We just upgraded our GDP estimate for the first quarter of 2017. Here's why.
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The U.S. economy is heating up. So is inflation. That’s kneecapping long-term bonds.
At yesterday’s testimony before the House Financial Services Committee, Fed head Janet Yellen said that the U.S. economy was "very close to achieving" objectives of maximizing employment and maintaining a stable inflation rate of 2% (the Fed's inflation target). On the news, investors anticipated the Fed would raise rates faster than was originally expected. The 2-Treasury yield jumped (from 1.206% the day prior to as high as 1.25%).
Investors don’t yet appreciate that the Fed is falling behind on growth and inflation. Interest rates could rise much faster than is expected. Data released yesterday confirmed this line of thinking:
The Fed says it’s data dependent. If they actually are, economic data over the coming months should force their hand. Interest rates will rise faster than the two or three currently expected by investors in 2017. That will be unequivocally bearish for Long-Term Treasury bonds (TLT). We say sell them.
Takeaway: Join us for a review of our WFM Long thesis today on why we think shares have 30% upside.
***We are hosting a Flash Call at 11:00 AM ET to go through our LONG thesis for WFM. Contact firstname.lastname@example.org for more information and access.
Whole Foods Founder John Mackey is taking back control of the company and has called for a slowing in store growth, focusing efforts now on costs and cash flow. This pivot for an industry leading growth company doesn’t happen often (think SBUX, MCD, TGT). It requires a period of revaluation and reset expectations. But it is also followed by significant outperformance if done correctly. That’s the road ahead we see for WFM.
Whole Foods reported another disappointing quarter last week, but more importantly they laid out a new path forward for the company. We published a note last week that explained why cutting capex is exactly what they need to do in order to improve the performance of this company. With John Mackey back in charge, he is taking the bull by the horns and returning this company to its roots by focusing on the core Whole Foods consumer.
This first cut is deep, but they can go deeper once they work through sites that are already in development, cutting capex to only maintenance and other necessary expenditures. We have seen this story before, and will provide examples of companies that grew too fast into an increasingly competitive environment, getting ahead of their skis and falling on their face. Pulling back on growth capex for a couple of years will allow them to refine their current footprint and accelerate profitability.
The core Whole Foods consumer is still alive and well, and by no means do we believe that the Whole Foods brand will die in the face of conventional competition. We will lay out in detail how we anticipate their new way forward to unfold, including conversation on their capital expenditure plan, the focus on the core consumer and how category management will change the way they operate.
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
Takeaway: Join us for a review of our EXAS Long thesis today on why we think shares have 30% upside.
Please contact email@example.com for further information. An invite with dial-in instructions will be sent to subscribers ahead of the conference call.
We are hosting a call today at 1:00PM ET to review our Exact Sciences (EXAS) Long thesis. With short interest still elevated at 30.6% we see significant upside heading into 2017 as consensus sales estimates are too low at $163.2M which implies a massive deceleration in either provider adds, tests per provider or ASP. We have developed a reliable tool to gain visibility into EXAS's provider count and will be watching this tracker closely over the next few months.
With a series of clinician and former executive interviews, combined with data from the National Ambulatory Medical Care Survey (NAMCS) we gained new insights into the colon cancer screening market and Cologuard's role in it, which stand in contrast to the short seller narrative. We'll review our addressable market analysis that estimates Cologuard's potential annual test volume to be 2.7M, or 2.0M for the commercially insured population and 0.7M for Medicare. We will also review EXAS provider adoption model and provide our thoughts on the bigger questions around payor contracts and dormant physician accounts. We see +30% upside in the near term, but also believe we have visibility into an opportunity to pivot short when growth starts to slow.
On January 8th Exact Sciences reported preliminary revenues for 2016 of $99-$99.5M implying 4Q16 revenues of $34.9-$35.4M. EXAS is scheduled to report 4Q16 and full-year 2016 results on Tuesday, February 21st. For 4Q16 and full-year 2016 we are expecting EPS of ($0.38) and ($1.68) compared to consensus of ($0.39) and ($1.69). For the fourth quarter we are modeling COGS at $178 per test and expect to see Sales and Marketing expense of $32.8M due to higher television ad campaign spend.
Key economic data (U.S. retail sales and inflation) reported yesterday confirms what we've been saying here at Hedgeye for some time now... U.S. growth and inflation are accelerating. Year-over-year growth in both data sets are near or above 5-year highs.
Okay. Obvious statement of the day: Growth and inflation accelerating is bullish for the U.S. stock market.
The epic Trump trade -- one which has propelled U.S. stocks to record highs across all three major indices -- continues.
The year-over-year growth rate in retail sales hit 5.6% yesterday, a level not seen since March 2012. Digging deeper into the report, the retail sales “control group” (a good proxy for the input into the consumption component of US GDP) accelerated to +4.0% year-over-year growth for the month of January versus +3.4% growth in December.
Core inflation just hit the highest level in 5 years. CPI accelerated to +2.5% year-over-year in January versus +2.1% in December. Inflation has now accelerated for the 6th consecutive month.
Fed head Janet Yellen said yesterday that the U.S. economy was "very close to achieving" objectives of maximizing employment and maintaining a stable inflation rate of 2% (the Fed's inflation target).
For some time now, we've been arguing that the Fed risks falling behind the curve if they don't raise rates (and soon). Our proprietary leading indicator on inflation suggests year-over-year CPI readings could hit three, even four, percent in the first quarter of 2017, as previously beleaguered commodity prices contribute to inflation growth in the coming months.
This would shock Yellen & Co. An inflation rate at or above 4% hasn't been seen since September of 2008. In other words, we may need more rate hikes than the two or three currently expected by the market in 2017.
Both retail sales and inflation suggest the U.S. economy is heating up. That's bullish for the stock market. And watch the Fed. They're already falling behind the curve on this growth and inflation data.
Don’t freak out.
Micron Technology (MU) shares were down -3% yesterday, as a Wall Street analyst warned of softness in PC pricing. But hang on a sec.
“While it’s always tempting to sell Micron and run away because it’s a heart attack stock, the data actually shows very stable, seasonal orders for smart phones and PCs,” says Hedgeye Technology analyst Ami Joseph in the video above.
Bottom Line? Joseph says:
“The bear case is still a theory while the current data is real, and we are still about 50% above Street EPS for the next 4 quarters due to the lagging impact of pricing on MU model and implied May-Aug quarterly revenue and incremental gross margins.”
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