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Expert Call: Geopolitical Outlook in The Energy Space

Expert Call: Geopolitical Outlook in The Energy Space - 06.25.14 Expert Call Logo

 

We will be hosting an expert call featuring Dr. Meghan O'Sullivan, Kirkpatrick Professor of the Practice of International Affairs and Director of the Geopolitics of Energy Project at Harvard University's Kennedy School. The call will be on Friday, June 27th at 1:00pm EDT.

 

CALL OBJECTIVE

To highlight the interconnectedness and progressive implications of recent geopolitical tension in the global energy space.

 

KEY WILL TOPICS INCLUDE:

  • Regional consequences of an ISIS advance in Iraq
  • Russian energy influence and its geopolitical undercurrent 
  • High level overview on the implications for the U.S. oil and gas boom

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 923285#
  • Materials: CLICK HERE (slides will download approximately one hour prior to the start of the call)

Ping for more information.

 

 

ABOUT PROFESSOR MEGHAN O'SULLIVAN

Meghan served as special assistant to George W. Bush and National Security Advisor for Iraq and Afghanistan from 2004-2007. She has spent two years in Iraq, most recently in the fall of 2008 at the conclusion of the security agreement and strategic framework agreement between Washington and the government of Iraq. Prior to her current post, Meghan was a senior director for strategic planning and southwest Asia in the NSC as well as political advisor to the coalition provisional authority administrator and deputy director for governance in Baghdad.

 

She is currently an adjunct senior fellow at the Council on Foreign Relations, a consultant to the National Intelligence Council, and a strategic advisor to John Hess, the Chairman and CEO of Hess Corporation. She is also a foreign affairs columnist for Bloomberg View as well as a member of the Council of Foreign Relations, the Trilateral Commission, and the Aspen Strategy Group. O'Sullivan has published several books and articles on American Foreign Policy and has been awarded the Defense Department's highest honor for civilians, the Distinguished Public Service Medal. Esquire Magazine named her one of the most influential people of the century. 

 

Dr. O'Sullivan received a B.A. from Georgetown University, a Masters of Science in Economics and Doctorate in Politics from Oxford University.


Cartoon of the Day: A Real Stinker

Takeaway: The U.S. economy declined 2.9% in the first quarter. That didn’t smell good to anyone.

Cartoon of the Day: A Real Stinker - GDP skunk 6.25.2014


Restaurant Value Spread In Unfamiliar Territory

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:

  1. Bullish data point for restaurants: consumers are more enticed to eat out
  2. Bearish data point for restaurants: consumers have less discretionary income to spend on eating out (which is often viewed as a luxury)

 

Restaurant Value Spread In Unfamiliar Territory - chart1

 

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.

 

Restaurant Value Spread In Unfamiliar Territory - chart8

 

Restaurant Value Spread In Unfamiliar Territory - chart9

 

 

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%

 

Restaurant Value Spread In Unfamiliar Territory - chart2

 

Restaurant Value Spread In Unfamiliar Territory - chart3

 

 

The spread between food at home CPI and core CPI widened 90 bps sequentially to +0.8%.

 

Restaurant Value Spread In Unfamiliar Territory - 4

 

 

The spread between food away from home CPI and core CPI narrowed 30 bps sequentially to +0.1%.

 

Restaurant Value Spread In Unfamiliar Territory - 5

 

 

NSA Full-Service CPI accelerated 10 bps sequentially to 2.2%.

NSA Limited Service CPI decelerated 20 bps sequentially to 2.2%.

 

Restaurant Value Spread In Unfamiliar Territory - 6

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


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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.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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