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Framing Up the Jobs Report – Hedgeye Style

Conclusion: If there’s one thing we’ve learned from today’s Jobs Report, it is that consensus has to start accepting the fact that US growth is slowing and that forward EPS estimates need to come down. In the report below, we pick apart the BLS’s reported numbers and update our view of the US economy.

 

It’s obvious that today’s Employment data is not positive, so there’s really no need to belabor the point (no pun intended). Where we do find added value in writing about today’s awful Jobs Report is in breaking down the numbers to find out what’s really going on with the labor market – Hedgeye style.

 

At the start of the year, the biggest pushback we got to our incredibly contrarian call that Growth will Slow as Inflation Accelerates was that the consumer would roar back and join the manufacturing-led recovery. With the Unemployment Rate ticking back up above 9% in May, that storytelling is rightfully being revised. We said it then and we’ll continue to say it: arguing that the jobs picture would improve and help fuel the recovery was significantly more apropos in March ’09 than in January ’11. Employment is a lagging indicator.

 

There are three charts we want to show you below, but first, let’s define some methods and terminology. 

  1. The first being the BLS’s Birth/Death Adjustment, which is the government’s way of estimating how many businesses are being created/shut down based on analysis of previous economic cycles;
  2. The second point we want to make is that the Birth/Death Adjustment is non-seasonally adjusted, so there is an omnipresent seasonal pattern to be recognized, with the peak positive adjustments typically coming in the three months of 2Q; and
  3. The third point we make is that the headline Payrolls numbers are seasonally adjusted, so netting out the government’s “fudge factor” is tougher than it appears to the naked eye. That said, while it may be akin to comparing apples vs. oranges, we find analytical respite in comparing the same faulty data series against itself on a year-over-year basis. 

More information on the Birth/Death model and its methodology can be found here: http://www.bls.gov/web/empsit/cesbd.htm

 

Equipped with these caveats and idiosyncrasies, let us show you three charts that matter to what we’re all ultimately searching for: the slope of economic growth.

 

The first is showing just how seasonal the Birth/Death adjustment really is. The key takeaway here is that beyond next month, made-up job creation will be less able to support whatever headline Payrolls growth we have left:

 

Framing Up the Jobs Report – Hedgeye Style - 1

 

The second chart is that, on a year-over-year basis, Private Payrolls growth excluding the Birth/Death adjustment is running at +21k. Though up from -12k in April, that compares to +267k YoY as recently as February. Through the first five months of the year, we’ve added a cumulative net +363k actual private-sector jobs on a YoY basis. That's well below the reported figure of +550k YoY, which includes the B/D adjustment:

 

Framing Up the Jobs Report – Hedgeye Style - 2

 

The last chart is perhaps the most daunting as it relates to the economy. On three different measures, Real Wage growth has either flat-lined or is trending down.  And with unemployment remaining high and reported inflation remaining sticky, one could make a compelling argument that these trends will only get worse before they get better. We don’t disagree:

 

Framing Up the Jobs Report – Hedgeye Style - 3

 

Net-net, if there’s one thing we’ve learned from today’s Jobs Report it is that consensus has to start accepting the fact that US growth is slowing and that forward EPS estimates need to come down. While the sell-side continues to ratchet down their growth “forecasts” after seeing the data, we’ll continue to stick to our process and help you manage risk before it happens. Growth is slowing and it’s much less “transient” than the bulls think it is. Even with the world’s largest bond fund net short US Treasuries, the bullish bid across the bond market is telling us just that.

 

Darius Dale

Analyst

 

Framing Up the Jobs Report – Hedgeye Style - 4


RL: KM Shorting for a Trade

 

Keith shorted RL in the Hedgeye virtual portfolio with the stock breaking through its intermediate-term TREND line of support and immediate-term downside to $113.88. Even though the 4Q print changes nothing related to our long-term call regarding $9 in EPS power and we still think RL will beat this year by +6% relative to consensus, we are shaking out below the Street in the upcoming quarter. Not only were we surprised the stock didn’t trade off more meaningfully following the miss, but perhaps even more so in the ensuing rebound. Trading above $123,  the stock is simply overbought relative to Keith’s model on an immediate-term TRADE basis.

 

See our recent post on 5/25 “RL: Great Company/Strategy, Bad Stock” for our more detailed view on the stock by duration.

 

RL: KM Shorting for a Trade - RL VP 6 3 11

 

 


Wet Kleenex Europe

European Positions: Long Germany (EWG); Short Spain (EWP)

 

To borrow a phrase from Keith, Europe’s latest high-frequency data feels like a Wet Kleenex, which is to say not great and leaving an uneasy feeling. In particular, our conviction in Germany (in the Hedgeye Virtual Portfolio via the etf EWG) has recently waned.  PMI (Services and Manufacturing) and confidence surveys have declined in recent months as inflation accelerates and broadly sovereign debt contagion risk remains in the forefront.  From a quantitative setup the equity markets of Germany to Sweden to the PIIGS are all broken on the intermediate term TREND: this often is an indication to short a market, or get out of the way. Therefore we will be managing our long position in Germany accordingly as the DAX is trading right at its TREND line of 7,100 (see below).

 

Wet Kleenex Europe - mh1

 

PMI Services data out today for May confirmed the Manufacturing readings released on Wednesday—declines month-over-month for the major economies and the Eurozone average (see charts below). On the PMI survey, 50 is the line in the sand, with figures above 50 indicating expansion, and below indicating contraction. Spain is firmly in the latter camp, with Manufacturing at 48.2 and Services dancing on the line at 50.9. Equally Italy’s Services is flirting with the line (50.1) as is Ireland Services (50.5).  While Greece is taking the spotlight, we remain decidedly bearish on all the PIIGS (we’re currently short Spain via EWP), as we expect them to underperform their target debt and deficit reduction targets.

 

Wet Kleenex Europe - mh2

 

Wet Kleenex Europe - mh3

 

On the EUR-USD, we’re bearish as the pair reaches the top side of our trading range at $1.44, and believe it will bounce around in a range to $1.40 alongside headline risk, but ultimately find support as the EU continues to socialize the periphery’s fiscal imbalances at every step.

 

Matthew Hedrick

Analyst


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DRI - INTERMEDIATE TERM ISSUES

DRI continues to be view as the “safety trade” in casual dining due to the stability of its core brands, strong financial characteristics and seasoned management team.    

 

Being one of the companies in the restaurant industry that has some of the most “mature” brands, DRI incremental sales drivers are very sensitive to the performance of the quarterly promotions and limited-time offers.  In addition, we are in a very value-sensitive environment and the consumer has many choices from which to choose. 

 

DRI has a demonstrated over time that management has proven to be able to build their brands using LTO’s effectively, but they are not perfect.   Last quarter, the Olive Garden top line performance suffered from the shrimp and ravioli promotion falling afoul of guest preferences; this led to a negative menu mix in February.  According to management, the shrimp dish was a little too “culinary-forward” and didn't drive the same level of incremental guests as did the ravioli promotion with the $10.95 price point in 3Q10.  In 4Q10, The Olive Garden kept with a “culinary-forward” feel promoting the Culinary Institute of Tuscany (CIT) Soffatellis followed by Pastachettis. 

 

With expectations for Olive Garden performance lowered due to 400 underperforming stores that are awaiting a fresh look, Red Lobster (and Long Horn) must pick up some of the slack if management is going to hit its stated goal of 1.5% to 2% same-store sales in FY11; with the lower end being more likely.  Management’s bullish view of the top line is based partly on a continued improvement in the broader economic climate, especially in terms of employment, which has certainly not materialized.

 

In 4Q11, Red Lobster will benefit from the timing of Lobster Fest and the Create Your Own Shrimp promotion.  This brings me to Red Lobster and the current LTO, which appears to have an extremely compelling price point.  The “$15 Seafood Feast” includes soup, salad, entrée, dessert and unlimited Cheddar Bay Biscuits and runs from May 31st through July 25th.  In 3Q11, same-store sales increased 0.1% at Red Lobster (despite the adverse impact of 120bps related to the timing of Lent and their signature Lobster Fest promotion, and another 50bps of winter weather issues).  It would appear that the current promotion is accomplishing one of management’s stated goals of “price certainty” for the Red Lobster guest.

 

The $15 price point compares to the $19.75 average check, which includes lunch. This implies that the average check at dinner is likely closer to $25.  The issue Red lobster faces with this promotion will be the level of customer preference for the highly compelling $15 price target at a time when inflation is impacting the company’s margins, particularly in sea food.  There is clearly potential for a significant decline in average check.

 

DRI - INTERMEDIATE TERM ISSUES - OG pod 1

 

DRI - INTERMEDIATE TERM ISSUES - RL pod 1

 

DRI - INTERMEDIATE TERM ISSUES - LH pod 1

 

 

Howard Penney

Managing Director

            


RESTAURANT INDUSTRY EMPLOYMENT DATA UPDATE

Employment data less positive for QSR, on the margin.

 

The overall jobs picture is causing concern here at the market open but, looking into the details that are most pertinent for QSR, it is the decline in the absolute growth level of employment in the 20-24 YOA cohort that caught our attention.  January through April brought 3%+ growth in the employment level among 20-24 year olds.  May’s number indicated a mere 1.1% in employment growth for that age bracket, which is a glaring red flag for QSR.  As a reminder, much of the positive sentiment from management teams over the past number of quarters has anchored on an improving employment landscape.  This view certainly doesn’t corroborate with Hedgeye’s macroeconomic view and, today’s news being the most recent instance, the data is also calling into question the idea of a sustained recovery in employment. 

 

As the second chart below shows, employment growth in the food service industry continued its upward trajectory in April.  Clearly, restaurant management teams can only react to the economic reality they are faced with, and the data is lagging one month behind the data in the first chart.

 

RESTAURANT INDUSTRY EMPLOYMENT DATA UPDATE - national employment growth by age

 

RESTAURANT INDUSTRY EMPLOYMENT DATA UPDATE - employment growth

 

 

Howard Penney

Managing Directory


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - June 3, 2011

 

The US futures are trading lower following the disappointing jobs numbers, while Europe is slightly higher and Asia traded lower.  Last month’s jobs report benefited from a very favorable Birth-death fudge factor which was +175,000 of the 224,000 reported.  All the MACRO data points for the past two weeks suggested that the today jobs picture would be bleak, no matter how made up the jobs number always is.  As we look at today’s set up for the S&P 500, the range is 20 points or -0.68% downside to 1304 and 0.84% upside to 1324.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 63

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -180 (+1763)  
  • VOLUME: NYSE 1008.32 (-15.26%)
  • VIX:  18.09 -1.15% YTD PERFORMANCE: +1.92%
  • SPX PUT/CALL RATIO: 1.61 from 1.19 (-26.59%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 21.64
  • 3-MONTH T-BILL YIELD: 0.04%
  • 10-Year: 3.04 from 2.96
  • YIELD CURVE: 2.59 from 2.52 

 

MACRO DATA POINTS:

  •  8:30 a.m.: Payrolls report: Change in nonfarm payrolls: est. 165k, prior 244k; Change in private payrolls: est. 173k, prior 268k
  • Unemployment rate: est. 8.9%, prior 9.0%
  • 8:30 a.m.: Net export sales: Soybeans, soy meal, soy oil, wheat *10 a.m.: ISM non-manufacturing: est. 54.0, prior 52.8
  • 12:30 p.m.: Fed’s Tarullo speaks on regulation in Washington
  • 1 p.m.: Baker Hughes Rig Count
  • 3:30 p.m.: Fed’s Rosengren speaks at Stanford

WHAT TO WATCH:

  • S&P says a Greek default is "far from certain
  • Groupon could raise up to $3B, valuing company at $30B - NYT,
  • Apple paying major reecord labels $25-50M each in advance - NY Post
  • Fox gets 10% price increase for primetime ads sold in upfront, takes in $2B - NY Post
  • Foster's unaware of unannounced information explaining today's jump in price
  • Coca-Cola CEO says will raise prices in H2 more than expected - FT
  • Fed reports balance sheet assets of $2.79T on Wednesday, +$13.7B w/w and +$453.1B y/y

 

 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Gold Declines a Second Day in London as Near-Record Prices Spur Selling
  • Feed Makers in South Korea May Favor Wheat Over Corn as Premium Narrows
  • Lead Smelters in China May Cut Output as Demand Slows, Regulation Tightens
  • Japan’s Tea Industry Facing Shortage as Nuclear Radiation Taints Shipments
  • Copper Climbs in London Trading on Speculation Two-Day Drop Was Overdone
  • Oil Falls Below $100 Before U.S. Jobs Report, OPEC; Crude Supplies Climb
  • Copper May Fall Next Week on Speculation of Slowing Demand, Survey Shows
  • Wheat Futures Climb for Second Day on Weather Concerns in U.S., EU, Canada
  • Highest-Quality Crude Shortage Cutting Refinery Profits: Energy Markets
  • Rubber Advances as Oil’s Rally Boosts Appeal, Car Output Recovers in Japan
  • Harmony Gold Digging World’s Third-Richest Mine Emerges as Takeover Target
  • Ukrainian Coal Production Rose 9.9% in 5 Months, Agriculture Ministry Says
  • Copper Stockpiles in Shanghai Rose 3,854 Tons to 86,163 Tons in Past Week
  • Europe Commodity Day Ahead: Wheat Futures Gain on U.S. Weather Concerns

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • Europe trading slightly higher ahead of the US open
  • Eurozone May Services PMI 56.0 vs consensus 55.4 and prior 55.4
  • Eurozone May Composite PMI 55.8 vs consensus 55.4 and prior 55.4
  • Germany May Services PMI 56.1 vs consensus 54.9 and prior 54.9
  • France May Services PMI 62.5 vs consensus 62.8 and prior 62.8

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • Australia’s May AiG Performance of Service index 49.9 vs 51.5 seq.
  • Asia traded lower, with the exception being China op 0.8%

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


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