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DPZ: GREAT QUARTER & THE REST OF THE PIE LOOKS GOOD TOO

1Q11 is proving to be a strong quarter for the pizza category.  DPZ reported $0.42 versus consensus $0.34.  Domestic comparable restaurant sales slowed -1.4% versus street expectations for a -4% print versus last year’s blowout first quarter.   Domestic company and franchise comparable sales slowed -2.3% and -1.3% versus consensus at -4.3% and -3.9%, respectively.   International comparable restaurant sales grew 8.3% versus consensus 6.5%. 

 

Management shirked away from providing guidance, reverting back to their normal practice after providing sales commentary on 1Q during the 4Q10 Earnings Call.  Management’s discussion, if a little light on forward-looking details, certainly seemed positive in tone.  The domestic and international businesses are performing well and management is “comfortable” with the +3-5% commodity cost outlook.  Given that inflation in 1Q11 was 5%, the higher end of the range seems more conservative.

 

 

Comparable-restaurant sales growth

 

The chart of company-operated domestic same-store sales below shows clearly that DPZ’s domestic business is trending very well.  Despite a negative comparable-restaurant sales number for the first quarter, the two-year average trend is encouraging.  On a sequential basis, from 4Q10, two-year average trends accelerated by 350 basis points.  Media spending in the quarter was in line with the one year ago and the last few quarters, and management stressed that media spend should remain at a fairly constant level for the foreseeable future. 

 

International markets are providing robust returns for the company with Turkey (promotions and TV) and Malaysia (new menu items) two of the standout markets.  The company began its recap of the quarter with commentary on international markets so that, according to management, it might be highlighted that Domino’s is an international company that derives one-third of its profit from international operations. 

 

By way of an explanation for the upside surprise in the company’s top-line performance, management reiterated its comments from a quarter ago; the company views its brand and equity as having been enhanced far past where it was pre-2010.  The U.S. business continues to perform well as the company added pizza and chicken promotions to the menu during 1Q11.  While management wouldn’t give specific numbers on the impact of chicken on average check, or what average check was during the quarter, it was explained that chicken was ordered with high frequency as an add-on, and did not cannibalize pizza sales, so we can infer, from a traffic and average check perspective, that the chicken promotion was a net positive.   Chicken was only rolled out for the last 5 weeks of the quarter so the impact on the current quarter may be more significant. 

 

DPZ: GREAT QUARTER & THE REST OF THE PIE LOOKS GOOD TOO - DPZ P1

 

 

Restaurant Operating Margins

 

Food costs are certainly rising for every company in the restaurant business, with the exception of BWLD, but DPZ is managing the challenge well.  The structure of the company, being 90% franchised, is a great help in this regard but DPZ feels that inflation has been managed and the company’s supply chain system has put the company in a good position in terms of negotiating contacts.  Commodities, according to the company, have been in line with their expectations.  As I wrote in my note titled “DPZ – 1Q11 INFLATION COMMENTARY”, DPZ has been maintaining a far more realistic inflation outlook than many of its peers.

 

Cheese prices were a huge concern for DPZ at the time of the past earnings call on March 1st.  Ten days later, cheese prices fell off a cliff and for the quarter, DPZ paid an average price of $1.60 per pound versus $1.44 last year.  Considering that cheese was trading at $2.00 before its precipitous decline in mid-March, investors are far more at east at the present time than one quarter ago.

 

DPZ: GREAT QUARTER & THE REST OF THE PIE LOOKS GOOD TOO - cheese

 

 

From here, I think this name has plenty of momentum.  Some of the key reasons for my stance include: robust sales growth, a heavily franchised system, a supply chain business that benefits from higher commodity costs, and a management team that is managing investor expectations, as well as the business, very well.

 

Howard Penney

Managing Director


The Correlation Risk: SP500 Levels, Refreshed

POSITION: Short SPY

 

If they didn’t know there was a surreal amount of The Correlation Risk associated with The Bernank’s Burning Buck, now they know…

 

Whether it’s Euros, Gold, Oil, or the SPYs, it’s one giant correlation suck. With the US Currency Crash finally stopping, abruptly, for a day, you can now see the crashing expectations of everything that’s priced relative to those crashing Dollars (remember Q208).

 

The good news here for US stocks is that the SP500’s inverse correlation to the USD is lower than that of say the Euro and Silver (-0.95 and -0.99, respectively on our intermediate-term TREND duration). The bad news is that it’s still very high at -0.82.

 

The rotational mechanism within the SP500 is healthy to observe. US Dollar UP = Deflating The Inflation (our Q2 Macro Theme), and that’s bad for the big beta TRADE (oil, basic materials, financials), but really good for the rest of America trade (consumers, savers, transports).

 

As a result, I’m still mapping a correction in the SP500 of -2.7-4.3% from the April month end high. No, that’s not calling for a crash – although beta can indeed feel that way.

 

Putting some prose with a picture (see chart below), here are some risk management lines to consider: 

  1. Immediate-term TRADE support of 1352 is now immediate-term TRADE resistance.
  2. Immediate-term TRADE support drops to 1332 (making the new immediate-term range = 1)
  3. Intermediate-term TREND support remains 1310 

Out on the long-term TAIL, as long as the manic media is still debating trivial levels like “Dow 13,000”, as professional Risk Managers you should be quite happy to know that using that consensus as your backboard will simply help you manage your gross and net exposures proactively ahead of their predictable behavior.

 

On the way down today (the SP500 is down every day this week), I’m expanding both my gross and net through the two Hedgeye products that I can best express that in (the Hedgeye Asset Allocation Model and the Hedgeye Portfolio).

 

Right now I have 16 LONGS and 7 SHORTS (versus Monday where I tightened up my net exposure to 15 LONGS and 12 shorts). I think I’m too long.

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Correlation Risk: SP500 Levels, Refreshed - 1


Retail: Showing Some Crack

 

We’re seeing the first of the big apparel retailers showing inability to pass through the cost increases that they otherwise planned. The industry needs this to prove aberrational, otherwise the 2H set-up will not be a pleasant one.  Our thesis is, and has been, banking on the latter.

 

The phrase “planning cautiously” appears to capture the tone coming out of Sales Day from more than a few companies. While there was still an exceptionally high number of beats relative to (company-set) expectations (17 of 23), we are beginning to see what may be the early signs of the meaningful roll in retail we expect in the 2H with margin pressure ratcheting both higher and sooner than anticipated.

 

Let’s recall for a moment that strong sales across the board were already baked into April numbers due to the holiday shift so of course the yy compares look solid, but in looking at the underlying 2-year comp trends that eliminate the shifts and noise, it just cracked for the first time since last July. That matters. We also had several retailers taking down numbers despite posting better than expected April comps (SSI and GPS) with at least Gap, Inc.  highlighting insufficient price increases resulting in more significant margin pressure than originally planned. If this unfolds as we suspect, the old adage “Sell in May and go away” may never be more true – particularly in retail. Remember that we don’t need to see everybody make Gap-ish comments, but simply need a few heavy hitters (like Gap, which accounts for a whopping 4-5% of US apparel retail sales) to put pressure on others who have otherwise planned more appropriately.

 

(clients that have not yet flipped through our industry overview outlining our scenario for a 4.5pt decline in industry margins this year, please contact sales at for a copy – we’d be happy to run through it with you).

 

 

SSS Callouts:

  • In a sign that higher product costs are proving more disruptive than some retailers have expected, not only did ARO announce lower sales and earnings, but both GPS and SSI took earnings expectations down despite better than expected sales. Our suspicion is that we are in the early stages of this trend.
  • The strongest performing categories were food/grocery (TGT, COST), women’s apparel particularly dresses (JCP, ROST, TJX), home/housewear (TGT, KSS, COST), and footwear particularly kid’s due to the holiday shift after several retailers highlighted it as a drag last month (ROST, KSS, JWN). Both COST and TGT highlighted electronics as a particularly weak category driven by persistent deflation.
  • TGT came in below expectations and at low end of their April comp guidance. This has been one of our favorite shorts this year for many reasons (see our 8/23 note “TGT: Multiple Targets”). The company’s May outlook of L-MSD implies a rollover in the 2yr trend – the company would have to post a +6% comp just to remain flat. That said, grocery posted a substantial improvement in April suggesting that P-Fresh remodels may finally be gaining traction. As the driver of an expected +200-400bps in incremental comp, the sustainability of such improvement will be one of the more scrutinized line items in next month’s release.
  • Consistent with recent results, ROST highlighted that pack-a-way counts for an even  higher percentage of total inventory to 48% up +1% from last month and compared to 33% yy driven by lower consolidated inventories up 29% down from 35% in March. The ability to offset higher costs with prior pack-a-way inventory is starting to become visible in results with stronger gross margins driving earnings upside.
  • JCP confirmed that it’s still comfortable with the level of inventory, but notably dropped the verbiage that it’s “in-line with sales trends” mentioned last month. While highlighting several outperforming brands including Sephora, American Living, and Liz Claiborne, internet sales contribution appears to be slowing up only ‘slightly’ compared to LSD-MSD increases of late. The company also highlighted that traffic at off-mall stores continues to outperform mall-based locations.
  • COST further confirmed our view on inflation with food and sundries up ~3% (from LSD) and fresh food across all departments now up MSD-to-HSD (from LSD). In addition, gas contributed +3.5% and +4.6% to SSS for both COST and BJ respectively.
  • As expected, weather received frequent mention including from JCP and FRED both of which missed expectations. By and large performance was strongest in the Southeast and West (JCP, ROST, TGT, GPS, JWN, KSS, COST)
  • Weekly trends were strongest in Week 3 in advance of Easter with Week 4 commonly cited as the weakest due simply to the loss of a sales day – JCP was the only retailer to note Week 2. COST was the only retailer to highlight Easter as a negative event during the month impacting comps by -1.5%-2%.

Retail: Showing Some Crack - TGT MoGrid 5 11

 

Retail: Showing Some Crack - SSS Total 5 11

 

Retail: Showing Some Crack - SSS YR1 5 11

 

Retail: Showing Some Crack - SSS 2 YR 5 11

 

Casey Flavin

Director


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Where's the Jobs Growth?: Prep For Tomorrow's Employment Report

Conclusion: We expect tomorrow’s employment report to affirm our call that Jobless Stagflation will continue to percolate domestically. We don’t see the growing bifurcation between the equity market and the direction of the economy as one that will exist in perpetuity – particularly given a Global Macro backdrop infused with Fed-sponsored Correlation Risk, Housing Headwinds, and the Sovereign Debt Dichotomy.

 

Position: Short US Equities (SPY).

 

Without question, this morning’s Jobless Claims number was a bomb. Josh Steiner, the Managing Director of our Financials Team, had this to say in his weekly analysis of this data series:

 

“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.”

 

Where's the Jobs Growth?: Prep For Tomorrow's Employment Report - 1

 

Where's the Jobs Growth?: Prep For Tomorrow's Employment Report - 2

 

Where's the Jobs Growth?: Prep For Tomorrow's Employment Report - 3

 

Irrespective of whether or not this week’s huge miss is a statistical anomaly, the larger takeaway here is that rolling claims have been trending higher for nine consecutive weeks and are now at their YTD high of 431k. That doesn’t bode well for continued improvement in the overall employment picture. To this point, Steiner writes:

 

“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.”

 

The takeaway from this deteriorating trend is that the bulls are running out of bullets. At the start of the year, “employment growth” was among the major factors supporting what we called out at the time as overly optimistic GDP growth forecasts. The others, including “continued strength in manufacturing” and a “pickup in exports”, have yet to have a meaningful impact on the overall economy, as evidenced by 1Q11 Real GDP growth coming in around half of what consensus expectations were in early February (+1.8% QoQ SAAR vs. +3.5%).

 

As the market braces for tomorrow’s employment report, we think it’s important to widen the analytical lens by which we contextualize this data series. We’re coming off a +230k MoM gain in Private Payrolls, which slowed from +240k MoM in February. Interestingly, February’s Private Payroll number was the highest rate of MoM growth this country has seen since March 2006 – roughly halfway through the largest consumer leverage buildup in economic history.

 

For many reasons, don’t expect the April 2011 Private Payrolls report to show a reacceleration to the upside. In addition to Initial Unemployment Claims consistently highlighting a developing trend of weakness in this sector, our proprietary Hedgeye ISM Employment Index lends credence to our thesis.

 

Using a GDP-weighted average of the Employment subcomponents within the ISM Manufacturing and Non-Manufacturing Reports on Business Surveys, we’ve created an index that accurately tracks Private Payrolls growth on a concurrent basis. It’s interesting to note that this index has backed off its current-cycle high of 56.6 in February ’11 to 54.8 in March and now down to 53.2 in April. While, in theory, the index could continue to make higher-lows and higher-highs from here, the balance of risks remain skewed to the downside given that February’s high was 1.3 standard deviations above the long run average. Thus, reversion to the mean seems likely for this series – just as slowing jobs and wage growth seems likely for the slowing US economy.

 

Where's the Jobs Growth?: Prep For Tomorrow's Employment Report - 4

 

A linear regression analysis of these two series produces a predicted value of +128k for tomorrow’s Private Payrolls series – which would be a noteworthy sequential deceleration and not supportive of current consensus expectations for +3.2% GDP growth in 2Q11. While +128k appears aggressive at face value considering that it would be a rather large miss relative to consensus expectations of +200k, we do believe the risks to Private Payrolls growth is skewed to the downside given the persistent weakness in Jobless Claims and increased corporate visibility on how the run-up in raw materials and energy prices over the last 7-8 months will negatively impact margins from a COGS standpoint. As such, we’ve done our best to define probable downside risk using 1x and 2x standard deviation bands as outlined on the chart below.

 

Where's the Jobs Growth?: Prep For Tomorrow's Employment Report - 5

 

As also depicted in the chart, we’ve attempted to define the potential upside risk to our model’s +128k output. Supporting the case for upside risks is April’s +4% gain in the DJIA, which helped boost US CEO sentiment to the second highest level (64.1) since the Young Presidents’ Organization survey began back in 2Q09. In addition, 42% of those surveyed said they intend to increase hiring throughout the year while only 3.7% expected to reduce employee head count. While our process flags survey results like these as contra-indicators and indicative of the tops of economic cycles, we cannot strongly argue any bullish spin as it relates to very near-term job growth.

 

All told, tomorrow’s jobs report should be a pretty telling gauge as to whether or not the US economy is, in fact, on firmer footing and whether or not we will see calls for additional stimulus ahead of QE2’s end-of-June expiration. With the US Dollar trading up over a full percent today, it will be interesting to see whether or not this is a leading indicator for a beat relative to expectations for tomorrow’s employment report (suggesting a pull-back in market expectations for QE3). On the contrary, falling US Treasury yields are not confirming this theory behind today’s dollar strength. In fact, yields on the short end of the curve are trading in what our models define as the quantitative equivalent of calls for additional easing.

 

Where's the Jobs Growth?: Prep For Tomorrow's Employment Report - 6

 

Tomorrow we'll get more clues as to whether market participants will call on The Bernank to try to inflate his way into more job creation via additional support for the equity market. For now, enjoy what's left of your Cinco de Mayo.

 

Darius Dale

Analyst


MACAU APRIL DETAIL

April was a surprisingly strong month, despite only 30 days and it being a seasonal shoulder month between March and May. MPEL was the standout. 

 

 

Total gaming revenue increased 44% YoY to HK$19.9 billion.  Certainly, hold played a part as junket volume declined 5.5% from March while total VIP revenue increased 4.4% sequentially.  Nevertheless, April was much better than expected.  Importantly, high margin Mass increased 31% YoY, putting in the 2nd best Mass month ever, falling only 2% below March 2011.

 

In terms of market share, MPEL was the big winner, generating 17.2% of the total gaming market, by far its best showing since September 2009.  MPEL’s 6 month average share was 14.6%.  Most importantly, MPEL was able to grow its mass share significantly, up to 11.2% and 90bps higher than its 6 month average.  Overall, MPEL grew its total gaming revenue 91% YoY in April.  We still think low hold in March may cause MPEL to disappoint the Q1 whisper EBITDA number of $145 million but the company is certainly off to a great start in Q2.

 

Wynn was also a market share gainer – 150bps over its 6 months average, driven mostly by a higher than normal VIP hold percentage.  Mass market share actually declined.  LVS’s share held steady relative to its average but Mass share continues to trend below its moving average.  Market share losers were SJM and Galaxy (low hold).  While MGM’s share was consistent, the property led the market in growth with total gaming revenue up 128%.

 

 

Y-o-Y Table Revenue Observations:

 

Total table revenues grew 45% YoY this month despite a difficult comp of 73% YoY growth in April 2010, with Mass growth of 31% and VIP growth of 50%.  Junket RC also grew 50% in April.

 

LVS table revenues grew 13% - the slowest of the concessionaires

  • Sands was up 19%, driven by a 23% increase in VIP and a 12% increase in Mass
    • Sands benefited from high hold this month.  Adjusted for 10% direct play (in-line with 1Q11), hold was about 3.6%, compared to 3.2% hold in April 2010, assuming a 14% direct play estimate (in-line with 2Q10).  Junket RC was up 18.5%.
  • Venetian was up 28%, driven by a 12% increase in Mass and 39% increase in VIP
    • Junket VIP RC increased 82%, compared to a 23% decline in April 2010.  Assuming 19% direct play, in-line with 1Q11, we estimate that hold was 2.8%, compared to 3.4% hold in April 2010 (assuming 24% direct play).
  • Four Seasons was down 43% driven by 61% decline in VIP which was somewhat offset by 76% Mass growth
    • The decline that FS experienced in April is partly due to difficult hold comparisons and low hold this month
    • Assuming 40% direct play, hold was 2.2% compared to an estimated hold of 3.8% in April 2010 assuming direct play levels were in-line with 2Q10 at 50%.
    • Junket VIP RC decreased 15%.

Wynn table revenues were up 71%

  • Mass was up 53% and VIP increased 75%
  • Junket RC increased 58%
  • Assuming 10% of total VIP play was direct, we estimate that hold was 3.4% compared to 3.1% last year (assuming 11% direct play)

MPEL table revenues grew 97%, driven by Mass growth of 62% and VIP growth of 104%

  • Altira was up 42% with Mass continuing its tear, up 73% while VIP grew 41%
    • VIP RC was up 25%
    • We estimate that hold was 3.4% compared to 3.0% last year.
  • CoD table revenue was up 149%, driven by 60% growth in Mass and 189% growth in VIP (the most of any property in Macau)
    • Junket VIP RC grew 81%
    • Massive VIP growth was due to very easy April 2010 comps and very strong RC growth. Assuming 19% direct play, hold was 2.9% compared to 1.9% in April 2010, assuming 18% direct play (in-line with 2Q2010)

SJM revs grew 28%

  • Mass was up 22% and VIP was up 31%
  • Junket RC was up 41%

Galaxy table revenue was up 15%, driven by 65% growth in Mass and VIP growth of 11%

  • Starworld table revenues grew 25%, driven by 104% growth in Mass and 21% growth in VIP
  • Junket RC grew 34% at Galaxy Group and 35% at Starworld

MGM table revenue was up the most in April, growing 131%

  • Mass revenue growth was 61%, while VIP grew 157%
  • Junket rolling chip growth also grew the fastest at 117%

Assuming direct play levels of 10%, we estimate that hold was 3.1% this month vs. 2.6% in April 2010

 

 

Sequential Market Share (property specific details are for table share while company-wide statistics are calculated on total GGR, including slots):

 

LVS share rose 1.2% in April to 16.9% from 15.6% in March. This compares to 6 month trailing market share of 17.1% and 2010 average share of 19.5%

  • Sands' share increased 90bps to 5.7% off of the properties all-time low share in March
    • The decrease was driven by a 120bps increase in VIP market share to 5%, off of an all-time property low in March.  RC share was 3.9%, down 30bps sequentially, and below the 2010 average of 4.5%.
    • Mass market share ticked down 10bps sequentially to 7.9%
  • Venetian’s bounced 1.3% to 9.3% share off of March's all-time lows
    • VIP share increased 1.9% to 7.9%
    • Junket RC increased 90bps to 6.7%, which compares to an average of 6.3% share in 2010. Perhaps they are making some inroads with their junket strategy?
    • Mass share decreased 30bps to 13.8% hitting an all time low for the property. 2010 average share was 15.9% and 6 month trailing share (ex. April) is 15.2% for the property
  • FS share decreased 110bps to 1.4%
    • VIP share decreased 160bps to 1.1%
    • Mass share increased 70bps to 2.5%, the property's 2nd best share month after December 2008      
    • Junket RC share decreased 60bps to 0.9%, the property’s lowest share since July 2009

WYNN was a big share gainer in April, with share up 2.7% to 16.8%, driven by a combination of high VIP hold and easy sequential hold comps, and above market growth in both Mass and Junket RC.  April’s share is above Wynn’s 6 month trailing average share (ex April) of 15.3% and 2010 average share of 14.9%.

  • Mass market share decreased 1% to 10.9%, compared to an average of 10.1% in 2010
  • VIP market share increased 4.6% to 18.4% sequentially, nicely above its 2010 average of 16.0%
  • Junket RC share increased 60bps to 15.3%, in-line with Wynn’s 2010 average of 15.2%

MPEL was the largest share gainer in April, with market share increasing to 17.2% from 14.1% in March – beating out LVS for 2nd place behind SJM!  April’s share compares with an average 6 month trailing and 2010 share of 14.6%

  • Altira’s share increased 80bps to 6.0%, compared to 5.6% average share in 2010
  • CoD’s share increased 2.4% sequentially to 11% - 180bps above Venetian’s table market share!
    • Mass market share increased 1.7% to 9.7%, the properties’ second best share after February's all-time high of 10.3%
    • VIP market share decreased 2.5% to 11.4% while Junket RC share decreased 40bps sequentially to 10% (compared with 6.7% share for Venetian).

SJM went from the biggest share gainer in March to the biggest loser in April.  SJM’s share fell 4.3% to 29.6%.  April share compares with an average share of 31.3% in 2010 and a 6 month trailing average of 31.6% (ex April)

  • Mass market share decreased 70bps to 40.1% while VIP share plummeted by 5.4% to 27.4%
  • Junket RC share decreased to 32.8% from 34.2% in March

In a reversal of last month’s trend, Galaxy was the 2nd largest share loser in April, with share declining to 9% from 11.4% in March. April share compares with an average share of 10.9% in 2010 and a 6 month trailing average of 10.3% (ex April)

  • Starworld's market declined 1.4% to 8.2%
  • Share gains were entirely driven by VIP which lost 2% share to 9.8% despite Junket RC share increasing 80bps to 11.7%.
  • Most of Galaxy’s share losses were caused by low hold, which we estimate was below 2.5% in April compared to 3.1% in March

 MGM's share decreased 50bps to 10.5%, from 11% in March. April share compares with an average share of 8.8% in 2010 and a 6 month trailing average of 11.2% (ex April)

  • Mass share increased 60bps to 8.9% - the 3rd highest property share after Venetian and CoD
  • VIP share decreased 70bps to 10.8% - the 2nd highest property share (that we track) after CoD
  • Junket RC decreased 10bps to 10%,but remained above the property’s 2010 average of 8.4%

 

Slot Revenue:

 

Slot revenue grew 32% YoY in April to $108MM

  • MGM slot revenues grew the most at 94% reaching $15MM
  • At 39% YoY, LVS had the second best growth, impressive given the large base. Slot revenues were $32MM.
  • Galaxy grew 37% to $3MM
  • Wynn’s slot revenue grew 31% reaching $20MM
  • MPEL’s slot revenues grew 28% reaching $23MM – in-line with March’s all-time high for the company
  • SJM was the only concessionaire to experience a decline in slot growth. SJM slot revenue fell 5% to $15MM.

 

MACAU APRIL DETAIL - table

 

MACAU APRIL DETAIL - mass

 

MACAU APRIL DETAIL - rc


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


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

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