No Growth?

Takeaway: Domestic economic growth remains fairly anemic with mounting risks to the downside as we progress through the balance of the year.

The Good: With the inclusion of this morning’s [fairly soft] personal income and spending data, Real PCE (~70% of GDP) is averaging +3.2% YoY for Q1-to-date (up from ~2.8% in Q4). That remains supportive of our #Quad1 forecast for 1Q15.


No Growth? - Personal Income   Spending


The Bad: Outside of housing, not one key economic indicator category is accelerating on both a sequential and trending basis. This pervasive lack of economic momentum will become a major headwind to annual growth rates once base effects become unsupportive throughout the following two quarters. Our full-year estimate of +2.4% real GDP growth – which is already well below the Street and below the Fed’s latest downwardly revised target(s) – could have a 1-handle on it by the time Q3 GDP is reported if growth surprises our expectations to the downside over the next 3-6 months.


No Growth? - U.S. Economic Summary Table


The Ugly: If GDP comes in at the +3% YoY midpoint of our GIP Model forecast range in 1Q15 (up from +2.4% in Q4), the QoQ SAAR growth is likely to be in the +0.2-0.3% range (down from +2.2% in Q4). As always, we should not anchor on any QoQ SAAR forecast given its sensitivity to even the most marginal changes in our YoY growth rate forecast range, but just being in the area code of 0% sequential growth is not good. It’s worth noting that “forecast” is perfectly corroborated by the Atlanta Fed GDPNow Model, which many FOMC and market participants anchor on.




The Conclusion: We reiterate our bullish bias on long-term Treasuries – a view we’ve held for over a year now – as the Fed is likely to continue downwardly revising their “dot plot” closer to subdued market expectations, at the margins. 2015 is shaping up to be the 2nd straight year in which long bonds bulls outperform their counterparts in the equity market: TLT and EDV appreciated +23.6% and +39.6%, respectively in 2014 vs. a return of +11.3% and +7.5% for the SPY and DIA, respectively. For those of you who must remain long of U.S. equities, we reiterate our preference for domestic revenue and EPS exposure in lieu of international exposure, which translates to favoring small-caps (IWM) over large-caps (SPY), as well as being long of Consumer Discretionary (XLY) and Housing (ITB) stocks.


No Growth? - FOMC Dot Plot


No Growth? - S P 500 Revenue and EPS Growth


Best of luck out there,


Darius Dale


Keith's Macro Notebook 3/30: China | USD | Oil


Hedgeye CEO Keith McCullough shares the top three things in his macro

notebook this morning.

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Takeaway: Street estimates still too high but some metrics less bad


With in-line weekly numbers reported this morning and following our trip to Macau last week, we are probably a little less negative.  Indeed, some takeaways were positive on the margin but there still appears to be too much risk, particularly with Street estimates still too high. 


We still think Street estimates for the Macau operators remain too high, despite recent reductions, particularly in the base or grind mass segment.  However, our Macau trip last week revealed some less negative trends.  Direct VIP seems to have stabilized (and maybe growing again?) and while junket VIP and premium mass probably haven’t, direct VIP carries higher margins.  Additionally, there was more optimism among market participants that the highest margin segment, grind mass, may be basing sequentially.


Unfortunately, the Street seems to be still projecting YoY growth in grind mass for the operators in 2015 which appears unlikely given the volumes in the early part of the year.  By contrast, simply projecting current volumes forward through the rest of the year yields a high teens YoY decline in total mass and a high single digit decline in grind mass.


Please see our detailed note:

Monday Mashup

Monday Mashup - 1


Recent Notes

03/23/15 Monday Mashup

03/23/15 DRI: Room to Breathe

03/27/15 MCD: Putting the Activist Thesis to the Test

Events This Week

  • No Events


Recent News Flow

Monday, March 23rd

  • DRI upgraded to outperform at Telsey Advisory Group with a $77 PT.
  • RT downgraded to neutral at Longbow Research.
  • DENN announced the adoption of a pre-arranged stock trading plan for the purpose of repurchasing a limited number of shares of its common stock between April 6, 2015 and May 6, 2015.

Tuesday, March 24th

  • DNKN promoted Jack Clare to the newly created position of Chief Information and Strategy Officer.  Mr. Clare will be a member of the Dunkin’ Brands Leadership Team and will continue to report directly to the CFO, Paul Carbone. 

Wednesday, March 25th

  • No material news

Thursday, March 27th

  • No material news

Friday, March 28th

  • RRGB target was raised at Miller Tabak following recent checks that suggest upside to 2015 same-store sales guidance.



Monday Mashup - 2


Sector Performance

The SPX (-2.2%) outperformed the XLY (-2.4%) last week.  Both casual dining and quick service stocks, in aggregate, outperformed the SPX.

Monday Mashup - 3

Monday Mashup - 4


Quantitative Setup

From a quantitative perspective, the XLY remains bullish on an intermediate-term TREND duration.

Monday Mashup - 5


Casual Dining Restaurants

Monday Mashup - 6

Monday Mashup - 7


Quick Service Restaurants

Monday Mashup - 8

Monday Mashup - 9

European Banking Monitor: Widening in Financials Swaps

Takeaway: Performance in Greek bank swaps diverged last week but the takeaway is continued Euro uncertainty given the drawn out process.

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email 




Key Takeaway:

The risk environment looks much the same as last week with intermediate measures in our heatmap slightly more negative. In Europe, even with Greece sending its draft of economic overhauls to creditors, the process has been so dragged out that investors' concerns and uncertainty remain heightened.  


European Financial CDS - Swaps mostly widened in Europe last week. Greek bank swaps are putting up diverging performance, but the main takeaway for Greece is continued uncertainty. Even with Greece sending a draft list of its economic overhauls to its creditors, this progress was delayed by contentious discussions between Greece and EU finance ministers.  Given how discussions have gone so far, investors rightfully see a smooth process going forward as unlikely. Separately, Russia's Sberbank saw further tightening as its swaps retreated -29 bps to 485 bps.


European Banking Monitor: Widening in Financials Swaps - chart1 financials CDS


Sovereign CDS – It was a fairly quiet week for developed market sovereign swaps,  which widened modestly vs last week. Portuguese sovereign swaps widened by +6 bps to 136, while Spanish swaps widened +3 bps to 93 bps. 


European Banking Monitor: Widening in Financials Swaps - chart2 sovereign CDS


European Banking Monitor: Widening in Financials Swaps - chart3 sovereign CDS


European Banking Monitor: Widening in Financials Swaps - chart4 sovereign CDS


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 11 bps.


European Banking Monitor: Widening in Financials Swaps - chart5 euribor OIS spread



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