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Are 10 Million Americans About To Be Screwed Out Of Their Pensions? $KR

Takeaway: We see 20%-40% downside for shares of Kroger from current levels. Not to mention the massive potential pain ahead for pensioners.

Are 10 Million Americans About To Be Screwed Out Of Their Pensions? $KR - traffic light

 

Earlier this spring, I presented my short call on Kroger (KR), arguing that America’s largest supermarket chain was feeling the increased pressure of an intensely competitive food retail environment. That’s the plain vanilla rationale behind my bear case. But there’s more.

 

One of the more distressing risks lurking beneath the surface—one that represents a threat not only to shareholders, but to pensioners as well—is Kroger’s exposure to a large number of multi-employer pension plans (MPPs). The company intentionally keeps these plans in an underfunded status and this has the potential to backfire on the company. In addition to increasing annual costs, the company’s total exposure to these plans, in another downturn, is potentially debilitating.

 

Kroger’s woes are emblematic of an affliction plaguing pension funds across the country. It’s the same old story – chronic underfunding, as the swelling ranks of retirees overtake a smaller base of currently contributing employees.

 

To underscore the issue at hand, MPPs are the primary source of retirement income for over ten million active, inactive and retired workers and their survivors. A number of these pension plans, much like their state-run brethren, are severely underfunded. In a report to Congress in 2013, the Pension Benefit Guaranty Corporation (PBGC) estimated that MPPs have $757 billion in pension benefit liabilities, $391 billion of which are unfunded obligations. No small potatoes.

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[UNLOCKED] Fund Flow Survey | Brexit-ing Equity Mutual Funds

Takeaway: Brexit worries prompted investors to pull funds from all but three asset classes last week.

Editor's Note: Below is a complimentary research note originally published June 23, 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 June 15th, Brexit worries prompted investors to withdraw funds from every asset class but investment grade bonds, municipals, and ICI's other bond category which took in +$469 million, +$1.6 billion, and +$512 million respectively. Total equity mutual fund and ETF flows came in at -$6.0 billion while total bond mutual funds and ETFs were virtually flat with a -$2 million outflow. With the Brexit vote ongoing today, we expect another weak survey next week which will capture more jitters ahead of this volatility event. Year-to-date, Bond ETFs have been the best category with +$3.7 billion in subscriptions on average each week (versus a weekly mean in 2015 of just +$571 million). Municipal bond funds have also been high grossing with +$1.3 billion in subscriptions per week versus just a +$313 million average last year.


[UNLOCKED] Fund Flow Survey | Brexit-ing Equity Mutual Funds - ICI19

 

In the most recent 5-day period ending June 15th, total equity mutual funds put up net outflows of -$5.9 billion, trailing the year-to-date weekly average outflow of -$2.7 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$1.5 billion, trailing the year-to-date weekly average inflow of +$2.4 billion but outpacing the 2015 average outflow of -$475 million.

 

Equity ETFs had net redemptions of -$167 million, outpacing the year-to-date weekly average outflow of -$864 million but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net outflows of -$1.5 billion, trailing the year-to-date weekly average inflow of +$1.4 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 | Brexit-ing Equity Mutual Funds - ICI2

 

[UNLOCKED] Fund Flow Survey | Brexit-ing Equity Mutual Funds - ICI3

 

[UNLOCKED] Fund Flow Survey | Brexit-ing Equity Mutual Funds - ICI4

 

[UNLOCKED] Fund Flow Survey | Brexit-ing Equity Mutual Funds - ICI5

 

[UNLOCKED] Fund Flow Survey | Brexit-ing Equity Mutual Funds - 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 | Brexit-ing Equity Mutual Funds - ICI12

 

[UNLOCKED] Fund Flow Survey | Brexit-ing Equity Mutual Funds - ICI13

 

[UNLOCKED] Fund Flow Survey | Brexit-ing Equity Mutual Funds - ICI14

 

[UNLOCKED] Fund Flow Survey | Brexit-ing Equity Mutual Funds - ICI15

 

[UNLOCKED] Fund Flow Survey | Brexit-ing Equity Mutual Funds - 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 | Brexit-ing Equity Mutual Funds - ICI7

 

[UNLOCKED] Fund Flow Survey | Brexit-ing Equity Mutual Funds - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: There wasn't a large standout in sector SPDR ETFs this week, but the materials XLB ETF saw the largest percentage outflow of -2% or -$68 million.

 

[UNLOCKED] Fund Flow Survey | Brexit-ing Equity Mutual Funds - 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 | Brexit-ing Equity Mutual Funds - ICI17

 

[UNLOCKED] Fund Flow Survey | Brexit-ing Equity Mutual Funds - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$6.0 billion spread for the week (-$6.0 billion of total equity outflow net of the -$2 million outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is -$2.8 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 | Brexit-ing Equity Mutual Funds - 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 | Brexit-ing Equity Mutual Funds - ICI11


The Folly of Fed Central Planning & Unintended Consequences

The Folly of Fed Central Planning & Unintended Consequences - Fed dunce cap cartoon 12.23.2015

 

As we've been noting in the past few days, the market is not assigning a more than 50% probability of a Fed rate hike until the beginning of 2018. 

 

That's right... a year and a half from now.

 

Meanwhile, rate CUT expectations have spiked and the market marches higher. Here's analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"Watching the Old Wall (and it’s media) shift to “Fed on Hold, buy stocks” is funny – but a friendly reminder that this is not funny if you are a bank; 1.44% 10yr Yield minus 0.62% 2yr = fresh YTD low (and low for #TheCycle) as trending US employment growth continues to slow ex-Brexit."

 

 

Below is a chart of 10s/2s yield spread. Notice that the last time it was at its current level the U.S. economy was in recession:

 

The Folly of Fed Central Planning & Unintended Consequences - yield spread 6 29

 

In short, the compression of the yield spread means pain for bank net interest margins... which is why bank stocks look like this year-to-date: 

 

Ouch!

 

The Folly of Fed Central Planning & Unintended Consequences - xlf financials

 

Take a look at the U.S. equity market sector scorecard.

 

Note: Our favorite sector long Utilities (XLU) continues to outperform Financials (XLF) by a wide margin:

 

 

What to do?

 

Stick with what's working in 2016. Long Utilities, Short Financials


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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 29

 

Daily Market Data Dump: Wednesday - sector performance 6 29

 

Daily Market Data Dump: Wednesday - volume 6 29

 

Daily Market Data Dump: Wednesday - rates and spreads 6 29

 

Daily Market Data Dump: Wednesday - currencies 6 29


CHART OF THE DAY: A Closer Look At Housing Cost Burdens

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to learn more.

 

"... As can be seen in the Chart of the Day below, almost half of all renter households make less than $75K so the incidence of moderate and severe cost burdens is the prevailing reality for over 20 million households.

 

And as housing’s share of wallet grows, capacity for other discretionary consumption declines proportionally.  Indeed, severely cost burdened households spend more on transportation costs and significantly less on Food, Healthcare and retirement savings."

 

CHART OF THE DAY: A Closer Look At Housing Cost Burdens - 06.29.16 Cost Burden CoD


Eviscerated ... $12,000,000,000,000+ Erased Since Global Equity Top

Takeaway: Global equities have lost $12 trillion in market cap since peaking last June. That's a 19.9% decline!

Eviscerated ... $12,000,000,000,000+ Erased Since Global Equity Top - Stocks crash test dummies cartoon 02.18.2016

 

Don't believe that the global economy is slowing?

 

Since peaking last June, global equities have lost $12 trillion in market cap as of this morning. Take a look below at the Bloomberg World Exchange Market Capitalization index.

 

Yep. That's a 19.9% decline...one hair away from full-blown crash mode.

 

Eviscerated ... $12,000,000,000,000+ Erased Since Global Equity Top - bloomberg world market cap

 

Here's a look at select equity markets around the globe and their drawdowns since then:

 

Eviscerated ... $12,000,000,000,000+ Erased Since Global Equity Top - global equities 6 29

 

What's the big message here?

 

For starters, global demand hasn't bottomed ... and the outlook remains unequivocally bearish.


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