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BREAKING DOWN THE US GDP REPORT

Takeaway: With a pre-election boost in government spending comes heightened odds that US GDP growth slows demonstrably in 4Q12/1Q13.

This note was originally published October 26, 2012 at 11:23 in Macro

SUMMARY BULLETS:

 

  • On an industry-standard C+I+G+NX (C=consumption, I=investment, G=government and NX=net exports) basis, the 3Q12 GDP report was not good. The underlying trends suggest the odds of US recession over the intermediate term are now much higher than they were a 8:29am EST.
  • The unsustainable uptick in government spending ahead of the election portends quite negatively for 4Q12/1Q13 real GDP growth. Without Uncle Sam’s pre-election encroachment, 3Q12 US real GDP growth would have came in at +1.3% QoQ SAAR – or unchanged from 2Q12. If “G” actually came in at the trailing four quarter average of its contribution to GDP, 3Q12 US real GDP growth would have been a paltry +0.9% QoQ SAAR.
  • Imports contributed +4bps to the headline GDP figure of +2% on the strength of a sequential contraction of -0.2% (down from +2.8% QoQ in 2Q12). This is the first sequential contraction of US imports since 2Q09. Importantly, the slowdown in import growth portends somewhat negatively for domestic demand trends over the intermediate term. Imports, which themselves are led by orders, lead real final sales. We’ve highlighted this relationship in previous notes (click here for more details). Is a disappointing holiday season on the horizon?
  • Furthermore, the 3Q12 GDP report suggests weak imports may be leading a sequential slowdown in both “C” and “I”  in the upcoming quarter(s). Additionally, an demonstrable and unsustainable acceleration  in “G” was all that stood in the way of a -35% deceleration to +0.9% QoQ SAAR, allowing the headline figure to come in at +2% QoQ SAAR. This means that growth is trending along a +0.9% QoQ SAAR run rate and potentially headed lower if “C” and “I” exhibits signs of slowing.
  • Unfortunately, dual slowing of “C” and “I” is indeed a probable scenario, given the uncertainty surrounding the election, fiscal cliff and debt ceiling breach. Moreover, each catalyst may actually be contributing to a noteworthy acceleration in corporate cost-cutting initiatives (layoffs?), as highlighted on 3Q earnings calls. Recessions happen when baseline GROWTH is weak, the corporate earnings cycle slows and companies start trying to cut their way into meeting peak-cycle, peak-margin forward EPS estimates. In this respect, 4Q12 is very much like 4Q07.

 

On a SAAR basis, US real GDP growth accelerated to +2% QoQ in 3Q12 from +1.3% in 2Q12; on a YoY basis, US real GDP growth accelerated to +2.3% in 3Q12 from +2.1% in 2Q12.

 

Looking beyond the headline figures, there were some rather interesting occurrences that we think are worth highlighting:

 

  • Driven by a demonstrable acceleration in federal government spending (+9.6% QoQ in 3Q12 from -0.2% in 2Q12) the “G” in the C+I+G+NX equation contributed +71bps (or 36%) to the +2% headline figure. This was the first quarter “G” posted a positive contribution to the headline figure since 2Q10. Like the SEP Unemployment Rate and the OCT UofMich Consumer Confidence Index, the 3Q12 GDP report is just strong enough for President Obama to claim he’s got the US economy back on track just in time for the election.
  • Driven by a -1.3% QoQ decline, business investment (i.e. nonresidential fixed investment) was net drag of -13bps on the headline GDP figure of +2%; this is the first time we’ve seen US businesses retrench since 1Q11, when a -1.3% QoQ contraction then contributed to a net drag of -11bps on the then-headline +0.1% QoQ SAAR figure. Uncertainty over the domestic political situation continues to contribute to slow economic growth. More on this later.
  • Driven largely by drought-induced weakness in farm inventories, inventories overall contributed a -12bps drag on the headline GDP figure of +2%; this is up sequentially from -46bps. Nonfarm inventories contributed +30bps to the headline GDP figure, while farm inventories contributed a -42bps drag.
  • The much-celebrated recovery in the housing market continues to auger positive for domestic real GDP growth, contributing +33bps to the headline figure in 3Q12 (up from a +19bps contribution in 2Q12) on the strength of a +14.4% QoQ growth rate (accelerated from +8.5% QoQ in 2Q12).

 

BREAKING DOWN THE US GDP REPORT - gdp1

 

Given that we’re well into 4Q12 already, we think it’s worth highlighting a few nuggets from the 3Q12 report that may offer clues as to where the rate of domestic GROWTH might end up in the current and proceeding quarters:

 

  • Imports contributed +4bps to the headline GDP figure of +2% on the strength of a sequential contraction of -0.2% (down from +2.8% QoQ in 2Q12). This is the first sequential contraction of US imports since 2Q09. Importantly, the slowdown in import growth portends somewhat negatively for domestic demand trends over the intermediate term. Imports, which themselves are led by orders, lead real final sales. We’ve highlighted this relationship in previous notes (click here for more details). Is a disappointing holiday season on the horizon?
  • The unsustainable uptick in government spending ahead of the election – as great as it may be for the Keynesian elite – actually portends quite negatively for 4Q12/1Q13 real GDP growth. Without Uncle Sam’s pre-election encroachment, 3Q12 US real GDP growth would have came in at +1.3% QoQ SAAR – or unchanged from 2Q12. If “G” actually came in at the trailing four quarter average of its contribution to GDP, 3Q12 US real GDP growth would have been a paltry +0.9% QoQ SAAR. Imagine if three months from now, US real GDP slowed from +2% QoQ SAAR in 3Q12 to +0.9% QoQ SAAR (or lower) in 4Q12. That is a real risk.

 

BREAKING DOWN THE US GDP REPORT - GDP2

 

Net-net, the 3Q12 GDP report suggests weak imports may be leading a sequential slowdown in both “C” and “I”  in the upcoming quarter(s). Additionally, an demonstrable and unsustainable acceleration  in “G” was all that stood in the way of a -35% deceleration to +0.9% QoQ SAAR, allowing the headline figure to come in at +2% QoQ SAAR. This means that growth is trending along a +0.9% QoQ SAAR run rate and potentially headed lower if “C” and “I” exhibits signs of slowing.

 

Unfortunately, dual slowing of “C” and “I” is indeed a probable scenario, given the uncertainty surrounding the election, fiscal cliff and debt ceiling breach. Moreover, each catalyst may actually be contributing to a noteworthy acceleration in corporate cost-cutting initiatives (layoffs?), as highlighted on 3Q earnings calls. Recessions happen when baseline GROWTH is weak, the corporate earnings cycle slows and companies start trying to cut their way into meeting peak-cycle, peak-margin forward EPS estimates. In this respect, 4Q12 is very much like its 2007 counterpart.

 

Our updated US GIP model is included in the chart below.

 

Darius Dale

Senior Analyst

 

BREAKING DOWN THE US GDP REPORT - GDP3


Hurricanes And Gas Prices

In 2011, Hurricane Irene drew the attention of the media and meteorologists as it approached the Northeast coastline. Since very few hurricanes actually make it to the New England coastal area and make impact, it's important to pay attention to the effects these storms have when they do make landfall. When Irene hit New York City in  late August, gas prices shot up temporarily as people rushed to fill up their cars while they could. With Hurricane Sandy, history is likely to repeat itself.

 

Hurricanes And Gas Prices - irene


MACAU SLOWS BUT STILL SHOULD BE A RECORD

On track for new monthly record

 

With the 3rd and 4th week of October now in, we think October will squeak out a gain off of a tough comp and set a record for monthly GGR.  We are projecting flat to up 4% for the month.  Average daily table revenue actually increased 7% YoY the past two weeks.  We continue to believe that double digit YoY growth could resume in November and December for two reasons:  easier comparisons and the Beijing government handover.

 

MACAU SLOWS BUT STILL SHOULD BE A RECORD - macau1

 

The past two weeks were good ones for LVS.  Market share has gone from 19.7% to 20.8%, well above trend.  Assuming normal hold, we expect LVS to remain over 20% and slowly increase its share over the coming year up to 22-24%.  This is likely above consensus of around 20%.  Wynn has had an awful month with market share of only 9.5%, mostly due to low hold we're sure but we do expect the property to be a market share loser until Wynn Cotai opens.  MGM also struggled this month.  MPEL is pretty much in-line with the trend.

 

MACAU SLOWS BUT STILL SHOULD BE A RECORD - macau2


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Sandy Markets

Client Talking Points

Sandy Markets

US Equity markets are closed today but the rest of the world continues to trade. And in Chicago, down at the Board of Trade floor, S&P 500 futures are moving down with commodities joining the party as the US dollar makes an upward move. What’s interesting about this hurricane here on the East Coast is that retailers will likely blame Sandy for any sort of miss on their next earnings report, whether it’s actually true or not. Some retailers will actually be impacted by the storm, but others have major fundamental issues that need to be addressed anyway. 

Chinese Cycles

China has been crashing for the last six-to-eight months and even longer than that if you use certain metrics. With Chinese stocks obliterated since March, a lot of people are coming out of the woodwork and declaring that “China has bottomed!” They will likely follow that statement up with something along the lines of how Chinese stocks are “cheap.” We have not bottomed and cheap can get a whole lot cheaper. Remember that. 

Asset Allocation

CASH 61% US EQUITIES 6%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 18% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
EAT

Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

PCAR

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

HCA

While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road

TWEET OF THE DAY

“EVERY retailer will blame #sandy, many genuinely impacted!” -@herbgreenberg

QUOTE OF THE DAY

“Free advice is worth the price.” -Robert Half

STAT OF THE DAY

Italy sells 8 billion euros of 6 month Treasury bills at 1.347% as borrowing costs fell, the lowest since March 28.


POSTPONED: What’s Next For Agriculture Prices? (Corn, Wheat, Soybeans and Protein)

Takeaway: Today's call has been postponed, a new date and time will be circulated once it has been scheduled.

The Hedgeye Macro Team and Restaurants Team will be hosting a Agricultural and Consumer Economics Expert Call with Professor Darrel Good of the University of Illinois. Good has been part of the faculty since 1976 and took part in developing a comprehensive farm risk management website (www.farmdoc.uiuc.edu). His efforts are now focused on the performance of grain futures contracts as well as corn and soybean yield trends. 

 

Topics will include: 

  • Supply side - planting intentions and farmer's economics
  • Demand side - key drivers of demand - ethanol, protein, consumption (domestic and abroad)
  • General long term trends to think about for farming - utilization, fertilizers, seed evolution
  • Thoughts on USDA projections, and their historical accuracy and what the implications are now
  • View on supply, demand, key drivers and prices next year (or next 6 - 12 months) for:
    • Corn
    • Wheat
    • Soybeans
    • Cattle
    • Chicken


Current subscribers of our Macro and/or Restaurant verticals will receive notification with the new date and time of this call along with the dial-in information automatically, if you have any further questions please email .

 

Good's Background

Darrel Good has a comprehensive understanding of agricultural markets and their economic implications.

"There was a time period in the early seventies when grain markets changed dramatically," said Good. "Russia started importing grain, prices just exploded to the upside and there was renewed interest in markets and prices. I was hired to help develop a very extensive educational program in marketing and risk management."  

  • Professor in the department of Agricultural and Consumer Economics, is marking his 33rd year with the University of Illinois
  • Developed, along with two other faculty members at U of I, a seminar called "Price Forecasting and Sales Management"
  • One of the founding members of the farmdoc team
  • Writes one of the featured newsletters on the farmdoc site, Weekly OUTLOOK , and he is a primary contributor to the AgMAS section
  • Current research includes:
    • Evaluation of the pricing performance of agricultural market advisory services
    • Evaluation of USDA production and price forecasts
    • Evaluation of pricing performance of Illinois corn and soybean producers  

EXPERT CALL ON AG PRICES POSTPONED

Due to the US markets and many offices being closed, we are postponing today's Expert Call on Ag Prices until a later date.

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

 

 


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