The Economic Data calendar for the week of the 1st of August through the 5th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
THE HEDGEYE BREAKFAST MENU
Notable news items and price action in the restaurant space, as well as our fundamental view on select names.
Yesterday, the KC FED Manufacturing survey showed the pace of hiring slowed sharply, as the employment index fell by 13 points to 4, the lowest level since October 2010.
After improving modestly for two weeks, the Bloomberg consumer comfort index slipped to a two-month; all three components were lower in the latest week. Sentiment dropped 3.5 points, to -46.8 for the week ended July 24.
The Coffee Bubble Watch
It is ludicrous to pay a higher multiple for the Dunkin’ Donuts “growth” story than the growth that Starbucks promises. Starbucks has delivered for years as a public company and is a global brand with quantifiable and undeniable appeal for consumers, globally. Dunkin’ Donuts is a great but regional domestic brand with no track record as a public company. Sure, the company plans to grow into new domestic markets but growth is expensive as BWLD discussed on its earnings call. Furthermore, if the brand doesn’t resonate as much as expected in new markets, and the ROI doesn’t meet what the current multiple implies it should be, it could pop the Dunkin’ bubble.
Initial jobless claims dropping below 400k was a positive sign for employment yesterday. Stocks reacted to the number positively at the open and QSR stocks caught a bid after trading softly recently.
The Macau Metro Monitor, July 29, 2011
SINGAPORE'S JOBLESS RATE RISES 2.1% IN JUNE Channel News Asia
S'pore's unemployment rate rose to 2.1% in June from 1.9% in March as employment growth slows and graduates enter the job market. Total employment grew by 22,800 in Q2 - about 20% lower compared to the previous quarter of 28,300. Services led the growth with jobs gains within the retail, F&B and hospitality industries.
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THE HEDGEYE DAILY OUTLOOK
TODAY’S S&P 500 SET-UP - July 29, 2011
As we see it the Debt Ceiling Debate = political drama; that’s it – it’s not being priced into either A) a US currency crash or B) US Treasury Yield credit risk. Sure, it’s being priced into US stocks, but I think what people are missing is that so are A) Europig problems and B) EPS expectations. As we look at today’s set up for the S&P 500, the range is 24 points or -0.67% downside to 1292 and 1.18% upside to 1316.
SECTOR AND GLOBAL PERFORMANCE
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS:
WHAT TO WATCH:
COMMODITY HEADLINES FROM BLOOMBERG:
“Every man's life ends the same way. It is only the details of how he lived and how he died that distinguish one man from another.”
Keith was on CNBC this morning, so as I was mulling over topics for the Early Look last night and this morning and my initial thought was to completely avoid discussion of the debt ceiling debate. It has become the one of the most overhyped factors in global markets and it is a little depressing to analyze the political shenanigans going on in Washington. Nonetheless, I’m at my keyboard in the Taft Mansion on Yale’s Campus this morning (more commonly known as the global headquarters of Hedgeye Risk Management) and I feel compelled to comment.
As many of you are now discovering, Speaker Boehner is having serious issues garnering votes for his debt and deficit plan. The vote was scheduled yesterday and is now postponed. It seems the Tea Party is not on his political side, despite fear mongering from the White House that Christmas will be ruined if a long term debt deal is not passed in short order. I can’t say I agree with the Tea Party on everything, but I will give them credit for a conviction of their beliefs.
The debt limit deadline is August 2nd, which is now four days away. Between now and then, how this plays out is really anyone’s guess. It seems likely the Tea Party will acquiesce and a deal gets passed in the House, although as we saw yesterday evening, even that is uncertain. If that does occur, Senate Majority Leader Reid and President Obama have been adamant that they will not support any bill that has a two-step process and that doesn’t extend the debt ceiling past the 2012 election.
Regardless of the two-step process in the Boehner bill, the Boehner and Reid bills have dramatic differences regardless. At face value they are talking about similar numbers, the Boehner plan, in total, is looking for more than $2.7 trillion in cuts, while the Reid plan is proposing almost $2.2 trillion in deficit cuts. While those numbers are in the same area code, the methodology for getting to the cuts is dramatically different.
The Reid plan only has $710BN in real budget cuts, the remainder of the deficit reduction plan comes from the winding down of the wars in Iraq and Afghanistan. Setting aside the differences in process, that leaves us with a $2 trillion difference in the nature of deficit cuts between the parties. That’s one mother of a compromise for four days.
Stepping back to the longer term, we need to keep in mind that both of the current bills proposed are really nothing more than Congressional Comb-overs. As a refresher, Merriam Webster describes a comb-over as follows:
“An arrangement of hair on a balding man in which hair from the side of the head is combed over the bald spot.”
As a man who sports a comb-over, I can vouch that is an apt description. The sneaky thing about a comb-over is that while you can comb your hair over, the rest of the world can usually tell that there is a bald spot lingering beneath.
In the chart of the day, I’ve shown what I mean graphically by comparing proposed Reid plan discretionary spending cuts as a percentage of the estimated deficit. Similar to many a bad business plan, the Reid plan is very back end loaded (by the way, so is the Boehner plan). In fiscal 2012, the discretionary spending cuts as proposed by Reid ramp from 2.2% of the CBO’s projected deficit to 14.0% of the CBO’s projected deficit by 2020.
The other key assumption to keep in context when considering the currently proposed Congressional Comb-overs are the GDP growth assumptions proposed by CBO. In the projection period used in my analysis in the attached chart, the federal government budget years from 2012 to 2020 at an average real GDP growth rate of 2.9% per year. This compares to the actual real GDP growth rate over the last ten years of 1.7%. Obviously, future deficits will be much higher if growth in the next decades tracks similar to the last decade.
While the political drama in Washington has been entertaining over the last few months, we need to keep in mind that even when the compromise is reached, the current bills proposed are merely covering up long term budget deficit issues that will again need to be addressed in the next 12 – 18 months. Therefore any short term positive stock market reaction should be taken with a grain of salt in the context of continued long term issues.
Keep your head up and your stick on the ice,
Daryl G. Jones
Director of Research
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