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Downhill | A Slope Story

Takeaway: The late-cycle, deceleration-ary march in the domestic macro data continues. PCE/Income/Durable Goods detail & cycle context below.

The late-cycle domestic macro data continued its slow, deceleration-ary march this morning with the Durables Goods and Income/Spending data for November.  

 

As we continue to stress, “late-cycle” is a process not some discrete point on a macro sine curve and as the cycle traverses its twilight the rate-of-change peaks across a growing number of metrics continue to roll-in. 

 

To summarily review the majors:

  • Employment:  Employment growth peaked in February 2015 and has been slowing since.  Employment growth is hostage to the law of large numbers and will invariably slow alongside tighter labor supply and a growing employment base as an expansion matures.  A negative inflection in employment growth doesn’t herald an imminent recession but, empirically, it’s a one way street as the cycles progresses past peak and onto eventual recession.  The labor trend matters insomuch as it’s the principal driver of all things consumption and investment …..
  • Income Growth:  Income Growth peaked in 4Q14/1Q15 alongside peak acceleration in employment growth and modest gains in earnings.  Absent a material acceleration in credit growth, income growth drives the capacity for and trajectory of consumption growth.  Indeed, income growth and the change in the savings rate carrying  >0.95 correlation to household consumption growth across decades of data .   Aggregate wage and salary income remains a particularly pronounced driver of consumption in the present cycle with credit growth remaining modest and the long-term capacity for consumer re-levering to drive incremental consumption growth remaining constrained.  Aggregate income growth will remain positive over the nearer-term but will continue to slow against steepening comps
  • Consumption:  Consumption growth peaked in 1Q15 alongside the peak in employment and income growth.  Again, absent remarkable changes in the savings rate and/or consumer credit growth, consumption growth will follow the slope of aggregate income growth.  Household spending growth will remain “okay” on an absolute basis over the nearer term but will continue to slow alongside slowing income trends and tougher base effects.  (recall – Macro cares about the slope of the line and the 2nd derivative trend will remain negative)
  • Corporate Profitability: Both Corporate Profitability as a % of GDP and S&P500 operating margins peaked in late 2014 and have retreated since.  Past peak profitability, persistent strongdollar deflationary pressures, negative growth/inflation revision trends and a broad expectation for higher labor input costs is not the stuff multiple expansion or lazy long allocations are made of.
  • Confidence Consumer Confidence across all the primary series (Conf. Board, Univ. Mich, Bloomberg) peaked in 1H15 and have since backslid.  Confidence peaks late-cycle and, unsurprisingly, peaks alongside the peak in real per capita disposable income growth (i.e. when the most people are realizing their greatest income flow) and Per Capita DPI appears to have peaked in 2Q/3Q15. 
  • MFG/Industrial: With the ISM printing in contractionary territory and Durable Goods and Capex Orders growth negative for most of the last year, the domestic manufacturing data has been conspicuously recessionary.  The collapse over the TTM, of course, is now the 2016 comp but given further OUS slowing, another step function lower in oil/energy/commodity prices and another wave of investment and labor realignment across the energy and mining spaces, the trend there is likely to get worse before it gets better.    

 

The November Detail:

 

Consumption:  Household spending grew +0.3% MoM in November (after declining in October for the first time in 21-months) but decelerated on both a 1Y/2Y basis for a 2nd consecutive month as the savings rate held at a multi-year high (5.5%)  and income growth decelerated further. 

 

Income:  Both DPI and aggregate Salary and Wage Income decelerated on a 1Y and 2Y basis as the dynamics highlighted above continued to define the 2nd derivative trend.  Income growth should continue to decelerate from here against peak comps into year end. 

 

Durable Goods:  Headline Durable Goods Order growth decelerated to +0.0% sequentially but managed a second month of modest year-over-year acceleration.  The improvement was largely a comp effect – and one that should remain a support to reported growth as we comp negative growth in 8 of the next 9 months. 

 

Under the hood, Core Capex Orders continued to slump - recording negative growth for the 10th consecutive month and decelerating on all of MoM/1Y/2Y basis in November.  Much like inflation's 4-year run of below-target "transience", the great capex renaissance remains 'just around the corner' and very much a phantasm.  

 

Also concerning is the prevailing trend in Durable Goods Ex-Defense and Aircraft - which represents the stuff the average household actually buys – which saw a 7th straight month of negative YoY growth.

 

Darkness:  In other, random positive inflection news, with the winter solstice now rearview, we're past peak on shortened daylight. Global luminary forces in the northern hemisphere will again marshal Mother Nature and her celestial minions to progressively overtake the oppresive fetters of the darkside ... so there's that, at least.  

 

A visual tour of this morning’s data along with the historical cycle context below

 

 

Downhill | A Slope Story - NFP YoY

 

Downhill | A Slope Story - PCE YoY LT

 

Downhill | A Slope Story - Income reported   Implied

 

Downhill | A Slope Story - Aggregate Salary  Wage Growth

 

Downhill | A Slope Story - Conf late Cycle Phenom

 

Downhill | A Slope Story - Confidence vs Real DPI per Capita

 

Downhill | A Slope Story - Durable Goods LT

 

Downhill | A Slope Story - ISM

 

Downhill | A Slope Story - SPX operation Margin

 

Downhill | A Slope Story - Corp Profits   of GDP

 

Downhill | A Slope Story - Eco Table

 

Downhill | A Slope Story - Income Spending Table

 

Downhill | A Slope Story - Durable Goods table

 

Downhill | A Slope Story - Confidence Table

 

 

Christian B. Drake

@HedgeyeUSA


INSTANT INSIGHT | The Coming Recession?

INSTANT INSIGHT | The Coming Recession? - recession cartoon 12.22.2015

 

We think there is an increasing probability that the U.S. economy enters a recession by 3Q 2016.

 

Why?

 

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

 

"... Yep. You got the recessionary industrial production print of down -1.2% year-over-year for NOV last week and you’ll get another recessionary Durable Goods print this morning – we signaled to short Industrials (XLI) and Caterpillar (CAT) and Wabtec (WAB) again on green yesterday."

 

(Editor's Note: See Real-Time Alerts for more information on these short calls.)

 

As you can see in the chart below, Industrial Production growth slowed to its lowest level since 2009, down -1.2% y/y...

 

INSTANT INSIGHT | The Coming Recession? - industrial production 2

 

Oh, and on Durable Goods...

 

INSTANT INSIGHT | The Coming Recession? - durable

 

"Durable Goods orders, more colloquially know as recessionary manufacturing data, decelerated across month-over-month and year-over-year," Hedgeye CEO Keith McCullough wrote following the durable goods release. "Core Capex Orders, meanwhile, continued to slump — recording negative growth for the 10th consecutive month. Remember the Old Wall telling you 'capex is going to accelerate" 12 months ago? It slowed, big time."

 

There you have it. More data confirming our #Recession call. 


[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds

Takeaway: In the week before the Fed's first rate hike this cycle, almost all risk asset classes saw withdrawals.

Editor's Note: This is a complimentary research note which was originally published December 17, 2015 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

 

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Almost all risk asset classes experienced net withdrawals in the 5-day period ending December 9th while investors shored up +$13 billion of cash in money market funds, the 8th inflow into cash products in the past 10 weeks aggregating over $85 billion. Other than money markets, only equity ETFs and municipal bond funds saw net positive flows with equity ETFs taking in +$4.1 billion and muni bond funds collecting +$825 million during the week. Meanwhile, taxable bond funds lost -$7.3 billion, their largest outflow of the quarter, on fears of high yield credit exposure. Domestic equity mutual funds lost another -$5.2 billion, bringing the YTD cumulative flow to -$160.2 billion.

 

With 30-40 day duration in most of their money fund portfolios, Federated Investors will now be able to add roughly 6 cents per quarter in new earnings starting in the middle of 1Q16 as new benchmark rates filter through the system (see our FII report).

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI1 large 12 23

 

In the most recent 5-day period ending December 9th, total equity mutual funds put up net outflows of -$6.4 billion, trailing the year-to-date weekly average outflow of -$1.1 billion and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund withdrawals of -$1.2 billion and domestic stock fund withdrawals of -$5.2 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 8 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net outflows of -$6.5 billion, trailing the year-to-date weekly average outflow of -$58 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds contributions of +$825 million and taxable bond funds withdrawals of -$7.3 billion.

 

Equity ETFs had net subscriptions of +$4.1 billion, outpacing the year-to-date weekly average inflow of +$2.4 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net outflows of -$39 million, trailing the year-to-date weekly average inflow of +$1.1 billion and the 2014 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.


Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI2

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI3

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI4

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI5

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI12

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI13 2

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI14

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI15

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI7

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors withdrew -5% or -$306 million from the long treasury TLT ETF ahead of the Fed's first rate hike in seven years. Additionally, the industrials XLI also lost -5% or -$315 million.

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI17

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$4.1 billion spread for the week (-$2.4 billion of total equity outflow net of the -$6.5 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$858 million (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

[UNLOCKED] Fund Flow Survey | Bull Market in Money Funds - ICI11 


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CHART OF THE DAY: The Canadian Loonie Tracks Oil

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more.

 

"... Unfortunately for many Canadians, the Chart of the Day shows the real driver of the Canadian economy. In this chart, we look at the relationship between the Loonie and Oil. As shown, historically the relationship between the two is very tight, but this relationship has only tightened and now has a correlation of about 0.94. So as oil goes, so too goes the Canadian economy, despite what politicians might tell you."

 

CHART OF THE DAY: The Canadian Loonie Tracks Oil - 12.23.15 EL chart


The Journey

“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, The Journey

 

In building Hedgeye over the past 8 years, we’ve struggled with many questions as a leadership team.  Some questions we’ve gotten to the right answers quickly.  While others, we’ve made the wrong decision and then had to re-chart our course years after going down the wrong path.  Perhaps the most ongoing critical question for us, and all companies and teams, is how best to motivate our players.

 

The most obvious answer to many in the finance industry is that money is the key motivator for people.  Certainly, the hedge fund industry with its 2% and 20% compensation structure underscores this point. And on some level, money provides security and opportunity, but does money motivate and drive outperformance?

 

Behavioral economist Dan Ariely has looked at this topic exhaustively and based on a number of studies has concluded that there are at least three motivators beyond money that drive satisfaction at work, these are:

  1. Meaningfulness of work - When the work has some greater meaning or impact, it is much more meaningful and motivational to the employee.  To the outside, the idea that a company is trying to "change the world" may seem a bit silly. However to those on the inside doing the work, it is anything but, as it’s important for them to see that their work leads to positive outcomes.
  2. Acknowledgement by others - This is an obvious, albeit sometimes forgotten point, but employees and teammates want to be acknowledged for their efforts.  At Hedgeye we do this in a few different ways, including, no surprise, awarding three people with the annual Hedgeye puck award.
  3. The amount of effort put in - In essence, the harder a job is and the more time and energy required for a successful outcome, the more rewarding people find the job. In essence, there is great motivation in accomplishing the really big and complicated tasks.

So, while compensation certainly has its role, especially in acknowledging a meritocracy in the workplace, there are other motivators that are just as important. Personally, I find the last one the most motivating, which is the joy of The Journey.

 

Back to the Global Macro Grind ...

 

Speaking of journeys, I had an epic one over the last couple of days as I brought my 18 month old daughter home to Canada. Though I'm not sure my solo journey with a toddler across the country was nearly as epic as the political journey that currently engulfs various regions across the world.

 

In Canada, this journey is probably most evident.  It started in the oil and natural gas laden province of Alberta when on May 5th of this year, the National Democratic Party (NDP) won the provincial election. Prior to this election, the Conservatives had won every election since 1971, or had held power for almost 50 straight years.

 

The Journey - trudeau

 

On the national level in Canada, the big sea change was with the election of the former drama teacher Justin Trudeau as Prime Minister as his liberal party swept to power on a Keynesian and populist platform.  Both this national election and the Alberta election were reactions to a weak economy and governments that had been in power for a long time and were seemingly doing nothing for the "common man."

 

Unfortunately for many Canadians, the Chart of the Day shows the real driver of the Canadian economy.  In this chart, we look at the relationship between the Loonie and Oil.  As shown, historically the relationship between the two is very tight, but this relationship has only tightened and now has a correlation of about 0.94. So as oil goes, so too goes the Canadian economy, despite what politicians might tell you.

 

In the U.S, the political journey can be summarized by one somewhat astonishing word: Trump. Despite the view of many pundits over the course of the year, Trump's stardom has not faded but rather gotten stronger over the course of his campaign.  Currently on a national level, Trump is polling at about 36% in poll aggregates versus the field.

 

Not only is Trump polling near his personal highs, but he also leads the candidate in second place, which is currently Senator Ted Cruz, by a spread of almost 17 points, which is his highest margin over second place. Most pundits and Republican insiders point to State level polls to emphasize Trump's weakness and on some level this is true, as the race appears much tighter in early nominating state polls. In certain states, such as Iowa, Trump is also trailing by a reasonable margin.

 

But make no mistake about it, Trump is only getting stronger and is emblematic of a sea change occurring in both American and really global politics, which is the search for an option that does not represent the politics of old. This point is probably most evidenced by the approval of Congress polls, which currently show, based on poll aggregates, that roughly 14% of respondents approve of Congress and 75% disapprove. That is just sad.

 

In Europe, the direction is less clear and more volatile. The recent election in Spain was inconclusive at best.  Acting Prime Minister Rajoy is slated to meet with Socialist leader Sanchez, but many followers of Sanchez have already indicated they would absolutely not support a Rajoy led government. 

 

Meanwhile in Portugal, the leftist alliance is showing its first cracks as the Communist Party (yes, Communism is alive and well!), said it would not support a budget that had bank bailout monies.   Finally, the Italians are in the midst of passing a tax cutting budget that appears to put them on war path with the EU over violating EU fiscal targets.

 

So as stock market operators, what does all this mean for us? Well, simply put, as governments change quicker with more frequent elections and adopt more extremes policies backed by more non-traditional candidates, it will become increasingly important in years ahead to have a handle on the direction of government policy.  On this front, we will have some very exciting news for you in early 2016 as it relates to a meaningful product expansion at Hedgeye. Stay tuned.

 

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND signals in brackets):

 

UST 10yr Yield 2.12-2.32%

SPX 1

VIX 15.53-24.72

USD 97.07-99.47

Oil (WTI) 35.04-37.07

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Journey - 12.23.15 EL chart


Fun in the Sun for U.S. Stocks

Client Talking Points

OIL

Oil led the bounce in U.S. equities yesterday – we can no longer count how many of these counter-TREND head-fakes we’ve had in the last 18 months but the immediate-term risk range still implies lower-for-longer at $35.04-37.07 WTI.

RECESSION

Yep. You got the recessionary industrial production print of down -1.2% year-over-year for NOV last week and you’ll get another recessionary Durable Goods print this morning – we signaled to short industrials (XLI) and CAT and WAB again on green yesterday.

UST 10YR

The UST 10YR Yield bounced to 2.25% with U.S. stocks having their 13th up day in the last 33, so we’re gearing up to make a big asset allocation move back to my max in the Long Bond (TLT) anywhere north of 2.30%.

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough and Restaurants & Consumer Staples analyst Shayne Laidlaw live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 66% US EQUITIES 2%
INTL EQUITIES 3% COMMODITIES 0%
FIXED INCOME 17% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
FII

Federated Investors (FII) profitability got a boost last week as the Fed boosted short term rates for the first time in 7 years. Even the slight 25 basis point hike improves profitability in the firm’s leading money fund business by +30% into the New Year.

 

In essence, the firm rolls 30-day paper throughout the short term fixed income curves and the new higher yields forthcoming into 2016 will allow the company to claw back some of the waived fees it has extended to its client base in money funds. Year-to-date the company has waived over $300 million in fees. With that firmly in the rearview, it becomes an opportunity set as FII gets higher yield from cash products next year.

 

In the financial sector, FII is the most asset sensitive name we cover, meaning it benefits most from even marginal interest rate hikes.

RH

We have to give Restoration Hardware Chairman and CEO Gary Friedman props for his approximately nine minute segment on Cramer last week. Let's face it, him going on what's arguably the most volatile and biased financial media platform, unscripted, is not what we wanted to see. The risk of fireworks was high.

 

But he capped off a successful day RH (CFO and IR) had on the investor conference circuit by focusing on the real value drivers at Restoration Hardware (RH) -- growth in product concepts, and RH's real estate transformation. The appearance was planned well before the earnings release, by the way, coinciding with a business-focused trip to NYC. All-in, it was a positive event for the stock.

TLT

Now that the Fed finally hiked federal funds by 25 basis points into a late-cycle slowdown, the fact that TLT was up 1.8% (Wed-Fri.) on “lift-off” should be concerning to the growth accelerating bulls. After the dovish hike, the U.S. Treasury 10-Year Yield (THE GROWTH EXPECTATION PROXY) was down 10 basis points (2.3% to 2.2%). And yes, the most telegraphed rate hike ever was dovish.

 

Just look at the Fed’s projections and the language in the FOMC's statement. Yellen, essentially, acknowledged what we have said for ~ a year and a half now:

  • “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”
  • “Market-based measures of inflation expectations remain low; some survey-based measures of longer-term inflation expectations have edged down”
  • “Net exports have been soft”
  • ... And on the Fed’s forward-looking economic projections:
  • The Fed kept 2016 GDP estimates unchanged, and downwardly revised 2017 to 2.0-2.3% from 2.0-2.4%.
  • 2016 PCE Inflation was downwardly revised to 1.2-1.5% from 1.5-1.8%. 

Three for the Road

TWEET OF THE DAY

McCullough: The Three Signs of Coming Recession https://app.hedgeye.com/insights/48213-mccullough-the-three-signs-of-coming-recession… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Knowledge speaks, but wisdom listens.

-Jimi Hendrix                   

STAT OF THE DAY

Today in 1823, The Night Before Christmas was published, anonymously.


Early Look

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