Takeaway: Live cattle and lean hog prices are up well into the double-digits year-to-date. But there's no inflation right?
Takeaway: The Labor market data remained solid in June, but keep optimism anchored as we move into 3Q.
Solid report overall as NFP goes >200K for five months in a row for 1st time since Jan 2000 (although that wasn’t a particularly positive harbinger), employment gains were broad based, the Unemployment rate flirts with a 5-handle, and the U-6 and total LT unemployed continued to decline.
On the other side, total part-time and involuntary part-time both increased significantly while the slope in private wage growth remained negative – with real earnings growth likely to be negative for a second month in June.
- NFP: Solid Report with NFP = +288, Private = +262, 2Mo Revision = +29K
- Household Survey: Net gain of +407K in June with Employment growth accelerating across all age buckets except 20-24 YOA
- Unemployment Rate: Unemployment Rate dropped to 6.1% from 6.3% prior alongside the +407K increase in total Employed and a -325K decrease in Total Unemployed
- U6/LT Unemployed: U-6 Unemployment dropped to 12.1% from 12.2% while the ranks of the long-term unemployed dropped -293K MoM on an absolute and -1.8% to 32.8% as a % of total
- State & Local Government Employment: increased for a 10th consecutive month in June while the rate of job loss at the Federal level improved 10bps sequentially to -2.0% YoY. Aggregate government salary and wage growth has finally begun to contribute positively to aggregate disposable income growth in recent months
- Initial Claims: The employment data has followed the steady improvement in the initial jobless claims data in recent months and this mornings update to claims was again positive with both headline rolling claims and the YoY rate of improvement in NSA claims holding near the best levels YTD.
THE MIDDLING & (STILL) MOROSE:
- Hours Worked: Ave weekly hours worked for private employees continued to track sideways at 34.5
- U-6/U-3 Spread: The spread, which sits as part of the FOMCs dashboard of “slack” indicators, ticked up sequentially with the magnitude of decline in the U-3 rate outpacing that of the U-6.
- Ticking Clock: At 61 months as of June, the current expansion continues to surpass the mean duration of expansions (59 months) over the last century. We continue to think this reality weighs into the feds policy calculus – they need to get out of QE if only to give themselves the opportunity to (credibly) get back in if need be.
WAGE GROWTH: Average hourly earnings in the Private sector grew 2.0% YoY, down from +2.1% in May and continuing the stagnant 2.0% +/- 20bps that has prevailed over the last two years. Average hourly earnings for Production and Nonsupervisory employees also decelerated -10bps to +2.29% YoY.
With nominal earnings growth static, real earnings growth likely to be negative for a 2nd month in June with the official release, and the spread between spending and earnings growth having re-expanded the last couple quarters, we continue to think the upside to consumption growth remains constrained in the immediate/intermediate term – particularly if inflation continues to march northward and the savings rate remains at current levels.
WAGE RAGE: Wage Growth Refuses To Accelerate, Does it Matter To The Policy Outlook?
Conventionally, wages are viewed as a lagging indicator, with wage inflationary pressure building as the labor supply declines and the economy moves towards constrained capacity. There’s a view that the FOMC won’t move to raise rates so long as real wage growth is flat or declining, which it is currently.
It’s somewhat difficult to make a particularly cogent empirical argument in either direction, however. The longest historical dataset for (real) wages is that for Production & NonSupervisory Employees which goes back to 1964 (the BLS series for total private employment reported inside the NFP release only dates back to 2006).
The problem with using this series stems from the well documented, secular plight of middle and low income earners where flat/negative real wage growth has characterized the last four decades.
In fact, the current post-recessionary trend in real wage growth compares favorably with those observed over the last half century.
We’d agree that the collective policy bias of the current FOMC body argues for dovish conservatism in the face of negative real wage growth alongside sub-target, or moderately above target, inflation levels.
THE WORST EVER...& EVER IS STILL A PRETTY LONG TIME
The painstakingly slow progression of growth out of the Great Recession has been exhaustingly documented and the duo of negative post-recession GDP prints observed in 1Q13 and 1Q11 sit as the two worst of any post-war recession with a recovery greater than 61 months (the duration of the current expansion).
The five month run of positive labor market data has been encouraging - though not fully corroborated by broad macro strength post the immediate weather-distortion bounce.
We’d advise keeping growth optimism anchored over the intermediate as growth compares get harder and inflation comps easier in 3Q and the conflation of rising inflation, static nominal wage growth, and an ongoing deceleration in housing should drive a sequential deceleration in domestic economic growth.
The reality of the intermediate/LT is that household balance sheets remain over levered, demographics are going the wrong way, and policy driven increases in inequality will continue to feed the growing phantasm that is the U.S. middle class.
Yellen’s acute attention to the prospects for secular stagnation and hysteresis isn't misplaced.
Enjoy the Holiday Weekend,
Christian B. Drake
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Takeaway: Livestock prices are heating up ... just in-time for grilling season.
This unlocked research note was originally published on June 30, 2014 at 16:39 in Macro
A sign at Chipotle in NYC notifying customers of “conventionally raised” steak has been up for two months now. Chipotle is either seeing outright supply scarcity or experiencing supply shortages at a price it’s willing to pay.
Granted this is only one location, prices have recently increased +8.3% for steak and 11.1% for guacamole at New York locations… And for “conventionally raised!” With the exception of a -3 bps correction in front-month live cattle futures during the week ending June 20th, Livestock prices closed in positive territory every week this month:
June 6th: Live Cattle: +1.7%; Lean Hogs: +1.1%
June 13th: Live Cattle: +5.3%; Lean Hogs: +1.2%
June 20th: Live Cattle: -0.3%; Lean Hogs: +10.3%
June 27th: Live Cattle: +3.2%; Lean Hogs: +2.4%
Rather than making a call on the direction of agricultural and soft commodity prices on a daily basis, we accept that the speculation of supply shortages can whip prices for a number of reasons outside our control. What we choose to dissect is the consumer and outlook for the U.S. dollar. For the first half of 2014, the consumer slowed and will continue to face similar headwinds in 2H:
- A Fed revision for 2014 full-year GDP from 3.0% to 2.1 - 2.3% at the last FOMC meeting will likely face a further downward revision after a -2.9% Final Q1 print last week
- The Fed gets more dovish with the data
- The bond market adjusts for growth expectations and the prospect for future dollar devaluation perpetuates the yield spread compression
- Commodities, which are priced in U.S. dollars, face continued pressure to the upside
Unfortunately this headline commodity inflation is not considered the kind of inflation that concerns the Federal Reserve formula. Forgive us on the repetitive call-out, but the Hedgeye Macro team felt the following article from Reuters last week was an epic interview with Yellen on the linearity of the Fed’s model.
Every FOMC meeting in the last several years precedes an abundance of financial media punditry that dissects the sequential change in the language of each statement. Although rare, we enjoy this direct commentary in the Reuters article for insight into the assumptions made by the fed machine:
"My own expectation is that, as the labor market begins to tighten, we will see wage growth pick up some to the point where ... nominal wages are rising more rapidly than inflation, so households are getting a real increase in their take home pay," she said last week, adding: "If we were to fail to see that, frankly, I would worry about downside risk to consumer spending."
Janet Yellen is, in this quote, referring to her belief in what is called “money neutrality” which is basically the idea that prices and wages move together without harm over the intermediate to long-term. In our opinion, she sounds rather nervous in her assessment of this “reality".
To further quote the Reuters reporter in this article:
“Over the last year Fed staff changed their main model for forecasting wage and price inflation to reflect evidence that companies were adjusting prices more slowly than in prior years. That implies the Fed has more time to allow wages to rise and employment to expand before having to be concerned about inflation accelerating.”
This seems like a convenient way to make room for an extension of accommodative policy as wage growth has stagnated against a flat dollar and skyrocketing cost of living…
Income earners save less and spend more with an increase in cost-of-living:
Our process points to Fed and consensus full-year growth and inflation estimates that are still too optimistic. Yellen’s comments point to the predictable FOMC policy response that we have continuously highlighted as a catalyst for further dollar devaluation. With the CRB Index up 10% in 2014, both the dollar and ten-year treasury yield remain in @Hedgeye bearish formations.
M, JCP, KSS - Internet Traffic
Takeaway: Retail numbers per ICSC and Redbook show that the last few weeks have been relatively strong. But it's interesting to see that Internet traffic has ticked down ever so slightly. This might very well be seasonal (we're looking into it), but on a relative basis, we see that JC Penney is still within striking distance of Macy's. That's good for both of them. KSS not only remains behind the pack, but it appeared to tick down before the peer group over the past three weeks. Not enough to draw a major conclusion. But enough for us to remain confident in our KSS short.
LULU - Lululemon Founder Explores Buyout
"Advisers to Lululemon Athletica Inc. founder Dennis "Chip" Wilson have been sounding out private-equity firms, including Leonard Green & Partners, about taking the yoga-gear maker private..."
Takeaway: Right in line with our thesis -- keeping in mind that a buyout is the least likely of all the outcomes we outlined on June 25 when we presented why LULU is worthy of being on our Best Ideas List as a long. We think that a strategic buyer is twice as likely as a 'Chip-led and PE-supported' buyout. But the greatest likelihood is that Wilson fails outright in his effort to control or sell the company, and he therefore defaults to selling all his stock. That's the highest return move for shareholders. See our separate LULU note from this morning for our rationale.
APP - Ousted American Apparel CEO Dov Charney Hands Over His Entire Stake To A Hedge Fund
"Dov Charney has handed over his entire stake and voting rights in the struggling retailer to Standard General LP, enabling the fund to negotiate directly with the independent directors over the company's future, two sources close to the matter said on Wednesday."
Takeaway: Charney would probably get nowhere with the Board on his own. Makes perfect sense for him to designate someone who could be more effective. Standard General has never been a holder before its recent 2Q filing. But 98% of its fund is Media General (MEG) which it bought over the past six months. The other two stocks are American Apparel, and the other staple of retail excellence that we call Radio Shack.
TGT - Leave the Guns Outside, Target Asks
"Target Corp. on Wednesday said it would "respectfully" ask customers to not bring guns into its stores, "even in communities where it is permitted by law," responding to a month-long campaign from a gun-control group."
Takeaway: This is such a hairy issue -- and one where we certainly won't take sides. But the reality is that allowing customers with gun permits to carry inside its stores clearly ruffles feathers with the soccer Mom crowd. But many -- if not most -- would shop there anyway. Unfortunately, the 4.8mm members of the NRA won't be too pleased with this decision, and might boycott Target outright. This is a tough call for Target, or any retailer for that matter.
COH - Lew Frankfort's Role at Coach Inc. Shifts to Part-time
"Lew Frankfort’s role as executive chairman of Coach Inc. is moving to part-time from full-time and his salary to $500,000 from $1.5 million."
Takeaway: Let me get this straight, the stock has lost 40% of its value in 12-months, and the company is still paying Frankfort $500k to work half as much as he has been? In the grand scheme of corporate governance issues, this is hardly egregious. But definitely seems odd.
ADS, EBAY, AMZN - Adidas lifts ban on sales via eBay, other online sites
""We have decided to extend our e-commerce guidelines to also include open market places: if our retail partners adhere to our criteria, there will be no restriction for online sales in any channel," Adidas said"
Takeaway: It's rarely a good sign when a company relaxes standards on selling through channels that it previously banned because they threatened the health of its business. It's possible, of course, that Adidas has finally devised a system to manage these accounts profitably. It's also possible that it simply needs the sales. We'll see how it's dot.com margins shape up in the coming quarters.
KR - Kroger to Buy Vitacost for $280 Million
Kroger Co., the largest U.S. supermarket chain, agreed to buy online retailer Vitacost.com Inc. (VITC) for $280 million to add a new channel for selling nutrition and healthy-living products.
FIVE - Five Below Announces Departure of Jeffrey Moore, EVP Merchandising
"Below, Inc., the leading retailer of trend-right, high-quality, extreme-value merchandise for pre-teens, teens and beyond, today announced the departure of Jeffrey Moore, EVP of Merchandising."
While an ugly report was expected, on a hold-adjusted basis, June was positive.
As we noted before, we believed June was affected by low hold. Adjusting for direct play, market hold was 2.8% vs 3.0% in June 2013. Assuming normal hold (3.0%) in both June periods, June GGR would have grown +1% YoY. While VIP volume fell almost 10%, the biggest decline since May 2009, June mass revenues continued its strong performance of 27% YoY growth – although it was slower than the growth seen from Jan-May 2014 of +37%
VIP was certainly the story in June. MPEL had a disastrous June, owning to poor VIP performance and very low hold. Galaxy was easily the best performer, despite lower VIP hold.
Here are some takeaways:
- Mass revenues grew 27%, off of a 31% comp
- Rolling Chip (RC) volume tumbled 10%, worst performance since May 2009
- VIP revenues fell 17%, its worst performance since June 2009
- Slots revenue grew 2%
- Assuming normal hold in both periods, GGR would’ve grown +1% YoY
- GGR grew 4% YoY – the slowest rate since Sept 2011
- The LVS properties held at 3.3%, higher than the 2.8% seen in June 2013
- Still, VIP revenues fell 14% and RC dropped an alarming 28%, the worst performer in the market
- One would expect high hold to negatively impact volumes but not this much
- Mass grew 25%, the slowest rate since February 2012
- GGR declined 10%
- WYNN held 2.7% on VIP vs 3.0% last June
- WYNN VIP revenues dropped 26% while RC volume fell 20%
- Thanks to easy comps, mass growth of 55% led the market. For Q2 2014, WYNN mass have grown 48%.
- GGR declined 10% for the 2nd consecutive month
- MGM held close to normal, in-line with last June
- Mass growth of 39% is relatively consistent with the YTD average growth
- VIP revenue and VIP volume fell 23% and 21%, respectively.
- Held well below normal on VIP (2.1%) compared with 3.2% last June
- MPEL had the worst GGR performance at -20%, worst performance since June 2009
- RC volume continues to be a major drag – falling double digits for the 4th consecutive month
- Mass grew 34%, in-line with recent trends
- Galaxy’s +6% GGR growth is what kept the market from tumbling further. It was the best performer despite lower hold.
- Hold was 2.8% vs 3.3% last June
- Mass grew only 17% - the slowest in the market
- Galaxy was the clear winner in the VIP race with RC volume growing 19% and VIP revenue up 2%
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