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HANGOVERS & LATE-CYCLE JUGGERNAUTS: 3Q GDP & Initial Claims

3Q14 GDP (advance est):  Parsing the Hangover

 

A sequential slowdown in GDP in 3Q14 from the near 5% in 2Q14 was as inevitable as the sequential acceleration from the worst post-war expansionary period GDP print ever in 1Q14. 

 

So how bad was the hangover? 

 

  • Growth:  Sequential growth across Durables, NonDurables, Residential Investment and NonResidential investment all slowed QoQ (again, not a real surprise given the comps – was anyone really modeling Investment to comp a 19% comp?)
  • Inflation:   GDP deflator decelerated -0.8% (to +1.3% from +2.1%) sequentially.  The lower deflator helped support reported real growth but Nominal GDP was above trend also.  Nominal grew at +4.7% - that is down vs 2Q’s inflated +6.7% gain but higher than the 4-qrt and 8-qtr ave of 4.2% and +3.7%, respectively.
  • Consumption:  Contributed +1.22 (down from +1.75 in 2Q) and growing just +1.8% QoQ (vs +2.5% prior) with Durables & NonDurables decelerating and Services up small.  Growth in Durables consumption is a fledgling positive sign for domestic consumerism and has supported the aggregate PCE in recent quarters.  A slowdown there (ie. the Sept Retail Sales/Durable goods data) will be a bit of a drag, both to consumer spending growth and to growth in (revolving) credit.  We’ll get the final Income & Spending detail data (Sept) tomorrow.  So long as the rising savings rate offsets accelerating income growth, the upside in household spending will remain constrained. 
  • NX:  The trade balance was sizeable…contributing +1.32 to GDP (vs. -0.34 prior) as exports grew +7.8% QoQ vs. a -1.7% decline in Imports.  With ROW slowing, the $USD higher and domestic demand better on a relative basis this magnitude of strength is likely nonrecurring/reversing.
  • G:  A positive support and big increase in defense spending.  Government expenditures contributed +0.83 (vs +0.31 prior) with Growth QoQ = +4.6% (vs. +1.7% prior) and Defense spending up 16% QoQ and contributing at big +0.7.   This was highest contribution since 2Q09 (political conspiracy theorists unite!).
  • Inventories:  after contributing +1.4 to GDP in 2Q, Inventories were a drag with a  -0.6 contribution in 3Q as comps were tough and middling consumption growth failed to expeditiously draw down that burgeoning inventory stock.
  • Investment:  Not much doing…Investment growth moderated sequentially but Gross and net Domestic Private Investment as % of GDP was essentially flat ...same for Residential & NonResidential construction
  • Real Final Sales (GDP less Inventory Change):  +4.2%, accelerating 100bps sequentially and +70bps above headline. 
  • Gross Domestic Purchases (GDP less exports, including imports):  Decelerating -210bps sequentially to +2.1%
  • Real Final Sales to Domestic Purchasers (GDP less exports less inventory change):  arguably the best read on overall domestic private sector demand = decelerating to +2.7% from +3.4%, but holding above trend. 

Overall, the 3Q advance estimate probably scores as a 1 aspirin hangover on our proprietary hangover scoring algorithm.  Government & Net Exports were outsized contributors with investment slowing off a strong 2Q and consumption still middling. 

 

So, easier sequentials for C & I in 4Q vs. tougher year-over-year compares alongside global growth slowing and disinflation predominating.   We're still modeling Quad #4 for the U.S. in the fourth quarter

 

On balance – if you give allowance to the under the hood dynamics – this is really just more of the same….we’re around 2-2.5% real economy. 

 

 

HANGOVERS & LATE-CYCLE JUGGERNAUTS: 3Q GDP & Initial Claims - GDP Table 3Q14A

 

 

INITIAL CLAIMS:  The good news is claims are hitting new lows. The caveat is this has been a dangerous place historically over the intermediate/long term.

 

Below is the detailed breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

Last week we wrote that jobless claims dropped to a new low of 281k - for perspective that was lower than at any point in the peak of the economic expansion in 2005/2006. This week, claims are unch'd at 281k again. Meanwhile, our gauge of rate of change looks at the y/y change in the rolling NSA claims, which accelerated further to its fastest rate YTD at -21%. The progress in the labor market remains substantial. Credit-sensitive financials still have the wind at their back.

 

But ...

Just as the day is always darkest before dawn, the reverse holds true too. The sun is always brightest before night, or something like that. The chart below is really the point. At 281k rolling initial claims the economy is now in-line with the all-time lows put in during each of the last three economic cycles (2006, 2000 and 1988).  

 

HANGOVERS & LATE-CYCLE JUGGERNAUTS: 3Q GDP & Initial Claims - 9 

 

The Data

Prior to revision, initial jobless claims rose 4k to 287k from 283k WoW, as the prior week's number was revised up by 1k to 284k.

 

The headline (unrevised) number shows claims were higher by 3k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -0.25k WoW to 281k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -20.7% lower YoY, which is a sequential improvement versus the previous week's YoY change of -19.5%.

 

HANGOVERS & LATE-CYCLE JUGGERNAUTS: 3Q GDP & Initial Claims - Claims NSA 103014

 

HANGOVERS & LATE-CYCLE JUGGERNAUTS: 3Q GDP & Initial Claims - Claims SA 103014

 

 

 

Christian B. Drake

@HedgeyeUSA

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 



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CLAIMS DATA JUGGERNAUT & A WORD OF CAUTION

Takeaway: The good news is claims are hitting new lows. The caveat is this has been a dangerous place historically over the intermediate/long term.

Credit Quality Tailwinds

Last week we wrote that jobless claims dropped to a new low of 281k - for perspective that was lower than at any point in the peak of the economic expansion in 2005/2006. This week, claims are unch'd at 281k again. Meanwhile, our gauge of rate of change looks at the y/y change in the rolling NSA claims, which accelerated further to its fastest rate YTD at -21%. The progress in the labor market remains substantial. Credit-sensitive financials still have the wind at their back.

 

But ...

Just as the day is always darkest before dawn, the reverse holds true too. The sun is always brightest before night, or something like that. The chart below is really the point. At 281k rolling initial claims the economy is now in-line with the all-time lows put in during each of the last three economic cycles (2006, 2000 and 1988).  

 

CLAIMS DATA JUGGERNAUT & A WORD OF CAUTION - 9

  

The Data

Prior to revision, initial jobless claims rose 4k to 287k from 283k WoW, as the prior week's number was revised up by 1k to 284k.

 

The headline (unrevised) number shows claims were higher by 3k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -0.25k WoW to 281k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -20.7% lower YoY, which is a sequential improvement versus the previous week's YoY change of -19.5%.

 

CLAIMS DATA JUGGERNAUT & A WORD OF CAUTION - 2

 

CLAIMS DATA JUGGERNAUT & A WORD OF CAUTION - 3

 

CLAIMS DATA JUGGERNAUT & A WORD OF CAUTION - 4

 

CLAIMS DATA JUGGERNAUT & A WORD OF CAUTION - 5

 

CLAIMS DATA JUGGERNAUT & A WORD OF CAUTION - 6

 

CLAIMS DATA JUGGERNAUT & A WORD OF CAUTION - 7

 

CLAIMS DATA JUGGERNAUT & A WORD OF CAUTION - 8

 

CLAIMS DATA JUGGERNAUT & A WORD OF CAUTION - 10

 

CLAIMS DATA JUGGERNAUT & A WORD OF CAUTION - 11

 

CLAIMS DATA JUGGERNAUT & A WORD OF CAUTION - 19

 

Yield Spreads

The 2-10 spread fell -3 basis points WoW to 182 bps. 4Q14TD, the 2-10 spread is averaging 186 bps, which is lower by -13 bps relative to 3Q14.

 

CLAIMS DATA JUGGERNAUT & A WORD OF CAUTION - 15

 

CLAIMS DATA JUGGERNAUT & A WORD OF CAUTION - 16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


MGM: TABLE HOLD OBSERVATIONS

Takeaway: Las Vegas operations disappoint and it WASN'T due to hold percentage

Selective disclosure

 

 

MGM’s Las Vegas properties clearly disappointed.  Management points out in the press release that low table hold vs last year cost them $18m in EBITDA in Las Vegas.  A few observations regarding that selective disclosure:

  • Wholly owned Las Vegas EBITDA was $262 million in Q3 versus the Street at $304 million
  • Table hold percentage at wholly owned casinos was 19.8%, almost exactly in the middle of management’s historical guidance of 18-22% (as discussed on conference calls and in 10Qs)
  • Analysts typically model Las Vegas to normal hold, so the $42m Las Vegas EBITDA miss was apples to apples
  • In Q2, wholly owned table hold % was 21.3% vs 18.1%, a 320bp delta. In Q3 it was 19.8% vs 21.5%, only a 170bp delta.  Last quarter management didn’t emphasize that they got a huge boost from higher hold YoY nor did they quantify what would’ve been a much bigger delta than the slightly lower YoY hold experienced in Q3.  In fact, we pointed out in a note last quarter that Las Vegas EBITDA would’ve been flat with normal hold in both periods.  Here is what we wrote in our 8/5/14 note “MGM & MACAU OBSERVATIONS: NOT GOOD”:
    • “MGM reported wholly owned adjusted EBITDA of $414 million, up 10% over last year.  However, if you normalize hold in both periods, EBITDA was roughly flat.  That seems disappointing to us given the excitement about a surging Las Vegas recovery and the solid RevPAR gain of 6% generated in the quarter.”

We still maintain that the Vegas recovery is concentrated in the hotel business and this past quarter was another indication that the Strip casino segment is stagnant.  However, the hotel business nationwide is doing quite well and actually better than the mid-single digit Strip RevPAR gains.

 

MGM: TABLE HOLD OBSERVATIONS - ggg


THE HEDGEYE MACRO PLAYBOOK

Takeaway: Our Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and proprietary quantitative market context.

CLICK HERE to view the document. In today’s edition, we highlight:

 

  1. How the recent spate of domestic economic data suggests you should continue to remain overweight Treasuries and munis as we await mass capitulation from both buy-side and sell-side consensus on bonds
  2. Adding ultra long-term Treasuries (EDV) to our Top-5 global macro long ideas in lieu of the Japanese yen, which is not providing us with the counter-cyclical exposure we had originally anticipated (inflation instead of deflation in Japan = lower real interest rates = less defensive when cross-asset volatility spikes)

 

Best of luck out there,

 

Darius Dale

Associate: Macro Team


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