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[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust

Takeaway: Defensive bond flows continued to outpace equity by $8.3 B last week, although slightly less than $12.3 B in the prior week.

Editor's Note: Below is a complimentary research note originally published May 26, 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:

Fund flows in the 5-day period ending May 18th were directionally the same as the prior week as investors continued to make defensive allocations, although the spread between bond and equity flows eased somewhat with bond flows outpacing equity by $8.3 billion, slightly less than $12.3 billion in the previous week. Leading this defensive trend over the past 15 weeks has been the price of Federated Investors stock (FII). As the leading public money fund manager in money funds and other short term fixed income instruments, Federated benefits from defensive allocatoins, and its stock price has risen +31% since February 1st and is up +13% year-to-date before a solid +3% dividend yield. Federated Investors has been a Best Ideas long since December 2014 and remains on our top ideas list in Financials.

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI1 2 normal 6 1

 

All domestic equity categories continued to bleed last week, losing -$2.0 billion. Equity ETFs also continued their string of losses with -$2.0 billion in outflows. Meanwhile international equity mutual funds took in +$844 million. In fixed income, investment grade, other, and tax-free bond funds all continued last week's inflows, taking in +$2.6 billion, +$1.6 billion, and +$2.2 billion respectively. Additionally, fixed income ETF flows accelerated to +$1.5 billion. Meanwhile, high yield and global bond funds lost -$695 million and -$2.0 billion respectively. Finally, investors shored up +$4 billion of cash in money funds last week.


[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI19

 

In the most recent 5-day period ending May 18th, total equity mutual funds put up net outflows of -$1.2 billion, outpacing the year-to-date weekly average outflow of -$2.1 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$3.7 billion, outpacing the year-to-date weekly average inflow of +$2.4 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net redemptions of -$2.0 billion, trailing the year-to-date weekly average outflow of -$1.4 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.5 billion, trailing the year-to-date weekly average inflow of +$1.6 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 | In Federated (Investors) We Trust - ICI2

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI3

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI4

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI5

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - 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 | In Federated (Investors) We Trust - ICI12

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI13

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI14


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 | In Federated (Investors) We Trust - ICI7

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors pulled -$568 million or -4% from the health care XLV ETF.

 

[UNLOCKED] Fund Flow Survey | In Federated (Investors) We Trust - ICI9


Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$8.3 billion spread for the week (-$3.1 billion of total equity outflow net of the +$5.2 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 -$1.7 billion (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 | In Federated (Investors) We Trust - 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 | In Federated (Investors) We Trust - ICI11


PMI's, Yields, SP500

Client Talking Points

PMI's

One narrative (for almost a year now) has been that “PMIs have bottomed” – and, clearly, post yesterday’s Chicago PMI of 49.3, last night’s China PMI of 50.2, and this morning’s 3 month low Eurozone PMI of 51.5, they have not – neither has copper and/or “Chinese demand”.

Yields

Around the world (Swiss 10yr yield hitting new lows this am at -0.40%), long-term yields have had #TheCycle right from a GDP #GrowthSlowing perspective – question now is, with the Fed “probably” raising rates in June/July, what do we do with our league leading positions in Long-Term Bonds, Munis, Utes, etc? We say it’s time to book some gains and enjoy the summer – we can always buy them back.

SP500

It’s a good thing they ramped SPX +1.4% on May 24th on a down -16% volume day (vs. the 1 month avg) – that all but ensured that many aren’t “beating the market” YTD unless they were super long #GrowthSlowing (Utes, XLU +13.6% YTD) and/or Reflation (Energy +10.9% YTD) for the period (MAR/APR) when Janet was diving dovish… now back to hawkish, because all is well, eh?

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/31/16 77% 0% 0% 6% 11% 6%
6/1/16 77% 0% 0% 6% 11% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/31/16 77% 0% 0% 18% 33% 18%
6/1/16 77% 0% 0% 18% 33% 18%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
MCD

For some perspective on the Macro environment and why we favor companies like McDonald's (MCD), here's an excerpt from the Early Look written by Hedgeye CEO Keith McCullough:

 

Taking a step back, don’t forget where US Consumers (70% of GDP) were at this time last year:

 

  • US Employment Growth (NFP) was putting in a cycle peak
  • US Consumer Confidence was putting in a cycle peak
  • US Consumption Growth was putting in a cycle peak

 

Peak. Peak. #Peak!

 

And what happens when you start to lap the cycle peak? Well, instead of crappy Baby Boom capacity putting up mediocre (barely positive) same store sales at the peak, they look even crappier on the back side of the cycle."

 

That's why we like large-cap, low-beta, liquid companies like McDonald's in this tumultuous market environment. Case in point, earlier in the week, MCD hit an all-time high. Since we added the company to Investing Ideas, it is up almost 30%.

 

Stick with it. Restaurants analyst Howard Penney reiterates his "road to $150" call, implyling more than 15% upside from here.

TLT

Credit markets are one of the major beneficiaries (maybe the largest) of the reflation trade since February. While yield spread compression has been a positive for Long Bonds (TLT, ZROZ), a perceived monetary policy shift and a collapse in bond market volatility expectations have been a positive for Junk Bonds (JNK), but we don’t expect it to continue.

 

With growth continuing to slow alongside consensus positioning broadly, downside deflation risk is on the table. As we’ve highlighted on a daily basis, consumption growth and labor market growth peaked in Q1 2015 and both are slowing alongside a continued corporate profits slowdown. This mix:

  • Smells like incremental deflation on the margin;
  • Is a huge risk for high yield credit (JNK);

 

ZROZ

In our view, the probability that the Federal Reserve continues on a tightening course is next to nil if #LateCycle employment data continues to deteriorate, and there are signs that is happening. For example, one of the slides in our Q2 macro themes deck provides a long history of one of Janet’s favorite indicators, the “Change in Labor Market Conditions Index.”

 

This index has trended positive for the balance of the cycle until 2016. The index has now dipped into negative territory for four consecutive months to the lowest readings since June of 2009. 

 

Does Janet want to be the catalyst in expediting that? When the bars in the chart above start to dip deep into red territory, she has to be dovish – it’s part of her playbook, and the dovish pivot will continue to be supportive of #GrowthSlowing allocations on the margin (like Long Bonds (TLT, ZROZ), and especially Gold (GLD). 

 

Three for the Road

TWEET OF THE DAY

[NEW] About Everything: Department Stores = Endangered Species? https://app.hedgeye.com/insights/51291-about-everything-everything-must-go … via @HoweGeneration $JWN $TGT $WMT $M $JCP $DDS

@Hedgeye

QUOTE OF THE DAY

"If you're going to have to bed them to play, it's  not going to work."

-Chuck Daly

STAT OF THE DAY

Without the 3 point line, Jerry West scored 2,309 points and recorded 1,240 rebounds during his career at West Virginia University.


Daily Market Data Dump: Wednesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Wednesday - equity markets 6 1

 

Daily Market Data Dump: Wednesday - sector performance 6 1

 

Daily Market Data Dump: Wednesday - volume 6 1

 

Daily Market Data Dump: Wednesday - rates and spreads 6 1

 

Daily Market Data Dump: Wednesday - currencies 6 1


investing ideas

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

CHART OF THE DAY: Investor Consensus = Bearish On Bonds & U.S. Dollar... WHY?

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.

 

"... One such incongruence that needs to work its way through markets is the relatively bearish position on both Treasuries (across the curve) and the U.S. Dollar Index in the futures and options markets.

 

Specifically, the +11.2k net long position on the latter represents a -1.7 z-score on a 1Y basis, while the -148.9k net short position in 2Y notes and -93.5k net short position in 10Y bonds represent z-scores of -1.4 and -1.6, respectively. How can investor consensus be that bearish on bonds amid a hawkish Fed, but not commensurately bullish on the dollar?"

 

CHART OF THE DAY: Investor Consensus = Bearish On Bonds & U.S. Dollar... WHY? - Chart of the Day 6 1


Something’s Gotta Give

“One of these things is not like the others.”

-Big Bird

 

One such incongruence that needs to work its way through markets is the relatively bearish position on both Treasuries (across the curve) and the U.S. Dollar Index in the futures and options markets.

 

Specifically, the +11.2k net long position on the latter represents a -1.7 z-score on a 1Y basis, while the -148.9k net short position in 2Y notes and -93.5k net short position in 10Y bonds represent z-scores of -1.4 and -1.6, respectively. How can investor consensus be that bearish on bonds amid a hawkish Fed, but not commensurately bullish on the dollar?

 

Something’s Gotta Give - Hawk or dove cartoon 05.31.2016

 

Back to the Global Macro Grind

 

We’re not so sure how to answer that question, but with the nascent trend of higher-lows in the U.S. dollar (up +2.7% MoM on the DXY and +2.9% on a broad trade-weighted basis) remaining a general headwind to reflation assets broadly, we thought this would be a good opportunity to highlight two policy catalysts emanating from the Far East that may serve to catalyze incremental upside in the underowned USD from here:

 

Japanese Officials Are Increasingly Worried:

 

  • The latest batch of high-frequency economic data in Japan continued to leave investors and policymakers alike wanting for more in terms of seeing material benefits from Abenomics. Specifically, various metrics of consumer spending growth remained in contraction despite accelerating sequentially (retail sales were down -0.8% YoY in APR, while overall household spending fell -0.4% YoY). Industrial production decelerated sharply to -3.5% YoY amid a deepening of deflation (headline CPI slowed to -0.3% YoY from -0.1% prior) and a -20bps deceleration in core CPI to +0.9% YoY. This follows last week’s sequential deceleration in Japan’s flash manufacturing PMI to 47.6 in MAY – the lowest reading on record – as well as export growth that plunged -10.1% YoY in APR.
  • In response to this general deterioration in reported growth and inflation, Prime Minister Shinzo Abe has ratcheted up pledges of fiscal support, which is in line with his recent pleas to other G7 officials. Specifically, in a press conference today, Abe announced his plan to delay next April’s scheduled +200bps consumption tax increase by 2.5 years to October 2019. This decision is accompanied by his decision to forgo snap elections in the lower house (which itself subsequently rejected a no confidence motion drawn up by opposition leaders). In addition to the aforementioned measures, Abe is allegedly mulling the introduction of Japan’s second supplementary budget this year, which would likely fall in the ¥5-10T ($45-90B) range and be introduced after next month’s upper house elections.
  • The decision to shift to a more fiscally-oriented policy support strategy in Japan comes amid more toned-down rhetoric out of BoJ Governor Haruhiko Kuroda – at least in terms of frequency (he’s only made material public statements twice over the past week). That said, however, he was keen to reiterate his consistent message of the BoJ’s commitment to its +2% inflation target and the board’s willingness to do ‘whatever it takes’ to accomplish that goal. As outlined in our recent work, we continue to think the BoJ is setting up to expand monetary policy over the next 1-2 months and that has been generally reflected in Japanese financial markets over the past month with the Nikkei 225 Index up +1.7%, the JPY down -2.8% vs. the USD, 1Y OIS Spreads -2bps narrower, 10Y Yields -4bps lower and 5Y5Y Breakeven Rates +3bps higher. All told, Japan looks to have unofficially exited the unofficial global FX détente – an outcome that is right in line with our expectations over the past 4-6 weeks.

 

Chinese Officials Are Not (But You Should Be):

 

  • Arguably the most important development out of China in recent weeks is the PBoC reaffirming its commitment to exchange rate reform – specifically to boosting two-way flexibility and the market’s impact on setting the exchange rate. This affirmation was in response to speculative reports put forth by the Western media that Beijing has since deviated from this policy path in favor of reduced FX volatility via tighter capital controls. To the extent such reports are indeed false in the sense that Beijing remains committed to market-oriented exchange rate reform, it would be wise for investors to brace for another round of China-centric headline risk – particularly if the Fed is keen to make another policy error next month by tightening into a trending slowdown across both the domestic and global economies.
  • Specifically, if the capital outflows which perpetuated broad-based economic and financial stability concerns in China were indeed a catalyst for G20 policymakers to institute the so-called “Shanghai Accord” and a sharply-dovish pivot out of the Fed, Janet Yellen will be pleased to note that said capital outflows have likely reversed following what had been accelerated foreign currency debt repayment by mainland enterprises. Specifically, China’s FX reserves are showing a nascent trend of positive growth, up +$10.3B and +$7.1B in MAR and APR, respectively. The aforementioned growth figures compare to declines of -$87B, -$108B, -$100B and -$29B in NOV, DEC, JAN and FEB, respectively. Capital account stability in China may have sown the seeds of its own future instability via an incrementally hawkish Fed.
  • All that being said, it is unlikely that the next bout of China concerns will be as concerning as the previous iteration which acted as a bearish overhang for risk assets for much of 2H15 and into the early part of this year. Specifically, the propensity for the PBoC to revalue the CNY lower in a seemingly hurried manner has been dramatically reduced, thanks to a dramatic narrowing of critical spreads; the spread between the onshore spot rate and the PBoC’s reference rate is now +13bps (vs. -1.5% in early AUG and -0.7% in early FEB) while the spread between the onshore and offshore yuan has narrowed to -11bps (vs. -1.8% in early SEP and -2.1% in early JAN).
  • It’s interesting to note that FX-related financial stability risk has largely subsided in China despite the PBoC revaluing its reference rate to the lowest level in over five years. As previously alluded to, a critical component of this reduced risk is the fact that peak/near-peak foreign currency debt repayment is likely a thing of the past for the time being. We arrive at this conclusion based on the sharp deceleration in total social financing growth to 751B CNY in APR vs. 2.3T CNY in MAY and the fact that 42% of prospectuses for corporate bond issues contain language that earmarks funds to pay outstanding debts in the YTD (up from 8% in 2014).
  • The key takeaway here is that if Beijing is less concerned about financial stability risk, it will be less inclined to support growth with monetary and fiscal policy. This move to tighter policy is already underway, as highlighted in our 5/20 note titled “A LOT Happened Across Asia, LatAm and EEMEA This Past Week…”; the reasons why Chinese policymakers are getting hawkish, at the margins, are detailed in our 5/2 note titled, “Post Stabilization, Are You Now Too Sanguine On China?”. In short, less policy support is not good in the context of the preponderance of key high-frequency growth indicators negatively inflecting from what had been a trend of stabilization in the month of APR and continuing here in MAY with the advent of this morning’s PMI figures.

 

All told, the aforementioned developments are but two of the external catalysts that we think are likely to perpetuate upside in the U.S. dollar from here on both a narrow and broad trade-weighted basis; a likely exit from the aforementioned global FX détente out of the ECB is another.

 

Assuming long-term correlations hold – a critical assumption given the lasting strength in the energy market – we expect incremental dollar strength to weigh upon reflation assets broadly (it’s already happening across emerging markets with the EEM ETF down -5.6% since peaking on 4/20).

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.74-1.91% (bearish)

SPX 2042-2109 (bearish)
Nikkei 161 (bearish)

DAX 90 (bearish)

VIX 12.74-16.99 (bullish)
EUR/USD 1.10-1.12 (bearish)
YEN 109.10-111.63 (bullish)
Oil (WTI) 46.60-50.05 (bullish)

Gold 1 (bullish)

 

Keep your head on a swivel,

 

DD

 

Darius Dale

Director

 

Something’s Gotta Give - Chart of the Day 6 1


The Macro Show with Darius Dale Replay | June 1, 2016

CLICK HERE to access the associated slides.

 


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