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Not Another GDP Summary Note...

Key Takeaway: Our forecasts for domestic economic growth continue to be proven most accurate and we continue to anticipate things will get a lot worse from here.





What did we know coming in:


  • Trade Balance: Global growth was slowing, export demand would remain weak and the trade balance was going to be a drag
  • Industrial Recession: Domestic manufacturing and industrial activity (negative growth Durable goods, Core Capex & Factory Orders) were going to be soft
  • Investment:  Inventory levels and Inventory-to-Sales ratios were at cycle peaks  (ISM, Census Bureau) and likely to be a negative contributor
  • Government: Government was probably not going to be an outlier and may provide some modest upside with spending getting a little pop into fiscal year end
  • Consumption:  Consensus was looking for consumption to singularly carry the growth load.  We knew from the July/Aug PCE data that household spending would again be good on an absolute basis although the slope of the line would remain in retreat off the 1Q15 peak. Further, with retail sales (i.e. good consumption) flagging, services consumption would carry the consumption load


What did we get:  Headline Real GDP growth slowed to 1.5% QoQ SAAR with year-over-year growth decelerating for a 2nd straight quarter to 2.0% from +2.7%. No real surprises with Consumption contributing almost all of the headline gain, Government providing a small positive contribution, Investment tanking and Net Exports contracting.


  • Consumption:  Contributing +2.19 to headline and decelerating QoQ  to +3.2%.  Services had outsized positive impact with Healthcare adding a notable +50bps to headline.  To reiterate, Consumption was again good on an absolute basis but the slope of the line remains negative with 3Q representing a 2nd quarter of deceleration off the 1Q15 peak.  Consumption comps get tougher from here and income growth (i.e. the driver of the capacity for consumption growth) is likely to moderate alongside slowing payroll gains.
  • Investment:  Contributing -0.97 and declining -5.6% QoQ with deceleration across the board. Both Residential and Nonresidential Investment decelerated sequentially and Inventories contributed a remarkable -146bps to the headline number
  • Government: Contributing +30 bps but decelerating -90bps QoQ
  • Trade Balance:  More balanced than expected but still a modest negative contributor. 
  • Deflator:  GDP price index and Core PCE decelerated sequentially (on QoQ basis) with core PCE coming in at 1.3% for the quarter


What did we learn:  Policy makers look at GDP sub-aggregates to gauge the strength of underlying domestic demand independent of international factors and some of the more volatile components. Each were better than headline growth, but all decelerated sequentially.


  • Real Final Sales (GDP less Inventory Change):  decelerating -90bps sequentially to +3.0% QoQ SAAR
  • Gross Domestic Purchases (GDP less exports, including imports):  decelerating -210bps sequentially to +1.5% QoQ SAAR
  • Real Final Sales to Domestic Purchasers (GDP less exports less inventory change):  decelerating -70bps sequentially to +2.9% QoQ SAAR


Not Another GDP Summary Note... - GDP Summary Table


Not Another GDP Summary Note... - PCE Growth ST


Christian Drake

Senior Analyst




Updating the GIP Model: The +2% YoY growth rate recorded in 3Q15 represented a -70bps deceleration from 2Q15’s +2.7% YoY growth rate and a -90bps deceleration from the cycle-peak recorded in 1Q15. In conjunction with a +10bps acceleration in the average rate of CPI during the quarter, the U.S. economy landed squarely in #Quad3 for the third quarter of 2015. Our forecast range of +1.6% to +1.9% YoY (which translates to +0.5% to +1.7% QoQ SAAR) for 4Q15E implies the U.S. economy is likely to close out 2015 with a third straight quarter in #Quad3. From the perspective of our proprietary asset allocation strategy process, 3Q15 was as classic a #Quad3 outcome as one can find. Specifically, within both equities and fixed income, the factor exposures which have typically performed best during historical episodes of #Quad3 performed best during the quarter and the factor exposures which have typically performed worst during historical episodes of #Quad3 were among the laggards this time around. We expect this trend to continue – with one caveat: the policy adjustments of Draghi (ECB), Kuroda (BoJ) and Carney (BoE) should continue to perpetuate deflation throughout the commodity complex via a stronger USD (CLICK HERE for more details).


Not Another GDP Summary Note... - 1


#Quad3 LONGS: Utilities (up +4.4% in 3Q), REITS (up +2.0% in 3Q) and Treasury Bonds (10Y Yield down -32bps in 3Q):


Not Another GDP Summary Note... - Utilities


Not Another GDP Summary Note... - FTSE NAREIT Index


Not Another GDP Summary Note... - 10yr Yield


#Quad3 SHORTS: S&P 500 (down -6.9% in 3Q), Materials (down -17.3% in 3Q), Financials (down -7.2% in 3Q) and High Yield Credit (Yields up +148bps and OAS up +154bps, on average, in 3Q):


Not Another GDP Summary Note... - SPX


Not Another GDP Summary Note... - Materials


Not Another GDP Summary Note... - Financials


Not Another GDP Summary Note... - HY OAS


Reviewing the Base Effects: Largely due to how we model GDP using a proprietary Bayesian Inference Process, 3Q15 marked the third straight quarter in which our model has pinned-the-tail-on-the-advance-GDP-estimate-donkey (see: 1Q15 and 2Q15). Notwithstanding the fact that the Bloomberg Consensus estimate for 3Q15E peaked at 3% QoQ SAAR in August, we continue to espouse the merits of modeling the macro economy like any thoughtful analyst would model a micro company – on a YoY basis. Refer to our 9/2 white paper titled, “Do You QoQ?” for a detailed explanation of this omnipotent distinction. Simply put, when base effects accelerate and/or remain elevated for an extended period of time, growth rates tend to slow on a trending basis. The opposite outcome holds true for growth rates that encounter decelerating and/or consistently subdued base effects. All told, U.S. Real GDP growth slowed right on queue into steepening base effects in 3Q15. Moreover, these “comps” are set to remain extremely difficult for the next four quarters, which implies the sine curve of underlying U.S. economic growth that oscillates between +1% and +3% is likely to mean revert back to the low end of that range of probable outcomes over the next few quarters. Indeed, domestic economic growth is now well past its cyclical and structural peaks and history has proven that rolling off the latter is bad.


Not Another GDP Summary Note... - 2


Not Another GDP Summary Note... - Trend GDP vs. S P 500


Not Another GDP Summary Note... - Trend GDP vs. Recessions


Assessing Our Predictive Tracking Algorithm: Not much to say here other than the loss of sequential momentum is now obvious to anyone who dares to view the data. With the domestic industrial and earnings recessions ongoing, the risk to consensus forecasts for domestic economic growth is primarily centered on hopeful expectations for the U.S. consumer. But with various metrics of household consumption growth and gauges of services sector activity rolling off their respective ~10Y-highs, we continue to find it more appropriate to position for trending deceleration in these metrics, rather than improbable suspension of economic gravity. As we penned in our 10/27 note titled, “Is the Bear Market Priced In?”, this is a run-of-the-mill #LateCycle Slowdown in which inflation and capital expenditures peak and roll first, followed by employment growth and ultimately by consumer spending. No sense in making it any more complicated than that.


Not Another GDP Summary Note... - 3


Not Another GDP Summary Note... - Bloomberg Consensus 2016 GDP Estimate


All told, feel free to rely on our competitors’ forecasts for domestic and/or global growth and inflation at your own risk. As the only accredited firm that actually called for the 2015 industrial and earnings recessions that would stem from our 2014 #GlobalDeflation call, we believe we have more than earned enough ethos to help steer investors to the right side of the mid-cycle (Consensus Macro) vs. late-cycle (Hedgeye) debate.


Darius Dale



Takeaway: The Fed has raised rates 9 times since April 2014 based on Wu-Xia math. This explains a) why growth is slowing and b) why it's late cycle.

Claims are maintaining steady strength below 330k, rising by just 1k last week to 260k. However, even with claims now marking their 20th month below the 330k level, the Federal Reserve once again held the Fed Funds rate flat at zero yesterday. Last week, as we show in the chart below, we pointed out that this delay in a rate increase appears to be different versus previous cycles. Historically, by now the Fed would already be well underway raising rates. This is one of the arguments put forward by bulls for why the current cycle may not yet be long in the tooth.




The reality, however, is that the Fed has actually been tightening policy since December 2013 when it began tapering QE3. Interestingly, as Christian Drake of our Macro Team pointed out, the Fed actually quantifies the effect of the current cycle's non-traditional policy action and the tapering thereof in the chart below with a measure called the Wu-Xia Shadow Fed Funds Rate (HERE). The Shadow Rate is basically the rate the Fed has set by implementing non-traditional policies. The following chart shows that we have been in a rising rate environment since April, 2014 and the effective Fed Funds rate has risen ~225 bps to -0.75% from -3%. This is one of the main reasons why a) growth is now slowing and b) the cycyle is, in fact, very late stage.




On the energy front, claims in energy states continue to worsen versus the country as a whole as we approach the end of the year around which point many energy firms' hedges will roll over. The chart below shows that in the week ending October 17, the spread between the indexed series of energy state claims and country-wide claims widened to 22 from 20 in the prior week.




The Data

Initial jobless claims rose 1k to 260k from 259k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4k WoW to 259.25k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -9.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -8.2%
























Yield Spreads

The 2-10 spread rose 1 basis points WoW to 141 bps. 4Q15TD, the 2-10 spread is averaging 143 bps, which is lower by -10 bps relative to 3Q15.






Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Our "Lower-For-Longer" Call? Validated Again With Lousy GDP Report

Our "Lower-For-Longer" Call? Validated Again With Lousy GDP Report - GDP cartoon 05.29.2015


That malodorous odor you're smelling? Today’s Q3 U.S. GDP report which came in much weaker than consensus expected. Their sanguine projections (though dramtically reduced over the past three months) proved to be too high yet again.


Spoiler alert #1 > We got it right.


The Bureau of Economic Analysis’ first estimate for third quarter GDP was 1.5% quarter-over-quarter and 2% year-over-year. That was at the high end of the range we had forecasted of 0.1% to 1.5%. For those keeping score, we’ve been right about GDP for three quarters in a row now. (To read our analysis of Q1 and Q2 GDP estimates click here and here.)


Wall Street's track record? Not so good.


Check out the chart below showing consensus GDP estimates. See how the projections slowly trickled up at the beginning of the year, before the drop to 2%, back in August.


*Still too high*


Our "Lower-For-Longer" Call? Validated Again With Lousy GDP Report - 10 29 2015 Bloomberg consensus


You can read today's news analyzing, ad nauseam, what happened during the quarter. (Quickly: investments and net exports were a drag on the economy, government expenditure was a tiny net positive and consumption contributed almost all of the gains.)


More importantly, here’s what you need to know heading into Q4 2015.


Spoiler Alert #2 > It's not looking good.


As our macro analyst Darius Dale pointed out on The Macro Show this morning, the batch of recent economic data has turned red. The omnipotent central planners at the Fed acknowledged as much yesterday... opting to remove global economic concerns from its statement, while punching up language related to issues here at home.


Here's the side-by-side comparison of the Fed statements:

Our "Lower-For-Longer" Call? Validated Again With Lousy GDP Report - 10 29 2015 consensus taper 


(To read Hedgeye's compendium of bearish economic readings check out our post "U.S. Economic Data Flashed Trouble Ahead.") 


Furthermore, consumption, the one bright spot in this quarter's GDP report, is slowing. Also on The Macro Show today, U.S. Macro analyst Christian Drake pointed to a historical chart which suggests consumption peaked in 1Q 2015.  


Our "Lower-For-Longer" Call? Validated Again With Lousy GDP Report - 10 29 2015 hedgeye consumption


Given this bearish setup heading into the year-end print, you may be wondering: What are our GDP estimates for Q4 2015?


Join us and we'll keep you well ahead of the consensus.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

LNKD: Thoughts into the Print (3Q15)

Takeaway: We expect a clean beat on 4Q15 guidance, which should improve waning sentiment following a series of self-inflicted wounds by LNKD mgmt.


  1. SELLING ENVIRONMENT REMAINS STRONG: Our LNKD JOLTS tracker is accelerating through the first two months of 3Q15, suggesting an improving selling environment.  Our tracker has produced a relatively tight correlation with LNKD's Talent Solutions ARPA dating back to 1Q11 (~0.75).  As a reminder, our LNKD Talent Solutions TAM analysis suggest the bulk of that TAM is in the upsell opportunity (ARPA) vs. new account volume.  See 2nd note below for detail.  
  2. GUIDANCE = WORST-CASE SCENARIO: We suspect LNKD all but removed Display Advertising revenue from its guidance (see 1st note below), so that headwind is more than baked into estimates.  That said, we see Talent Solutions as the swing factor moving forward.  LNKD should handily beat rebased 2H15 consensus TS revenue estimates barring a considerable deceleration in both ARPA and LCS account growth (see scenario analysis below).  LNKD's salesforce ramp into the improving selling environment would suggest the opposite.  
  3. BUT IT'S UP TO MGMT: We suspect the street needs a clean beat on 3Q revenues/4Q15 guidance or we'll likely see another sell-off in the name.  Fundamentally, there's nothing in the way of that (see Points 1 & 2), but the risk into any LNKD earnings release is a notoriously conservative mgmt team as it relates to its guidance.  However, mgmt already played that card twice over the last two prints, and we suspect it now realizes that was a big mistake (especially two quarters in a row).


See the notes below for supporting detail/analysis on our LNKD Long thesis, and let us know if you would like to disucss. 


Hesham Shaaban, CFA




LNKD: Thoughts into the Print (3Q15) - LNKD   ARPA vs. JOLTS 3Q15 2

LNKD: Thoughts into the Print (3Q15) - LNKD   Guidance slide 

LNKD: Thoughts into the Print (3Q15) - LNKD   TS FC slide


LNKD: Notes from 10-Q & IR
08/26/15 10:35 AM EDT
[click here


LNKD: New Best Idea (Long)
07/14/15 08:00 AM EDT
[click here]

FLASHBACK: Why Twitter's Problems Run Deep | $TWTR

Our contrarian Internet & Media Sector analyst Hesham Shaabban has been raising warning flags on the social media site for quite some time. Here he is back in mid June. The stock is down around 18% since.

Click here to subscribe to The Macro Show today.


Takeaway: Pre-announced so few surprises but a relief. Positive fwd commentary with the exception of "transient softness" that looks leisure related



  • Equity markets overeacting to lodging space, intend to take advantage of the overreaction by backing additional shares
  • Expected weaker results due to holiday shifts
  • In 3Q Group revenues were flat, 2% rate up, OCC negative 
  • 4.5% increase for transient demand in July and September but August lagged 
  • Arrivals from China still postive, but the average stays appear to be shorter which is a negative 
  • HST returned more than $1 billion of capital to stockholders in 2015 through stock repurchases and dividends, to increase stock repurchase program by an additional $500M
  • Domestic RevPAR led by Boston +5.3% YoY, Los Angeles +9.1% YoY, Seattle +9.8% YoY, and San Francisco +6.2% YoY
  • NY RevPAR +1.3% YoY
  • RevPAR decreased 3.4% at its Washington D.C. hotels due to a decline in convention activity and 9.7% at its Houston properties due to continued weakness in the energy market.
  • Difficult World Cup related comps hurt RevPAR in Brazil, renovations and oil weakness hurt performance at the Calgary Marriott.
  • Intl segment offset by Asia-Pacific market where RevPAR increased 6.2%YoY and 7.7% YoY for the quarter and YTD
  • The European JV comparable hotel RevPAR on a constant euro basis increased approx 9.1% YoY in 3Q
  • Increased 10.2% YoY on constant currency basis
  • 4Q RevPAR growth driven by several of the Company’s west coast properties, as well as Boston, Atlanta, Chicago, and Florida properties
  • F&B +6.5% YoY in 3Q
  • Will be exiting AUS and NZ. Proceeds of sales $104M, expecting to sell additional properties 
  • Currently marketing over $1 billion in assets worldwide.  Volatility in the marketplace seen temporary, and see attactive valuations. Will continue to market properties as long as the valuations are attractive. 
  • Asset sales could present opportunity for special dividends in the future
  • Booking activity in 4Q positive
  • Group demand should be +4%, mostly driven by rate in 4Q 
  • Transient activity moderating thus far in OCT - leisure
  • 1Q 2016 showing some shortfalls due to calendar shifts, but rest of 2016 looking strong and group demand is promising 
  • NY weakness to persist in 4Q and 2016 
  • DC weak as the city could not retain events they had last year over the same period 
  • Houston group business is accelerating sequentially but RevPAR will likely remain negative 
  • Leverage 2.5x-3.5x range but likely to stay at the high end due to the buyback but feel very comfortable at the higher end of the range. 


  • Confident in their ability to dispose assets at multiples richer than their traded equity muiltiple 
  • EBITDA impact on asset dispositions = +$20M in 2015, acquistion of Phoenician will add $6M of EBITDA for 2015
  • Overall there will be less disruption in the comp base in terms of rennovations and CapEx 
  • Also seeing some transient weakness in Q4. Group holding up very well in OCT. Group should be +6% in 2016
  • Intl travel weakness in OCT probably a reason for transient weakness, but very tough to pinpoint
  • Supply constrained in the segments where they operate. Houston, NY, and Miami are going to see strong levels of supply. Hawaii virtually no supply
  • Seeing very strong group demand next year, booking window lengthening. 2017 visibility for group is also strong
  • Fall off from Japanese travel and European outbound travel has lagged due to the strong dollar and has hurt growth in certain markets
  • 50% of asset sales going towards dividend - bullish on their ability to raise the dividend in 2016, or issue a special dividend by the end of 2016. Lots of flexibility with that. 
  • No interest to move into the select service space, becuase it is the only area seeing meaningful supply increase. Longer term it has potential, but not ready to commit capital to that space at present.
  • Implications of M&A among the C-Corps:  limited  
  • Despite selling assets, they don't see the cycle ending any time soon. Asset sales aren't meant to time the market top. 
  • Market stronger for individual assets vs. a portfolio of assets, and this is how they will proceed with asset sales. 
  • Best markets to focus on are still in the U.S., validates their plan to reduce exposure to Asia


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