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Lipper Fund Flows: Mass Exit For Money Market Funds

By Patrick Keon Lipper’s fund macro-groups (including both mutual funds and exchange-traded funds [ETFs]) suffered net outflows for the first time in five weeks, with over $8.1 billion leaving their coffers during the fund-flows week ended Wednesday, November 4. Money market funds (-$13.8 billion) accounted for the majority of the net outflows, while taxable bond funds (-$100 million) also posted negative numbers. Equity funds (+$5.7 billion) and municipal bond funds (+$63 million) both had net inflows for the week. The S&P 500 Index (+0.57%) and the Dow Jones Industrial Average (+0.50%) both recorded positive performance numbers for the trading week. These numbers capped a month in which both indices recorded their largest monthly percentage increases since October 2011; the Dow was up 8.5% for October, while the S&P 500 appreciated 8.3% for the month. October’s stellar performance came on the heels of two consecutive down months that saw the S&P 500 give back 8.9% in total and the Dow retreat 8.0%. October’s rally could be largely attributed to the easing of global growth fears (which were the main impetus for the meltdown of the prior two months), thanks to the European Central Bank’s indicating it is considering more quantitative easing and China’s economy looking more stable. The Federal Reserve continued to jawbone the market with additional hawkish comments about the potential for an interest rate hike in December. Despite data suggesting a cooling economy should weigh against any moves in December (weak third quarter GDP of 1.5%, a drop in pending home sales for the second consecutive month, and consumer spending recording its smallest increase in eight months), Federal Reserve Chair Janet Yellen continued to prepare the market for a possible rate increase next month. Yellen stated that a rate hike in December would not inhibit the recovery and continued to point to low unemployment and growth in the inflation rate as the key determining factors. This past week’s net outflows for money market funds (-$13.8 billion) were largely attributable to institutional money market funds (-$14.1 billion). The week marked the second week in the last three the group has suffered net outflows. Similar to the prior week, equity ETFs were once again responsible for the overwhelming majority of the net inflows (+$4.0 billion) for the equity group, while equity mutual funds did increase their contribution to $1.7 billion. On the ETF side, Lipper’s Financial Services Funds (+$1.3 billion) and Science & Technology Funds (+$814 million) classifications were the largest contributors to the positive flows, while for mutual funds nondomestic equity funds (+$931 million) accounted for slightly more of the net inflows than did domestic equity funds (+$791 million). Mutual funds were responsible for all the net inflows for taxable bond funds (+$1.5 billion), while ETF products saw over $1.6 billion of net outflows. Lipper’s High Yield Funds and Core Bond Funds classifications (+$1.2 billion and +$494 million, respectively) recorded the two largest net inflows on the mutual fund side. For ETFs two Treasury products had the largest individual net outflows: iShares 1-3 Year Treasury Bond ETF ((NYSEARCA: SHY ), -$1.1 billion) and iShares 7-10 Year Treasury Bond ETF ((NYSEARCA: IEF ), -$247 million). Municipal bond mutual funds took in $53 million of net new money – for their fifth consecutive week of positive flows. Funds in Lipper’s national municipal bond fund classifications (+$30 million) contributed the most to the week’s net inflows.

A Rate Hike Can Badly Hurt High-Flying Growth Stocks In Tech, Biotech

Growth companies are currently valued very richly not only because they are growth stocks but also because short-term interest rates are almost zero. Waiting for growth companies to reach their potential is inexpensive when it doesn’t incur interest payments, but that can change at any time. There is a real chance that investors will panic about growth stocks when (or before) short-term rates will be raised. Very few investors would believe that a rate hike can hurt stocks like Amazon ( AMZN ), Facebook ( FB ), Tesla ( TSLA ), Netflix ( NFLX ) and LinkedIn ( LNKD ) (or even Alphabet ( GOOG ) (NASDAQ: GOOGL ) – what used to be Google). These are some extraordinary companies. And there are many other companies, especially in the biotech sector, which can have extraordinary growth in the coming years. Very few people doubt that these names are great and will offer exceptional growth in the coming years. I’m no exception – I believe that the mentioned companies, and many other smaller ones, will offer great revenue and income growth over the coming years. But if you look at their valuations Facebook seems to be a bargain, with a respectable trailing P/E of 100. Amazon, Tesla, Netflix and LinkedIn don’t really make any meaningful profits and their valuations are based on their potential alone. And there are many such companies, smaller and less known ones, which are solely valued according to their potential, especially in the biotech sector. Stocks can be quite vulnerable to short-term interest rates because there are very easy ways, for pretty much everyone, to own stock on leverage nowadays without paying much in interest. Other assets are a lot more complicated to own just based on short-term interest rates, as they are quite illiquid, and intermediaries – especially banks since the financial crisis – are not willing to lend at low rates. Therefore it’s not common to see such optimistic valuations anywhere, nowadays, other than in the so-called growth stocks. I am saying “so-called” not because I do not believe they are growth stocks, especially the ones I named, but because the whole idea behind “growth” is subjective and based on popular perception. I don’t remember many people calling Amazon a growth stock 10 years ago. But it was a growth stock even back then, however not popular at all. Just take a look at two charts below, the first one of Amazon, and the second one from the Nasdaq Biotechnology Index ( NBI ). Both Amazon and the biotechnology sector were considered to have growth potential 10 years ago, but their shares were very unpopular. What has happened in the meantime that has made such stocks so popular? Money has become very cheap, and the time value of short-term money has become almost zero, especially if you have access to large sums and you can practically leverage up at almost no cost. This phenomenon was true since 2009, but it truly started to affect the growth sector in 2013. Why 2013? Between 2009 and 2013 there had been too many nasty surprises, especially with the real estate market and then with the European crisis. Probably investors, and particularly hedge funds, started to think that zero interest rates were a safe bet as long as you went for growth stocks. They apparently offered no nasty surprises. And they haven’t offered nasty surprises ever since the crash in year 2000 actually. With hindsight it seems very easy to understand that if you can borrow at practically no cost there is no problem to wait. So, why not bet for companies which offer “certain” growth for at least 5 to 10 years in the future? This way, with some good hedging in place for short-term fluctuations, a hedge fund could do quite well in the longer term. Now the market has become complacent, evaluating growth companies as if short-term interest rates are a sure thing forever. If this changes, it will catch many by surprise. Even the belief that the Fed is certain to raise rates might panic those who are in the so-called growth stocks. But this is to be seen. What is for sure is that very expensive and fashionable growth stocks are not exactly the safe bet they are believed to be. The companies behind the stocks will likely continue to do well, but there is good chance that their current out-of-touch valuations will be a thing of the past, at least for a while. Amazon and Facebook, for example, are truly great companies. They have exceptional management and they have pretty much built monopolies. But they are currently making very little profits to justify their huge valuations. Does anybody know how much they will make in 5 or 10 years? I personally think that Facebook is likely to make $10 billion perhaps in 5 years – for fiscal year 2020. But it’s valued at almost $300 billion now. When will it make $20 billion in a year to justify its current capitalization? In 2025? It is quite possible, though not certain at all. But that is 10 years from now. It is OK to wait if you don’t pay any interest on your money, but if there will be interest to pay things will change. And as any experienced investor knows, when things change course in the stock market it usually happens suddenly and dramatically. The situation is even more serious in the case for Amazon. Amazon is a great company, but one of the reasons it has such extraordinary growth right now is because it doesn’t care about profits. Investors don’t really want to own shares in a company where the management doesn’t care about profits. So they will ask for profits in case the stock will go down – and it won’t be so popular any more. Will Amazon stock be so popular by continuing to offer great service to its customers but almost nothing to its shareholders? Of course this is considered to be a temporary thing, but it is anybody’s guess how much money Amazon will be able to make when it will consider that it has grown enough to start making some real money. It’s also anybody’s guess whether those online merchants whom Amazon will not have killed off by then will not take away its apparently loyal customers. Will Amazon users/customers/members will still stick around in case other online shops will offer better deals? It’s simply anybody’s guess. But in today’s zero short-term interest rates many investors seem not to mind waiting. And this zero short-term rate environment can change soon. And all this waiting has resulted in some too optimistic evaluations for companies which have been able to offer growth for some years now, as if the future is a certainty – which it never is.

Top ETF Stories To Watch For In November

The third quarter of 2015 was shockingly downbeat for the broader U.S. market and the global indices with the China-led tumult culminating into a bloodbath in August and September. Needless to say, investors will keenly watch the market movement in the fourth quarter. With the first month of Q4 finally bringing back the strong stretch for the U.S. market, investors must now be hoping for more and seeking to carve out some solid gains. Traditionally, the three months from November through January mark the most successful run of the stock market. A consensus carried out from 1950 to 2014 shows that November ended up offering positive returns in 43 years and negative returns in 22 years, per moneychimp.com . In fact, all the three major indices are now positive from the year-to-date look with the S&P 500 rising 2.5%, Dow Jones Industrials Average gaining over 0.5% and Nasdaq composite climbing 8.6%. With vacations, holiday season buying and seasonal optimism taking charge, investors might reap more returns to close out 2015. However, before riding on the cyclicality, one should not cast out the presently-hot areas of the global investing arena, which will play the kingmakers in November. This is why we highlight the top financial stories and the related ETFs which should be strongly watched this month. Fed Rate Lift-off Talks and Rising U.S. Bond Yields Turning on rounds of hearsay about the lift-off, the Fed brought the December rate hike possibility back on to the table in October end. Yes, the central bank is supportive now, citing a slowing job market, moderating U.S. economic growth and subdued inflation. But it was finally the easing of the upheaval in the global market that led it to mull over policy tightening this year, if possible. Post Fed meeting at October end, investors rapidly shifted their bets with futures contracts entailing a 52% December hike possibility (at the current level) compared with 34% preceding the statement. In anticipation of a faster lift-off, the 10-year Treasury bond yields jumped 18 bps to 2.23% in six days (as of November 3, 2015). The rising yields give cues of the fact that though Q3 U.S. economic growth tallied 1.5 % in Q3, falling short of the 1.6% expectation, investors are hardly paying heed to the soft GDP data, rather wagering on a sooner-than-expected lift-off. As a result, sectors benefitting from higher rates showed strength in recent trading. Financial ETFs like SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) and U.S. dollar ETF PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) performed nicely and could be in watch this month. High Yield Bond ETFs Back into Business After having a troublesome time in the first half of the year, the scope of outperformance for the high-yield bond ETFs is now opening up. Investors seeking to beat the yields provided by the benchmark U.S. treasury bonds might flock to this segment. Corporate bonds are also showing an uptrend on rising issuance. In October, as much as $ 100 billion worth of U.S. corporate bonds were sold. This dynamics in the high-risk fixed-income market should put bonds like BulletShares 2016 High Yield Corporate Bond ETF (NYSEARCA: BSJG ), High Yield Long/Short ETF (NASDAQ: HYLS ) and High Yield Interest Rate Hedged ETF (BATS: HYHG ) in focus. Biotech Bounce The biotech space saw choppy trading in the past few weeks on drug pricing concerns. While the sell-off made the space affordable, a few more days of easy money from the Fed should be supportive of this high-beta sector. Needless to say, the operating fundamentals of the biotech space are stronger than many other sectors. As a result, ETFs like Dynamic Biotech & Genome ETF (NYSEARCA: PBE ), SPDR S&P Biotech ETF (NYSEARCA: XBI ) and ALPS Medical Breakthroughs ETF (NYSEARCA: SBIO ) would be in focus throughout this month. Inside the Chinese Wall Now who can forget China? Surprises and shocks from the world’s second largest economy are rampant these days. In October, China reduced the key interest rates by 25 bps which marked the sixth slash since last November. Apart from these, China enacted a volley of accommodative measures to boost domestic consumption. Of which, scrapping of its long-standing ‘one-child’ policy was eye-catching. Since, the so-far-rolled-out measures to jumpstart the ailing economy went down the drain, investors can very well expect some other stimulus measures this month. Chinese ETFs including Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) and iShares MSCI China Small-Cap ETF (NYSEARCA: ECNS ) are worth a watch. European Delight Though Q3 was patchy for the continent, Q4 has so far been joyous for the European region. No, economic data hasn’t been great; but it is ECB’s promise to beef up the ongoing QE measure (if need be) that has started showering gains on the European stocks and ETFs. As a result, all currency-hedged European ETFs including Europe Hedged SmallCap Equity Fund (NYSEARCA: EUSC ), Europe Hedged Equity Fund (NYSEARCA: HEDJ ) and Currency Hedged MSCI Germany ETF (NYSEARCA: HEWG ) are set for a northbound journey since last month and are likely to top investors’ list in November too. Original Post