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CHART OF THE DAY: A Closer Look At Late-Cycle Reality

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to learn more.

 

"... 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.

 

Both disposable personal income and aggregate Salary and Wage Income growth decelerated on a 1Y and 2Y basis in November as employment and comp dynamics continue to define the 2nd derivative trend. Aggregate income growth will remain positive over the nearer-term but will continue to slow against steepening comps."
 

CHART OF THE DAY: A Closer Look At Late-Cycle Reality - Aggregate Salary  Wage Growth


Cojones

This decision has come not from fear, but from a clarity of judgement – free from the cloud of terror that surrounds us and obscures our view.  I can say only one thing to Columbians in this time of peril.  There will be a future!

-Cesar Gaviria, Narcos (s1, e5) 

 

Cesar delivers that line as part of an epic speech supporting extradition of drug traffickers in Colombia – a landmark decision which would indelibly shape the future of Colombia and ensure his own attempted assassination.

 

The decision was born of objective mental clarity, moral conviction … and cojones.  

 

If you haven’t yet watched the series (Narcos, Netflix original), I’d recommend it. 

 

The downtime around holidays provides a natural opportunity for introspection and life-contemplation – this year, perhaps more than ever, as peril and serial terror attempt to obscure our national and global history of humanism and acceptance with a cloud of fear and knee-jerk protectionism. 

 

Immigration and refugee policy is invariably complex and wrought with competing interests and compelling intellectual, emotional and ideological arguments. 

 

We're largely politically agnostic @Hedgeye but our process is rooted in objective analysis and common sense – and I’m fairly certain we can do better than a “cold shoulder” policy prescription. 

 

The world our children will inherent is not static and sterilized and everyone doesn’t get a trophy just for showing up. 

 

Collectively, we need to be the change we want to see and an aspirational model for the first generation of a flat world.

 

Don’t wait for it to come. Be-come it. 

 

Back to the Global Macro Grind …

 

The change (as in rate-of-change) panglossian equity optimists want to see in the domestic data flow is not what Mother Macro delivered yesterday.

 

Alongside detailing yesterday’s deluge of Income, Spending, Industrial and Confidence data, let's quickly review the 2nd derivative (i.e. slope of the line) state of some key macro metrics. 

 

Cojones - late cycle

 

We highlighted these in an institutional note yesterday, but they’re helpful in contextualizing the cyclical slowdown currently characterizing our late-cycle reality. So, to recapitulate: 

  • 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 cycle 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. Both disposable personal income and aggregate Salary and Wage Income growth decelerated on a 1Y and 2Y basis in November as employment and comp dynamics continue to define the 2nd derivative trend. 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. Indeed, we saw that again in the November consumption data yesterday with household spending growth slowing for a 2nd month as the savings rate held near multi-year highs and income growth decelerated further. 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 strong dollar 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 (Conference Board, University of Michigan, 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. 
  • Manufacturing: 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. Under the headline Durable goods numbers yesterday, Core capex-orders recorded negative growth for a 10th consecutive month and Durable Goods Ex-Defense and Aircraft - which represents the stuff the average household actually buys – saw a 7th straight month of negative YoY growth. The collapse over the trailing twelve months, 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.    

 

Cycles cycle and our current cyclical march is one of deceleration. There will be a future filled with positive inflections and accelerations but between here and there exists a stocking full of P&L to risk manage. 

 

We’re looking forward to chasing the peri-holiday gluttony with some rest then helping you chase down some early, non-consensus new year alpha.  

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.12-2.32%

SPX 1 

VIX 14.42-24.89
USD 97.13-99.41
Oil (WTI) 34.94-38.08

 

Merry Christmas and Happy Holidays to you and your loved ones,

 

Christian B. Drake

 

Cojones - Aggregate Salary  Wage Growth


USD, Oil and Japan

Client Talking Points

USD

Down Dollar is what that ole “reflation” hope is built on and you’re seeing some follow through there this morning with the EUR and YEN  up +0.4-0.5% against the USD. But a bullish TREND in the USD remains firmly intact, the risk range is 97.13-99.41.

OIL

Oil up +4.8% in a straight line yesterday led the rally in oversold #Deflation equities – that move does not a bullish TREND make with the immediate-term risk range for WTI now at $34.94-38.08 (sell at the top-end of the range).

JAPAN

Japan doesn’t like this whole up Yen (Down Nikkei for the 5th straight day), so BOJ’s Kuroda opts for the Draghi “whatever it takes” speech overnight saying they’ll even “buy ETFs” (equities!) directly, LOL.

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

INSTANT INSIGHT | The Coming #Recession? https://app.hedgeye.com/insights/48235-instant-insight-the-coming-recession… cc @KeithMcCullough $CAT $XLI $WAB #Economy #Yellen

@Hedgeye

QUOTE OF THE DAY

Let your life lightly dance on the edges of time like dew on the tip of a leaf.

Rabindranath Tagore

STAT OF THE DAY

Amazon spent 11.7% of revenue on shipping costs in the third quarter this year.


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INSTANT INSIGHT | What To Watch: The Fed, Oil And U.S. Dollar

 

A nice little 3-day rally (+2.9%) for the S&P 500 for Christmas, and the Fed (Atlanta) cuts its Q4 GDP forecast to 1.3% after raising rates!

 

INSTANT INSIGHT | What To Watch: The Fed, Oil And U.S. Dollar - Fed dunce cap cartoon 12.23.2015

 

In other financial market news, Down Dollar is what that ole “reflation” hope is built on and you’re seeing some follow through there this morning with EUR and YEN +0.4-0.5% against USD, but bullish TREND in U.S. Dollar remains firmly intact – risk range = 97.13-99.41 US Index.

 

INSTANT INSIGHT | What To Watch: The Fed, Oil And U.S. Dollar - dollar other guys

 

Meanwhile, Oil was up +4.8% in a straight line yesterday and led the rally in seemingly oversold #Deflation equities. That move does not a bullish TREND make with the immediate-term risk range for WTI now = $34.94-38.08 (sell at the top-end of the range).

 

INSTANT INSIGHT | What To Watch: The Fed, Oil And U.S. Dollar - oil cartoon 12.14.2015

 

Merry Christmas and Happy Holidays to you and your loved ones.


The Macro Show Replay | December 24, 2015

 


[UNLOCKED] Keith's Daily Trading Ranges

Editor's Note: We've made some new enhancements to Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. Click here to view a brief video of McCullough explaining how to use it most effectively.

 

Subscribers now receive risk ranges for 20 tickers each day -  the last five are determined by what's flashing on Keith's radar screen and what tickers subscribers are asking about. Click here to subscribe.

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.32 2.12 2.27
SPX
S&P 500
1,993 2,079 2,064
RUT
Russell 2000
1,108 1,157 1,152
COMPQ
NASDAQ Composite
4,895 5,085 5,001
NIKK
Nikkei 225 Index
18,507 19,239 18,886
DAX
German DAX Composite
10,163 10,823 10,727
VIX
Volatility Index
14.42 24.89 15.57
DXY
U.S. Dollar Index
97.13 99.41 98.37
EURUSD
Euro
1.07 1.10 1.09
USDJPY
Japanese Yen
120.08 121.99 120.88
WTIC
Light Crude Oil Spot Price
34.94 38.08 37.89
NATGAS
Natural Gas Spot Price
1.69 2.03 2.00
GOLD
Gold Spot Price
1,049 1,084 1,069
COPPER
Copper Spot Price
2.02 2.15 2.13
AAPL
Apple Inc.
104 110 108
AMZN
Amazon.com Inc.
642 681 663
GOOGL
Alphabet Inc.
746 778 768
DIS
Walt Disney Company, Inc.
102 109 105
NKE
Nike Inc.
126 133 128
KMI
Kinder Morgan Inc.
13.72 16.91 16.41

 

 


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