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JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT

Initial Claims Fall 1k Before Revision

The headline initial claims number fell 1k (3k after the revision) this week to 420k.  Rolling claims fell to 422.75k, 5.25k lower than the previous week and a new YTD low.  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 9.8%, it's 11.8%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.8% actual rate as opposed to the 9.8% reported rate. Today's data is a tiny step in the right direction. 

 

JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT - 2

 

JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT - 3

 

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.

 

JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT - 1

 

Joshua Steiner, CFA

 

Allison Kaptur


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - December 16, 2010

As we look at today’s set up for the S&P 500, the range is 14 points or -0.26% downside to 1230 and 0.87% upside to 1246.  Equity futures are trading modestly above fair value following mixed day on Wednesday, which saw the S&P snap a six-day winning streak. 

 

In Europe, the start of a two-day summit may be of note should any major disagreements emerge on how best to deal with the European sovereign crisis going forward. On the data front, weekly jobless claims, Q3 current account balance and Dec Philadelphia Fed are due for release

  • Annaly Capital Management (NLY) announced 64c-shr dividend for 4Q, vs BDVD est. 68c
  • AutoZone (AZO) authorized $500m stock buyback
  • Bank of America (BAC) said some investors in soured mortgage bonds agreed to postpone deadlines set in Oct. 18 letter
  • Danaher (DHR) sees 1Q GAAP EPS 52c-57c, vs est. 57c
  • Herman Miller (MLHR) reported 2Q adj. EPS 29c vs est. 28c
  • Nasdaq OMX Group (NDAQ) agreed to acquire FTEN, terms not disclosed
  • Nordson (NDSN) sees 1Q adj. EPS $1.03-$1.13 vs est. 94c
  • SciClone Pharmaceuticals (SCLN) will end devt. of SCV-07 for hepatitis C after trial didn’t meet primary endpoint
  • Tower Bancorp (TOBC) announced public offering of $44m shares

PERFORMANCE

  • One day: Dow (0.17%), S&P (0.51%), Nasdaq (0.40%), Russell 2000 (0.43%)
  • Last Week:  Dow +0.25%, S&P +01.28%, Nasdaq +1.78%, Russell +2.70%
  • Month-to-date: -to-date: Dow +4.10%, S&P +4.63%, Nasdaq +4.76%, Russell +5.69%;
  • Quarter-to-date: Dow +6.21%, S&P +8.24%, Nasdaq +10.50%, Russell +13.64%;
  • Year-to-date: Dow +9.87%, S&P +10.77%, Nasdaq +15.34%, Russell +22.86%
  • Sector Performance: Utilities (0.9%), Financials (0.9%), Materials (0.7%), Energy (0.7%), Tech (0.6%), Industrials (0.5%), Consumer Disc (0.4%), Healthcare (0.4%), Consumer Spls +0.1%.              

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -965 (-597)  
  • VOLUME: NYSE 1111.05 (+16.58%)
  • VIX:  17.61 +0.34% YTD PERFORMANCE: -18.77%
  • SPX PUT/CALL RATIO: 1.10 from 1.26 -12.40%  

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 16.50 -0.203 (-1.214%)
  • 3-MONTH T-BILL YIELD: 0.14% -0.01%  
  • YIELD CURVE: 2.85 from 2.83

COMMODITY/GROWTH EXPECTATION:

  • CRB: 318.90 -0.25%
  • Oil: 88.62 +0.39%
  • COPPER: 413.25 -1.82%
  • GOLD: 1,386.38 -1.22%

CURRENCIES:

  • EURO: 1.3276 -1.02%%
  • DOLLAR: 80.261 +1.13%

OVERSEAS MARKETS:

 

EUROPEAN MARKETS:

  • European markets mostly trade higher with indices near the days best levels.
  • Gains are muted ahead of the start of the two day EU Leaders Summit as investors await any details on an increase in the size of the current bailout fund and following Spain's bond auction that saw a significant increase in yields.
  • Advancing sectors lead decliners 16-2 with healthcare and insurance the only sectors lower.
  • Retailers are amongst the leading gainers. US futures trade higher 
  • Dec Preliminary PMI France: Manf 56.3 vs con 57.6; Svcs 54.1 vs con 55.2, Germany: Manf 60.9 vs con 58.1; Svcs 58.3 vs con 59.0, EuroZone: Manf 56.8 vs con 55.2; Svcs 53.7 vs con 55.2, UK Nov Retail Sales inc. fuel +0.3% m/m vs con +0.4%

ASIAN MARKTES:

  • Most Asian markets fell today, with concerns about European debt keeping many players out of the market.
  • Australia rose slightly. Virgin Blue and Air New Zealand rallied 6% each after the ACCC conditionally approved their alliance.
  • Japan was flat, as gains from a weaker yen were offset by worries about European debt.
  • South Korea fell0.41%, breaking a three-day winning streak.
  • Coal stocks rose, but China fell 0.46% on low volume.
  • Insurers took Hong Kong down 1.33%.

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER



TALES OF THE TAPE: MCD, YUM, PFCB, SBUX, CHUX, CBRL, DRI

More weakness in restaurant stocks yesterday with coffee concepts being the worst performers over the last week.

 

Some news items from the restaurant space:

  • MCD Japan revised up its earnings outlook for the year ending December 31st due to the introduction of a new menu and the shutdown of non-profitable stores.
  • PF Chang’s China Bistro has appointed Lane Cardwell, most recently CEO of Boston Market, to the board of directors
  • Goldman Sachs has resumed coverage of YUM with a Neutral rating and $58 price target
  • The Kraft versus Starbucks showdown continues with Kraft raising prices on both its Maxwell House and Yuban Coffee brands by approximately 12% after prices for green coffee rose to 13-year highs.  Starbucks says that the move is in violation of Kraft’s agreement with Starbucks (that Starbucks is trying to sever)
  • O’Charley’s CEO Lawrence Hyatt has resigned, effective this year end.  As you can see in the table below, shares of CHUX sold off on high volume.  Who knew what and when?
  • CBRL subsequently named Hyatt as CFO
  • As the second table below illustrates, the Street’s estimate of DRI’s earnings have been creeping ahead of the quarter – the company reports EPS on 12/20.  Intra-quarter, DRI introduced new products and lowered select prices at Red Lobster.  Business at Reb Lobster continues to lag Olive Garden and Longhorn Steakhouse
  • Burger King is no longer requiring its restaurants to stay open until 2 a.m. on Fridays and Saturdays.  While this is a victory for franchisees, it is a clear indication of the lack of profitability in late night for Burger King

TALES OF THE TAPE: MCD, YUM, PFCB, SBUX, CHUX, CBRL, DRI - stocks 1216

 

TALES OF THE TAPE: MCD, YUM, PFCB, SBUX, CHUX, CBRL, DRI - cd estimates

 

Howard Penney

Managing Director


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JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT

Initial Claims Fall 1k Before Revision

The headline initial claims number fell 1k (3k after the revision) this week to 420k.  Rolling claims fell to 422.75k, 5.25k lower than the previous week and a new YTD low.  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 9.8%, it's 11.8%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.8% actual rate as opposed to the 9.8% reported rate. Today's data is a tiny step in the right direction. 

 

 JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT - rolling

 

JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT - raw

 

Yield Curve Continues to Widen Rapidly

We chart the 2-10 spread as a proxy for NIM. The 2-10 spread has recently expanded sharply, expanding 44 bps in the last two weeks alone and 78 bps since the beginning of the quarter.  Yesterday’s closing value of 287 bps is up from 262 bps last week.

 

JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT - spreads

 

JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT - spreads QoQ


Financial Subsector Performance

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

 

JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur



MACAU DEMAND >SUPPLY

PWC raised some eyebrows with their growth projections.  At least for next year, they may be low, and it’s hardly supply driven.

 

 

The main goal in our trip to Macau last week was to gauge the long-term growth potential of the Macau market.  We already get weekly data and with our contacts, we think we have a good read on the near-term developments.  We came away not only positive about current fundamentals but that the market may grow faster than currently anticipated.  Our trip coincided with the PWC release of its Macau forecast which certainly raised a few eyebrows.  PWC thinks the Macau market will grow at a CAGR of 24.7% over the next five years from the 2009 base.  Of course, that includes roughly 50% growth for 2010 which is pretty much in the bag.  Still, their 2011 estimate of 26% growth is pretty compelling.  We think it will be closer to 30%.

 

Are we being too aggressive?  We don’t think so.  Even if the market doesn’t grow from the Q4 run rate (adjusted for seasonality), 2011 will still be over 13% higher than 2010.  Our 30% projection assumes 2% monthly sequential growth, adjusted for seasonality, throughout 2011. 

 

What about same store growth?  Well, Galaxy Cotai will open in the spring and boost table supply by 12%, a substantial increase but well below demand growth.  As can be seen in the following chart, our monthly revenue growth projection remains higher than supply growth in every month of 2011.  To be conservative, we are not assuming any increase in visitation as a result of the opening of Galaxy which is probably unrealistic.

 

MACAU DEMAND >SUPPLY - macau234

 

We remain most bullish on Wynn Macau due to recent market share gains, a clean operation, and a differentiated product.  MGM also looks like a winner as its recent market share gains are sustainable and likely higher margin than the Street expects.  MPEL’s City of Dreams (CoD) is probably most at risk when Galaxy Cotai opens.


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