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MEXICAN STANDOFF: Claims vs. GDP vs. Expectations

THE STANDOFF: Initial Jobless Claims say the Labor Market continues to improve, 1Q14 GDP & April Pending Home Sales say “escape velocity” remains a panglossian phantasm, and consensus growth expectations continue to sing a sirenic but delusional tune around 2014 growth.

 

In this morning’s Early Look, ahead of the 1Q14 GDP revision, we made the following remark:

 

Q114 GDP probably wasn’t as bad as the headline and Q214 won’t be as good...taking the average of the two quarters offers the easiest smoothing adjustment and it will show we’re a high 1% economy – which is about right.” 

 

In the wake of the worse than expected revision to reported 1Q growth that still pretty well characterizes our view.   

 

THE CONCLUSION:  Labor market trends remain solid, but with housing slowing, inflation rising, earnings growth static (w/ savings rates troughed) and the current level of consumption growth (which sat as the singular source of strength in 1Q14 GDP) overstated and/or unsustainable, we continue to think the currency and debt markets ($USD broken and rates in full retreat) are scoring the immediate/intermediate term growth outlook correctly. 

 

THE DELUSION:  Consensus GDP estimates for full year 2014 remain at +2.5-3%, implying 4% growth for the balance of the year.  We’d argue the side on which the balance of risk in that expectation sits is fairly conspicuous. 

 

(Note:  This morning’s strategy note-  Sell #OldWall Polish  - reviews how the markets are scoring the data YTD and highlights our view and preferred positioning for the immediate/intermediate term.  This morning’s housing note reviews the April Pending Home Sales data - Pending Home Sales Remain Sluggish)

 

 

INITIAL CLAIMS:   ANOTHER STRONG PRINT

  • The Data:  Headline claims fell -26k WoW to 300K with the 4-wk rolling average declining -11K WoW to 311.5K.  Non-seasonally adjusted claims, which we consider a more accurate representation of the underlying labor market trend, came in at -15% YoY (vs. -5.3% prior) with the 4-wk rolling average improving to -10.4% YoY vs. -5.3% last week.  
  • The Takeaway: The positive momentum in the labor market along with the broader, sequential improvement in the domestic macro data off the 1Q14 weather distortion suggest no change in the pace of Tapering.  The improvement in claims also bodes well for the May employment report.  While SA claims reported during the BLS survey period (conducted during the pay period including the 12th of the month) were less good than the most recent weeks figures, on balance, the May claims data is supportive of a good NFP print.  

source: Hedgeye Financials

MEXICAN STANDOFF:  Claims vs. GDP vs. Expectations - 1 normal  2

 

MEXICAN STANDOFF:  Claims vs. GDP vs. Expectations - 2 normal  1

 

MEXICAN STANDOFF:  Claims vs. GDP vs. Expectations - Eco Summary 052914

 

 

1Q14 GDP (1st Revision):  #GrowthSlowing 

  • Bad But Not A Surprise:  The first revision to 1Q14 GDP came in at -1.0%, missing estimates of -0.5%.  The magnitude of the revision was larger than expected but the negative print and downward revisions to  inventories, exports, & Gov’t spending  was not a surprise as the actual march data came in worse than the BEA estimates embedded in the advance GDP report. 
  • Inventory Drag:  The negative revision to inventories was the biggest contributor to the total revision.  The inventory ramp, which comprised a big portion of reported nominal GDP growth in 2H13, is now reversing as end demand/income growth proved insufficient at expeditiously drawing down that burgeoning stock.  
  • Consumption:  Strength in consumption growth, particularly Services, was the conspicuous positive on the quarter.  Notably, Services consumption was supported by the significant acceleration in healthcare spending.   

 

*Healthcare Spending:  The strength in Healthcare Services spending stems largely from the implementation of Obamacare. The reported figures, by BEA’s own admission (see their note Here), are very much an estimate and the preliminary data are likely to be revised (significantly) over time as the Census bureau’s quarterly QSS and annual SAS survey’s provide harder data.   

 

With reported Hospital and Outpatient spending both accelerating materially in 1Q14, it could also be that individuals are accelerating medical consumption ahead of ACA implementation and uncertainty around coverage changes. 

 

Either way, in the context of the broader spending data, the takeaway is pretty straightforward – Healthcare Services represent ~17% of total household consumption expenditures and certainly impacts the direction of reported, headline consumption growth.   To the extent that deceleration is the larger trend across the balance of services, a mis-estimation of ACA related spending and/or a significant, transient pull-forward in medical consumption could be materially distorting the prevailing, underlying trend. 

 

  • Real Final Sales growth (GDP less Inventory Change):  decelerating 2.1% QoQ to 0.6%…revised lower by 10bps
  • Gross Domestic Purchases (GDP less exports, including imports):  Very Weak sequentially. Decelerating 160bps QoQ to +0%..revised lower by -90bps
  • Real Final Sales to Domestic Purchasers (GDP less exports less inventory change):  Probably the cleanest read on aggregate private sector demand was decent at 1.6% QoQ (flat sequentially)…revised up +7bps. 
  • So…: Ugly Macro or (now) easy comps – pick your spin!

 

MEXICAN STANDOFF:  Claims vs. GDP vs. Expectations - GDP 1Q14P Table

 

MEXICAN STANDOFF:  Claims vs. GDP vs. Expectations - HC PCE 052914

 

 

Christian B. Drake

@HedgeyeUSA 


PLKI: Delivering the Goods

Takeaway: PLKI is up double-digits intraday and rightfully so.

Popeyes Louisiana Kitchen, Inc. (PLKI) continues to be on our Investment Ideas list as a long.

 

PLKI released earnings after the close yesterday, posting exceptional first quarter results despite a sluggish QSR environment.  Rather than blame the weather, PLKI grew global, domestic and international same-store sales by 4.5%, 4.3% and 5.8%, respectively, while beating top and bottom line estimates.  Similar to what we heard from Chipotle, management noted a strong bounce back in sales following periods of unfavorable weather.

 

Popeyes continues to outperform the domestic chicken-QSR and overall-QSR segments.  Management noted intense competition in the quarter, as direct competitors sought to take advantage of favorable chicken costs by shifting their menu and promotional focus to chicken products.  We believe this increased promotional activity actually benefitted Popeyes by bringing attention to its superior product.  The company managed to increase its share in the domestic chicken-QSR segment to 22.3% from 20.2% a year ago. 

 

Commodity prices are expected to be favorable throughout 2014, primarily led by lower chicken costs. Surging shrimp prices were a bit of a concern heading into the release, but management was quick to point out that shrimp only accounts for approximately 5% of total annual spend.  All told, management doesn’t feel inclined to take any price increases this year as value continues to be very important to their guests.

 

The majority of leverage in its operating model moving forward will be driven by top line sales and, to a lesser degree, enhanced back of house operations.  To that extent, management has notable top line drivers in place including the continuation of its reimage program (65% of domestic stores are currently remodeled; 80% will be by year end), the virtual success cycle of advertising (growing sales drive an increase in media spend), and a full calendar of resonant promotional activity.  Remodels have typically resulted in a 3-4% sales lift although the remaining remodels will be some of the most expensive and dramatic ones to date, suggesting greater upside to any sales lift.  In addition, the new model of restaurants (which is leading the expansion efforts) is generating $1.6 million in average unit volumes, significantly greater than the old model which generates $1.3 million.

 

Longer-term, we believe a significant domestic and international growth opportunity lies ahead for Popeyes and are confident they will expand at a rate that doesn’t sacrifice returns.  Aside from continued expansion, we’re attracted to Popeyes’ diversified revenue stream and stable cash flows which enables management to continue pursuing value enhancing initiatives. In our view, Popeyes is well-positioned to outperform for the remainder of 2014 and we continue to view annual long-term guidance of 1-3% same-store sales growth, 4-6% unit growth and 13-15% adjusted EPS growth as achievable.

 

What we liked:

  • It is clear to us that Popeyes is one of the best managed companies in the restaurant space.
  • Global same-store sales increased 4.5% y/y.
  • Total domestic same-store sales increased 4.3% y/y.
  • International same-store sales increased 5.8% y/y.
  • Management didn’t blame weather and noted a strong rebound in sales following unfavorable periods.
  • Popeyes’ domestic same-store sales continue to outpace both the chicken-QSR segment and overall QSR segment.
  • Popeyes increased its market share in the domestic chicken-QSR segment to 22.3%, up from 20.2% a year ago.
  • Restaurant food, beverages and packaging costs for company operated stores decreased 40 bps to 32.7% of sales.
  • Restaurant employee, occupancy and other costs for company operated stores decreased 34 bps to 46.9% of sales.
  • Restaurant operating profit for company operated stores increased 74 bps to 20.4% of sales.
  • Adjusted EPS of $0.46 grew 15% y/y.
  • Free cash flow grew 21% y/y to $14.2 million.
  • The company repurchased approximately $10 million worth of stock.
  • The company increased full-year same-store sales guidance to 3-4%, up from 2-3%.
  • The company increased full-year adjusted EPS guidance to $1.58-1.63, slightly up from $1.57-1.62.

 

What we didn’t like:

  • Operating margin decreased 15 bps y/y to 26.7%.

 

PLKI: Delivering the Goods - 1

PLKI: Delivering the Goods - 2

PLKI: Delivering the Goods - 3

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst



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Jobless Claims: Strong Labor Means Falling Rates

Takeaway: Expect a strong May labor market print next Friday. This should set the stage for more tapering and more downforce on long-term rates.

Claims Strong = Rates Down

Yesterday the 10-Year Treasury yield dropped 8 basis points to close at 2.44%, down from 2.52% on Tuesday. In early May, we argued that the Fed's ongoing taper, facilitated by strong labor market data, was indirectly causing downward pressure on long-term rates. This was based on the idea that following the expiration of both QE1 and QE2 we saw 100+ basis points declines in long-term rates.

 

Jobless Claims: Strong Labor Means Falling Rates - how to get a better job

 

With that in mind, today's initial jobless claims data is very strong, and the ongoing taper of QE3 should continue and, by extension, the ongoing decline in long-term rates should persist over the short/intermediate term. The year-over-year change in NSA initial claims came in at -15% and the four-week rolling average is now lower by 10.4% year-over-year versus the prior week being lower by 5.3%.  It's fair to say that this is some of the strongest labor market data we've seen in a while, and it bodes well for next Friday's May labor market report. It's also interesting in the context of the negatively revised 1Q GDP print.

The Data

Prior to revision, initial jobless claims fell 26k to 300k from 326k week-over-week, as the prior week's number was revised up by 1k to 327k.

 

The headline (unrevised) number shows claims were lower by 27k week-over-week. Meanwhile, the four-week rolling average of seasonally-adjusted claims fell -11k week-over-week to 311.5k.

 

The four-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -10.4% lower year-over-year, which is a sequential improvement versus the previous week's year-over-year change of -5.3%

 

Jobless Claims: Strong Labor Means Falling Rates - 2

 

Jobless Claims: Strong Labor Means Falling Rates - 5

 

*   *   *   *   *   *   *

 

Editor's Note: This is an excerpt of a research note that was originally provided to subscribers on May 29, 2014 at 9:35 a.m. EST by Hedgeye’s Financials team. Follow Jonathan Casteleyn and Josh Steiner on Twitter @HedgeyeJC and @HedgeyeFIG.

SUBSCRIBE TO HEDGEYE.


PENDING HOME SALES REMAIN SLUGGISH

Takeaway: April pending home sales rose 40 bps m/m, but are down 9% year-over-year - consistent with the trend over the last four months.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

 

PENDING HOME SALES REMAIN SLUGGISH - Compendium 052914

*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.

 

 

Today's Focus: April Pending Home Sales Index

The National Association of Realtors (NAR) today released its Pending Home Sales Index for the month of April. Pending Home Sales rose by 0.4% month-over-month to an index level of 97.8 (vs 97.4 in March). For reference, an index value of 100 corresponds to the average level of contract activity in the year 2001. While the report was positive month-over-month, contract activity remains down year-over-year by 9%. This is a stark contrast vs where we were one year ago, when contract activity was running +10% year-over-year. Weakness on a year-over-year basis was pervasive geographically. The best performing region is the South, where contract activity is down 6.4% y/y while the West is the worst at -15.0%.

 

Pending Home Sales activity tends to lead price by ~18 months, as we show in the second chart below. This is why we are bearish on the outlook for HPI in 2H14 and 1H15. We expect the y/y weakness we're seeing in demand since the middle of 2013 will manifest in weaker rates of home price appreciation as we progress into 2014 and 2015. Inflections in the rate of HPI have historically been powerful macro tailwind/headwind drivers. 

 

 PENDING HOME SALES REMAIN SLUGGISH - PHS Index   YoY  TTM

 

PENDING HOME SALES REMAIN SLUGGISH - PHS vs Case Shiller 18Mo Lag

 

PENDING HOME SALES REMAIN SLUGGISH - PHS LT

 

PENDING HOME SALES REMAIN SLUGGISH - PHS by Region

 

PENDING HOME SALES REMAIN SLUGGISH - PHS vs Purchase Apps Line Chart unlagged 

 

PENDING HOME SALES REMAIN SLUGGISH - Pending vs Existing 1Mo Lag Line Chart

 

PENDING HOME SALES REMAIN SLUGGISH - Pending vs Existing 1Mo Lag Scatterplot

 

About Pending Home Sales:

The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.

 

Frequency:

The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.

 

Joshua Steiner, CFA

 

Christian B. Drake


INITIAL CLAIMS: STRONG LABOR = FALLING RATES

Takeaway: Expect a strong May labor market print next Friday. This should set the stage for more tapering and more downforce on long-term rates.

Claims Strong = Rates Down

Yesterday the 10-Year Treasury yield dropped 8 bps to close at 2.44%, down from 2.52% on Tuesday. In early May we put out a note entitled "Tapering = Rates Falling", in which we argued that the Fed's ongoing taper, facilitated by strong labor market data, was indirectly causing downward pressure on long-term rates. This was based on the idea that following the expiration of both QE1 and QE2 we saw 100+ bps declines in long-term rates. See our note for more detail.

 

With that in mind, today's initial jobless claims data is very strong, and the ongoing taper of QE3 should continue and, by extension, the ongoing decline in long-term rates should persist over the short/intermediate term. The y/y change in NSA initial claims came in at -15% and the 4-week rolling average is now lower by 10.4% y/y vs the prior week being lower by 5.3%.  It's fair to say that this is some of the strongest labor market data we've seen in a while, and it bodes well for next Friday's May labor market report. It's also interesting in the context of the negatively revised 1Q GDP print.

 

To reiterate our conclusion from our early May note, falling rates means more tough sledding for Financials positively correlated to long-term rates such as banks (R = +0.62), Life Insurers (R = +0.75) and Online Brokers (R = 0.67). Conversely, negatively correlated Financials include the agency mortgage REITs like NLY, MFA (R = -0.90) and select bond fund managers (i.e. AB, where R = -0.45). Squaring these values will tell you the magnitude of the headwind you're fighting being long. Yield plays also do well amid falling rates so our recent Best Idea addition, OZM, should fare well alongside our traditional fixed income asset manager idea LM. 

 

The table below is from our May 6 note and shows the correlations of various Financial stocks to the 10-Year Treasury yield over the past year.

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - rates correlation table 2

 

The Data

Prior to revision, initial jobless claims fell 26k to 300k from 326k WoW, as the prior week's number was revised up by 1k to 327k.

 

The headline (unrevised) number shows claims were lower by 27k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -11k WoW to 311.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -10.4% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.3%

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 1

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 2

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 3

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 4

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 5

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 6

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 7

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 8

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 9

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 10

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 11

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 12

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 19

 

Yield Spreads

The 2-10 spread fell -10 basis points WoW to 208 bps. 2Q14TD, the 2-10 spread is averaging 224 bps, which is lower by -15 bps relative to 1Q14.

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 15

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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