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WATCH YOUR WALLET: INITIAL CLAIMS JUMP TO HIGHEST LEVEL IN SEVEN MONTHS

Initial Claims Rocket 45k

The headline initial claims number rose 45k WoW to 474k (43k after a 2k upward revision to last week’s data).  Rolling claims rose 22k to 431k.  A Labor Department spokesman said that the increase was due to temporary layoffs in the auto sector, and also noted an effect from some New York school employees, who can claim unemployment during spring break.  On a non-seasonally-adjusted basis, reported claims rose 27k WoW, an atypical seasonal move. 

 

Big picture, regardless of whether this week's number was artificially higher due to one-time events, the takeaway from this morning's data is that rolling jobless claims are now up for the past 9 weeks, and even more importantly we're now at the YTD high in rolling claims. We use claims as our primary frequency determinant in thinking about losses for the consumer book of balance sheet dependent financials. The last time we saw such an inflection in the trend in jobless claims was summer 2010, a period in which the XLF lost roughly 20% of its value. Given the XLF is only modestly off its recent highs, we would be cautious given this continuing development on the jobs front. To this end, take a look at our fourth chart showing the overlay of jobless claims with S&P 500. The current divergence is among the widest we've seen in the last few years suggesting that either the market is due for a significant correction in the near-term or claims should fall precipitously in the next few weeks.

 

We have been looking for claims in the 375-400k range as the level that can begin to bring unemployment down.  If claims return to this level, 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.

 

WATCH YOUR WALLET: INITIAL CLAIMS JUMP TO HIGHEST LEVEL IN SEVEN MONTHS - rolling

 

WATCH YOUR WALLET: INITIAL CLAIMS JUMP TO HIGHEST LEVEL IN SEVEN MONTHS - reported

 

WATCH YOUR WALLET: INITIAL CLAIMS JUMP TO HIGHEST LEVEL IN SEVEN MONTHS - NSA

 

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. 

 

WATCH YOUR WALLET: INITIAL CLAIMS JUMP TO HIGHEST LEVEL IN SEVEN MONTHS - s p and

 

WATCH YOUR WALLET: INITIAL CLAIMS JUMP TO HIGHEST LEVEL IN SEVEN MONTHS - fed and

 

Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 2Q is tracking 5 bps tighter than 1Q.  The current level of 264 bps is 7 bps tighter than last week.

 

WATCH YOUR WALLET: INITIAL CLAIMS JUMP TO HIGHEST LEVEL IN SEVEN MONTHS - spreads

 

WATCH YOUR WALLET: INITIAL CLAIMS JUMP TO HIGHEST LEVEL IN SEVEN MONTHS - spreads QoQ

 

Financial Subsector Performance

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

 

WATCH YOUR WALLET: INITIAL CLAIMS JUMP TO HIGHEST LEVEL IN SEVEN MONTHS - perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


TALES OF THE TAPE: DPZ, MRT, CPKI, BJRI, DIN, DRI, RUTH, CAKE, EAT, PZZA, CBOU

Notable news items and price action from the past twenty-four hours along with our fundamental view on key names.

  • DPZ reported impressive earnings, easily beating consensus.  EPS came in at $0.42 versus $0.39, driven by total domestic comps of -1.4% versus consensus -4% and international comps at +8.3% versus consensus +6.5%. 
  • MRT reported after the close yesterday.  1Q11 EPS came in at $0.16 versus $0.13 with comparable restaurant sales up 7.5% versus consensus of 7%.  Food and beverage costs came in at 31% of sales which was slightly higher than expected.  2Q guidance is for EPS of $0.03 to $0.05 versus consensus $0.05 but FY11 guidance was raised by a penny on each end of the range to $0.45 to $0.49 versus consensus $0.45.  The company guided to 2Q and FY11 comps up 6-8%.  Beef gained 10% in the quarter for MRT but rising commodity costs were successfully offset by price increases.
  • CPKI has responded to those affected by the recent Alabama tornado with a two-day fundraiser.
  • BJRI was upgraded to “Overweight” from “Neutral” at Piper Jaffray.
  • MSSR’s board has decided to put the company up for sale.  Tilman Fertitta/Landry’s has responded by withdrawing the proxy seeking to contest a quorum at the 2011 AGM.  Mr. Fertitta said in a statement that his group hopes that the Board is “committed to conducting a process in which all acquisition proposals are fairly evaluated”.
  • DIN, DRI, RUTH, CAKE, EAT, PZZA and CBOU both traded higher on accelerating volume yesterday.
  • COSI, TXRH, and SONC all traded down on accelerating volume.

 

TALES OF THE TAPE: DPZ, MRT, CPKI, BJRI, DIN, DRI, RUTH, CAKE, EAT, PZZA, CBOU - stocks 55

 

 

Howard Penney

Managing Director


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - May 5, 2011


As we look at today’s set up for the S&P 500, the range is 39 points or -1.14% downside to 1332 and 1.76% upside to 1371.

 

SECTOR AND GLOBAL PERFORMANCE


Energy and Financials remain broken on the TRADE duration leaving 7/9 sectors broken on TRADE and 8/9 broken on TREND.    

 

THE HEDGEYE DAILY OUTLOOK - levels 55

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING GLOBAL

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING GLOBAL

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1138 (-227)  
  • VOLUME: NYSE 1069.11 (+6.62%)
  • VIX:  17.08 +2.28% YTD PERFORMANCE: -3.77%
  • SPX PUT/CALL RATIO: 2.08 from 1.84 (+12.60%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 25.30 -0.200 (-0.784%)
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 3.25 from 3.28
  • YIELD CURVE: 2.65 from 2.67 

 

MACRO DATA POINTS:

  • 8:30 a.m.: Jobless claims, est. 410k, prior 429k
  • 8:30 a.m.: Non-Farm productivity, est. 1.1%, prior 2.6%
  • 8:30 a.m.: Net export sales
  • 9:15 a.m. Fed’s Evans speaks at Chicago conference
  • 9:30 a.m. Fed’s Bernanke speaks at Chicago conference
  • 9:45 a.m. Bloomberg Consumer Comfort Index, est. (-45.0), prior (-45.1)
  • 10 a.m.: Freddie Mac mortgage
  • 10:30 a.m.: EIA natural gas storage change
  • 1:15 p.m. Fed’s Kocherlakota speaks on monetary policy in California

WHAT TO WATCH:

  • Intl Game Technology launches tender offer to buy Swedish gaming company Entraction Holding AB for $115m
  • Ralcorp board unanimously rejects improved $86-shr bid from ConAgra Foods.
  • General Motors reports Q1 EPS $0.95 ex-items vs Reuters $0.91
  • Large Canadian banks look for ways to derail London Stock Exchange's (LSE.LN) takeover of TMX Group - Globe and Mail
  • British government review of solar subsidies proposes a cut in subsidies for large projects - FT
  • Google, Facebook have both held joint venture talks with Skype - Reuters
  • Monster Employment Index rises 9 points m/m in April to 145

COMMODITY/GROWTH EXPECTATION


THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Silver Investors Dump Futures as Comex Boosts Speculator Trading Costs 84%
  • World Food Prices Rise to Near-Record High as Inflation Speeds Up, UN Says
  • Coal’s Two-Year High May Spur Rebound in Chinese Imports: Energy Markets
  • Copper Falls to Seven-Week Low on Concern Policy Tightening May Sap Demand
  • Silver Extends Bear-Market Decline on Margins; Gold Trades Little Changed
  • Grains, Soybeans Drop, Erasing Gains, as Elevated Prices May Erode Demand
  • Wheat in China Unlikely to Get Enough Rain to Avoid Yield Cuts, DTN Says
  • Cocoa Falls on West Africa Mid-Crop Speculation; Sugar and Coffee Retreat

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • king keeps rate, asset plan steady as reports show UK economy is fading
  • European stocks slide for third day; Lloyds, Socgen tumble after earnings
  • Spain’s borrowing costs rise as demand declines at sale of five-year debt
  • Greek yields signal failure in region’s fiscal crisis policy  - euro credit
  • UK Apr services pmi 54.3 vs consensus 55.7 and prior 57.1

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING EURO

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING EURO

 

 

ASIA MARKETS

  • Asia Stocks Fall on Concern U.S. Economic Recovery Waning; Bharti Slides
  • Philippine Central Bank Raises Key Rate to 4.5% as Inflation Accelerates
  • Hong Kong Banks May Boost Lending to Small Companies on Property Slowdown
  • Indonesia’s Economic Growth Slows, Giving Central Bank Room to Hold Rates
  • Malaysia Raises Key Interest Rate to 3%, Boosts Reserve Ratio on Inflation
  • Australia March retail sales (0.5%) m/m vs consensus +0.5%.
  • Japan was closed for Children’s Day.
  • South Korea was closed for Orininal.
  • Thailand was closed for Coronation Day.

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING ASIA

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING ASIA

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

 

Howard Penney

Managing Director


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IGT ENTRACTION ACQUISITION CONF CALL

On the surface, this looks like a decent acquisition: 2x revs, not dilutive, and strengthens IGT's online positioning.

 

 

"The addition of Entraction advances IGT's position in legalized Interactive gaming markets.  It strengthens our interactive portfolio by adding poker, bingo, casino, and sports betting. This combination will drive enhanced value for our global customers and partners."

- Patti Hart, President and CEO of IGT

 

"This transaction represents a fantastic opportunity for our employees, customers, and shareholders alike. Entraction will be able to utilize IGT's global scale and distribution to advance our short and long term objectives in exciting, new ways and we look forward to joining the IGT team."

Peter Astrom, President and CEO of Entraction

 

HIGHLIGHTS FROM THE RELEASE

  • IGT launched a cash tender to purchase all the outstanding shares of Entraction Holding AB for $11.11/share ($115MM)
  • The Entraction board has recommended the transaction to its shareholders
  • "Established in 2000 and based in Stockholm, Sweden, Entraction operates one of the world's largest, legal online poker networks and has quickly grown into one of the leading suppliers of online gaming products and services."
    • Over 4 million registered players
    • Partnerships with over 60 operators
    • "Provides a comprehensive suite of services needed to operate a successful gaming site such as content management, payment solutions, and fraud protection."
  • "IGT expects to fund the transaction from available cash on its balance sheet. The tender offer is projected to close within IGT's current fiscal year and is subject to conditions customary for Swedish public companies as well as certain regulatory approvals."

 

CONF CALL NOTES

  • Their offer for Entraction serves to further IGT's objective of growing their international and online gaming business
  • Entraction has 40 turnkey customers and 20 poker customers that use their technology
  • Premature to estimate impact on IGT's FY11 guidance, but the acquisition will enhance IGT's online business in FY12
  • No change to guidance

 

Q&A

  • What is the status of Entraction's remake of their poker product?
    • Too early for IGT to have input on Entraction's platform
    • According to IGT's due diligence, they believe that the platform is good base for online poker
  • This transaction is in support of an ex-US strategy. It's really about participating in existing legal markets.
  • They do generate positive cash from operations and have roughly $54MM of revenue
  • It's really important for them to have the regulatory approvals and they believe that they will be able to take this platform into markets where Entraction didn't have the size and financial ability to pursue. Also complements their existing suit of products that they already have in order package a complete online casino offering. 
  • Entraction has not pursued other takeout opportunities to IGT's knowledge. Have just north of 20% of the shareholders that have already indicated support for the transaction.


Ragingly Bullish Bears

“Forget about style; worry about results.”

-Bobby Orr

 

Last night, after the Boston Bruins scored 2 goals in the 1st minute of the 1st period against the Philadelphia Flyers in the Stanley Cup Playoffs, I found myself high fiving friends in the Boston Garden amongst 18,000 of the most Ragingly Bullish Bears I have seen in my life.

 

Bears wearing black and gold jerseys have been pounding Boston’s pavement since the Bruins were born in 1924. While I’m not a long-time Bruins fan, I can assure you that the best risk managed position I could assume last night was to be one for the night.

 

Bears, Bud Lights, and belting heavy metal music with the Bruins about to go up 3-0 in a playoff series in May is as bullish a 3-factor model as a hockey fan can recognize. It’s been a long time. They haven’t won The Cup since Bobby Orr (1972). These bears are hungry.

 

How Ragingly Bullish are you?

 

While sentiment is one of the more difficult risk management factors to quantify, we do have some qualitative data that we overlay with our models. In mid-February, one of the key sentiment signals we called out in calling for a US stock market correction was the Institutional Investor (II) Bullish-to-Bearish survey.

 

Like most surveys, this one is far from perfect – but if measured relative to itself, you can at least consider little mathematical critters that matter like mean reversion and spread risk.  

 

So let’s forget about the style of this survey for a second and consider the results:

  1. Bulls up 100 basis points week-over-week to 55%
  2. Bears down 200 basis week-over-week to 16.5%
  3. The Spread (Bulls minus Bears) widened by 150 basis points week-over-week to +38.2% for the Bulls

Again, relative to itself, there are a few critical risk management callouts in this long-dated survey to consider:

  1. Bulls are not ragingly bullish
  2. Bears are not allowed to be bearish
  3. The Spread between Bulls and Bears is only 200-300 basis points from its all-time wides (all-time is a long time)

All-time “wides” is risk management locker-room speak at Hedgeye for something you don’t want to mess with – kind of like being a man dressed in orange last night drinking a smoothie with your i-pod on in the bowl of the Boston Garden – it’s just a bad position to be long of.

 

Of course, with Correlation Risk to the US Currency Crashing running at all-time highs (see yesterday’s EL note to see how we quantify that), that definitely doesn’t mean you couldn’t try riding that Silver bull to the bitter end. But remember, the last 8-seconds of that ride is where all your risk really lives.

 

Interestingly, but not surprisingly, all it took to rock the raging inflation bulls’ world for a few days was some deflation.

 

How do you Deflate The Inflation (one of our Q2 Global Macro Themes)?

 

You stop the Currency Crash in the US Dollar.

 

For the week-to-date, after closing down for 14 of the prior 18 weeks, all it took to Deflate The Inflation was an arrest of the US Dollar’s decline. For the week, with the US Dollar Index trading flat, pull up a some of the following charts and you tell me how Ragingly Bullish you are on being long The Correlation Risk:

  1. Gold
  2. Silver
  3. Oil
  4. Cotton
  5. Copper
  6. Energy stocks

I can tell you that I for one am not enthused about being long Gold and Oil this week. When this gargantuan global carry trade of Gaming Policy unwinds, we can all forget about debating risk management styles and see who is left standing. Mr. Market owes the fans nothing.

 

My immediate-term support and resistance lines for Gold are now 1488 and 1526, respectively. Immediate-term support and resistance lines for oil are now $107.11 and $109.54 and my immediate-term lines of support and resistance for the SP500 are now 1332 and 1371, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Ragingly Bullish Bears - Chart of the Day

 

Ragingly Bullish Bears - Virtual Portfolio


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