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 

 

 

$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

 


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more