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CHART OF THE DAY: Sobering Online Sales Trends

CHART OF THE DAY: Sobering Online Sales Trends - el

 

Editor's note: Below is an excerpt from today's Morning Newsletter which was written by Hedgeye Director of Research Daryl Jones.

 

Staying on the theme of consumption as a big driver of Q3 GDP, our Retail Sector Head Brian McGough circulated a chart of “ICSC (International Council of Shopping Centers) YTD Comp Sales Trends,” which is in the Chart of the Day, and according to McGough:

 

“A big rebound in sales for the week, but this follows two big weekly declines in the context of an intermediate term downtrend. The point there is that with sales trending down so much into the biggest holiday week, it makes sense that retailers would really turn the discounting machine into overdrive to have any shot at hitting numbers and prevent a glut of inventory in January. Online sales trends per Channel Advisor are downright sobering.”

 

Certainly, this data doesn’t guarantee that Q4 GDP will slow from Q3, because it is still possible that old St. Nicholas has some last minute shopping to do!


The Night Before

“Twas the night before Christmas, when all through the house

Not a creature was stirring, not even a mouse;

The stockings were hung by the chimney with care,

In hopes that St. Nicholas would soon be there.”

-Major Henry Livingston Jr.

 

 

Whether you celebrate Christmas or not, undoubtedly many of you are familiar with the poem “Twas The Night Before Christmas”.  It is the classic story of children waiting for the mythological character Santa Claus to show up on Christmas Eve.

 

A side note on this poem is that there is some serious controversy surrounding the author.  The poem was originally published anonymously in 1823, but then attributed to Clement Clarke Moore, who acknowledged authorship in 1837. 

 

A graduate of Columbia University, Moore was an interesting character.   Among other things, his father officiated at the inauguration of George Washington, he was opposed to the abolition of slavery, he was also a vocal opponent to Thomas Jefferson for mostly religious reasons, and, ironically enough, founded the Chelsea area of New York City. 


Despite claiming authorship, Professor Donald Foster of Vassar, who is considered of the top forensic linguists in the world, has concluded quite definitely that true author was Henry Livingston, Jr.   Livingston was also a New Yorker, though primarily a gentleman farmer as opposed to being a political and religious activist, and wrote the poem for his seven children.

 

Admittedly, this story of disputed authorship, jolly men in suits bringing presents and a red nosed flying rein deer leading the way, remind us a little of the global stock markets.  On Nasdaq, on Dow, on Yen and on Ruble ! (Ok, not on Ruble.)

The Night Before - Yellen cartoon 12.23.2014

 

Back to the Global Macro Grind...

 

Yesterday, the market mildly cheered on not the arrival of St. Nicholas, due to a meaningful upward revision in GDP for Q3.  The most prominent area of revision from the initial GDP estimate was a +0.70% increase in consumption to +3.2% from last quarter.  But across the board, the other key components were revised higher as well.

 

The challenge with GDP for stock market operators, of course, is that it is often rightfully considered a lagging indicator.  Case in point is that we are just now getting the final GDP number for Q3 when we are seven days before the end of Q4 2014.  The key questions from here to ask are: a) Did GDP just peak? and b) How is Q4 and beyond shaping up?

 

On the first point, to us it certainly looks like Q3 GDP was the peak, or close to it.  On a sequential basis, GDP was up +5%, which was the best sequential increase since Q2 2011.  On a year-over-year basis, it was the second best print since Q2 2011.  Most importantly, on a two and three year average basis this was the best year-over-year growth rate since Q2 2011. The question from here, of course, will the rate of change accelerate or decelerate, on the margin?

 

Staying on the theme of consumption as a big driver of Q3 GDP, our Retail Sectorhead Brian McGough circulated a chart of “ICSC (International Council of Shopping Centers) YTD Comp Sales Trends”, which is in the Chart of the Day, and according to McGough:

 

“A big rebound in sales for the week, but this follows two big weekly declines in the context of an intermediate term downtrend.  The point there is that with sales trending down so much into the biggest holiday week, it makes sense that retailers would really turn the discounting machine into overdrive to have any shot at hitting numbers and prevent a glut of inventory in January.  Online sales trends per Channel Advisor are downright sobering.”

 

Certainly, this data doesn’t guarantee that Q4 GDP will slow from Q3, because it is still possible that old St. Nicholas has some last minute shopping to do!

 

It won’t all be coal in our stockings heading into 2015.  One area that we recently highlighted as likely to see improvement and outperformance in 2015 is U.S. housing.   A headwind to housing has been the inability, by some, to get credit.  Aside from the potential easing of down payment rules, another key area that might provide a credit tailwind is the improvement in subprime mortgage market.

 

According to an analysis by Barclays, subprime mortgage bonds have gained 12% this year, which is more than 6x the return of junk rated corporate debt.  In aggregate, subprime bonds have returned more than 75% since 2010.  To be fair, 30% of the subprime mortgages tied to these bonds are more than 60 days delinquent, but that too is an improvement from 41% in 2010.

 

Certainly, we aren’t hoping for a return to the days when mythical characters like Santa Clause took out mortgages with no paperwork, but incremental improvement in the ability to get financing for the younger and less wealthy demographic is a real positive.

 

As it relates to real-time data on housing, my colleague Christian Drake wrote a note yesterday that looked at new home sales and recent pricing data.  While in his words new home sales was still a bit muddling, on the pricing front FHFA Home Price Index accelerated to +4.4% in Oct from +4.2% in Sep.  All three primary price series are telling the same (2nd derivative) stabilization story.

 

So really what we are saying is that if your loved ones were really well behaved in 2014, this is probably a very good time in the cycle to buy them a house!

 

Our Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.04-2.27%

SPX 1

RUT 1125-1208

VIX 13.17-24.35

USD 89.08-90.66

YEN 118.43-121.18

WTI Oil 52.87-59.23

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Night Before - el


Purchase Demand | Flirting With Some Firsts

Takeaway: Purchase demand flirts with its 1st week of positive YoY growth in a year. Rates flirt with a breach of 4% to the downside.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 

 

Purchase Demand | Flirting With Some Firsts - Compendium 122414 

 

 

Today’s Focus:  MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended December 19th. 

 

The Composite Index rose 0.9% sequentially with Refi activity up +1.07% WoW and Purchase demand rising 1.3% WoW …(yes, via SA translation, the combination of +1.07% and +1.3% gets you less than 1% on the composite)

 

Three quick highlights: 

 

Hurry up and wait:  Given the regulatory change for Fannie Mae, which reduced minimum down payment requirements to 3% from 5%, took effect on December 13th we were interested to see this week’s purchase apps data as it captures the first week of potential impact. 

 

In short, purchase demand was higher by 1.3% sequentially, but given peri-holiday seasonality in combination with the typical weekly volatility in the series, it’s hard to (convictedly) discern the impact of any single factor in isolation.  Its more likely that any positive impact – which we expect to be modest/moderate – will manifest as a support to the underlying trend in 1H15 rather than a discrete, step function increase in reported demand trends. 

 

Rate of Change:  Our reversal from bear (in 2014) to bull (for 2015) on housing is more of a rate of change and balance of risk call than it is an expectation for meteoric, industry ‘escape-velocity’ in the immediate/intermediate term. 

 

Summarily, with 2nd derivative HPI trends stabilizing, easy comps, marginal expansion of the credit box and supportive macro we expect housings transition from ‘bad’ to ‘less bad’ will be a positive for the related equity complex. 

 

We are seeing that play out on the purchase demand side (1st & 2nd charts below) with the year-over-year change improving to just -0.5%; flirting with its first positive growth number in a year and facing progressively easier comps through 1Q15. 

 

3-Handle:  With rates on the 30Y FRM contract down another -4bps week-over-week to 4.02%, we are also flirting with a breach of 3% to the downside for the first time since May of last year.  To the extent that expectations for monetary policy normalization continue to drive a flattening in the yield curve and global disinflation and growth deceleration continue to anchor the long-end (Japan & German 10Y both <60bps), ceteris paribus, domestic housing demand/affordability stands to benefit.  

 

Purchase Demand | Flirting With Some Firsts - Purchase   Refi YoY

 

Purchase Demand | Flirting With Some Firsts - Purchase 2014 vs 2013

 

Purchase Demand | Flirting With Some Firsts - 30Y FRM

 

Purchase Demand | Flirting With Some Firsts - Purchase qtrly

 

Purchase Demand | Flirting With Some Firsts - Purchase LT w summary stats

 

Purchase Demand | Flirting With Some Firsts - Composite LT w summary stats

 

Joshua Steiner, CFA

 

Christian B. Drake

 

 

 


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December 24, 2014

December 24, 2014 - 1


U-G-L-Y

This note was originally published at 8am on December 10, 2014 for Hedgeye subscribers.

“U-G-L-Y, You Ain’t Got No Alibi”

-Wildcat Cheerleaders

 

Every year around the holidays I make a point to pick up a stranger, fund a trip to the nearest fast food drive-thru and further them towards wherever “point B” happens to be.   

 

I picked up my first hitchhiker in four years this past weekend. 

 

My multi-year drought in holiday humanism hasn’t been intentional, there’s just been a secular bear market in central CT hitchhiking. 

 

My father started the tradition when I was young.  He passed away when I was 17 and I’ve carried on the tradition over the last decade+.

 

It’s an homage of sorts and my way of paying-it-forward.

 

U-G-L-Y - h1

 

Back to the Global Macro Grind….

 

The thing about ‘paying-it-forward’, in real terms, is that one generally has to get paid to begin with. 

 

While the recent crescendo in Energy/Russia/Greece crashing captions has dominated newsflow the last couple weeks, accelerating wage inflation – and its seemingly perpetual imminence – remains a trending and favorite topic for headline writers.   

 

Indeed, slack reduction and the hoped-for flow through to wage inflation has been the bull case for purveyors of panglossianism for the last year. 

 

The flow of Wall Street wealth to Main Street income remains core to Janet Yellen’s policy calculus as well – and front-running reactionary central bank policy remains the game – so the iterative, Bayesian review of the monthly labor/wage data remains a ceaseless exercise. 

 

To review:

 

THE THEORY: Conventionally, wages are viewed as a lagging indicator, with wage inflationary pressure building as the labor supply declines and the economy moves towards constrained capacity.

 

That an output gap still exists in the domestic economy remains readily apparent.  The core of the slack debate continues to center on the magnitude of the shift in labor supply-demand dynamics and whether policy makers will move ahead of or behind any emergent inflationary curve.     

 

THE (RECENT) SLACK DATA:

  • Quits & Hires:  Yesterday’s JOLTS data showed voluntary separations (Quits) held above 2.7MM for a second consecutive month – the highest level since February 2008 – while total hires held above 5MM for a second month for the first time since December 2007. 
  • Available Workers per Job Opening:  Available Workers (the sum of Unemployed + those Not in the Labor force but Want a Job) per Job Opening (JOLTS reports) dropped to 3.21 in October – marking a new cycle low and dipping below the pre-recession average of 3.31.
  • Short-term Unemployed, % of Total:   The share of short-term unemployed - those unemployed for less than 5 wks – made another new cycle high, increasing to 27.6% of total in November.   While the share of total has typically ranged between 40-50% at peak in prior cycles, the trend in the current cycle remains one of ongoing improvement. 
  • NFIB Hiring & Compensation: The Small business optimism data for November, released yesterday, showed hiring plans, compensation, and difficulty in filling positions all remain positive with each increasing sequentially and sitting jut below recent cycle highs.

 

So, the continued, albeit frustratingly slow, transition to tautness remains ongoing on the labor slack front.  Does that portend material (imminent) upside in wage growth?  

 

INCONVENIENT TRUTHS? 

  • Nominal Wage growth over the last 3 cycles (1982-2007) has peaked at just north of 4% and has averaged 3.3%.   Real Wage growth, however, has been largely a phantasm – particularly for the median and lower income quintiles.   
  • The lone long-term data set on realwage growth – which focuses on production and nonsupervisory workers - shows real wage growth has been flat/negative for most of the last 4 decades.  The current post-recessionary progression in real wage growth actually compares favorably with those observed over the last half century. 
    • Labor’s share of National Income only rises at the tail end of an expansion and after growth and profits have been strong for a protracted period. 

Remember too that those averages were achieved alongside peak positive demographics, accelerating credit growth, and a favorable interest rate backdrop.    

 

PLAYING FOR…+40bps?:

 

Is a return to a halcyonic 3-4.5% level of nominal wage growth in the face of persistently lower inflation, an aging workforce, top heavy demographics, lower productivity and lower credit growth a reasonable expectation?

 

We don’t think so. 

 

Hourly wage growth for the private sector has been stuck at ~2% for the better part of the last four years.  The trend in wage growth for production and non-supervisory workers (+2.4% in November) has been better but not great. 

 

Assuming there is an intermediate-term to the current expansion (now 67 months old), there is probably some runway for further wage gains but with upside to something closer to ~+2.5% than to the ~4% (a double from current levels) of prior cycle peaks. 

 

Strong dollar deflation and a protracted deceleration in global growth should only constrain the upside for domestic inflation.    

 

To review the current state of the top 7 Global Economies: 

 

  1. United States:  Good - but slowing from a rate of change perspective
  2. China:  Ugly - Growth slowing, Disinflation rising (printed 5Y low last night), central bank easing
  3. India:  Good - growth improving & inflation worries ebbing with Dr. Raj doing a credible job at the helm of the RBI
  4. Japan:  Ugly - Yen crashing, economy slowing, Abe/Aso scrambling
  5. Germany/Eurozone:  Ugly – deceleration growth and disinflation prevailing, Incremental CB easing imminent
  6. Russia:  Disaster – Ruble is crashing, GDP is looking like -6-8% at current oil prices, risk of a banking crisis is rising
  7. Brazil:  Ugly -  perhaps some interesting upside in another quarter or so but, for now, Brazilian policymakers/economy (still) can’t get out of their own way 

 

If you’re keeping score that’s:  4 Uglies, 1 Disaster, and 1.5 Good

 

What say prices/markets about those macro realities?

 

  1. Global Growth and Inflation Revisions = negative
  2. 10Y Yield = -27% YTD, Bearish Formation, immediate-term downside to 2.16%
  3. Yield Spread (10’s -2’s) = 52 Week Low
  4. Inflation Expectations = Crashing
  5. Energy Equities & Commodities = Crashing
  6. Style Factor Performance = Low Beta, High Yield, Large Cap Outperforming (across durations)
  7. High Yield = Breaking Out and holding at 52-wk highs. 

 

In his keynote address to the CATO institute, Jim Grant presaged that a summary analysis of the 2016 crash will sound something similar to the following:

 

“My generation gave former tenured economics professors discretionary authority to fabricate money…we put the cart of asset prices before the horse of enterprise…we entertained the fantasy that high asset prices made for prosperity, rather than the other way around.”

 

With hedge fund trailing correlations to beta >0.90 and rampant central bank interventionism starving the alpha from active management, most investors, wittingly or not, have just been along for the five-year ride. 

 

Thumbing for central bank (helicopter) rides….no secular bear market there.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.16-2.26%

SPX 2043-2075

RUT 1163-1194

VIX 13.05-15.56

Yen 119.36-121.76

Oil (WTI) 60.94-66.99 

 

To chickens & eggs, carts & horses, paying it forward & having it to begin with.  

 

Christian B. Drake

U.S. Macro Analyst

 

U-G-L-Y - Available Worker per Job Opening


Cartoon of the Day: Visions of a Fed Sugar Daddy Danced In Their Heads

Cartoon of the Day: Visions of a Fed Sugar Daddy Danced In Their Heads - Yellen cartoon 12.23.2014

In less than 48 hours, Santa Claus is set to arrive bearing gifts for children across the globe. Janet Yellen? She arrived last week.


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