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2Q13 GDP: Hurry Up and Wait

Takeaway: The path of least resistance here is to stick with the positive TREND slope of improvement in the domestic macro data.

Conclusion:  So, what do you do with a strong ADP print for July and a (expected) deceleration in a rearview looking 2Q13 GDP number within the context of the consumption and expectation dynamics highlighted below? 

 

In part, you wait for tomorrow’s update to our favored, high frequency read on the Labor Market in the NSA claims data and then you wait again for Friday and the monthly exercise in speculation and data myopia that is the Employment report. 

 

All in, as we highlighted in Monday’s Note - U.S. Growth - #TRENDing – with the research and risk management signals both still aligned on the pro-growth side, the path of least resistance here is to stick with the positive TREND slope of improvement in the domestic macro data until something changes.  

 

Below is a review of this morning’s GDP data along with some summary commentary: 

 

----------------------------------------------------------------------------------------------------------------------

 

2Q13 REAL GDP:  1.7% QoQ (vs. revised 1.1% prior and 1.0% expected)

1Q13 Revision:  Revised down to 1.1% from 1.8%

 

C:  Consumption growing +1.8% QoQ, decelerating 50bps sequentially.  Contributed 1.22% to Total GDP.

I:  Investment growing +9.0% QoQ, accelerating +4.3% sequentially.  Contributed +1.32% to Total GDP 

G:  Government less of a drag in 2Q13, growing -0.4% QoQ vs. -4.6% in 1Q13.  Contributed -0.08% to Total GDP on the quarter.

NX:  Total Exports growing 5.4% QoQ (vs. 9.5% for Imports).  Net exports contributing -0.81% to Total GDP vs. -0.28% last quarter. 

 

Inventories:  Inventories provided a positive contribution to GDP of +0.4.  Down from a positive contribution of +0.9 in 1Q13.

 

Inflation:  The PCE Deflator printed at its second lowest level ever, coming in at 0.8%, helping to support real consumption growth

 

Final Sales (GDP less Inventory Change): Growth in Real final Sales accelerated to 1.3% in 2Q13 vs 0.2% in 1Q13

 

Final Sales to Domestic Purchasers:  Reminder - this metric is a measure of GDP excluding both exports and changes in Inventories. In measuring total U.S. demand from both domestic and international sources, arguably, it offers the cleanest read on the health of the domestic private sector. Growth in Final Sales to Domestic Purchasers accelerated to 2.0% from 0.5% in 1Q13.   

 

Benchmark Revision:  This benchmark revision is interesting, but not particularly investible.  Below we provide a summary review of the methodology changes from Bloomberg Economist Joseph Brusuelas along with a comparison of the Pre and Post revision GDP estimates from the BEA. 

 

Consumption:  Consumption growth decelerated 30bps sequentially in 2Q13. The deceleration, however, was fairly well advertised and not unexpected alongside the rising savings rate, lagged impacts of fiscal policy changes, and the difficult 1Q13 comp in which consumer spending benefited from the special dividend bonanza and compensation pull-forward in December 2012 ahead of impending fiscal cliff related tax law changes. 

 

We continue to think the upside in Disposable Personal Income, and Consumer Spending by extension, will be constrained in 3Q13 as well given the ongoing reduction in the federal workforce and the implementation of furloughs for the balance of the fiscal year.   That said, it’s now August and 2Q13 is rearview, 3Q13 is a third gone, the real-time labor market data remains positive, seasonality will turn positive in September, and we’re close enough to annualizing the fiscal policy drags for it to become a tractable narrative for investors. 

 

Expectations:  With consensus growth expectations for the balance of the year at a moderate 2.30 and 2.60 for 3Q13 & 4Q13, respectively, the setup isn’t as asymmetric to the upside as it was back in December.  Also, congress will likely re-emerge as a negative headline catalyst in the coming weeks as budget and debt ceiling rhetoric crescendo’s yet again. 

 

Meanwhile, flows to U.S. assets remain ongoing and Investor Sentiment, as measured by the II Bull/Bear Survey, showed bulls dropping back below 50% in the latest reading.  On balance, the balance of risk in the market from an expectations perspective is less clear than its been.  From here, it gets a little more interesting.     

 

 

2Q13 GDP:  Hurry Up and Wait - GDP Summary Table

 

2Q13 GDP:  Hurry Up and Wait - GDP Revision Bberg Table With Citation

 

2Q13 GDP:  Hurry Up and Wait - GDP Revision Comparison

 

Christian B. Drake

Senior Analyst 


MAR YOUTUBE

In preparation for MAR's F2Q 2013 earnings release tonight, we’ve put together the recent pertinent forward looking company commentary.

 

 

GOLDMAN SACHS CONFERENCE (JUNE 4)

  • "As we look at the U.S., we think it's steady as you go, good growth environment."
  • "We get about 10% of our fees out of Europe. It's still flat. The economies in Western Europe, Germany, France, some of those countries, obviously still have some structural issues to get through. Southern Europe, Spain, Portugal, Italy, suffering with high unemployment, so I think Europe's going to be kind of flat for a while."
  • "One area in Europe that is doing well is Eastern Europe, Russia, the 'stans', Georgia, those areas with the natural resources, commodities, continue to drive well and especially Russia seems to be doing well right now."
  • "China, same thing, growing middle class, growing business community, so a lot of new travel that's taking place in that part of the world. We think it'll be choppy, but over the long-term it's a great place."
  • [Long-term, short-term group bookings] "In fact, they were up significantly in the first quarter, the pace for 2014, and we saw big movement in the year for 2014 bookings.  On the shorter horizon, though, on what we call, in the year for the year, that short-term bookings, as we said in the first quarter, we are seeing a little hesitancy at corporate America pulling the trigger on those."
    • "For 2014, we'll probably have 40%, 45% of the group business on the books I would think. And so we're building that book and obviously by the time we get to the end of year we should be something closer to 70%, actually we could be 50%-ish now, maybe low 50% for the total business for 2014 that's already on the books."
  • "On DC, in referring to the government, I guess, DC obviously feels sequestration more than others. But it hasn't been a big mover. I think the government, quite frankly, started cutting costs and stopped traveling or slowed down their travel pretty dramatically in 2012...I think we talked in the first quarter that it's going to cost us 60 basis points to 70 basis points. That hasn't changed. We still see that probably holding up. I think DC, it's interesting as you look at DC, it kind of leveled off. And it's holding its own."

YOUTUBE FROM Q1 CONFERENCE CALL

  • "Transient business was very strong, particularly nonqualified or retail-rated business as we eliminated discounts, pushed business into higher rated categories and raised rates."
  • "First quarter association group attendance exceeded our expectations, and association bookings for 2014 and beyond were very strong."
  • "Incentive fees exceeded our expectations, largely due to strong performance among our full-service hotels in the U.S., particularly in New York and Florida."
  • "Asia Pacific REVPAR should grow at a low single-digit rate, reflecting weak trends in Seoul and Beijing. We expect flattish REVPAR growth in Europe, low single-digit REVPAR growth in CALA, and high single-digit REVPAR growth in the Middle East. For you modelers, we estimate the shift in fiscal calendar will add approximately $20 million."
  • "We expect second quarter operating income will total $275 million to $295 million and diluted EPS will total $0.55 to $0.59. For full year 2013, we expect worldwide system-wide REVPAR to increase 4% to 7%. Fee revenue could increase 8% to 12%. We expect owned, leased, and other revenue net of direct expenses will decline 9% to 15% for full year 2013."
  • "We expect lower year-over-year termination and residential branding fees and higher pre-opening costs."
  • "We'll continue to manage our cash flows to a 3 to 3.25-type leverage ratio."
  • "As it relates to the $800 million to $1 billion to return to shareholders, we continue to look at that."
  • "Q3 is the relatively weaker time for group business generally. You're talking about the bulk of the summer being in that quarter. I think we'd be a bit more bullish about Q2 and about Q4 because of that kind of seasonality."
  • [Edition] "We have obviously intended to sell all three of these assets. For internal planning purposes and even more so for external expectations, we don't think it's wise to expect that there will be recycling of that capital until after they open, because before they open you have not just the ramp risk, but you've got construction risk and other things, which make a sale practically much more difficult."
  • "We would expect North America to be the stronger of the continents out there."
  • "When you look into 2014, certainly ObamaCare is the biggest new potential wrinkle in the cost profile. Our estimates today for the managed portfolio in the United States is about $60 million to $100 million, and that would be, oh, I don't know, maybe about half of a point, so a 50 basis point impact on margins....obviously these are system costs that will ultimately be borne by the hotel. We will pick up a share of that through incentive fees for the managed portfolio. We don't know what the number would be for the franchise portfolio, but in terms of number of rooms, the franchise portfolio is about the same as the managed portfolio in the United States, so the numbers could be around the same order of magnitude."
  • "We're more likely to see inflation go up than vice versa, and that will have some modest impact. On the other hand, with each passing year, more of the REVPAR growth comes from rates, and obviously a REVPAR coming through rate is better for margins then REVPAR coming through occupancy. And I think, guys, it's way too early to be giving guidance for 2014 and 2015, but I think our expectations would be that we will net-net see margin growth above 100 basis points in each of those years."

MAR YOUTUBE - MAR123


Morning Reads on Our Radar Screen

Takeaway: Here's a glimpse at what some of our sector heads are reading

Morning Reads on Our Radar Screen  - Screen Shot 2013 07 31 at 8.57.11 AM

 

 

TODD JORDAN: GAMING | LODGING | LEISURE

Norwegian Cruise Investors to Sell $600 Million of Shares (via Bloomberg)

 

 

 

JOSH STEINER: FINANCIALS

FHFA Nominee Mel Watt Won’t Get Vote Until September, Reid Says (via Bloomberg)

 

BlackRock Starts Retirement Indexes in Retail Asset Push (via Bloomberg)

 

 

 

KEITH MCCULLOUGH: MACRO

Facebook Said to Plan to Sell TV-Style Ads for $2.5M Each (via Bloomberg)

 

 

 

 

 

 

 

 

 

 

 

 

 

 


the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

HLF Saga Continues

Herbalife has been heavily covered by media and investment research over the past six months but the math suggests that buying the stock here may be a risky proposition. 2Q13 earnings impressed to the upside, but we believe further increases in earnings and/or the implied multiple being assigned by the market are unlikely over the next six months. The chart below illustrates our quantitative view of the stock; the stock is currently near the high end of its immediate-term TRADE range (overbought) with support at $54.59 and $47.64 (intermediate term TREND).  

 

HLF Saga Continues - hlf levels

 

 

Fundamentals Coming Out of the Shadows: In March, the multiple expansion thesis seemed credible and has played out to a degree (chart below). There are some valid concerns being raised by activists in the stock such as the FX rate being used to account for Venezuelan cash balances but, all in all, the company produced impressive results for 2Q.

 

 

What we liked:

  • EPS beat by almost 20% supported by better-than-expected revenue growth
  • Total volume points grew by 13.5%
  • $183 million in free cash flow
  • Share buy-back resuming, included in guidance
  • May buy back more than guiding to, given “under-levered” balance sheet

 

What we didn’t like:

  • Operating income growth of 3% versus sales growth of 18.1% (last Q 26% and 17%, respectively)
  • SG&A margin going to 32.8% of sales from 30.3% in 1Q and 29.7% in 2Q12

HLF Saga Continues - hlf valuation

 

Rory Green

Senior Analyst


The Next Move in Oil

Client Talking Points

JAPAN

The Nikkei ended the month on a red note as the Yen retraced some of yesterday’s weakness - moving higher vs. the $USD ahead of another fun filled central planning (Bernanke) day in the U.S.  Our TREND lines of support for the USD/YEN and Nikkei are 97.39 and 13,505, respectively.  

OIL

The momo might be flagging a bit here with Brent holding red this morning after getting whacked yesterday.  We would like to see Oil breakdown through its TREND line before getting more comfortable with Q313 US Consumption relative to where it was in Q1/Q2.  TREND line support for Brent is still intact at $105.86.

UST 10YR

The northward march continues with 10Y treasuries making higher-lows again to 2.62% and the Yield Spread (10s minus 2s) expanding to 231bps wide; #RatesRising and an expanding yield spread is bullish for the Financials (XLF).  We bought back the XLF in our Real Time alerts after it signaled buy again on red yesterday.

Asset Allocation

CASH 36% US EQUITIES 25%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road

TWEET OF THE DAY

@hedgeyeJC @HedgeyeFIG Casteleyn's presentation on Asset Managers yesterday was amazing-changed my view of capital markets in coming yrs $LM

Jay Van Sciver ‏@HedgeyeIndstrls

 

QUOTE OF THE DAY

“I don't think much of a man who is not wiser today than he was yesterday.”

-Abraham Lincoln

STAT OF THE DAY

Shanghai experiences its hottest July in 140 years, according to figures from the Shanghai Meteorological bureau, Shanghai has seen 24 days with temperatures at or above 35C in July. (BBC)


Pain's Delusion

This note was originally published at 8am on July 17, 2013 for Hedgeye subscribers.

“The greatest obstacle to pleasure is not pain; it is delusion.”

-Lucretius

 

When I read that in The Swerve (pg 196) I couldn’t stop drawing the analogy between the 14-16th century Vatican and the US Federal Reserve. That might sound a little out there for you this morning, but Bernanke’s fear-mongering dogma is way out there too. Hopefully you can find some balance in between our opposing definitions of economic freedom. I am, if you care, Catholic.

 

If you stop studying the history of your beliefs, you’ll have issues. At the end of the 4th century, “historian Ammianus Marcellinus complained that Romans had virtually abandoned serious reading.” (pg 93) Getting people to just take the church’s word for it without thinking was a process (no books). “It had taken a thousand years to win the struggle and secure the triumph of pain seeking.” (pg 107)

 

Mixing politics, religion, and perceived wisdoms – that’s bringing it on thick. But it’s the only way I can remind you that the pattern of changing human beliefs are not new this morning. It’s called education. The delusion that a country needs to be perpetually punished by a weak currency and a 0% return on her hard earned savings is one of the greatest obstacles to free-market pleasures.

 

Back to the Global Macro Grind

 

Many are paid to think Bernanke is right. They believe that the US Dollar needs to be beat and whipped whenever it rises from the deadness of it all. Many think bond yields should stay at the 0% bound in perpetuity too. Just don’t forget why – they run Bond funds.

 

This morning we’re seeing a sharp contrast between American and Chinese economic policies:

  1. In the USA, people who are long Gold, Bonds, and Crude Oil futures continue to beg for Bernanke to talk down tapering
  2. In China, they’re reminding you that the entire world doesn’t sign off on short-term (reactive) Keynesian policy making

In a strikingly simple statement overnight, China’s Finance Minister said that they “won’t use large scale stimulus.” Markets took their word for it. The Shanghai Composite backed off in a hurry and closed down another 1%.

 

So who wouldn’t like a statement like that? Who will be in pain if, god forbid, Bernanke isn’t dovish in today’s testimony?

 

1.   Copper – hopefully you aren’t long that bubble. It took the Chinese “news” (in line with Darius Dale’s view that China wasn’t going to stimulate you) seriously and Copper futures fell over -1% immediately. Don’t forget that when China was spending its brains out on “infrastructure” over 3 years ago, it represented almost 2/3 of incremental global copper demand.

 

2.   Caterpillar – for the last year (as the Mining Capex Bubble began to pop) its CEO, Doug Oberhelman, has sounded like he should be running for political office in the south of France. He wants bailouts and government stimuli in his Chinese order book, baby! Do you blame him? I do. Hope is not an investment process.

 

Copper and CAT perma-bulls are just two of the many constituencies who lobby The Ben Bernank to whisper sweet-nothings of dovishness in the ears of the WSJ Hilsy (yes, the Jon Hilsenrath) as the Rest of Us just try our best to front-run it all.

 

If you don’t think that’s what’s really behind the pain-seeking messaging of the Fed, you are delusional. I have never seen the US government spend so much time talking down the one thing all these central plans were supposed to produce – growth.

 

And I mean real (inflation adjusted) economic growth. In the USA at least, sustained growth has always been married to 2 major (and coincident) leading pro-growth indicators:

 

1.       #StrongDollar

2.       #RisingRates

 

So, if you don’t want to step on anyone at the Fed Vatican’s toes – and if you never want to question any of these money-printing pontiffs publicly, you would have probably been cool with taking The Borgias word for it in the 15th and 16th centuries too.

 

In other news, the US stock market finally had a down day yesterday. That was its 1st down day in the last 9 as the SP500 and Russell2000 backed off their all-time highs of +18% and +23% YTD, respectively.

 

Immediate-term TRADE overbought is as overbought does, so we’ll see if we can re-load the long book on a correction to a reasonable line of immediate-term TRADE support (for SPY that’s now 1656).

 

The #1 thing that will stop me from getting really long again is Bernanke Burning The Buck (toning down tapering expectations). Every one of the aforementioned constituencies disagrees with me on that – but I’m betting 99% of The People in this country would call my #StrongDollar America the pleasure they seek.

 

Now, if only the US government explained it to them like we do, without all the conflicts of interest…

 

Our immediate-term Risk Ranges are now:

 

UST10yr 2.49-2.75%

SPX 1656-1701

Shanghai Comp 1951-2099

USD 82.12-83.61 (bullish)

Brent Oil 107.61-110.13

Copper 3.05-3.19

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Pain's Delusion - COPPER vs CAT

 

Pain's Delusion - vp 7 17


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