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Crossfire in Europe

Ireland

 

-Today Ireland’s PM Brian Cowen released the country’s four year budget plan to cut €15 Billion from the deficit. The plan hopes to cut €10 billion from spending and raise €5 billion in extra taxes, and includes:

  • 24,750 public sector job cuts
  • €2.8bn reduction in social welfare spending
  • Plans to raise an additional €1.9bn from income tax
  • The minimum wage will be cut by €1 cut to €7.65 an hour
  • VAT will be raised from 21% to 22% in 2013, with a further increase to 23% in 2014
  • A property levy, called a site tax, will be introduced
  • Unemployment is expected to fall from 13.5% to below 10% over the four years
  • The government forecasts the economy will grow by an average of 2.75% in the years from 2011 to 2014
  • Corporate rate of tax of 12.5% will remain untouched
  • Target to narrow the budget deficit to 3% of GDP by end of 2014

Catalyst: On Dec. 7th lawmakers are scheduled to vote on the country’s 2011 budget in parliament, which is expected to shave €6 billion from the budget through spending cuts (~€4.5 Billion) and tax hikes of ~€1.5 Billion. Passage of the package should ensure a funding (bailout) agreement from the EU and IMF, projected at €85 Billion.

 

PM Cowen, who publically stated on Monday that he is prepared to dissolve his government following the passage of the 2011 austerity package and EU/IMF bailout, is standing on pins and needles as opposition parties are demanding snap elections. Further, Cowen’s narrow 3-seat parliamentary majority with his junior coalition partners, the Green Party, threatens to vote against him in a by-election vote tomorrow, which could further turn sentiment against him. [For more, see our post on 11/23 titled “Voted Off the Island”.]

 

Main Issue: while the Irish may meet the demands of the EU/IMF to find savings worth €6 billion next year to secure a bailout, the government makes a rather lofty growth estimate for the country given the severity of austerity measures, which we believe should choke off growth to levels far below the government’s projections.

 

 

Portugal

 

-Workers are on striking across the country protesting austerity measures today; infrastructure ground to a halt.

 

Catalyst: On Friday (11/26) PM Jose Socrates and his Socialist government attempt to pass the final round of legislation on its 2011 spending plan, with austere measures including:

  • 5% wage cut for public workers earning more than $2,005/month
  • Hiring freeze of government jobs
  • Raising VAT 2% to 23%

All these measures are designed to shave down the country’s budget deficit that stood at 9.3% of GDP in 2009. While the OECD thinks Portugal can reduce its deficit to 4.6% in 2011, markets are telling a lot less convincing story with yields and credit spreads rising to higher highs (chart below). Further, data suggests its budget gap has increased +1.8% in the first 10 months of this year. One bullish point to note is that the country does not have a bond redemption until April 2011 and has completed this year’s bond sales.  

 

Crossfire in Europe - eyield

 

Main Issue: while the country did not experience a housing bubble like Ireland or Spain, Portugal has not shown real growth prospects, with Real annual GDP growth up a mere +0.4% on average over the last 7 years.  The country’s inability to grow could severely weigh on investor confidence that it can clean up its fiscal imbalances short of a EU/IMF bailout, similar to the cases of Greece and Ireland. It’s estimated that 80% of the country’s debt is held by foreigners, which further compounds the country’s ability to “internally” fix its fiscal imbalances. 

 

 

UK

 

-An estimated 10,000 students held protests across the U.K. over plans to cut funding for education and increase university tuition fees.

 

Main Issue: As part of the effort by UK PM Cameron’s government to slash 81 billion pounds from public spending by 2015 to reduce the country’s deficit , Cameron is allowing British universities to charge as much as 9,000 pounds ($14,218) a year for tuition, compared with the current 3,290 pounds, as the government seeks to cut subsidies to colleges.

 

Take Away: We continue to believe that fiscal austerity measures will equate to social unrest.

 

 

And on that cherry note, Happy Thanksgiving!

 

Matthew Hedrick

Analyst


PSS: Ammo for the Qtr

In looking at the upcoming quarter for PSS, we like what we see. The bottom-line is that we believe earnings are more likely to start with a ‘6’ than a ‘5’ as suggested by consensus expectations of $0.51 when the company reports next week. That said, there’s a reason why the stock is just now back to its pre analyst day price on October 20th while peers have surged 20% higher on average over the same period. In short, a disappointing long-term outlook for Payless domestic coupled with the reality that management is more actively vetting acquisition candidates spooked investors – as we hit on in detail in our “PSS: Ready, Shoot, Aim” post on 10/26. After walking away last month thinking the story was intact with room for upside compared to management’s outlook, we’re even more confident this is indeed the case due to both underlying industry strength confirmed in peer results and strong mid-quarter trend data.

 

Here’s a detailed look at how we're getting to $0.60 in EPS this quarter:

 

Top-line:

  • In taking a look at our monthly NPD POS footwear data, we can get a sense of what brands are doing from a directional standpoint. While in no way does the data capture all U.S sales of the Performance Lifestyle Group’s big brands, it has still proven to track closely with reported trends. Since Q2, three of PLG group’s four brands have accelerated sequentially. In addition, with Q3 backlog up +70% compared to +50% in Q1, we expect revs up +21.5% on the heels of +20.3% growth last quarter.
  • In the domestic business, the river cards have all have all been revealed in the form of peer results and the results are exceptional. However, since Q4 last year – this has mattered little with PSS decoupling from its peers and significantly underperforming on comp. The primary reason -  the company missed the the boat on BOTH the boot and toning trends last year, which for a few quarters each contributed +4%-5% to peer comps alone. With boots accounting for roughly 20% of the fall assortment well above the single digit presence it’s had in the recent past and toning now contributing as well accounting for a +2.5% boost in Q2, we expect the comp performance gap to start narrowing this quarter.
  • We expect a comps to come in down -6% driven by more positive traffic seen across the channel as well as mix, which is likely to drive ticket up LSD. Simplistically, if we take 5% of the portfolio with an average ASP of $18 and shift it to boots/toning with an ASP of $30, this would increase the average ticket by +3%-4% alone. 

Gross Margins:

  • Headwinds in the quarter consist primarily of product costs and channel mix. With product costs expected up LSD in the quarter we estimate an -80bps impact in addition to another -50-60bps headwind from mix (greater PLG sales) assuming ~$45mm in incremental PLG sales at say an average margin below 30%.
  • More than offsetting these factors will be several tailwinds in the form of lower promotional activity (Oprah alone impacted GMs by roughly -200bps in Q3 last year), rent/occupancy with mid-to-high-teen reductions on 20% of the portfolio renegotiated annually equating to +30-40bps, and product mix by category with addition of toning and boots.

SG&A:

  • With another ~$10mm of expense related to building out both PLG wholesale and international similar to what we saw in Q2, marketing spend up slightly to support new lines/product, and Payless domestic and PLG retail to be kept relatively flat, we expect SG&A to be up a modest +3% in the quarter.

 

Given the company’s recent performance, it’s going to take more than a quarter to convince investors that this story is on track. However, we expect to see clear signs of progress when the company reports next week. With shares barely responding to strong peer results again yesterday, PSS is clearly in “show me” mode. As such, shares are likely to move higher on any results that come in less bad presenting investors with one last play on footwear before year end.

 

Casey Flavin

Director

PSS: Ammo for the Qtr - PSS PLG Q3 trends 11 10

 

PSS: Ammo for the Qtr - Comp Table 11 10

 

PSS: Ammo for the Qtr - Comp 1yr 11 10

 

PSS: Ammo for the Qtr - Comp 2yr 11 10

 


Tales of the Global Inflation Tape: China, Brazil and India

Conclusion: Inflation continues to percolate within these economies and we expect further monetary policy tightening in each country over various durations, with China being the most imminent. Furthermore, we expect inflation to continue to remain a headwind for many countries globally and that will eventually lead to slowing economic growth (via policy tightening) which is negative for equities.

 

Position: Bearish on Indian equities.

 

Chairman Bernanke’s experiment with Quantitative Guessing continues to have unintended consequences, due to the impact of the equation highlighted below:

 

QG = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]

 

A brief review of global economic data points highlights the three very key countries’ struggles with inflation (China, India and Brazil). While divergence between each country’s response reminds us that both inflation and monetary policy are local, analyzing them collectively allows us to derive the equation laid out above.

 

Let us briefly visit each country’s headlines and data points from today’s global macro run for a quick update on the global inflation front:

 

Country: China; Policy Stance: Proactive

 

On a relative basis, China has been particularly proactive in their fight with inflation of late, raising bank’s reserve requirements twice this month, hiking interest rates in October, and announcing potential price controls and supply rationing in its food market. In line with our forecast(s), recent data points support our view that additional tightening may be on the way: 

  • China’s largest banks are being rumored to have hit their government-set caps on lending this year and regulators are monitoring the banks’ loan balances daily to ensure the full-year 7.5 trillion yuan new lending quota isn’t breached. Concurrently, Industrial & Commercial Bank of China Ltd. and Agricultural Bank of China Ltd. are reported to be only extending new loans as existing loans get repaid. Overnight, People’s Bank of China Deputy Governor Hu Xiaolian said China will face challenges meeting its full-year lending target and that China will control the pace of lending for the rest of the year.
  • The premium investors demand to hold ten-year Chinese corporate bonds vs. similar maturity Chinese sovereign debt rose 16bps yesterday – the most since Lehman Bros. filed for bankruptcy – on speculation that bank lending curbs will create illiquidity in that market.
  • China’s Banking Regulatory Commission has threatened (via its website) to crack down on the use of loan funds for speculation and hoarding.
  • China’s benchmark money-market rate rose to a seven-week high of 2.22%. Yesterday’s one-year bill auction saw the lowest amount of yuan sold since July 2008 due to declining demand for the securities, which have yielded 2.3437% for the second straight week.  Translation – the Chinese bond market sees additional rate hike(s) in the near future. 

For more color on China’s inflation issues, please reference the following reports (email us if you need a copy):

 

10/19: China Raises Rates… Setting Off a Chain Reaction That’s Bad for Reflation

10/21: China Sets the World Up for a Crash

11/11: Chinese Inflation Data Confirms What We Should Already Know: QE2 Will Slow Global Growth

 

Tales of the Global Inflation Tape: China, Brazil and India - 1

 

From a quantitative perspective, China's Shanghai Composite Index is bearish TRADE and bullish TREND:

 

Tales of the Global Inflation Tape: China, Brazil and India - 2

 

Country: Brazil; Policy Stance: Reactive, Hopeful

 

The latest developments out of Brazil are supportive of our views that Brazil will be late off the snap when it comes to fighting inflation. While the latest inflation readings remain comfortably within the central bank’s target of 4.5%  (+/- 2%), the recent acceleration in price growth, appointment decisions and hopeful rhetoric from Brazilian officials have the Brazilian bond market as concerned as we have been for the past couple of months: 

  • The bond market’s expectations for annual inflation over the next two years hit a two year high of 6.68% yesterday, as measured by the breakeven rate between the government’s fixed and inflation-linked debt. The current expectation of 6.68% puts two-year inflation expectations 18bps above the upper band of the central bank’s target.
  • Yields on Brazil’s interest rate futures due in January 2012 have jumped 49bps since the start of this month to 11.83%, implying the bond market expects the central bank to raise the benchmark Selic rate to ~13% by the end of next year from the current 10.75%. This latest up-move coincides with fiscally loose rhetoric from President-elect Dilma Rousseff, who herself is a big proponent of spending on social programs.
  • It is being reported that President-elect Dilma Rousseff will not ask the hawkish Henrique Meirelles to stay on board as her central bank chairman, leading to speculation that his replacement may not be as vigilant in combating inflation. Today, it is rumored that Rousseff will appoint the 46 year-old Alexandre Tombini a the new central bank chief. This appointment is noteworthy and positive on the margin because it signals to the market some degree of continuity in monetary policy, as Tombini has served as a board member in the central bank since 2005. Further, former Brazilian president Henrique Cardoso has previously flagged Tombini as an instrumental figure in helping design the 1999 inflation targeting plan.
  • Treasury Secretary Arno Augustin said yesterday, “There is no reason to expect faster inflation and higher interest rates in Brazil.” Reminds me of another Treasury Secretary whom we’re all familiar with that simply doesn’t get it…
  • Shortly after Arno’s commentary, Brazilian inflation, as measured by the IPCA-15 Index, was reported to have accelerated to a 20-month high of +5.47% YoY in the latest reading (mid-November).
  • On top of market inflation expectations getting away from Brazilian officials, yesterday’s economic data show that Brazil’s formal employment sector added +204.8k new jobs in October. While down from September’s +246.9k rate, the January-October total of +2.4 million new jobs created is the highest rate EVER for a ten-month period. In addition to the employment tailwinds, Brazilian consumer confidence, as measured by the FGV Consumer Confidence Index, hit a record high in November. The 125.4 reading advanced +2.7% MoM. We have been in print for much of 2H10 documenting the tailwinds of the Brazilian consumer and how robust internal demand will continue to keep upward pressure on inflation readings going forward. 

For more color on Brazil’s inflation issues, please reference the following reports (email us if you need a copy):

 

10/22: Real Commotion in Brazil

11/9: Outlook for Brazilian Interest Rates: Read the Fine Print

 

Tales of the Global Inflation Tape: China, Brazil and India - 3

 

From a quantitative perspective, Brazil's Bovespa is bearish TRADE and bullish TREND - for now. Last night it tested a TREND line breakdown, closing below its TREND line of 68,826. It is trading slightly above that intraday, but we'll need to see it close above the TREND line for bullish confirmation:

 

Tales of the Global Inflation Tape: China, Brazil and India - 4

 

Country: India; Policy Stance: Inactive, Hurtful

 

It would be an understatement to suggest India is losing this three-horse monetary policy race. Having shifted from his hawkish stance (six rate hikes YTD) to a more relaxed position, Reserve Bank of India Governor Duvvuri Subarrao has recently signaled to the market that additional rate hikes are not in India’s near future. That would be fine if India had inflation under control; unfortunately, the latest WPI reading of +8.58% YoY suggests India is far from achieving its target of +4-4.5% YoY inflation.

 

Compounding this blatant lack of vigilance is the RBI’s decision to add fuel to the fire by buying back government bonds from Indian lenders with the intention of increasing liquidity in a cash-strapped banking system that has been struggling to meet demand for loans. Fueling speculation when inflation is running at twice the target rate is not our idea of risk management. We expect further tightening ahead, but only after inflation becomes the problem it was in 1H10, which suggests the RBI will be slow to react to this burgeoning issue. For now, the Indian currency market is taking the other side of the trade: 

  • The premium investors pay to exchange the rupee for dollars in 12-month forward contracts vs. the spot rate has dropped -84bps since the end of last month and is down -1.36% from its nine-year high of 6.08% on October 27th. The drop signals that investors are anticipating smaller increases in Indian interest rates over the duration of the contract.
  • The muted outlook for interest rate hikes over the near term has many investors less optimistic on the rupee, as the premium paid for options offering protection against declines in the rupee have grown +229bps to 260bps from a 16-month low of 31bps on September 20th. 

For more color on India’s inflation issues, please reference the following reports (email us if you need a copy):

 

11/2: Eye On Asia: Things Are Getting Ugly

11/9: India’s Two Big Problems

 

Tales of the Global Inflation Tape: China, Brazil and India - 5

 

Indian equities got tagged again overnight (down -1.2%), which caused the SENSEX to close below its TREND line. This is new and further confirmation of this price action will lend additional support for our bearish stance on Indian equities:

 

Tales of the Global Inflation Tape: China, Brazil and India - 6

 

All told, we remain bearish on equities as an asset class globally because of the spectre of further tightening in these three economies, as well as incremental tightening in other countries. The CRB Index may have backed off its YTD highs recently, but commodity prices remain elevated enough (up +8.3% YoY) to continue to fuel inflation globally and inflation will eventually lead to slowing economic growth (via policy tightening) which is negative for equities.

 

Darius Dale

Analyst


Daily Trading Ranges

20 Proprietary Risk Ranges

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R3: M, DSW, JCG, WMT

R3: REQUIRED RETAIL READING

November 24, 2010

 

 

 

 

RESEARCH ANECDOTES

  • Score one for Macy’s on the collaboration front.  Rumor has it the mega department store operator is close to announcing a deal with Karl Lagerfeld to produce an affordably priced ready-to-wear line.  The offering is expected to range from denim to gowns and is likely to launch in Fall 2011.  Interestingly, Lagerfeld’s namesake brand is owned by private equity firm Apax Partners, the same former owners of Tommy Hilfiger (another high profile Macy’s exclusive).
  • Celebrity sells.  Replica copies of soon to be royalty, Kate Middleton’s engagement dress sold out within 1 hour in the UK.  Even more interesting, the $26 dollar dress was sold at Tesco, a retailer more known for groceries than fashion!
  • A strong boot season last year which was driven by a perfect cold-weather set up and a growing fashion boot trend does not appear to be too big of a hurdle for footwear retailers hoping to “comp the comp”.  DSW reported yesterday that it’s boot business is up 10% on top of a 47% increase last year! And, it’s finally cold out.

OUR TAKE ON OVERNIGHT NEWS

 

More on JCG - Millard “Mickey” Drexler may have just fired the starting gun for a new and potentially transformative round of industry dealmaking. By joining with private equity firms TPG Capital and Leonard Green & Partners in a $3 billion buyout of J. Crew Group Inc., Drexler is also readying the company for expansion and giving its new concepts like Madewell and Crewcuts a chance to mature away from Wall Street scrutiny. Under terms of the deal signed Tuesday, Drexler will remain chairman and chief executive officer and keep his equity stake in the business, which is currently 5.4 percent. Stockholders will be paid $43.50 a share — a 15.5 percent premium over Monday’s closing price but still below the more than $50 the stock sold for in April. The holiday season could single out the best retail opportunities and lead to a “very active” round of mergers and acquisitions in the first quarter, Bassuk said. “You will see more retail deals in the $1 billion to $3 billion range,” said David Shiffman, investment banker and managing director at Miller Buckfire & Co. “At that size range, large-cap and midcap [private equity] firms can put significant capital to work. In addition, strategic acquirers are building large cash balances and will use M&A for growth.” <WWD>

Hedgeye Retail’s Take: Implications that Mickey is becoming a banker with this deal might be premature.  Anyone who knows Mickey is aware that he is the merchant of all merchants and not a dealmaker in the making.

 

WMT Gears up For Black Friday - Global economic crisis? Lingering recession? Apparently, retailers didn’t get the memo. They’re amping up shopping opportunities for Black Friday with aggressive incentives and promotions both online and in stores, which are opening earlier and staying open longer than ever before. Many stores didn’t save their best deals for Black Friday, offering specials typically associated with the day after Thanksgiving, some as early as Halloween. Most projections are calling for a low-single-digit increase of 2 percent to 4 percent, which would mark the best holiday results in four years. MasterCard Advisors’ SpendingPulse said sales of apparel from Oct. 31 to Nov. 13 rose 9.7 percent against the same period last year. This is on top of October’s 8.2 percent gain. Kurt Salmon Associates said that while consumer confidence “remains shaky,” retail sales are expected to show a “modest increase through the holiday season.” Wal-Mart Stores Inc. is being aggressive, starting a three-day promotion on Monday of savings typically reserved for Black Friday. It advertised 150 online specials at walmart.com, three-times as many as last year, with savings of up to 40 percent on electronics, video games and toys among other categories. Wal-Mart said it will match the price of competitors’ ads on Black Friday and is offering free shipping on electronics as well as the majority of online specials available through the Site to Store program. Most Wal-Mart units will be open 24 hours on Thanksgiving Day, with Black Friday in-store specials kicking off at midnight and 5 a.m. Starting at midnight, Wal-Mart will provide entertainment and treats for customers. <WWD>

Hedgeye Retail’s Take: WMT is the master of the deal focused press release.  At least from what we’ve seen, there is no evidence to suggest that deals will be any  better than they’ve been on past Black Fridays.  The difference is in how the message is being conveyed.

 

Bulgari Signs Watch Deal for China - Raising its profile in a fast-growing market, Bulgari SpA said Tuesday it has signed a five-year agreement with Hengdeli Holdings Ltd. to distribute high-end watches through more than 50 multibrand watch stores in China. The partnership will allow Bulgari to further increase the visibility of its timepieces in China as the multibrand stores open over the next five years. Hengdeli will be the sole distributor of Bulgari watches in the country. Bulgari chief executive officer Francesco Trapani said the deal was “very important” for the Rome-based firm because it helps “to even more effectively cover the watch market, in an area with a huge potential such as mainland China,” where Bulgari already counts 20 monobrand stores. “On the other hand, this agreement, signed with one of the most important companies in the world for the distribution of international high-end watch brands, proves that our strategy for the watch business is correct and extremely competitive.” China has been particularly resilient during the global economic downturn and it ranked first among world markets with the highest potential for retail development in A.T. Kearney’s ninth annual study of areas ripe for expansion. <WWD>

Hedgeye Retail’s Take: Given the recent strength in the category, particularly from southeast Asia – there’s little risk embedded in this agreement and likely plenty of growth ahead in one of retail's hotest sub-segments.

 

Google's Local Availability Feature - Moosejaw, the muti-channel retailer of outdoor gear and apparel, will be part of the new Google Local Availability feature that recently launched. Moosejaw and Google have a long-standing relationship through Moosejaw's successful paid search programs. When Google asked Moosejaw to be one of the first participating retailers, Moosejaw jumped at the chance.  "We're really excited to be included with this new feature,s aid Kate Runyon, Moosejaw's Internet Marketing Manager. "We offer a lot of hard-to-find outdoor products, so this will really help drive people into our stores. We see Google Local converting some online shoppers back to local, as they discover specialty retailers like Moosejaw." Google Local Availability will be both available for online and mobile shoppers. The participating retailers upload inventory feeds from all their retail locations, along with their online availability and Google will offer options that are both online and in store fronts that are in close proximity to the customer. 'Google Local Availability should really drive sales, not just traffic, as this program is designed to bring in buyers that know the product that's in stock at a price they like," said Eoin Comerford, SVP of Marketing and Technology. <SportsOneSource>

Hedgeye Retail’s Take: Yet another example of new e-commerce/mobile technologies benefitting those with the exposure and systems in place to capitalize. With only seven retail locations, Moosejaw provides a limited, but important example of the evolution in the competitive landscape.

 

TRU Looking to Lure Customers - Toysrus.com will launch a weekend of Web-only deals at 12:01 a.m. on Thanksgiving Day. Free shipping will also be offered on thousands of toys with purchases of $49 or more.

Product highlights will include:

  • Up to 70 percent off on select action figures and play sets
  • Up to 60 percent off select vehicles, trains and radio controls
  • 30 percent off Crayola Pop Art
  • 20 percent off Hasbro Ultimate gifts
  • 30 percent off Club Penguin
  • 20 percent off all Tron action figures
  • 15 percent off Bratz, Liv and Taylor Swift dolls and play sets

"As gift-givers head online to begin their holiday shopping, we're planning our biggest cyber weekend ever, including our best free shipping event of the season," says Greg Ahearn, senior vice president of marketing and e-commerce at Toys"R"Us. "We know that online shoppers turn to Toysrus.com for the broadest selection of toys, and we will offer extraordinary deals on thousands of items sure to wow kids on Christmas morning." <licensemag.com>

Hedgeye Retail’s Take: While TRU’s $49 hurdle for free shipping isn’t the lowest in retail, there’s certainly no shortage of deals.


INITIAL CLAIMS FALL 34K TO NEW YTD LOWS, BUT THEY DID THIS LAST YEAR TOO

Not So Fast: Initial Claims Hit YTD Lows Falling 34k, But They Fell 39k This Week Last Year Too

The headline initial claims number fell 34k last week to 407k.  Rolling claims fell to 436k, 7.5k lower than the previous week.  For both series, today’s report is a new YTD low and the lowest level since July 2008 – certainly positive at face value. It is worth noting that during this week last year, claims had a comparable size improvement (down 39k) only to then unwind that improvement in the following weeks (see charts below for reference).  We continue to remind investors that the unemployment rate won't improve until we see claims move into the 375-400k range - this is based on our analysis of past cycles. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.5%, it's 11.5%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.5% actual rate as opposed to the 9.5% reported rate. All that being said, on the margin, today's data is positive.

 

INITIAL CLAIMS FALL 34K TO NEW YTD LOWS, BUT THEY DID THIS LAST YEAR TOO - 1

 

INITIAL CLAIMS FALL 34K TO NEW YTD LOWS, BUT THEY DID THIS LAST YEAR TOO - 2

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

INITIAL CLAIMS FALL 34K TO NEW YTD LOWS, BUT THEY DID THIS LAST YEAR TOO - 3

 

Joshua Steiner, CFA

 

Allison Kaptur


INITIAL CLAIMS FALL 34K TO NEW YTD LOWS, BUT THEY DID THIS LAST YEAR TOO

Not So Fast: Initial Claims Hit YTD Lows Falling 34k, But They Fell 39k This Week Last Year Too

The headline initial claims number fell 34k last week to 407k.  Rolling claims fell to 436k, 7.5k lower than the previous week.  For both series, today’s report is a new YTD low and the lowest level since July 2008 – certainly positive at face value. It is worth noting that during this week last year, claims had a comparable size improvement (down 39k) only to then unwind that improvement in the following weeks (see charts below for reference).  We continue to remind investors that the unemployment rate won't improve until we see claims move into the 375-400k range - this is based on our analysis of past cycles. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.5%, it's 11.5%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.5% actual rate as opposed to the 9.5% reported rate. All that being said, on the margin, today's data is positive.

 

 INITIAL CLAIMS FALL 34K TO NEW YTD LOWS, BUT THEY DID THIS LAST YEAR TOO - rolling

 

INITIAL CLAIMS FALL 34K TO NEW YTD LOWS, BUT THEY DID THIS LAST YEAR TOO - raw

 

Yield Curve

We look at the yield curve as a proxy for industry NIM tailwinds or headwinds. The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. After falling sharply for two quarters, the 2-10 spread has stabilized thus far in 4Q, rising 6 bps thus far (average of QTD versus average of 3Q).  Yesterday’s closing value of 231 bps is down from 238 bps last week.

 

INITIAL CLAIMS FALL 34K TO NEW YTD LOWS, BUT THEY DID THIS LAST YEAR TOO - spreads

 

INITIAL CLAIMS FALL 34K TO NEW YTD LOWS, BUT THEY DID THIS LAST YEAR TOO - spreads QoQ

 

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS FALL 34K TO NEW YTD LOWS, BUT THEY DID THIS LAST YEAR TOO - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


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