It's Inauguration Day... An Update On The State of the U.S. Economy

It's Inauguration Day... An Update On The State of the U.S. Economy - Presidential Donald J Trump 123


It's Inauguration Day. Whether you woke up today feeling good or bad about Trump at the helm doesn't change the fact that the U.S. economy is growing. Trump can't claim credit for this just yet. The evidence of growth is apolitical and suggests sectors like Industrials (XLI) and Financials (XLF) are a buy.


As you can see in the Chart of the Day below, this week’s inflation data (the Consumer Price Index or CPI) accelerated to +2.1% year-over-year growth. This week’s growth data (Industrial Production, measuring the manufacturing side of the economy) accelerated to +0.5% year-over-year growth.


It's Inauguration Day... An Update On The State of the U.S. Economy - 01.20.17 EL Chart

Why this Matters: Growth

It's no wonder the Rust Belt states voted for Trump. For some time now, these states have been hammered by a protracted recession in the industrial side of the economy.


While 0.5% growth might seem like a paltry sum, the more important point is that Industrial Production broke a 15-month streak of negative year-over-year growth in December. This was the worst string of contractionary months the American manufacturing economy had ever seen outside of a broader U.S. recession. 


The upshot is that other measures like the ISM Manufacturing survey and corporate capital expenditures have also broken out of late. It would seem that the manufacturing economy is growing once again after a protracted period of contraction.


Investing Implications: On dips in the sector, buy Industrials (XLI) as the manufacturing economy grows.

Why This Matters: Inflation

Trump has been at odds with Federal Reserve chair Janet Yellen for some time now. "Janet Yellen for political reasons is keeping interest rates so low that the next guy or person who takes over as president could have a real problem." Unknowingly, Trump may be right. Inflation is heating up.


The Consumer Price Index attempts to measure monthly changes in prices. Price stability is closely watched by the Federal Reserve, since falling prices are viewed as a negative for economic growth. Economic theory suggests that Americans save more and consume less when prices fall because they can expect to buy goods tomorrow at a relatively cheaper price. Inflation that's not-too-hot, therefore, is viewed as positive for the economy.


The Fed may get what they've wished for. CPI hit a year-over-year rate of 2.1% for the month of December, up from 1.7% in the prior month. This effectively ended 30 straight months of inflation readings that were stubbornly below the Fed’s 2% target.


Inflation Alert! Our proprietary leading indicator of inflation suggests it could hit three, even four, percent on a year-over-year basis in the first quarter of 2017 (click here to learn more about this indicator). In short, previously beaten down commodities, like oil prices, are rising and will push measures of inflation steadily higher. 


Investing Implications: On dips in the sector, buy Oil & Gas Exploration and Production ETF (XOP) as inflation picks up.

Bottom Line

Expect Trump to take credit for this modest economic turnaround at his swearing in speech today. Don't be fooled. The U.S. economy is growing but our 45th President has a lot to prove before he can claim victory.

14 Reasons To Like U.S. Equities Right Now

14 Reasons To Like U.S. Equities Right Now - bulls

The U.S. economy is growing. Inflation is accelerating. And the Fed may raise rates faster than expected. These trends suggest investors should buy sectors like Energy (XLE) and Financials (XLF). Here's why.


Check out yesterday's manufacturing sector data (Industrial Production) and inflation reading (Consumer Price Index, CPI):


  • Industrial Production: As you can see in the Chart of the Day below, Industrial Production registered its first positive reading in 15 months yesterday, or +0.5% year-over-year growth. That snapped the longest streak of negative growth ever outside of protracted U.S. recessions. 
  • U.S. CPI: Headline Inflation accelerated for a 5th consecutive month, taking consumer price growth to its highest level in 32-months (since May 2014) at +2.1% in December.  This effectively ended 30 straight months of inflation readings that were stubbornly below the Fed’s 2% target.


14 Reasons To Like U.S. Equities Right Now - IP CoD

14 Accelerating Economic Indicators

#Economy #GDP #Growth


Add these to the laundry list of economic indicators that are now realizing positive year-over-year growth:


  • Consumer Confidence
  • Business Confidence
  • Wage Growth
  • ISM Manufacturing
  • ISM Services
  • Industrial Production
  • Capacity Utilization
  • Durable Goods (ex-Defense & Aircraft)
  • Auto Sales
  • Retail Sales
  • Revolving Credit Growth
  • Disposable Personal Income Growth
  • CPI
  • PPI


(***Don't take our word for it. Click here, here and here for a bit of background reading on U.S. growth accelerating)

An Investing Wildcard: The Fed

#Yellen #Fed #Inflation 


Expect the Fed to raise interest rates a whole lot faster than was initially projected. “As of last month, I and most of my colleagues were expecting to increase our federal funds rate target a few times a year until the end of 2019,” Fed chair Janet Yellen said yesterday.


The Fed isn't (yet) aware how quickly things might escalate. According to our proprietary inflation forecasting model, year-over-year inflation could hit as high as three, even four, percent in the first quarter of 2017, as previously beaten-down commodities comes back and push prices higher.


“That’s going to be really nasty for the Fed to deal with,” says Hedgeye CEO Keith McCullough in a HedgeyeTV video presentation yesterday. “That’s why the Fed, for the first time, isn’t hawkish enough. They should be talking about a lot more rate hikes.”


Bottom Line: What to Buy



As the Fed falls behind the curve and the U.S. economy heats up, prepare your portfolio for growth and inflation accelerating. Buy Energy (XLE) and Financials (XLF) sectors on pullbacks. Both benefit from this trend. 

An Early Look At The Earnings Scorecard

An Early Look At The Earnings Scorecard - earnings image 1 18

It's earnings season...



So far, 34 of 500 S&P 500 companies have reported fourth quarter results. Aggregate sales and earnings are up +4.6% and 10.3% respectively year-over-year. If this earnings growth holds, it would mark the first time S&P 500 aggregate earnings have grown for two consecutive quarters in almost two years. 


Here’s the Earnings Season breakdown so far:


  1. Financials (XLF) SALES and EPS have gained +3.5% and +14.1% year-over-year, respectively
  2. Consumer Staples (XLP) SALES of -1.2% year-over-year are the laggards, so far
  3. Energy (XLE) companies (35 of 500 in the S&P 500) are expected to show anywhere between +250-350% year-over-year earnings growth... in Q1 2017 consensus has Energy earnings up +727% year-over-year
  4. Digging into the pop in Materials (XLB), Monsanto (MON) went from losing -$0.11/share in the prior year's first quarter to +$0.21/share in the first fiscal quarter of 2017. 


An Early Look At The Earnings Scorecard - earnings 1 18 17

U.S. Economy and Earnings Accelerating

#GrowthAccelerating #Earnings


Interestingly, but not surprisingly, the trend of earnings acceleration mirrors exactly the slowing then bottoming of the U.S. economy in the second half of 2016. In the third quarter, GDP was up +1.7% year-over-year growth (+40 bps versus the prior quarter). Prior to that, U.S. growth slowed for five consecutive quarters (from the peak of 3.3% in March 2015 to 1.3% in June 2016) before the trend finally flipped. 


Sound familiar?


That's precisely what happened to earnings. In the second quarter of 2016, earnings had declined for five consecutive quarters, a streak not seen since the dark days of 2009. Now, it's looking like we'll have a second consecutive quarter of growth in the fourth quarter.


In other words, the U.S. economy and earnings have both bottomed out. "We have a real Sales and Earnings acceleration to go along with the big, top-down macro-economic, and behavioral data accelerations," writes Hedgeye CEO Keith McCullough in today's Early Look


That's why we're bullish on the S&P 500.

Looking Good: What to Buy (And Sell) Ahead of S&P 500 Earnings

Looking Good: What to Buy (And Sell) Ahead of S&P 500 Earnings - earnings1 17 17

The earnings outlook for American companies is looking up

#Earnings #Growth


Here's an interesting observation worth noting. If companies meet or beat Wall Street earnings expectations for the fourth quarter of 2016, it would mark the first time the S&P 500 has seen year-over-year growth in earnings for two consecutive quarters in almost 2 years.


That would obviously mark a huge step in the right direction.


For the record, earnings declined for five consecutive quarters, through the second quarter of 2016. That hadn't happened since the dark days of 2009, when the U.S. was mired in the worst economic period since the Great Depression.

What a difference a few months can make: Earnings Growing

#Energy #Bankruptcies


As you can see in our Chart of the Day below, we're now lapping this nasty period of earnings contraction. Growth will be a lot easier to come by heading into the first quarter of 2017.


Nowhere is this more evident than in the Energy sector (XLE). Wall Street analysts expect the sector to print declining earnings for the fourth quarter, but then snap back (rather dramatically actually) heading into 2017. Earnings estimates put profits up +727% for the first quarter.


No, that is not a misprint.


Following a protracted period of oil price declines, profitability fell and energy bankruptcies spiked. According to industry estimates from law firm Haynes and Boone:


"These bankruptcies, including Chapter 7, Chapter 11, Chapter 15, and Canadian cases, involve approximately $74.2 billion in cumulative secured and unsecured debt. As of December 14, 2016, 70 producers have filed bankruptcy so far this year, representing approximately $56.8 billion in cumulative secured and unsecured debt."


This has buoyed estimates for S&P 500 earnings more broadly. The aggregate index is expected to be up +13.2% year-over-year in the first quarter. That's versus 3.2% expected in the fourth quarter of 2016 and actual growth of 5.3% for the third quarter. 


Looking Good: What to Buy (And Sell) Ahead of S&P 500 Earnings - 01.17.17 EL Chart

What to Buy & What to Sell

#GrowthAccelerating $SPY $XOP $TLT $GLD


We like the S&P 500 and high beta stocks – companies that tend to rise along with the broader index like U.S. Oil & Gas Exploration and Production (XOP). This is what you want to own when the U.S. economy is accelerating.

Conversely, continue to sell U.S. growth slowing exposures like Long Bonds (TLT) and Gold (GLD).



Trumponomics: Will It Succeed? (And Should Investors Stay Bullish?)

Trumponomics: Will It Succeed? (And Should Investors Stay Bullish?) - trump white house


Wall Street fully expects President-elect Donald Trump to lower taxes, cut regulatory red tape, and enact fiscal stimulus. As a result, inflation expectations have been rising (in the next five years markets expect 2.13%, up from 1.64% just three months ago). Meanwhile, consensus estimates for 2017 U.S. economic growth have also been rising (to 2.3% for year-end 2017 versus 2.1% before Trump's win). 


Since Election Day, exuberant investors have sent the S&P 500 up 6%. The small cap Russell 2000 has gained almost 14%. All of this begs an important question... Are Trumponomics expectations realistic?

First, A brief list of Trump Policy proposals

#CorporateTax #IncomeTax #Infrastructure #Repatriation


Wall Street is giddy over tax cuts and infrastructure spending. Here's a list of some of the proposed policies:


  • Reduce the corporate tax rate from 35 percent to 15 percent. 
  • Cut the number of income tax brackets from seven to three – 12%, 25%, 33% (from 10%, 15%, 25%, 28%, 33%, 35%, 40%)
  • Repeal the estate tax (a tax of 40% levied at death on estates with assets greater than $5.45 million)
  • Infrastructure plan of $1 trillion
  • A one-time tax holiday for the repatriation of the $2.6 trillion in corporate profits held overseas at a rate of 10% (versus existing rate of 35% minus tax credits equal to whatever already paid to foreign governments)


What does this mean for U.S. debt?

Trump Calls Himself the "King of Debt": He Would be

#Debt #CBO #TrumpTaxPlan


This should lay out the scope of Trump's tax cut and fiscal spending proposals. As you can see in the chart below, the CBO estimates Trump's tax plan would cause the Federal debt to balloon, from 75% currently to 120% by 2026. 


Trumponomics: Will It Succeed? (And Should Investors Stay Bullish?) - trump debt

Will Trumponomics Succeed? We'll See, But The U.S. Economy is Accelerating

#Trumponomics #Volatility $SPY


As Hedgeye Director of Research Daryl Jones writes in today's Early Look, "The expectations for a strong(er) economy are being priced into the market. The S&P 500 has now gone 64 days without a -1% down day." Meanwhile, as you can see in the Chart of the Day below, the VIX, a measure of equity market volatility, is literally at a 10-year low.


Time will tell whether Trump's policies live up to the hype. For now, the more important point is that U.S. growth is accelerating (and this has little to do with Trump).


As we've noted before, Trump didn't kickstart the U.S. economy. He had the good fortune to be elected just as the economic data was turning. Now, everything from Durable Goods to Retail Sales to formerly recessionary Industrial Production numbers are accelerating.


For now, we remain bullish on U.S. equities, specifically the S&P 500 (SPY), and suggest investors sell Long-Term Bonds (TLT) and Gold (GLD) as the economy continues to accelerate. 


Trumponomics: Will It Succeed? (And Should Investors Stay Bullish?) - 01.13.17 EL Chart

Cha-Ching! U.S. Wage Growth Hits Post-Recession High

Cha-Ching! U.S. Wage Growth Hits Post-Recession High - money money


After years of stagnation, worried Rust Belt Trump voters are finally getting the bump up in their pay stubs for which they've long yearned. More is coming. None of this has anything to do with Trump and everything to do with the U.S. economic cycle. Here's why.


Wage growth is finally breaking out. Average hourly earnings growth hit a post-recession high last Friday, of +2.9% year-over-year. This should come as no surprise to anyone really (and to the relief of Federal Reserve officials, who have been hoping for wage gains to justify further rate hikes). The dynamics are fairly simple. Ask yourself this simple question (below is our answer):


Q: What happens when the pool of available labor shrinks to new lows in both absolute and relative terms?


A: Employment growth slows because you can’t hire fast enough (i.e. the easy gains have been made) and wage growth accelerates because the negotiating dynamics shift from a buyers to a sellers’ market.


Let's run through the numbers.

Demand for Workers , Supply = Wages 

#JobsGrowth #NFP 


It's not entirely complicated.


"The typical progression of slowing employment growth and accelerating wage growth should make a ton of sense for anyone with some familiarity of ninth grade macroeconomics," writes Hedgeye Senior Macro analyst Darius Dale in today's Early Look.


As you can see in the Chart of the Day below, the ratio of available labor to job openings fell to 2.4 in November from 2.5 in the prior month. Jobs growth on a year-over-year basis continues to slow to +1.51%, down -77 basis points from its February 2015 peak of +2.28%.


Cha-Ching! U.S. Wage Growth Hits Post-Recession High - Chart of the Day 1 12 17

Wages  = Consumption 

#Wages #Earnings #Consumption #GDP


Wage gains will continue to filter down into consumption and provide further support to our view that the U.S. economy is accelerating. Consumption growth continues to track the broader economy and suggest that both have bottomed out and are now re-accelerating:


  • Real Consumption Growth (year-over-year): peak 3.64% (March 2015) to bottom 2.37% (March 2016) to re-acceleration 2.78% (September 2016)
  • U.S. GDP Growth (year-over-year): peak 3.3% (March 2015) to bottom 1.3% (June 2016) to re-acceleration of 1.7% (September 2016)


This relationship isn't altogether shocking since U.S. Consumption makes up 70% of GDP. Prior to this, the U.S. economy had been relying on revolving credit to fill in for slowing wage growth and help backstop consumption. With both now rising, the U.S. economy is poised to grow.

Bottom Line

Rust Belt voters may finally get the relief they so desperately deserve after a protracted recession in the industrial side of the economy. Don't praise Trump. Simply put, the U.S. economy is accelerating once again.