Shares of WisdomTree (WETF) are down over 35% since Hedgeye Financials analyst Jonathan Casteleyn issued his short call earlier this year. In the excerpt below from The Macro Show this morning, he explains why WisdomTree funds are hemorrhaging money and are overly dependent on easy money.
Takeaway: Dark skies for WisdomTree don't appear to be abating anytime soon.
Editor's Note: Hedgeye Financials analyst Jonathan Casteleyn was on The Macro Show this morning discussing Brexit, European equities and a number of his high-conviction long and short calls. Below is an abridged transcript from today's episode in which Casteleyn explains why investors in European equities should "avoid the whole region."
“This is what I think we should be talking about in Europe. The region is actually really unappealing as you can see in this time series of European bank stocks [see below].
Out of the 2008-2009 Financial Crisis, you saw a slight rebound in the banking sector but there’s been no recovery. Rates are down, growth is down, deflation is moving into the economy and there’s been no rebound in financial company profits. Essentially, the banks are dis-incentivized to make loans because they can’t do it profitably.
Remember, this chart has nothing to do with Brexit and is proof that the financial sector is not a place to invest. Since credit is the lifeblood of the economy, the pull forward of consumption, Europe is in massive distress.
We just want to avoid the whole region.”
Takeaway: Total equity products are averaging a weekly redemption of -$3.4 billion versus fixed income which is bringing in +$3.9 billion per week.
Editor's Note: Below is a complimentary research note originally published June 16, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email firstname.lastname@example.org.
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Investment Company Institute Mutual Fund Data and ETF Money Flow:
In the 5-day period ending June 8th, Large Cap and Emerging Markets were the only active equity categories to have net contributions. Large Cap took in meager +$346 million and Emerging Markets gained +$130 million, however losses in the other categories brought total equity mutual fund flows to -$3.8 billion. Meanwhile, active fixed income flows came in strongly at +$5.0 billion. Global bonds, with a -$755 million outflow, was the only fixed income category to experience a net withdrawal. In passive ETFs, bond inflows of +$2.9 billion slightly outpaced equity ETF contributions of +$2.3 billion. The year-to-date scorecard is telling with total equity products (including ETFs) shedding -$3.4 billion versus all fixed income product which is averaging +3.9 billion in subscriptions (lead by tax-free munis with a +1.2 billion weekly average inflow).
In the most recent 5-day period ending June 8th, total equity mutual funds put up net outflows of -$3.8 billion, trailing the year-to-date weekly average outflow of -$2.5 billion and the 2015 average outflow of -$1.6 billion.
Fixed income mutual funds put up net inflows of +$5.0 billion, outpacing the year-to-date weekly average inflow of +$2.5 billion and the 2015 average outflow of -$475 million.
Equity ETFs had net subscriptions of +$2.3 billion, outpacing the year-to-date weekly average outflow of -$895 million but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$2.9 billion, outpacing the year-to-date weekly average inflow of +$1.5 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 contributed +$537 million or +4% to the health care XLV ETF and +$331 million or +4% to the long treasury TLT 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 -$9.4 billion spread for the week (-$1.5 billion of total equity outflow net of the +$7.9 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 -$2.4 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.)
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:
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Takeaway: A closer look at global macro market developments.
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"Thank goodness for no Brexit - we were running out of global equity bull market catalysts!" Hedgeye CEO Keith McCullough wrote in a note to subscribers this morning.
European equity markets surged on the news that Brexit polling showed a "resurgence" of the "Remain" camp. Here's the latest from MarketWatch:
"An opinion poll by Survation for newspaper the Mail on Sunday showed 45% in favor of remaining and 42% in favor of leaving. That telephone poll was conducted Friday and Saturday, after the killing of British politician Jo Cox. It shows a swing back to “remain,” as a previous survey conducted on Thursday by Survation had put Brexit in the lead by 3 points."
But take a look at the latest aggregate polling below, which shows "stay or leave" odds at essentially a coin toss (with 11% of the electorate undecided heading into Thursday's vote):
Here's additional Brexit analysis from McCullough:
"FTSE: +2.6% (DAX +3.3%) in a straight line to 6172 with intermediate-term TREND line up at 6335; anything that isn’t closed in Global Equity markets doing the same so they better not Brexit!"
"Big pop for Pound vs. USD of +1.8% taking it right back to where it’s been twice now (1.46-1.47) in both April and May; can it hold? Sure. Can it do this every day? Doubt it. Everything reflation should love it today regardless (Dollar Down)"
Finally, take a look at today's Chart of the Day, which shows the Pound/U.S. Dollar fluctuations tightly tracking Brexit "Remain" odds.
More to come.
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.
"... So if they the British don’t exit… and:
- The British Pound ramps right back to where it’s been multiple times this year ($1.46-1.47)
- The FTSE rips right back to intermediate-term @Hedgeye TREND resistance of 6335
- All equity markets worldwide go straight up …
What could possibly go wrong?
Nothing, obviously. Until the causal factor (worldwide cyclical and secular #GrowthSlowing) on why most things political that are American, Chinese, European, Japanese, etc. aren’t dying starts to get reported again, that is…"
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