How long can these central planners keep this charlatan charade going?
Takeaway: What a long, strange trip it's been.
Treasury yields peaked at 15.84% ... Ronald Reagan was in the early innings of his 1st term ... Simon & Garfunkel performed in Central Park for 500,000 people ... Home Depot had its IPO eight days earlier ... and the U.S. debt ceiling was raised to one trillion dollars for the first time.
35 years later ... we're saddled with over $19,000,000,000,000 in debt, Hillary Clinton vs Donald Trump, NIRP, Kim Kardashian and Justin Bieber.
Takeaway: M&A is past peak, restructuring won't bail the company out and emerging market exposure continues to weigh on shares.
Market fallout post-Brexit triggered an -11% selloff in Lazard (LAZ) the Friday following the UK referendum. Investors were selling due to its significant European exposure (25% of global advisory revenues) and as concerns mounted about slowing M&A activity industrywide.
Hedgeye Financials analyst Jonathan Casteleyn first recommended institutional subscribers short LAZ on February 12, 2015. Since then, the stock is down -42% versus +0.3% for the S&P 500.
Casteleyn thinks Lazard has additional downside. During an updated Black Book presentation back in January, Casteleyn reiterated his short call. In it, he outlined unrecognized risks and complacency in this highly cyclical company.
Below are the three key takeaways:
After a new high water mark in global mergers and acquisitions in 2015, the Street is still unrealistic about the opportunity for activity into '16. Estimates are still 20% too high based on "flat to up" activity levels for the New Year which ignore various warnings in the data. Our research shows with corporate funding costs on the rise, that every 100 bps rise in credit costs has historically impacted M&A activity by -20%. Thus the backup in credit spreads that started in 1Q15 all but guarantees a negative comp for mergers in '16. In addition, rising private equity percentages in global announcements and also record highs in consideration values signal an exhausted M&A marketplace.
Complacency is also being sourced by "hopeful" insulation that the firm's restructuring business can plug any gap as the revenue opportunity in M&A slows. Historically, the restructuring business has had a 2 year lag after M&A peaks before contributing to results but restructuring cycles have just half the duration of M&A cycles and never fully cover the lost revenue. At just 15% of total advisory revenues across cycle, restructuring is a mild insulation at best.
The firm's most profitable business, asset management, has unfavorable Emerging Market exposure and total non-US exposure sits at over 50% of AUM. The ongoing elevated levels of the U.S. dollar and investments in petro-oriented economies has historically weighed on demand for institutional exposure to non-developed domiciles. We will flesh out what a reasonable yield on Lazard's AUM business is.
For more information on Jonathan's Casteleyn's research email firstname.lastname@example.org
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Takeaway: While defensiveness continued, Brexit optimism ahead of the vote caused total equity MF and ETF outflows to ease somewhat to -$2.6 billion.
Editor's Note: Below is a complimentary research note originally published June 30, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email email@example.com.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Optimism leading up to the Brexit vote caused equity outflows to ease somewhat in the 5-day period ending June 22nd, although total equity mutual funds still put in a -$3.8 billion net withdrawal. Equity ETF inflows of +$1.3 billion brought total equity mutual fund and ETF flows to -$2.6 billion. Meanwhile, investors poured +$10.2 billion into fixed income mutual funds and ETFs, which was the category's best week since June 24, 2015. Money market funds, which experienced -$4 billion in outflows were likely a source of funds for that subscription to fixed income. Given the result of the Brexit vote, we expect defensive reallocations to continue and intensify in next week's survey.
In the most recent 5-day period ending June 22nd, total equity mutual funds put up net outflows of -$3.8 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 +$3.3 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 +$1.3 billion, outpacing the year-to-date weekly average outflow of -$779 million but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$7.0 billion, outpacing the year-to-date weekly average inflow of +$1.6 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, the utilities XLU ETF took in +$214 million or +3% last week.
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 -$12.8 billion spread for the week (-$2.6 billion of total equity outflow net of the +$10.2 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 -$2.7 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.)
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:
Takeaway: You've Got Bail; Tar Heel Takedown; Guns, Ryan and Dems;
Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email firstname.lastname@example.org.
“I not only use all the brains that I have, but all that I can borrow.”
Hillary Clinton and her team dodged a bullet (more like a nuclear bomb) after FBI Director James Comey concluded that the agency will not recommend criminal charges against Clinton or any of her aides over the use of a private email server during her tenure as Secretary of State. Comey’s slap on the wrist had a stern sting to it though - as he further characterized her practices as “extremely careless” but lacking clear evidence of an intent to violate the law.
The release comes just in the nick of time as speculation about Clinton’s meeting with the FBI over the weekend, along with the stir created by the ill-conceived appearance of her husband and Attorney General Lynch were reaching new heights. Clinton now hopes that the remnants of the controversy fade quickly, so she can refocus on rebuilding her image - we think the Republicans won’t give her that chance.
Clinton hit the trail with President Obama to tackle the Tar Heel state while Donald Trump and Senator Bob Corker (TN) tried their own hand just hours away. Clinton and Obama touted their friendship, focusing on why she’s the right leader for the job, while hitting on Trump’s obsession with Twitter. Trump bashed Clinton for her email controversy, and rigging the system (of course).
Trump rallies on the idea that if Clinton is elected, it will be a continuation of Obama’s presidency - maybe so, but Clinton believes that with the help of the president, she can rouse voters and build her own legacy. Top aides believe NC - which Mitt Romney won in 2012 - is the biggest must-win for Trump - and will be on everybody’s mind until November 8.
Though House Democrats put a lot of work into forcing a vote on guns in the coming week, the actual thrust of the legislation remains a sticking point. Democrats believe the Republican proposal does not take sufficiently strong enough action to thwart terrorism, warning that renewed protests are possible later this week. Remember, we have just eight legislative days until a very loooong summer recess. Better get moving.
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