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DIY Macro

“Every generation has underestimated the potential for finding new recipes and ideas.  We consistently fail to grasp how many ideas remain to be discovered.”

-Paul Romer

 

I love big ideas.

 

Elegant, intuitively appealing big picture epiphanies resulting from restless minds finding “harmonious resolution in dissonant details”.     

 

Paul Romer had just such an idea when he conceptualized the “Romer Model” in the early 90’s. Up to then, conventional growth theories followed some Solow variant whereby capital & labor combined to produce output while some exogenous (i.e. external and unexplained) productivity factor acted as an offset to diminishing returns in support of sustainable long run growth. 

 

Romer added a crucial third factor to the productivity formula – #Ideas. At a most basic level, the interplay between ideas and objects (capital, labor & everything else) can be summarized like this:

 

Objects can be viewed as all the atoms, elements and raw materials of the universe. Ideas represent the recipes and instructions for using those raw materials. 

 

That’s it. Simple, obvious even.  

 

But in formalizing the idea (about ideas), macroeconomics found a tractable explanation for sustainable growth. Ideas, unlike capital, are non-rivalrous (i.e. anyone can use them and one person’s use doesn’t restrict its use by anyone else) and when combined with capital and labor provide for increasing (not diminishing) returns.

 

The number of different ways of combining and employing the atoms of the universe is virtually unlimited. And adopting this very fundamental perspective – Objects & Ideas, Raw Materials & Recipes - makes the scope for ongoing innovation feel almost infinite. 

 

Moreover, as China & India (i.e. a third of the world’s population) continue to come up the sophistication curve and bring their collective acuity to bear on the edge of frontier research, the rate-of-change of growth in ideas stands to benefit. 

 

Increasing returns, Sustainable growth, Unlimited innovative capacity …. Not your grandfather’s dismal science. 

DIY Macro - light

 

Back to the Global Macro Grind …. 

 

Ideas don’t have to be revolutionary to strike a chord. Simple, “new to me” ideas can be similarly satisfying.

 

Case in Point: In discussing domestic Income & Credit trends on yesterday’s Macro Show, I walked through the math on front-running the official income and spending figures from the BEA using the relevant data from the employment report. 

 

Multiplying three terms is elementary school math but, based on my inbox flow, the Macro DIY base we’re hoping to empower seemingly finds satisfying utility in “the little things”.

 

Here’s the deal: 

 

Income growth anchors the capacity for consumption growth and total spending is what matters in a modern, Keynesian consumption economy. Divining the slope of income growth, therefore, is of obvious import - and in the very near term, it’s also relatively straightforward. 

 

The aggregate income data is reported alongside the Household Spending data about a month after the Employment report. But income – and the likely path of consumption, by extension - can be well inferred from the BLS Employment data.

 

At the aggregate level, total labor income is just the product of aggregate hours and earnings. 

 

In other words: how many people are working * how many hours each person works per week * how much they get paid per hour (all of which is in the NFP release)

 

As can be seen in the 1st Chart of the Day below, if we do that exercise with the October employment report, income growth was largely flat sequentially despite the big sequential increase in net payroll gains and the acceleration in hourly earnings. 

 

Flattish income growth is what we should expect to see when the official data is reported on 11/25.

 

The absolutist read-through on consumption is that it will remain “good” in October. From a pro-cyclical investors perspective, the slope of the line for both income and consumption will hold negative off the 1Q15 peak and will remain so through the balance of the year as we lap peak payroll gains recorded in 2H14. 

 

How can consumption growth be supported in the face of decelerating wage income growth?

 

#Credit homie!

 

Credit 101: Generally, credit is pro-cyclical with banks loosening standards and extending credit in response to rising demand and improved credit risk.   

 

The reason for the pro-cyclicality is rather straightforward: Household capacity for credit increases as incomes rise alongside positive employment growth and as net wealth rises alongside the rise in real and financial assets that typically accompanies an expansionary economic phase. 

 

Thus, cash flows to service debt and the collateral values backing the debt both support incremental capacity for credit and serve to drive an upswing in the credit cycle, which can serve to jumpstart and/or amplify the economic cycle.   

 

The 2nd Chart of the Day below shows revolving credit growth (i.e. credit cards). Household appetite for credit card debt went negative following the financial crisis and remained in hibernation for ~3-years before inflecting positively in April 2014. The latest September data showed a 3rd month of acceleration with revolving credit growth making a new cycle high at +4.73% YoY.

 

Accelerations in revolving credit growth typically show up in rising higher ticket, discretionary durable goods consumption. If the current pace of revolving credit growth persists in the coming months then durables consumption in 4Q would remain pretty healthy and would help support aggregate consumption growth.

 

In other words, the Keynesian spending coin has two sides and, if the collective domestic consumer is so inclined, credit growth has some modest runway to offset decelerating income trends over the nearer-term. 

 

Over the medium and longer-term, however, given already zero bound rates, the initial debt position (HH debt/GDP still = ~77%), and negative consumption demographics, we certainly aren’t in position to jumpstart a repeat of the prior credit based consumption cycle. 

 

So, that’s the current set-up and immediate-term outlook for Income, Credit and Consumption. We’ll get the latest update on the state of domestic consumerism with November Consumer Confidence and October Retail Sales (remember Retail Sales only = Spending on Goods) this morning. 

 

None of the analysis and context above requires black-box sophistication. It’s mostly just doing the work and passing the output through a commonsense filter.   

 

We consistently fail to grasp how many ideas remain to be discovered …. and our own capacity for insight and productive application. 

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.09-2.38% 

SPX 2036-2089 

VIX 15.55-19.02 
Oil (WTI) 41.08-44.64 

Gold 1065-1105 

 

Be the change you want to see. Have a great weekend.

 

Christian B. Drake

U.S. Macro Analyst

 

DIY Macro - EL CoD1 Income Growth

DIY Macro - EL COD2 Credit Growth 


November 13, 2015

We've made some updates and enhancements to Daily Trading Ranges. You'll now receive risk ranges for 20 tickers each day -  the last five of which will be determined by what's flashing on Keith's screen and by what names you're asking about. Contact support@hedgeye.com if you have any questions or feedback.

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.38 2.09 2.32
SPX
S&P 500
2,036 2,089 2,046
RUT
Russell 2000
1,141 1,176 1,155
COMPQ
NASDAQ Composite
4,933 5,102 5,005
NIKK
Nikkei 225 Index
18,996 19,990 19,698
DAX
German DAX Composite
10,582 11,001 10,783
VIX
Volatility Index
15.55 19.02 18.37
DXY
U.S. Dollar Index
98.05 100.23 98.71
EURUSD
Euro
1.06 1.08 1.07
USDJPY
Japanese Yen
121.33 123.99 122.59
WTIC
Light Crude Oil Spot Price
41.08 44.64 41.60
NATGAS
Natural Gas Spot Price
2.19 2.39 2.29
GOLD
Gold Spot Price
1,065 1,105 1,085
COPPER
Copper Spot Price
2.12 2.24 2.16
AAPL
Apple Inc.
114 119 116
PCLN
Priceline.com Inc.
1,255 1,366 1,314
VRX
Valeant Pharmaceuticals International, Inc.
68.60 84.85 73.77
FB
Facebook, Inc.
103 110 108
M
Macy's Inc.
38.91 45.07 40.82
KSS
Kohl's Corp.
41.22 47.09 45.79

 

 


NUS | BLACK BOOK PRESENTATION REPLAY

We added Nu Skin (NUS) to the Hedgeye Consumer Staples Best Ideas list as a SHORT.

 

SHORT NUS – 11/11/15 Call Replay and Slides

Link to Audio Replay

Link to Video Replay

Link to Slide Deck

 

On Wednesday November 11th, we walked through our short thesis on Nu Skin (NUS), a multi-level marketing company that distributes primarily skin care product. Below is a brief overview of the material that we went through.

 

NUS | BLACK BOOK PRESENTATION REPLAY - CHART 1A

BUSINESS BREAKDOWN

China is the largest region by revenue for NUS, representing 33% in 4Q15. It is also the region that had the sharpest decline in both sales leaders and revenue from 2013 to 2014.

NUS | BLACK BOOK PRESENTATION REPLAY - CHART 2A

LACK OF MARKET SHARE

Nu Skin is a small player in the global Beauty and Personal Care category, with only a 0.3 value share.

NUS | BLACK BOOK PRESENTATION REPLAY - CHART 3A

VITAMEAL

NUS | BLACK BOOK PRESENTATION REPLAY - CHART 4A

NUS | BLACK BOOK PRESENTATION REPLAY - CHART 5A

 

VitaMeal is becoming increasingly meaningful to the NUS income statement, on both the top and bottom line.

NUS | BLACK BOOK PRESENTATION REPLAY - CHART 6A

 

The money flows of the charities are inviting scrutiny.

NUS | BLACK BOOK PRESENTATION REPLAY - CHART 7A

BALANCE SHEET

Lackluster inventory management, inventory levels are currently 1 standard deviation above the long-term average.

NUS | BLACK BOOK PRESENTATION REPLAY - CHART 8A

SUSTAINABILITY

With the current trajectory of downward trending sales leaders and declining revenue per sales leaders NUS’s business model is not sustainable.

NUS | BLACK BOOK PRESENTATION REPLAY - CHART 9A

 

NUS | BLACK BOOK PRESENTATION REPLAY - CHART 10A

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

The Macro Show Replay | November 13, 2015

 


Cartoon of the Day: Whatever It Takes!

Cartoon of the Day: Whatever It Takes! - Draghi cartoon 11.12.2015

 

Below is an excerpt from a note Hedgeye CEO Keith McCullough sent to subscribers earlier this morning: 

 

"... After suggesting #Deflation wasn’t a risk and European growth was 'encouraging,' our man Mario (ECB President Mario Draghi) pivots to 'downside risks are now clearly visible … and inflation dynamics have weakened,'" Hedgeye CEO Keith McCullough wrote earlier today. "Finally, some #truth – don’t forget that Down Euro = #Deflation via Strong USD."


Rate Hike 'Live Possibility'? NY Fed Head Can't Make Up His Mind

Takeaway: Conflicted NY Fed President debates himself over "whether the time is right to begin to normalize monetary policy."

You may have noticed this headline from the Wall Street Journal today.

 

Rate Hike 'Live Possibility'? NY Fed Head Can't Make Up His Mind - dudley

 

That’s odd.

 

As we recall, New York Federal Reserve President Bill Dudley was the same central planner who rocked markets last week when he mentioned that a December rate hike was a “live possibility.”

 

In today’s speech, Dudley was doing the same old song and dance, blaming the uncertainty surrounding a December rate hike on the damn data (as we affectionately refer to it here at Hedgeye).

Rate Hike 'Live Possibility'? NY Fed Head Can't Make Up His Mind - Fed cartoon 04.30.2015

 

Most interesting was Dudley’s reading of the “few issues” that could “still cloud the [economic] outlook.”

 

Amusingly, his take on the data acknowledged many of the concerns our Macro team at Hedgeye has been highlighting for a long time now, including recent “softness” in 3Q GDP, the strengthening dollar and the slowing manufacturing sector:

 

“With respect to the economic growth outlook, the softness in third-quarter real GDP—which according to its initial estimate rose at only a 1.5 percent annualized pace—and the weakness of the manufacturing sector have raised concerns that the U.S. economy may be losing some forward momentum. 

 

Sharp reductions in oil and gas drilling activity and a loss of international competitiveness associated with the dollar’s appreciation over the past year have restrained factory output. Judging from historical experience, the impact of the dollar’s recent strength has the potential to be protracted, so that the trade sector probably will continue to be a drag on growth in 2016.  Thus, the manufacturing sector is likely to continue to lag behind the rest of economy.”

 

Another key Hedgeye Macro theme is #Deflation. Funny enough, during his speech, Dudley mentioned “inflation” 47 times and begrudgingly admitted that it was running “well below” the Fed’s 2% objective.

 

Dudley again:

 

"... [that] the economy is growing only slightly at an above-trend pace and inflation is too low relative to our objectives, suggests that we need to think carefully whether the time is right to begin to normalize monetary policy."

 

This after San Francisco Fed President John Williams told USA Today just this week that there was a "very strong case" for a rate hike this year.

 

Huh?

 

While we wait for the Fed to make up their mind and interpret the data, here's an important reminder from Hedgeye CEO Keith McCullough.

 

“The Fed’s ‘forecast’ is wrong 70% of the time. They are the new market risk.”

 

Here's more From mccullough on the fed risk...



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