. Look out below equity investors! Here's the must-see chart:
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