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10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH

Takeaway: Expectations should weigh on the growth style factor in the US. Chinese growth is bottoming out – on both a reported and prospective basis.

CONCLUSIONS (USA):

 

  1. While we’re likely to see post-winter optical strength in the MAR/APR timeframe, we continue to believe that the trend in domestic economic growth is decelerating and will continue to decelerate over the intermediate term. An acceleration in reported inflation coupled with a slowdown in both house price appreciation and housing sector activity remain our primary catalysts for the aforementioned deceleration in the consumption-heavy US economy.
  2. This is especially true in the context of consensus expectations that continue to bake in our team’s 2013 bull case as the base case scenario for 2014 and beyond.
  3. The likelihood that US economic growth continues to slow relative to those expectations should perpetuate what we have been appropriately signaling as a regime change in market leadership that is likely to be supported by the introduction of easier monetary policy (both on an absolute basis and relative to existing expectations) over the intermediate term.
  4. As such, we continue to favor high-yielding assets (i.e. Treasuries, REITs, Utes), carry trading strategies (i.e. emerging markets) and inflation hedges (i.e. TIPS and commodities) in lieu of consumer exposure and high-growth/high-beta names, at the margins.
  5. The biggest near-term risk to our view is that likely sequential strength in reported economic data over the next 1-2M is extrapolated as confirming evidence of a consensus bias towards favoring the growth style factor in domestic capital markets. The biggest long-term risk to our view is a Federal Reserve that openly supports a #StrongDollar = #StrongAmerica economic policy. For now, neither risk appears particularly probable.

 

CONCLUSIONS (CHINA):

 

  1. Chinese real GDP growth slowed in 1Q14, coming in roughly in line with our and the Street’s expectations. There were some bright spots in the higher-frequency data, but the general trend in Chinese economic growth remains negative.
  2. That being said, we are of the ilk to side with the now-consistent rhetoric of Chinese policymakers in anticipating that Chinese economic growth is at/near a cyclical bottom from a rate-of-change perspective.
  3. Specifically, either said policymakers have visibility into the Chinese economy that we lack as investors/analysts or they are effectively signing off on a plan to provide meaningful stimulus if growth continues to slow from here.
  4. Our favorite leading indicator for the slope of Chinese economic growth (i.e. the slope of the average YoY % change in rebar, iron ore and coal prices) is supportive of the former outcome; the dramatic easing of Chinese monetary conditions and sharp tightening of credit spreads in recent months is supportive of the latter outcome.
  5. We are currently doing the work to re-quantify the risks embedded in the Chinese financial sector in order to appropriately handicap the probability of a severe and prolonged crisis (conference call date TBD). To the extent we find those risks are priced in, consensus expectations for Chinese economic growth are depressed enough to warrant bargain hunting on the long side of CNY/CNH-denominated capital markets.  

 

US GROWTH CHARTS:

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - 1

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - 2

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - 3

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - 4

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - 5

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - 6

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - 7

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - 8

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - 9

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - 10

 

CHINESE GROWTH CHARTS:

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - China GDP Growth

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - China Iron Ore  Rebar and Coal YoY

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - China 7 day Repo Rate Monthly Avg

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - China 5Y AAA Spread.tif

 

10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH - China GDP Expectations

 

RECENT CHINESE GROWTH DATA (in descending order of release date):

 

  • 1Q14 Real GDP: 7.4% YoY from 7.7% in 4Q13 vs. a Bloomberg consensus estimate of 7.3%
    • QoQ: 1.4% from 1.7% vs. a Bloomberg consensus estimate of 1.5%
  • MAR YTD Fixed-Assets Investment: 17.6% YoY from 17.9% in JAN-FEB
  • MAR Retail Sales: 12.2% YoY from 11.9% in JAN-FEB
  • MAR Industrial Production: 8.8% YoY from 8.6% in JAN-FEB
  • 1Q14 Business Climate Index: 128 from 124.3 in 4Q13
    • Large Enterprises: -0.6pts MoM to 132.5
    • Medium Enterprises: +3.5pts MoM to 129.4
    • Small Enterprises: +5.3pts MoM to 121
  • APR MNI Business Indictor: 51.1 from 53.4 in MAR
  • MAR Total Social Financing: 2.07T from 938.7B in FEB
    • New CNY Loans: 1.05T from 644.5B
    • Non-traditional Credit: 544.1B CNY from 17.2B
      • Ratio: 26.3% from 1.8%
        • SMAVG(3): 22.2% from 28.5%
    • The big acceleration in Chinese credit data in MAR would suggest that default risk is being mitigated, at the margins (via refinancing activity), given how poor the broad swath of Chinese growth data has been.
  • MAR M0 Money Supply: 5.2% YoY from 3.3% in FEB
  • MAR M2 Money Supply: 12.1% YoY from 13.3% in FEB
  • MAR FX Reserves: +$128.7B from +$31.9B in FEB
    • YoY: 15.8% from 15.4%
  • MAR Exports: -6.6% YoY from -18.1% in FEB
  • MAR Imports: -11.3% YoY from 10.1% in FEB
  • MAR Trade Balance: $7.7B from -$23B in FEB
    • YoY: +$8.7B from -$37.9B
  • MAR Non-Manufacturing PMI: 54.5 from 55 in FEB
    • New Orders: 50.8 from 51.4 in FEB
    • New Export Orders: 51.7 from 48.3 in FEB
    • Employment: 51.4 from 50.9 in FEB
  • MAR HSBC Services PMI: 51.9 from 51 in FEB
  • MAR HSBC Composite PMI: 49.3 from 49.8 in FEB
  • MAR Manufacturing PMI: 50.3 from 50.2 in FEB
    • Production: 52.7 from 52.6 in FEB
    • New Orders: 50.6 from 50.5 in FEB
    • New Export Orders: 50.1 from 48.2 in FEB
    • Finished Goods Inventories: 48.3 from 47.8 in FEB
    • Imports: 49.1 from 46.5 in FEB
    • Raw Materials Inventories: 47.8 from 47.4 in FEB
    • Employment: 48.3 from 48.0 in FEB
    • Business Expectations: 62.7 from 61.8 in FEB
  • MAR HSBC Manufacturing PMI: 48 from 48.5 in FEB
  • MAR CREIS Home Price Index (100 cities): 10% YoY from 10.8% in FEB
  • MAR E-House Home Price Index (288 cities): 8.1% YoY from 9.1% in FEB

 

Feel free to email us if you have any follow-up questions and we’ll be more than happy to walk you through our logic in greater detail. Have a great afternoon/evening,

 

DD

 

Darius Dale

Associate: Macro Team


Poll of the Day Recap: 55% Think China’s Growth In Decline

Takeaway: 55% said it’s IN-DECLINE; 45% said it’s BOTTOMING.

Poll of the Day Recap: 55% Think China’s Growth In Decline - CFP395049710 115538 copy1

 

China’s economy grew only 7.4% in the first quarter from a year earlier, according to the Chinese government. But though its growth has slowed to a six-quarter low, there was speculation that the actual number could have been closer to 7% after a recent string of other soft economic numbers.

 

In today’s poll, we wanted to know how you viewed this situation: Is Chinese growth in decline or is it bottoming?


At the time of this post, 55% said it’s IN-DECLINE; 45% said it’s BOTTOMING.

 

Of those that voted IN-DECLINE, one noted that “China will publish their 2015 full year GDP in 2 weeks time. #Forwardguidance.”

 

Another explained, “It doesn't really matter what the official data says. They forecast 7.5%, that's what they'll announce. Question is: is there real demand growth, will there be significant stimulus, what is the credit cycle doing?”

 

Conversely, over in the YES group, one responder pointed out, “Most countries would love 7.4% growth -- and this doesn't feel like a decline to me.” 

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Investment Ideas: Shorts

The Cheesecake Factory Incorporated (CAKE)

Details: We’ve been bullish on CAKE for the better part of the past two years, but we believe margin pressure is building and the bar is set too high for FY14.  To be clear, this is not a structural short.  CAKE is a strong company with a good management team, so we will be disciplined with our call.

 

Traffic: Traffic has declined for the past five quarters at CAKE and the macro backdrop hasn’t been encouraging.  We believe the casual dining industry is in secular decline as it continues to lose market share to select fast casual and quick service players.  Mall traffic has also been weak as consumers are increasingly shopping online.  CAKE has significant exposure to malls, but management has denied a link between mall and restaurant traffic.  We contend that this dynamic presents a headwind for CAKE, not matter how minimal it presently is. 

 

Margin Pressure: CAKE needs to drive positive traffic soon.  As a result, we expect them to reinvest in labor and other expenses in order to attract more visits and increase frequency.  Minimum wage increases and the looming ACA are also expected to pressure margins.  Our biggest concern, however, is on the cost of sales line as food inflation has accelerated meaningfully in 2014.  Management guided to 3-4% food inflation in FY14, due in large part to rising shrimp and salmon prices which are up +60.8% and +10.4% YoY, respectively.  We believe dairy prices are causing incremental pressure on the COGS line, as the surge in milk and cheese prices has been more resilient than most anticipated.  These two commodities are up +36.6% and +17.5% YoY, respectively.  Management previously noted that they only have 40% of dairy needs locked in for FY14.  The street only estimates cost of sales as a % of revenue to increase 8 bps for the full year.  We believe this is very unlikely.

 

Guidance: Management guided down 1Q14 numbers on the 4Q13 earnings call, but maintained full-year guidance.  As such, the stock has been quite resilient.  We believe the bar is too high and expect management to guide down FY14 numbers on the 1Q14 earnings call.  FY14 EPS estimates have come down slightly, from $2.38 to $2.36, only to reflect a disappointing first quarter.  Full-year estimates look achievable if commodities ease in the back half of 2014, but we’ve seen no signs of this happening.  FY15 estimates for 16% EPS growth on 8% sales growth continue to look aggressive.

 

Valuation: CAKE trades at 20.07x P/E and 9.08x EV/EBITDA on a NTM basis.

 

Investment Ideas: Shorts - chart1

 

Investment Ideas: Shorts - chart2

 

Bloomin’ Brands

Details: It’s difficult to find a compelling company in the casual dining industry that has a large, complex portfolio of brands.  We believe the casual dining industry is in secular decline.  According to Malcolm Knapp, 2013 marked the eighth consecutive year of same-restaurant traffic declines.  In the new age of casual dining, the brands that focus on doing one thing right are the most successful.  Companies with large, diverse portfolios are at greater risk of missing the numbers than smaller, more nimble players.

 

Sales Trends: Two-year same-store sales trends across all four of BLMN’s main concepts are deteriorating.  As a result, management has been rolling out weekday lunch at Outback and Carrabba’s.  We contend this is to mask a decline in the core dinner business.  As a result of the lunch rollout, we expect same-store sales trends to outperform the Knapp Track Index.  We believe BLMN will run into trouble at some point in 2H14 and beyond as they begin to lap the lunch rollout.  Bonefish Grill, the portfolio's “growth vehicle,” has had same-store sales decline on a two-year basis since 1Q12.

 

Margins: BLMN has some of the worst operating margins in the restaurant industry.  Despite the efficiencies management has claimed to achieve, operating margins as a % of sales have mostly remained flat since 1Q11.  We believe this is a primary reason why BLMN opted to acquire its Brazilian JV late last year.  We expect food costs in FY14 to pressure margins more than the street expects and believe the street is too aggressive in its labor cost leverage assumption.  We believe margins will be pressured for the majority of 2014.  FY14 consensus estimates have been cut in half to 10% EPS growth on 8% sales growth.  The real disconnect comes in FY15, with the street expecting 20% EPS growth on 7% sales growth.  These estimates are far too aggressive – in fact, we don’t think BLMN will ever grow EPS by 20% in a given year.

 

Valuation: BLMN trades at 18.59x P/E and 8.61x EV/EBITDA on a NTM basis.

 

Investment Ideas: Shorts - chart3

 

Investment Ideas: Shorts - chart4

 

Panera Bread Company (PNRA)


Details: PNRA has secular and well-publicized operational issues working against it.  This has led to the vision for Panera 2.0, in which management aims to thrive in a digital future.  We are on board with management’s plans, we just happen to think they will take longer to materialize than consensus.

 

Increased Competition: PNRA has secular forces working against it that didn’t exist a few years ago.  There are more fast casual players than ever before, QSR chains have upgraded looks and menus, and casual dining companies have resorted to discounting.  These chains market their products heavily and offer them at cheaper price points than Panera’s core offerings.  As a result, PNRA has little pricing power and a value equation that is out of sync.

 

Operational Issues: Capacity and throughout issues plagued PNRA in 2013.  As a result, 2014 and 2015 will be heavy investment years.  PNRA must invest to improve its café operating experience by reconfiguring product lines, streamlining menu offerings, offering lower priced items, delivering product consistency and improving speed of service.  We believe Panera 2.0 will address these issues, but it will take significant investment and time to materialize.  PNRA also plans to ramp up its advertising spend in 2H14 with a national cable TV launch.  Will the system be ready to handle incremental traffic as a result?

 

Concerns: We are concerned by a lack of visibility around earnings and the reality is PNRA 2.0 won’t be fully rolled out until the end of FY15.  Management would not commit to higher margins post-rollout, because they don’t know if this is possible.  They also spoke of conscious cannibalization during the Investor Day in late March.  To us, this signals market maturity and indicates that the majority of future growth will be at lower returns as cannibalization and the significant investment (labor and training, IT fees, etc.) that comes with Panera 2.0 take hold.  We expect FY14 and FY15 to be margin compressing years.  FY14 could get a bump from the national advertising rollout, but FY15 estimates of 15% EPS growth on 10% sales growth look aggressive.

 

Valuation: PNRA is trading at 24.6x P/E and 10.76x EV/EBITDA on a NTM basis.

 

Investment Ideas: Shorts - chart5

 

Investment Ideas: Shorts - chart6

 

Potbelly Corporation (PBPB)


Details: We’ve been bearish on PBPB since it closed its first day as a public company at $30.77 a share.  We believe Potbelly is a solid company, with a respected management team, but it’s been difficult to justify its valuation considering it competes in the most competitive segment in the restaurant industry.  At its core, PBPB is a single daypart, low margin, low return, local sandwich chain with declining traffic and little competitive advantage over its most basic peers.

 

Fundamentals: Same-store sales and traffic trends continue to be discouraging for a company flagged as a growth chain.  Weather is partly to blame for recent weakness, but the truth it will continue to be a headwind until management diversifies its unit base.  PBPB’s operating model requires sales leverage in order to drive further upside.  We believe 1Q14 will mark the fifth consecutive quarter of traffic declines and another quarter of lower YoY average unit volumes. 

 

Takeaway: We believe PBPB can be a feasible, financially robust company over the long haul, but we continue to see downside in the stock.  Current fundamentals continue to suggest it is overvalued and the FY14 outlook is under pressure.  We’d be tempted to like PBPB at a much lower price, but we need to see the company begin to generate some sustainable same-store sales momentum.

 

Valuation: PBPB is trading at 50.18x P/E and 20.92x EV/EBITDA on a NTM basis.

 

Investment Ideas: Shorts - chart7

 

Investment Ideas: Shorts - chart8

 

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst



Consumer Staples Marginally Outperforms S&P 500

Takeaway: U.S. consumption growth is slowing as inflation rises.

Consumer Staples Marginally Outperforms S&P 500 - wallstreet

Consumer Staples (XLP) outperformed the broader market last week, falling -0.5% versus the S&P 500 at -2.6%. XLP is down -0.5% year-to-date vs the SPX at -1.8%.

 

For a sixth straight week, XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up. This is a material shift as the sector traded bearish TRADE and TREND for the majority of the year-to-date.

 

Consumer Staples Marginally Outperforms S&P 500 - 2

 

Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

 

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 2014 Q1 theme of #InflationAccelerating, and Q2 theme of #ConsumerSlowing.
     
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth.
     
  • The sector is loaded with a premium valuation (P/E of 18.8x).
     
  • Less sector Yield Chasing as Fed continues its tapering program.
     
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months, and declined to -31.9 versus -30.0 in the prior week.

Consumer Staples Marginally Outperforms S&P 500 - 4

Consumer Staples Marginally Outperforms S&P 500 - 5

Consumer Staples Marginally Outperforms S&P 500 - 6

 

*   *   *   *   *   *   *

 

Editor's Note: This is an excerpt of a research note that was originally provided to subscribers on April 14, 2014 by Hedgeye Consumer Staples Analyst Matt Hedrick. Follow Hedgeye's Consumer Staples sector @HedgeyeStaples.

 

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