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Consumption Check - Is Good, Good Enough?

Conclusion:  Domestic Consumption should be 'okay' (not great) for 2Q13 with the low savings rate and historically low PCE inflation continuing to help offset ongoing, modest growth in wage inflation and disposable personal income.  Government furloughs beginning in July along with the potential for a further shift towards part-time/temp employment related to Obamacare hours worked thresholds is likely to constrain the upside in personal income in 3Q.   

 

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The domestic Labor market, Housing and Confidence data all continue to accelerate – even the economic wet blanket that has been the March-May manufacturing data is showing some life with the latest Empire and Phili Fed reports.  Still, wage inflation remains subdued and real wage growth, while looking increasingly better, is still not exciting on an absolute basis and is benefitting, in large part, from abnormally lower inflation.

 

So, with the market remaining in FOMC myopia hangover mode, what’s the current read-through for consumption from the conflation of the above fundamental factors?      

 

Broadly speaking, the drivers of Consumption aren’t overly complicated.  In short, consumer spending growth is hostage to (the growth in) income, the marginal propensity to consume or save that income, and the net change in household credit. 

 

Asset reflation/appreciation and the wealth effect matter, but they are largely indirect impacts  - higher net worth doesn’t mystically transubstantiate itself into consumption – the incremental benefit to consumption has to come via a behavior shift such that households hold fewer non-housing related assets than they would otherwise have held.  Empirically, this manifests as a decline in the savings rate and/or an increase in debt levels.

 

Below we take a summary look at each of the primary consumption drivers:

 

 

Income and Savings:  Together, growth in disposable income and the change in the savings rate explain most of the change in nominal consumption growth.  Over the last 30 years, the multiple regression between PCE growth vs. Disposable Income growth and the change in the Savings rate produces an R^2 of 0.94.  Under the following assumptions, the regression equation suggests y/y real consumption growth of 2.6% for 2Q13.      

 

Assumptions:

  • Disposable Personal Income: In the estimate chart below we are assuming growth of 1.8% y/y – just north of reported April growth of 1.74% and inline with the recent trend average. 
  • Savings Rate:  assuming a static, sequential savings rate of 2.5%.  The personal savings rate dropped discretely in 1Q13 as households attempted to maintain consumption in the face of negative tax adjustments.  At 2.5%, we are already at the very low end of the normal LT range with a material boost to consumption stemming from a further drawdown in the savings rate unlikely.
  • Inflation:  The final inflation reading could be the acceleration/deceleration swing factor.  Excluding the 2008-09 recession trough, the latest April reading of 0.7% for PCE inflation represents a 60Y low.  In the scenario chart below we are assuming 1.0% PCE inflation for the quarter; above the 0.7% reported for April, but below the 1.24% reported in 1Q13.   

 

Consumption Check - Is Good, Good Enough? - Consumption   GDP 2 

 

Consumption Check - Is Good, Good Enough? - Real Earnings May 2013

 

Consumption Check - Is Good, Good Enough? - DPI vs Savings Rate

 

 

Sequestration:  The furloughing of ~ 750K federal employees will begin in July.  There are currently 2.75M federal employees, which represents 2.0% of the NFP workforce.  A continuation of current trends in Federal government employment growth alongside a 20% paycut for ~27% of the Federal workforce equates to a 7.2% decline in aggregate pre-tax income YoY.   Stated different, the collective impact of the furloughs and employment growth at the federal level should equate to a ~7% decline in income for 2% of the total workforce as we move through 3Q.

 

State & Local government employment growth went positive in May for the first time in 5 years.  Continued, positive job growth at the state/local level could serve as an offset to accelerating declines in federal employment and income growth.  Collectively, Federal, State, & Local government employment currently represents 16.1% of total payrolls.   Layering on an assumption of modest, but accelerating state & local gov’t employment growth to the furlough and employment related pressure at the Federal level, the net impact is ~1.2% negative aggregate income growth for 16% of the employment base.   

 

In short, negative income growth for 16% of the workforce will serve to constrain the potential for acceleration in personal disposable income growth, and aggregate consumption growth by extension, in 3Q13.

 

Consumption Check - Is Good, Good Enough? - Gov t Employee Income 

 

Household Balance Sheet:  The 2Q13 Fed Flow of Funds data reflected an acceleration in household net worth, largely on the back of accelerating home values and new highs in equities and other financial assets.  On a nominal basis, net wealth is 5.2% above the 2007 peak.  Adjusting for inflation and the growth in households, household net wealth remains ~7.6% below peak levels.   

 

Net-net, the household balance sheet recovery remains ongoing and should remain supportive of household capacity for credit expansion.  Further, the LTM appreciation in home values should be supportive of some measure of the wealth effect (+25-40bps net impact to GDP by our estimate).  While an expedited back-up in mortgage rates would be serve as a headwind to transaction volumes in the more immediate term, current affordability (even with the rate backup) and supply/demand dynamics coupled with the positive labor market trends and the giffen nature of housing, we continue to see further intermediate and longer-term upside for housing. 

 

Consumption Check - Is Good, Good Enough? - Household BS 3 Adj

 

Credit:  The latest Federal Reserve data reflects a $19B sequential decline in total household debt in 1Q13 with Y/Y growth in total debt recovering further towards the zero line.  The Fed’s 2Q13 Senior Loan officer survey showed bank credit standards continued to ease while business and consumer loan demand, particularly for real estate and auto loans, showed further sequential improvement. 

 

So, while broader credit trends are favorable and a positive change in the flow of net new household credit would provide an incremental tailwind to consumption growth, thus far, credit has had a muted to dampening impact on consumption as the larger deleveraging trend has continued to predominate.   Over the more immediate term, we’re not anticipating a change in credit to serve as a material driver of household consumption growth.

 

Consumption Check - Is Good, Good Enough? - Household Debt

 

Consumption Check - Is Good, Good Enough? - Household Debt to GDP

 

Consumption Check - Is Good, Good Enough? - HH Debt burden

 

Consumption Check - Is Good, Good Enough? - Senior loan Officer Survey Demand 2Q13

 

In sum, ‘okay’ is probably the right adjective in describing the outlook for consumption growth over the intermediate term.  Policy headwinds certainly exist but the labor market, housing, and confidence all continue to stream roll ahead alongside #StrongDollar upside for consumption. 

 

Given the global macro alternative’s – you don’t want to be long bonds, commodities, EU or EM debt, equity, or currencies, or anything Japan – is “okay” good enough to increase gross exposure to domestic equities with an eye towards easy comps and a diminishing fiscal drag in 2014? 

 

The answer is yes…but at a price.  As Keith highlighted in today’s S&P500 update note:  “For a few weeks I have been saying ‘get out of the way’ – and for the 1st time this year I am saying stay out of the way (for now).”

 

Enjoy the weekend,

 

Christian B. Drake

Senior Analyst 


TREND Bearish?: SP500 Levels, Refreshed

Takeaway: For a few weeks I have been saying ‘get out of the way’ – and for the 1st time this year I am saying stay out of the way (for now).

POSITION: 5 LONGS, 4 SHORTS @Hedgeye

 

This is not good. Both PRICE and VOLATILITY are now confirming yesterday’s VOLUME signal. In my 3-factor model, that’s all I need to stay out of the way. If the TREND line of 1589 remains broken, there is not intermediate-term support to 1503.

 

Many of you will ask why I am using 1589 now (instead of 1583). That’s the right question. And the answer is that I’ve had to tweak my implied volatility assumption for a breakout in intermediate-term US Equity (front-month) volatility above my 18.98 VIX TREND line.

 

Across our core risk management durations, here are the levels that matter to me most:

 

  1. Immediate-term TRADE resistance = 1629
  2. Intermediate-term TREND resistance = 1589
  3. Long-term TAIL support = 1503

 

In other words, for a few weeks I have been saying ‘get out of the way’ – and for the 1st time this year I am saying stay out of the way (for now). That’s new for me. For 6 months you’ve been used to seeing me buy corrections. Thanks Ben.

 

I am price, volume, and volatility data dependent. This is my plan (for now). And the plan is that the plan is always changing.

 

Enjoy your weekend,

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

TREND Bearish?: SP500 Levels, Refreshed  - SPX


NKE: In Rare State of Transition

Takeaway: Don't read this management change as a precursor to an EPS miss.

This note was originally published June 20, 2013 at 21:09 in Retail

Conclusion: Some things surprised us about Nike's announced management changes, other things did not.  Regardless, we don't think that it was timed such that there'd be a fall guy(s) for disappointing earnings to come next Thursday.   We think that the company will do its best to keep guidance for FYMay14 earnings grounded -- but that has absolutely nothing to do with what we saw after the close today. The bottom line is that most of the job changes make sense and have long-term organizational benefits -- but for the next quarter or two half a dozen key roles will be in transition.

 

NKE: In Rare State of Transition - nike 

 

Plain and simple, Charlie Denson (COO) is retiring. We all knew back in 2006 that this day would come. Back then Bill Perez was fired from the corner office and Mark Parker got the nod to take the CEO role over Denson -- who was then his equal. Denson is 57 and Parker is 56 -- they're both still young, and Parker isn't going anywhere soon.  Denson can't move any higher up the org chart.  He's sticking around until January 2014 -- hardly a time frame for an executive who's running for the door (or being pushed out of it). The press release says Parker is sad to see him go, and we think it's genuine.

 

We're pleased to see that there are no changes to the Finance organization -- notably Don Blair or his team. With Denson transitioning out, we think that Don Blair's stock inside the company will rise given Don's ability to lend expertise to a new incoming COO.  That said, it bugs us to see that Gary DeStefano is retiring. DeStefano is 54 years old, and has been at Nike for 31 years in too many roles to list. He's currently President of Global Operations, and will only be at the company for another five weeks.  Last we checked, that's a pretty important role.  The good news is that Denson will still be there to oversee the team while replacements are groomed. But out of the whole management change, if there was one part that we'd point to as being  potentially disruptive, this would be it.

 

One thing that was put in place at Nike over the past few years is that all employees that have managerial responsibilities have several people identified in their HR file who could easily step into their role in the event that they move on.  What this means is that if there is one higher-profile departure, then it sets off a domino-effect of other movement inside the organization.   Look at past press releases. Try to find an example where only one person leaves or moves to a different role.  You can't find it.

 

Another thing that works for Nike is that the company is not afraid to move its employees around the organization into and around different disciplines. Take for example Eric Sprunk (note: Wall Street universally loves the guy) who started his career at Price Waterhouse, and then after joining Nike in 1994 as Finance Director for the Americas, then Finance Director of Europe, Regional GM of Europe Footwear, GM Global Footwear, VP Global Product, EVP Merchandising and Product, and now COO. We could follow a similar track for almost all of the more successful Nike executives. 

 

In the end, this is all consistent with how we expect Nike to run it's business long-term, and it's what makes it so successful at what it does. We'll keep a closer eye on a few of these areas that are in transition, but over our 15-years covering the company have never been given reason to doubt the company's ability to manage through similar leadership changes without coming out on top.


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Morning Reads on Our Radar Screen

Takeaway: A quick look at top stories on Hedgeye's radar screen.

Keith McCullough – CEO

Pushed to Limit, James and Miami Repeat as N.B.A. Champions (via New York Times)

Ford’s CEO Calls Japan Currency Manipulator Amid Weaker Yen (via Bloomberg)

Brazil unrest: 'Million' join protests in 100 cities (via BBC)

 

Morning Reads on Our Radar Screen - reading


Kevin Kaiser – Energy

Hess, Newfield launch sale of $3 billion of Asian assets (via Reuters)

 

Josh Steiner – Financials

U.S. Weighs Doubling Leverage Standard for Biggest Banks (via Bloomberg)

 

Brian McGough – Retail

Survey Says: 60% of Bangladesh Factories Could Collapse (via Sourcing Journal Online)

Nike’s Second in Command to Retire Amid Management Shift (via Bloomberg)

 

Matt Hedrick - Macro

EU to decide who pays when banks fail (via Reuters)

 

Jonathan Casteleyn – Financials

Morgan Stanley Receives Approval to Purchase Smith Barney (via Bloomberg)


Today Matters. A Lot.

Client Talking Points

ASIA

Away from Japan, the bounce wasn’t even a bounce – Weimar Nikkei +1.66%, but still closed inside of my 13,696 TREND line of resistance. The rest of Asia acted horribly. KOSPI -1.5% is clean cut broken and the more EM looking indices (Indonesia, Philippines) down -1.6 and -2.3%. Asian #GrowthSlowing happening here at an accelerating rate #EmergingOutflows.

USD

The only good news this week? The US Dollar Index has recovered TREND support of $81.11. (The upside down of that is YEN back over 96.18 TREND support vs USD). Bottom line: If there’s one quote - just one - that I was allowed to get live in a dark room to make decisions, this one would be it. It’s been triggering everything else. #CorrelationRisk 

UST 10YR

After banging the top end of my immediate-term 2.24-2.46% risk range yesterday, the 10-year yield backs off to 2.38% here. But this thing is a beast. 0% asset allocation to Treasuries is the obvious call. Where to re-short bonds will be an important exercise here on the bounce today too. 

Asset Allocation

CASH 53% US EQUITIES 19%
INTL EQUITIES 10% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
NSM

Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014.  This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios.  They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations.  Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes.  Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road

TWEET OF THE DAY

I've decided to launch a new hedge fund, using only the proprietary "LINN Energy Put Option Accounting Strategy."

 

Buy a put for $10, sell it for $5. $5 realized gain. Simple. Sooo who wants to invest w me?? $line $lnco

@HedgeyeENERGY

QUOTE OF THE DAY

"The truth is, I've never fooled anyone. I've let men sometimes fool themselves" - Marilyn Monroe

STAT OF THE DAY

Among smartphone owners age 18-44, making phone calls accounts for only 16% of the total time spent with their devices, whereas the remaining 84% of time is spent texting and interacting with email and social networks. (Source:Marketingprofs)


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 21, 2013


As we look at today's setup for the S&P 500, the range is 46 points or 0.33% downside to 1583 and 2.57% upside to 1629.                 

                                                                                                              

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.07 from 2.09
  • VIX closed at 20.49 1 day percent change of 23.14%

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 1pm: Baker Hughes rig count

GOVERNMENT:

    • President Obama to announce Jim Comey as pick for FBI director
    • 9am: Natl Housing Conf. holds symposium on neighborhoods, household recovery from housing crisis; HUD Sec. Shaun Donovan delivers keynote remarks
    • 9am: Transportation Undersec. for Policy Polly Trottenberg, Deputy Energy Sec. Daniel Poneman participate in discussion of IEA report, “Redrawing the Energy-Climate Map.”
    • 1pm: Vice President Joe Biden speaks at U.S. Conf. of Mayors
    • 3pm: Senate Homeland Security and Governmental Affairs Cmte holds hearing on curbing prescription drug abuse in Medicare

WHAT TO WATCH

  • Oracle 4Q adj. rev. misses; co. applies to list on NYSE
  • News Corp. publishing spinoff to join S&P 500
  • U.S. said to consider doubling leverage standard for big banks
  • Apple wins suit against Samsung in Japan on screen effects
  • Tesla adding model S battery swap for faster refuels, credit
  • CME raises gold margins as prices fall to lowest since 2010
  • Nike’s second-in-command to retire amid management overhaul
  • ADM in talks on sale of cocoa ops after margins squeezed
  • United 787 to Houston diverts to Newark on low oil alert
  • Endo Health unit pays $54.5m in vaginal mesh settlement
  • CBRE plans to invest in Chinese offices even as rents slow
  • U.S. Supreme Ct, EU Summit, Wimbledon: Wk Ahead June 22-29

EARNINGS:

    • Darden Restaurants (DRI) 7am, $1.04
    • CarMax (KMX) 7:35am, $0.58

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Copper Rises as Aluminum Nears Longest Losing Streak Since 1987
  • Gold Trade Most Bearish Since ’10 as Fed Spurs Drop: Commodities
  • WTI Crude Trims Weekly Drop After Biggest Slump in Seven Months
  • Gold Rebounds in New York After Slumping to Cheapest Since 2010
  • India Approves Wheat, Rice Sale From Inventories to Curb Prices
  • Anil Ambani’s Reliance Halts Gold Sales in India to Cut Imports
  • Rebar Rises on Optimism Government Policies May Boost Demand
  • Ichimoku Beats Copper Charts Over Five Years: Technical Analysis
  • Arabica Coffee Rebounds After Nearing a 4-Year Low; Sugar Rises
  • Rajoy Targets Endesa to EDP’s Revenue to Cut Spain Debt: Energy
  • HKEx to Sign MOU With Bank of China on RMB Commodity Contracts
  • Anemic Growth Pressures Metal Prices and Capex Plans: Bear Case
  • ADM in Talks on Sale of Cocoa Operations After Margins Squeezed
  • CME Raises Margins for Gold as Prices Fall to Lowest Since 2010

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 


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