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[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015

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.

Editor's Note: This is a complimentary research note originally published April 14, 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:

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.

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - Dom

 

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.

 


[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI19

 

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:

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI2

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI3

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI4

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI5

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - 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 | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI12 2

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI13 2

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI14 2

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI15 2

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI16 2



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 | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI7

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI8



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.

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - 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 | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI17 2

 

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI18 2



Net Results:

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.)

  

[UNLOCKED] Fund Flow Survey | Domestic Equity Mutual Funds...Worse Start Than 2015 - 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 | Domestic Equity Mutual Funds...Worse Start Than 2015 - ICI11 


RL | From Last To First

Takeaway: Bottom line, if you can get RL at sub-15x EPS on a trough earnings number, you take that trade all day.

We’re taking RL from the bottom of our Long Idea Bench to the very top. The reality is that RL is one of the few stocks we can find in retail that has arguably found a floor, and has potential catalysts to take it higher. To be clear, we’re not certain of the fat tailed ‘recovery call’ yet, as we still have too many long-term concerns about management, the latest restructuring, and ultimately the Brand. As the research gets us past even just one of these concerns, we’re very likely to get full-on bullish.  

 

Here’s what’s changed in our mind.

  1. We think that earnings have bottomed. RL is likely to earn around $6.50 this year. That’s no surprise to the consensus. But remember that just 18 months ago, it was widely (and wrongly) ‘accepted’ that RL was going to earn $10 this year. The consensus was wildly wrong back then, and if it’s wrong again over the next 12 months, we think it will prove to be on the conservative side.
  2. EPS Looks Doable. The earnings report is on May 12, and we think that the Street’s $0.83 will be very tough to miss – especially when compared to $1.41 last year (-41%) and $1.68 (-51%) two years back in this quarter. That says something for a stock that traded down an average of 11% in 4 of the past 5 earnings reports, and has missed only twice during this economic cycle.
  3. What about a guide-down?  We all know that Ralph Lauren is a perennial sandbagger. But we can say for certain that the consensus (on either Side of the Street) is absolutely not expecting a blow-away quarter on the 12th.  But can the company guide-down? Yes. A bit. But we’d be surprised to see much.  The Street is at $1.01 for the June quarter, which compares to $1.80 in June just two-years ago, and business does not appear to have gotten meaningfully worse.
  4. The Last to be the First. If there is a guide-down on the print, the company will almost certainly point to the analyst meeting the first week of June. To be clear on this…it is Ralph Lauren’s first analyst meeting in the history of the company. We’re gonna bank on the assumption that RL is not all of a sudden going to invite Wall Street into its mahogany-paneled offices on Madison Ave to explain why it does not have a clue about its future.  
  5. It’s Cheap. This is never enough of an argument on its own – as a cheap stock with earnings risk is a land-mine waiting to make a big, ugly and painful mess. But RL is near its lowest multiple in over a decade. The only time it was lower is when we were in the Great Recession – but then the base of earnings expectations had not come down yet. Today it has.
  6. The Larsson effect. Is it possible that new CEO Steffan Larsson steps up the spending, and subsequently takes a bite out of EPS? Definitely. But we welcome that. RL has been a very good steward of capital in the past. We won’t welcome higher spending by most companies, but RL makes the cut.  In fact, we heard twice from investors in the past two days that there’s the potential for a lot of cost cuts at RL. We disagree. You can’t sustainably grow earnings for a Consumer Nondurable brand that is restructuring one company into six divisions and whose core distribution channel is in a secular decline. If ‘cost-cutting’ becomes a pillar to this story, then we want no part of it.

We admit that the text above reads like a ‘Buy RL Now’ note. If you have a duration of 2-3 months, then you read it right. But we definitely need more of an edge on the TAIL part of this story before we can truly get on board as a long-term investment. Then it’s not a call about simply going to $120…then we’re potentially talking $220+.

 

RL | From Last To First - 4 19 2016 Idea List chart1


Junkbonds, Eurozone and Reflation

Client Talking Points

#JUNKBONDS

Whether it’s commodities, high yield credit, or EM currencies, there has been a lot of buying behind the global reflation trade, especially in beaten down resource-based issues. This has made us wrong on our call for continued deterioration in credit markets in isolation. JNK is +10.5% off the Feb lows and +3.1% YTD. However, our pair trade against the long bond (TLT +8.1% YTD) has been a winner and it remains our view that yet another unwinding of the global reflation trade will give us even more alpha on this position as treasuries will continue to be bid unless there is a sustained turn in the economic cycle.   

#EUROZONE

European stocks are popping higher on the back of improving confidence figures from the ZEW survey. The Eurozone Expectations (6-month forward looking) rose to 21.5 in April vs 10.6 in March. German Expectations rose to 11.2 vs 4.3 in the prior month. However our #EuropeSlowing thesis remains intact, with the region entering the ugly Quad 3 (equating to growth slowing as inflation accelerates) in 2H 2016.

#REFLATIONREFLATIONREFLATION

Everywhere you look, reflation is winning the day – and perhaps the year. Arguably nowhere is that more prevalent in the YTD than it is in Argentina, whose recent $15B international bond issuance was well oversubscribed. While yields of 7.5% and 8% on 10Y and 30Y paper, respectively, are well above peer rates, the return to international capital markets after 15 years of exile represents a huge win for the Mauricio Macri administration. How much of the Merval Index’s +34.8% appreciation over the past 3M or the ARS’s +4.6% MoM ascent vs. the USD is a function of Macri’s reform agenda – which is far from a slam dunk considering his weak footing in Argentine parliament – or a dovish Janet Yellen remains to be seen. We think it’s a lot of both.

 

*Catch the replay of The Macro Show with Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan - CLICK HERE

Asset Allocation

CASH 65% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 5%
FIXED INCOME 25% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's (MCD) is reporting 1Q16 results on Friday, and we will have a more thorough update following the release. Current consensus estimates are projecting system-wide same-store sales (SSS) growth to be +4.6%, and +4.6% in the United States. Given another full quarter of All Day Breakfast, and ever evolving value proposition that MCD is providing, we feel confident in their ability to perform at or above expectations.

 

MCD continues to be a great LONG stock to hold during turbulent times in the market given their attributes of being large-cap, low beta, and aligns with our macro teams view of going LONG lower to middle income food providers.

CME

With the largest Capital Markets operation reporting results last week, JP Morgan's numbers continue to relay the business-to-business (B2B) shift in both bond and equity markets. With capital hamstrung by Financial Crisis era regulation, and fixed income desks running tight as a drum, brokerage activity continues to shift over into the exchange traded derivative markets. JPM's FICC, or fixed income trading, results hit $3.5 billion in revenue in 1Q16, down 13% year-over-year.

 

Conversely, the daily reporting of CME Group's (CME) bond volumes finished at 8.2 million contracts per day in 1Q, up +9% from last year. On a revenue basis, CME's results are actually a little stronger, with fixed income rate per contract up +2% year-over-year. The shift in equities is more balanced, with JPM's equity trading revenues up +6% y-o-y according to their latest report.

 

CME's stock volumes, however, still outflank the big brokerage desk with futures and options volume up +9% y-o-y for the forthcoming quarterly report on April 28th. This activity shift is secular in our view and CME Group has a strong upward bias in earnings power which makes its stock one of the few to own in Financial Services.

TLT

We remain the bears on the U.S. economy and the corporate profit and credit cycles - we’re long growth slowing via Long Bonds (TLT) and Pimco 25+ Year Zero Coupon U.S. Treasury ETF (ZROZ) and short risky corporate credit via Junk Bonds (JNK) as the profit cycle rolls over.

 

High yield bonds have experienced meaningful relief in price terms with the move in reflationary assets. Again, we reiterate that once credit spreads move off their cycle lows, they don’t typically revert in the same cycle, which is why we are sticking with our sell recommendation on junk bonds (JNK).

 

Any time corporate profits decline for two consecutive quarters, the S&P drawdown has had a peak to trough decline of at least 20%. Dissecting the likely direction of earnings in Q1 and Q2 of this year, we could be facing 4 consecutive quarters of declining corporate profits, and we question the market's ability to slap higher earnings multiples on the S&P 500.

Three for the Road

TWEET OF THE DAY

McDonald's is building an epic restaurant with all-you-can-eat fries http://www.businessinsider.com/mcdonalds-new-restaurant-offers-all-you-can-eat-fries-2016-4

via @BI_RetailNews $MCD

@HedgeyeHWP

QUOTE OF THE DAY

I look real good and feel even better, I make a burlap sack look like a cashmere sweater.

Ravishing Rick Rude

STAT OF THE DAY

The U.S. accounts for 5% of the world's population but 25% of the world's prisoners.


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The Macro Show with Todd Jordan Replay | April 19, 2016

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CHART OF THE DAY | Emerging Markets: 'A Sucker's Bet'

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more.

 

"... But what is clear, however, is that investors have had ample opportunity to sell into every “face-ripping” short squeeze to lower-highs across the spectrum of emerging market assets over the past ~5Y – of which there have been many – as highlighted by the Chart of the Day below."

 

CHART OF THE DAY | Emerging Markets: 'A Sucker's Bet' - Chart of the Day 4 19


What Did You Buy?

“If gambling is exciting, you’re doing it wrong.”

-Jordan Ellenberg

 

I thought that was a very appropriate quote for the times we currently reside in as stock market operators. From my own read through of sentiment among our diverse client base, buying U.S. equities with the SPY trading within 2% of its all-time high feels a bit more like gambling than allocating capital to the reflation trade did in late-January/early-February was – gambling on monetary policy that is.

 

With the two sectors most exposed to reflation expectations leading the way higher off of the February 11th YTD lows in the SPY – i.e. Energy and Materials – we don’t need to employ advance statistical concepts to arrive at the conclusion that marginally dovish monetary policy out of the Federal Reserve is a principle component of this epic short squeeze in U.S. equities.

 

What Did You Buy? - Fed bubbles cartoon 07.09.2 14

 

The aforementioned quote is sourced from a good “process evolution” book I’ve been reading titled How Not to Be Wrong: The Power of Mathematical Thinking and it was specifically in regards to the legal and systematic rigging of the Massachusetts state lottery in the mid-2000s by a handful of quantitatively-oriented cartels. Ellenberg goes on to say:

 

“If you can make enough bets with the odds tilted in your favor, the sheer volume of your advantage dilutes any bad luck you might experience. That makes playing the lottery less exciting, to be sure. But for Harvey and the other high-volume bettors, excitement wasn’t the point.”

 

Back to the Global Macro Grind

 

In a market where we can all agree to agree that quant strategies have become a significant degree of the trading volume, it’s easy to imagine a guy like Cliff Asness as James Harvey and Asness’ AQR Capital Management as Harvey’s Random Strategies LLC.

 

Indeed, Harvey’s genius was only betting on days where the “roll-down” jackpot would be triggered. Perhaps the genius of Asness and other quant strategies this year was “betting” (i.e. switching their trading algorithms into unadulterated offensive risk taking) only during times when they knew rising expectations of a dramatically easier Fed would act as a tailwind for reflation assets and an impetus to chase and/or cover high among other market participants.

 

Perhaps no other reflation assets have benefitted more from this directional shift in policy expectations than Brazilian capital and currency markets:

 

  • The Bovespa Index is up +39.4% over the past 3M;
  • The BRL is up +12.5% vs. the USD over the past 3M (inclusive of yesterday’s dovish intervention); and
  • Bloomberg’s Brazil Local Currency Bond Index is up +17.5% over the past 3M.

 

Obviously Brazil has idiosyncratic tailwinds perpetuating the aforementioned relief rallies – namely the rising probability of much-needed economic and political reform to the extent President Rousseff does not survive the impeachment process she was voted into by lawmakers in Brazil’s lower house over this past weekend. The process from here is somewhat convoluted, so it bears summarizing:

 

  1. On May 10th, Brazil’s upper house will vote to proceed with a formal trial against Rousseff, who is under investigation for alleged violation of federal budget laws by using loans from state-owned banks to mask the true size of the country’s fiscal gap.
  2. The impeachment process requires a simple majority of 41 votes to move forward and it is rumored that there are 47 senators in favor of the motion. According to Brazilian polling institute Datafolha, 61% of Brazilians support the impeachment process and 60% believe President Rousseff should simply resign.
  3. In the event of a trial, a two-thirds majority (54 votes) is required to convict Rousseff and remove her from office.
  4. The senate will have up to 180 days to deliberate, but market participants are expecting a prompt trial in order to ensure the smooth functioning of government and, potentially, a smooth transition of power.
  5. Vice President Michel Temer of Brazil’s PMDB party – a former PT ally as recently as last month – would take over as acting president if Rousseff is ousted. He has promised a myriad of market-friendly policies such as fiscal retrenchment, welfare reform and incentives to promote private sector investment.

 

In hindsight, I can see why an investor would’ve rolled the bones on bombed-out Brazil in light of #5 above. That said, however, the story deteriorates very quickly from there, as the river of corruption in/around Brazilian politics runs dishearteningly deep. Consider the following developments:

 

  • The aforementioned impeachment process is separate and apart from corruption charges stemming from her alleged use of misappropriated funds during her 2014 reelection campaign, as well as from her willful blindness to widespread corruption as chairwoman of Petrobras during the heyday of the “Operation Car Wash” scandal – Brazil’s largest ever at $17B in related losses and 84 convictions thus far (mostly businesspeople; Brazilian lawmakers are immune to arrest without congressional or Supreme Court authorization).
  • Temer himself is not without prosecution risk; he too faces corruption charges stemming from Rousseff’s 2014 reelection campaign.
  • Third in line for Brazilian presidency is Rousseff’s sworn enemy and leader of Brazil’s lower house, Eduardo Cunha, who himself has been indicted for his alleged role in Operation Car Wash and a subsequent money laundering scheme – of which he is now officially a defendant after the PT voted to strip him of his immunity from prosecution the morning of the day Cunha finally decided to move forward with impeachment proceedings against Rousseff after having previously blocked 27 such motions. #catty
  • The same Datafolha survey referenced above showed a whopping 77% of Brazilians support Cunha’s impeachment.
  • Temer’s successor as PMDB party chief, Sen. Romero Jucá, is under investigation for alleged ties to the same scandal as well.
  • According Transparência Brasil, a nonprofit government watchdog, 60% of Brazil’s federal legislators have been convicted or are under investigation for crimes ranging from electoral fraud, to corruption, to outright assault. Sixty percent!
  • For example, upper house president Renan Calheiros is under investigation for his alleged involvement in Operation Car Wash.
  • Cunha has strong political ties to ex-President Fernando Collor, who himself was the last Brazilian president impeached back in 1992. The irony of him chairing the upper house ethics committee while also being under investigation for his alleged involvement in Operation Car Wash is almost too much to bear.

 

While this all makes for good entertainment, our purpose for highlighting these facts goes beyond mere amusement. We want to stress that there is a high likelihood that political uncertainty reigns supreme in Brazil for months – if not years – to come. Brazil has 23 distinct parties operating in parliament with 12 in the ruling party alone. Consensus-building on the best plan forward will be a tall order for whoever winds up as president when all is said and done.

 

All told, with Brazil’s cyclical and structural economic bear cases fully intact (refer to slides 71-93 and 100 of our 3/16 presentation on Emerging Markets for more details), we think Brazilian capital and currency markets are priced to perfection and anticipate another flush down alongside other reflation assets over the intermediate term. Whether or not they make new lows ahead of market participants eventually starting to explicitly bet on QE4 remains to be seen.

 

But what is clear, however, is that investors have had ample opportunity to sell into every “face-ripping” short squeeze to lower-highs across the spectrum of emerging market assets over the past ~5Y – of which there have been many – as highlighted by the Chart of the Day below.

 

Being long of reflation assets has been nothing shy of a world-class trade over the past few months and one that we generally failed to anticipate. That’s our mistake. We can, however, take solace in the fact that we covered our thematic shorts in Energy and Industrials in early-January on our Q1 Macro Themes call. Covering reflation then was a great call; buying reflation then would’ve been a downright legendary flip. But, alas, hindsight is 20-20 and we are thankful for the opportunity to learn each day.

 

As always, the question remains, “Where to from here?” and with respect to anyone who appropriately got long of reflation earlier this year, we caution against overstaying your respective welcomes. The simple risk management question, “What exactly did we buy?” is one that we expect to get asked with increasing frequency over the intermediate term.

 

With respect to Brazil specifically, we believe many investors have positioned their portfolios to be adversely impacted by political disappointment that would make Narendra Modi’s failure to implement meaningful reforms in India look like some form of “Reaganomics” or “Thatcherism”.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.69-1.82% (bearish)

SPX 2045-2104 (bearish)
RUT 1086-1150 (bearish)

DXY 93.81-95.17 (bullish)

Oil (WTI) 37.58-43.98 (bearish)

Gold 1215--1268 (bullish)

 

Keep your head on a swivel,

 

DD

 

Darius Dale

Director

 

What Did You Buy? - Chart of the Day 4 19


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