When a Record $46 Billion Exit Makes Perfect Sense: Taking Stock

(Bloomberg) -- It’s not surprising that people are taking their money out of stocks, especially when we’ve seen very little follow-through in any bounce ever since the bull market began to unravel in the beginning of October.

The lack of conviction from true buyers has been perturbing if you’ve been heavily exposed on the long side. The clear rotation into the most defensive part of the stock market for months now, as the graphic below shows (utilities, REITs and consumer staples as the only three members of the S&P 500 in positive territory since the end of September), only adds to the anxiety.

The utes being up 7.4% in that time frame versus tech plunging more than 12% tells you all you need to know.

You can thank amped up concerns over a slowdown in growth (and a sooner-than-later recession thanks to the yield curve inversions), a Fed that’s having their rate hike outlook questioned on a more regular basis, a trade war that continues to escalate and impact global corporations, and a rash of investment gurus who are shouting at the top of their lungs that a debt crisis and/or a bear market is just around the corner, among other concerns that are being touted for the recent rout.

So yes, finding other areas to park your money than a stock market that’s been on an upward parabolic ride for almost 10 years probably does make some sense for many market participants.

But it is a bit staggering how much money is actually being taken out.

According to data released by Lipper last night, a record $46 billion was pulled from U.S. stock mutual funds and ETFs in one week (much of the data goes as far back as 1992, for what it’s worth). A near-record $13 billion also came out of bonds while money market funds saw $81 billion in inflows.

Data firm EPFR Global pins U.S. equity funds outflows at $28 billion for the week ended Dec. 12, or the second-largest on record. The worldwide figure was a gargantuan $39 billion, the largest ever.

The fact that yet another rip, albeit a relatively miniature one, was sold on Thursday (~33 handle reversal on the S&P 500) doesn’t help things. That makes it five straight rally failures in a row, where we saw peak-to-trough declines of 35, 53, 55, and 88 point, to be exact.

The e-minis are down another ~23 points this morning to ~2,625, which is around the same level we tested on Monday before that scary dip below 2,600.

The worst part is that there doesn’t appear to be any great reason for the drop. Trade frictions are arguably the biggest overhang for this market, but the biggest news out overnight was positive (China confirming reports that it would remove auto import tariffs). Is it follow through from weakness in global markets with Stoxx 600 down ~1% and the Shanghai Composite faring even worse? Or a reaction to the mounting political chaos in the White House?

Whatever it is, I think it’s fair to say more broadly that it remains tough to be overly confident on this tape heading into the year end, where very few tradeable catalysts are even left. Add in the chances for an ugly preannouncement season once 2019 rears its head, and I predict we get more money exiting equities well before we get any pouring back in.

Sectors in Focus Today

• Autos on three pieces of news: 1) China removing a retaliatory tariff on autos imported from the U.S. for three months, 2) European new car registrations fell for the third month in a row, hitting shares of Renault and Peugeot, and 3) a cautious initiation on the sector out of Deutsche Bank (see details below)
• Lodging sector after French luxury behemoth LVMH agreed to buy upscale hotel company Belmond for $25 per share in cash, which looks like a premium of 42% to the last close, but it’s actually considerably higher if you go back to where the stock was trading in August just before the company said it would consider a sale (just above ~$11-share)
• Mass merchants after Costco slipped a few percentage points after margins missed analyst expectations
• Software sector after $121 billion market capper Adobe slips more than 2%; numbers looked fine, though analysts cited optical headwinds tied to currency, M&A dilution, and purchase accounting

On Tap for Next Week

The FOMC meeting on Wednesday is likely to be the biggest actionable event for the rest of the year, with odds still in favor of the fourth rate hike of the year.

Elsewhere on the macro front, we’ll be awaiting any new wrinkles in the trade war situation, especially in regards to the Huawei CFO making bail and any updates on the second citizen being questioned by Chinese authorities. There is also a triple dose of housing data (XHB and ITB both holding relatively steady over the past week) and the Friday government funding deadline.

There’ll be a decent amount of big earnings to sift through, including FedEx (concerns over Amazon competition and risk to Express after the unit’s CEO surprisingly left), Micron (one of the weakest semis in the past six months), Nike (after a rough reception to Under Armour’s long-term targets this week), Navistar (closed at 52-week lows yesterday) and Red Hat (any color on the IBM takeout).

Meanwhile, the always volatile pot stocks could get added attention on Monday when the state of New Jersey is expected to legalize recreational marijuana.

Notes From the Sell Side

Wedbush’s Dan Ives, who covers a wide swath of tech stocks like Apple and Microsoft, initiates on Tesla with an outperform rating and a price target of $440, which is about a hundred bucks above the consensus average. The note is a gushing read, with quotes like "The company has the most impressive product roadmap out of any technology/auto vendor around" and "We believe Tesla has the most innovative product roadmap in the technology space over the next 5 to 10 years."

Deutsche Bank’s Emmanuel Rosner, who comes from Guggenheim and CLSA, initiates on the auto and auto technology sector with a cautious view, "reflecting cyclical and macro risks globally, as well as secular pressure from the shift to electrified vehicles and autonomous shared mobility." Of the 15 stocks now under coverage, 6 are a buy (Ford, GM, Aptiv, BorgWarner, Dana Inc, and Lear) and two are a sell (Autoliv and Veoneer).

Morgan Stanley has a cautious take on the consumer staples, calling for EPS downside with initial 2019 guidance at several megacaps, including PepsiCo, Coca-Cola, Colgate, Altria, and Kraft Heinz (with the greatest downside for PEP and CL). The exception is Procter & Gamble, which gets upgraded to an overweight and a near Street high price target of $106 as broad-based market share momentum, an improving gross margin outlook and greater earnings achievability aren’t being adequately reflected in valuation versus peers.

Tick-by-Tick Guide to Today’s Actionable Events

• 7:00am -- LEE earnings
• 8:30am -- Retail sales
• 8:30am -- CNC, STWD investor day
• 8:40am -- XYL CEO Patrick Decker on Bloomberg TV
• 9:00am -- MET investor outlook call
• 9:15am -- Industrial production, capacity utilization
• 9:45am -- Markit PMIs
• 10:00am -- Business inventories
• 1:00pm -- SCG/D South Carolina deal approval decision
• 8:30pm -- China new home prices

To contact the reporter on this story: Arie Shapira in New York at ashapira3@bloomberg.net

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Joanna Ossinger

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