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FIVE-FECTA: Consumer Credit Growth Accelerates (Again) in July

Takeaway: Consumer revolving credit accelerated to +3.2% YoY in July, marking a 5th consecutive month of positive growth.

FIVE-FECTA:  REVOLVING CREDIT GROWTH ACCELERATES FURTHER IN JULY AS THE BREAKOUT IN CONSUMER CREDIT HITS 5-MONTHS

Consumer Revolving Credit rose at a 7.3% annualized rate in july, the 2nd largest increase in 6.5 years behind the 13.2% rise reported for April. 

 

Inclusive of July, this marks the 5th consecutive month of positive MoM loan growth – the longest such streak since April of 2008.    

 

The monthly revolving consumer credit data continues to accord with the broader cross-category trends in the weekly Fed H.8 release where the slope of growth across total loans, C&I, CRE, and residential real estate all remain positive.   

 

FIVE-FECTA: Consumer Credit Growth Accelerates (Again) in July - Revolving Credit MoM July

 

FIVE-FECTA: Consumer Credit Growth Accelerates (Again) in July - Consumer Credit 090814

 

FIVE-FECTA: Consumer Credit Growth Accelerates (Again) in July - Commercial Bank Loan Growth

 

SO, WHERE’S THE SPENDING?

Aggregate personal and disposable income growth is currently accelerating alongside an emergent breakout in salary and wage income growth. 

 

Indeed, aggregate private sector salary and wages grew +6% in July, the fastest rate of growth in over 3 years excluding the peri-fiscal cliff period (although wage income growth will likely slow in august given flat growth in hourly earnings and a modest deceleration in growth in the employment base).

 

FIVE-FECTA: Consumer Credit Growth Accelerates (Again) in July - Salary   Wage Income

 

However, while capacity for consumption is rising, actual consumption is not.  Real consumer spending declined -0.2% MoM in July and decelerated on both a 1Y and 2Y basis as the savings rate hit an 18-month high at 5.7%.

 

FIVE-FECTA: Consumer Credit Growth Accelerates (Again) in July - Real Spending July

 

The collective motivation underpinning the concomitant acceleration in both savings and revolving credit isn’t completely clear – it may be some combination of liquidity preference and income distributional effects, but we don’t have a clean explanation (yet).

 

Irrespective of the somewhat incongruous income-credit-saving dynamics, the reality of a modern, consumption economy, is that it's total spending that matters and accelerating credit growth + accelerating income growth is certainly supportive of consumption growth.

 

Whether the conflation of positive labor and credit market trends, the fledgling breakout in the dollar and the fledgling breakdown in commodity inflation can drive a sustainable, late-cycle acceleration in domestic consumerism in the face of negative real wage growth, a slowdown in housing, a discrete EU/Japan/ROW growth deceleration, and a nascent proclivity for saving remains to be seen, however.

 

We continue to like defensive yield and late-cycle exposure vs. consumer/housing/early-cycle leverage.   

 

FIVE-FECTA: Consumer Credit Growth Accelerates (Again) in July - Eco Summary

 

 

Christian B. Drake

@HedgeyeUSA

 


European Banking Monitor: European Sovereign Swaps Tighter Out of QE-Lite From ECB

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 mixed, though, on average, tighter across Europe's banking complex. Apparently, much of the QE-lite move was already priced in. Sberbank widened on the week by 12 bps to 321 bps.

 

European Banking Monitor: European Sovereign Swaps Tighter Out of QE-Lite From ECB - chart 1 euro financials CDS

 

Sovereign CDS – Sovereign swaps mostly tightened over last week. The US was the exception, widening by 1 bp to 17 bps. European sovereign swaps were tighter across the board on the heels of the ECB's QE-Lite. Portuguese swaps tightened 17 bps to 145 bps while Spanish sovereign swaps tightened by -10.7% (-7 bps to 57 ).

 

European Banking Monitor: European Sovereign Swaps Tighter Out of QE-Lite From ECB - chart 2 sovereign CDS

European Banking Monitor: European Sovereign Swaps Tighter Out of QE-Lite From ECB - chart 3 sovereign CDS

European Banking Monitor: European Sovereign Swaps Tighter Out of QE-Lite From ECB - chart 4 sovereign CDS

 

Euribor-OIS Spread – 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. The Euribor-OIS spread widened by 1 bps to 17 bps.

 

European Banking Monitor: European Sovereign Swaps Tighter Out of QE-Lite From ECB - chart 5 euribor OIS Spread

 

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 

 


The Real Question Isn't $100/Share for Restoration Hardware, It's Whether We See $200 or $300 | $RH

Takeaway: We think that people are missing the boat on Restoration Hardware.

Editor's note: This is an excerpt from our retail sector team led by Brian McGough.

The Real Question Isn't $100/Share for Restoration Hardware, It's Whether We See $200 or $300 | $RH - 45

Restoration Hardware - 2Q14 Earnings Preview

 

Takeaway: We think that people are missing the magnitude of earnings growth at RH, the sustainability of that trajectory over a long period of time, and ultimately the degree to which that will accrue to equity holders.

 

The question is not whether the stock will go to $90 vs $100 (where we see most price targets), but whether it will get to $200 vs $300.

 

Even the best stories, however, are not linear. There will be bumps along the road. But this print should not be one of them.  We’re well above the Street in Sales, Margins and EPS, and we flush out in this note where we could be wrong. 

HEDGEYETV Flashback | 10.17.13


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS?

Takeaway: We expect EM assets to continue outperforming their DM counterparts over the intermediate term.

Not much has changed with respect to our thematic views on emerging market assets. After having been the bears throughout 2013 and into 2014, we’ve been extremely bullish on the EM space since MAR of this year and see no reason to alter that stance.

 

Specifically, both our top-down quantitative signals and bottom-up GIP fundamentals augur for continued outperformance of EM assets over the intermediate term.

 

TACRM Quant Signals (CLICK HERE to download the expository white paper):

 

  • The 29% Optimal Asset Allocation to EM Equities is +6ppts and +12ppts above its trailing 3M and TTM averages, respectively. These deltas suggest the presence of rotation based capital flows (i.e. marginal investor interest). Moreover, 29% is as high a Optimal Asset Allocation to EM Equities we’ve seen on both a TTM and trailing 5Y basis. This effectively means global equity investors with flexible mandates that aren’t overweight EM have likely underperformed and are likely to continue to underperform.
  • Across the six primary liquid asset classes (Fixed Income & Yield Chasing Instruments, DM Equities, EM Equities, FX, Commodities and Cash), EM Equities is currently the only asset class with a “high-conviction BUY” rating according to TACRM.
  • 14 of the top 20 most bullish ETFs (roughly ~200 in aggregate) from the perspective of TACRM’s Volatility-Adjusted Multi-Duration Momentum Indicator readings are EM Equity exposures.

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - TACRM Summary Table

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - TACRM Heat Map

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - TACRM ACRM Delta

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - TACRM ACRM Percentile

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - TACRM 20 20

 

GIP Fundamentals: Core to our bullish bias on EM assets is an deep understanding of the role DM monetary conditions has historically played in determining valuations for EM assets. Specifically, as those conditions ease – especially US dollar liquidity – EM assets tend to benefit from a tailwind of marginal investor interest. We’ve discussed this carry trade at length over the course of our thematic work on emerging markets (CLICK HERE for the most recent example… refer to slides 17, 19 and 20).

 

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - UNITED STATES

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - EUROZONE

 

Looking to the scoreboard, EM has certainly been the place to be since we introduced the thesis (performance since 3/26):

 

  • MSCI EM Index: +13.3%
  • MSCI US Index: +8.4%, or -490bps  of underperformance
  • MSCI Europe Index: +5.4%, or -790bps of underperformance

 

This outperformance makes perfect sense in the context of the outperformance of the slow-growth, yield-chasing style factor domestically. Specifically, the performance of REITs, MBS and stocks with high dividend yields have explained anywhere from 60-78% of the MSCI EM Index’s price movements across the trailing intermediate-term duration, per the table below which shows the average of trailing 1M, 3M, 6M and 1Y correlations.

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - 9 8 2014 11 35 13 AM

 

All told, until the outlook for domestic and European economic growth ticks up (it won’t in our models through at least year-end), we think investors will have adequate fundamental cover to remain overweight EM. That call is certainly not without risk in the context of #VolatilityAsymmetry across every major asset class, but that remains a bridge we’re happy to cross when we get to it. Calling stock market tops on a prospective basis tends to amount to little more than a fool’s errand.

 

Our current best ideas across the EM space are highlighted in the table below. A couple of changes to note:

 

  • We are swapping out the iShares MSCI Emerging Markets ETF (EEM) for the Vanguard FTSE Emerging Markets ETF (VWO) to maximize our exposure to China (17.4% VWO vs. 14.7% of EEM) and India (10.8% of VWO vs. 6.7% of EEM) and to minimize our exposure to South Korea (0% of VWO vs. 14.7% of EEM), which is suffering from both deteriorating GIP fundamentals and idiosyncratic risks (Samsung lawsuit and ownership transfer). The +14.1% advance for the EEM since MAR 26 compares to a +6.2% advance for the MSCI All-Country World Index, effectively generating +789bps of research alpha.
  • We are booking the gain in both the WisdomTree Emerging Currency Fund (CEW) and the Market Vectors Emerging Markets Local Currency Bond ETF (EMLC). While a net +141bps of alpha between the two exposures is nothing to scoff at, both ideas have become stale in light of the recent quantitative breakout in the US Dollar Index.

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - Idea Flow Monitor

 

SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS? - DXY

 

Best of luck out there and feel free to email us with any questions.

 

DD

 

Darius Dale

Associate: Macro Team


Buy Pound Sterling on Scottish Independence NOT Happening

  • Adding in on our bullish GBP/USD (via the etf FXB) position as we believe that the Scots vote down independence when the country votes next Thursday, September 18th
  • We expect the currency to retrace its move alongside strong fundamentals underpinning the cross

We did not see the Scottish Independence threat manifesting like it has. In fact, UK high frequency data has shown a strong positive divergence over continental Europe in recent weeks, which we believe is supportive to our thesis. 

 

That said, the GBP/USD (etf FXB) has clearly been battered down:  -5.8% since a high on 7/2; -2.6% month-to-date; and over -1% intraday (the weakest levels since late November 2013). It has moved in step over the last two weeks as the spread between “No” versus “”Yes” votes for Scottish independence has come in considerably to the Yes side - to a 2% advantage according to a YouGov poll released over the weekend.

Buy Pound Sterling on Scottish Independence NOT Happening - z. yougovb

Buy Pound Sterling on Scottish Independence NOT Happening - z. gbp anno
 

Ultimately we think the myriad of economic risks presented by a "Yes" vote (listed below) will outweigh the more popular sentiment shift over recent weeks – which has been driven alongside a campaign by Scotland’s First Minister Alex Salmond to appease fears presented by secession – however be prepared for a close vote.  Also note, betting markets are not buying into Scottish independence, with No = 71%; Yes = 29%.

 

Secession Risks:

  • Currency –  UK politicians have stated that Scotland could not use Sterling. The country would have to issue its own currency
  • Central Bank – until the formation of a central bank there is no backstop for sovereign debt
  • Massive Capital Flight –investors could pull money out of Scottish banks en masse that would destabilize the financial system 
  • EU Membership – it’s unclear if an independent Scotland would be granted EU membership, which could have huge trade implications
  • Regulation – uncertainty if banks would remain regulated under the UK regulatory authority? Tax and trade regulations also uncertain
  • Economic Drag – prominent financial firms likely to move to London
  • Budget –  the Institute for Fiscal Studies pointsout that Scotland's Deficit could be 4.6% if independent. Low credit quality could negatively impact debt raises, and push the country's debt and deficit levels higher, a vicious cycle

While Salmond’s "Yes" campaign has been driven on the promise that an independent vote will allow the country to capitalize on oil wealth and enable the government to improve its system of social welfare, we size up his campaign rhetoric as over-promising and under-delivering. 

 

The myriad of economic risks (presented above) may in fact leave the average citizen at a disadvantage as the economy grows at a slower rate with less jobs. Add on the uncertainty around the promise of “oil wealth”:  while more than 80% of Britain’s oil lies in reserves with Scotland’s maritime borders, how the reserves would be divided is uncertain, with no certainty that an independent Scotland would get the long end of the stick.

 

Matthew Hedrick

Associate


Cartoon of the Day: Smells Like 2007

Takeaway: "I haven’t been this bearish since the fall of 2007," Hedgeye CEO Keith McCullough wrote in today's Morning Newsletter.

Cartoon of the Day: Smells Like 2007 - smells like 2007 09.08.2014


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