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CREDIT CARD CORRELATION TO CLAIMS WARRANTS CAUTION

The Implications of a Rollover in Claims for the Card Stocks

The credit card stocks are among the most-correlated names to inflections in jobless claims. We anticipate the claims have troughed and will start gradually backing up towards 380k over the next three to five months, which will create a headwind for COF, AXP, and DFS.  

 

In the charts below we show the long-term weekly relationship between the credit card stocks and rolling initial jobless claims. Note that all three of these charts are over a long time period: from 2000 to present for COF and AXP and since the IPO for DFS.

 

CREDIT CARD CORRELATION TO CLAIMS WARRANTS CAUTION - AXP

 

CREDIT CARD CORRELATION TO CLAIMS WARRANTS CAUTION - COF

 

CREDIT CARD CORRELATION TO CLAIMS WARRANTS CAUTION - DFS

 

Why We Expect Claims to Rise

In our note last week, we walked through a quantification of the distortion in seasonal adjustment factors arising from the Lehman shock in 2008.  Because the Labor Department uses a five-year lookback to create its seaosnal adjustment, the 2008 shock is still percolating through the data. See our note from last Thursday for more detail. 

 

The seasonal distortion plays out as follows.  Claims are understated by the largest amount in the last weeks of February.  From now through May, the understatement disappears.  Absent an underlying trend in the series, this effect would drive claims higher by about 20k over the course of the next three months.  By July, the distortion reappears, this time as an overstatement, pushing claims slightly higher still. From July through year-end, the distortion disappears, and the underlying trend will be reflected in the weekly data. 

 

Long-Term Ceiling

There's another set of implications for this analysis: the long-term call.  Looking at the charts of AXP and COF in particular (since DFS hasn't been public through a full decade), it's striking that the stocks seem to retrace their steps almost exactly from one cycle to the next. This is the natural consequence of failing to accrete TBV over the cycle. American Express in particular is eager to spend cash on buying back stock at multiples to tangible, a process that is guaranteed to reduce TBVPS in exchange for growing EPS.  

 

Keep in mind that claims don't go much lower than 300,000, and right now we're already at 350,000.  That's not a lot of room to play for.  For the stocks to go meaningfully higher, they need loan growth, multiple expansion, or a very extended stay with claims at 300k.

 

Bottom Line

This reversal in jobless claims should put a lid on upside in these card stocks from now through the end of the summer. Therefore, on the long side you're playing for arguably very little. However, that opens up the possibility of serious downside in the event that gas prices, Iran or any of a number of the other risk factors we're monitoring come to pass. We see the setup for these stocks over the next five months as asymmetrically negative.  

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser.  

 


THE WEEK AHEAD

The Economic Data calendar for the week of the 5th of March through the 9th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - top

THE WEEK AHEAD - bottome


Weekly European Monitor: Moving the Goalposts

Positions in Europe: Covered Italy (EWI)

 

Asset Class Performance:

  • Equities:  There were plenty of European equity performance swings this week, yet the top performer was Italy’s FTSE MIB, gaining 2.5% week-over-week, and Eastern Europe showed outperformance. Top performers: Romania 2.2%; Ireland 2.0%; Portugal 1.9%; Czech Republic 1.7%. Bottom performers: Ukraine -2.1%; Finland -1.2%; Switzerland -60bps; FTSE -40bps. 
  • FX:  The EUR/USD is down -1.88% week-over-week.  Divergences: PLN/EUR +1.45%, GBP/EUR +1.63%; RUB/EUR +1.38%, NOK/EUR +1.28%, CZK/EUR +1.07%; CHF/EUR -0.15%.
  • Fixed Income:  10YR sovereign yields continued to move down in Italy and Spain week-over-week, while Greece and Portugal continued higher.  Italy fell -53bps to 4.95% -- can the sub 5% level be held?  Spain fell -16bps to 4.89%. Conversely, Greece rose 341bps w/w or 197bps Friday/Thursday to 37.65% and Portugal rose 101bps to 13.78%. 

Weekly European Monitor: Moving the Goalposts  - 11. yields

 

 

In Review:


Markets continue to make gains on short term hurdles—think Germany’s parliamentary approval of Greece’s second bailout on Monday and the 2nd 36M LTRO of €529 billion on Wednesday. To the latter example, while we think the LTRO is pumping in critical liquidity to the banking system (up from LTRO1 of €489), it cannot cure the solvency issues facing certain banks, nor is there any evidence that this cash is being lent through to corporates and consumers. Much of it still looks to be parked “safely” at the ECB’s overnight lending facility. Markets finished the week giving up some of their early week gains as reality set back in: there are many unanswered questions like if the fiscal union can really work when a similar program, the Stability and Growth Pact, failed so miserably in the past, and if the size and composition of the ESM and/or EFSF are sufficient.

 

For now, Eurocrats seem resolved to keep the existing Eurozone fabric in place, which is to say to prevent a “default” or exit of Greece and/or Portugal. ISDA, too has been playing ball, ruling that Greece has not had a "credit event" and credit default swap payments will not be triggered. Yet, as austerity takes hold and the region slips into recession, it will be increasingly difficult for governments to shave down bloated debt and deficit levels, and maintain sinking sovereign yields without the magic hand of the ECB. Noting these structural headwinds is nothing new, however this week emerged a great optimism in the press (at least pushed by the Eurocrats at their Summit this week) that the worst is behind us. We’ll take the other side. Witness a revision this week to Spain’s budget deficit, which last year reached 8.5% of GDP versus the original target of 6.0%.

 

All the while, the goalposts continue to change. This week’s highlight includes further details that the when the ECB swapped about €50 billion of Greek bonds for new longer maturity securities, the switch made the ECB senior to other investors, exempting it from a haircut of 53.5% that all other private holders must take.  Obviously this last point will have a huge impact on gaining the critical 95% participation rate on the PSI. Should this rate not be reached, all calculations on a Greek plan to reduce its debt load will have to be revised higher.  Back to square one--Yippie!

 

Another diverging theme this week is the stance of the UK (but also Czech Republic) that it does not want to be part of the fiscal compact. We’ll be touching on this subject in more detail, but it’s clear that to some extent there is an advantage to having one’s own currency, however the problem remains that that Eurozone is the largest trading partner for most European countries, so a slowdown is going to impact topline no matter the currency benefits. 

 

And a continuing theme over the last week remains sovereign bond auctions issuing paper at lower yields than previous auctions. Notable call-outs this week include: Spain sold €1.06 billion due April 2014 with a yield of 2.06% vs above 6% in November 2011; France sold €3.92 billion of 10YR debt at an average yield of 2.91% vs 3.13% on February 2nd; and Italy sold €3.75 billion in 10YR bonds with an average yield of 5.50% versus 6.08% at a January 30th auction.

 

Finally, as we go into the weekend, it looks like a foregone conclusion that Putin will win Russia’s Presidential election on Sunday. This has severe implications for the modernization of Russia, a theme we’ll reserve for another post.

 

 

Call Outs:


France

  • Sarkozy gains in polls. With less than two months before the ballot, Sarkozy lags behind Hollande by 4.5 points in voting intentions, down from a seven-point gap a week earlier, according to an Ipsos SA poll for Le Monde and France Televisions.
  • Hollande reiterates calls to renegotiate EU Fiscal Treaty and pledges to cap oil prices for 3 months if elected.
  • Hollande floats idea of creating 75% tax bracket on super rich if he wins election.

 

Data Dump:


Eurozone M3 2.5% JAN Y/Y (exp. 1.8%) vs 1.6% DEC

Eurozone Unemployment Rate 10.7% JAN vs 10.6% DEC  (highest since ‘97)

Eurozone CPI Y/Y 2.7% FEB (exp. 2.6%) vs 2.7% JAN

Eurozone PPI 3.7% JAN Y/Y (exp. 3.5%) vs 4.3% DEC  [0.7% JAN M/M (exp. 0.5%) vs -0.2% DEC]

 

Germany GfK Consumer Confidence  6 MAR vs 5.9 FEB

Germany Retail Sales 1.6% JAN Y/Y (exp. 0.2%) vs 0.3% DEC  [-1.6% JAN M/M (exp. 0.5%) vs 0.1%]

 

Italy Business Confidence 91.5 FEB (exp. 92.3) vs 92.1 JAN  (falls to 2-year low on recession)

Italy Annual GDP 2011 0.4% (exp. +0.3%) vs 1.8% 2010

Italy Deficit to GDP in 2011 3.9% (exp. +4%) vs 4.6% in 2010

 

Ireland Property Prices  -17.4% JAN Y/Y vs -16.7% DEC  [-1.9% JAN M/M vs -1.7% DEC]

Greece Retail Sales -11% DEC vs -6.4% NOV

Portugal Retail Sales -8.5% JAN Y/Y vs -10.3% DEC

 


CDS Risk Monitor:

 

Similar to sovereign yields, Italy and Spain saw CDS declines on a week-over-week basis.  Italy contracted -32bps to 359bps and Spain dropped -11bps to 359bps. Interesting, you’d have to go back to AUG 2011 to find Italian CDS at or below Spanish CDS.  Portugal’s CDS rose the most at 57bps w/w to 1187bps, but is down -165bps m/m.  Ireland rose 14bps w/w to 588bps. 

 

Weekly European Monitor: Moving the Goalposts  - 11. cds a

 

Weekly European Monitor: Moving the Goalposts  - 11  cds b

 


Manufacturing PMI:


Weekly European Monitor: Moving the Goalposts  - 11. PMI


 

The European Week Ahead:


Monday: Mar. Eurozone Sentix Investor Confidence; Feb. Eurozone PMI Composite and Services - Final; Jan. Eurozone Retail Sales; Feb. Germany and France Services PMI – Final; Feb. UK House Prices (Mar 5-9), PMI Services, Official Reserves, and BRC Sales Like-For-Like; Feb. Italy Services PMI; Jan. Italy PPI; Feb. Russia Consumer Prices (Mar 5-6), and Services PMI

 

Tuesday: Q4 Eurozone GDP, Household Consumption, Government Expenditures, and Gross Fix Cap – Preliminary; Feb. UK BRC Shop Index, and New Car Registrations

 

Wednesday: Jan. Germany Factory Orders

 

Thursday: Eurozone ECB Policy Meeting and Interest Rate Announcement; Jan. Germany Industrial Production; UK BoE Announces Rates; Feb. France Business Sentiment; Jan. France Trade Balance; Q1 France Non-farm Payrolls – Final; Dec. Greece Unemployment Rate

 

Friday: Feb. Germany Consumer Price Index - Final; Jan. Germany Exports, Imports, Current Account, and Trade Balance; Q4 Eurozone Labor Costs; Feb. UK GfK Inflation Next 12 Mths; Jan. UK Industrial and Manufacturing Production, PPI Input and Output, and NIESR GDP Estimate; Jan. France Manufacturing and Industrial Production, and Central Government Balance; Jan. Italy Industrial Production; Feb. Greece CPI; Q4 Greece GDP - Final

 

 

Extended Calendar Call-Outs:


 20 March: Greece’s €14.5 billion Bond Redemption due.

 

April:  French Elections (Round 1) begins to conclude in May.

 

29 April:  Potential Greek Presidential Elections

 

30 June:  Deadline for EU Banks to meet €106 billion capital target/the 9% Tier 1 capital ratio.

 

1 July:  ESM to come into force.

 

 

Matthew Hedrick

Senior Analyst 


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REPLAY PODCAST & SLIDES: JAPAN'S DEBT, DEFICIT AND DEMOGRAPHIC RECKONING

"I can take pot or leave it. I got busted in Japan for it. I was nine days without it and there wasn't a hint of withdrawal, nothing."

-Paul McCartney 

 

If the quote above from Paul McCartney is accurate, he cured his dependence on an illicit substance after a visit to Japan. The question as it relates to the Japanese in 2012 is whether the Japanese government can cure their dependence on debt to sustain their economy.

 

Earlier today, the Hedgeye Macro Team, led by CEO Keith McCullough, Director of Research Daryl Jones, and Senior Analyst Darius Dale hosted a conference call to update our investment view on Japan with a 100 page presentation. 

 

Topics included:

  • Accelerating debt maturities - In the context of credit default swaps on Japanese government debt doubling since we introduced our Japan's Jugular thesis on October 5, 2010, a cascade of maturities in 2012 -- specifically March -- increase the probability that Japan's sovereign debt market comes under pressure over the intermediate term.
  • Long term demographic headwinds - Japan has the oldest population in the G-7 and by some estimates, based on current demographic trends, the Japanese population will decline by more than 30% over the next 40-years. The headwind of demographics has specific implications for government entitlement spending and GDP growth, both over the short and long term.
  • Government policies gone awry - Decades of Keynesian economic policies have left Japan with a structural deficit of 8-9% of GDP and a revolving door of political leadership. Current policy proposals on the horizon actually appear poised to push Japan closer to the abyss of debt and deficits by structurally impairing economic growth incrementally.

All told, we think Japanese government bonds are at risk of being downgraded by the market due to the aforementioned factors, as well as notable inflections in a number of key tailwinds. The main risks are as follows:

  1. The threat of official ratings downgrades to critical levels; 
  2. A structural erosion of Japan’s net creditor status; 
  3. A failure to pass any meaningful fiscal reform at a critical juncture as it relates to the global perception of sovereign credit risk; and 
  4. A structural increase in long-term inflation expectations.

To access the replay podcast, please copy/paste the following link into the URL of your browser: 

https://app.hedgeye.com/feed_items/18779-japan-s-debt-deficit-and-demographic-reckoning

 

To access the accompanying slide deck, please click on the following link (try copying/pasting if clicking it does not work): http://docs.hedgeye.com/Japan2012.pdf

 

As always, feel free to email our team with questions.

 

Have a wonderful weekend.

 

The Hedgeye Macro Team


THE HAUNTED HOUSE OF RESTAURANTS

Two transient factors have been positively impacting restaurants’ top-line numbers recently.  A distortion in initial jobless claims and – for certain companies – a favorable weather impact have been boosting revenues year-to-date.

 

The Hedgeye Financials team conducted an interesting analysis on initial jobless claims recently and, specifically, the implications therein of the Lehman bankruptcy-related shock to the labor economy in late 2008 and early 2009.  We have been attempting to process what the read through of this analysis is for our space.  Our conclusion is that the impact of a recently-favorable distortion to the headline seasonally adjusted initial claims data, coupled with the impact of favorable weather versus 2011, may have boosted top line numbers for many restaurant companies year-to-date.

 

The phrase given to the aforementioned initial claims issue by the Hedgeye Financials team is “The Ghost of Lehman”.  They explained the impact of Lehman’s demise on the Labor Department’s construction of the seasonal adjustment factor.  They write:

 

 “Lehman's Ghost is a distortion in the seasonal adjustment factors that the Department of Labor is using to treat jobless claims arising from the shock in the series in late 2008 - early 2009.  The Labor Department uses a five-year lookback in constructing its seasonal adjustment factor, which means that the '08-'09 shock continues to skew the data.  Essentially, the seasonal adjustment sees the increase in claims in September 2008 - February 2009 and reads it as a seasonal factor rather than as a bona fide shock.”

 

To estimate the extent of the distortion from the seasonal factor on this week's data, we examined the YoY increase in NSA claims in February 2009 (+88%) and then backed out the average YoY growth from September 2008 to February 2009 (+60%).  So the February 2009 growth is 28% above trend, YoY.  This should be a rough approximation of the contribution of the seasonal factor from that year.  Since the overall seasonal adjustment takes a five-year average, we divide this number by five to get a 5.6% increase.  The conclusion is that this week's claims data is 5.6% understated.  Instead of being 351k, it should really be 372k.”

 

If the analysis is correct, and we have passed the maximum benefit to restaurant stocks by way of the seasonal adjustment distortion, restaurant stocks’ outperformance could begin to reverse in the coming months.  The Financials team contends that “from now through May, the understatement disappears…by July, the distortion reappears, this time as an overstatement, pushing claims higher still.  From July through year-end, the distortion disappears, and the underlying trend will be reflected in the weekly data.”

 

There are clearly a lot of moving parts under the hood where the labor statistics are concerned and, while we are not stating that the jobs market is not showing some improvement, we would caution clients against over-exuberance.  The claims data, distorted or not, are important drivers of restaurant stocks (albeit more so for casual dining) and to the extent that the claims data becomes marginally less positive as the seasonal adjustment becomes a headwind, we would expect to see a marginal slowdown in restaurant stocks’ performance (again, more so in the casual dining space). 

 

THE HAUNTED HOUSE OF RESTAURANTS - inverted claims vs casual dining

 

THE HAUNTED HOUSE OF RESTAURANTS - inverted claims vs qsr

 

 

The quick service and casual dining spaces have, year-to-date, outperformed the S&P 500 by 320bps and 718bps, respectively.  Many names are up on a rope at these levels and, given the Ghost of Winter 2011 – the favorable year-to-date weather impact – combined with the possibility of the Ghost of Lehman distortion going away, we see a likely inflection to the negative side in sentiment around the top line over the next 3-4 months.  We are cautious on the broader space at this point.  The weather impact, which we discussed in our recent post “WINTER WONDERLAND”, is a wildcard currently given that the impact on different companies within our space will largely depend on their respective store bases’ geographic dispersions and disclosure from management as to the magnitude of any weather impact is not likely (until it is being lapped next year!).  The Ghost of Lehman, however, will be far more visible if the analysis is correct, in the jobs data going forward.

 

While a more benign cost inflation outlook, improving sales trends, and increased pricing have fueled the space’s outperformance year-to-date, it is clear that investors could become spooked if favorable factors turn negative or, even, less positive.  Given how lofty expectations have become, we believe that heading through 2Q we could see the top line begin to disappoint.  We believe that the casual dining space is most at risk given its leverage to jobless claims and the outsized performance of that category year-to-date.

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


DIAL IN & MATERIALS: JAPAN'S DEBT, DEFICIT AND DEMOGRAPHIC RECKONING, CONFERENCE CALL TODAY

Valued Client,

  

5-10 minutes prior to the 11AM EST start time today please dial:

 

(Toll Free) or (Direct)

Conference Code: 337697#

  

Materials: "JAPAN'S DEBT, DEFICIT AND DEMOGRAPHIC RECKONING" 

                  

To submit questions for the live Q&A, please email

 

******************************************************************************  

 

 

"JAPAN'S DEBT, DEFICIT AND DEMOGRAPHIC RECKONING"

   

  

"I can take pot or leave it. I got busted in Japan for it. I was nine days without it and there wasn't a hint of withdrawal, nothing."
 -Paul McCartney 

 

If the quote above from Paul McCartney is accurate, he cured his dependence on an illicit substance after a visit to Japan. The question as it relates to the Japanese in 2012 is whether the Japanese government can cure their dependence on debt to sustain their economy.

 

On Friday, March 2nd, 2012 at 11am EDT, the Hedgeye Macro Team, led by CEO Keith McCullough, Director of Research Daryl Jones, and Senior Analyst Darius Dale will be hosting a conference call to update our investment view on Japan with a 75+ page presentation. Please contact if you do not currently subscribe to our Macro vertical and would like to trial our product and receive the materials.

 

Topics will include:

  • Accelerating debt maturities - In the context of credit default swaps on Japanese government debt doubling since we introduced our Japan's Jugular thesis on October 5, 2010, a cascade of maturities in 2012 - specifically March - increase the probability that Japan's sovereign debt market comes under pressure over the intermediate term.
  • Long term demographic headwinds - Japan has the oldest population in the G-7 and by some estimates, based on current demographic trends, the Japanese population will decline by more than 30% over the next 40-years. The headwind of demographics has specific implications for government entitlement spending and GDP growth, both over the short and long term.
  • Government policies gone awry - Decades of Keynesian economic policies have left Japan with a structural deficit of 8-9% of GDP and a revolving door of political leadership. Current policy proposals on the horizon actually appear poised to push Japan closer to the abyss of debt and deficits by structurally impairing economic growth incrementally.

 

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        The Hedgeye Sales Team

        

 

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