Takeaway: Spending outpaced Income as the decline in Saving supported services and nondurables consumption. Gov't sourced income inflecting positively


SPENDING:  Spending grew at a premium to incomes for a third consecutive month as the savings rate fell -40bps sequentially to 3.9%, the lowest level in a year.  


With the savings rate now back to the low end of the historical range, the capacity for Incremental savings depletion to support further improvements in consumption growth appears largely constrained. 


Household expenditure growth on Services and NonDurables accelerated, while spending on Durables – the 2013 leader as sales on higher ticket items improved – decelerated 300bps and 120bps on a 1Y and 2Y basis, respectively.  Whether the nascent deceleration in Durables represents a pull-back in spending across the higher income brackets remains TBD.    


INCOME:  Personal income growth, Disposable Personal Income (DPI) Growth, and Real DPI per capita all decelerated on both a 1Y and 2Y basis. 


Note that the December comp dynamics were impacted by the conspicuous pull-forward in compensation that occurred at year-end last year ahead of the fiscal cliff resolution and impending tax law changes.  Given the comp distortion, the 2Y comp offers the cleanest read for December and on that basis growth decelerated a moderate 20bps sequentially from +3.8% to +3.6% (vs. the reported -0.8% on a YoY basis).


Salaries & Wages:  Private sector salaries & wages slowed modestly in December while the slope of the broader trend remains positive at ~5% YoY on a 2Y basis.   


The other notable dynamic is that government sourced salary and wage income is inflecting positive for the first time in years. 


State & local government employment was positive for the 5th consecutive month in December (after 4 years of negative growth) and the ebbing of the fiscal drag alongside the spending friendly budget deal has aggregate incomes for government workers - which represent ~17% of labor force and ~17% of aggregate wage/salary income – beginning to show some positive mojo.


INFLATION:  PCE and Core PCE inflation both a little firmer sequentially, but still well below target.   The longer we mark time sub-target the more worrying it becomes for policy makers.  Expect speculation around an “inflation floor” to pick up as the Yellen transition matures.







CONFIDENCE:  This morning’s final estimate of confidence from the Univ. of Michigan capped the January data on consumer sentiment.  Across the primary survey’s, the results were mixed on a Mom basis with the Conference Board estimate advancing 3.2 pts while the Univ. of Michigan and Bloomberg readings declined a modest 1.3 and 1.1 points, respectively. 


The middling confidence numbers make sense in the context of the quantitative setup for the $USD and the TTM relationship between sentiment and the currency.  The dollar is currently neutral on a TRADE basis from a quant perspective and searching for some direction as it flirts with a breakout above the 81.12 TREND line.







Christian B. Drake



[video] Keith's Macro Notebook 1/31: FINANCIALS JAPAN COPPER

MTW: Exiting Following Solid Beat





Our MTW thesis based on its exposure to a recovery in construction and break-up value (see 10/28/13 “MTW: Next Activist Value Target?”) has played out well.  Given current market prices, the shares have entered our fair value range in a softer equity market and potentially less attractive macro environment.  We also would prefer to own OC (and potentially other building products names) at current levels for construction exposure, rather than MTW at ~$27.60.  We are not signaling an MTW problem/short/sell, but rather responding to our repricing thesis working out in a market offering some better construction-exposed opportunities.  If MTW shares retreat, we would look to re-enter, with our thesis put forth in our March 2013 Mining & Construction Equipment black book.



Quick Take


  • Solid Beat:  MTW readily exceeded expectations for the quarter, principally on 10% revenue growth in Foodservice Equipment amid solid margin gains.
  • Both Segments Grow: Excluding $120 million shift in 2012 Crane revenues between quarters, the Crane segment showed 4Q growth of 9.3% - consistent with other strong construction equipment sales readings.
  • Less Under Recognized:  MTW is better recognized today, with several of our catalysts having occured (e.g. the redemption of a high cost/problematic covenant tranche of debt has now been announced.)
  • Better Options:  We see OC as a better exposure for 2014 from current levels to a construction rebound following MTW’s ~35% total return since late October (vs. a roughly flat S&P 500).

MTW: Exiting Following Solid Beat - lkj


Snap, Crackle, Pop?

Client Talking Points


Financials snapped our Hedgeye TREND line this week and closed just above it yesterday (TREND = 21.21). This is the single most important sector signal for me today. Right now the Yield Spread is compressing -- fast -- as the 10-year yield remains below our TREND  of 2.80%. Meanwhile, whatever yesterday’s low-volume U.S. stock pop was (month-end?), it’s not popping this morning.


Most of Asia was closed last night (Happy New Year!) but I found it very interesting (revealing) to see them sell the Nikkei in the face of a U.S. bounce. The Nikkei is now confirming bearish TREND at -8.4% year-to-date. 


Copper is diverging negatively versus the CRB Index (commodities) as it slices back through our Hedgeye TREND support of 3.31/lb. Not all commodities are the same obviously – copper’s long-term supply (mining) bubble remains very relevant.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.


We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


Amazon now bigger than Target on revenues, 5x larger mkt cap, 1/5th as much income @JeffMacke


"The world ain't all sunshine and rainbows. It is a very mean and nasty place and it will beat you to your knees and keep you there permanently if you let it. You, me, or nobody is gonna hit as hard as life. But it ain't how hard you're hit; it's about how hard you can get hit, and keep moving forward. How much you can take, and keep moving forward." - Rocky Balboa


It’s been 835 days without a 10% correction. That’s the 5th longest streak of its kind, and the third in the past 25 years. Of course, it still has a long way to go to compete with the mystifying seven-year stretch starting in 1990, when we had 2,553 correction-free days. (Bespoke)

CHART OF THE DAY: Valuation Shmaluation


CHART OF THE DAY: Valuation Shmaluation - Chart of the Day

Valuation Shmaluation

“Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.”

-Albert Einstein


Valuation is an analytical staple in deciding whether an asset, company or asset class should be bought or sold.  The challenge with valuation? As a decision making tool, the inputs are often more important than the outcome.  Regularly on Wall Street, especially when some of the large investment banks are involved, valuation becomes an even more amorphous thing.


Yesterday our CEO Keith McCullough discussed price targets for the S&P 500 in 2014 (see video "Is Consensus Too Bullish?") that are being established by some of our peers and the arbitrariness of the multiples being applied to come up with the target.  Now to be fair, coming up with a view on the future price of a market is difficult at best because as Einstein notes all the factors that matter “cannot necessarily be counted”.   (In part, this is why we stay away from precise long-term price targets on the broad market.)


Valuing a company has its challenges as well.  Take for instance the Kinder Morgan companies, which are a massive group of pipelines, terminals and oil and gas productions assets cobbled together by billionaire Rich Kinder over the years.  We are currently short $KMI and $KMP on our Best Ideas list because we, simply put, think the company is grossly overvalued.


I won’t steal his thunder but my colleague Kevin Kaiser will be giving an update on his short thesis on Kinder Morgan today at 1pm EST and his presentation starts with the following views on valuation:

  • “Cheap” is a LONG WAY DOWN.  We believe Fair Values are:
    • KMI: $15 - $20/share
    • KMI Warrant: near $0
    • KMP/KMR: $30 - 40/unit (Preferred Way to Play This)
    • EPB: $25 - 30/unit

As always valuation is an opinion, but this opinion is way outside of consensus and likely worth considering if you are invested in or looking at Kinder Morgan.  Please email for details.


Back to the Global Macro Grind...


In my inbox last night was a summary note on the equity markets that was titled, “Equities Explode.”  I’m hoping it was a tongue in cheek title because up 1.1% on less than impressive volume was far from an explosion.  In the Chart of the Day today, we take a look at the last three weeks and highlight the point of accelerating volume on market down days.  


The equity bulls are trying to regain the market’s upward momentum, but meanwhile the bond bulls have just experienced the euphoria of a meaningful move in rates.  Since January 2nd the 10-year bond yield has declined from +3.0% to the most recent yield of +2.7%, for a +12% expedited move down in the last twelve days.   So, now the Fed has finally starting tightening by the way of tapering, why are yields falling?


Simply put, economic growth is decelerating in the U.S. and Mr. Market is beginning to price this in.  As a result, the SP500 is down -2.9% on the year and the VIX is up +26.0%.  We see these market signals even more glaringly in sector performance.  The only sectors that have had positive performance in the year-to-date are healthcare up +1.8% and utilities up +2.1%.  Meanwhile the most negative two sectors in terms of performance are staples down -4.7% and energy down -4.6%.


In a recent book by Frank Partnoy, he shows that decisions of all kinds, whether “snap” or long-term strategic, benefit from being made at the last possible moment. The art of knowing how long you can afford to delay before committing is at the heart of many a great decision—whether in a corporate takeover or a marriage proposal. 


The reality in the investment management business though is that you literally can’t wait until the last minute unless you have unlimited duration on your capital, like say Warren Buffett.  The rest of us market minions actually have to try and stay ahead of market moves and shifts in economic outlook.  This is why in our macro process identifying economic and market changes on the margin is so critical, and why long term valuation targets can be so misleading.


The question of course is whether it is possible to front run (legally) moves in the market.  For example, did any of the bulls on Japanese equity shift quickly enough in 2014 to avoid the almost -9% drawdown in the Nikkei in January? Perhaps, but unlikely.  After all it is human nature to value and project things for perpetuity based on the most recent data points.


An example is Kinder Morgan using $95 oil in their projections for oil or European bears projecting an abject failure of European markets when the sovereign debt turmoil was at its worst.  On the last point, the healing of Europe and European credit markets has been staggering over the past few quarters.


Currently, the Spanish 10-year yield is +3.73% and the Italian 10-year yield is +3.85%, which are literally the lows for the Eurozone.  This morning Italy also sold five year notes at a record low yield of 2.43% with a bid/cover of 1.49 versus a bid/cover 1.28 on December 30th.


This rampant improvement in European sovereign debt obviously begs the question of whether we are closer to the bottom then the top in European debt.  But one thing is for certain, if the European debt markets are again working fluidly, it is positive for corporations that need to borrow to grow. It also begs the question of whether a short European debt and long European equities play is the best relative value play around.  But, as they say, valuation shmaluation!


Our immediate-term Global Macro Risk Ranges are now:


SPX 1 (bearish)

Nikkei 141 (bearish)

VIX 15.31-20.41 (bullish)

USD 80.17-81.19 (neutral)

Gold 1 (neutral)


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Valuation Shmaluation - Chart of the Day


Valuation Shmaluation - Virtual Portfolio

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