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CHART OF THE DAY: The Consummate U.S. Growth Industry

Editor's Note: The chart and brief excerpt below are from today's Early Look which was written by Hedgeye Director of Research Daryl Jones. Click here if you'd like to get a step or two ahead of consensus.

 

CHART OF THE DAY: The Consummate U.S. Growth Industry - zz ben cod 09.29.15 Chart

 

...In the bubble that is Washington, no one seemed to notice the beat down that the stock market was taking yesterday.  In part, this makes sense since the federal government is a growth industry, and in most years appears to have no real correlation to the real economy or stock market.  In fact, since 1950 federal government outlays have declined on a year-over-year basis in only 5 of those 65 years. Over the entire period, as we’ve highlighted in today's Chart of the Day below, spending is up an astounding 87x.

 

At annual outlays of more than $3.5 trillion, an annual deficit of close to $500 billion, and outstanding debt of more than $18 trillion, it is pretty clear that the federal government eats while we are sleeping.  And then eats some more.  And more.

 


Eat While You Sleep

“Never invest in something that eats while you are sleeping.”

-Dan Sullivan

 

Yesterday, I was at the kick off dinner of a joint conference put on by the Wall Street Journal and U.S. Chamber of Commerce called, “Accelerating America’s Middle Market.”   When I mentioned I worked at a firm that was in the investment business, the quip above was passed on to me from the person seated to my right.  Admittedly, it’s sage advice.

 

In the bubble that is Washington, no one seemed to notice the beat down that the stock market was taking yesterday.  In part, this makes sense since the federal government is a growth industry, and in most years appears to have no real correlation to the real economy or stock market.  In fact, since 1950 federal government outlays have declined on a year-over-year basis in only 5 of those 65 years. Over the entire period, as we’ve highlighted in today's Chart of the Day below, spending is up an astounding 87x.

 

At annual outlays of more than $3.5 trillion, an annual deficit of close to $500 billion, and outstanding debt of more than $18 trillion, it is pretty clear that the federal government eats while we are sleeping.  And then eats some more.  And more.

 

Eat While You Sleep - zz dj dc

 

Back to the Global Macro Grind...

 

While I was in Washington hob-nobbing yesterday, Keith spent the a couple hours in the morning on Fox Business hosting the morning show with Maria Bartiromo.  One of the interviewees during Keith’s segment was none other than former Florida Governor Jeb Bush.  By most appearances, Jeb has the staying power (translation: money) to remain in the race for the Republican nomination, but his polling number are dreadful at best.

 

According to the most recent poll aggregates from Real Clear Politics, the top five contenders and their polling numbers are as follows:

  • Trump – 23.4%;
  • Carson – 17.0%;
  • Fiorina – 11.6%;
  • Rubio – 9.6%; and
  • Bush – 9.2%.

Clearly, the electorate on the Republican side continues to increasingly support outsider candidates, who have no attachment to Washington or political jobs on their CVs.

 

On the Democratic side, Hillary Clinton still holds a sizeable lead over the field, a field at this point which only really contains Senator Bernie Sanders.  Her lead may be short lived until current Vice President Joe Biden enters the race.  We’ve also heard rumblings in our travels that Secretary of State John Kerry may throw his hat in the ring.

 

Despite being in the lead, Clinton is appearing more and more vulnerable.  Her increased vulnerability is most evident in a recent Wall Street Journal and NBC news poll that shows Clinton basically in a dead heat when polled against Bush, Fiorina, and Carson.   Meanwhile, Trump trails her by a good 10 points.  This inability to get broad support and overcome his negatives may ultimately be what gets The Donald "fired" in his Oval Office quest.

 

As it relates to the markets, the most imminent catalyst coming out of Washington, DC is likely to occur in mid-December.  While Speaker Boehner’s resignation has paved the way for the passing of continuing resolution to keep the government open (and spending your hard earned money), the resolution will expire around December 11th.

 

Ironically, or not, that is also about the time that the U.S. government will have surpassed the debt ceiling.  Technically, the Treasury has already surpassed the debt ceiling and is using so-called “extraordinary measures” to fund the government.  By mid-December, the Treasury will have surpassed its ability to use these measures to borrow money to fund the government, so it will have to go back Congress to extend the debt ceiling.

 

Inasmuch as the last few months and weeks have been volatile for stock markets, it appears that Washington is going to rear its ugly head again in the next few months with the debt ceiling being eclipsed, the continuing resolution to keep the government open having expired, and a new Speaker of the House in place.   For those of you that are concerned about a premature rate hike by the Fed, this is just another reason for our view of lower for longer to hold into 2016.

 

Keith noted as much that this morning in his Direct from KM note to clients (email if you’d like to be added) when he wrote:

 

10yr – the bond market either doesn’t believe Yellen on the DEC hike and/or is signaling that that would flatten the curve and slow growth faster – either way, next support = 2.04% and lower-highs of resistance continue at 2.17%.”

 

And as we like to say around Hedgeye, markets don’t lie, people do.

 

Before signing off and leaving you with a gloomy view of the world, I did want to highlight a stock that we are positive on with what we believe will be better than expected fundamentals . . . and the stock is the venerable Starbucks (SBUX).  As our restaurants Sector head Howard Penney wrote yesterday:

 

“In addition to increasing throughput and efficiency of the store, this app is meant to help drive incremental traffic. In the chart below assuming flat 2-years trends, estimates for Americas traffic, would accelerate to 5% in 4Q15.  This would be a significant positive for the company and likely make the consolidated traffic number look conservative.  We believe with the new app launched nationwide, consensus estimates may turn out to be slightly conservative.”

 

The app Penney is referring to is Mobile Order & Pay (MOP). The video below outlines some of his proprietary research on why he is positive on the app and its ability to drive same store sales at SBUX.

 

https://app.hedgeye.com/insights/46584-is-mobile-order-pay-the-holy-grail-for-starbucks-sbux

 

Long SBUX and short DC anyone?

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.04-2.17%

SPX 1

VIX 23.03-28.76
USD 94.65-96.99
Oil (WTI) 43.75-47.65

Gold 1112-1155 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Eat While You Sleep - zz ben cod 09.29.15 Chart


#Deflation’s Dominoes

Client Talking Points

UST 10YR

The bond market either doesn’t believe Janet Yellen on the DEC hike and/or is signaling that that would flatten the curve and slow growth faster – either way, next support = 2.04% and lower-highs of resistance continue at 2.17%.

CRASHES

Oil, China and Emerging Markets! The Hang Seng is down another -3% overnight taking its crash to -28% (since April). Germany’s DAX is down -24% (since April) and the Russell hasn’t technically crashed yet down -16% from its year-to-date high, so only 4% to go there.

INDIA

India cuts by 50 basis points (instead of 25 expected) citing a “vortex of a global trade slow-down” – that’s scary language for any central bank, and at this stage of the central planning crisis central banks will scare people on reality.

 

**Tune into The Macro Show with special guest Housing & U.S. Macro analyst Christian Drake at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 7%
FIXED INCOME 23% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald’s clearly continues to be well-liked by our Restaurants research team and is a near perfect fit into our macro team’s current "style factor" preferences. This stock is high cap with a low-beta, coupled with a company turnaround story that is currently well underway. We believe this stock will do well through this tumultuous time in the market.

 

As previously mentioned, the company has all day breakfast starting on October 6. We anticipate this development as not only driving increased visits from existing customers, but also new customers that maybe don’t wake up early enough to get breakfast by 10:30am (or simply just people that enjoy eating breakfast items outside of the morning!)

PENN

As Sector Head Todd Jordan notes, "PENN should benefit from the release of state gaming figures over the next few weeks. Recall that August was weaker than many thought. While we predicted this particular slowdown, our model is showing a sharp September rebound.

 

September revenues should rebound and serve as a catalyst for the stock going into Q3 earnings. On the research side we have not altered our views of PENN’s long term growth story. We continue to see more upside from current price levels.  

TLT

Is the U.S. economy still showing signs of a cyclical slowdown? Yes.  If you, like us, remain skeptical on the said policy path from our omnipotent central planners, and you believe growth continues to slow, then we respectfully submit that you sit on your GLD and TLT allocations.

 

3 GDP comps are difficult. And, once the data comes out, we think expectations will be downwardly revised again. In other words, wait for yet another Fed punt on a 2015 hike.

Three for the Road

TWEET OF THE DAY

NEW VIDEO

Is 'Mobile Order & Pay' the Holy Grail for #Starbucks? | $SBUX https://app.hedgeye.com/insights/46584-is-mobile-order-pay-the-holy-grail-for-starbucks-sbux… via @HedgeyeHWP cc @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

A positive attitude may not solve all your problems, but it will annoy enough people to make it worth the effort.

Herm Albright

STAT OF THE DAY

Whole Foods is cutting 1,500 jobs (1.6% or workforce).


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The Macro Show Replay | September 29, 2015

 


September 29, 2015

September 29, 2015 - Slide1

 

BULLISH TRENDS

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BEARISH TRENDS

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September 29, 2015 - Slide11


Is Mobile Order & Pay the Holy Grail for Starbucks? | $SBUX

In this Hedgeye TV special presentation, veteran restaurants analyst Howard Penney puts the new Starbucks Mobile Order & Pay app through its paces. His findings, coupled with the results of a consumer survey rating user experience, support his current long-term view on the company.

 

Subscribe to Hedgeye on YouTube for access to our free video content.


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