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DOUBLE, DOUBLE, TOIL & TROUBLE: MAY INFLATION

Our 1Q14 Macro Investment theme #InflationAccelerating called for ~100 bps increase in reported CPI into the easiest inflation comps in 3Q14.  With inflation running just above 1% into 2013 year-end, a +100 bps increase was effectively a call for a doubling in the rate of price growth.   

 

With the May reading of +2.13% YoY that doubling of inflation growth has largely manifest.  What hasn’t accelerated, unfortunately, is earnings growth (more on that below).   

 

Headline CPI accelerated for a 3rd consecutive month in May, hitting its highest rate of growth since October 2012,  while Core CPI accelerated 20bps to +2.0% YoY.

 

Shelter inflation (~31% weight), which almost singularly supported the headline number most of the last year, accelerated +10bps to +2.9% YoY while protein (meat, poulty, fish, eggs) price growth accelerated another +130 bps sequentially to +7.7% YoY.  

 

DOUBLE, DOUBLE, TOIL & TROUBLE:  MAY INFLATION - Food Energy Shelter 061714

 

Notably, while shelter inflation has buttressed the headline number over the TTM and food/energy inflation have been the outliers YTD, the rise in prices has been increasingly broader based the last several months.  

 

Indeed, the percentage of components registering sequential acceleration made a new multi-year high in May and is looking similar to the commodity price cycle catalyzed acceleration in 2011. 

 

DOUBLE, DOUBLE, TOIL & TROUBLE:  MAY INFLATION - CPI breadth 061714

 

DOUBLE, DOUBLE, TOIL & TROUBLE:  MAY INFLATION - CPI all items ex shelter

 

So, where to from here?

 

Interestingly, the slope of price growth need not continue increasing for inflation to hold the 2% line or accelerate further over the balance of 2014.  

 

To illustrate, we show two simple scenario’s in the chart below: 

  • Scenario 1:  if the current CPI Index level  doesn’t change at all for the balance of the year, CPI growth will finish 2014  >2% as base effects predominate.
  • Scenario 2:  If the CPI Index compounds at +0.1% MoM (for reference: 6M ave = +0.3%/mo, TTM ave=+0.2%/mo) for the balance of the year, CPI inflation will be north of 2.80% at year end.

Simply, inflation comps continue to ease through October and we don’t need much in the way of incremental price growth to drive a further acceleration in reported CPI growth.  

 

With oil prices jumping alongside heightened geopolitical risk, the $USD still broken, and the potential for the Fed to get rhetorically easier alongside a slowdown in both housing and the consumer, we continue to think the risk to inflation estimates is to the upside – at least through the third quarter.  

 

DOUBLE, DOUBLE, TOIL & TROUBLE:  MAY INFLATION - CPI Scenario Analysis

 

 

 

REAL WAGE GROWTH:  Back to Negative Growth in May

 

Flat Nominal Wage growth + Accelerating Inflation = Lower Real Wage growth

 

It’s been our contention that the conflation of dollar depreciation and rising inflation serves to slow real growth as food/energy/rent costs take down a rising share of the consumer’s wallet. 

 

The identity above is trivial, but the gravity associated with that reality in terms of household capacity for accelerating real, discretionary consumption is not insignificant – particularly with consensus 2014 growth estimates still aggressive despite the iterative haircutting of expectations over the last few months. 

 

To the point, this morning BLS reported real weekly earnings grew -0.1% YoY in May while real average hourly earnings declined -0.2% YoY.   

 

Sure there are some signs of wage inflation pressures building under the hood, but overtly strong labor and income dynamics propelling resurgent consumerism isn’t the reality of the moment.  Negative real earnings growth in May appears in harmony with the  middling consumer spending data in April/May and the conspicuous rise in revolving credit.     

 

DOUBLE, DOUBLE, TOIL & TROUBLE:  MAY INFLATION - Real Earnings

 

 

Christian B. Drake

@HedgeyeUSA

 

    

 


Cartoon of the Day: Inflation Accelerating

Takeaway: The latest CPI number confirms what we've been saying about inflation accelerating.

Cartoon of the Day: Inflation Accelerating - Inflation cartoons 06.17.2014

 

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Oil and Inflation: BRENT and WTI Reach Nine-Month Highs

The quantitative set-up for Brent Crude is in what we call a Bullish Formation (i.e. bullish on all 3 of our core risk management durations, TRADE, TREND, and TAIL).

 

Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - BRENT Levels

 

Brent Crude increased +4.4% on ICE last week to its highest level since September and now sits at +1.8% YTD after hovering unchanged for most of the year. WTI also touched 9-month highs on NYMEX on Friday, closing at +4.1% on the week (+8.6% YTD). Market sentiment, as measured by net positions in all actively traded futures and options contracts, suggests the market is leaning 4.7% longer than its 6-month average. Volume in Brent has spiked and front-month implied volatility has more than doubled to 18% from the lowest levels since 1988 on June 3rd (7.2%). 

 

Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - Friday Brent Volume

 

Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - Brent Implied Vol

 

Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - CFTC Net Contracts NYM Crude

 

Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - USD 1 week correlations

 

The CRB sits at +10.5% YTD with 16 out of 19 commodities in green territory. We reiterated our consumer slowing call yesterday in the chart-of-the-day by showing a snapshot of just how sensitive the average American is to food and housing prices: 

 

Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - PCE Expenditure Survey Visual

 

Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - Median Consumer

 

Hedgeye’s inflation call has not been to ignore the potential price impact of unexpected weather and geopolitical tension in commodity markets year-to-date. Periods of relative calmness followed by bouts of heightened volatility have historically been commonplace. The commodity inflation that perpetuates our #consumerslowing theme remains a self-reinforcing headwind on the consumer. With a final Q1 GDP revision that could be as low as -2% on the 25th coupled with a CPI reading this morning that doubled-up expectations (+0.2% vs. +0.4% estimated), an easier than expected policy response tomorrow from Janet Yellen is probable.

Market participants choose to hold commodities for different reasons. For example, our view on Gold’s interaction with policy has been well documented. We added Gold (ETF: GLD) to Hedgeye’s investing ideas on May 23rd and remain comfortable on the long-side:

 

https://app.hedgeye.com/feed_items/35712-stock-report-spdr-gold-trust-gld?page=2&with_category=32-investing-ideas

 

To clarify our process, we do not view the choice to hold GOLD or something like a COFFEE futures contract to hedge the heightened expectation of future dollar devaluation as interchangeable. With regard to the push-back we have received on highlighting weather-driven, overextended softs and agricultural commodities as a driver in our inflation call...

 

We have not made the argument that the entire complex’s negative correlation with the dollar is purely a growth and policy relationship. However, a spike in the cost of the goods and services that people consume alongside a flat dollar perpetuated by wealth-destroying monetarism burdens the consumer on the margins. This squeeze results in slower-than-expected consumption growth. We highlight the risk in this environment by alluding to sector variances and the increasingly negative correlations between the U.S. dollar and the commodity complex as a whole as this shift takes place.

Therefore, ignoring all arguments for why commodity prices are at artificially-high levels (i.e. weather, geopolitics, etc.), the reality is that they ARE in fact much higher from three months ago:

 

Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - CRB Dashboard

 

It will always be difficult to predict the next volatility-producing event in the space, but consequential responses to sharp changes in supply and demand are almost certain to follow. Unfortunately monetary policy has made the average consumer increasingly sensitive to commodity and asset price inflation as margins become thinner on a micro level. Almost 50% of the average American’s after-tax income is spent on food, housing, and utilities. 

 

--- 

 

Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - nat gas brent wti ytd

 

Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - brent futures curve

 

Proven crude oil reserves seem plentiful with North America’s newly utilized capacity. Brent has hovered in negative territory for most of the year with the crack spread near all-time highs despite geopolitical tension and a surge in the commodity complex. The forward curve suggests this downward trend will continue:

 

Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - nat gas brent wti ytd

 

However, a number of factors suggest that today’s geopolitical dynamic is capable of instilling fear of short-term supply disruptions:

1)      Chinese reserve-build policy and forceful effort to obtain production capacity   abroad (East and South China Seas)

2)      Political Unrest in OPEC’s second largest producing country

3)      Supply restraints imposed on Ukraine   

On Friday June 6th we hosted guest speaker, Professor Charles Hill to highlight some of the axioms of these three points of concern:

 

https://app.hedgeye.com/feed_items/36042-foreign-policy-briefing-professor-charles-hill?page=2&with_category=3-macro

 

The EIA estimates that southern Iraq holds about 75% of the country’s proven reserves. Iraq shipped 3.3MM barrels/day last month on average and it ranks second in oil exports among OPEC countries behind Saudi Arabia. All of May’s exports were shipped out of southern ports. ISIL militants were successful in seizing the Kirkuk-Ceyhan pipeline, halting repairs, and taking Iraq’s second-biggest city, Mosul, but oil has ceased had flowing through this Mediterranean port since March 2nd. Nevertheless ISIL has successfully halted stopped the repairing of this pipeline which is capable of exporting 310K barrels/day. Abdalla El-Badri, Secretary General of OPEC, said yesterday in front of the World Petroleum Congress that Iraq will maintain its production limit of 300MM barrels/day for now. Iraq successfully shipped 5.43M barrels of oil from Basra in Southern Iraq on Friday and supply disruptions have not yet materialized.     

 

Ben Ryan

Analyst

 

 

 

 

 


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ISLE FQ4 2014 CONF CALL NOTES

Trending along the bottom, not worse but not significantly better...but that's a directional improvement.  

 

 

CONF CALL

 

Prepared Comments

  • Balancing act - operating efficiency while improving guest experience.
  • Top line remains challenged
  • Focused on operational efficiencies
  • Change in culture - challenges of regional gaming...
  • Creating value for customers and stakeholders
  • Margins: 4Q margins up 90 bps

 

Balance Sheet:

Corporate Line of Credit $64m outstanding

Leverage 6.2x for covenant purposes

Retired $90m of debt, leverage down 0.25x

Capacity $184 million

 

2015 Guidance

D&A:  $80-$82 million

Int Exp: $83-$85 million

Maintenance capex $47-50 million

 

 

Q & A

  • New Golden Nugget in Lake Charles - Formulated battle plan for marketing, staffing, etc.
  • Blackhawk and Monarch expansion - expect Monarch to create more foot traffic for pod 1.  Ameristar promoting/marketing new car give away, challenge to market share battle. 
  • ISLE formal plan to go land based in Bettendorf - what is incremental capex and how to fund it? Going through application process with City, still finalizing scope of project. Could fund with capacity on revolver. 
  • Additional development plans at Pompano?  Looking at Pompano, a lot of options, but until better understanding of how Florida may develop for gaming simply wait.
  • Pompano results driven by higher slot play and higher F&B. Changes to slot reconfiguration to slot floor, especially high limit.  Big focus on customer service
  • What is meant by new reality in regional gaming?  Continuous top line pressure because traditional customer is under pressure and consumer spending is not rebounding.
  • Pennsylvania Control Board having trouble reaching consensus regarding 2nd Philadelphia gaming license. 
  • Leverage target:  5x or less within a couple of years...
  • Fan Club - revenue benefits, especially for Tier 1 customers?  Fan Club 2.0 launched end of January, still have 11 properties where yet to be rolled out. 
  • Cost savings now $3 million in the quarter, so $12 million annualized vs. $10 million annual goal.  Hit the big opportunities, now in the weeds looking for next phase.  Next round will be smaller saves.
  • Web-site:  new Pompano site live today, rest of portfolio next month. 
  • May improvement - weather, pent up demand?  Delta between where were in January, February, March was different than recent.  But May did not see a huge swing in trends to the upside (but not eroding further). 
  • June any changes?  Things haven't change for quite a while for the industry.
  • Lake Charles - Sasol plans - where will property be located?  Core market should increase visitation and local employment.
  • Gaming mix - slot/table ratio, any opportunity to change/improve?  Slots still 90%+ on GGR basis.  Still seeing weakness on slot play because the <$100 theoretical customer just not playing as much. 
  • CO December ballot initiative - still polling, testing. Location needs to be determined first, then quantify negative impact/cannibalization to Blackhawk. 
  • Pennsylvania: spent $60 million but earning $4 million vs. prior expectation of closer to $8-9 million.  Operating under restrictive daily/annual access plan, customers have other options without access fee as well as new competition.  Seeking legislative/financial relief.  Surprised how resistant customers were/are to paying daily/annual access fee despite knowing ISLE would have to charge customers to visit.
  • Asset sales - interest in selling one-off or portfolio to deliver?  Always a market...when it make sense ISLE will divest of assets near end of life or mature/declining markets.  
  • Interact with Goldstein family?  Fully involved and 3 members sit on the Board of Directors.

CONSTRUCTION ACTIVITY REMAINS WEAK AS SF STARTS TICK DOWN -6% M/M

Takeaway: May's headline starts/permits print looks soft, and upon closer inspection...is soft.

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.

 

CONSTRUCTION ACTIVITY REMAINS WEAK AS SF STARTS TICK DOWN -6% M/M - Compendium

 

Today's Focus: May Housing Starts & Permits

The Census Bureau released its monthly Housing Starts & Permits data for May this morning. The big takeaway is this: No Growth.

 

Summarily, activity was weak across the board as both SF and MF starts declined, permits went sub-1MM, and single family starts and permits re-coupled at the low 600K level.  

 

The lone source of relative strength was the sequential rise (+3.7% MoM) in SF permits, however, the YTD trend in permits continues to suggest softish forward starts figures.  

 

  • TOTAL STARTS = -6.5% MoM & decelerating to +9% YoY from +26% prior
    • Single Family:  Down -5.9% MoM (-39K absolute)
    • Multi-family:  Down -7.6% MoM (-31K absolute)  
  • TOTAL PERMITS:  -6.4% MOM…with April revised lower to 1059K from 1080K
    • Single Family: Up +22K sequentially to +619K (still negative -1% on a YoY)
    • Multi-family: Down a big -90K MoM to 372K from 462K prior (-19.4% MoM)

 

While total starts and permits bounced sharply in April they were down in May. More importantly, however, the Single family component showed little-to-no signs of life in April and was down again m/m in May (SF starts down -5.9% m/m). Yesterday’s sequentially improved NAHB HMI print of 49 seems at odds with today's continuation of the soft single family data. 

 

Three factors are principally responsible for the ongoing weak 1H14 performance for housing. First, QM rules that took effect on January 10 of this year are having a suppressing effect on credit availability. Second, institutional investor demand for properties is waning sharply. Third, affordability dynamics have swung sharply; whereas 12-18 months ago there was a strong asymmetry favoring homeownership, today renting vs owning are close to a toss-up.

 

CONSTRUCTION ACTIVITY REMAINS WEAK AS SF STARTS TICK DOWN -6% M/M - Single Family Starts   Permits TTM

 

CONSTRUCTION ACTIVITY REMAINS WEAK AS SF STARTS TICK DOWN -6% M/M - Single Family Starts   Permits LT

 

CONSTRUCTION ACTIVITY REMAINS WEAK AS SF STARTS TICK DOWN -6% M/M - Multi Family Starts   Permits TTM

 

CONSTRUCTION ACTIVITY REMAINS WEAK AS SF STARTS TICK DOWN -6% M/M - Multi Family Starts   Permits LT

 

CONSTRUCTION ACTIVITY REMAINS WEAK AS SF STARTS TICK DOWN -6% M/M - Total Starts TTM

 

CONSTRUCTION ACTIVITY REMAINS WEAK AS SF STARTS TICK DOWN -6% M/M - Total Starts LT

 

About Housing Starts & Permits:

The US Census Bureau records the number of new housing units that have obtained permits for construction and those that have begun construction. This data includes new buildings intended primarily as residential units. The US Census Bureau defines a start as, “Start of construction occurs when excavation begins for the footings or foundation of a building.” 

 

 

Joshua Steiner, CFA

 

Christian B. Drake



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