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Lower for Longer | 1Q15 GDP

Summary:   1Q GDP was expectedly soft at just +0.2% QoQ while accelerating to +3.0% on a year-over-year basis given the easy comp dynamics.  Consumption growth was a relative positive although the large rise in the savings rate drove the weakest print in household spending growth in a year.  Energy related Investment got cut in half and the confluence of strong dollar, flagging export demand, and relative domestic economic strength drove a widening trade gap and a -1.25% contribution to growth from net exports.  Expect the Fed to acknowledge the softening but maintain policy flexibility by highlighting residual seasonality, externalities and firming inflation expectations.   

 

Lower for Longer | 1Q15 GDP - UNITED STATES

 

The Data:  C + I + G + NX

  • C: +1.9% QoQ and contributing +1.31 = strongest part of report but also weakest in a year with goods consumption flagging alongside the largest sequential increase in the savings rate since (the fiscal cliff impacted) 2012. 
  • I:  +2.0% QoQ and contributing  +0.34 =  Residential fixed investment softened in conjunction with the severe weather in 1Q while Non-Residential investment declined -3.4% QoQ alongside a halving in energy related investment and ongoing reticence by corporate management to accelerate capex into decelerating global growth, past peak margins and percolating labor cost inflation.  Inventory accumulation was a sizeable support to total investment spending, contributing +0.7 to headline
  • G:  -0.8% QoQ and contributing -0.15 on the quarter.  
  • NX: Contributing -1.25 with exports -7.2% QoQ and Imports +1.8% = strong dollar/slumping export demand/relative economic strength driving a widening trade gap = lowest exports contribution in a year

 

Savings Rate:  Income ↑, Savings ↑, Spending ↓:  Savings Rate ticked up to +5.5% in 1Q15 vs. +4.6% in 4Q14.  Aggregate incomes continue to increase but the rising savings rates continues to mute the translation to realized household spending growth. 

 

Inflation:  Price softening modestly sequentially but core prices are stabilizing and Fed will looks towards the firming data/outlook

 

Real Final Sales (GDP less Inventory Change), Gross Domestic Purchases (GDP less exports, including imports), Real Final Sales to Domestic Purchasers (GDP less exports less inventory change) = all decelerating sequentially 

 

Lower for Longer | 1Q15 GDP - GDP 1Q15 Table

 

 

POLICY:   The net of domestic 1Q Macro data = lower for longer – something the market has been pricing in as we traversed the quarter. 

 

The Fed will moderate its assessment of economic conditions/momentum but will refrain from translating that into an explicit policy conclusion.    A host of factors are rhetorically supportive of the Fed’s “transient” view of 1Q weakness including residual seasonality, firming inflation expectations, resumption of west coast port activity, a retreat in the dollar’s ascent and probable sequential improvement in the April employment report. 

 

Residual seasonality in 1Q has been the new normal (ave GDP by Quarter chart below), breakevens have rallied, Core CPI/PCE/Billion prices project have stabilized, the weather drag has reversed (as evidenced in the March/April housing data) and each instance of marked sequential deceleration in net monthly employment gains over the last five years has been followed by a strong rebound in net hiring. 

 

In short, the sequential deceleration in the 1st quarter was real but its magnitude was likely overstated and the Fed has enough fodder to keep its prospective policy path largely unchanged as its data dependency engine trolls for disconfirming/confirming 2Q data.     

 

Lower for Longer | 1Q15 GDP - Energy Structure Investment

 

Lower for Longer | 1Q15 GDP - Residual Seasonality

 

Lower for Longer | 1Q15 GDP - inflation expectations

 

Lower for Longer | 1Q15 GDP - Net Investment

 

Christian B. Drake

@HedgeyeUSA

 


Keith's Macro Notebook 4/29: U.S. Dollar | UST 10YR | Asia

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


GS: Removing Goldman Sachs from Investing Ideas

Takeaway: We are removing Goldman Sachs from Investing Ideas today.

Please be advised that we are removing Goldman Sachs from Investing Ideas today. Shares of Goldman have risen 3.6% since being added on 3/25 versus a 0.78% return for the S&P 500.

GS: Removing Goldman Sachs from Investing Ideas - 44

 

Below is a brief note from Hedgeye CEO Keith McCullough on the decision.

*  *  *  *  *  *  *

GS was a catalyst driven way (we thought they’d have a great quarter, and they did) to build up our Investing Ideas list when the US stock market was oversold. Now that a bad headline GDP report and an easier Fed are priced in, I want to reduce the size of the list – and this is one way to express that.

 

Our fundamental research view on Goldman Sachs (GS) has not changed. This is a portfolio/market timing call. Its generated the alpha we wanted.

 

KM

 

 


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Risk Ranges Widening

Client Talking Points

USD

The USD is hitting 2 month lows on the combination of what are now consensus expectations for an easier Fed and a big bounce in Greece (stocks v-bottomed off bombed out lows in Athens on the “no exit” headlines); if the Fed isn’t dovish enough today, the USD can easily bounce off this oversold signal.

UST 10YR

It is hard to discern whether bonds are front-running a “not dovish enough” Fed, but the levels really matter here as we’ve seen plenty of bounces to lower-highs in rates for the last 16 months. Our immediate-term risk range for the UST 10YR is 1.85-2.02 and that’s as wide as the range has been in 2 months.

ASIA

Asia experienced one of the weaker sessions in a while with Indonesia down another -2.5% (down -7.1% in 3 days), Australia -1.8%, and India continuing to break down (BSE Sensex is now bearish TREND signal) – Thailand unexpectedly cut rates and stocks dropped -0.8% there too.

Asset Allocation

CASH 40% US EQUITIES 12%
INTL EQUITIES 14% COMMODITIES 0%
FIXED INCOME 30% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
MTW

The Dodge Construction Starts Index accelerated at its highest rate since 1982. The index was driven largely by non-building projects, which was 74% higher for the first three months compared to last year. The Architecture Billings Index (ABI), a survey of architects, increased ~3% month-over-month and ~5% year-over-year for March. The ABI Index typically leads nonresidential and residential construction spending by 9-12 months. More importantly, the ABI Index leads Manitowoc Crane Orders by 2 quarters. This suggests MTW’s crane sales should see a pickup in the first half of the year. MTW reports April 29th after the close. Earnings Call will be held at 10:00am eastern time the following day.

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. Housing went 4 for 4 in a data heavy calendar for the sector this week with demand improving across both the new and existing markets and the fledgling acceleration in price growth finding some positive confirmation. The builder stocks had a choppy week of performance as investors held mixed opinions of earnings reports and management commentary out of DHI and PHM but, from a fundamental data perspective, the Trend remains one of discrete improvement.

TLT

Ten-year rates dipped 12bps on the week (forward-looking growth expectations) and the USD got crushed for a 1.5% loss. Growth and inflation expectations get priced in AHEAD of the more dovish policy tone resulting from any sign of deterioration in the labor market. Wednesday’s Fed meeting will be the next catalyst that will steer the market’s expectation on forward-looking growth and inflation. We expect the dots (forward-looking federal fund rate expectations) to be pushed out….again.

Three for the Road

TWEET OF THE DAY

*THIS MORNING* The Macro Show, Live with @KeithMcCullough + special guest at 8:30AM ET https://app.hedgeye.com/insights/43771-the-macro-show-live-with-keith-mccullough-at-8-30am-et … via @hedgeye

@Hedgeye

QUOTE OF THE DAY

If you are not willing to risk the usual you will have to settle for the ordinary.

Jim Rohn

STAT OF THE DAY

U.S. Purchase Applications were 0% week-over-week, up +20.8% year-over-year.


CHART OF THE DAY: It Pays to Listen to Hesham Shaaban | $TWTR $YELP $P $BABA

CHART OF THE DAY: It Pays to Listen to Hesham Shaaban | $TWTR $YELP $P $BABA - z 04.29.15 chart

 

Editor's Note: This is a brief excerpt and chart from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to subscribe.

 

...During yesterday’s meeting, circa 3:15PM, one of our analysts slammed his laptop and left the room in a frenzy. This had nothing to do with Penney telling Hesham Shaaban to “embrace meditation” – one of his Best Short Ideas, Twitter (TWTR) was blowing up!

 

...While you can criticize Shaaban for literally never having presented a Best Long Idea (yet), he’s nailed the following names to the proverbial NHL playoff boards in the last 18 months (i.e. since we let him start publishing on his own names):

 

  1. Weight Watchers (WTW)
  2. eHealth (EHTH)
  3. Pandora (P)
  4. Yelp! (YELP)
  5. Alibaba (BABA)

 


Who Really Knows?

“Our greatest power is that we know that we don’t know.”

-Ray Dalio

 

Do you really know what the Federal Reserve is going to say today? I don’t. If you do, with 100% certainty, please don’t call and/or email me with that information. I don’t want to go to jail.

 

Having witnessed some characters in this business take on orange-jump-suit-risk to get what some of them call “edge” (i.e. inside information), I’ve spent my entire career trying to build a #process that doesn’t need short-cuts (i.e. cheating).

 

That puts me in a position of really not knowing what I’m not supposed to know. Instead of selling you certainty, it forces me to embrace uncertainty… and probability weight each and every decision I make based on the most recent data and market pricing.

Who Really Knows? - Fed doves cartoon 04.21.2015

 

Back to the Global Macro Grind

 

We had our company meeting yesterday. We do one every quarter. It’s usually lunch and 3-4 hours of thought leaders at Hedgeye thinking out loud about #process: what’s working; what’s not – what can we do next. #BestPractices

 

The best part about these meetings is the element of surprise. When you have 57 thoughtful people in a room who have decided to open their minds to learning, a lot can happen in an afternoon. Who can really make you challenge yourself and think?

 

Our veterans (Daryl Jones, Howard Penney, and Tom Tobin) stepped up and delivered the wood on that front yesterday. In fact, I don’t think I’ve ever seen objective and critical self-reflection like that – back to back to back.

 

You can call us a cult. But we call ourselves a team.

 

During yesterday’s meeting, circa 3:15PM, one of our analysts slammed his laptop and left the room in a frenzy. This had nothing to do with Penney telling Hesham Shaaban to “embrace meditation” – one of his Best Short Ideas, Twitter (TWTR) was blowing up!

 

Fat finger on the pre-market close release. Stock down 18% in a New York minute. Halted. #Boom!

 

And the Hedgeyes smiled.

 

There’s something about building an independent think tank that prides itself in SELL ideas that gets me up in the morning. As most of you know, building a repeatable #process on the short side is not an easy thing to do. That’s why we’re doing it.

 

At one point in the QA session of the meeting, I was asked what our “pipeline of prospective analyst hires” was looking like. And, for the first time, instead of rattling off names of people we’re interviewing, I said I just wanted to see more of our rookies play.

 

Not only do the “young” guys/gals at this firm get how to not be certain about anything, they know how to build a battle-tested #process that allows them to probability weight both the accuracy and timing of their research ideas.

 

While you can criticize Shaaban for literally never having presented a Best Long Idea (yet), he’s nailed the following names to the proverbial NHL playoff boards in the last 18 months (i.e. since we let him start publishing on his own names):

 

  1. Weight Watchers (WTW)
  2. eHealth (EHTH)
  3. Pandora (P)
  4. Yelp! (YELP)
  5. Alibaba (BABA)

 

In other words, what he really needs next is to get run-over in one of these things. Because no analyst I have ever worked with stays this good (on the short side) for this long, in an up market!

 

I obviously don’t want the man to get crushed. But reality is that everyone gets tagged in this business, eventually – and that’s how we all learn. But if you listen to Shaaban talk through his ideas, he’s constantly talking about not only what he doesn’t know… but what the management teams he follows don’t know either.

 

And that, my friends, is how you get really good at this game.

 

That’s how you beat the guys who take the short-cuts, cheat, and have no other process than asking “management” what the numbers are. When management doesn’t know what they don’t know – the fundamentally driven research analyst who thinks for himself wins.

 

As for what macro “management” (The Fed) really knows… Cyclically, do they get that the US is #LateCycle? Secularly, do they get global demand is slowing due to #DemographicYields? We’ll see.

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

 

UST 10yr Yield 1.85-2.02% (bearish)
SPX 2095-2126 (bullish)

RUT 1 (bullish)
DAX 118 (bullish)
VIX 11.89-14.82 (neutral)

USD 95.63-97.83 (bullish)
EUR/USD 1.06-1.10 (bearish)
YEN 118.55-120.81 (bearish)
Oil (WTI) 52.61-58.30 (bearish)
Natural Gas 2.44-2.62 (bearish)
Gold 1181-1215 (neutral)
Copper 2.65-2.83 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Who Really Knows? - z 04.29.15 chart


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