Monday, May 6, 2013

Fund flows show investors still cautious

With data as of last week, ICI's tally of equity fund flows shows no net inflows for the past two months, even as equity prices have hit new all-time highs. Bond funds, meanwhile, continue to enjoy strong inflows, even as bond yields remain very near all-time lows. Mutual fund flows thus reflect a market that is still dominated by caution.



The chart below is a reminder of just how low 10-yr Treasury yields are from a long-term historical perspective:


The chart below is a reminder that the real yield on TIPS tends to track the economy's health:


Negative real yields imply that investors have very pessimistic assumptions for economic growth over the next few years. This jibes with the dearth of equity fund inflows. There is a real shortage of optimism out there.

12 comments:

Public Library said...

The bond market knows the Fed is never exiting.

Compare the decline in 10yr rates between Japan and the US from crisis start points but let the JPY rate contiue on through today.

Stikingly similar path and gives you an approximately 50% drop from here on where US 10yr rates can go.

Down, down, down...

William said...

I read an interesting thought last week about a possible Fed exit strategy which wouldn't rile the equity market - gradually stop the QE and simply let the purchased US bonds and MBS mature over the next ten years thereby winding them down quietly.

Scott Grannis said...

Re: QE exit. Allowing securities to mature and not reinvesting principal and interest is almost sure to be part of the Fed's exit strategy. But they will also need to raise the interest rate paid on bank reserves, and that will push interest rates in general higher.

Benjamin said...

Scott Grannis: Why on earth would the Fed raise interest rates paid on excess reserves (IOER)?

The last PCE inflation rate came in at 1.1 percent, y-o-y.

We are talking Japan-style inflation, historically low rates of inflation, sinking rates of inflation.

Not only is the Fed way below its target, it is way, way below what might be a reasonable rate on inflation for an economy that is still not generating real job growth.

You know, when Volcker was Volcker, he got inflation down to five percent, and the WSJ told him enough is enough, and he was regarded as a great inflation fighter, and Ronald Reagan was too.

Now, we are at 1.1 percent and sinking, and everyone is fretting about inflation.

Sometimes, I wonder. When does a concern become an fixation, then an obsession?

The 1970s are over, and the structural impediments of the 1970s that helped inflation survive are gone (also Burns erroneously believed you could not fight inflation with tight money).

There is no more unions in the private sector, and international trade is robust, unlike the 1979s. Banks, rails, trucks, airlines, phones deregulated.

If we keep fighting inflation, we will only end up like Japan: Permanent and growing federal deficits, and extremely weak growth and frequent recessions.

The safe thing now is a very aggressive, growth-orinted monetary policy.





theyenguy said...

Many should have been optimistic, and invested in a risk-on Global ZIRP, currency carry trade and Aggregate Credit driven Crack Up Boom in equity investment in Nation Investment, EFA, specifically in Ireland, EIRL, the Philippines, EPHE, New Zealand, ENZL, and Thailand, THD, as well as sector investment in Homebuilding, ITB, Consumer Services, IYC, Biotechnology, IBB, Dynamic Media, PBS, and Global Financials, IXG, as well as credit investment in Junk Bonds, JNK, Ultra High Yield Bonds, UJB, Junk Bonds, JNK, Senior Bank Loans, BKLN, and Distressed Investments, FAGIX.

On Monday April 6, 2013, Electric Utilities, XLU, traded 1.4% lower, as the 10 30 US Sovereing Debt Yield Curve, $TNX:$TYX, steepened. A steepening yield curve, seen in the chart of the Steepner ETF, STPP, steepening, is deleterious to electric utility stocks, as they are loaded with debt, especially long term debt.

The electric utilities which had been doing better than their peer group traded strongly lower; these utilities, with their Long Term Debt to Equity Ratio, and yield are presented below:

AEP, 1.0 and 3.8% yield, -1.2%

DTE, 1.0 and 3.5% yield, -1.6%

NEE, 1.4 and 3.3% yield, -1.4%

D, 1.5 and 3.7% yield, -0.7%

PNW, 0.8 and 3.6% yield, -1.3%

WEC, 1.1 and 3.1% yield, -1.7%

CMS, 2.1 and 3.5% yield, -1.4%.
This heavily endebted electric utility stock was one of the best performing utility stock in the last six months, as is seen in this ongoing Yahoo Finance chart. Under the development of Global ZIRP, seen in the trade higher of the Euro Yen Currency Carry Trade, EUR/JPY, that is FXE:FXY, beginning in August 2012, as well as an ongoing rise of Aggegrate Credit, AGG, investors favored stocks that were debt laden, as the pursuit of yield ensued.

David Fabian, Fabian Capital Management, writes in Seeking Alpha, that the iShares 20+ Yr Treasury Bond Fund TLT traded 2.36%, lower on Friday April 6, 2013, as the yield on the 10-Year Treasury Note, ^TNX, rose 7.42%, to close up at its 200day average of 1.75%.

Financial Times reports US junk debt yield hits historic low.

The trade lower in Electric Utilities, XLU, suggests that chasing yield is over; look for all of these yield bearing equity and debt investments, seen in this Finviz Screener, PSP, UJB, KBWY, ROOF, DRW, AUSE, DBU, XLU, REM, IST, SEA, BRAF, FNIO, REZ, PGF, IYR, KBWD, DTN, TAO, FLOT, to trade lower on the exhaustion of the world central banks’ monetary authority to continue to stimulate global growth and trade and to prevent sovereign default in the Eurozone.

Over the last six months, Leveraged Buyouts, PSP, (yielding 3.7%) Premium Yield Equity REITS, KBWY, (yielding 4.1%), Small Cap Real Estate, ROOF, (yielding 4.1%, and Australian Dividends, AUSE, (yielding 4.1%), were the the best paying dividend equity investments, as is seen in their combined ongoing Yahoo Finance Chart. Their seigniorage, that is their moneyness, came from Global ZIRP, as well as from the US Fed continuing to buy Morgtage Backed bonds, MBB, which has fallen parabolically lower in value, when World Stocks, VT, blasted higher on Friday May 3, 2013, on excitement that the ECB had lowered its interest rate.

With the trade lower in Aggregate Credit, AGG, a see-saw destruction of wealth is underway, where World Stocks, VT, and Aggregate Credit, AGG, will alternatively turn ever lower, on competitive currency deflation, which will be seen in Major World Currencies, DBV, and Emerging Market Currencies, CEW, trading lower in value, as all forms of fiat wealth, equity, credit, currencies, will join commodities, falling into the pit of financial abandon, as the dynamos of global growth, and corporate profitability wind down Crony Capitalism, European Socialism, Greek Socialism; and the dynamos of regional security, stability, and sustainability, wind up Regionalism.

Benjamin said...

You gotta love 15k on the Dow, an all-time record, and a milestone that will have an effect on optimism.

Hate to say it, but what happened under Clinton, then Bush jr. then Obama, when it comes to the Dow?

f the GOP wants my vote (which would be easy if they just tried), they will have to show they are serious about governance, and not just about getting into expensive and useless wars....

The record under Clinton, Bush jr and Obama does not justify a GOP vote...and barely a Dem vote, but that is where it stands now....

William McKibbin said...

I am terrified of big government Democrats and military-industrial Republicans -- absolutely terrified...

William McKibbin said...

PS: In fact, I am more terrified of big government Democrats and military-industrial Republicans than I am of Al-Qaeda...

William McKibbin said...

PPS: And how about Scott's 10-year treasury yield chart -- is everyone now terrified -- we should be...

William McKibbin said...

Benjamin, I would not bank on near or mid-term monetary expansion other than what we see already -- any monetary expansion we have seen to date has only been sufficient to offset deflation, which was the Fed's goal in the first place -- I would also rule out significant cuts in government spending under the big government Democrats and military-industrial Republicans -- in the end, entitlements and overseas wars will continue indefinitely, or until a "shock" occurs -- which is my point -- everyone should be preparing for what we cannot see coming, and I mean something very big that will enable the US restructure itself instantly -- for example, an "Al-Qaeda" attack the kills 100,000 plus US citizens requiring imposition of martial law -- I am terrified at this point -- the only good news is that world-class skills continue to earn premium wages that convert into cheap dividend and rent-earning equities right now -- in the mean time, unaccredited investors should be under cover preparing for the storm that is coming...

William McKibbin said...

PPPPS: No one should doubt that accredited investors have already created alternative "quick escape" living arrangements overseas in neutral countries -- now is a good time to own a home in Scandanavia, South America, South Africa, or perhaps a Carribean or Pacific island -- we are entering dark times, folks...

Jason Mertz said...

curious if any have seen fund flows broken down as to where within the "bond fund" world are the flows going? Best guess would HYLD...