Takeaway: The U.S. economy declined 2.9% in the first quarter. That didn’t smell good to anyone.
The BLS released CPI data for the month of May last Tuesday, June 17th, 2014 and we thought it’d be interesting to look at the impact it could have on the restaurant industry. Most notably, the Restaurant Value Spread turned positive for the first time in 25 months as food at home inflation outpaced food away from home inflation in May; as such, the spread widened by 120 bps sequentially to +70 bps.
This can be interpreted two different ways:
- Bullish data point for restaurants: consumers are more enticed to eat out
- Bearish data point for restaurants: consumers have less discretionary income to spend on eating out (which is often viewed as a luxury)
While we aren’t here to solve this debate, we’d be remiss not to highlight these two hotly contested beliefs. We’d also be remiss, however, to ignore the recent trends we’ve seen in grocery and food service sales. The data would suggest a favorable environment for restaurants is developing. LTM grocery sales have been fairly flat to-date in 2014, while LTM food service sales have shown a slight acceleration. Importantly, food at home inflation has accelerated sequentially in each of the last four months.
The charts below highlight important sequential inflation trends:
- Core CPI accelerated 10 bps sequentially to +1.9%
- Food at home CPI accelerated 100 bps sequentially to +2.7%
- Food away from home CPI decelerated 20 bps sequentially to 2.0%
The spread between food at home CPI and core CPI widened 90 bps sequentially to +0.8%.
The spread between food away from home CPI and core CPI narrowed 30 bps sequentially to +0.1%.
NSA Full-Service CPI accelerated 10 bps sequentially to 2.2%.
NSA Limited Service CPI decelerated 20 bps sequentially to 2.2%.
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…
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.
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.
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:
Both the Fed and the Street have been cutting their growth forecasts of late and we expect them to keep cutting:
Tough comps paint a dour outlook for 2H14:
After pushing back hard in 1Q, the investment community is finally starting to catch up to our hawkish inflation outlook:
Easy comps are supportive of this view:
As is annualized currency weakness – which should only accelerate if the Fed continues to get easier, at the margins:
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.
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.
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)
Keep an eye on those doves!
Associate: Macro Team
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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.
If you're just waking up and wondering what you've missed this morning, here it is:
"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:
Bottom line according to McCullough: Inflation slows real consumption growth.
Takeaway: We are hosting the update call today at 1pm EST. Dial-in information is below
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.
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