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HOT Q2 CONFERENCE CALL NOTES

Takeaway: And another...

cONF CALL 

  • EBITDA and EPS ahead of guidance 
  • Revpar and Fee growth below guidance. FX and macro headwinds to blame.
  • Market share increasing across 7 of 10 brands
  • Focusing on reducing cost and remaining effective in the industry and continuing their asset light strategy 
  • Owners seeing greater accessibility to management 
  • They would like to remain lean and nimble in the future
  • On April 16 launched new tribute portfolio collection brand with the Royal Palm and Miami South Beach
  • Development group announced that they will open a tribute hotel in London
  • Cited the new website and new reservations display, has been received well
  • In august the new Sheraton grand hotels will be named 
  • This fall they will role out a brand new advert campaign for Sheraton 
  • Renewed focus on service and innovation for the guest experience 
  • Marketing and sales efforts ramping up for the luxury collection 
  • Notable conversions into the luxury collection include Chicago's miracle mile property and their hotel in Prague, CZ 
  • Owners of the luxury collection are spending liberally on renovations 
  • Limited service in Upscale segment has largest portion of pipeline 
  • Aloft is next in terms of pipeline growth 
  • Aloft US RevPAR increased by 13%, and up 24% since 2013. Aloft was up 10% in Q2. Intend to grow Aloft's room count and grow the brand. 
  • HOT is serious about organic growth, Aloft is major focus, but it is widespread. 
  • Willing to use BS flexibility to seek new opportunities
  • HOT opened 21 hotels with 5k rooms in Q2
  • 64 deals for new hotels in signed Q2. Up 70% YoY
  • 15 of which were conversions from other hotel brands, a 100% increase YoY
  • Net room growth in 2016, should be up to historical 4-5%
  • Excited about their recent deals, Phoenician and Gritti palace and the prices they commanded
  • On track to meet $800mm disposition goal for 2015
  • Search for successor CEO and board of director seat is ongoing, nothing to report as of now
  • Intl revpar came in weak, and dragged the Q down. 
  • Management and franchise fees down 1%
  • FX a major issue 
  • OCC up 140bps YoY to 72.2%
  • Owned and leased hotels outperformed - 
    • WW revpar +7%
    • NA +9%  
  • Vacation ownership earnings came in at $44 million at the high end of the expectations 
  • contracts signed up 1.8% YoY
  • average price was down YoY
  • on track to complete the spin off in Q4 
  • SG&A down 3.4% YoY
  • Run rate pnl savings of 21mm 
  • Expect additional write downs of 30-35mm 
  • Negative impacts in oil states and western canada on revpar 
  • Gain of share in NYC 130bps
  • Room nights from intl spg guests are flat yoy
  • Group bookings remain on pace for rest of the year 
  • Difficult comps in South America due to world cup, but also a weakening economy is to blame 
  • Mexico is showing strong signs, resorts revpar up 18%
  • Argentina is very similar to brazil
  • not seeing this changing in 2H
  • Volume of US travelers to Europe up 20%, and strong Chinese travelers which assisted better than expected results
  • Due to soft comps, MEA should be at the higher end of the range in 2H
  • Mainland china revpar growth driven by occ 
  • Thailand showing good signs of growth (off low comps)
  • $285-$295mm is the new ebitda range for q3. 
  • Increasing revpar range for owned hotels to 5%-7% 
  • vacation ownership earnings up to ---
  • CF guidance up to 84mm 
  • 1.2mm share buy back in Q2
  • YTD they returned $228 million, expect to buyback $380mm in shares this year. 

Q&a 

 

Timeline on new CEO search?

  • No comment, can confirm they're in the middle of the search but will not rush to make an announcement. 

Timing of the timeshare spin? 

  • On track for the end of 2015. Continue to believe it will add value 

How to drive unit growth? ideas on the market? 

  • They are working harder to reach out to owners and streamline processes to drive unit growth. seeing material results due to this approach 
  • not worried about it, 

Mkt share increase in 7 of the 10 brands? 

  • Technically its 9 because Tribute is new. Sheraton and Fourpoints are the only ones to not increase share. 
  • most increases in share are not more that 100bps. 
  • Aloft continues to be the strongest brand for them in terms of growth. 

Restructuring costs? 54 million? Transitioning that into additional savings? how?

  • Actually closer to 30-35 million in costs

When will HOT be 100% fee driven?

  • After vacation ownership spin, they will be at 80% or so. there is no new timeline, but there is substantial progress. Never have said they intend to be 100% fee driven, but north of 80% is likely. 

IHG and WYN rumors? 

  • No comment. 

Buyback this Q? only 100mm but asset sales over 500mm, why not buyback more shares?

  • They are simply ahead on asset sales, and trying to remain consistent with the $300-$350mm capital return policy.  After the spin off leverage will be at high end of range, no need to buyback more shares as of now. 

Strategic review and CEO search a distraction to owners and developers?

  • No, they haven't seen it hurting business and relationship with owners and developers 

Likelihood of more asset sales despite uncertainty with new CEO search? 

  • No slowdown experienced, they have brokers out to market and there is a lot of interest worldwide for their properties. 
  • quite confident they will meet the target of asset sales. 

Expanding distribution? what is ideal? how will you get there?

  • Open to a wide array of new distribution channels, trying to build out mobile and websites to make them more functional.  listening to consumers and watching where the market is headed.

Corporate travel? Trends seen this year and the trajectory? 

  • Too early to call for 2016. Transient booking growth will continue through the year, think it will continue to drive rates. 

Momentum building for select service? How do you get out to scale?

  • The answer will come from the strategic review. From that review they will build out their plan for more growth. 

How many Sheratons need to come out of the brand to keep consistency in the brand? 

  • No need to think about taking rooms out. With more marketing efforts they can redefine the whole brand, to move it up the latter and become a top choice hotel. 
  • In sum, they are working on making sure they refresh the brand and make it better. 

Additional restructuring costs in Q3?

  • There will be additional charges. $9mm for the company plane. Additional trickle of charges going into 2015. 

Any black out dates for buybacks? did you buyback enough?

  • Achieved target they wanted, and are pleased to be in a good position to complete the pledged buyback.  

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH

Both General Mills (GIS) and WhiteWave Foods (WWAV) are on the Hedgeye Consumer Staples Best Ideas list as LONGS.

 

We know what the obvious reaction is going to be to this deal.  GIS’s management would never do a deal like this and there is a significant amount of dilution.  It’s just not a realistic possibility, or is it? It’s true that this deal would be dilutive, but this is a unique opportunity for a transformational transaction that would overshadow the dilution.  Given the strategic rationale for bringing together two high quality companies in the food space, we are confident the street will look past the 10-20% dilution in year one and two, and focus on the long-term potential it would provide GIS.

 

This is a transformational, portfolio shaping transaction that will change the way GIS operates forever. Acquiring $3.5bn in rapidly growing sales is exactly what we called out GIS needs to do in our GIS Black Book.  If GIS were to take on WWAV it would be the beginning of other substantial changes at the company.  Management still needs to divest the anchor brands attached to the portfolio, the self-identified 28% of non-priority brands representing $5.4bn in sales.

 

On a pro-forma basis GIS would overnight become the largest global natural and organic company with $4.2bn in natural & organic revenue.  Once the transformation is complete the pro-forma total company would be generating mid-single digit organic volume growth, rather than the low-single digit growth GIS produces on its own. 

 

Naturally, there is also going to be a significant amount of skepticism around the possibility of this deal coming to bear given, GIS’s perceived sleepy corporate culture.  At age 61, GIS Chairman and CEO Ken Powell, has a significant opportunity to cement his legacy in the food industry as one of the most dynamic CEO’s.

 

The following is an overview of how the GIS/WWAV deal would unfold. 

 

COMPANY OVERVIEWS

These companies are more similar than people think, just at different stages of maturity. Both operate multinational corporations focused on growth globally. GIS is building out a yogurt business in China, while WWAV recently launched a joint venture in dairy-free drinks under the Silk brand. Although GIS has strong growth brands, the company in total has hit a growth plateau recently and is currently working on growing its portfolio. This is where WWAV comes in, providing immediate growth, and an abundant amount of international expansion possibilities.

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 1

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 2

 

STRATEGIC RATIONALE

GIS already plans to get their natural & organic portfolio to $1bn by 2020 organically, this transaction will allow for greater learnings to help GIS’s core portfolio to grow even faster. The perception of GIS will begin to change as they acquire WWAV and divest less desirable brands. Imagine GIS actually being perceived as a health company, the company will gain a lot of appeal from both consumers and Wall Street.

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 3a

 

GIS NATURAL & ORGANIC

GIS is going to be a healthier company with or without WWAV. The company has been adamant about changing the consumers perception of their brands by taking out artificial colors and flavors, going gluten free, and innovation towards cleaner ingredient decks.

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 4

 

SYNERGIES

Revenue synergies are going to be a big aspect of this deal. The strong equity that WWAV’s brands have will help to support growth among GIS brands. Cost synergies will be big as well; we imagine some cuts coming from the GIS side, in order to retain the strong talent at WWAV. WWAV knows how to run a natural & organic company and we would hope that instead of absorbing the brands, GIS would create a new division for only natural & organic products and have WWAV personnel run it. We believe this would maximize the benefit.

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 5

 

PERFECT COMPLIMENTS

These two companies solve each other’s issues.

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 6

 

MANAGEMENT TEAM REDESIGN

GIS shouldn’t just want the brands, WWAV has an enormous amount of talent that needs to be retained. Gregg Engles is a phenomenal CEO at WWAV, although he wouldn’t be promoted to CEO at GIS (we think he should some time down the road) he would be a perfect fit as COO of U.S. Retail. A noticeable switch on this chart is the resignation of Ken Powell, current CEO of Chairmen, coupled with a splitting of the CEO and Chairman positions. Jeff Harmening the current COO of U.S. Retail, would work well as the CEO of this improved GIS, he has strong experience across the organization.

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 7

 

This is one of those transactions we get very excited thinking about. The new General Mills would be a powerhouse in the industry with some of the best brands and people the industry has to offer.

 

HEDGEYE’S ORIGINAL LONG THESIS

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 8

 

LINKS TO BLACK BOOKS:

GIS BLACK BOOK

WWAV BLACK BOOK

 

 

 


Retail Callouts (7/30): KATE Earnings Timing | SIGMAs - SHOO, GNC, SKX

Takeaway: What matters most -- KATE stepping in front of KORS in earnings queue.

KATE - Thoughts on 2Q Earnings Timing

 

There's a lot going on this morning, but from our perspective there is one thing that matters and that is the timing of the KATE 2Q release. The fact that KATE is stepping up ahead of KORS in the queue (it’s the first time KATE has reported ahead of KORS in a 2nd quarter since 2012 -- KORS 3rd quarter as a public company) tells us that the company wants to be out in front of KORS to delineate the good from the bad. That means that a) the company feels good about the trends in its business and b) management is playing a little bit of offense which is a step in the right direction for the IR department. Separating itself from the noise is a good move by the company and should give those pressing the short headed into the quarter due to concerns on the 'space' something to worry about.

 

SHOO - 2Q15 SIGMA

Retail Callouts (7/30): KATE Earnings Timing | SIGMAs - SHOO, GNC, SKX - 7 30 chart1

 

GNC - 2Q15 SIGMA

Retail Callouts (7/30): KATE Earnings Timing | SIGMAs - SHOO, GNC, SKX - 7 30 chart2

 

SKX - 2Q15 SIGMA

Retail Callouts (7/30): KATE Earnings Timing | SIGMAs - SHOO, GNC, SKX - 7 30  chart3

 

OTHER NEWS

 

Petco Said to Be Interviewing Banks for IPO Later This Year

(http://www.bloomberg.com/news/articles/2015-07-29/petco-said-to-be-interviewing-banks-for-ipo-later-this-year)

 

Xcel Brands Raising More Money, Moving to Nasdaq

(http://wwd.com/business-news/financial/xcel-brands-nasdaq-offering-qvc-10193495/)

 

Joe’s in Breach of Forbearance Agreements

(http://wwd.com/business-news/financial/joes-jeans-breach-forebearance-10194581/)

 

TGT - Target doubles down on denim

(http://www.retailingtoday.com/article/target-doubles-down-denim)

 

Menswear retailer acquires all Jones New York stores in Canada; to expand

(http://www.chainstoreage.com/article/menswear-retailer-acquires-all-jones-new-york-stores-canada-expand)

 


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INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW

Takeaway: Claims bounced in the latest week but remain extremely low. Energy states have recoupled to the US and were flat in the latest week.

Following last week's 42 year low in claims, SA claims, not surprisingly, rose by 12k. Nevertheless, claims remain at a very low 267k in the latest week. Year-over-year improvement in rolling NSA claims held steady at -7.8%, but, as we have flagged repeatedly, should begin to converge towards zero from a Y/Y rate of change standpoint in the coming months as comps run into the sub-300k environment that began in the Fall of 2014. 

 

Meanwhile, the improvement/re-convergence in energy state claims versus the country as a whole has sustained itself for a second week. The now nominal spread between the two series was essentially flat W/W as we show in the below chart. However, chatter has re-emerged around another spike in energy layoffs as energy prices have fallen off again in the past month.

 

INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW - Claims18

 

Prior to revision, initial jobless claims rose 12k to 267k from 255k WoW, as the prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -3.75k WoW to 274.75k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -7.8% lower YoY, which is consistent with the same reading in the previous week.

 

INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW - Claims2

 

INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW - Claims3

 

INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW - Claims4

 

INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW - Claims5

 

INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW - Claims6

 

INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW - Claims7

 

INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW - Claims8

 

INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW - Claims9

 

INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW - Claims10

 

INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW - Claims11

 

INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW - Claims19

 

Yield Spreads

The 2-10 spread fell -2 basis points WoW to 159 bps. 3Q15TD, the 2-10 spread is averaging 167 bps, which is higher by 9 bps relative to 2Q15.

 

INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW - Claims15

 

INITIAL JOBLESS CLAIMS | SLIGHT RISE BUT STILL LOW - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


HST 2Q 2015 CONFERENCE CALL NOTES

Takeaway: HST continues the trend of lodging companies reporting weaker Q2 RevPAR

  • Strong ADR and group demand
  • Domestic REVPAR (constant-currency): +5.3%
  • Except Houston and NY, portfolio performed in-line or better 
  • Group demand: +2.7%, rate: +4.7%, Overall group rev: +7%
  • Transient demand: >2%, rate: +4.9%, transient revs: >+4%
  • June was strongest month; April was a renovation month
  • Calgary Marriott Downtown Hotel renovations
  • YTD, REVPAR: +4.4%
  • Overseas travel (excluding Mexico and Canada): +3%
  • Weakness in travel from EU offset by strong travel from West Coast (Asian customers)
  • F&B: +5% (+2% on adjusted basis), excellent flowthrough
  • Euro JV:  Sold Crown Amsterdam for $106 euros.  Expect to close another asset transaction for $10m
  • Transactions impact on 2016: +12m
  • $100-200m  in international sales by end of 2015.  $100-250 in domestic sales in 2015.
  • YTD, invested $101m in ROI projects, $220 renewal projects
  • Outlook for 2015: 
    • Group bookings in 2Q for 3Q/4Q grew 20%.  Booked revs are flat in 3Q (calendar challenges) and up 6% in 4Q
    • Pleased with shift to higher-rated business
    • Overall, expect 2H REVPAR to trend higher than 1Q 2015
    • Net M&A will reduce FY 2015 EBITDA by $5mm
    • Houston and NY will underperform previous expectations
    • Seeing strength in group rates for 2016
  • 2Q:  San Diego, Seattle, San Francisco, Hawaii all achieved double digit REVPAR
    • San Diego:  Group +19%, Transient +12%
    • Seattle:  Group: +15%, Transient: +14%, F&B: +17% (banquet/catering lead)
    • San Francisco:  strong association business,  transient: +9%, group: +8%; expected to only slightly outperform portfolio for 2H 2015
    • Hawaii:  F&B: +27% (banquet/catering/outland sales), group & transient: +20%, Hawaii expected to underperform in 2H 2015 due to decrease in citywide events and and visits from Japanese customers.
    • Atlanta:  F&B+ +15%, expect Atlanta to outperform portfolio in 2H 2015
    • Washington DC:  group nights: +12%, transient nights: -11%;  group rev: +19%, transient rev: -3%. 
    • NY/Houston/Calgary:  combination of increased supply, renovation and oil issues
      • Originally expected NYC to be slightly positive REVPAR, did not happen.  High supply and lower international travel to US impacted US.  Expect better group bookings pace in 2H vs 1H.
      • Houston: flooding in May.  Some renovation disruption in December 2015.
      • Calgary:  declining energy business 
    • 8 of our 18 Euro JV hotels achieved +9% REVPAR.  Outlook on Euro hotels remain encouraging.  Spain/Netherlands is improving. YTD, US travel to Europe up 5% with 3Q looking stronger.
    • 3Q REVPAR should be slower than 1H REVPAR 
    • 4Q REVPAR (strongest quarter of year) should exceed 3Q REVPAR 

Q & A

  • M&A markets:  expect to put a lot of domestic properties in the market in the fall.  Looking to acquire in LA and Seattle.
  • Best pricing is for one off transactions
  • Group demand in the quarter for the quarter:  modestly down
  • NYC: Flat bookings pace in 2016 (down in 2015)
  • 2015 NYC EBITDA will be 12% of total
  • Lowered FY 2015 EBITDA
    •  -~$5m EBITDA:  Phoenician addition offset by EBITDA loss properties sold for a net of $5m
    • The rest of EBITDA decline is spread out among the factors they raised (e.g. NY/Houston, renovations)
  • Secondary markets had better occupancy gains in last 12 months
  • NYC:  least pricing power right now
  • Hard to push rate for transient business
  • 2016 Group bookings up 6% YoY in revs
  • Continue to sell weaker assets in portfolio
  • NYC:  1st few wks in July - roughly in-line with June (slightly positive REVPAR)
  • Houston:  a little of both cancellations and delays, 
    • Group bookings pace quite weak in 3Q but quite strong in 4Q
  • Will be net seller in Europe

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


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