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Personal Income, Spending & Strategy Summary

Takeaway: Personal Income and Spending growth accelerated in November. Do equities still work if growth decelerates? Watch the $USD, VIX, & 10Y.

PERSONAL INCOME: Optically, personal income and personal disposable income growth decelerated in November. The reality is far more sanguine.  Collectively, November and December of 2012 were skewed significantly by individuals pulling compensation forward ahead of the impending fiscal cliff related tax law changes.  

 

On a 2Y basis, private sector salaries and wages are still accelerating and the drag on government sourced income stemming from federal austerity will improve against easy comps, the spending friendly budget deal, and the annualization of last year’ s tax increases.  

 

Personal Income, Spending & Strategy Summary - PI

 

PERSONAL SPENDING:  Real personal consumption growth saw its largest MoM acceleration since February of last year as service consumption (the recent laggard) was resurgent, growth in durables was flat with trend, and Durables accelerated on a MoM, 1Y and 2Y basis.  Spending grew at a premium to incomes for a second months as the savings rate dipped another 30bps to 4.2%.  

 

While the spending numbers were strong, the MoM and YoY growth figures for November may be modestly overstated given the noisy comp dynamics – namely, any government shutdown related impact depressing October consumption and the Hurricane Sandy distortion in November of 2012.

 

Personal Income, Spending & Strategy Summary - Personal Income   Spending Table Nov

 

 

INFLATION: Core PCE inflation came in at +1.1% YoY, still well below target.  Incremental central bank hawkishness may be mildly deflationary and both food & energy cost growth is running negative in the latest CPI reading (we’d argue that’s a good thing), but labor market trends are strong, wage inflation is beginning to percolate, household credit growth went positive for the 1st time in 18 quarters in 3Q13, corporate productivity is flagging and business investment/capex spending is somewhat of a ball under water here.  

 

Personal Income, Spending & Strategy Summary - Net invesment

 

Personal Income, Spending & Strategy Summary - HH Debt QoQ   YoY

 

SEASONALITY REMINDER:  Seasonal adjustments act as a tailwind from September – February, then reverse to a headwind over the March-August period. 

 

Shifting seasonality is perhaps most visible in the initial claims and NFP numbers but the impacts have been pervasive with the reported macro data, equity market performance, investor sentiment and analyst estimates all following a similar annual, temporal pattern. Seasonality will continue to build as a positive support through 1Q14.

 

Personal Income, Spending & Strategy Summary - JS 1

 

Personal Income, Spending & Strategy Summary - NFP Seasonality Nov

 

FLOWS:  “Great Rotation” talk is annoyingly trite but the year-to-date tallies are hard to dismiss and existent trends look set to continue.  Below we highlight the latest fund flow analysis from Jonathan Casteleyn and the Hedgeye Financials team: 

  • Bonds:  Within mutual funds, the $1 trillion that has come into bond funds since 2008 (or the start of the Fed's quantitative easing program) has started to unwind with the first outflow in fixed income funds within the ICI data since 2007. The fixed income outflow of $63 billion through the first 49 weeks of 2013 still pales in comparison to the $303 billion inflow that came into fixed income last year in 2012 (can you say blow off top?) and also the record year of 2009 when the Great Rotation from stocks into bonds started and $379 billion came into fixed income funds. While the over $155 billion outflow in the back half of 2013 has been the sharpest bond outflow in history (most significant 27 week ouflow sequence), the first half of 2013 experienced nearly $100 billion of inflow into fixed income to net to the fairly insignificant outflow year-to-date of $63 billion so there is a case to be made that bond outflows have only just started. 
  • Stocks: Conversely, the nascent production in stock funds (while consistently dismissed) has been historically quite impressive being double that of the $74 billion that came into equity mutual funds in 2007. While the $159 billion running inflow into stock funds thus far in 2013 has had an international fund bend ($131 billion has gone into international stock funds versus just $28 billion into domestic equity funds), there is still ample reason to think that U.S. stocks can continue this turn in redemptions that has plagued them for all 6 years of ICI data before '13 (still record amount of cash on U.S. corporate balance sheets, generally low yields can allow stocks higher multiples, and the unwinding of the commodity super cycle and U.S. bond fund outflows needing to be invested somewhere).

(Source: Hedgeye Financials)

Personal Income, Spending & Strategy Summary - ICI chart 10 normal 

 

 

$USD/Yields/VIX/Equities:  The Hedgeye Macro Manifesto (if there was one) posits that everything that matters in macro happens on the margin.  In other words, the forecasting goal centers on divining better/worse not good/bad.   In other other words, it’s all about the slope of the line. 

 

From a GDP accounting and slope-of-the-line perspective, 3Q13 should mark the short-cycle peak in reported domestic growth.  The recurrent question we’ve received over the last few weeks has been some form of “can domestic equities still work if growth slows from great to good”

 

As always, our immediate/intermediate term allocation strategy will anchor on the price signal.

 

In short, if the dollar can break out above Trend Resistance at 81.13, the VIX holds below TREND resistance at 14.91, and 10Y yields can breach 2.99% (September highs) on the upside, on balance, we’ll stay on the long side of both U.S. equities and pro-growth style factor exposure. 

 

The bond market has been been front-running the Fed all year, as have flows, and while the reallocation from credit to equities may oscillate between trickle and deluge, the broader bond outflow trend should continue alongside the northward march in rates.  Further, with china stable, the  Abenomics trade in full effect, and  Europe following our growth path on a lag, developed markets/economies broadly should remain supportive of risk appetite in the near term.  

 

Personal Income, Spending & Strategy Summary - VIX

 

Personal Income, Spending & Strategy Summary -  USD Levels

 

Higher highs in equities on accelerating volume – with “flows” support, domestic and global macro fundamental support, and the lack of discrete negative, near-term catalyst - are bullish until they aren’t.

 

To enjoying the holiday and (still) buying the bubble,

 

Christian Drake

Associate

 


European Banking Monitor: Europe's Momentum

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - Swaps were sharply tighter last week across Europe. In fact, just 2 of 30 European banks were wider on the week. The biggest improvements came from the Spanish, Italian, German and Greek banks. It's safe to say that the recovery in Europe and Europe's banking system more generally remains alive and well.

 

European Banking Monitor: Europe's Momentum - zbanks

 

Sovereign CDS – Sovereign swaps mixed last week, but overall saw little movement. The average and median changes were zero. The largest positive and negative moves came from Spain (+4 bps) and Portugal (-5 bps).

 

European Banking Monitor: Europe's Momentum - z. sov1

 

European Banking Monitor: Europe's Momentum - z sov 2

 

European Banking Monitor: Europe's Momentum - z sov3

 

Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Europe's Momentum - z. euribor

 


MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM

Takeaway: The last "real" week of the year saw a continuation of the generally positive trends we've been seeing for a while now.

Europe's banks remain on a roll. Last week we saw further improvement in risk across the board. Our macro #EuroBulls theme continues to dovetail with what we're seeing on the banking side. On the negative side, the only notable risk change this week is the Chinese interbank rate, the Shifon Index, which rose 41 bps week-over-week to 3.85%. That being said, the Shifon remains roughly in-line with its level from a month earlier.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged

 • Intermediate-term(WoW): Negative / 3 of 13 improved / 4 out of 13 worsened / 6 of 13 unchanged

 • Long-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 15

 

1. U.S. Financial CDS -  Swaps tightened for 24 out of 27 domestic financial institutions and the largest improvements came from the large cap banks, where Citi, Goldman and Morgan tightened by 7-8 bps apiece. Radian (RDN) also posted a notable improvement at -18 bps.

 

Tightened the most WoW: WFC, AXP, C

Widened the most WoW: TRV, AGO, MBI

Tightened the most WoW: WFC, RDN, C

Widened the most/ tightened the least MoM: AGO, MBI, TRV

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 1

 

2. European Financial CDS - Swaps were sharply tighter last week across Europe. In fact, just 2 of 30 European banks were wider on the week. The biggest improvements came from the Spanish, Italian, German and Greek banks. It's safe to say that the recovery in Europe and Europe's banking system more generally remains alive and well.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 2

 

3. Asian Financial CDS - China and Japan were uneventful last week, but Indian bank swaps tightened dramatically once again. The month-over-month change in Indian Bank swaps is now 33-48 bps.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 17

 

4. Sovereign CDS – Sovereign swaps mixed last week, but overall saw little movement. The average and median changes were zero. The largest postive and negative moves came from Spain (+4 bps) and Portugal (-5 bps).

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 18

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 3

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 4

 

5. High Yield (YTM) Monitor – High yield rates fell 1.3 bps last week, ending the week at 6.02% versus 6.03% the prior week.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1834.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 6

 

7. TED Spread Monitor – The TED spread rose 0.9 basis points last week, ending the week at 19 bps this week versus last week’s print of 18.1 bps.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.7%, ending the week at 283 versus 281 the prior week. As compared with the prior month, commodity prices have increased 2.7% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 41 basis points last week, ending the week at 3.84% versus last week’s print of 3.43%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 1 bp ending the week at 91 bps versus 90 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 11

 

12. Chinese Steel – Steel prices in China fell 0.7% last week, or 24 yuan/ton, to 3544 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 251 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 3.0% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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What's New Today In Retail (12/23)

Takeaway: TGT has a long way to go to reassure customers. JOSB gives MW a taste of its own medicine. NKE plays defense w US soccer. 'Anti-AMZN' 42%

COMPANY NEWS

 

TGT - Target Says Few Fraud Reports From Card Data Breach

(http://online.wsj.com/news/articles/SB10001424052702304773104579270591741798968?mod=WSJ_business_whatsNews)

 

"Target Corp. said on Friday it has received 'very few' reports of credit-card fraud after the discount retailer suffered a massive data breach that compromised 40 million credit and debit card accounts over a 20-day period."

"The Minneapolis-based company is rushing to reassure customers and keep them shopping in the final days of the big holiday-shopping season. On Friday, it said it would offer buyers 10% off at its U.S. stores this weekend. Target also will extend free credit-monitoring services to those affected by the breach, and will be contacting those customers directly."

 

Takeaway: Seriously, Target. Whether or not there have been fraud reports is irrelevant. It doesn't change the fact that you exposed your customers to criminals not once. Not twice, but 40 million times. Saying 'only a few fraud reports' is akin to lowering a child off a boat into shark infested waters and saying 'she only got bit a few times'.

 

TIF - Award Issued in Arbitration Between The Swatch Group Ltd. and Tiffany & Co.

(http://files.shareholder.com/downloads/TIF/2809946001x7492918xS98246-13-217/98246/98246-13-217.pdf)

 

"As previously disclosed by Tiffany & Co. in filings with the United States Securities and Exchange Commission, certain claims and counterclaims had been pending between and among The Swatch Group Ltd. and its wholly-owned subsidiary Tiffany Watch Co…"

"In respect of certain breaches of the Tiffany Parties under the Agreements, Tiffany is to pay the Swatch Parties CHF 402.7 million (or approximately USD $449.5 million), plus interest thereon from June 30, 2012 to the date of payment at the statutory compound interest rate for damages under applicable Dutch law (which rate is currently three percent)."

"Tiffany & Co. intends to fund any amounts to be paid by the Tiffany Parties from immediately available cash on hand and funds available under its existing debt facilities. The management of Tiffany & Co. believes that the charges associated with this award will reduce earnings per diluted share for the fiscal year ended January 31, 2014 by $2.30 - $2.35 relative to the guidance issued on November 26, 2013 of $3.65 - $3.75."

 

Takeaway: We're surprised not by the judgment, but by the fact that TIF noted so quickly how it intends to pay. These things are usually stretched out a lot longer than this. I guess accrued interest on $450mm is a powerful motivator.

 

JCP - Blake Shelton Performs for J.C. Penney

(http://www.wwd.com/eye/people/blake-shelton-performs-for-jc-penney-7323066)

 

"The country singer and 'The Voice' judge made an unexpected appearance in Greeley Square, across from the J.C. Penney Manhattan store, in his role as the company’s JCP Cares ambassador."

 

Takeaway: Nice win for JCP…but to have a real impact on the company's numbers they need U2 and the Stones to tour all 1,100 JCP stores…twice.

 

JOSB - Jos. A. Bank Rejects Men's Wearhouse Acquisition Proposal; Will Continue to Review Strategic Acquisition Opportunities

(http://phx.corporate-ir.net/phoenix.zhtml?c=113815&p=irol-newsArticle&ID=1886725&highlight=)

 

"Jos. A. Bank Clothiers, Inc.  today responded to the non-binding acquisition proposal it received on November 26, 2013, from The Men's Wearhouse, Inc. The Company said that after thorough consideration by its Board of Directors, with the assistance of its financial and legal advisors, it has unanimously rejected the proposal made by Men's Wearhouse."

"The Company's Board of Directors concluded that the price proposed by Men's Wearhouse significantly undervalued the Company and its near and long-term potential and was not in the best interest of the Company's shareholders."

"Further, as the Company has said previously, it is reviewing all alternatives regarding potential strategic acquisition opportunities that would enable the Company to drive significant value for shareholders."

 

Takeaway: This is a kick in the teeth to MW. MW was good enough for JOSB to buy, but apparently not good enough to be the buyer.

 

NKE - Nike to sponsor US Soccer for nine more years

(http://www.fibre2fashion.com/news/garment-company-news/newsdetails.aspx?news_id=157556)

 

"Nike and the U.S. Soccer Federation have announced a renewal of their partnership, that will see [Nike] design and create the kits for men and women’s United States teams at every level for nine more years."

"Nike and U.S. Soccer, currently celebrating its centennial, have been partners since 1995."

 

Takeaway: This is purely defensive. Do you really think that US Soccer is a revenue driver for Nike? No. It makes money off its sponsorship of teams like Brazil -- not the US. But could you imagine Nike's shame if Adidas came along and endorsed the US? That would be almost as big a slap in the face as if Nike pulled the Germany endorsement away from Adidas (something it has repeatedly tried to do).

 

MIK - Michaels Reorganizes IPO Plans

(http://blogs.wsj.com/privateequity/2013/12/20/michaels-stores-withdraws-ipo-cites-reorganization/)

 

"Michaels Stores Inc. has reorganized its plans for its public trading debut. The arts-and-crafts retailer initially withdrew its delayed initial public offering on Friday, citing its July reorganization, which created an indirect parent holding company called The Michaels Companies Inc., as the reason for the withdrawal."

"Michaels Companies, meanwhile, filed for an IPO of up to $500 million in common stock. The timing, number of shares to be sold and the price range for the proposed offering haven’t yet been determined."

 

Takeaway: At face value, an IPO of Michael's Stores might not seem too sexy, but keep in mind that this stock was a rocket when it was public during the last cycle -- and that's before rumors swirled around about it going private.
 

JOEZ - Hudson Clothing's Jeans Dodges EU Tariff

(http://apparel.edgl.com/news/Hudson-Clothing-s-Jeans-Dodges-EU-Tariff90196)

 

"Los Angeles-based Hudson Clothing LLC yesterday received a ruling from the UK's customs and tax department exempting its women's blue jeans from a 200 percent EU tariff increase imposed last spring."

"According to attorney Elise Shibles of Sandler, Travis & Rosenberg, PA, who represented Hudson in the matter, the retaliatory EU tariff that raised the tax on U.S.-made women's denim trousers from 12 percent to 38 percent should not have been applied to Hudson's jeans. Shibles crafted a legal argument asserting that the blue jeans in question fall under a tariff provision not covered by the increased tax."

 

WMT, COST, BBY, JCP - Albany-based anti-Amazon hitting revenue targets

(http://nypost.com/2013/12/22/albany-based-anti-amazon-hitting-revenue-targets/)

 

"CommerceHub, a tech company owned by billionaire John Malone’s Liberty Media, has watched growth skyrocket in recent seasons as it fuels online sales nationwide for chains like Walmart, Costco, Best Buy and JCPenney."

"The service, which allows retailers to beef up their picks online without buying inventory or operating costly warehouses, was a big hit industrywide during the Thanksgiving weekend. It adds merchandise to client websites while making sure a network of third-party suppliers can deliver it posthaste."

"Sales of CommerceHub’s 'virtual inventory' — the name Poore uses for third-party goods that his firm sources for retail clients — surged 42 percent to $1 billion from Thanksgiving through cyber-Monday."

"Year to date, online sales processed through CommerceHub are up 31 percent to $7 billion, he says, or about double the rate of online sales growth across the US generally."

"What’s more, Poore predicted that virtual inventory fulfilled by third-party suppliers will account for more than 90 percent of all online goods within the next five years, up from about a third today."

 

INDUSTRY NEWS

 

Outlook Unchanged After 'Super Saturday'

(http://www.wwd.com/retail-news/trends-analysis/outlook-unchanged-after-super-saturday-7323676?module=hp-topstories)

 

“'As big as Super Saturday was, it’s still a lousy season,' said Craig Johnson, president of Customer Growth Partners. He estimated Super Saturday could exceed Black Friday — for the past 10 years the largest volume day of the year — by a $1 billion to $2 billion. 'Super Saturday could be the number-one day of the year,' agreed ShopperTrak founder Bill Martin. He added that the last Friday to Monday stretch might prove to be 'the largest spending period of the year, bigger than Black Friday weekend.'”

 

Rampant Returns Plague E-Retailers

(http://online.wsj.com/news/articles/SB10001424052702304773104579270260683155216?mod=ITP_marketplace_0&cb=logged0.27198440092615783)

 

"Behind the uptick in e-commerce is a little known secret: As much as a third of all Internet sales gets returned, according to retail consultancy Kurt Salmon. And the tide of goods flowing back to retailers is rising. Shipper United Parcel Service Inc. expects returns to jump 15% this season from last year, making them a significant and growing cost for retailers."

"The stakes get even higher during the holidays, when return volume peaks. So this year, chains are digging through past transactions to weed out chronic returners, train shoppers to make better decisions or stem buyer's remorse."


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