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XLE: Bigger Than Brent

The chart essentially speaks for itself: Earlier this year, when Brent Crude oil was busy ripping to the upside, it had the edge over the broader Energy Select Sector SPDR ETF (XLE). As the dollar got crushed by Bernanke heading into the late summer and fall, diversifcation became essential; the XLE performed better and as we've seen this week, oil continues to get crushed. 

 

XLE: Bigger Than Brent - image001


BLS DATA IMPLYING SLUGGISH CASUAL DINING COMPS

Takeaway: Knapp Track Casual Dining sales track BLS employment growth data for the full-service industry. We are bearish on $DRI, $BLMN, $TXRH & $BWLD

Employment data released this morning by the Bureau of Labor Statistics suggest near-term strength for Quick Service and Fast Casual trends.  The outlook for Casual Dining seems less positive.  Employment trends within the industry suggest a possible sequential deceleration in same-restaurant casual dining sales. Knapp Track Casual Dining sales data track BLS employment growth data for the full-service and leisure and hospitality industries.  Within casual dining, we are bearish on DRI, BLMN, TXRH, and BWLD.

 

BLS DATA IMPLYING SLUGGISH CASUAL DINING COMPS - knapp vs leisure   hospitality1

 

BLS DATA IMPLYING SLUGGISH CASUAL DINING COMPS - knapp vs full service emp growth1

 

 

Employment by Age

 

Employment growth among the 20-24 YOA cohort, which has been highlighted by many QSR and fast casual management teams as an important source of demand, accelerated to 3% year-over-year in September from 1.3% in August.  Employment growth among 55-64 year olds decelerated, sequentially, in September to 3.6% from 4.4% in August.  If this deceleration were to continue, it would be a negative signal for casual dining sales.

 

BLS DATA IMPLYING SLUGGISH CASUAL DINING COMPS - Employment by Age

 

 

Industry Hiring

 

The Leisure & Hospitality employment data, which leads the narrower food service data by one month, suggests that employment growth in the food service industry may have tracked sideways-to-down in September.  On a sequential basis, the Leisure & Hospitality employment data registered a month-over-month gain of 11k (second chart below).   As the first chart of this post illustrates, the trend of employment growth within the Leisure & Hospitality seems to be stabilizing at roughly 2%. 

 

Sequential Moves

  • Leisure & Hospitality: Employment growth at +2.3% in September, down 7 bps versus August
  • Limited Service: Employment growth at 3.9% in August, down 15 bps versus July
  • Full Service: Employment growth at 2.5% in August, up 13 bps versus July

BLS DATA IMPLYING SLUGGISH CASUAL DINING COMPS - employment growth

 

BLS DATA IMPLYING SLUGGISH CASUAL DINING COMPS - leisure   hospitality

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


Jobs Report: Fuzzy Math?

Takeaway: Unemployment is likely in the 10.8-11.1% range, not 7.8%. The government needs to go back and check the math it's using.

Today’s jobs numbers don’t add up when we take a closer look at what’s been going on during the last four years under the Obama administration. The headline today was that unemployment rate was 7.8%, a suspiciously low number that any American would second guess. Stripping away the government’s window dressing, we believe that the number is somewhere in the range of 10.8-11.1% depending on the methodology used.

 

 

Jobs Report: Fuzzy Math?  - unemployment1

 

 

We continue to think the headline US unemployment rate is being artificially deflated through generationally-low labor force participation rates. Hedgeye Senior Analyst Darius Dale explains why the numbers that came out today don’t display the true state of America’s jobs and employment landscape:

 

If you adjust the headline figure for a 10yr average LFPR, the US unemployment rate for September would have been 10.8% in September; a decent improvement over the 11.3% rate in August, but still elevated nonetheless – particularly relative to the elevated 8.9% adjusted rate Obama inherited from President Bush. 

 

Interestingly, if you adjust the headline figure for the LFPR on Obama’s first day in office, the September unemployment rate would have been 11.1% – substantially elevated from the comparable 7.8% figure he inherited from Bush. What this suggests is that, over the last four years, President Obama has seen the US unemployment rate tick up 3.3% when accounting for all the disgruntled civilians who’ve completely given up looking for work since the president took over the leadership reigns of the US economy.”

 

Take a look at the two charts below for a visualization of the range in which we believe the unemployment rate truly lies.

 

Jobs Report: Fuzzy Math?  - unemploymentA

 

Jobs Report: Fuzzy Math?  - unemploymentB

 

While this is not the appropriate setting to debate whether or not this material erosion in the US labor market is A) a function of President Obama’s failed economic policies or B) a function of the failed Policies To Inflate out of Washington D.C. in general, we can be sure the dismal state of the US labor market should continue to give Mitt Romney the upper hand in any economic exchange. The next two presidential debates are October 16 and October 22; the former will be Romney’s best chance to capitalize on his momentum from Wednesday night’s big win, as it focuses on both domestic and foreign policy, rather than just the latter as the October 22 debate does.

 


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COH: Anatomy Of A Short

Hedgeye Retail Sector Head Brian McGough has delivered a 9-point breakdown of fundamentals and durations of Coach (COH). We think Coach as a brand is just fine, but we are keen to short the stock in the immediate-term TRADE and intermediate-term TREND durations. With 8 out of 9 negatives, this image speaks for itself.

 

COH: Anatomy Of A Short  - coachCHART


THE HIDDEN TAXES OF SOVEREIGN DEBT

Takeaway: Every dollar of sovereign debt is a dollar of [future] tax. Who's going to foot the bill?

SUMMARY BULLETS

 

  • In the note below, we review a recent analysis put forth by the bi-partisan American Enterprise Institute titled: “A Simple Measure of the Distributional Burden of Debt Accumulation” which was co-authored by Aspen Gorry of UC Santa Cruz and Matthew Jensen of AEI.
  • One of their primary conclusions was that sovereign debt expansion implies incremental taxes and, like tax policy, these costs of servicing incremental federal debt is incredibly progressive.
  • A key takeaway we had was that, because of this highly progressive nature of debt service, the rich will bear the lion’s share of the burden in a revenue boosting scenario and the poor (i.e. households who receive a disproportionate amount of gov’t benefits) will bear the lion’s share of the burden in an expenditure reduction scenario. Moreover, if the GOP has its way, the poor will pick up the tab via regressive spending cuts; if the Democrats have their way, the rich will pay via progressive tax hikes.
  • Lastly, to the extent this continues to edge higher, the marginal propensity for politicians to pursue tax hikes (via voter preference) should also increase.

 

Those who’ve grown familiar with our team’s work over the last few years know that we aren’t afraid to evolve, often borrowing new ideas from risk managers, authors and academics alike. Moreover, we like to use those ideas to help develop the structural views and biases we manage immediate-to-intermediate-term risk within.

 

In this vein, one of the more prominent conclusions we’ve weaved into our own research process is the idea that there is a critical threshold (~90% of GDP) where the stock of sovereign debt in an economy structurally impairs economic growth. This thesis was originally demonstrated through the empirical analysis of Carmen Reinhart and Kenneth Rogoff as has since been expanded upon and cited by other scholars in the field. Their work is one of the primary reasons we continue to hold the view that economic growth is likely to remain structurally depressed across a number of developed economies for the foreseeable future.

 

THE HIDDEN TAXES OF SOVEREIGN DEBT - 9

 

Why sovereign debt slows economic growth at that critical threshold is still up for debate. From our vantage point, sovereign debt loads that great imply to a certain extent that the government is crowding out private investment, on the margin, due to its deficit financing needs. Another hypothesis we’ve posited is that the threat of future tax hikes and spending cuts loom large in the psyches of consumers and businesses alike, causing them to slow their rate of consumption and investment growth – two occurrences that perpetuate incremental sovereign budget deficits! A third, more simple hypothesis is that it likely takes economies some time to grow the stock of sovereign debt to 90%-plus of GDP and that is may just well be that an older, less productive society is left behind to foot the bill.

 

There’s likely a handful of other explanations to the aforementioned question; in the prose below, however, we focus specifically on the second hypothesis from above – particularly with regards to the costs of servicing sovereign debt imposed upon US consumers.

 

A few days back, the bi-partisan American Enterprise Institute published a paper titled: “A Simple Measure of the Distributional Burden of Debt Accumulation” which was co-authored by Aspen Gorry of UC Santa Cruz and Matthew Jensen of AEI. From a critique standpoint, we like that there are no major assumptions in their analysis and that it is overwhelmingly fact-based, sourcing the [presumed] bi-partisan CBO and Tax Policy Center for the bulk of their forward-looking data (though we are all aware of the fact that the CBO’s forecasts of “long run” real interest rates and GDP growth tend to be a bit aggressive). The article mostly walks through their methodologies – which we find generally sound – allowing the reader to focus extensively on the detailed tables of data analysis presented throughout the paper. They even do a good job of remaining bi-partisan, as advertised. All told, the paper is definitely a good read and the analysis is quite thought-provoking; we send our thanks to the client who initially passed it along.

 

The primary conclusions from the article is that incremental sovereign debt implies incremental taxes and, like tax policy, these costs of servicing incremental federal debt is incredibly progressive. Moreover, when operating under the key assumption that the revenue source for all federal expenditures (including sovereign debt service) is the government’s power to “tax” the public via outright tax hikes or lower future expenditures relative to previously-established policy, we should arrive at the conclusion that any budget outlook with persistent deficits implies equally persistent tax hikes.

 

One key takeaway that we had is that, because of this highly progressive nature of debt service, the rich will bear the lion’s share of the burden in a revenue boosting scenario and the poor (i.e. households who receive a disproportionate amount of gov’t benefits) will bear the lion’s share of the burden in an expenditure reduction scenario. Now we know why President Obama was so keen to focus on Governor Romney’s alleged “$5 trillion tax cut” during Wednesday night’s debate.

 

Lastly, the paper sheds light on exactly why both the existing stock of debt and the rate of future debt accumulation are so critical when discussing changes to fiscal policy: it’s not just about having an ideological debate about spending, taxes and the size of the government, but rather about the most important discussion of them all – who’s footing the bill? If the GOP has its way, the poor will pick up the tab via regressive spending cuts (assuming they are in conjunction with tax cuts); if the Democrats have their way, the rich will eventually pay via progressive tax hikes (though lower-income earners could still wind up “paying” via incrementally faster inflation and incrementally slower economic/employment growth).

 

Given that there’s 15.3x the number of US households at or below the median income than those making $200k-plus (91 million vs. 5.9 million), it’s not difficult to anticipate a future where tax hikes are increasingly favored over spending cuts – especially considering that politicians in a democratic government are generally incentivized to pursue populist means. It’s worth noting that the US’s Gini Index (a standard measure of income inequality) rose for the first time since 1993 last year (at .477 currently). To the extent this continues to edge higher, the marginal propensity for politicians to pursue tax hikes (via voter preference) should also increase.

 

A collection of the key tables is below; we encourage you to check out the appendix of the paper as well  - some great data. We especially enjoyed the tables highlighting the annual projected debt service costs levered upon US households as a result of the Bush and Obama presidencies.

 

Darius Dale

Senior Analyst

 

THE HIDDEN TAXES OF SOVEREIGN DEBT - 1

 

THE HIDDEN TAXES OF SOVEREIGN DEBT - 2

 

THE HIDDEN TAXES OF SOVEREIGN DEBT - 3

 

THE HIDDEN TAXES OF SOVEREIGN DEBT - 4


Obama Rally: SP500 Levels, Refreshed

Takeaway: The economy is not the stock market. Sometime in October though, I think they will collide.

POSITIONS: Shorting Basic Materials (XLB) and Russell (IWM)

 

Signals are signals. So is political noise. If you don’t think there was any irony in the US employment rate dropping to the precise rate when Obama took office (7.8%), I’ll take the other side of that trade.

 

I’ll also take the other side of the bullish call I made around this time yesterday. Romney Rally becomes Obama Rally (look at Intrade) – and we know what that means for our hard earned currency (US Dollar Debauchery) and commodity inflation.

 

The economy is not the stock market. Sometime in October though, I think they will collide.

 

Across risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE overbought = 1468
  2. Immediate-term TRADE support = 1448
  3. Intermediate-term TREND support = 1419

 

In other words, overbought is as overbought does, so I hit the button. It’s not political. Neither is my process. The title of this note just is.

 

Get ready for #EarningsSlowing season next week and enjoy the weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Obama Rally: SP500 Levels, Refreshed - SPX


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.63%
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