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[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness

Takeaway: All equity categories experienced withdrawals last week while investors sought shelter in IG fixed income and municipal bonds.

Editor's Note: This is a complimentary research note originally published April 21, 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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Emerging market equities put up their 5th consecutive week of outflow with a cumulative -$2.3 billion having come out of the category since the week ending March 16th. While EM received some fanfare as a "generational buying opportunity" in mid-February, equity prices and flows haven't broken their down trend and are in again in retreat. Importantly, the recent +20% rally in the MSCI index is not uncharacteristic as there have been eight 20%+ (short covering) rallies in the 4 year price action starting in 2011.

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - EEM Theme

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - 4 12 2016 4 38 51 PM 

 

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Investors pulled funds from all equity categories last week with both funds and ETFs experiencing redemptions totaling -$4.7 billion. Additionally, high yield and global fixed income lost -$419 million and -$820 million respectively while investors sought shelter in investment grade and municipal bonds; IG fixed income took in +$2.1 billion with municipal bonds collecting +$910 million. Finally, money market funds lost another -$8 billion to outflows, as tax season finished up during the week.


[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI19

 

In the most recent 5-day period ending April 13th, total equity mutual funds put up net outflows of -$4.6 billion, trailing the year-to-date weekly average outflow of -$1.4 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$2.8 billion, outpacing the year-to-date weekly average inflow of +$1.6 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net redemptions of -$75 million, outpacing the year-to-date weekly average outflow of -$957 million but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$493 million, trailing the year-to-date weekly average inflow of +$1.9 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 | Eh-Merging Markets...Back To Weakness - ICI2

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI3

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI4

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI5

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - 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 | Eh-Merging Markets...Back To Weakness - ICI12

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI13

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI15

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - 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 | Eh-Merging Markets...Back To Weakness - ICI7

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: While ETF flows were fairly mild last week, the long duration treasury TLT saw the largest percentage flow; investors pulled -2% or -$211 million from the fund.

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - 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 | Eh-Merging Markets...Back To Weakness - ICI17

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$8.0 billion spread for the week (-$4.7 billion of total equity outflow net of the +$3.3 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 -$746 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 | Eh-Merging Markets...Back To Weakness - 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 | Eh-Merging Markets...Back To Weakness - ICI11 


All Good Though, Right?

Client Talking Points

USD

It’s a good thing we’re not ex’ing out Dovish Dollar (Fed) expectations and its impact on “reflating” the S&P 500. But today is event day for Yellen and our main macro question is what happens if she can’t burn the USD to a lower-low (vs. the last year of USD holding 93-94 on the U.S. Dollar Index?) Stay tuned… should be riveting.

OIL

Oil is up big again, +1.9% and pushing the Pain Trade to almost its max on FOMC event day. For WTI our TAIL risk level of resistance is just north of $46 – for something like Oil & Gas Stocks (XOP) it’s in the $36-37 range; if you were a bear on Energy (we don’t have this on, yet), on whatever Yellen says you’d probably buy/cover USD and sell Energy (for now).

QQQ

Turns out that going bearish on the Nasdaq for the 1st time in this cycle (on March 31st, 2016) wasn’t such a bad idea after all… Ex-AAPL-GOOGL-NFLX-MSFT, all good though, right? This is precisely what happened during the Spring of the last 2 U.S. economic/profit cycle tops (in 2000 and 2008); SPX bulls should pray for a mecca of Yellen dovishness and $60 Oil.

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 60% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 3%
FIXED INCOME 31% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's (MCD) released earnings Friday reporting strong numbers across every important metric. Consider, for example, Q1 EPS $1.23 versus FactSet's consensus estimate of $1.16. Same-store sales in the U.S. were +5.4% vs consensus +4.4%. Revenue in the U.S. was $2.02B vs consensus $1.98B. Company-operating margin was 15.4% vs consensus 14.9% and year-ago 14.3%. We are sticking with our $150 target and believe that $7.00 in EPS for 2017 is not out of the question.

CME

CME Group (CME) which reports on April 28th still has the opportunity for an earnings beat with the +13% year-over-year volume increase coinciding with a +2% increase in pricing power. We have a 1Q16 estimate at $1.18, +3% ahead of consensus. CME stock has positively reacted on earnings the past 5 announcements, rising between +1.5-3.7%.

TLT

The market is currently pricing in a rate hike but not until … late 2017. So if you’re looking for reasons to buy the market at all-time highs, don't expect a boost from incremental Fed policy. To be clear, the dovish Fed commentary of late is a direct result of U.S. growth slowing. Friday’s manufacturing PMI continued its downward trend (it peaked in rate of change terms in August 2014). Clearly, the market gets decelerating growth, which is why Utilities (XLU) are leading equity sector divergences YTD (+9.3%) and the U.S. Treasury 10-year yield down 0.35% over that same period. (That translates into TLT +6.5% and ZROZ +10.2% year-to-date.)

 

With that being said, the alpha on our long utilities and Long Bonds (TLT & ZROZ) vs. short Junk Bonds (JNK) position has gone against us in the last two months. Notably, we have no direct exposure to commodities or commodity-related sectors, but being short of JNK amidst a huge rally in commodities has not been a good position. Much of the beaten down resource-leveraged credit has rallied.

 

Three for the Road

TWEET OF THE DAY

VIDEO: Can Fed Stop Recessionary Selloff? https://app.hedgeye.com/insights/50528-can-fed-stop-recessionary-selloff

@KeithMcCullough

QUOTE OF THE DAY

The reality is: sometimes you lose. And you’re never too good to lose. You’re never too big to lose. You’re never too smart to lose. It happens.

Beyonce Knowles Carter

STAT OF THE DAY

Donald Trump has been personally sued in federal court 72 times since 2000. Since 2000, Bloomberg found that Trump and his companies have either sued or been sued at least 1,300 times.


CHART OF THE DAY | Consumer Confidence: Elevator Up, Then ... 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.

 

"... While most Americans don’t own stock market funds and Fed fueled “reflation” indexes anymore (yeah, the 2000 and 2008 cycle peaks did leave some crazy people cautious), a lot of Americans own single stocks like AAPL, NFLX, and GOOGL.

 

That’s why I think it’s going to be a lot harder to stop Consumer Confidence from doing what it always does after the economic, profit, and stock/credit market cycle peaks. See Chart of The Day – it takes the elevator up during the cycle, then it crashes."

 

CHART OF THE DAY | Consumer Confidence: Elevator Up, Then ... Crash - CoD Confidence


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

Is Tech Cyclical?

“One of my great mentors, Frank Meyer, stressed to me that many businesses are cyclical over time.”

-Ken Griffin

 

That’s the last lesson I wanted to highlight from an excellent markets book I’ve been reviewing this year: Efficiently Inefficient. This may be the last time anyone who has invested in “Tech” since 1 gets to learn the lesson that Tech is cyclical too!

 

We all make mistakes in this business; especially short-term ones. But very few of us build real big businesses by not learning from the big mistakes. The biggest lessons of my career have been learned by studying #TheCycle.

 

The title of this note is a rhetorical question. Of course Tech Revenue and Earnings growth is cyclical. If you successfully risk managed the economic cycle peaks of 1999 and 2007, you didn’t get sucked into the final rallies in the Nasdaq (or SP500) in the 1st half of 2000 and 2008. And you probably didn’t chase the “charts” in March of 2016 either.

Is Tech Cyclical? - The Cycle cartoon 03.04.2016

 

Back to the Global Macro Grind

 

It’s a good thing none of the “home gamers” out there in America own Apple (AAPL).

 

In July of 2015 (when we initially went bearish on the SP500 and AAPL), in terms of both the number of people and its market cap, it was obviously the most over-owned stock in human history.

 

It won’t be after today.

 

Maybe a “buying opportunity”? Probably (lower). Apple has a lot of the Style Factors I want to own (big cap, liquidity, eventually low-beta). But we patient investors now have the luxury of being able to wait and watch for lower-prices as #TheCycle plays out.

 

Damn that cycle!

 

“Stocks” rallied off their lows yesterday on more terrible US economic data (US Dollar went DOWN in response, Oil Up):

 

  1. US Durable Goods “missed expectations” coming in at -2.5% year-over-year in MAR (i.e. #recessionary)
  2. US Consumer Confidence slowed (again) from its Q1 2015 Consumption Cycle Peak to 94.2 APR vs. 96.1 MAR

 

Ex-people-saying-global-demand “bottomed” in Q1 on the most cyclical components of the US economy (newsflash: demand did not bottom; Oil prices are trying to), the latter report on confidence is not going to be resuscitated by AAPL -8% on the open.

 

While most Americans don’t own stock market funds and Fed fueled “reflation” indexes anymore (yeah, the 2000 and 2008 cycle peaks did leave some crazy people cautious), a lot of Americans own single stocks like AAPL, NFLX, and GOOGL.

 

That’s why I think it’s going to be a lot harder to stop Consumer Confidence from doing what it always does after the economic, profit, and stock/credit market cycle peaks. See Chart of The Day – it takes the elevator up during the cycle, then it crashes.

 

“So”… as the Old Wall likes to say, here’s the new bull market narrative:

 

  1. Ex-Financials
  2. Ex-Tech
  3. Ex-Biotech

 

The new bull case for America is Janet Yellen burning the US Dollar back to 1-year lows, ramping the cost of living (rent, food, gas prices, etc.) again, and having everyone swap their Apple into Exxon.

 

Btw, you know what > $46 Oil does to GDP, right?

 

It slows real GDP even faster.

 

Yes. It’s elementary math (it’s called the GDP Deflator), but for those of your friends who are telling you that Down Dollar, Up Oil is the next panacea, just remind them that as inflation rises during a cyclical-slow-down, you get this thing called #Stagflation.

 

#Stagflation (Quad 3 in our GIP – Growth, Inflation, Policy – Model) is good for Energy stocks, but horrible for stock market multiples. In fact, even the beloved Buffett struggled with owning stocks during the late 1970s stagflation.

 

Think about why that is.

 

It’s as simple as Hedgeye going bearish on the Nasdaq (QQQ) on March 31, 2016. It’s #TheCycle (just like it was in March of 2000 and 2008) stupid. Tech is cyclical. And as the cycle slows, the Fed gets dovish and devalues the purchasing power of The People.

 

As The People have less, they get less confident. As confidence crashes, eventually “demand has bottomed” expectations crash too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.71-1.95%

SPX 2060-2105

NASDAQ 4

VIX 13.01-18.07
USD 94.01-95.42
Oil (WTI) 40.98-45.02

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Is Tech Cyclical? - CoD Confidence


T. Rowe Price (TROW) | Compressing Margins

Takeaway: All things considered, TROW had a decent quarter of net new asset generation, however margins are dropping like a stone.

T. Rowe Price (TROW) did well in a tricky environment in their 1Q16 earnings report yesterday with the company putting up decent net new asset raises in a quarter where the S&P 500 dove -11% to start the year to then rebound by just as much to end the period. Normally that type of volatility shakes investors out of the market however the company was able to take in net new assets of +$5.1 billion or organic growth of +2.7%, offsetting market related losses of -$3.6 billion. While the bulk of the inflow was target date funds subscriptions of +$4.2 billion, the +$900 million of non target date inflow was a solid respite from the consistent downward trajectory that has persisted since 2013.

 

While we applaud the new fish on the deck in the quarter, the TROW boat is still being weighed down by substantial margin degradation with new hiring expenses and the build out of non U.S. distribution. Operating margins hit 41.3%, their lowest level since 3Q09 as the company blew through the 6,000 employee mark for the first time in it's history. The $1.04 per share in earnings reported was in line with a lowered Consensus estimate but was down -8.2% year-over-year and validates that Street estimates are way too high for the out year and that the company has put in its high water mark in profitability (in 2013 with operating margins over 48%).

 

With ending assets-under-management only -1% off of their all-time high from 2Q15, the company is barely putting up earnings over $1 per share and thus with the Street at over $5 per share in the out year (2017), we continue to put out the stock as better on the Short side. Our fundamental, intermediate term thesis continues to outline the pervasive shift in Large Cap strategies from mutual funds to passives and that the firm's important Target Date fund product suite is materially slowing. The +10% annualized organic growth in Target Date flows in the quarter was the lowest 1st quarter growth rate in the history of the product and with deliberate 1H seasonality raises the risk that trends will decelerate throughout the year. Outside of the positive quarter for fund raising, the TROW enterprise is still heavily dependent on the market to increase its billable assets with market returns since 2009 responsible for $4 out of every $5 raised by the company (market returns since '09 have tallied $409 billion compared to $77 billion in organic net new asset growth). With margins compressing and intermediate term trends still outlining substantial share gain by passives, we maintain our Short view on shares.  

 

Both sides of the House including Target Date and Non Target Date contributed to a positive first quarter in fund raising for the firm:

 

T. Rowe Price (TROW) | Compressing Margins - chart12

 

However Target Date growth rates on a rolling 4 quarter moving average are now well below double digits at +8% growth with the rest of the franchise still averaging a decay or negative growth rate:

 

T. Rowe Price (TROW) | Compressing Margins - chart13

 

And margins are dropping substantially to new cycle lows as the company continues to add employees and distribution which raises the stakes that the market will have to continue to perform to keep TROW AUM and earnings stable:

 

T. Rowe Price (TROW) | Compressing Margins - chart14 

 

Our fundamental, intermediate term thesis outlined in our recent Black Book is unchanged and rests on the following:

 

The shift from active to passive continues to accelerate and 67% of passive inflows are going to Large Cap strategies. TROW has the largest percentage of Large Cap product of any public mutual fund manager and when including SMAs, TROW's Large Cap exposure goes to over 40% of total assets-under-management:

 

T. Rowe Price (TROW) | Compressing Margins - replay 2

 

T. Rowe Price (TROW) | Compressing Margins - replay 3

 

2.) The firm's Target Date franchise is its go to source of growth, however the oldest Baby Boomers turned 65 in 2011 and now three Series of TROW target date products are in redemption. The hump gets worse in the distribution into the 2020 series which is the second biggest pool of TD assets for the manager. Target date is the only source of growth currently in the overall complex.

 

T. Rowe Price (TROW) | Compressing Margins - replay 5

 

3.) TROW is once again at peak margins and profitability and after setting a new high water mark in 2013 at over 48% operating margins, results are set to recede. TROW will also be bumping up against a break point in fees at over $500 billion in mutual fund AUM which won't help margins. We have earnings at $4.06 for 2017, -17% below the Street before considering that the stock's multiple should also contract against the group.

 

T. Rowe Price (TROW) | Compressing Margins - chart7

 

T. Rowe Price (TROW) | Compressing Margins - replay 8

 

TROW Best Ideas Short Call - Paddling UpStream

 

 Please let us know of any questions.

 

 Jonathan Casteleyn, CFA, CMT 

  

  

 

 Joshua Steiner, CFA

 

 

 

 


The Macro Show with Hedgeye CEO Keith McCullough Replay | April 27, 2016

CLICK HERE to access the associated slides. 

An audio-only replay of today's show is available here.


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