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CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS

Initial Claims Plunge 34k Breaking the 400k Line

Reported initial claims dropped sharply by 34k to 388k in the week ended December 25th. On a four-week rolling basis, they fell 12.5k to 414k. By any measure this is a positive print and should further perpetuate the Santa Claus rally in Financials. As we've written before, we expect initial claims will continue to have a tailwind through mid-January, consistent with the last two years. In other words, in spite of the seasonal adjustment factors, claims have a tailwind that starts at the beginning of December and runs through mid January. The charts below demonstrate.

 

We would remind investors that based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. With claims in the 388k range as of this most recent print, that would suggest we could start to make some forward progress if claims remain in this range or move lower. 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. So, while we're heading in the right direction it will likely be a very long time before the headline unemployment rate improves.

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - 1

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - 2

 

Yield Curve Widens 23 bps in 4Q10 Relative to 3Q10

We chart the 2-10 spread as a proxy for industry NIM. The spread in 4Q is tracking 23 bps wider than 3Q. The current level of 272 bps is flat with the 272 bps at the end of last week.

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - 3

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - 4

 

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.

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - 5

 

Joshua Steiner, CFA

 

Allison Kaptur


CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS

Initial Claims Plunge 34k Breaking the 400k Line

Reported initial claims dropped sharply by 34k to 388k in the week ended December 25th. On a four-week rolling basis, they fell 12.5k to 414k. By any measure this is a positive print and should further perpetuate the Santa Claus rally in Financials. As we've written before, we expect initial claims will continue to have a tailwind through mid-January, consistent with the last two years. In other words, in spite of the seasonal adjustment factors, claims have a tailwind that starts at the beginning of December and runs through mid January. The charts below demonstrate.

 

We would remind investors that based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. With claims in the 388k range as of this most recent print, that would suggest we could start to make some forward progress if claims remain in this range or move lower. 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. So, while we're heading in the right direction it will likely be a very long time before the headline unemployment rate improves.

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - rolling claims

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - raw claims

 

 

Yield Curve Widens 23 bps in 4Q10 Relative to 3Q10

We chart the 2-10 spread as a proxy for industry NIM. The spread in 4Q is tracking 23 bps wider than 3Q. The current level of 272 bps is flat with the 272 bps at the end of last week.

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - 2 10 actual

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - 2 10 chg

 

 

Financial Subsector Performance

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

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - subsector perf table

 

Joshua Steiner, CFA

 

Allison Kaptur



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Alberta Bound

“This piece of heaven that I've found;
Rocky Mountains and black fertile ground;
Everything I need beneath that big blue sky;
It doesn't matter where I go;
This place will always be my home;
Yeah I've been Alberta Bound for all my life;
And I'll be Alberta Bound until I die.”

- Paul Brandt

 

For those that have experienced an Alberta winter, you may disagree with Canadian singer and song writer Paul Brandt that Alberta is a great place to be bound for in December.  In fact, our Chief Operating Officer was in Calgary a month ago on a day in which Calgary registered as the second coldest place on the planet. While he was a bit whiny about that fact, in my opinion, cold weather is like anything – if it doesn’t kill you it makes you stronger.  Last night I took my nieces and nephew on a sleigh ride in -20 degrees Celsius weather and I think it made them stronger.

 

I always enjoy flying back home to Alberta and into the Calgary International Airport.  Each time I’m struck by two things: the vastness of my home province and the rapid growth of Calgary, the business capital of the Canadian energy industry.  The newest addition to the growth of Calgary is a 59-story office tower called “The Bow”, which will be the largest office tower in Canada outside of Toronto when it’s completed in 2012.  This tower will become the world headquarters of Encana, a global leader in non-conventional gas production.

 

Alberta is the home to the vast majority of Canada’s energy resources.  In particular, the Canadian oil sands, containing ~170 billion barrels of oil reserves, is second only to Saudi Arabia and accounts for just over 13% of all global reserves.  It is estimated that the Canadian reserves could supply Canadian energy needs for the next 400 years.  This is true energy independence. 

 

These vast energy resources are one of the key factors supporting our long position in the Canadian Dollar (or the Loonie) in the Virtual Portfolio.  Not only is Canada completely energy independent, it will also benefit in a weak dollar environment which inflates the prices of U.S. dollar-based commodities, such as oil.  While the United States gets squeezed in a high oil price environment, Canada becomes cash rich, as 99% of Canadian oil exports get sent to the U.S.  Clearly, the current U.S. Federal reserve policy of Quantitative Guessing is very supportive of our long Loonie position.

 

It is estimated that energy contributes ~31% of Alberta's GDP and almost 5% of Canada's GDP overall, therefore the price of oil has a real impact on Canadian GDP.  As the price of oil increases, Canadian GDP will directly benefit.  Moreover, as Canadian production increases, energy’s contribution to Canada’s GDP will grow.  Currently, Canada represents ~6% of global oil production through ~13% of global reserves.  Over time, as we’ve seen throughout the last decade, Canada’s production share globally will begin to mirror its reserve share, which should create a major tailwind for Canadian GDP in the next decade.

 

Our Energy Team led by Lou Gagliardi recently released their top 10 list for energy investment ideas in 2011.  Not surprisingly, a number of these ideas were Alberta based energy companies.  So without further adieu, our top 3 Alberta ideas for 2011:

 

1. CANADIAN OIL SANDS TRUST (COS) – Mispriced conversion

 

The company is converting to a corporation from a trust at the end of December 2010. The stock recently took a hit on news that COS will cut its dividend payout ratio in half upon conversion to a corporation in order to maintain cash flow within capital spending. COS is 100% levered to oil sands production, as the largest partner (36.74% interest) in the Canadian Syncrude Joint Venture.

 

We view COS a company with upside earnings potential in 2011 -- potentially a 63% increase from 2010 to C$2.04/share at $85 oil, and net cash flow positive C$0.20/share after capital spending. At $89 per barrel oil, earnings could increase further to C$2.28/share, with net cash flow at C$0.45/share.  We view shares as oversold, as the market overreacted to the dividend reduction news, presenting a buying opportunity. COS is undervalued by roughly 30% according to our discounted cash flow models. The company's operating fundamentals remain strong, particularly with high oil price leverage.  The balance sheet has a moderate debt-to-capital ratio at ~23%, net of cash at ~21%.

 

2. NORTH AMERICAN ENERGY PARTNERS (NOA) – Predictable cash flow and dirt cheap

 

This Canadian oil sands resource "services" provider has been hit hard by the downturn in Oil Sands project expansion that began in 2009 and continued into 2010. NOA provides oil sands mining and site preparation, piling and pipeline installation services: as of the end of September, revenue from oil sands services generated 83% of net revenue, 84% of which is recurring revenue. Although its balance sheet remains under pressure at ~57% debt-to-capital and net of cash at ~50%, recent projected increases in capital spending by oil sands companies and the resumption of oil sands growth projects is good news for NOA, which will benefit from increased project spending.

 

Oil sands project growth will provide the catalyst to earnings growth into next year. For NOA's fiscal year ending March 2011, earnings are expected to decline 21% to C$0.61/share, but earnings for fiscal year 2012 (beginning in April 2011) should bounce back by ~120% to $1.36/share, driven by higher oil sands spending, which equates to just under 10x earnings. Net cash flow for both years should remain positive, with fiscal 2012 expected at $32 million or C$0.90/share.

 

3. MEG ENERGY (MEG) – Growth with a monster balance sheet

 

MEG Energy is a bitumen producer based in Calgary, Alberta with shares traded on the Toronto Stock Exchange. We expect MEG's 2011 earnings to benefit from a full year in operation, a 3% increase in oil sands production lower operating costs per barrel, and expanding margins. With its strong balance sheet, a strategic partner in China's CNOOC owning 15%, debt-to-capital at 21% and net of cash at negative ~13%, we believe MEG is being underpriced by the market by roughly 30%.

 

The company is sitting on roughly C$1.4 billion in cash -- more than enough to meet its expected net cash flow deficit after capital spending of roughly ~C$600 million for 2011. It is in the growth mode, ramping up production for its next phase of expansion at Christina Lake, with expected start-up in 2013. Based on $85 oil in 2011, MEG's 2011 earnings should top consensus, reaching ~C$0.92 per share, up more than 150% increase from 2010. Should crude oil average $89 in 2011, MEG's earnings could go about 16% higher to ~C$1.06.

 

You would be remiss not make your energy portfolio “Alberta Bound” in 2011.

 

Yours in risk management,

 

Daryl G. Jones

Managing Director

 

Alberta Bound - 1


THE M3: JACOBS LAWSUIT; S'PORE NOV VISITATION; LEVEN TO SELL SHARES; MACAU LRT

The Macau Metro Monitor, December 30th, 2010

 

DETAILS EMERGE ON FIRING OF SANDS CHINA EXECUTIVE Las Vegas Sun

Attorneys for LVS argued that while Jacobs had sued LVS and Sands China, he had failed to name an “indispensable” party as a defendant — his actual employer Venetian Macau Ltd.  For this reason, his lawsuit in the US should be dropped and any disputes should be resolved in Macau.

 

Some causes of Jacobs' termination are:

  • Negotiated “arrangements” for Sites 5 and 6 without approval; and commissioned a brand study for those sites involving changing their names without informing the boards of Sands China and Venetian Macau.
  • Negotiated a transaction with Caesars for certain development sites (site 3 and or sites 7 and 8). It’s unknown what type of deal Caesars had worked with Jacobs on.
  • Disagreed in public with Adelson’s position on the growth prospects for Sands China.
  • Exercised LVS stock options and sold LVS stock without first informing superiors.

 

TOURISM SECTOR PERFORMANCE FOR NOVEMBER 2010 STB

Visitor arrivals to Singapore registered 16.1% growth to reach 963,000 in November 2010.   It is also the 12th consecutive month of record visitor arrivals. 

 

Indonesia (176,000), Malaysia (100,000), P R China (94,000), India (73,000) and Australia (64,000) were Singapore's top five visitor-generating markets in November 2010.  These markets accounted for 53% of total visitor arrivals for the month.  India (+46.3%), Hong Kong SAR (+45.3%), and South Korea (+41.8%) registered highest growth out of the top 15 markets.

 

THE M3: JACOBS LAWSUIT; S'PORE NOV VISITATION; LEVEN TO SELL SHARES; MACAU LRT - Spore

 

REGULATION FD DISCLOSURE Las Vegas Sands

As part of his individual long-term strategy for asset diversification, tax and family planning, acting Sands China CEO, Michael Leven, plans to sell up to 1,758,349 shares of company stock during 2011, with 133,349 stock option shares planned to be exercised and sold in January 2011, 125,000 stock option shares planned to be exercised and sold in February 2011 and 150,000 stock option shares planned to be exercised and sold in each month from March through December 2011.


LIGHT RAIL TENDER WINNER ANNOUNCED macaubusiness.com

Mitsubishi Heavy Industries has won Macau's LRT contract (1st phase) by bidding MOP4.688 BN (US$586 MM).  Construction is expected to start in 2011 with the 1st phase of the system opening in 2015.


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