“For God’s sake declare the colonies independent at once, and save us from ruin.”
That’s what Page said to Thomas Jefferson in the Spring of 1776. By September (on this day in fact), the Continental Congress officially named its union of independent states, the Unites States.
And the rest is history (sort of). We’re a long way from Patrick Henry’s “give me liberty, or give me death” speech from Virginia (March of 1775). At this point, Congress is the butt of most jokes. But in these Unites States, anything can happen – there’s always a chance!
Imagine Congress saves us from seeing $6 at the pump? My simpleton read-through of Obama’s QA from St Petersburg last week is that he’ll respect Congress’ wishes if he can’t sell action in Syria. A no-action vote could save the American Consumer from ruin.
Back to the Global Macro Grind…
There is no greater threat to this country than empowering both the almighty petro-dollar and/or the conflicted and compromised overlords who get paid by it. One of the most misunderstood realities of the 2008 crisis was $150 oil. Never forget that.
Since they are now front-running Obama with weapons of manic media, do you think Putin or Assad (or any of these whack jobs in Latin America or the Middle East) would stand a chance if the President of the United States started pulverizing them with a Weapon of Mass Currency Appreciation?
Both Reagan and Clinton seemed a lot stronger versus the Ruskies than Bush or Obama have been. Have you ever thought to yourself whether or not $20 oil had anything to do with that? How about the +4% US GDP growth rips of 1983-89 and 1993-99? Both were #StrongDollar, Strong America periods for both our Presidents and people.
“Our” – I keep saying our – and I am Canadian! For God’s sake Americans, stand up to this.
While both the US Dollar and US stock market seem to be sniffing out a no-action vote on Syria, they haven’t gone after the price of oil, yet. Check out last week’s most speculative lines on Middle Eastern conflict (commodities):
That’s right Sons of Washington, when Wall Street wants to roll the bones on geo-political risk, they opt for the asset class with the highest beta, and then lever up those bets with options contracts. That’s why they’re great contra-indicators as they peak.
Gold peaked when speculation peaked that the USA would use the only other weapon of mass currency destruction that’s more dangerous than the Taliban – The Federal Reserve’s Dollar Debauchery campaign. That was 2011-2012.
So when will oil peak? (*hint, it already did in 2008)
If we don’t do Syria, oil prices have plenty of intermediate-term downside – and, as a result, the US Consumer has plenty of intermediate-term upside.
Across our core risk management durations, here are the lines of support for WTI and Brent Oil that matter to me most:
In other words, the opportunity for Obama here is to back off Syria and give Americans a 7-8% back-to-school tax cut (to TREND support) at the pump.
God forbid he drives a #StrongDollar move above and beyond a no-action call on Syria (i.e. hires Summers to taper and tighten). Oil prices could crash.
That’s what I’m talking about! Oh yeah – a little more red, white, and blue pin action for the only community of investors who are killing it in 2013 YTD – Growth Investors.
Last week’s Hedgeye Risk Management Style Factors were screaming growth:
“Screaming” – yes, Patrick Henry style - keep screaming at the government to strengthen the Dollar. That includes cutting defense spending from the all-time USA high Obama established in 2011.
Never, ever, forget that the government of these United States works for you – not the other way around.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.83-3.01%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
TODAY’S S&P 500 SET-UP – September 9, 2013
As we look at today's setup for the S&P 500, the range is 22 points or 0.74% downside to 1643 and 0.59% upside to 1665.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Friday’s jobs report was a mixed bag and the narrower data sets released this morning followed suit. The largest acceleration in employment growth came from the 20-24 YOA cohort, which suggests that sales at quick-service and fast casual restaurants are likely to remain strong through the rest of 3Q.
Highlighted in the following charts, there is a notable inverse correlation between rolling initial claims and the performance of stocks within our space.
Below, we discuss employment by age and restaurant industry employment. These serve as proxies for demand and operator confidence, respectively, in our models.
Employment by Age (demand)
Employment growth by age skewed negatively in August as the 20-24 YOA cohort saw growth accelerate to +338 bps from +205 bps in July, the 25-34 YOA cohort saw growth decelerate to +185 bps from +204 bps in July, the 35-44 YOA cohort saw growth accelerate to +59 bps from +53 bps in July, the 45-54 YOA cohort saw growth slow at an accelerating rate to -113 bps from -94 bps in July, and the 55-64 YOA cohort saw growth decelerate to +257 bps from +348 bps in July.
Employment by age is an important metric for the restaurant industry. Given the discretionary nature of casual dining expenditure, and the highly-competitive nature of the industry, we infer that sustained employment growth in core demographics is necessary for continued comp growth in the absence of new unit growth or income per capita growth. The sequential acceleration in growth slowing in the 45-54 YOA cohort and the deceleration in the 55-64 YOA cohort reflect negatively upon casual dining companies, indicating that we could see weakness persist within the sector.
Within the QSR segment, we continue to find that the majority of management teams we track are consistently highlight the importance of employment growth to the success of their business. The strong sequential acceleration in the 20-24 YOA cohort, offset marginally by the small deceleration in the 25-34 YOA cohort, should sit well with quick-service and fast casual restaurants.
Restaurant Industry Employment (confidence)
The Leisure & Hospitality employment data, which leads the narrower food service data by one month, suggest that employment growth in the food service industry decelerated sequentially in August. Leisure & Hospitality employment data did, however, register a month-over-month gain of +27k (second chart below), an acceleration from July’s +13k month-over-month gain.
The more narrow restaurant-focused data sets paint a less clear picture. Limited-service employment growth decelerated sequentially in July, while full-service employment growth accelerated sequentially in July.
Leisure & Hospitality: YoY employment growth at +3.08% in August, down -14 bps versus July
Limited Service: YoY employment growth at +4.9% in July, down -3 bps versus June
Full Service: YoY employment growth at +2.97% in July, up +34 bps versus June
Takeaway: Editor’s Note: We added Annie’s (BNNY) and Restoration Hardware (RH) to our list of Investing Ideas, and we removed Melco Crown Ent, (MPEL).
BNNY: Consumer Staples analyst Matthew Hedrick is bullish on Annie’s (BNNY), a producer and distributor of organic foods and snacks. We added Annie’s to the Investing Ideas list this week. Please click here to view that Stock Report.
FDX: FedEx took delivery of its first 767 Freighter, an aircraft that is a key component of the firm’s fleet renewal strategy, writes Industrials sector head Jay Van Sciver. One reason why FedEx Express’ margins lag those of competitors has been its operation of a high cost aircraft fleet. The 767-300Fs offer up to a 30% cost improvement versus older MD-10 aircraft. FedEx has already been converting 757s to replace less efficient A310s, which offer up to 20% improvement. FedEx expects a $300 million annual profit improvement by fiscal year 2016 from modernizing its air fleet.
HCA: Hospital employment continues to decelerate with yesterday’s labor report. On the margin, this is a negative update, but a minor one. We’ve begun tracking monthly data on Medicare Part A payments, or those for Hospital care.
We’ve seen some steep deceleration in Medicare Part A payments, which has shown up in company results across all the publicly traded hospitals, although HCA has done much better than others. We’ll get the next update to this important series next week.
We did some additional work to understand Medicare trends, adding a prescription tracking tool that should show us the shorter term trends as they occur. As we mentioned previously we’ve been running a monthly survey of OB/GYN offices which has been showing doctors are seeing some better results in patient volume and maternity. We could be finally seeing the recovery Medical Economy that has been frustrating healthcare investors for over five years.
HOLX: Thursday, the Health Care sector team lead by sector head Tom Tobin updated market data for mammography industry growth. In terms of the total number of facilities and mammography boxes in the field, both continue to show acceleration. Our proprietary Tomo-Tracker also showed solid growth for August. We’re expecting Medicare to issue a reimbursement code for 3D Tomo this Fall, clearing the path for a big surge in demand.
Additionally, Obamacare gets going at the start of next month. We believe HOLX is one of the best positioned players to take advantage of newly insured heading to the doctor’s office.
MD: Employment trends for women aged 20 to34 continues to improve on the employment report released yesterday. As employment recovers in this age group we expect to see improving maternity trends and improving revenue growth for MD. We noticed the US Census updated 2012 birth data earlier this week showing a flat 2012, the first year without a decline since 2008. We think there are one million or more mothers who deferred having a child the last few years and a turn would be a big deal for MD.
NKE: The latest Nike US Footwear retail sales data leaves us less than inspired. Specifically, it shows that footwear sales are growing, but are in a clear downward trend. Two factors keep us optimistic:
NSM: Nationstar Mortgage hit a new high this week, rising to a closing price of $52.44 on Thursday. Our value estimate for the stock remains in the $67 to $70 range, implying approximately 30% further upside from that level.
We continue to expect that the company will announce further servicing acquisitions between now and year-end and into the first half of 2014. Historically, these acquisitions have been catalysts to push shares higher. For reference, the big three specialty servicers (NSM, OCN, WAC) all raised their acquisition pipeline estimates during their most recent second quarter 2013 results (by a combined $145 billion). Interestingly, NSM accounted for 70% of the increase.
The main risk to keep tabs on with Nationstar is interest rates rising. The reality is that rates continue to rise on the back of strengthening US economic data and a growing expectation that the Fed will begin tapering asset purchases sooner than previously expected.
Rising rates are inversely correlated with mortgage origination volumes, as refinancing activity drops rapidly in response to higher rates. Nationstar derives a significant portion of its earnings from mortgage origination, but is more defensive than a traditional mortgage bank as their originations are largely sourced through the HARP channel, which is less rate-sensitive than the traditional refinancing channel. Nevertheless, origination volumes are likely to come under pressure amid further increases in rates and this will weigh on earnings upside going forward.
RH: We added Restoration Hardware (RH) to our Investing Ideas list this week. Click here to see the full Stock Report on the company.
SBUX: Hedgeye Restaurants sector head Howard Penney has no update on Starbucks (SBUX) this week.
TROW: Hedgeye Financials director Jonathan Casteleyn has no update on T. Rowe Price (TROW) this week.
WWW: The catalyst calendar is lining up for Wolverine World Wide (WWW). In the upcoming quarter, we’re modeling $1.20 earnings per share, which compares to the Street estimates of $1.02. That’s something that we’re known for several months now, as the Street is far underestimating the accretion of its recently-acquired PLG brands (Sperry, Keds, Stride Rite, Saucony).
But now the company bolstered the catalyst calendar by adding an analyst meeting on Oct 15, which is within a week of reporting earnings. A powerful catalyst calendar, indeed.
(Editor’s Note: Below is a column from Hedgeye CEO Keith McCullough that ran in Forbes this week. We believe the column is prescient, and that’s why we wanted to include it in today’s newsletter.)
“The physicists have known sin; and this is a knowledge which they cannot lose.”
Do you have introspective accountability?
Six decades or so ago, shortly after he began to fully grasp the unspeakably fearsome reality of the nuclear weapons he helped unleash, Robert Oppenheimer—“The Father of the Atomic Bomb”—became a rather unpopular man with the U.S. government.
After provoking the ire of politicians with his outspoken opinions during the Second Red Scare, Oppenheimer’s security clearance was revoked in a much-publicized hearing in 1954, and he was effectively stripped of his direct political influence.
Oppenheimer once remarked that his creation brought to mind words from the Bhagavad Gita: "Now I am become Death, the destroyer of worlds." In essence, Oppenheimer ultimately held both himself and the government to account.
Now stop for a moment and ask yourself: Can you imagine a central planner of the Bernanke epoch holding themselves accountable for the highest levels of food, energy, education, etc. inflation in world history?
Most likely, the answer is no. That would require an incredibly uncomfortable un-spinning of the truth.
And the truth is that American “political scientists” who systematically engaged in devaluing the purchasing power of the American people to four-decade year lows in 2011 know that sin. It is market knowledge that history will not soon forget. Facts don’t lie, politicians do.
If you’ve ever sat across the table from me and my macro research team during the monetary mayhem and tumult of these last few years, you’ll know that I refuse to have a debate about mean reversion risks without contextualizing the post-Nixon low in the world’s reserve currency (see chart):
Since most global commodities settle in Dollars, why there’s been raging inverse correlation (Dollar Down = Commodities InflationUp) alongside causality in this relationship is trivial to everyone other than the people who should be held responsible for it.
What is less trivial is all of the unintended consequences associated with the ultimate central planning sin (an un-elected overlord confiscating the purchasing power of The People). Here are some of the big ones:
Yep, that’s going to be a lot for Bernanke’s children (and theirs) to noodle over for the next century. That is, of course, unless the next guy or gal running the un-elected agency does what no modern Federal Reserve Chairman has ever not done – raise rates.
For the last year or so, I’ve spent a considerable amount of time ranting about these Global Macro Themes:
These are relatively easy long-term risk calls to make because all three of them are basically about unwinding all three of the aforementioned bubbles.
Once prices stop making all-time highs (commodities, bonds, or currencies), there’s this big little risk management critter Ben Bernanke has never mentioned under oath called asymmetry.
So, at this stage of the cycle this is what you get:
All the while, what we still get from the consensus TV circus that is “Government Access Media” is a bunch of uninformed people begging for more of the drugs that the political scientists got rich selling us.
If I am not clear on my long-term policy view, let me state it plainly – stop devaluing the Dollar. Stop trying to smooth economic gravity. Stop the monetary madness. Start tapering. Now.
If you ever want to see US growth expectations come back (yes, markets and business run on expectations, fyi), you have to let the US Dollar come back and let rates rise right alongside her.
Just this morning, we received additional support that the economy doesn’t need any more of the Fed’s monetary amphetamines. In case you missed it, the US jobless claims trend is near a six-year low. Meanwhile, Q2 US economic growth was revised up to a 2.5% annualized rate.
What will it take to get the Fed out of the way once and for all?
We are at a critical crossroads in America right now. Unwinding the monetary sin embedded in Bernanke’s post 2012 Jackson Hole policy is what markets have been doing for 10 months.
Collectively, we either have the responsibility within all of us to rise up against the tyranny of easy money and currency debauchery, or we do not. At this point, I can only hope the people who voted for this government hold it to account.
Robert Oppenheimer eventually got it. He had introspective accountability. The $3,600,000,000,000 question is whether Ben Bernanke ever will.
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