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U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15

Takeaway: 2Q GDP was largely in-line and the focus was mostly on the revisions. Growth is set to meaningfully decelerate in 2H15.

*Note:  The July data carries revisions & statistical updates including:  revisions to 2012-1Q15 GDP data, statistical methodology changes to reduce residual seasonality and the introduction of the GDI/GDP hybrid series and the Real Final Sales to Private Domestic Purchasers series.

 

  • Revision (1st chart below):  This bigger news is  probably in the revisions than in the 2Q data itself with 1Q15 revised from negative to positive (from -0.2% to +0.6%) and 1Q14 revised from -2.1% to -0.9%. 
  • Headline:  QoQ GDP = +2.3% = below consensus at +2.5% but the miss is largely irrelevant given the revision to 1Q  (i.e. people were largely modeling 2Q relative to the original -0.2% 1Q print or some mostly unknown expectation around the revision)
    • YoY – GDP decelerates to +2.3% YoY vs 2.9% prior
    • Consumption:  YoY Consumption Growth decelerating sequentially against the upwardly revised (& post-crisis peak) 1Q15 figures. 
  • C + I + G + NX: all expenditure types contributing positively in 2Q
    • Consumption:  Contributing +1.99% to headline and accelerating QoQ  to +2.9%.  Solid growth across all of Durables/Nondurables/Services
    • Investment:  Contributing 0.06% and decelerating to +0.3% QoQ  à Inventories were a negative contributor this quarter after last quarter’s outsized contribution, Resi investment was decent while NonResi investment contributed -0.1% and was down -0.6% QoQ
    • Government: Contributing 0.14% and accelerating to +0.8% QoQ
    • Trade Balance:  Contributing 0.13% with exports rising at a premium to imports QoQ following 1Q’s collapse
  • Inflation:  GDP price index and Core PCE accelerating sequentially (on QoQ basis) to +2.0% and +1.8%, respectively  – not overly remarkable given the 0% inflation reported in 1Q. 

 

Sub-Aggregates:  Better on balance

 

  • Real Final Sales (GDP less Inventory Change):  accelerating to +2.4% from -0.2% prior
  • Gross Domestic Purchases (GDP less exports, including imports):  modest deceleration to 2.1% growth vs +2.5% prior
  • Real Final Sales to Domestic Purchasers (GDP less exports less inventory change):  arguably the best read on overall domestic demand; accelerating to +2.2% vs. +1.7% prior  

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - GDP PRe Post

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - Real PCE YoY

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - GDP Summary Table

 

-Christian Drake, Senior Analyst

 

U.S. GIP Model Update

With the advent of the 2Q15 GDP report, we are now at +2.1% for CY15, which is down -10bps from our previous estimate as 2Q15 came in 10bps shy of our forecast of +2.4% YoY. The QoQ SAAR figure came in at +2.3% as well, or 20bps shy of our forecast of +2.5%.

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - UNITED STATES

 

Looking to our U.S. Economic Summary Table, we see that growth is slowing on a sequential and trending basis across a broad swath of key high-frequency data:

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - U.S. Economic Summary Table

 

The decelerations and/or outright YoY declines in consumption and investment growth coupled with plunging consumer and business confidence speak loudly to the lack of sequential momentum in the economy that could otherwise help economic growth surmount steepening base effects throughout the balance of the year.

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - GDP COMPS

 

The net result on the model is that real GDP growth is likely to slow sharply in 2H15 from a cycle peak growth rate of +2.9% YoY in 1Q15. Our revised forecasts are as follows:

 

  • 3Q15: +1.6% YoY and +1.4% QoQ SAAR
  • 4Q15: +1.5% YoY and +1.7% QoQ SAAR

 

***Reminder: we don’t care much about the “headline” QoQ SAAR figures. The YoY rate of change continues to be where our focus lies as that has historically been the most explanatory of asset class returns and most useful for front-running key inflection points in and across economic cycles.***

 

Keep in mind that we won’t get the 3Q GDP report until the end of October and 4Q GDP won’t be reported until the end of next January. That lag may give the Fed scope to pretend like domestic economic growth is hanging in there just fine (even though the preponderance of high-frequency data is unlikely to support that view in the interim).

 

Moving on to inflation, we continue to see little sequential momentum in either direction from the perspective of reported inflation here in 3Q.

 

On one hand, decaying base effects support a modest acceleration in YoY CPI in 3Q and a meaningful acceleration in 4Q. On the other hand, the dramatic loss of “non-core” inflationary pressures we’ve seen in the third quarter to-date supports a continued bottoming process in inflation intra-quarter.

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - CPI COMPS

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - INFLATION

 

All told, with a sharp deceleration in growth in 2H15 as our most differentiated view from consensus with respect to the U.S. economy, we continue to reiterate our lower-for-longer view on interest rates and our bearish bias on all things reflation.

 

Moreover, we expect market breath to continue to deteriorate on a trending basis as falling growth expectations beget premiums for real growth stories and discounts for the myriad of companies that will see their toplines suffer from the 1-2 punch of slowing economic growth and low inflation. For more on this, we encourage you to review the following two research notes:

 

 

Feel free to email us with any questions. Best of luck out there!

 

-Darius Dale, Director


Here Are Hedgeye's Top-3 Macro Themes For Q3

Editor's Note: Our world-class macro team hosted its highly anticipated macro themes call earlier this month with institutional subscribers. Led by CEO Keith McCullough, the presentation detailed the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and the associated investment implications. For more info on how you can access this and other Hedgeye research please email sales@hedgeye.com.

*  *  *  *  *

Q3 2015 MACRO THEMES OVERVIEW:

 

#SecularStagnation

Amid consensus expectations for a return to “normal” economic conditions, our analysis shows ample evidence of secular stagnation. In light of that, we reiterate our “lower-for-longer” thesis on growth, inflation and interest rates and continue to find the FOMC’s hawkish guidance wholly misplaced.

Here Are Hedgeye's Top-3 Macro Themes For Q3 - Growth cartoon 06.03.2015

 

#EuropeSlowing

With our proprietary GIP (growth, inflation, policy) model we’ll outline the top 6 European economies that will be most impacted by real GDP growth slowing as inflation accelerates in the back half of 2015. The timing of ECB head Mario Draghi’s eventual response will be critical in terms of risk managing the EUR/USD exchange rate, as well as any associated spillover risks.

Here Are Hedgeye's Top-3 Macro Themes For Q3 - Draghi balloon cartoon 01.23.2015

 

#ConsumerCycle

Consumption peaks late cycle and with domestic and global growth set to slow alongside easing inflation comps in 2H15, it looks increasingly likely 1H15 marked the current cycle peak in household spending growth.  We'll contextualize the current cycle, discuss the implications and detail how best to be counter-cyclically positioned as the consumer cycle enters its twilight. 

Here Are Hedgeye's Top-3 Macro Themes For Q3 - Growth cartoon 06.10.2015


BLMN | ANOTHER BACK HALF MISS?

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 1

 

On the heels of the BWLD and PNRA “miss and guide down” we wanted to highlight another “miss and guide down” name, Bloomin’ Brands (BLMN). BLMN is not currently on our list and although we don’t see it as a long term LONG, given the stock performance of BWLD and PNRA on their earnings, up ~11% and ~8%, respectively, this relatively cheap stock could see a “miss and guide down” and similar pop.

 

BLMN has their 2Q15 earnings conference call on Tuesday, August 4, at 9:00am ET.

 

The company’s current guidance of same-store sales of “at least” 1.5% and EPS of “at least” $1.27 will be difficult to achieve.  We believe that same-store sales will be between 0-0.5% and EPS will be closer to $1.20.

 

BLMN is down ~10% year-to-date, so expectations are not high for the company, except sell-side estimates are too high for fiscal 2015.  BLMN (like BWLD and PNRA) has seen a significant increase in the short interest over the past three months.  If the beat and miss is less than feared the shorts will likely be forced to cover following the earnings release.     

 

PERFORMANCE

As we just stated BLMN is down ~10% YTD, while the S&P 500 is up ~2.4%. Expectations for this company are low and we think there is a possibility of the company missing by “not that much” which would probably yield a positive reaction.

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 2

 

SAME-STORE SALES

Consolidated same-store sales (SSS) are projected to decelerate modestly for the next three quarters. Management’s focus continues to be on Outback, which represents the only brand that matters for the company. Outback needs to maintain positive momentum in order for the company to succeed. This is crux of our issue with BLMN, because we have little faith in the Outback concept long-term.

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 3

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 4

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 5

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 6

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 7

 

MARGINS

Restaurant level margins are trending upwards, thanks to cost management practices.

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 8

 

EBIT margins are similarly benefiting seeing larger % increases YoY in 1Q15 than Restaurant level margins.

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 9

 

VALUATION

This stock is cheap, but rightfully so, multi-concept casual dining chains are disadvantaged from the get-go given the lack of focus and capital allocation issues. But with BLMN currently trading at 8.15x EV / NTM EBITDA, it is trading at a steep discount to the competition, but deservingly so.

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 10

 

SHORT INTEREST

Currently short interest is 5.5% of the float, there is not a big bet against this company currently, but short interest is rising heading into the quarter.

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 11

 

SENTIMENT

The street cannot get more bullish on this company, 79% of analysts covering the stock have a buy rating, with zero sell ratings.

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 12

 

HEDGEYE RESTAURANTS IDEAS LIST

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 13 


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Lower-highs

Client Talking Points

USD

While yesterday’s Fed commentary was, on the margin, dovish (this time acknowledging that “reflation” isn’t happening anymore), we think both rates and USD are trading up this morning ahead of what should be a “good” headline GDP report – it’ll read good vs the “bad” Q1, then Q3 will just be bad vs. Q2 again. 

GOLD

Positioned for #deflation? Gold bounced then faded like a flower, trading down another -0.9% this morning and has no immediate-term support to $1065/oz – most of the “reflation” trades led the 2-day U.S. equity bounce; fade them.  

DAX

The DAX is up +0.4% on the bounce but remains bearish TREND @Hedgeye with no support to 10,905 – while some may want to ignore the “data” right now, you shouldn’t . July CPI readings are dropping again this morning with Spain back to 0.0% year-over-year.

Asset Allocation

CASH 49% US EQUITIES 5%
INTL EQUITIES 9% COMMODITIES 0%
FIXED INCOME 23% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
GIS

General Mills (GIS) remains on the Hedgeye Consumer Staples Best Ideas list as a LONG. Key segments across the company are turning the corner and improving performance. Specifically GIS has figured out the yogurt category, after 3 years of struggling with Greek and losing on the core business, management has turned the Yogurt division into a growth segment. Cereal has obviously been a struggle for all companies participating. Although still down, the trend is looking better, in FY16 we hope to see the switch to Gluten Free Cheerios and other improvement, turn performance around.

PENN

Penn National Gaming reported Q2 profit of $16.9 million on Thursday. The company's profit of 19 cents per share beat analysts' expectations.  PENN posted revenue of $701 million in the period, which also beat forecasts.  Shares have climbed 40% since the beginning of the year and 58% over the last 12 months, obviously much higher than the S&P 500. Gaming, Lodging and Leisure Sector Head Todd Jordan was at Penn National Gaming's investor day on July 24th. He will provide a detailed update this week.

TLT

Those long of #LowerforLonger enjoyed another solid week of 2%+ gains for TLT and EDV. VNQ followed up last week’s gains with a pullback of equal size, but we received a positive sloth of data this week that confirms our long housing theme. A positive housing outlook within a bearish rate environment should be positive for VNQ.

Three for the Road

TWEET OF THE DAY

$LINE $LNCO to suspend distribution!

@HedgeyeEnergy

QUOTE OF THE DAY

If you limit your choices only to what seems possible or reasonable, you disconnect yourself from what you truly want, and all that is left is a compromise.

Robert Fritz

STAT OF THE DAY

This quarter marked the 5th consecutive quarter of traffic growth for PNRA, showing strong performance versus the competition beating Black Box Intelligence traffic metrics by 290 basis points in 2Q.


CHART OF THE DAY: Just One Bad Jobs Report Away From Janet Bailing on Hikes...

Editor's Note: The chart and excerpt below are from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to begin your subscription.

 

And… as you can see in today’s Chart of the Day, the “pace” (which most of you who are mathematically inclined might agree should be defined as the rate of change) of “gains” in US Non-Farm Payrolls has been slowing since February.

 

Therefore the most patient investor does nothing on today’s “good” Q2 GDP report and waits for not only the Q3 economic data, but the next 3-6 jobs reports. With “reflation” crashing, we’re only one bad jobs report away from Janet bailing on hikes...

 

CHART OF THE DAY: Just One Bad Jobs Report Away From Janet Bailing on Hikes... - Z NFP CoD


The Fed's Pace

“Adopt the pace of nature; her secret is patience.”

-Ralph Waldo Emerson

 

Admittedly, there is a confirmation bias in my rate of change driven #process. I’m a big believer in gravity. Cycles take time to play out. We need to dynamically adapt to their pace and be patient.

 

This Federal Reserve isn’t the one we got used to with Bernanke. Janet’s secret isn’t trying to shape the data to a +3% “growth” outcomes – hers is much more “data dependent.” She’s patient.

 

Yesterday’s Fed statement had a wiggle. It adjusted (just a bit, but on the margin is what matters) for the recent marked-to-market change in inflation. Very few at the Fed want to raise rates as nature’s pace of #deflation is accelerating.

 

The Fed's Pace - Deflation cartoon 02.24.2015

 

Back to the Global Macro Grind

 

“So” as many like to say, if we’ve already solved for inflation looking a heck of a lot more like #deflation, what we really need to solve for is growth; specifically the pace of growth in the US labor market.

 

And… as you can see in today’s Chart of the Day, the “pace” (which most of you who are mathematically inclined might agree should be defined as the rate of change) of “gains” in US Non-Farm Payrolls has been slowing since February.

 

Therefore the most patient investor does nothing on today’s “good” Q2 GDP report and waits for not only the Q3 economic data, but the next 3-6 jobs reports. With “reflation” crashing, we’re only one bad jobs report away from Janet bailing on hikes.

 

Moving along to the European “data” this morning:

 

  1. Spain’s headline “inflation” (CPI) reading came in at 0.0% y/y for July (vs. 0.1% in June)
  2. Belgium’s CPI slowed to 0.46% y/y in July (vs. 0.63% in June)
  3. Greece and Austria printed deflationary PPIs (producer prices) of -5.7% and -1.0% y/y, respectively

 

I know. Damn the “data.” Eventually a mean reverting diffusion index like the PMI will stop going down and everything will be fine, eh?

 

Reality is that Draghi was as unsuccessful at slowing the pace of nature as Bernanke ultimately was. The lesson from this grand central planning experiment is this:

 

You can print, devalue, and obfuscate until enough people get sucked into the illusion of growth (commonly known as inflation)  - but then, from those artificially inflated asset prices, all you have left is #deflation.

 

What to do with all of this?

 

  1. Stay long US Dollars (UUP) until the Fed starts getting bad jobs reports and hints at Qe4
  2. Stay net short or out of anything commodity “reflation”
  3. Stay with long-duration ways to be bullish on growth and inflation slowing (long-term Bonds and their proxies)

 

And, in equity markets you like (which hopefully have nothing to do with inflation expectations and/or their commodity-links), I have another huge confirmation bias that seems to be working: buy low, sell high.

 

On that score, after 5 straight down days (tagging the low-end of my immediate-term risk range) the beloved SP500 was up for 2 days, to lower-highs. “So” you can start selling everything “reflation” and “global growth” again.

 

Heck, even the almighty Facebook (FB) talked about year-over-year revenue growth “slowing” last night. Those of you who “love the company” but have been patient enough to buy something like that on down days will be rewarded by nature today.

 

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

 

UST 10yr Yield 2.21-2.39% (bearish)

SPX 2065-2123 (bearish)
RUT 1 (bearish)
DAX 105 (bearish)

VIX 11.88-15.15 (bullish)
USD 96.43-98.44 (bullish)
EUR/USD 1.07-1.10 (bearish)
YEN 123.18-124.79 (bearish)
Oil (WTI) 46.43-49.05 (bearish)

Nat Gas 2.75-2.92 (bearish)

Gold 1065-1101 (bearish)
Copper 2.31-2.51 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Fed's Pace - Z NFP CoD


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.49%
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