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Is Swine Flu a Tail Risk You Are Contemplating?

Our Healthcare Sector Head Tom Tobin called out a global macro risk to us the other day that we had not been considering, the reemergence of swine flu (H1N1).  In the United Kingdom, almost 36 people have died of the virus this flu season.  Interestingly, almost all were under 65 years of age and, according to reports, 40 percent of the fatalities did not have the usual risk factors (weak immune systems, primarily).

 

Ireland, in particular, is seeing an acceleration in swine flu activity.  According the Public Health Agency in Ireland, as of the week ending January 2nd, reported swine flu cases had grown from 30 to 91 week-over-week – a +190% increase in seven days! (albeit on small numbers)

 

As a refresher, the H1N1 form of the swine flu is descended from the strain that caused the 1918 flu pandemic, which was estimated to have killed 50 – 100MM people globally.   The symptoms to swine flu are similar to other flues – chills, fever, sore throat, muscle pain, and general discomfort.   Fatalities occur as these symptoms accelerate, and the most common reasons for death are respiratory failure, pneumonia, dehydration, and kidney failure.  Not surprisingly, fatalities are most common in the young and elderly, which is what makes the recent strain in the U.K. interesting to note, as 40% of the fatalities did not come from this target group.

 

We actually did a Google analytics analysis to understand whether swine flu is a risk the investors are currently considering.  As the chart below outlines, currently search volume for the term swine flu is well below levels in 2009 and, in fact, search activity is quite low overall. 

 

Is Swine Flu a Tail Risk You Are Contemplating? - 1

 

Interestingly, we also looked at the last 30 days of search activity and noticed that swine flu search activity is beginning to break out to the upside, which suggests that the idea of swine flu as macro risk is gaining momentum.

 

Is Swine Flu a Tail Risk You Are Contemplating? - 2

 

In 2009, the World Health Organization (WHO) declared swine flu a pandemic and President Obama declared a state of emergency after more than 1,000 people had died from it.  In August 2010, the WHO officially declared the pandemic over.  While we are not trying to be alarmists in suggesting that a new pandemic is coming, we did want to highlight that there is evidence of a pickup in infections, which is not currently priced into expectations based on the low relative amount of Google search activity.

 

While it is tough to measure the potential economic impact from a broader breakout, it is likely fair to suggest that even a mild pickup in activity would hurt confidence and have a more severe impact on the travel and hospitality industries.  In 2009, the Brookings Institute estimates that “a mild scenario would cost the global economy about $360 billion and an ultra scenario up to $4 trillion within the year of the outbreak.”  Even if we are early and wrong, those are numbers that make this a Tail Risk worth considering. 

 

Daryl G. Jones

Managing Director


Government Whispering: Ahead of Tommorrow's Jobs #

Ahead of tomorrow’s US jobs print, here are some of our team’s thoughts: 

  1. Whisper of 580,000 payroll adds has been going around since yesterday
  2. Every market rally (from yesterday’s pre-market futures lows) has been followed up with people reminding me of the whisper
  3. Government Whispering is turning into the casino that Big Government Intervention built into your markets – get used to it 

Where are we at on estimates versus expectations: 

  1. The payroll number could be at least 3x consensus (it started the wk at 125,000 which is a bit of a joke)
  2. The question now is can it be 2x that (or better than the whisper of 580,000)? 

In terms of what an improving jobs picture actually means for the interconnected macro markets tomorrow: 

  1. BONDS: definitely baking this in (collapsing UST’s have been for a month and yields are bullish TRADE, TREND, and TAIL in our model)
  2. FX: definitely, maybe overly, baking this in (USD had its best day in a month yesterday and up again today)
  3. STOCKS: are trying their best to bake this in, but I think they’re going to look late 

Too late, because January looks more like November did to us (when the SPX was down) in terms of US growth, employment, and confidence trends (ABC conf hit -45 this week, down for 2 weeks in a row, and jobless claims this morn were more in line with what we see in the intermediate term TREND = Jobless Stagflation. The hype about US growth recovery is certainly getting disconnected with some very big cap consumer stocks (BBY, MCD, TGT, GPS, M, etc)…

 

From Josh Steiner:

 

I cannot speak to the NFP mousetrap that Barclays has built (my old alma mater), but I will say that our preferred method for tracking the employment situation is jobless claims. Jobless claims had their big move in December and that fueled much of the market rally over that time, so it would seem like a further rally on NFP for December would be overkill, though that’s not to say it won’t happen given how short-sighted this market is. Bigger picture, taking a step back from this one datapoint, our work suggests that claims will actually worsen over the next 4-6 weeks as they did in both 2010 and 2009, which may make tomorrow’s number a last gasp of good news on the employment front for some time, so the question becomes do you want to use that as an entry or an exit point? You also have to wonder about the importance of a single NFP print that disconnected from the claims series.

 

Not that anyone seems to care about the unemployment rate anymore, but there is very little likelihood that it will come down anytime soon based on the degree of contraction in the labor force participation rate, which is actually understating unemployment by around two whole percentage points.

 

From Howard Penney:

 

A few more relevant data points related to deteriorating or stagnant labor market conditions.

  1. The ISM’s purchasing managers survey (manufacturing) showed the December employment diffusion index dropping to 55.7 versus 57.5 in November.  The December reading was the lowest since March 2010. 
  2. The ISM’s purchasing managers survey (services) also showed the December employment diffusion index declining, from 52.7 in November to 50.5 in December.  The December reading was the lowest since September 2010. 

In Conclusion:

 

Tomorrow’s jobs # isn’t about anything other than the whisper at this point. Missing the whisper is probably as bad as smoking it (intraday rallies this week have been based on this 580k whisper, while the rest of the world’s stock markets in Asia and Europe have sold off). The short term performance spread between the VIX and SPX hasn’t been this wide since, well, ever.

 

That’s a very risky inverse relationship to be rolling the bones on the long side in front of a macro catalyst. At a bare minimum, that’s not what we are going to tell you to do.

 

Yours in risk management,

KM


INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD

Initial Claims Rise 21k

The headline initial claims number rose 21k week over week to 409k (18k after a 3k upward revision to last week’s data).  Rolling claims fell 3.5k to 411.25k.  We continue to 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. 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.

 

One thing worth pointing out is that in the last two years the first several weeks of the new year have seen raw SA claims rise. We would expect to see this trend continue. If not, it would suggest a stronger underlying improvement in the jobs environment.

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - 1

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - 2

 

There is seasonality in initial claims, which the BLS makes an effort to remove via the seasonal adjustment factor.  Below we show the non-seasonally adjusted initial claims series for purposes of comparison.  

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - 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.

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - 4

 

Joshua Steiner, CFA

 

Allison Kaptur


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European Chart of the Day: UK Services PMI

Position: Long Germany (EWG); Short Italy (EWI), Euro (FXE)

 

UK Services PMI for December declined to 49.7 versus 53.0 in November, and importantly fell below the 50 level that divides expansion (above 50) and contraction (below 50).

 

As we’ve noted in previous work, including yesterday’s piece titled “Europe’s New Year’s Update”, we believe inflation in the UK will continue to be a negative headwind in 2011. In the most recent Bank of England Minutes the committee concluded that over the intermediate term CPI could reach as high as 4.0%. Even at its current level of 3.3% Y/Y we’re cautioning that consumption can be chocked off.

 

While UK Manufacturing PMI showed a gain to 58.3 in December (the highest in 16 years) versus 57.5 in November, given the prospects for slower growth this year, including the economies of its main trading partners in Europe, there’s reason for caution. The UK’s austerity program over the next 4 years is a tax on the consumer and should weigh on confidence to the downside. With Services a stronger driver of overall growth than manufacturing in the UK, we believe this inflection in the Services PMI is meaningful and stagflation may not be far afield.

 

Currently we’re playing Europe’s Sovereign Debt Dichotomy with a short position in Italy (we re-shorted the etf EWI on 1/4), and are short the Euro (FXE) with a TRADE range of $1.30-$1.32 versus the USD. We remain long Germany (EWG) in our Virtual Portfolio.

 

The BoE meets next on January 13th to announce its interest rate policy, with consensus expectations of no change to the current main rate of 0.50%.

 

Matthew Hedrick

Analyst

 

European Chart of the Day: UK Services PMI - UK Services


INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD

Initial Claims Rise 21k

The headline initial claims number rose 21k week over week to 409k (18k after a 3k upward revision to last week’s data).  Rolling claims fell 3.5k to 411.25k.  We continue to 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. 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.

 

One thing worth pointing out is that in the last two years the first several weeks of the new year have seen raw SA claims rise. We would expect to see this trend continue. If not, it would suggest a stronger underlying improvement in the jobs environment.

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - rolling claims

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - raw claims

 

There is seasonality in initial claims, which the BLS makes an effort to remove via the seasonal adjustment factor.  Below we show the non-seasonally adjusted initial claims series for purposes of comparison.  

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - claims NSA

 

Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for the trend in industry NIM. Thus far the spread in 1Q is tracking 38 bps wider than 4Q.  The current level of 276 bps is up from 272 bps last week.

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - spread

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - spreads QoQ

 

Financial Subsector Performance

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

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - subsector perf

 

 

Joshua Steiner, CFA

 

Allison Kaptur


TALES OF THE TAPE: EAT, RT, DRI, CAKE, RRGB, PFCB, COSI, SONC, CBOU, CMG, MCD, SBUX

Strong performance yesterday, particularly in QSR, after well received earnings from Sonic on Monday and Ruby Tuesday yesterday after the close

 

Notable news items and price moves yesterday:

  • A notable divergence in price action yesterday was EAT up on accelerating volume, while DRI, CAKE, RRGB and PFCB were down on accelerating volume
  • RT posted strong results after the close last night, beating expectations with strong same-store sales results showing a healthy gap emerging between RT and the Knapp-Track casual dining benchmark.
  • Cosi outperformed once again and remains one of my favorite names.  Yesterday’s 13% gain was confirmed by strong volume and Cosi is now the top performing stock over the last month and week.
  • Sonic posted strong gains following Monday’s earnings results.
  • Some upgrades/downgrades from Piper Jaffray hit the tape: CAKE was raised to “Neutral" from "Underweight", CMG was raised to "Overweight" from "Neutral" CPKI was downgraded "Neutral" from "Overweight" and BJRI was downgraded to "Neutral" from "Overweight".
  • CBOU coffee upgraded at Jeffries.
  • RT upgraded by BofA/ML.
  • CMG article in Fortune: “Chipotle Mexican Grill is the hottest restaurant stock around”.  CMG founder Steve Ells said Wednesday he is developing an Asian fast-casual concept that he expects to debut in mid-2011.
  • MCD is selling Lattes in the Atlanta market for $1 until January 17th.
  • Year-over-year food prices rose 10 percent for the most popular store-bought grocery items, especially breakfast foods, according to the American Farm Bureau Federation.
  • SBUX removed the words “Starbucks Coffee” from its logo, seeking to emulate NKE and AAPL as a brand that is ubiquitous and instantly recognizable.  The move also reflects company’s shift from being purely about coffee to selling food and other beverages.  Much of the reaction online has been negative, which could make SBUX’s move look more like GAP than NKE.

TALES OF THE TAPE: EAT, RT, DRI, CAKE, RRGB, PFCB, COSI, SONC, CBOU, CMG, MCD, SBUX - sbuxlike

 

TALES OF THE TAPE: EAT, RT, DRI, CAKE, RRGB, PFCB, COSI, SONC, CBOU, CMG, MCD, SBUX - stocks 16

 

Howard Penney

Managing Director


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