Takeaway: CPI accelerated in Dec..kinda, Initial Claims improved sequentially..sort of, and Consumer Confidence worsened while Bus Confidence improved
There are always a host of ways to spin the Macro #Storytelling and this week’s data offers an illustrative case study.
Consider the Retail Sales numbers earlier this week:
Headline Retail Sales growth decelerated on a MoM basis in December, but was flat on a YoY and accelerated on a 2Y. Further, the Control Group (which feeds into GDP) accelerated on a MoM, YoY and 2Y, but the complexion of that strength from an industry level perspective wasn’t particularly inspiring and middling wage growth is unlikely to support equivalent gains going forward. So, good on balance, but not the stuff incremental, levered allocations are made of.
From a TREND perspective, the preponderance of fundamental data remains favorable. The labor market continues to improve, credit growth is accelerating, capacity utilization and productivity are up alongside strength in the manufacturing base, confidence is rising and the bipartisan accord on the federal budget is consumption friendly on the margin.
On the flip side, capex spending and wage growth have yet to really accelerate and housing market activity is set to slow into 1H14 with home price growth decelerating from the low-teens to the mid-single digits over the next few quarters (our expectation).
The Economic Indicator table below provides some summary context for the latest macro data with respect to Trend averages.
STRATEGY: This weeks data has been consistent with our current view on the direction of sequential growth domestically and serves as a solid microcosm for the broader macro data. Reported growth isn’t really accelerating sequentially, but its not getting materially worse either and, from a GDP accounting perspective, we’ll go from ‘very good’ to just ‘good’ in 4Q.
Certainly, the currently prevailing sentiment and price/growth dynamics make it a tougher call here in 1Q14 than in 1Q of last year when our macro models were explicitly signaling a positive inflection in growth while strategists and economists were taking down estimates alongside a 0% 4Q12 GDP print.
But with decent macro fundamentals, positive fund flow support, favorable seasonality through 1Q14 and the lack of a discrete negative catalyst in the immediate term, we still like U.S. equities – just not as much as we did over the TTM.
Summarily, Stocks Up, Dollar Up, Rates Up remains the price factor constellation we’d like to see trend to drive a convictional (re-) increase in our exposure to domestic, pro-growth equities.
Please see our 1Q14 Macro Investment Themes presentation for a detailed view of our current thinking on global macro asset allocation >> 1Q14 Macro Investment Themes
INITIAL JOBLESS CLAIMS: Steady as the Distortions Ebb
Successive distortions (technology upgrades, Sandy comps, calendar/holiday shifts) in the initial claims series over the last two months of 2013 made garnering a clean read on the direction of the domestic labor market increasingly difficult.
Despite the volatility, we’ve held that the positive improvement that characterized most of 2013 has largely persisted as divergences from trend, stemming from the aforementioned distortions, have repeatedly been followed by a subsequent re-convergence to the high-single digit, Trend rate of improvement.
While year-end/holiday seasonality will persist in the data for a couple more weeks, the last two weeks of relatively clean data are signaling a return to trend with both the 2-wk and 4-wk rolling averages in YoY non-seasonally adjusted claims reflecting a ~8.5% rate of year-over-year improvement.
We continue to expect ongoing improvement in the reported labor market data as seasonality builds as a tailwind into March before again reversing to a tailwind over the March to August period.
CPI INFLATION: (STILL) WATCHING THE $USD
Headline CPI accelerated on both a MoM and YoY basis with the month-over-month increase driven primarily by the jump in energy prices. Core Inflation decelerated 10bps MoM and was flat at +1.7% YoY while price inflation for services decelerated modestly on both a YoY and 2Y.
As we highlighted in our 1Q14 Macro themes call last week, the dollar has driven commodity inflation over the last 10 years and headline CPI follows the slope of food and energy inflation.
With the dollar currently in no man’s land from a quantitative perspective - below TREND resistance ( 81.12) and above TAIL support (80.72) - a breakdown or breakout for the dollar will be critical input in determining how we manage our asset/geographical exposures from here.
CONFIDENCE: NFIB small business confidence improved in December making unanimous the post-government shutdown resurgence observed across the primary survey’s to close the year (see December data in Table Below).
Meanwhile, Bloomberg’s weekly read on consumer comfort deteriorated sequentially in the second print for 2014. Notably, most of the weakness was concentrated in the higher income brackets while the lowest income bucket posted its best reading since June of 2008 and the penultimate bucket improved for a fifth consecutive month.
With Consumer Confidence and the USD moving in lockstep over the last year, it makes sense to continuing ball-hawking the price signal in the dollar.
Christian B. Drake
We are adding CAKE to our Best Ideas list as a high conviction SHORT.
After being the bull on CAKE for the majority of 2013, we have reversed course and turned bearish heading into the 4Q13 print and throughout 2014 for several reasons including, but not limited to:
- The secular decline of the casual dining industry
- The end of the road for CAKE’s margin story
- Growing complacency on the street
Trading at a peak multiple, we see 20-30% downside to the stock in 2014 as full-year earnings estimates and expectations are revised down.
Click here for the full report: CAKE: BEST IDEA SHORT
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Takeaway: For now at least, investors should stay SHORT, underweight, or completely out of Brazil.
- Looking to Brazil specifically, we continue to see inflationary pressures emanating throughout the economy, which is perfectly in-line with view we introduced as part of our AUG ’11 Brazil Black Book, which called for Brazilian CPI to remain persistently elevated over the long-term TAIL.
- The aforementioned sticky inflation has weighed and continues to weigh on the slope of Brazilian economic growth.
- Jumping ship, two potential catalysts we see heading into and through 2H14 that investors will become increasingly focused on are the 2014 World Cup (6/12 – 7/13) and the 2014 General Elections (OCT 5).
- The former will obviously deliver a much-needed boost to GDP (positive catalyst), but might also expose Brazil’s shoddy infrastructure, ill-preparedness to host such a large event and angry populous (riots?) to the world stage (negative catalysts). The latter might ultimately be viewed as a positive catalyst if the market starts to price in expectations for a candidate like Jose Serra emerging victorious with Pena Nieto-like promises of economic reforms.
- For now at least, investors should stay SHORT, underweight, or completely out of Brazil.
WHERE WE’VE BEEN
In a unanimous 8-0 decision yesterday afternoon, BCB hiked its benchmark SELIC Rate by another +50bps to 10.5%. This tightening measure marked the sixth consecutive meeting where BCB hiked interest rates; the SELIC rate has now been hiked +325bps from an ill-advised (but forced) record-low of 7.25% in APR ’13, making BCB the most hawkish central bank in the world over that time frame.
We were very critical of President Rousseff and Finance Minister Guido Mantega’s overt influence over Brazilian monetary policy then (dating back to JUL ’12) and that policy interference continues to haunt the Brazilian economy to this day. From the analytical rooftops, we boldly shouted “GET OUT OF BRAZIL IF YOU HAVEN’T ALREADY” in early FEB ’13 as a continuation of this thesis:
“Not much else needs to be said other than the fact that it has recently become clear to us that Brazilian policymakers refuse to address the country’s growth/inflation imbalance – which they themselves have perpetuated through currency debasement – with an adequate amount of exchange rate appreciation (we already know Dilma won’t budge on rates). As such, we no longer consider Brazilian equities or the BRL good investment opportunities on the long side with respect to the TREND duration…” (2/6/13)
Since then, both the Bovespa Index and the BRL are down roughly -16%; Bloomberg’s Brazil LC Sovereign Debt Index has declined -2.3% over that duration.
In full disclosure, we made a terrible mistake pitching Brazilian consumer exposure from early-MAY to mid-AUG of last year in an attempt to help investors find opportunities on the long side in the context of our bearish #EmergingOutflows theme; the MSCI Brazil Consumer Discretionary and Consumer Staples indices declined -17.5% and -10.7% over that time frame. Bad performance for a bad idea; we should’ve just stuck to the original script – something we have done since.
WHERE WE’RE GOING
Looking ahead, 1Y OIS rates are now trading at a +45bps premium to the benchmark SELIC rate after a +19bps DoD move, implying further hawkishness in the months ahead. Contrary to the general tone of sell-side commentary following yesterday’s hike, we think that is the appropriate view to adopt in the context of our #InflationAccelerating Q1 macro theme.
Looking to Brazil specifically, we continue to see inflationary pressures emanating throughout the economy, which is perfectly in-line with view we introduced as part of our AUG ’11 Brazil Black Book, which called for Brazilian CPI to remain persistently elevated over the long-term TAIL.
A bloated budget balance – which doesn’t include all of the accounting gimmickry Mantega pulls with BNDES – and an increasingly tight labor market remain headwinds for BCB’s inflation fight.
Cyclically speaking, CPI accelerated on both a YoY and MoM basis in DEC; the YoY reading of +5.9% YoY remains ~140bps higher than the midpoint of BCB’s +4.5% +/- 200bps target and the MoM reading of +0.92% was the fastest sequential rate since APR ’03. Increasingly easy comps and a currency/commodity base effect (refer to slides 7-9 of our Q1 macro themes for more details) support maintaining a hawkish outlook for Brazilian CPI over the intermediate term.
In short, sticky inflation has weighed and continues to weigh on the slope of Brazilian economic growth.
WHAT MIGHT HAPPEN
Lastly, two potential catalysts we see heading into and through 2H14 that investors will become increasingly focused on are the 2014 World Cup (6/12 – 7/13) and the 2014 General Elections (OCT 5).
The former will obviously deliver a much-needed boost to GDP (positive catalyst), but might also expose Brazil’s shoddy infrastructure, ill-preparedness to host such a large event and angry populous (riots?) to the world stage (negative catalysts). The latter might ultimately be viewed as a positive catalyst if the market starts to price in expectations for a candidate like Jose Serra emerging victorious with Pena Nieto-like promises of economic reforms.
For now at least, stay SHORT, underweight, or completely out of Brazil. If you have on existing SHORT positions, don’t add to positions unless you see lower-lows in the Bovespa Index (cycle trough: 45,044 on 7/3) and higher-highs in the USD/BRL cross (cycle peak: 2.4543 on 8/21/13).
Associate: Macro Team
This unlocked Daily Trading Ranges note was originally published January 16, 2014 at 07:47. For more information on this Hedgeye product and how you can become a subscriber click here.
Takeaway: Does a negative view on WFM heed caution on SBUX?
This note was originally published January 10, 2014 at 14:21 in Restaurants
It was not too long ago that the success of Starbucks and Whole Foods Market was linked to the “higher end” consumer, particularly when compared to their counterparts McDonald’s and Walmart. Accordingly, both SBUX and WFM have been strong performers, as the “higher end consumer” has proven to be much more resilient in a stagnant economy than others.
With another downgrade today, the street has turned decidedly negative on WFM. We offer no opinion on the stock at this time, but a negative outlook could suggest that “higher end” consumers are starting to feel the pinch. If this plays out and WFM sees same-store sales growth begin to slow, we have reason to believe the same could happen at SBUX.
The tepid jobs number reported earlier today is also concerning and, on the margin, bearish for SBUX. We continue to believe street estimates are too high for SBUX and with 78% of analysts having a “buy” rating on the stock (versus only 50% for WFM), sentiment could be peaking. After being one of the biggest fans of SBUX over the past 5 years, we see plenty of reason to be cautious on the stock in the early stages of 2014.
Editor's note: This is an excerpt from a recent report issued by Hedgeye Restaurants Analyst Howard Penney. He added SBUX to Investing Ideas on 7/18/13 and held it to 12/18/13 netting subscribers over 12% versus a 6% return for the S&P 500. Penney thinks Starbucks remains a great company with a strong and feasible long-term strategy. That said, he expects SBUX to adjust accordingly to slower revenue growth in the early innings of 2014.
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