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HBI: Don’t Bet Against HBI

Top line momentum + transparency on the cost side are factors few companies have in this environment.  The market has figured it out – but in this instance, the market is right.



Investment Conclusion

It’s tough to bet against HBI at this stage. The company has solid top-line momentum and a high degree of transparency on the cost side – unlike almost every other company in retail (sans GIL). As it relates to revenue, there’s still three quarters of the Gear for Sports acquisition that give the model implied growth, but also continued organic growth due to considerable momentum with several marketing campaigns (ie watch Oprah today). Let’s not forget that this company is not afraid to miss top line targets; its done it plenty of times in the past.  But don’t bank on it in reported numbers until January ’12. On the cost side, this is a company that has the luxury of directly procuring nearly all raw materials instead of relying on another partner in the supply chain to look out for them. Anyone that is beholden to someone else in the chain immediately exposes themselves to risk of the unknown. In this business, ‘the unknown’ is far worse than severe fluctuations in costs. At least the latter can be managed proactively by nearly any management team. In the meantime, you’re looking at a name trading at 8.2x EBTDA, 9.5x earnings,  and that throws off enough cash to pay down its considerable debt burden within a 4-year time period. We’ll keep a sharp eye on the overwhelmingly positive sentiment factors right now (8 out of 9 analysts have Buy ratings, and only 6% of the float is short), but we think that – at least for the time being – that the consensus has this one right.



Overview of the Quarter and our Model

Solid quarter for HBI with Q1 EPS of $0.49 topping our estimate of $0.34. The beat was broad-based coming in better than expected on every line item. Strong top-line results (+12% vs. our +10%) driven by the Outerwear and International businesses coupled with less significant gross margin contraction and greater SG&A leverage drove 60bps in operating margin expansion in the face of the toughest compare of the year. The Street was also looking for $0.34.


On the margin, we’ve adjusted several lines in our model to reflect the traction that’s clearly evident in the business as well as the company’s ability to successfully mitigate higher costs. The bottom-line here is that following Q1 results, increased full-year guidance of $2.70-$2.90 up from $2.60-$2.80 actually looks conservative.

  • First, our consolidated top-line assumptions remain little changed for the year up +12% taking into account stronger growth than we expected in the company’s International business and a modest ramp in Outerwear driven by early success at Gear offsetting more modest growth assumptions in Innerwear due to less meaningful from timing related space gain contribution.
  • GMs contracted -108bps in the quarter 100bps less than expected in the face of the toughest compare of the year +460bps proving the company can mitigate higher commodity costs. With supply chain efficiencies of $8mm-$10mm, or 75-100bps a quarter, offsetting less onerous commodity costs as we look out to the balance of the year, we’ve taken up margins modestly in the 2H to flat and down -25bps in Q3 and Q4 respectively from down -50bps in each quarter.
  • SG&A leveraged better than expected with dollars coming in below our expectations with added distribution costs to handle higher sales volume coming in much lighter than anticipated. Additionally, despite the perception of increased marketing spend given a multitude of new campaigns, the company confirmed that marketing spend will stay in-line with historical spend of $90-$100mm annually.


All in, given the $0.15 beat in the quarter and approximately $0.08 of added benefit attributed to both gross margins and SG&A over the balance of the year, we are taking our numbers up to $2.95 and $3.40 for this year and next ahead of what amounts to conservative guidance. While inventory growth of +30% (+26% ex Gear) is higher than we’d like to see at this point in the year, taking inventory early may in hindsight be an opportunistic move with retailers potentially looking to take stock earlier than usual heading into BTS.



Few Key highlights from the call:



“what is interesting is that retailers are taking very different approaches to managing inventory as cost increases start to hit them throughout their entire apparel floor. Some are extremely conservative, some are pretty aggressive using as an opportunity to gape share, they will start to normalize later in the year, we clearly did anticipate in our guidance somewhere during the year we would see unit levels drop on in aggregate for retailers.”


“We are seeing a pickup in spending and confidence that help may help mitigate that a little bit. We are seeing consumers actually start to travel back up scale in terms of retailers and show a predisposition to begin spending higher prices per unit, that bodes well for the economy throughout the year.”


Re Pricing

“We got the lion's share of pricing secured. We feel fine about it and remember we price on a run rate basis, not to try and make a fiscal year and so we look at what we think the go forward rate is from a inflation stand point, both with cotton, oil and wages, as we put in prices, that should take care of not only 11 but cascading in to 12. We are fine from a pricing perspective”



HBI 1Q FY11 Earnings Call


P&L Notables:

  • Sales Increased 12%Reflecting:
    • o Innerwear: (Flat)
      • Innerwear Operating Margin -400bps
      • Deterioration Reflects:  higher cost cotton and commodity cost throughout the quarter and price increases that were not implemented until mid quarter
        • o Outerwear segment: +37%
        • o Hosiery:  -6.9%
        • o International segment sales: +24%
        • o International Business
        • o Direct to Consumer: -2%
      •  The fact that price increases were only in place for two months in the quarter contributed to a 23% decrease in operating profit.
      • Across-the-board strength in Gear For Sports, wholesale casual wear (Hanes), retail casual wear (Just MySize andHanes), and retail active wear (Champion).
      • 19% was due to Gear for Sports Acquisition
      • Strength in all geographies - Canada, Latin America, Asia and Europe. Operating profit increased 86 percent (75% Constant Currency).
      • Sales from Brazil, China and India all saw 40%+ revenue growth


  • Gross Margins 34.2% down 108 bps
    • o Spoke to GM in Q&A


  • SG&A up 4.5%
    • o Spoke to SG&A in Q&A


Balance Sheet:

  • Inventories up 30%
    • o Reflects the normal seasonal build for back-to-school, Gear for Sports acquisition, and higher Cotton and Commodity costs.
  • Continue to have a priority of deleveraging and will continue to pay down debt with free cash.


2011 Guidance

  • Expect Sales for FY 2011 to be within the rage of  $4.9 billion to $5 billion
  • Expect free cash flow to be between 100-200 million
    • o Expect to reduce year-end debt levels by the amount of free cash flow
  • EPS  for 2011 at $2.70- $2.90





  • International Business Drivers
    • o Strong positions in Canada, Mexico and brazil. Overall you will see continued strength in the teens in International .
    • o China: All of the major developing markets have a long term growth potential. Our categories are used all around the world. As middle class grows HBI benefits. Focused on developing china, Mexico, brazil and India.
    • o In china focused on building the basics business first. Intimate apparel will be built out later.
    • o International up 17% on constant currency. Believe that international should be able to deliver low teens. All geographies are performing well.
      • Only weak region is Japan. It is a 75-80 million dollar business.


  • Gear For Sports/ M&A environment/ Gold Toe:
    • o Acquisitions are not a major part of our strategy. Three are a lot of opportunities to grow business. Clearly tuck-in acquisitions are helpful. On the look out for acquisitions but acquisitions are not necessary for success of HBI.
    • o Gold toe has been perennially on sale. They have passed on the acquisition in the past.
    • o Low profit quarter for Gear for Sports when seasonality is taken into account.


  • Innerwear /Elasticity
    • o Weakness in Innerwear growth due to tough comp
    • o "From a profit perspective its simple we are starting to see the impact of inflation. Price increases have not hit innerwear yet. Will begin to see rebound in second and third quarters."
    • o Company has embedded a substantial unit fall off in guidance for FY 2011.
    • o 400bps of EBIT margin deterioration
      • Last year there were huge space gains and fixture fills (approximately 30 million).
      • Higher commodity prices
      • Price increases not passed through yet


  • SG&A
    • Was unplanned. Still in marketing mode (Marketing expected to be 90-100 million for the year). Bulk of SG&A dollars went to G4S. Might see SG&A  dollars go up.
    • Through the remainder of the quarters SG&A will be leveraged. Rate will continue to improve (dollars up but leverage as a % of sales up)
    • SG&A dollars were up about $11 million.  Gear  represented ~$12 million of SG&A in the first quarter (Excluding Gear, SG&A was relatively flat in dollars)


  • Elasticity
    • From retailer perspective, retail  inventories are where they should be. Interestingly however, retailers are taking much different approaches to managing inventories. Some are being conservative, others are using this time period to take share.
      • Unit levels have dropped off in the aggregate for retailers.
    • No consumer elasticity impacts as of yet.
    • Seeing a pickup in consumer spending and confidence. Seeing consumers travel back to upscale merchandise.
      • As there is better visibility feel more secure in negotiating with retailers and feel more comfortable with position.
      • "It is the end of the deflationary environment in retail"


  • Pricing/Cotton
    • Have the lion share of their costs locked in.
      • Use run-rate pricing
    • Work directly with merchants who become involved in the futures market.


  • Gross Margins
    • Excess service costs spilled over very little but was not material.


  • Inventory
    • Inventory in 11 will be up 50million
      • Inflation costs +100
      • Turns will improve by +50


  • Competitor Responses to price Increases
    • Every single company is having to deal with huge inflation. No one is immune. Every company is going about inflation differently. There are a few big global players who have been surprised by the increased.


  • Average Interest Rate on all debt?
    • 7.5%


  • Outerwear
    • Overall increase was driven by G4S.  Even so, everything was up excluding G4S (~18% Excluding g4s)


  • Direct -Sales Segment
    • Down about 2%. Comps were up 2%. Internet business was soft. Attribute softness to a mid quarter change in mailing strategy and timing.  Believe it will turn around later in the year


  • Transportation and Energy Prices
    • Built into guidance is oil at 100



Brian McGough

Casey Flavin
Robert Belsky


Good enough.  We expect Q2 to come in at low end of guidance. 



"We are optimistic about the future.  Overall business transient demand is very strong and corporate group demand is building.  Our outstanding brands continue to lead in their respective market segments as reflected by our substantial REVPAR index premiums to competitor hotels.

- J.W. Marriott, Jr., Marriott International chairman and chief executive officer




  • "We expect to open approximately 35,000 new rooms in 2011 alone, or over one-third of our worldwide development pipeline of 95,000 rooms."
  • "We plan to launch the AC Hotels by Marriott brand on our booking channels next month."  
  • 1Q11: "REVPAR for worldwide comparable systemwide properties increased 6.5 percent (a 6.6 percent increase using actual dollars)."
  • "While our Washington, D.C. hotels reflected weaker demand associated with a shorter Congressional calendar and budget negotiations and New York was impacted by new supply, most North American markets reflected both strong demand increases and modest supply growth."
  • "Calendar quarter REVPAR for North American comparable systemwide properties increased 6.8 percent."
  • "Owned, leased, corporate housing and other revenue, net of direct expenses, increased ... largely due to an increase in branding fee revenue, higher termination fees and improved operating results at owned and leased hotels."
  • "Nearly 25 percent of company-managed hotels earned incentive management fees compared to 23 percent in the year-ago quarter."
  • "North American house profit margins were affected by the non-comparable New Year's holiday, increased state unemployment tax rates, higher marketing and sales costs and the timing of property-level bonus" accruals.
  • "Contract sales to existing owners represented more than 61 percent of sales in the quarter compared to 48 percent in the year-ago quarter.  While sales to existing customers were strong, with fewer sales to new customers year-over-year and a lower average contract price, first quarter adjusted Timeshare segment contract sales declined $27 million."
  • "Timeshare segment results increased from the year-ago quarter largely due to the $5 million decrease in losses for a residential and fractional joint venture and the $2 million decrease in interest expense as a result of lower interest rates and lower outstanding debt obligations related to previously securitized notes receivable."
  • [SG&A] "The increase in expenses reflected $7 million of higher incentive compensation costs, which are largely related to timing, the absence of $8 million in prior year favorable items noted below, as well as higher costs in international markets and increased brand investments."
  • "While all terms of the transaction are not yet complete, post spin-off, the company expects the new timeshare company will pay a franchise fee to Marriott International totaling approximately 2 percent of developer contract sales plus a flat $50 million annually for use of Marriott's brands.  The franchise fee is also expected to include a periodic inflation adjustment."
  • Repurchased 7.8MM shares in 1Q11 for $300MM. YTD MAR repurchased 13.4MM shares for $493MM. There are 10.5MM shares left under MAR's share repurchase authorization as of 4/19/2011
  • Cash: $144MM
  • Debt: $2,857MM, including CP of $42MM
  • FY 2011 Guidance:
    • Largely unchanged from previous guidance; only differentiated commentary/guidance is highlighted below
    • "Compared to full year guidance issued in February 2011, the company expects stronger performance at European owned and leased hotels and higher termination fees, offset by a $10 million decline in results in Japan."
    • Adjusted EBITDA was lowered by $15MM
    • Fee revenue was lowered by $5MM
    • SG&A was increased by $15MM
    • Net interest expense higher by $10MM
  • 2Q2011 Guidance:
    • EPS: $0.34 to $0.38 is below consensus of $0.40
    • Fee revenue: $320-330MM
    • Owned, leased, corporate housing & other, net of direct expenses: $25-30MM
    • Timeshare sale and services, net of direct expenses: $50-55MM
    • G&A: $165-170MM
    • Net interest expense: $35MM


  • Washington DC - business is already improving with the recent budget settlement
  • Group business was weaker than expected for in the quarter for the quarter booking, however, bookings in the quarter made for the balance of the year was strong, up 10%.
  • Why was MAR's RevPAR lower than Smith travel data?
    • Systemwide, 1 in 20 of their systemwide hotels are in the DC market more than twice that of their comp base. They also have more exposure to group business - 45% more than the average smith travel hotel - 40% more than the average Sheraton.  Group business tends to lag the RevPAR index.  
    • 47 hotels are under renovation this year vs. [30] last year
    • They don't feel like they are overpriced relative to comps
    • They report comparable hotel data rather than same store like their competitors
  • Expect that domestic house profit margins will expand 100 -150bps this year while international will expand 100 bps
  • Last year's G&A included $8MM of unusual benefits
  • Expect to file the timeshare spinoff with the SEC in June 
  • International RevPAR will slow later this year.  Shanghai World Expo is a tough comp and they will be impacted by the events in Japan and the Middle East - although they expect that Japan and ME RevPAR will rebound by YE
  • Special Corporate rate negotiations resulted in rate increases in-line with their expectation
  • Interest income will be lower as one of their loans is expected to be paid back early
  • Expect share count to decrease due to their large share buybacks as they have been taking advantage of the recent share weakness
  • Believe that their actual openings will exceed today's pipeline over the next 3 years
  • Expect to add another 1700 AC hotels rooms next quarter
  • Have not adjusted their guidance for the incremental costs of the Timeshare Spin transaction
  • After adjusting for large renovations - Marriott's brand share was flat in Feb - despite their larger group concentration
  • Their brands are not losing marketing share
  • Over half of the occupancy in their hotels is touched by direct sales - group primarily
  • Recently changed their sales efforts (Sales Force One) for booking group business to a centralized system to be able to sell across all their brands vs. selling taking place at the individual hotels. Expect that their group market share will increase as a result.


  • Have seen good group bookings for 2011. March was the second best month that they've seen in 2 years for group bookings. Think that what they saw in 1Q was an anomaly.
  • $500-$700MM of investment spending update
    • Not a lot has been committed - the last investor day is the best guidance
    • Flat level of investment spending in 2011-2013
  • The Timeshare spinoff fees were set as to not stifle potential growth outside of MAR brands
  • House margin growth is based on incentive comp accrual - they are booking more aggressive comps than last year. They also have some issues with NY's day revenue recognition issues. Expect that RevPAR will be stronger in the balance of the year than in Q1
  •  Timeshare growth strategy out of the box regarding new brands?
    • As they convert to points they can be more efficient in growing the company without building new product
    • Individual projects; also don't need to be as large
    • Right now, the business is generating positive cash flow and given the level of inventory, they expect that that continues in the near term
  • Expectations from their leisure customer base?
    • Fairly optimistic despite the rise in gas prices. So far, there hasn't been an impact from the increase in gas prices and airfares
    • They still expect growing leisure business
  • Philly hotel renovation had 1/2 pt of RevPAR impact on their business. They don't take their under renovation hotels out of the comp set unless a material number of guest rooms are out of commissions. 
  • Haven't included one time costs from the spin transaction into their guidance
  • Ex Japan and ME, their international business is expectations are higher than they were last quarter. Feel like they are losing 3 cents of EPS due to ME & Japan impact.  
  • G&A - they had some one time items in 2010. Core G&A is growing more like 5% vs. earlier guidance of 3-5%
    • Ok i don't understand their response. Marriott clearly was aware of all the one-time 2010 items when they guided last quarter - including under accrual for incentive comp in 1Q2010... so the explanation for the revision doesn't really hold water
  • Claim the ME & Japan will impact their incentive fees by $10MM or so. Plus the DC market was really soft in the Q1 and they expect that to improve
  • How much of their group business in 2011 was booked before 2011
    • Varies by hotel. Bigger hotels could have as much as 75% of their business on the books before the year starts
    • Claim that on average 65% of their group business for the year is on the books at the beginning of the year
  • Not seeing much change in their booking window


First of three strong regional earnings reports. This one was very good.  PNK and ASCA next.



"With first quarter results exceeding guidance and cautious expectations for continued positive operating momentum throughout 2011, we are raising our full year 2011 revenue and adjusted EBITDA guidance to $2.7 billion and $677.0 million, respectively. We're generally seeing a stabilization of consumer spending across our businesses and markets, though we are hesitant to forecast higher revenues based on February and March trends which benefited from favorable weather versus 2010."

Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming




  • Development/Acquisition updates:
    • "Beginning in June 2011, operating results are expected to reflect the acquisition of The M Resort. The property generated adjusted EBITDA of $6.2 million in the first quarter and we believe that our operating discipline, rationalized approach to marketing and active player database can gradually improve the property's financial performance.  Since sending offers to stay at M Resort to some of our highest value players earlier this year, the facility has booked approximately 2,500 incremental room nights and we are now developing other plans to drive profitable revenue at the property."
    • "Based on the current pace of construction, Hollywood Casino at Kansas Speedway and Hollywood Casino Toledo are expected to open in the first and second quarter of 2012, respectively, provided the required regulatory framework and approvals are in place."
    • "In Columbus, we have instituted legal proceedings and requested injunctive relief to protect our rights to continue to receive water and to utilize pre-existing sewer services from the district's sole provider, the City of Columbus, at the former Delphi Automotive site in Franklin Township. In the meantime, we recently named Smoot Construction Company of Ohio as our construction manager for the project and are planning a groundbreaking on April 25... We remain hopeful that the project will open as originally contemplated in the fourth quarter of 2012."
    • "On April 8, Penn National closed on its 50/50 joint venture to own and operate the Sam Houston Race Park in Houston, Texas, the Valley Race Park in Harlingen, Texas and a planned racetrack in Laredo, Texas. Our joint venture ownership also includes significant real estate, including interests in 323 acres at Sam Houston Race Park, 80 acres at Valley Race Park and an option to purchase 135 acres for the planned racetrack in Laredo... we are seeking legislative action to permit the addition of slot machines at existing Texas pari-mutuel facilities in order to maximize the overall value of these businesses. Recent polls indicate that the overwhelming majority of Texans want the right to express their position on slot machines at racetracks through a state-wide referendum"
  • Guidance:
    • Net revenue: Q2: $682.7MM; 2011: $2,707.5MM
    • Adjusted EBITDA: Q2: $179.4MM (Consensus $171MM); 2011: $677MM (Consensus of $662MM)
    • EPS: Q2: $0.47 (Consensus of $0.41); 2011: $1.64 (Consensus of $1.54)
    • Pre-opening expenses:  Q2: $1.1MM ; 2011: $9MM (up from $7MM previously)
    • D&A: Q2: $57.9MM; 2011: $239.5MM
    • Non-cash stock comp: Q2: $6.3MM; 2011: $25.1MM
    • Blended tax rate: 43.2%
    • Diluted Share count: 107MM



  • More optimistic than in the past
  • Columbus going as planned
  • Cost cuts went well
  • Still not seeing robust top line growth except Penn National and Charlestown


  • Gotten off to decent start in April; will watch Easter calendar shift this year.
  • 1Q Corporate expense: high legal expenses (TX, MD)
  • Can't extrapolate margin improvement in 1Q for rest of FY 2011
    • Can't expect 3Q/4Q margins to be as good as 1Q/2Q
    • they might be sandbagging a bit
  • Assuming revenues are basically flat for FY 2011
  • Charles Town: Tables games revs will start to anniversary so YoY growth will come back in-line, in other words, not as strong as 1Q.
  • M Resort - will act as a typical LV Local business
  • Columbus water dispute: considering alternatives
  • Have met with Gov Kasich's staff, but no meaningful dialogue yet; hopes Ohio will follow PA's example
  • Vegas alliance? Do not see any opportunities at this time.
  • 1Q consumer spending: slight strength in VIP and mass non-rated play; generally flat
  • March was generally flat; February higher, driven by weather.
  • Gas price impact: does not see any correlation with spending; most of their consumers reside within 30 miles of the property so high gas prices not significant.
  • Texas: standalone slots at racetrack bill pending, final bill/hearing may come next week. There could be a special session in June/July.
  • Illinois smoking ban bill: pending in Senate
  • Sees JV track losses to be lower going forward
  • Maryland Jockey Club - will be positive in 2Q because of Preakness; also, Maryland state may provide funding to mitigate losses in MJC--waiting on Governor's desk.
  • LV Locals-- not much change in promotional spending in 1Q, it's "moderate";
    • Fairly stagnant; modest growth in group business and Southern Cali business
  • Anne Arundel: nothing in guidance; no smoking facility (Charles Town has smoking)
  • Charles Town: adding 20 more tables games in 2Q; opening $40MM entertainment/sports bar in June/July
  • 1Q total cash: $234 MM; unrestricted sub: $59MM;  $175MM operating cash;
  • Debt: $35MM non-revolver debt; $1.518BN term loan B; $1.53BN total bank debt; $2.135BN total debt
  • 1Q Capex: 54.5MM (14.7MM maintenance, 39.8MM project); FY 2011 Capex: $443MM (85MM maintenance, 287MM project)
  • Promotional spending: very rational at this time across the country
  • Margin trends: cost structure very sustainable; if top-line continues to grow, still room for improvement
  • Online gaming: not interested
  • In 1Q, low-end rated play ($1-$99) declined but non-rated play increased
  • Non-rated retail spending picked up
  • Gulf coast properties: have reduced insurance costs
  • Admission counts flat 
  • Term loan B: L+175bps
  • 10th IL gaming license impact: Elgin takes biggest hit, followed by Aurora and Joliet, and Northwest Indiana
  • Unrated customers in 1Q: low to mid single digit growth benefited by tables games in WV and PA
  • No pre-opening expense in Joliet
  • Joliet: not satisfied with performance; have picked up share from Harrah's Joliet but still need non-gaming business to do better

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German IFO Business Survey Down

Positions in Europe: Long British Pound (FXB)


The German IFO business survey for April was published today. As we called for in previous weeks and mentioned in a note yesterday titled “Europe: Sweden Hikes Rate as PIIGS Tumble”, we expected to see a slowdown in the German survey numbers, and we got it. IFO reported:


Germany IFO Business Climate               110.4 APR    vs 111.1 MAR

Germany IFO Current Assessment           116.3 APR    vs 115.8 MAR

Germany IFO Expectations                      104.7 APR    vs 106.5 MAR


German IFO Business Survey Down - IFO


While one survey does not confirm a trend (and we tend to focus more on the 6-month forward-looking Expectations number), recent confidence numbers are in line with a slight slowing of high frequency data from Germany, including Services and Manufacturing PMI, as inflationary pressures gradually increase.


The capital markets of Europe’s stronger and fiscally sober economies like Germany, France, Sweden held relatively strong this week despite existing sovereign debt contagion fears, namely an outstanding bailout to Portugal and continued concern over Greece’s fiscal house. Equally, the EUR-USD trade has held strong, largely a function of the severe weakness in the USD, in our opinion. Our immediate term TRADE range for the EUR-USD is $1.44-$1.46.


German IFO Business Survey Down - EUR2


In other European news, German Finance Minister Wolfgang Schaeuble praised Mario Draghi, the favorite to take over as ECB President when Trichet steps down in late June, calling his qualifications undisputed. This sentiment is a clear inflection from the German camp (although German Chancellor Angela Merkel remains silent on her pick) that has largely voted against him, due in part to assumptions that he was a dovish-leaning puppet of Trichet, and preference for Bundesbank President Axel Weber. However, in February when Weber announced he would not run for another term as Bundesbank President, nor put his name in for the ECB job, his decision has left the German camp uncertain on who to back.


Fresh in the mind of Merkel, in particular, has been the baggage Draghi carries as Italy’s Central Banker (a state with a considerable load of public debt--2nd highest after Greece-- and scandalous headlines from the country's PM Berlusconi) and his 3-year stint at Goldman Sachs in early 2000 in which among other responsibilities he arranged currency swaps that helped Greece hide the extent of its budget deficit. 


There’s no question that Draghi comes with much international experience, including as Executive Director of the World Bank. While we can only speculate how he’ll direct monetary policy should he win the seat, it’s clear that given his affinity with Trichet we’d expect he’d follow through with Trichet’s hawkish interest rate stance to control rising inflation across the Eurozone. This again could be a positive for the common currency and global investment in the region.


Matthew Hedrick



Jobless Claims Moving Sideways - No Improvement for Past 8 Weeks

The headline initial claims number fell 9k WoW to 403k (13k after a 4k upward revision to last week’s data).  Rolling claims rose 2.25k to 399k. On a non-seasonally-adjusted basis, reported claims fell 67k WoW, a typical seasonal move. 


We have been looking for claims in the 375-400k range as the level that can begin to bring unemployment down.  If this level is held, we expect to see unemployment improve. We consider unemployment to be ~200 bps higher than the headline rate due to decreases in the labor force participation rate. In other words, if the labor force participation rate were at the long-term average level of the last decade, unemployment rate would be 10.8% rather than 8.8%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 10.8% actual rate.


Rolling claims have now trended sideways for the past 8 weeks.  








Two relationships that we are watching closely are the tight correlation between the S&P and claims and between Fed purchases (Treasuries & MBS) and claims.  With the end of QE2 looming, to the extent that this relationship is causal, it is quite concerning. 






Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 2Q is tracking 4 bps tighter than 1Q.  The current level of 273 bps is flat from than last week.






Financial Subsector Performance

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






Joshua Steiner, CFA


Allison Kaptur