Summary: We’ve been vocal in our expectation for a deceleration in the slope of domestic growth over the last couple months and while this morning’s downward revision to 4Q13 wasn’t particularly surprising, it does offer some positive confirmation to that view.
With the dollar breaking down, #InflationAccelerating, earnings growth still sub-trend, wealth effect (equities/housing) momentum decelerating and little incremental upside for consumption growth via a reduction in savings, we continue to think the growth decelerating trend extends through 1H14.
GIP MODEL REFRESH: The net impact to our GIP (Growth/Inflation/Policy) model from this morning’s data is another incremental shift in trajectory towards quadrant #3 – Slowing Growth and Rising Inflation.
To the extent that the market continues to discount slowing growth and subsequent, incremental easing in policy – which ironically/unfortunately only perpetuates the move into Quad #3 – we think slow growth exposure (gold/bonds/commodities/utilities) continues to outperform pro-growth leverage.
GDP DATA SUMMARY: Below we highlight the notables in this mornings, 1st revision to the 4Q13 GDP estimate.
Real GDP: revised lower by 80bps to 2.4% from 3.2%. Decelerating 170bps QoQ to 2.4%.
Nominal GDP: decelerating 200bps QoQ from +6% in 3Q13 to +4% in 4Q14.
Inflation: Inflation estimates marked higher with the GDP Price index and Core PCE measures revised up 30bps and 20bps, respectively.
C+I+G+E Revision: Investment revised up small, everything else revised lower.
C: Consumption saw the largest downward revision from a contribution perspective at -.53% with QoQ growth revised from +3.3% to +2.6%. Durable/NonDurables/Services were all revised lower but Durables (as the latest PCE data has reflected) saw the largest decline.
Whether the emergent deceleration in durables, and luxury and higher-end durables particularly, represents a pull-back in spending across the top income quintiles as equity and home value gains slow remains to be seen. We’ll get the updated PCE detail data on Monday.
I: Investment: Private Nonresidential Investment, which was revised higher by +0.4 from a contribution perspective and +3.5% from a growth perspective, was one of the lone bright spots in the report.
Inventories were revised lower and with inventory-to-sales ratios continuing to creep higher through year end, its unlikely inventories provide another outsized boost to reported growth in the coming quarters.
G + NE: Government was revised down modestly while the revision to the trade balance was the second biggest contributor to the headline decline with export growth revised -2.0% against a +.60% revision for imports.
Real Final Sales growth (GDP less Inventory Change): decelerating 20bps QoQ to 2.3%…revised lower by 50bps
Gross Domestic Purchases (GDP less exports, including imports): Very Weak sequentially - Decelerating 250bps QoQ to +1.4%..revised lower by 40bps
Real Final Sales to Domestic Purchasers (GDP less exports less inventory change): (Perhaps) The cleanest read on aggregate domestic demand was also weak, decelerating 100bps to +1.2%, revised lower by 20bps.
Christian B. Drake
daily macro intelligence
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The Big Picture
Rapid advances and declines have largely muted the overall commodities basket to-date in 2014, with the CRB Foodstuffs Index up 40 bps YoY. However, the index ticked up 310 bps last week and a continuation of this trend would be bearish for all restaurant operators.
Commodity prices up YoY:
- Lean Hogs
- Cheese Block
- Live Cattle
- Natural Gas
Commodity prices down YoY:
- Gasoline at the Pump
- Chicken Wings
- Rough Rice
- Chicken Whole Breast
Coffee prices continue their rapid rise, ticking up 5.5% over the past week. They are now up 12.8% YoY. First, it was torrential rains in Brazil’s coffee belt hurting the crop. More recently, however, the Brazil crop has been hampered by a prolonged period of dry weather. Analysts estimate the global market could be facing its first shortage in over four years. Not only is this fundamentally bearish for coffee retailers, but it has also negatively affected sentiment within the space (see SBUX for example). Takeaway – bearish for SBUX, DNKN, GMCR, KKD.
Pork and Beef prices continue to rip higher, up 5.1% and 4.0% over the past week. They are now up 25.9% and 17.5% YoY, respectively. Pork prices have come under pressure lately due to the spread of the porcine epidemic diarrhea virus, also known as PEDv, which results in a very high mortality rate for piglets. Beef prices have been surging as cow herd sizes continue to decline. Restaurant operators don’t expect much relief anytime soon, as it takes well over two years for a cattle herd to hit the market. Takeaway – bearish for TXRH, RUTH, RRGB, BLMN, CMG, MCD, JACK, SONC, WEN and other operators with notable exposure.
Cheese Block and Milk prices are up 38.3% and 36.5% YoY. While cheese block prices ticked up 4.2% over the past week, milk held flat. CME cheese block prices are currently close to a decade high. We will continue to monitor these trends closely. Takeaway – bearish for CAKE, DPZ, PZZA and others.
Corn and Wheat prices continue to be the saving grace for many operators, effectively offsetting pressure from other commodity costs. Both commodities are down 20.6% and 21.3% YoY, respectively. Takeaway – bullish for everyone.
Chicken and Chicken Wing prices have also led several operators to offer new items and LTO’s as they seek to more prominently feature chicken on their menus. Both commodities are down 9.7% and 29.4% YoY, respectively, and should help the margins of operators with notable exposure to this group. Takeaway – bullish for PLKI, BWLD, YUM and others.
Gasoline at the Pump is down 8.8% YoY, but ticked up 1.1% over the past week. Takeaway – while the YoY decline is a positive for the industry, last week’s move gives us reason to be cautious on our outlook. We will continue to monitor this trend, as any sustained increase or decrease in gas prices could have a significant impact on the direction of discretionary spending and the consumer’s willingness to eat out.
Client Talking Points
That's right. Janet Yellen just loves that passive Burning Buck policy. The US Dollar continued lower as she spoke yesterday, reminding America and the world that she now has completely qualitative commentary of prices/employment and really just wants to price fix rates. Not good. Longer term #inflationary. The inverse correlation between the USD and S&P 500 is now -0.75 (USD vs Gold = -0.95). In other words, pay attention.
No... the Nikkei no likey the Burning Buck. Why? Simple. Because Japan is supposed to be burning yen. Check out the Yen which is up another +0.3% versus the US Dollar and the Nikkei is down for the third straight day to -8.8% year-to-date. The global currency war is on.
So all I did yesterday was buy Euros, Pounds, and German stocks. Those who understand #StrongCurrency will have less inflation (and more consumption growth). EUR/USD is ripping a new year-to-date high this morning at $1.38.
|FIXED INCOME||12%||INTL CURRENCIES||21%|
Top Long Ideas
We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.
Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike. The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet. The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%. And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.
Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.
Three for the Road
TWEET OF THE DAY
Dollar Down, Rates Down is the best path to economic misery @KeithMcCullough
QUOTE OF THE DAY
"I don’t see evidence at this point in major sectors of asset-price misalignment, at least at the level that would threaten financial stability."
- Janet Yellen
STAT OF THE DAY
Freddie Mac just reported a record annual profit of $48.7 billion for 2013 powered by a strong rebound in U.S. home prices and a series of legal and accounting benefits that reversed earlier losses. Freddie will pay $10.4 billion to the U.S. Treasury after it posted an $8.6 billion Q4 profit, the ninth-straight quarter in which the company has been profitable. The bulk of those gains were due to either one-time benefits or to home-price gains that are likely to moderate.
Takeaway: GPS’ ugly beat. DECK forecast accuracy is horrendous. PIR shows perils of no dot.com presence. JOSB scaring off MW could cost 1/3 of mkt cap
GPS - 4Q Earnings
Takeaway: Let's put this GPS 'beat' in context. They levered SG&A on a 3% revenue decline. On one hand, give 'em credit for controlling costs. But on the other, that hardly bolsters our confidence that the company is investing in driving the top line going forward. Gross margin was down -277bps. Ugly. Operating margin -133bps. EPS -7%. Oh, and by the way, inventories were up 10% on a 3% revenue decline. #terrible. That brings us to the SIGMA chart below. The massive move to the lower right is absolutely uncharacteristic of a stock at a 10-year high.
DECK - 4Q Earnings
Takeaway: This one is puzzling. By the look of the quarter, and the SIGMA chart below, you'd think that DECK was sitting pretty. But the stock is down double digits on the print, which is largely the result of a weak 1Q guide. But the thing with DECK is that the company ALWAYS guides down. It's what they do. We don't condone it, but it's a reality. Either a) the company is simply uber-conservative, or b) it's internal forecasting accuracy is horrendous. We'd like to think it's conservatism, but our sense is that DECK has a problem with forecast accuracy. The trouble with this stock now is that we just passed the seasonal period where its core product, UGG, does best. Now people have to wait another nine months for anything to get excited about.
PIR - Pier 1 Imports, Inc. Updates Fourth Quarter and Full Year Fiscal 2014 Sales and Earnings Per Share Guidance
- “'Since our holiday sales update on January 9th we have continued to experience significant disruption from adverse weather in many of our major markets. This has resulted in considerably softer store traffic, as well as some temporary store closings, which further pressured fourth quarter sales and merchandise margin...We saw another sequential increase in e-Commerce sales, which reached 5% of total sales in the quarter, while traffic to the site increased to 1.9 million visitors per week. For the full year, e-Commerce will contribute approximately 4% to fiscal 2014 total sales – putting us readily on track to reach our targeted contribution of 10% of total sales by the end of fiscal 2016.'”
Takeaway: PIR is no stranger to disappointing. One of the problems it faces is that e-commerce is only 6% of total sales. Stack that up against someone line Restoration Hardware at 47%, or Williams-Sonoma at 46%, and it puts considerable risk on the business when store traffic is under pressure due to factors like weather.
JOSB , MW - Jos. A. Bank Board Rejects $63.50 Per Share Tender Offer; Agrees to Meet With The Men's Wearhouse-Willing to Consider a Higher Price
- "The letter...states that its Board of Directors, after careful consideration and discussions with its financial and legal advisors, has unanimously rejected The Men's Wearhouse Inc.'s $63.50 per share unsolicited offer as inadequate, after giving effect to the Eddie Bauer acquisition and related issuer tender offer, and not in the best interests of Jos. A. Bank stockholders. The Board recommends that the Company's stockholders reject the Offer and not tender their shares into the Offer."
- "The Jos. A. Bank Board continues to believe that significant value will be created for shareholders in its proposed acquisition of Eddie Bauer and the related issuer tender offer...It further stated that the financing for the Jos. A. Bank acquisition of Everest is proceeding on track, and that the Company expects to market and place the high yield bonds promptly. The bridge loan committed to by Goldman Sachs remains fully committed and, subject to its terms and conditions, will be available to Jos. A. Bank to finance the Everest transaction."
Takeaway: JOSB's biggest risk here is that it succeeds in its effort to thwart MW's proposed acquisition. If MW walks, which is entirely possible, then JOSB loses a third of its market cap overnight.
ADDYY - Media Bank: Reebok Teams With Miranda Kerr... Rocky's New Champ
- "Reebok launched a campaign with supermodel Miranda Kerr on Tuesday to promote Skyscape, its new active-and-casual women’s shoe."
- "The Skyscape collection is available beginning April 1 at Shoe Carnival, Rack Room, Kohl’s, Shoe Show and on Reebok’s website."
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.30%
SHORT SIGNALS 78.51%