“We shall not cease from exploration, and the end of all our exploring will be to arrive where we started and know the place for the first time.” - T. S. Eliot
Is the USA a good business?
It’s the most fundamental question of all and one of ongoing import for both global capital suppliers and domestic residents as returns to capital increasingly accrue to foreign investors in the wake of decades of cumulative trade deficits and trillions in net capital inflows. It’s also a topic for a different Early Look.
Considering the “business of America”, however, leads to a question of equal import to Macro investors – and a relevant one alongside the release of the advance estimate of 4Q GDP this morning. Specifically, does it make sense to model the Macroeconomy as you would a company?
Think of it this way: Would you want to be long a company with accelerating topline, expanding margins and a competent management team while being underweight/short the converse? No brainer, right.
Conceptually, we view Macro investing in the same way. In the context of our GIP (Growth/Inflation/Policy) model, we want to be long accelerating topline (GDP), expanding margins (decelerating Inflation) and competent management (policy effective in supporting sustainable growth).
Q: How do you model companies?...or put differently, how many companies that you follow reported earnings results on a QoQ annualized basis this quarter? …I’ll take the under on “one”.
How does the U.S. report/ measure GDP? Officially QoQ, kinda….it depends
- BEA: The BEA reports real GDP growth on a seasonally adjusted annual rate (SAAR) basis, but….
- ....when they report longer run data they report it on a year-over-year basis using an average of the quarterly data
- FOMC: The Fed projections typically estimate growth on a Q4-over-Q4 basis
- Consensus: Consensus estimates are generally available for both QoQ and full year. However, attempting to true up quarterly estimates with the full year growth estimate is typically a quixotic pursuit. Fuzzy math and data collection/sample differences drive the delta and incongruity.
Conveniently, all this variation lets both policy makers and pundits speak to whichever estimate best fits the narrative du jour and/or writes the best revisionist history. Same goes for inflation measurement.
We’ve found modeling growth on a year-over-year basis - and backtesting it against equity/sector/asset class performance – to be an effective approach. It makes intuitive sense to us as well.
Relatedly, how many countries report GDP principally on a year-over-year basis? …. Most.
As it relates to this morning’s 4Q14 growth data - Consensus is expecting +2.95% QoQ SAAR and the Fed’s GDPNow model is estimating +3.5%. For illustrative purposes, if we simply split the difference and assume 3.2% for the quarter, full year growth for 2014 will be ~+2.4% YoY.
So, inclusive of two ~+5.0% QoQ prints, we’re still essentially a 2% plus-or-minus economy. We think 2% with cyclical oscillations above and below remains the right reflection of our intermediate term reality.
The GDP table below provides a redux ahead of this morning’s data. I’ll tweet out the updated table after the release (@HedgeyeUSA)
Yesterday’s Early Look explored the value of asking both a lot of questions and, importantly, the right questions in generating investing insight. Given some of the (superficially) internal inconsistency in recent macro data it makes sense to extend that discussion.
Consider yesterday’s Housing data:
Pending Home Sales: Pending Home Sales in December were pretty bad…..or pretty good
- MoM: On a month-over-month basis, PHS dropped the most in a year with seasonally-adjusted sales declining -3.7% sequentially .
- YoY: On a year-over-year basis both SA and NSA sales accelerated to their fastest rate of growth in 18 months. Seasonally adjusted sales accelerated +220bps sequentially to +6.1% YoY while NSA sales accelerated to +8.5% YoY from +1.5% YoY in November. So, from which rate of change metric should you take your cue?
- Our take: With Purchase Application accelerating sharply thus far into January, the preponderance of housing data improving as we traverse progressively easier comps, and PHM, DHI and RYL results reflecting positive momentum of late, we’re inclined to maintain our constructive view on housing.
Household Formation vs Homeownership Rate - A Tale of Two (or Three) Metrics:
- Homeownership Rate: Housing Vacancy and Homeownership data released from the Census Bureau yesterday showed the national homeownership rate declining to 64% to close out 2014- the lowest level since 1994. Doesn’t sound too good, right?
- Household Formation: The same survey data showed household formation was en fuego in 4Q. As can be seen in the Chart of the Day below, the CPS/HVS survey estimated that the total number of households grew by 2.0MM in December vs a year earlier, the largest yearly change since July 2005. On a rate of change basis, year-over-year growth accelerated to +1.4% in 4Q – up from 0.4% growth in the Jan-Sept period and the first material acceleration in 8 years.
- Headship Rate: Rising household formation rates will show up in a rising Headship Rate. The Headship Rate represents the percentage of adults who head households (Headship Rate = Households/Population) and is a more comprehensive measure than the homeownership rate. It’s important to understand the distinction. Definitionally, Households can be either 1. Owners or 2. Renters and the Homeownership Rate = Owners/Households. Thus, similar to Unemployment Rate dynamics, the Homeownership Rate could ‘improve’ due to fundamentally negative developments. For instance, if both the number of owners and the number of renters declines (an obvious negative for housing broadly) the homeownership rate could actually increase if the magnitude of decline in renters is larger than that for owners. The Headship Rate is less ambiguous.
- Our Take: Accelerating household formation and a retreat from peak in “basement dwelling” is a broad positive for the housing market. Even if the balance of activity is occurring on the rental side – which it appears to be thus far – the broader recovery in headship rates will ultimately see flow through to single-family purchase activity.
More broadly: The preponderance of domestic macro data has been slowing from a rate of change perspective the last couple months (retail sales, durable/capital goods, ISM/PMI’s). Less than 56% of SPX constituents have beaten topline estimates in 4Q thus far and less than a third of companies have registered sequential acceleration in revenue growth. Corporate earnings estimates are sliding and revenue revision trends are almost universally negative alongside decelerating global growth and the ongoing energy price cratering.
Does a modest deceleration in domestic growth matter for domestic assets in the face of the flood of global capital inflow and relative value reaching? While the US may benefit broadly from the inflow, with the long bond (TLT) up +7.9% YTD vs. -1.83% for the SPX, its seems that capital deluge is, indeed, discerning.
The YTD performance divergences across equity sectors are equally large…and the year is young. Performance chases price, particularly in the immediate term, and with the fundamentals rightly supporting deflation leverage and defensive yield flows, we think what has been working continues to work.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.70-1.82%
WTI Oil 43.22-46.26
Re-think. Re-work. Reward.
Christian B. Drake
U.S. Macro Analyst