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The Final Countdown | Income Growth = Past Peak

Takeaway: If you’re the band Europe, you sing The Final Countdown, it’s what you do.  If you’re an economic cycle, you cycle.  Income & Consumption Growth are now past peak.   



Reading through consensus economist reactions to yesterday’s advance GDP release for 3Q, the basic, collective conclusion was this: 


Bad:  Global Headwinds, Energy and broader Industrial Sector Activity


Good:  Continued strength in domestic, private sector demand


Right ... But Also Wrong:  That conclusion isn’t inaccurate.  Consumption was again good on an absolute basis (we knew that ahead of the GDP print) while export and industrial activity continued to flag (also a known-known).  


Indeed, looking at Real Final Sales or Real Final Sales to Domestic Purchasers – which strips out exports and inventories and is meant to be a cleaner read on underlying domestic, private sector demand – the numbers remained solid (but decelerating) and better than the headline.   


REMEMBER, IT'S ABOUT BETTER/WORSE:  The liability in taking an absolutist view of the data is that macro trades on better/worse, not good/bad. 


As we highlighted (again) in our latest quarterly themes deck, Consumption growth peaked in 1Q15 and the slope of the line has now been negative for two quarters.  In employing a rate-of-change-centric view of the data, going from great-to-good is bad  – or should at least serve as a red flag.


In our modern consumption economy where household spending accounts for ~69% of GDP and the balance of expenditure buckets are in retreat, negative 2nd derivative trends in the singular source of demand strength are not inconsequential. 


So, can the domestic consumption train re-accelerate?


DON'T OVERTHINK IT:  Broadly speaking, the drivers of Consumption aren’t overly complicated.  In short, consumer spending growth is a function of the growth in income, the marginal propensity to consume or save that income, and the net change in household credit. 


Together, growth in disposable income and the change in the savings rate explain most of the change in nominal consumption (PCE) growth.  Indeed, over the last 30+ years, the multiple regression between PCE growth vs. nominal Disposable Income growth and the change in the Savings Rate produces an R-squared >0.94. 


Because its convenient (and largely agrees with the data), let’s assume both credit growth and the savings rate stay largely static from here and income growth remains the predominate driver of spending growth.  In other words, the forward slope of income growth determines the path of consumption growth.  


INCOME GROWTH | THE OUTLOOK: This morning we got the detailed household income and spending data for September.  Decelerating growth in aggregate hours and flat wage growth in the September employment report translated into a deceleration in income growth. 


Aggregate private sector salary and wage growth decelerated to +3.8% YoY – a -50bps deceleration relative to August and well below the TTM pace of +5.1%.  Indeed, aggregate private sector income actually declined -11bps month-over-month.    


Given the slowing trend in payrolls and progressively steeper income and consumption comps, it looks increasingly likely that aggregate income growth is now past peak as well. 


If you’re the band Europe, you sing The Final Countdown, it’s what you do.  If you’re an economic cycle, you cycle. 


Is a recession immediately imminent …  the balance of lead labor market data doesn’t suggest that, but we are in the twilight of the current expansionary cycle and the slope of the line across a growing number of indicators has gone negative.   


Our annotated summary table along with the longer-term income & consumption cycle charts are below.


Enjoy the weekend.


The Final Countdown | Income Growth =  Past Peak - IS Sept


The Final Countdown | Income Growth =  Past Peak - Income   Consumption Growth


The Final Countdown | Income Growth =  Past Peak - PCE Growth


The Final Countdown | Income Growth =  Past Peak - Salary   Wage Grwoth LT


The Final Countdown | Income Growth =  Past Peak - PCE vs Income   Savings 3D


Christian B. Drake


See LinkedIn? Hedgeye Internet Analyst Strikes (Again) | $LNKD

Takeaway: It pays to listen to Hesham Shaaban.

Some people pigeonhole our Internet & Media analyst Hesham Shaaban as being perennially bearish. The truth of the matter is he has a host of names he likes on the long side. Take LinkedIn. He added it to his Best Ideas list back in July. Shares of LNKD are rocketing higher today up 12%.  The stock has gained 14% since he added it versus the S&P 500 which is down 0.6%.


Not too shabby.


See LinkedIn? Hedgeye Internet Analyst Strikes (Again) | $LNKD - 10 30 2015 lnkd chart 2


Heading into last night’s earnings release, Shaaban was looking for a “clean beat and raise” of LinkedIn's forward guidance. That’s exactly what shareholders got. (Editor’s Note: LNKD is also on Hedgeye’s Investing Ideas list of top thirteen top holdings.)   


Here’s a snippet of what he said ahead of the print:


See LinkedIn? Hedgeye Internet Analyst Strikes (Again) | $LNKD - 10 30 2015 lnkd 3q15


And Shaaban's update today:


“No lumps of coal in guidance this time. The transition that spooked the Street in 1Q15 was due to a massive investment in its salesforce… We see that ramp as a coiled spring.


Incidentally, Shaaban correctly called Pandora's (P) move lower just last week (see here). Shares have tumbled even lower this week down 6%, after plunging 38% last week. 


***If you're interested in learning more about how you can subscribe to our institutional research please email sales@hedgeye.com.


Retail Callouts (10/30): COLM - Too Soon to Short, TGT, WMT, KSS

Takeaway: COLM -- Too Soon To Short, But Start Doing The Work | WMT not offering free holiday shipping | KSS Giving the store away

COLM -- Too Soon To Short, But Start Doing The Work


We question how long this good news out of Columbia will last. With the 3Q print, and positive market reaction, we're nudging closer to the short side.


On the plus side, this is about as airtight a quarter as we’ve seen from any company in the retail space (outside of NKE) this 3Q. The earnings algorithm on the income statement was impeccable with revenues +14%, gross profit +16%, EBIT +35%, and earnings +38%, with the sales to inventory spread improving sequentially from -10% to +3%.Even if we exclude the $40mm in wholesale shipments pulled forward from 4Q, the organic growth rate for the company still improved sequentially by 250bps (excluding Fx, Prana, and China JV). If we were to poke holes in any part of the print it would be on guidance, but that’s par for the course with the COLM management team -- the king of the 'guide & beat'. In truth, guidance was far less bearish than we've seen from COLM in a while -- and today's stock reaction knows it. 


On the flip side, we can't escape three things…

1) This selling season has not started off well for cold weather apparel by a country mile. This revenue represents wholesale shipments we're seeing out of Columbia -- they were ordered six months ago when retailers still had fresh memories of extremely harsh winters over each of the past two years. Now that everyone already owns a puffy jacket (we'd argue that 8 out of 10 people reading this bought a new foul weather coat in the past two years), we're curious to see how sell-through looks this season.
2) COLM's shipments and inventory levels look great. But that's not the case in apparel retail in general. There's no question that inventory/sales ratios for the retailers have eroded-- perhaps temporarily -- in the wrong direction. It's simply too early in the season for them to turn on the discounting spigot, but as Black Friday approaches keep an eye on the category. 

3) A significant part of the revenue upside came from Sorel, which is a great brand in its own right. But it's definitely struck a fashion chord with its women's line for this fall (see below). These trends always last longer than most people think, but let's be clear -- this is NOT COLM's core competency. It's not even close.

Retail Callouts (10/30): COLM - Too Soon to Short, TGT, WMT, KSS - 10 30 15 Chart3

Retail Callouts (10/30): COLM - Too Soon to Short, TGT, WMT, KSS - 10 30 15 Chart1

Retail Callouts (10/30): COLM - Too Soon to Short, TGT, WMT, KSS - 10 30 15 Chart2


WMT, TGT - Wal-Mart Won't Offer Free Shipping over Holidays



Why didn't WMT follow TGT down the free shipping rabbit hole? Our sense is that WMT feels that it's currently doing enough to win the Holiday battle -- 'rollbacks' starting 11/1, lower prices, higher wages/better service. And, it just couldn’t stomach the $5-$8 dollars it costs to ship a pack of pencils for free. Our sense is that WMT will compete away any shipping delta between itself, TGT, and AMZN in price which in effect takes prices down across the industry as price matching algos step into high gear.


KSS - Giving the Store Away

To be fair, this isn't a big deviation from the Halloween weekend sales KSS has run in the past with the one exception being the extra 20% off + triple points for rewards members. But, if you are the consumer (especially a fringe KSS consumer) how  do you keep the promotions straight? 50% off specials + Kohl's Cash + Rewards Benefits. It would not only take a really savvy couponer to figure out the benefits, but this looks like the type of promotion that would cater to a dedicated Kohl's shopper and doesn't solve THE key issue, which is attracting new customers. Looks like Mansell and co. is throwing the kitchen sink at its customer base.


2015 vs 2014

Retail Callouts (10/30): COLM - Too Soon to Short, TGT, WMT, KSS - 10 30 2015 chart4 


TGT - Target officially announces free shipping on all orders for the holidays, repeating last year's offer. 



DECK - Deckers appointed Stefano Caroti, former Nike and Puma exec, as president of omni-channel.



TGT - Target launched a new international website shoppable in more than 200 countries/territories.



M - Macy’s will be opening Thanksgiving with Black Friday deals starting at 6pm.



M - Macy’s Inc. discusses store plans for Abu Dhabi in 2018.


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LNKD: Thank You Santa (3Q15)

Takeaway: No lumps of coal in guidance this time. Also the acceleration in organic TS revenue growth essentially puts the Lynda decoy story to bed.


  1. GOOD PRINT: LNKD beat top-line estimates by roughly 3%, beating estimates across all segments while surprising with a considerable beat on EBITDA.  Naturally, some of its upside has to do with its sandbagged guidance (i.e. Display) over the last two prints, but the bulk of its top-line beat came from Talent Solutions.  LNKD produced accelerating organic Talent Solutions revenue growth in 3Q, with ARPU also accelerating from 2Q levels.  We suspect LNKD’s heavy investment in its salesforce within an improving selling environment is starting to pay off. 
  2. CLEAN GUIDANCE: LNKD raised guidance 2015 guidance by $37.5M at the midpoint, which is basically driven mostly the 3Q beat of $32.5M.  So 4Q guidance only translates to $5M raise, which wound up being only $1M above consensus estimates at the midpoint.  Granted, $5M is not a big raise by any extent, but it was clean; no big upside surprises from Lynda or organic cuts.  
  3. BUT NOT A SLEEPY LONG: The setup on LNKD can turn any given quarter, and naturally we are cautious staying long into the 2016 guidance release since this mgmt team is notoriously cautious with guidance.  The positives into 2016 is that LNKD will start comping past two pretty big drags on revenue growth (Display and Fx), and is still ramping its salesforce into 4Q.  The potential risk is that the selling environment, which is driven by the macro backdrop.  That said, if our tracker turns, we'll likely get out of the way.   


LNKD: Thank You Santa (3Q15) - LNKD   Sales Rep Slide

LNKD: Thank You Santa (3Q15) - LNKD   ARPA vs. JOLTS 3Q15 3


Let us know if you have any questions or would like to discuss in more detail.  


Hesham Shaaban, CFA


CHART OF THE DAY: Disappointing U.S. Data Eerily Reminiscent Of 2006-2007


CHART OF THE DAY: Disappointing U.S. Data Eerily Reminiscent Of 2006-2007 - chart1 EL


"For what it’s worth," Hedgeye Macro analyst Darius Dale wrote in today's Early Look. "We think the preponderance of incremental data is likely to continue to be negative."

Macro Journalism

“I was a liberal arts major at Yale and wanted to become a journalist.”

-Scott Bessent


So was I. No, but seriously. Upon explaining to then Defensive Backs Coach Tony Reno (now Head Football Coach and a beloved mentor) that I wanted to be a sports broadcaster over dinner during a home recruiting visit, he remarked (paraphrasing):


“I’ve got some great news for you. Yale has the #1 communications program in the country. We ship students down-the-road to ESPN [in nearby Bristol, CT] all the time.”


Much like Scott Bessent (former CIO of Soros Fund Management), I eventually learned that Yale does not have a journalism major, though I’m guessing that he probably learned that much sooner than I did – especially given that: A) I had never heard of Yale until I met Coach Reno my senior year of high school; or B) I didn’t have the wherewithal or the means to confirm.


Specifically, you tend to take a lot of people’s word for it when you don’t have internet access at home. In fact, you could make an argument that he could’ve literally said anything positive about this mysterious place called “Yale” and I would’ve bought it. I was just excited for the opportunity to go to college. For a variety of reasons – mostly unfortunate – most people don’t go to college where I’m from.


Back to the Global Macro Grind


In reviewing my 2nd favorite book of all time, Inside the House of Money, I re-learned that Mr. Bessent and I have a fair amount in common – we both got our first jobs on Wall St. working for another Yalie (he: Jim Rodgers; me: Keith McCullough). Additionally, from the teachings of our respective mentors we both learned to have enough confidence in our own work to stand apart from the herd:


  • Steven Drobny (author): “What did you learn from Jim Rodgers?”
  • Scott Bessent: “I learned about doing primary research. To just keep digging and look where nobody else is looking. He used to have me do these spreadsheets before there was Excel. Barron’s used to have an issue that ranked the stocks of industry groups and we’d flip it upside-down to look at the worst performers to buy and the best performers to short.”


To be crystal clear, I’m no Scott Bessent. While I hope to someday improve upon his process, performance and impact on the industry, I humbly acknowledge that I have a long way to go.


Disclaimer intact, that passage resonated with me a lot because I had a very similar experience learning how to model economies like companies instead of countries. I can recall sitting in Keith’s office at the crack of dawn in 2009 and marveling at how seemingly simple modeling growth and inflation using a Bayesian Inference Process appeared to be. If the “comps” are tough, the growth rate is overwhelming likely to slow in the forecast period. If the “comps” are easy, the growth rate is overwhelmingly likely to accelerate in the forecast period. I thought to myself, “This seems too simple. Why in the world do so few investors think to do this?”


I still have that same thought. Having been one of, if not the most, accurate firms on Wall St. forecasting domestic and global economic growth over the past few years, I continue to marvel at how simple and effective, yet non-consensus modeling the economy from a rate-of-change perspective is (CLICK HERE for a more detailed discussion). Moreover, as we penned in our GDP recap note from yesterday, our forecasting process is signaling both incremental and material degradation to U.S. economic growth over the intermediate term:


“U.S. Real GDP growth slowed right on queue into steepening base effects in 3Q15. Moreover, these “comps” are set to remain extremely difficult for the next four quarters, which implies the sine curve of underlying U.S. economic growth that oscillates between +1% and +3% is likely to mean revert back to the low end of that range of probable outcomes over the next few quarters.”


Another quality Mr. Bessent and I have in common is a passion for seeing everything, which coincides with a general disdain for missing stuff. As macro investors, it’s our job not to miss stuff. In pursuit of this outcome, one thing Mr. Bessent added to his investment process is a top-down quantitative overlay that signaled, at the bare minimum, emerging regime changes and also the occasional legitimate investment opportunity:


  • Steven Drobny: “Do you use technical analysis as a behavioral analysis tool?”
  • Scott Bessent: “Yes and we also use it to keep us on top of things we might not be seeing. We have a system that screens about 1,400 stocks and commodities around the world every week. We never trade based on it, but if all of a sudden 10 stocks in Indonesia show up, then we’ll look at Indonesia.”


It was in the reading of this passage that I got the first idea to develop what would eventually become our Tactical Asset Class Rotation Model, or TACRM for short.


Like Mr. Bessent’s quantitative overlay, the primary function of TACRM is to provide investors with an unparalleled degree of advanced market color. TACRM is especially useful in alerting investors to critical breakouts and breakdowns for every liquid factor exposure across the liquid global macro investment universe (~200 in aggregate) and collating those signals in a manner that significantly enhances one’s ability to identify existing or developing regime changes at the primary asset class level. It does this by employing resoundingly robust quantitative methods:


Macro Journalism - chart2 EL


So what is TACRM signaling today?:


  • TACRM is generating a sell signal for each of the seven primary asset classes tracked by the model, which implies investors should be taking advantage of opportunities to raise cash.
  • Within U.S. Equities, our preferred style factor exposure(s) – low-beta, large-cap liquidity – is dominating the leaderboard from the perspective of bullish risk-adjusted VWAP momentum across  multiple durations. Homebuilders – a factor exposure we’ve liked all year – is now bringing up the rear and perpetuating a great deal of internal debate about the outlook for the domestic housing sector.
  • Within Domestic Fixed Income, Credit and Equity Income, we continue to be on the right side of the market’s #Quad3 vs. #Quad4 debate, with REITS and TIPS at opposite ends of the leaderboard. Recall that the former is one of two factor exposures we’ve liked on the long side of the U.S. equity market and that we’ve been anticipating another round of #GlobalDeflation post the ECB’s 10/22 statement.
  • Also in line with our current investment themes, the U.S. Dollar is atop the leaderboard in FX from the perspective of bullish risk-adjusted VWAP momentum across  multiple durations. The CHF, EUR, SEK and AUD are bringing up the rear.
  • International Equities, Emerging Market Equities and Commodities are all still overwhelmingly bearish from a breadth perspective. In fact, only one factor exposure in each asset class is signaling bullish from the perspective of risk-adjusted VWAP momentum across  multiple durations: New Zealand, Argentina and Sugar. I personally wouldn’t chase either of them here, but have at it if you’re the gambling type.
  • Perhaps most importantly, Global Macro Volatility is still accelerating on a trending basis per TACRM’s proprietary calculations, having been in that state since the week-ended 10/3/14. The implications of this are two-fold. 1) All things being equal, a sustained increase in volatility forces most investors to take down their risk, at the margins, which probably caps upside and forces markets to rally to lower-highs. 2) The average investor reduces their lookback window when volatility is trending higher, meaning that he/she is more sensitive to incremental data in the context of forming a bullish or bearish narrative. For what it’s worth, we think the preponderance of incremental data is likely to continue to be negative (see Chart of the Day below).


CLICK HERE to download the complete TACRM report.


Unfazed by one of the most proactively predictable squeezes to a lower-high in S&P 500 history (the net short position in non-commercial S&P 500 and S&P 500 e-minis contracts came in -2.5 standard deviations below its TTM average on 9/18; recall that any Z-Score in excess of +/- 2 sigma has historically been a tradable/investable contra indicator), we continue to have upmost conviction in our #SuperLateCycle and #GlobalDeflation themes.


Why? Because both global macro markets signals (highlighted above) and the rate-of-change across key economic data (detailed summaries below) continue to support our conclusions, at the margins.



Stick with the #process.


Our immediate-term Global Macro Risk Ranges are now:


 UST 10yr Yield 1.98-2.19% (bearish)

SPX 2008-2099 (bearish)
VIX 13.55-19.48 (bullish)
EUR/USD 1.08-1.11 (bearish)
USD/JPY 119.02-121.31 (neutral)
Oil (WTI) 43.08-47.26 (bearish)

Gold 1141-1164 (bullish)

Keep your head on a swivel,


Darius Dale



Macro Journalism - chart1 EL

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