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FOUR SCORE | December Employment

Four Score and Zero Months ago the current expansion commenced.  0.5 Score months ago growth in the labor market peaked. 


Inclusive of the solid monthly gain in December hiring, the trend towards deceleration remains ongoing.  The net of a solid NFP print in December is likely more deflation risk. 


There’s no dearth in NFP data reporting so we’ll keep it to a quick quadfecta of key takeaways.  There’s a visual tour of the employment data below:

  • Between a RoC and a Hard Gray Bar:  From a rate-of-change perspective the employment cycle cycles rather cleanly (see 1st chart below).  Once employment growth peaks, it''s effectively a one way street towards contraction.  The RoC peak-to-recession timeline is cycle specific but roughly consistent (has averaged ~23 months in the last 3 cycles) and February 2015 (+2.34% YoY) marked peak growth in the current cycle. Employment growth in December was +1.88% YoY.   
  • Good is Probably Bad:  The macro factor flow stemming from a good domestic jobs report is basically this:  Solid NFP --> hawkish policy expectations ↑ --> $USD ↑ --> Deflation Risk ↑ = continuation of the market price and macro data trends that characterized 2H15.  With the $USD up, 10Y Yields flat-to-down and equities quickly fading early (lack of china crashing, not NFP) optimism, the market looks to be pricing in some measure of a similar conclusion. 
  • Income:  Sequential Acceleration, Trend Deceleration:  Income growth drives the capacity for consumption growth (and anchors the pro-cyclical trend in credit growth) and the net of the decline in aggregate hours growth and the acceleration in hourly earnings growth in December will result in a modest acceleration in salary and wage income growth when the December data is released later this month.  Like the employment data, aggregate income growth peaked in 4Q14/1Q15 and should continue to decelerate against tough comps.  The silver lining is that so long as employment/income growth can hold in (albeit slowing), the probability of an outright recession declines or, at least, gets pushed out.    
  • Labor Income ↑ = Profitability ↓:  With labor rising, topline (GDP & Corporate Profit estimates) decelerating and inventories spiking (see this mornings wholesale inventory data), the probability that positive hiring perpetuates continued margin contraction is more likely than not.  

FOUR SCORE | December Employment - NFP YoY


FOUR SCORE | December Employment - NFP Goods vs Services


FOUR SCORE | December Employment - Reported   IMplied income growth


FOUR SCORE | December Employment - Hourly Earnings


FOUR SCORE | December Employment - Payroll Growth vs Wage Growth


FOUR SCORE | December Employment - IS

FOUR SCORE | December Employment - Labor Income Share 

FOUR SCORE | December Employment - SPX Margins


FOUR SCORE | December Employment - Emp Summary


Christian B. Drake



Here's the REAL Picture Behind Today's Jobs Report

Takeaway: The US stock market has only had 16 up days in the last 42 – please, don’t blame China.

Here's the REAL Picture Behind Today's Jobs Report - ball drop cartoon 12.31.2015


Jobs, Jobs, Jobs...


That's what Old Wall is talking up today. 


Thinking like consensus is the biggest risk right now. On today's non-farm payroll number, Old Wall is staring at the absolute number this morning, instead of the rate-of-change. Don’t forget that the US employment cycle peak was a NFP growth rate of 2.3% year-over-year in Q1 of 2015. It’s also the latest of late cycle indicators (put another way, nothing could change our bearish TREND view).



To better understand the year-over-year slowdown in NFP, here's a quick visual summary from Hedgeye U.S. Macro analyst Christian Drake. Take a look at the circled fourth line down, labelled "NFP, Y/Y," with the current reading of 1.88% versus the aforementioned peak of 2.3% in Q1 of 2015.


In other words, this is the last data point you'll see that the bulls can try to hang their hat on. It was a nice ride. It's over.



The S&P 500 appears to be shrugging off the NFP number today anyway. Remember, the US stock market has never NOT crashed (i.e. a 20% or more decline from peak – that would get you 1704 SPX from the 2130 #bubble high) when corporate profits go negative for 2 consecutive quarters. We’ll have that in earnings season that starts next week.


Just look at the chart...



That's why JPMorgan's (JPM) earnings are way more important to me than this today's jobs report.


You won't hear that from anyone on Wall Street though.

RTA Live: January 8, 2016


Early Look

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FL | FINL Closures Not Material For FL

Takeaway: FINL store closures worst case gives FL 1.5% in EPS Growth.

FINL announced yesterday that it would be closing 25% of its existing fleet over a 4 year time period. That’s gross closures as the company will be working on the quality of its real estate portfolio to increase its penetration in better quality malls, i.e. more overlap with FL in better markets. What we know – each of the 150 stores earmarked for closure are doing about 1mm bucks per store, about 50% below the company average of $2mm. 65% of those sales are attributed to FINL loyalty members.


If we look at the store footprint overlap by mall between Foot Locker (banner) and Finish Line it’s only 67% (chart 2 below). And our sense is, there is more overlap on the top end of the spectrum compared to the bottom end where FINL will be closing locations. That’s because FL has been extremely prudent over the past 5 years as it stripped capital out the model by rationalizing its store footprint.


All in we get to a $0.03 benefit to FL’s bottom line, and $20mm to the top line per year through FY19 from the door closures assuming a high overlap ratio between the store locations. Less than 1% accretion per year. To get there we assume that FINL recaptures 40% of the lost sales, and 80% of the forfeited share shifts over to FL. We assume a 30% margin for dollars transferred, as FL won’t have to spend up dramatically to win those $. Worst case, assuming FINL recaptures 0% of the dollars lost, and FL gets 100% (ain’t going to happen as NKE pushes its DTC agenda), we could see a $40mm benefit to the top line and $0.06 on the bottom about 1.5% of earnings growth.


FL |  FINL Closures Not Material For FL - FL 1 8 16 chart1


FL |  FINL Closures Not Material For FL - FINL FL overlap

CHART OF THE DAY | Recession? This Indicator Sees Worst Contraction Since 2009

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


"... In the Chart of the Day, we highlight ISM Manufacturing data, which contracted for the first back-to-back month since 2009. As the chart highlights going back to the 1980s, this type of contraction typically precedes or coincides with a recession. The same scenario could be said for a slew of data including industrial production, capital investment, durable goods, exports, and the list goes on. In fact, of the 34 key economic data points we track for the U.S., 24 have gotten worse sequentially."


CHART OF THE DAY | Recession? This Indicator Sees Worst Contraction Since 2009 - CoD 01.08.16

The End of the Beginning

“This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

-Winston Churchill


The quote above is one of my favorite quotes from Churchill. After all, what exactly is the end? What is the beginning? Certainly for many of us, the start of the year signifies a beginning. In the investment management business, it really is a new beginning in that performance numbers are again set at zero and the race for outperformance begins anew.


We used this same Churchill quote in the conclusion of a recent video we put together on the history of Hedgeye. We showed that video to a new group of analysts that we are onboarding this week. We are officially announcing the combination on Tuesday next week, but suffice it to say we think the group we acquired will dramatically improve our research with their domain expertise in studying government policy. Stay tuned for the official announcement early next week.


There is no question that the next twelve months will be critical in Washington, DC. We will definitely have a new President, we will certainly have a slew of new legislators, and generally speaking the election outcomes at this point are still unknown. It seems likely that Hillary Clinton will get the Democratic nomination and, much to the chagrin of many, Donald Trump seems poised to capture the Republican nomination.


But even these nominations are far from done deals at this point, especially in the broader context of how unhappy Americans are with the government, which is obvious in a few areas:

  • President Obama’s approval ratings are dismal at around 44% and disapproval being above 50%;
  • In the most recent “Direction of the Country” poll, those believing the country is going in the wrong direction came in at 59%, versus those believing the country is going in the right direction at 27%; and...
  • Finally, the worst approval rating is Congressional job approval, with 73% disapproving and a mere 13% approving of the job Congress is doing.

Whoever is elected President is going to have the challenge of winning the country back and the objective is likely to come with a slew of legislative activity. So, as it relates to the governments impact on the economy and markets, we are likely only at the end of the beginning.


The End of the Beginning - Bull SCREAM 01.06.2015


Back to the Global Macro Grind …


This has been a busy week at Hedgeye and the month is only going to get busier as our Sector Heads ramp up their idea production. We have a couple of key events to highlight in the coming weeks, but most importantly this past week was our Q1 Macro Themes Conference call. The first theme, front and center, was US #Recession. We were the first to call out the likelihood of U.S. growth slowing more than expected and now we are #TimeStamped making the recession call.


In the Chart of the Day, we highlight ISM Manufacturing data, which contracted for the first back-to-back month since 2009. As the chart highlights going back to the 1980s, this type of contraction typically precedes or coincides with a recession. The same scenario could be said for a slew of data including industrial production, capital investment, durable goods, exports, and the list goes on. In fact, of the 34 key economic data points we track for the U.S., 24 have gotten worse sequentially.


All this is not to say that a recession is a forgone conclusion, but as our colleague and Senior Macro analyst Darius Dale wrote in response to a client question earlier this week:


“Per the preponderance of indicators we track, the U.S. economy has the highest probability of entering into recession somewhere around Q2/Q3 of this year. Recall that a technical recession requires two consecutive quarters of QoQ SAAR contraction, though the NBER’s actual dating of recessions is a bit more nuanced.


Our +1.5% estimate for 2016E is calculated as the average of the four quarterly YoY estimates; this is the same calculus the BEA uses to calculate annual growth rates. Given that distinction, you don’t have to have a full-year number be negative to experience an intra-year recession (or one that spans multiple calendar years). Recall that U.S. Real GDP grew +1.9% during CY1990 in spite of the July ’90 - March ’91 recession and +1% during CY2001 in spite of the March ’01 – November ’01 recession.


Beyond that, the +1.5% estimate doesn’t actually include an outright technical recession. Recall that we run a predictive tracking algorithm that feeds high and low-frequency data into the model to generate a probable forecast range for any given quarter in conjunction with the directional adjustment implied by the base effects. Obviously the C&I data has been recessionary, but given its outsized weight in the GDP calculus, we actually do need to observe further slowing of consumption data to open up the downside in the quarterly forecast ranges throughout 2016E.”


So from a timing perspective, we think Q2 going into Q3 is when growth likely slows the most, but it will require a slowdown in consumption to fully push the economy into a recession. One catalyst for this slowdown in consumption may be the housing market being worse than expected.


In that vein, our Housing team is introducing their view of the U.S. housing market on Wednesday January 13th and are shifting to a negative bias. The call is titled, Less Good is Bad, and they are making the call that key metrics for housing will likely slow in 2016. Housing, of course, has a very high correlation to consumption, so in the world of interconnected research, housing will be a critical determinant in how much the economy slows.


So, is a U.S. recession and housing slowdown the end? No, but it is also not likely the beginning of outsized equity returns.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.09-2.24%

RUT 1051-1090

VIX 18.74-27.49
USD 97.44-100.12
Oil (WTI) 32.28-36.26


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The End of the Beginning - CoD 01.08.16