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PADDLING UPSTREAM: DOMESTIC INFLATION

Summary Bullets:

  • Housing’s Pull:  Inflation in Owners Equivalent Rent/Shelter have almost single handedly buttressed headline inflation growth over the last year.
  • What if Housing Rolls?  The Fed faces a Sisyphean inflation battle if the slowdown in housing drives deceleration in Shelter price growth
  • Inflation Percolation:  Food & Energy Costs are taking a rising share of consumer wallet, but moderate inflationary pressures continue to hold in the largest part of the economy
  • Vicious Policy-Price Cycle: A material, policy driven acceleration in food and energy inflation only serves to slow inflation adjusted growth – particularly in a world of sub-trend credit and nominal wage growth.   
  • Fed Front Running:  Investor positioning into slowing growth and the expected, reactionary policy response has become largely Pavlovian & the dollar continues to breakdown and commodities breakout.

 

 

“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

 

In you're unaware, that perfectly imprecise line of questioning, asked as part of BLS’s monthly price survey process, drives the calculation of “owner’s equivalent rent” and singularly represents approximately one quarter of the index used to calculate CPI inflation in the United States.   

 

Calling out the sweeping subjectivity inherent in the domestic survey methodology is trivial at this point, but I still find it rather remarkable and worthy of a re-highlight every once in a while.   

 

What hasn’t been trivial is the impact of owner’s equivalent rent on the reported inflation figures. 

 

 

HOUSING’S PULL:  CAN THE FED SUCCEED IF HOUSING FAILS?

Owner’s equivalent rent (OER) carries a 23.9% weighting in the CPI index as of the latest reading while Shelter more broadly, which also includes insurance and housing fuels and utilities, carries a 32% weighting. 

 

What’s notable is that over the last year, the ongoing acceleration in OER and Shelter inflation has almost singularly buttressed headline inflation growth. 

 

The chart below shows YoY growth in CPI Shelter vs. CPI All Items ex-Shelter.   As can be seen, the divergence between the two measures has shown ongoing expansion over the last 3 quarters – a trend which extended itself in February with CPI Shelter flat sequentially at +2.6% YoY while YoY growth in CPI Ex-Shelter decelerated 60bps sequentially to just +0.5% YoY, its second lowest print since the end of the recession.

 

PADDLING UPSTREAM: DOMESTIC INFLATION - CPI   Housing s Pull

 

PADDLING UPSTREAM: DOMESTIC INFLATION - CPI Ex Shelter YoY bar graph

 

PADDLING UPSTREAM: DOMESTIC INFLATION - Owners Equivalent Rent Contribution

 

WHAT IF HOUSING REALLY ROLLS OVER?

Shelter and OER inflation is generally pretty sticky but 100bp moves in the rate of change of growth over a 12 month period aren’t abnormal.   Housing activity has already begun to slow and home prices generally follow the slope of demand on a 12 to 18 month lag. 

 

While the relationship between growth in shelter inflation and growth in home prices isn’t overly tight (and we need to do more work on this), it’s probably more reasonable to expect a material slowdown in home price appreciation to drag on shelter inflation than not. 

 

In the chart/scenario analysis below, we show the trajectory for headline CPI growth over the next 10 months under a scenario of decelerating Shelter CPI growth. 

 

Specifically, we’ve assumed CPI All-items ex-Shelter continues to grow at its TTM average of +0.9% over the balance of 2014 while CPI Shelter decelerates 100bps ratably, from +2.6% to +1.6%, over that same period.    

 

Obviously, any number of scenario iterations can be envisaged, but under a scenario of modest deceleration in Shelter inflation, headline CPI growth would struggle to stay north of 1% over the remainder of 2014. 

 

PADDLING UPSTREAM: DOMESTIC INFLATION - CPI Housing Deceleration Scenario 

 

PADDLING UPSTREAM: DOMESTIC INFLATION - HHC 031814

 

INFLATION PERCOLATION

Food & Energy costs have been the notable positive diverger, taking a greater share of consumer wallet YTD as protein and fuel cost have tracked back towards peak 2011 growth levels.   

 

However, pockets of inflation have been percolation eslewhere as well despite the broader disinflationary trend.   

 

CPI Services growth continues to hold above 2% and the growth trend looks similar even if you strip out the Shelter and Energy components of the Index.  On a YoY basis the slope of Services price growth is slowing, but it continues to accelerate on a 2Y basis. 

 

We’d argue that the 2Y comps generally offer a cleaner read on the Trend rate of improvement as outlier impacts and odd comp dynamics get smoothed, but the read through is somewhat equivocal here. 

 

The general takeaway is that the headline inflation figures modestly belie more moderate inflationary pressures in the largest part of the economy.

 

PADDLING UPSTREAM: DOMESTIC INFLATION - Food   Energy Inflation

 

PADDLING UPSTREAM: DOMESTIC INFLATION - CPI Services 

 

PERVERSE POLICY-PRICE CYCLE....AGAIN 

With the Fed rhetorically abandoning their 6.5% unemployment target, we’ve received the first tangible confirmation of what everyone already intuitively knew – namely, that  data dependence and forward guidance can’t credibly co-exist.   

 

With the fed broadening its “qualitative” focus across a broader swath of labor market data, talk of an inflation floor or other more inflation specific guidance is also likely to emerge as the Yellen transition matures. 

 

If rent inflation decelerates alongside the slowdown in housing, it will become increasingly harder for the Fed to achieve its stated inflation target.  To the extent they implement incremental easing to help combat another round of disinflation, it’s likely to perpetuate further speculative investment in hard commodities and other currency debasement and inflation hedge assets.   

 

Unfortunately, a material, policy driven acceleration in food and energy inflation only serves to slow inflation adjusted growth – particularly in a world of sub-trend credit and nominal wage growth.   

 

PADDLING UPSTREAM: DOMESTIC INFLATION - Hourly Earning NonSupervisory Feb

 

#InflationAccelerating:  Base effects alongside the combination of investors/$USD front-running a rhetorical shift in policy as the slope of domestic growth slows anchored our 1H14  #InflationAccelerating call. 

 

Investor positioning into slowing growth and the expected, reactionary policy response has become largely Pavlovian.     

 

With the dollar in bearish formation (Broken TRADE/TREND/TAIL) and back near 52-week lows, slow-growth equities leading (Utilities outperforming consumer by >900bps), and Gold and the CRB Index outperforming almost every other asset class  YTD at +13% and +8%, respectively, investors again appear to be (attempting) to front run the Fed.  

 

PADDLING UPSTREAM: DOMESTIC INFLATION - DXY

 

PADDLING UPSTREAM: DOMESTIC INFLATION - CRB Index

 

 

Christian B. Drake

@HedgeyeUSA 



GameStop, Meet Goliath | $WMT $GME

Takeaway: The reality is that the used game route is a tough business, and one that takes awhile to get right.

Editor's Note: This is a complimentary research excerpt from Retail Sector Head Brian McGough. For more information on our services, click here.

 

Newest Player in Used Videogames: Wal-Mart

 

GameStop, Meet Goliath | $WMT $GME - 1109 Walmart full 600

  • "Wal-Mart Stores Inc. is making a play for the used videogame business, a move that could bring in new customers while rankling GameStop Corp., which has long dominated the market."
     
  • "Starting next week, the world's largest retailer will allow shoppers to trade in used videogames for anything from groceries to gadgets across 3,100 of its stores. Customers will receive gift cards ranging from a few dollars to more than $35, based on the value of the games they turn in. Those cards can be redeemed in stores and online."
     
  • "Wal-Mart itself ran a smaller trade-in program in 2009 where it allowed customers to sell used games through kiosks in certain stores, but the retailer failed to make it work. This time, Wal-Mart has teamed up with CExchange Inc., an electronic trade-in and recycling company based in Carrollton, Texas, which also works with RadioShack Corp. and eBay Inc."

Takeaway from Hedgeye’s Brian McGough:

We have to give Wal-Mart credit for going the used game route. Honestly, they could prove disruptive to GameStop…to an extent.

 

The reality is that it’s a tough business to sell used games. It even took GameStop a very long time to get it right.

 

It’s just simply harder to manage inventory in this category than almost any other in retail.

 

Really, there's no way Wal-Mart can do it as well as GameStop.


One of the key reasons is that you need consistent volume of gamers that view your store as a source for the content that they want.  GameStop has that steady flow of traffic -- it is the destination for gamers. And it was only after it established itself as the “Mecca for Video Games” could it build a used game business.

 

Point blank, this all seems too premature for Wal-Mart.

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LULU: SURVEY RESULTS PREQUEL #2

Takeaway: In advance of our 3/24 Black Book, we review our prior survey on buying patterns vs a yr-ago for Yoga brands. Can LULU can get much worse?

Here's the second note in a series of five in advance of our LULU Consumer Survey results on Monday March 24th at 11am ET.  When we polled consumers three months ago, we pulled away some clear insights. The concerns largely outweighed the strengths, which foreshadowed the company's results, and ultimately the stock price.

 

We're re-running our survey to gauge the incremental change over the past quarter, with the goal of seeing whether LULU is making progress (which could get us more constructive on the name) or not.

 

In preparation for 'Round 2' we want to offer up some of the notable takeaways from our last survey, as they'll be framing the discussion on Monday.

 

BUYING MORE/LESS

 

In this question, we asked consumers if they are buying more or less than a year ago. Now…we're the first to admit that we don't like this question very much. The reality is that the average consumer does not know how much she was buying a year ago. But, at least the question is consistent across brands, which is good enough for us. In our next survey, we'll see the rate of change by brand, which we think strengthens the question further.

 

The first chart shows the percent of women who said that they are buying MORE product than they were a year ago. Winners are Sweaty Betty, Zella (Nordstrom), Ideology (Macy's) and Prana.  Losers are Lululemon, Old Navy and AdiBok.

 

The second chart shows the percent of women who said that they are buying LESS of each brand versus a year ago.  Roxy scored poorly, but the company is literally just starting its Yoga brand now (it is probably unfair to even have it on the list). Then comes LULU, Puma and Adidas.  Most other brands scored respectably with 13% or less buying a smaller amount of the brand today versus a year ago. Check out Sweaty Betty and Zella (JWN) -- truly solid brand momentum.

 

LULU: SURVEY RESULTS PREQUEL #2 - buying more

LULU: SURVEY RESULTS PREQUEL #2 - buying less

 

Continuing with the 'buying more or less' theme, we thought it would be interesting to stack up our Yoga results vs what we learned when we did this for prior surveys in different categories.  We're talking different consumer groups and different income levels in each survey. But the trends are noteworthy nonetheless.  Department stores naturally trailed the pack with far more people 'buying less' than 'buying more'. Then comes Action Sports with a positive trend, followed by Yoga which puts the rest of the categories to shame.  The results of this question won't make or break our thesis -- or decision to potentially change it. But it will give us an indication as to whether the category is getting even stronger or is easing on the margin. 

 

LULU: SURVEY RESULTS PREQUEL #2 - category buyingmore



Chain Store Sales: Hoping Against Hope

Takeaway: After this week's drift downwards, we're hoping to see trends accelerate.

Editor's Note: This is a complimentary research excerpt from Retail Sector Head Brian McGough. For more information on our services, click here.

 

ICSC - Chain Store Sales Index

 

Chain Store Sales: Hoping Against Hope - tumblr mp0b65iLOx1r6f15co1 1280 

 

The latest International Council of Shopping Centers (ICSC)-Goldman Sachs weekly index, which measures nominal same-store or comparable-store sales excluding restaurant and vehicle demand, has been released. The weekly index statistically represents industry sales and is not just a sum of sales for a handful of retailers.

 

What we see is not a disaster by any means, but last week's positive +2.1% reading gave us a glimmer of hope. This week, though, we drifted back down to just +1.5%.

 

Keep in mind, as outlined in the chart below, that we're about to go against a 10-week run last year where sales growth was well below 2012 levels. In other words, we have an easy comp.

 

We hope we'll see trends accelerate…but we hate relying on hope.

 

 Chain Store Sales: Hoping Against Hope - chart2 3 18 large

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