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HIGH END IN RETREAT? January Personal Income & Spending

SUMMARY: 

  • At current levels, the ability for incremental savings reductions to drive further improvement in consumption growth remains very much constrained.  
  • Rising profligacy on luxury durables by the top income levels – which supported consumption growth in 2013 - occurred alongside peak gains in both housing and equities and is now collapsing as those same measures weaken.  
  • Given last years distortions, we’d argue that the 2Y comps still offer the cleanest read on the Trend in personal income growth – and on that basis, income growth continues to decelerate.  
  • With Inflation accelerating and growth slowing (which are reflexive, non-mutually exclusive dynamics) and geopolitical risk percolating, we’ll cover opportunistically on red, but will remain better sellers/shorters of domestic equity strength in the immediate term.   

 

 

SPENDING & INCOME

 

Spending grew at a premium to income for a fourth consecutive month as Services expenditures led the gains, accelerating on a MoM, 1Y and 2Y while spending growth on Durables and NonDurables declined MoM and decelerated on both a 1Y and 2Y basis.    

 

The savings rate held at 12 month lows and remains near the low end of the historical range.  

 

At current levels, the ability for incremental savings reductions to drive further improvement in consumption growth remains very much constrained. 

 

HIGH END IN RETREAT?  January Personal Income & Spending - Savings Rate 2

 

HIGH END IN RETREAT? 

The acceleration in Durable Goods expenditures led the strength in household spending last year.  Demand for durables is generally more elastic than that for NonDurables and rising, broad based demand for durable goods can offer insight into emergent strength in household consumerism.    

 

What’s notable, however, is that last year’s acceleration in durable goods spending was driven largely by demand for luxury and high-end items. 

 

In fact, as can be seen in the chart below, demand for luxury durables (Pleasure Boats/Aircraft and Watches/Jewelry) accelerated in 2H13, supporting headline durables growth even as broader durables demand began to slow.   

 

Spending on the same luxury items has collapsed since hitting peak growth in October.   

 

Coincidently (or not), rising profligacy on luxury durables by the top income levels occurred alongside peak gains in both housing and equities and is now tracking the same measures lower. 

 

With home price gains decelerating since October and domestic equities down YTD, it appears increasingly unlikely that the rich provide an incremental boost to consumption growth – at least not at the magnitude of last year’s contribution.   

 

HIGH END IN RETREAT?  January Personal Income & Spending - PCE   Luxury Goods

 

HIGH END IN RETREAT?  January Personal Income & Spending - PCE   Durable Goods Luxury Contribution

 

HIGH END IN RETREAT?  January Personal Income & Spending - Corelogic HPI Jan

 

 

INCOME:  Use the 1Y or 2Y comps?

Optically,  personal income growth improved sequentially as Disposable Income (DPI), Real Per Capita DPI, Private Sector Salaries and Government Salaries and Wages all accelerated YoY in January. 

 

Recall, however, that personal income figures over the peri-fiscal cliff period from Nov-12 to Jan-13 were distorted as individuals pulled forward compensation and companies ramped special dividend payments ahead of the impending tax law changes.

 

Given the noisy comp dynamics we’d argue that the 2Y comps still offer a cleaner read on the Trend in personal income growth currently. 

 

Growth on a 2Y average basis showed a second consecutive month of deceleration across all the aforementioned income measures and stands in direct contrast to the positive income dynamics suggested by the YoY figures.   

 

HIGH END IN RETREAT?  January Personal Income & Spending - Personal Income

 

HIGH END IN RETREAT?  January Personal Income & Spending - Income spending Table jan

 

2014 TAILWIND: 

While hourly earnings growth and weekly hours continue to track sideways, at the margin, the spending friendly budget deal and positive employment growth at the State and Local Government level should support salary and wage growth for the 17% of the labor force that is government workers. 

 

Indeed, aggregate, government sourced wage and salary income showed positive YoY growth for the first time in 11 months in January.   

 

Further, from a comp perspective, the annualization of the (higher-earner) tax increases and the end of the payroll tax holiday that occurred in January of last year both setup as positive dynamics supporting consumer spending for 2014.

 

HIGH END IN RETREAT?  January Personal Income & Spending - Salary   Wage  2Y jan

 

So, similar to the February ISM report this morning, the January income and spending data extended the broader Trend towards decelerating growth. 

 

With Inflation accelerating and growth slowing (which are reflexive, non-mutually exclusive dynamics) and geopolitical risk percolating we’ll cover opportunistically on red, but will remain better sellers/shorters of domestic equity strength in the immediate term.   

 

HIGH END IN RETREAT?  January Personal Income & Spending - ISM

 

HIGH END IN RETREAT?  January Personal Income & Spending - ISM Prices

 

HIGH END IN RETREAT?  January Personal Income & Spending - ISM Table Feb

 

Christian B. Drake

@HedgeyeUSA



ISM: From God-Awful to Just Awful

Takeaway: Today's report was better than the worst report in over three decades. Joy.

So, this morning’s ISM manufacturing report really couldn’t have been much worse. In case you missed it, the ISM index for February inched up to 53.2 versus 51.5 in January—a bump off the lows.

 

Let's dig in a little deeper than Old Wall Consensus chirping about "beating expectations!"

 

Reality check ... New Orders went from 64.4 in December to 51.2 in January, then to 54.5 in February.

 

Note that the drop in New Orders (from DEC to JAN) was the worst since 1980. In other words, today's report was better than the worst report in over three decades. Joy.

 

Meanwhile, Prices Paid (see Hedgeye research on #InflationAccelerating) remained very sticky at 60.0.

 

ISM: From God-Awful to Just Awful - ism prices

 

ISM: From God-Awful to Just Awful - ism 2

 

Up next, Obama's Budget. Should be a beauty.  #RampsSpending

Join the Revolution.


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ICI Fund Flow Survey, Solid Equity Inflow

Takeaway: Both equity mutual funds and ETFs displayed solid trends in the most recent week with small but improving bond inflow into mutual funds.

Editor's note: This research note from Hedgeye's Financials team was originally published February 27, 2014 at 07:04 in Financials. For more information on how you can subscribe to Hedgeye click here.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent week, both equity vehicles including mutual funds and ETFs had solid inflow trends with small but improving inflows into bond mutual funds as well.

 

ICI Fund Flow Survey, Solid Equity Inflow - 999

 

Total equity mutual funds produced a strong week of inflow with $5.8 billion of net subscriptions, a slight deceleration from the $7.2 billion inflow the week prior. The $5.8 billion inflow had a domestic bend during the most recent 5 day period, with $4.1 billion flowing into domestic equity funds and $1.7 billion flowing into international stock funds. The 2014 running weekly average inflow for equity mutual funds is now $4.9 billion, an improvement from the $3.0 billion weekly average inflow for 2013. 

 

Fixed income mutual funds also had net inflows during the 5 day period ending February 19th with $2.8 billion flowing into all fixed income funds. The breakout of improving bond inflow amounted to $2.4 billion into taxable products and a $422 million inflow into tax-free or municipal products, the 6th consecutive week of inflow into munis after 33 consecutive weeks of outflow. The 2014 weekly average for fixed income mutual funds now stands at a $523 million weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).

 

ETFs had mixed trends during the week, with a strong week of subscriptions in stock ETFs with $8.9 billion in net inflow with bond ETFs experiencing withdrawals of $625 million. The 2014 weekly averages are now a $3.3 billion weekly outflow for equity ETFs and a $2.3 billion weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $12.6 billion spread for the week ($14.8 billion of total equity inflow versus the $2.2 billion inflow within fixed income; positive numbers imply inflows for stocks; negative numbers imply inflows for bonds). The 52 week moving average has been $6.9 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) and a 52 week low of -$36.9 billion (negative numbers imply a net inflow into bonds for the week). 

 

Continued strong equity mutual fund inflow trends currently support our favorite long idea in the sector, T Rowe Price (TROW) which should benefit with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the emerging trends on the institutional side of the industry which is experiencing inflow into fixed income and outflow in equities (see our Legg report here).

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

 

ICI Fund Flow Survey, Solid Equity Inflow - ici

 

 ICI Fund Flow Survey, Solid Equity Inflow - ICI chart 2

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

 

ICI Fund Flow Survey, Solid Equity Inflow - ICI chart 3

 

ICI Fund Flow Survey, Solid Equity Inflow - ICI chart 4

 

ICI Fund Flow Survey, Solid Equity Inflow - ICI chart 5

 

ICI Fund Flow Survey, Solid Equity Inflow - ICI chart 6

 

ICI Fund Flow Survey, Solid Equity Inflow - ICI chart 7

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

  

 

ICI Fund Flow Survey, Solid Equity Inflow - ICI chart 8

 

ICI Fund Flow Survey, Solid Equity Inflow - ICI chart 9

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $12.6 billion spread for the week ($14.8 billion of total equity inflow versus the $2.2 billion inflow within fixed income; positive numbers imply inflows for stocks; negative numbers imply inflows for bonds). The 52 week moving average has been $6.9 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) and a 52 week low of -$36.9 billion (negative numbers imply a net inflow into bonds for the week). 

 

 

ICI Fund Flow Survey, Solid Equity Inflow - ICI chart 10 

 

 

Continued strong equity mutual fund inflow trends currently support our favorite long idea in the sector, T Rowe Price (TROW) which should benefit with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the emerging trends on the institutional side of the industry which is experiencing inflow into fixed income and outflow in equities (see our Legg report here).

 

 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 


The Russian Bear

Client Talking Points

RUSSIA

Just when it was looking like it was safe to get back in the water. The Ukraine suddenly matters (a lot) to investors, with Europe off 2-3% and S&P 500 futures down ~20 handles. World markets are doing to Vladimir Putin what Barack Obama can't. The Russian stock market is getting absolutely hammered down -13.8%. It's swan dived to -24.2% year-to-date. Got correlation risk?

U.S.

In other non-Crimean news, US GDP #GrowthSlowing sequentially (from 4.12% in Q313 to 2.37% in Q413) is only the beginning of the Down Dollar (USD down another -0.7% last week, and down 3 of the last 4 weeks), Down Rates (UST 10yr Yield -38bps YTD) thing. Both US monetary and fiscal policy going dovish on the margin is just fantastic! Because, without going to sub 2% US GDP growth and plus 2% made-up-reported-inflation growth, how the heck else could the Keynesians blame Russia?

S&P 500

To be clear, we don’t go with the whole how markets and GDP “feel” thing. You can overpay to get that from someone else. While the S&P 500 was up a whopping +0.6% for 2014 YTD (it’s March fyi), it's mainly the inflation and #GrowthSlowing parts of the market leading: Healthcare (XLV) +7.2% Utilities (XLU) +6.5% Basic Materials +1.9%. The most meaningful parts of the economic cycle (the consumption economy) are actually down YTD: Consumer Staples (XLP) -1.5%. Financials (XLF) -0.7% Industrials (XLI) 0.4%.

Asset Allocation

CASH 44% US EQUITIES 0%
INTL EQUITIES 8% COMMODITIES 16%
FIXED INCOME 14% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
FXB

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. 

LVS

Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike.  The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet.  The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%.  And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.

DRI

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

TWEET OF THE DAY

EUROPE: train wreck morning w/ war markets like Poland -4.9%, Hungary -4.5%, Austria -3.9% @KeithMcCullough

QUOTE OF THE DAY

You must obey the law, always, not only when they grab you by your special place. -Vladimir Putin

STAT OF THE DAY

Rising tension over Ukraine slammed Russian financial markets Monday, prompting the central bank to hike interest rates as the ruble plunged. The ruble, already one of the weakest currencies so far this year, fell as much as 3% versus the U.S. dollar before posting a small recovery. The ruble has declined by more than 10% this year as Russia experiences a significant slowdown and weak future growth prospects. (CNN)


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