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INITIAL CLAIMS JUMP AND MORTGAGE DEMAND TUMBLES

INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS

Initial Claims Rise 35k

The headline initial claims number rose 35k WoW to 445k (36k after a 1k upward revision to last week’s data).  Rolling claims rose 5.5k to 417k. On a non-seasonally-adjusted basis, reported claims rose 192k WoW.  As the third chart below shows, claims are usually elevated in this week of the year. Based on the charts below it seems probable to expect that claims will continue to rise for the next several weeks.

 

As a reminder, 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.

 

INITIAL CLAIMS JUMP AND MORTGAGE DEMAND TUMBLES - 1

 

INITIAL CLAIMS JUMP AND MORTGAGE DEMAND TUMBLES - 2

 

INITIAL CLAIMS JUMP AND MORTGAGE DEMAND TUMBLES - 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 CLAIMS JUMP AND MORTGAGE DEMAND TUMBLES - 4

 

MORTGAGE DEMAND TUMBLES 24% IN 2010 AND 3.7% SO FAR IN 2011


Taking a Look at the Forest

Now that 2010 is done, it's worth taking a step back and considering how mortgage demand fared throughout the whole year. On a full-year basis, the 2010 mortgage purchase applications index averaged 200, which was down 24% year-over-year when compared with the average index level of 264 for 2009. For reference, both years included a stimulative tax credit - 2009's was late in the year while 2010's was early in the year. 2010's 24% decline was a continuation of a trend that's been in place since the peak in 2005. Consider the following year-over-year changes: 2006: -14%, 2007: +4%, 2008: -19%, 2009: -23%, 2010: -24%. We think that speaks quite clearly to the longer-term trend in place in housing demand. This is in spite of affordability improving in each of these years. We would expect 2011 to be another down year for housing demand, driven by still tighter underwriting standards, a lack of incremental downside in mortgage rates and a deflationary mindset driven by further declines in home prices keeping buyers on the sidelines. 

 

Taking a Look at the Trees

MBA Purchase Applications fell 3.7% week over week. Refinance Applications rose 4.9% as mortgage rates fell. On a year-over-year basis, purchase applications were down 10%.  The charts below show the recent trends in this series.

 

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INITIAL CLAIMS JUMP AND MORTGAGE DEMAND TUMBLES - 5

 

INITIAL CLAIMS JUMP AND MORTGAGE DEMAND TUMBLES - 6

 

Joshua Steiner, CFA

 

Allison Kaptur


EAT: NEW LUNCH MENU $6 COMBO ROLLOUTS

Conclusion: I remain positive on Brinker for the intermediate term given the significant progress the company is making on its back-of-house margin-enhancing initiatives.  In November I reaffirmed my positive view on the stock and now the lunch day part initiatives management had spoken about are being rolled out.  I expect these initiatives to positively impact comps for Chili’s, which I expect to be in positive territory in 2HFY11.

 

The lunch day part has traditionally been difficult for Chili’s and I am encouraged by management’s efforts to drive traffic during the 11am-4pm slot.  In my most recent post focused on Brinker, I outlined the lapping of menu changes made last year, “2 for $20” becoming a permanent fixture on the menu, and the new lunch menu rollout as being three factors that would lead the concept to positive same-store sales in 2HFY11.  Below I include a screenshot of the promotion email and also EAT’s quadrant chart, which shows EAT currently in the “life-line” quadrant with positive year-over-year margin growth and negative same-store sales.  I anticipate a migration into the “nirvana” quadrant (positive year-over-year margins and same-store sales) in 2HFY11.

 

EAT: NEW LUNCH MENU $6 COMBO ROLLOUTS - chili s promo

 

EAT: NEW LUNCH MENU $6 COMBO ROLLOUTS - eat matrix

 

Howard Penney

Managing Director


INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS

Initial Claims Rise 35k

The headline initial claims number rose 35k WoW to 445k (36k after a 1k upward revision to last week’s data).  Rolling claims rose 5.5k to 417k. On a non-seasonally-adjusted basis, reported claims rose 192k WoW.  As the third chart below shows, claims are usually elevated in this week of the year. Based on the charts below it seems probable to expect that claims will continue to rise for the next several weeks.

 

As a reminder, 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.

 

 INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS - rolling

 

INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS - raw claims

 

INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS - claims nsa

 

Yield Curve Continues to Widen

We chart the 2-10 spread as a proxy for industry NIM. Thus far the spread in 1Q11 is tracking 38 bps wider than 4Q10.  The current level of 276 bps is up from 272 bps last week.

 

INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS - spread

 

INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS - spread QoQ

 

Financial Subsector Performance

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

 

INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

TALES OF THE TAPE: MCD, DPZ, CAKE, PNRA, SBUX

News/price action callouts from restaurant space over the past 24 hours:

 

  • MCD declined on accelerating volume in an up tape
  • DPZ's strong outperformance continues
  • CAKE raised to Buy from Neutral at BofA/ML
  • PNRA opens pay what you wish location in Oregon
  • SBUX signs an agreement with Tata Coffee for sourcing coffee beans and to explore future entry of  SBUX into the Indian market
  • Arabica coffee process climbed to a 13 year high on speculation that crop diseases will disrupt global supplies
  • Cattle futures jumped to a record and hogs climbed to an eight-month high on concern rising feed costs will prompt farmers to curb supplies

TALES OF THE TAPE: MCD, DPZ, CAKE, PNRA, SBUX - stocks 113

 

Howard Penney

Managing Director


MACRO ICEBERGS

“It's been 84 years, and I can still smell the fresh paint. The china had never been used. The sheets had never been slept in. Titanic was called the Ship of Dreams, and it was. It really was.”
-Old Rose

 

In the quote above from the blockbuster film “Titanic”, an elderly Rose DeWitt Bukater reminisces on the grandeur and splendor of a vessel once described as “unsinkable” – even by God. More deeply, her allusion to the Titanic’s former nickname triggers feelings of grief as she turns to the memories of a lost life that could’ve been so many years ago.

 

Unfortunately global risk managers don’t have the luxury of dwelling on the past like Old Rose here. We must constantly be playing the game in front of us; this week global markets are tuned squarely to Europe’s bond auctions and statement’s from the region’s leaders on its sovereign debt issues as a proxy for market performance.

 

Over the short term we’d expect European markets to continue to make gains on the heels of announcements from China (earlier this month) and Japan (on Tuesday) to buy European bonds and statements from EU Economic and Monetary Commissioner Olli Rehn (yesterday) that EU officials are trying to forge a “comprehensive” plan to contain the sovereign debt crisis and from German Chancellor Angela Merkel who indicated a desire to do “whatever is needed to support the euro.”  Rehn also ruled out debt restructuring for Greece or any other euro-area member state.

 

With this kind of support, it’s no surprise that investors cheered, markets boomed, and the European auctions have found plenty of demand. Yesterday saw substantial outperformance from the peripheral equity markets, with gains from: Spain’s IBEX +5.4%; Greece’s Athex+ 5.0%; Italy’s FTSE +3.8%, as credit markets have improved over the last 3 days.

 

As we head in to earnings season, MACRO seemed to return to the forefront as the high-profile upside driver to global equity prices as concerns over sovereign debt auctions diminish.  The dampened European sovereign contagion concerns fueled a pickup in risk appetite on the back of a better-than-expected Portuguese bond auction yesterday and Spain’s auction today.  This is leading to outsized gains in the financials around the world.

 

Yesterday in the US, financials extended their 2011 outperformance with the leadership coming from the banking sector, with the BKX +1.5% and the broader XLF up 1.7%.  Despite disappointing Machinery orders out of the Japan, the Japanese megabanks followed their American peers higher, leading Japan to +0.73%.  Like in the US, the potential for increased dividends is driving equity prices higher as both Sumitomo Trust & Banking and Chuo Mitsui Trust Holdings rose 5% overnight on the potential of higher dividends. 

 

Macro Icebergs

 

As we’ve seen throughout market history, it’s typically when everyone is expecting smooth sailing ahead that certain “icebergs” tend to derail things. If we’ve learned anything from the movie “Titanic”, it’s that hubris about our top ideas (the ship) and a disregard for risk (not having enough lifeboats on board) can get us into trouble.

 

Certainly a few Macro Icebergs are scattered across our domestic waters. How we navigate them individually will be the key to getting paid in 2011; currently, the collective is “full speed ahead”.

 

Below we’ll highlight one of the largest Macro Icebergs that a) has the potential to capsize our ship; and b) is out of consensus – at least for now:

 

Municipal Debt Dichotomy

 

Yesterday we published an intraday report titled: “The Municipal Bond Market: Silent But Deadly” (email if you want to see our work on muni bonds). In it, we took a deep dive at the headwinds affecting this sector of our financial markets and the systemic risk therein. The key takeaways from the article were:

  • Fiscal austerity at the State and Federal Government level and a strong political will in D.C. to avoid bailing out States and municipalities will perpetuate budget woes at the municipal level (together, State and Federal support account for ~34% of municipal budgets);
  • Local governments are running out of room with their accounting “tricks” and are staring at potentially 2-5 years of declining property tax receipts, which are ~26% of their budget;
  • Calls for State defaults are overblown; the real issues lie within the municipalities and municipal authorities across the nation; the States that have the most severe fiscal issues will see a disproportionate number of their municipalities go bust (though bankruptcy is not permitted in 23 States, defaulting on payments to vendors and creditors will be the more likely outcome in many cases); and
  • The equity markets are misinterpreting the recent back up in yields as “growth” and not “risk” and this risk isn’t going away any time soon.

While still largely ignored by consensus, it was certainly interesting to see some big names in our industry come out on both sides of this debate yesterday:

 

PIMCO’s Bill Gross: “Ultimately, municipal bankruptcies will be at a lower level. I don’t subscribe to the theory that there will be lots of them.” 

 

JPMorgan’s Jamie Diamond: “There have been six or seven municipal bankruptcies already. I think unfortunately you will see more… If you are an investor in municipals you should be very, very careful.”

 

“Smooth Sailing Ahead” vs. “Icebergs A’Cometh”.

 

We certainly aren’t crying wolf for the sake of attention like some analysts with ulterior motives. We don’t do ratings, banking, trading or manage assets; we only get paid for being right. Considering that we’re still in business after three of the most volatile years in the history of financial markets, we’ve been blessed to be more right than wrong over this duration.

 

For the sake of our economy (yes we are patriots), we hope we are not right on this one. The last thing America needs right now is another financial crisis on its hands perpetuated by blow-ups in the $2.9 trillion dollar muni bond market and Housing Headwinds Part II (not mentioned here; email us for more details). Unfortunately, hope is not an investment process. That’s why we’ll continue to help you navigate these murky waters as Global risk managers.

 

We’ll discuss these risks and how to play them on the long and short side on our Q1 Quarterly Themes Conference Call tomorrow at 1:00pm. Qualified prospective institutional subscribers please email for more details.

 

Keep your head on a swivel.

 

Howard Penney

Managing Director

 

Matthew Hedrick

Analyst

 

Darius Dale

Analyst

 

MACRO ICEBERGS - MUNI


LVS: EXPECTATIONS MAY HAVE CAUGHT UP TO REALITY

It’s been awhile since we haven’t been way above the Street for quarterly earnings.

 

 

There are many things to like about the LVS outlook:  strong growth in two very profitable Asian markets, potential recovery in Las Vegas, and the prospect of new Asian markets.  Maybe unfortunate for the stock, investors are well aware of the prospects.  As we wrote about a few weeks ago, for the first time in a long time, consensus estimates do not appear conservative, starting with Q4.

 

We’re actually slightly below the Street on LVS’s 4Q results.  We estimate that LVS will report $659MM of EBITDA this quarter, which is 2% light of consensus.  While this wouldn’t be a huge miss, we believe that anything short of a nice beat would be disappointing given the momentum behind this name – not to mention the rich valuation.

 

We’re in-line in for Vegas and a little below consensus on everything else… read below for more details and the math behind our numbers.

 

 

Las Vegas

 

We estimate that Venetian and Palazzo will produce $316MM of net revenues and $78MM of EBITDA

  • Net casino revenues of $134MM
    • 6% growth in slot handle and slot win of $54MM
    • 4% growth in table drop, with normal hold of 19%, for total table win of $101MM.  Last year Vegas table hold was only 17% (same as last quarter)
  • $226MM of non-gaming revenue (compared to $215MM last quarter) and $44MM of promotional expenses (compared to $41MM last quarter)
  • Operating expenses of $238MM (compared to $232MM last quarter) up 15% YoY

Pennsylvania

 

We estimate that Sands Bethlehem will report $79MM of revenues and $15MM of EBITDA (5% below the Street)

  • Slot revenue of $62MM / win % of 7.3%
  • Table revenue of $14MM, Oct and Nov revenues totaled $9.7MM

Macau

 

We estimate that Sands will report net revenues of $317MM and EBITDA of $81MM (4% above consensus)

  • VIP net win of $154MM
    • Assuming 14% direct play, RC volume of $7.4BN, up 12% YoY
    • Above normal hold of 3.05%
    • Gross win of $226MM and a rebate of 98bps (32% of hold)
  • Mass win of $132MM and slot win of $25MM
  • $20MM of non-gaming revenue and $14MM of promotional expenses
  • $182MM of variable expenses, $4MM of non-gaming expenses and $50MM of fixed expenses
    • 3Q10 fixed expenses were $50MM

We estimate that Venetian will report net revenues of $658MM and EBITDA of $214MM (in-line with consensus)

  • VIP net win of $254MM
    • Assuming 23% direct play, RC volume of $12.5BN, up 24% YoY
    • Hold appears normal at 2.9%
    • Gross win of $363MM and a rebate of 87bps (30% of hold)
  • Mass win of $270MM and slot win of $54MM
  • $111MM of non-gaming revenue and $31MM of promotional expenses
  • $182MM of variable expenses, $21MM of non-gaming expenses and $100MM of fixed expenses
    • Implied fixed expenses were $96MM for 3Q10 and $111MM in 4Q09

We estimate that Four Seasons will report net revenues of $105MM and EBITDA of $22MM (43% below consensus)

  • VIP net win of $53MM
    • Assuming 44% direct play, RC volume of $3.8BN, up less than 1% YoY
      • Junket RC volumes were actually down 22% YoY
    • Direct business is booming  and the junket business is weaker because they lost share from Jack Lam – which was down $1BN for the year
    • Low table hold of 2.2% didn’t help- although 4Q09 also suffered from low hold of 2.12%
    • Gross win of $363MM and a rebate of 87bps (30% of hold)
  • Mass win of $28MM and slot win of $7MM
  • $25MM of non-gaming revenue and $8MM of promotional expenses
  • $58MM of variable expenses, $5MM of non-gaming expenses and $20MM of fixed expenses
    • Implied fixed expenses were $20MM for 3Q10 and $18MM in 4Q09

Singapore

 

We estimate that Marina Bay Sands will report net revenues of $558MM and EBITDA of $302MM (5% below consensus)

  • VIP net win of $156MM
    • RC volume of $10.8BN, up 5% sequentially
    • Normal table hold of 2.8%
    • Gross win of $301MM and a rebate of 1.35% (in-line with last quarter)
  • Mass win of $211MM and slot win of $94MM
  • $129MM of non-gaming revenue (compared to $101MM in 3Q10) and $32MM of promotional expenses
  • $105MM of variable expenses and $150MM of fixed expenses
    • Implied fixed expenses were $145MM for 3Q10

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