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US GROWTH: WHEN DOVES CRY

Takeaway: Our GDP estimates are coming down and consensus macro remains out to lunch with theirs. Stick w/ our YTD game plan RE: investment strategy.

UNLEASH YOUR INNER DOVE

The other day at lunch, I was describing the recent progression of my wardrobe to Hedgeye Health Care Sector Head Tom Tobin. In hearing this, Tom went on to compare my latest fashion exploits to that of Prince in the 80s. Having been born in the 80s, I don’t remember much, if anything, of Prince or his music. So I did what most fashion-forward millennials do when they don’t know something – I Googled it!

 

Needless to say, his music is legendary. “When Doves Cry” is a personal fav…

 

US GROWTH: WHEN DOVES CRY - Prince

Source: Google Image

 

As it relates to actual macroeconomic analysis, the doves are definitely starting to cry at the Fed. In a fantastic article today, Reuters journalist Howard Schneider walks though the current debate being held amongst members of the Federal Reserve and its regional banks. Specifically, the Yellen-led institution is openly debating pushing out their forecasts for labor market tightness, citing both new and old analyses in the process.

 

The key takeaway is that the FOMC is setting up to surprise both buy-side and sell-side consensus to the downside with respect to tightening monetary policy. A less-tight labor market in the interim means the Fed can remain “accommodative” for longer – which is exactly what is being priced into the interest rate markets. Expectations for a 2015 Fed Funds Rate hike are down -27% on average, across the curve, from when we correctly introduced this bold prediction back in JAN.

 

US GROWTH: WHEN DOVES CRY - Fed Funds Implied Rate

 

With respect to 2014, we still think the Fed will continue to surprise investors by incrementally easing as the year progresses. An example of this is last week’s rhetorical easing via extending rate hike guidance. A cessation of tapering at the SEP 16-17 FOMC meeting is not out of the question (then the Fed will likely have to cut their 2014 growth forecasts – again).

 

If there’s one thing we’ve learned in the post-crisis era, it’s that the Fed – which continues to use outdated, linear forecasting models – is always wrong on growth.

 

US GROWTH: WHEN DOVES CRY - FOMC Growth Forecasts

 

Preferring to opt for differential calculus and Bayesian modeling techniques, we remain the “bears” on 2014 growth and the “bulls” on 2014 inflation and both the Fed and the investment community will have to continue to chase our growth estimates lower. In doing so, we think the Fed’s marginal dovishness is likely to weigh on the USD and propel our inflation estimates higher – hurting household consumption (i.e. ~70% of GDP) in the process.

 

REFRESHING THE MODEL

With this morning’s bomb of a 1Q GDP print, our predictive tracking algorithm is now -41% below both the Street and the Fed for 2014 GDP growth; recall that we were at +2.2% to start the year:

 

US GROWTH: WHEN DOVES CRY - UNITED STATES

 

US GROWTH: WHEN DOVES CRY - GDP Summary 062514

 

US GROWTH: WHEN DOVES CRY - Consensus Macro Estimates

 

Both the Fed and the Street have been cutting their growth forecasts of late and we expect them to keep cutting:

 

US GROWTH: WHEN DOVES CRY - GROWTH

 

Tough comps paint a dour outlook for 2H14:

 

US GROWTH: WHEN DOVES CRY - GDP COMPS

 

After pushing back hard in 1Q, the investment community is finally starting to catch up to our hawkish inflation outlook:

 

US GROWTH: WHEN DOVES CRY - INFLATION

 

Easy comps are supportive of this view:

 

US GROWTH: WHEN DOVES CRY - CPI COMPS

 

As is annualized currency weakness – which should only accelerate if the Fed continues to get easier, at the margins:

 

US GROWTH: WHEN DOVES CRY - FX

 

BUT, BUT WASN’T IT ALL JUST THE WEATHER?

Notwithstanding the fact that both CapEx and employment growth are late-cycle in nature (we are 60 months into an economic expansion – the average length in the post-war era) AND the fact that a sustained boom in either has never occurred without concomitant structural appreciation of the dollar and higher interest rates, we do cede the view that the weather played a material role in crushing 1Q GDP.

 

US GROWTH: WHEN DOVES CRY - CapEx

 

That said, however, we think the bounce “off the lows” in domestic high-frequency economic data is both long in the tooth and poised to roll over starting in JUL.

 

US GROWTH: WHEN DOVES CRY - Eco Table 062514

 

US GROWTH: WHEN DOVES CRY - Bloomberg ECO Surprise Index

 

CONCLUSION

All told, we reiterate our still-active 2014 macro themes and their associated investment implications (i.e. LONG slow-growth yield-chasing, late-cycle industrial pricing power and M&A; SHORT early-cycle sectors like the consumer, housing and financials – especially regional banks):

 

  • #InflationAccelerating (1Q14)
  • #GrowthDivergences (1Q14)
  • #ConsumerSlowing (2Q14)
  • #StructuralInflation (2Q14)
  • #HousingSlowing (2Q14)

 

We will host our 3Q14 macro themes call on JUL 11 at 11am EDT; email if you need the details.

 

Keep an eye on those doves!

 

DD

 

Darius Dale

Associate: Macro Team


What's Happening in Macau and What It Means for Key Gaming Stocks

 

Todd Jordan, Managing Director of Hedgeye's Gaming, Lodging and Leisure team, talks with fellow analyst David Benz about business conditions in Macau and the impact on these five stocks.


FLASHBACK: @KeithMcCullough Issued Warning Before Today's -2.9% GDP Stink Bomb

If you're just waking up and wondering what you've missed this morning, here it is:

 

FLASHBACK: @KeithMcCullough Issued Warning Before Today's -2.9% GDP Stink Bomb  - tums

 

"It is mathematically impossible, at this point, to get to anything that remotely resembles a 3-4% U.S. GDP economy," Hedgeye CEO Keith McCullough remarked in this morning macro conference call.  "Down -2.9%? That is just nasty. And they're making up the inflation number! If they used the real inflation number, I have to go through the math here, GDP might have been like minus 4% or more."

 

Our macro team has been warning on growth all year long. One example:


FLASHBACK: @KeithMcCullough Issued Warning Before Today's -2.9% GDP Stink Bomb  - boom1

Bottom line according to McCullough: Inflation slows real consumption growth.


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

YELP: Short Best Idea Update Call (Today)

Takeaway: We are hosting the update call today at 1pm EST. Dial-in information is below

YELP: Short Best Idea Update Call (Today) - HE IM YELP UPDATE

 

Hedgeye's Internet & Media Team, led by Sector Head Hesham Shaaban, is hosting an update call to their SHORT Yelp (YELP) Best Idea.  The update will provide a review of our thesis with incremental data and analysis; notes from our call with YELP management, and our rebuttal to the push-back on our thesis. 


The conference call will be held today at 1:00pm EDT detailing our thesis and fielding questions at the conclusion of the call.

 

KEY TOPICS WILL INCLUDE:  

  • Short thesis with incremental data & analysis
  • Notes from our call with management
  • Rebuttal to the push-back on our thesis
  • Why YELP isn't a viable acquisition target

 

PARTICIPANT DIALING INSTRUCTIONS

Toll Free Number:

Direct Dial Number:

Conference Code: 245132#

Materials: CLICK HERE

 

 

INTERNET & MEDIA SECTOR 

Hesham Shaaban oversees the Internet & Media Sector for Hedgeye Risk Management, which was recently launched in 2014. Before joining Hedgeye, Hesham worked as a private equity analyst at Viscogliosi Brothers following equity research roles at Cerulean Capital and Maxim Group. Hesham received his CFA charter in 2008, and graduated from Northeastern University in 2004.   


Join for E-Cig Speaker Series - Are Vaporizers Taking Share from Big Tobacco's E-Cigs?

We look forward to continuing our Speaker Series on electronic cigarettes with Jan Andries Verleur, CEO of VMR Products, on Wednesday July 2nd at 2:00pm EDT. VMR is a leading private online e-cigarette and vaporizer manufacturer with such brands as V2 Cigs and Vapor Couture.

 

Is the consumer switching to an alternative vaping product? Mr. Verleur will offer his latest insights and expertise to Hedgeye's ongoing research on the electronic cigarette category.

 

 

KEY CALL TOPICS WILL INCLUDE

  • Industry developments and trends
  • How the FDA's proposed regulations stands to impact the industry
  • VMR's product offering versus Big Tobacco's
  • What does future technology look like

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 685512#
  • Materials: CLICK HERE (slides will download approximately one hour prior to the start of the call)

                                                                                                                                                     

ABOUT JAN ANDRIES VERLEUR, CEO & CO-FOUNDER OF VMR PRODUCTS

Verleur co-founded VMR with Dan Recio in 2009. During 2012/13 Verleur served as President of the Smoke Free Alternative Trade Association (SFATA), and is currently serving as its treasurer. Prior to VMR, Verleur spent the past fifteen years running business-to-consumer (B2C) companies across the Americas, Europe, and Europe that deliver products and services over the internet. He majored in marketing at Penn State University. 

  

ABOUT VMR

Incorporated in April 2010 and headquartered in Miami, VMR is a leading online retailer of electronic cigarette products, with 3,000 online orders daily across 30 countries. In the U.S. VMR products can be found across gas and convenience stations and food channels, including Walmart. The company has 225 employees worldwide.


Keith's Macro Notebook Special Edition: Why He Saw the Big GDP Miss Coming


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