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INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW

Claims Continue to March Higher 

Claims move notably higher again this week, up 9k WoW to 386k. Excluding the normal weekly revisions, which this week were 3k, claims were higher by 6k (377k vs 380k). This data series continues to play out very consistently with our framework for thinking about the seasonal distortions taking place in the economic data. As a reminder, we think the data will continue to get worse for approximately two more months before starting to get better. Rolling claims rose 3.5k to 382k. On a non seasonally adjusted basis, claims were 9% lower YoY. 

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Raw

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Rolling

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - NSA

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - NSA rolling

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - S P

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Fed

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - YoY

 

The Yield Curve Continues to Get Steamrolled

The 2-10 spread tightened another 10 bps last week to 130 bps as of yesterday. The ten-year yield decreased 6 bps to 160bps. To put this in perspective, if spreads hold where they are now, the 3Q12 sequential change will rival what we saw in 3Q11, an ominous sign for bank margins. 

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - 2 10

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - 2 10 QoQ

 

Financial Subsector Performance

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

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Subsector performance

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Comapnies

 

Joshua Steiner, CFA

 

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 M3: TAIPA INFRASTRUCTURE; PACKAGE TOURS

The Macau Metro Monitor, June 14, 2012

 

 

LRT STARTS CONSTRUCTION ON ALL TAIPA AND COTAI SEGMENTS Macau Daily Times

Four months after the beginning of construction for the first section of the Taipa Light Rapid Transit (LRT) system, yesterday's ground-breaking ceremony marks the start of a full force construction of the entire mass transit system, and is expected to be completed in 3 years.

 

The 3.4km Cotai Section consists of four stations covering the major resorts in the Cotai Strip as well as the centre of Taipa village, while the 3.1km Lotus Border Crossing Section has three stations linking the Macau University of Science and Technology, the airport and the Pac On Ferry Terminal.  The 1.9km section with five stations linking Taipa village and the Sai Van Bridge started its construction in February.  According to Lei Chan Tong, Coordinator of the Transportation Infrastructure Office, the original completion target of 2015 for the Taipa project remain unchanged.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR APRIL 2012 DSEC

Visitor arrivals in package tours increased by 28% YoY to 695,762 in April 2012.  Visitors from Mainland China (491,337) went up by 20.3%, with 170,164 coming from Guangdong Province; besides, those from Taiwan (53,774); Hong Kong (41,672); and the Republic of Korea (23,247) soared by 95.6%, 68.6% and 25.3% respectively.

 

Attributable to the opening of new hotels, the number of available guest rooms of the 97 hotels and guest-houses totaled 24,211 at the end of April 2012, an increase of 4,063 rooms (+20.2%) YoY, with those of the 5-star hotels accounting for 61.3% of the total.  Average occupancy rate of the hotels was 82.5%, with 5-star hotels leading at 83.1%.  The average length of stay decreased by 0.08 night to 1.4 nights.



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Cheap Talk

“My own view is that he will speak eloquently, but that words are cheap, and that the record of an individual is the basis upon which you determine whether they should continue to hold on to their job.”

-Presidential candidate Mitt Romney

 

Since starting Hedgeye almost four years ago, many of our readers have a hard time discerning the political leanings of the firm.  At times we’ve been accused of being Democrats and in other instances we’ve been accused of being Republicans.   In reality, while individuals at Hedgeye have personal political leanings, and we encourage them to get involved in the process, as analysts we are completely objective about politics.  Our job is to analyze the economic policies of politicians and come up with a view of their ultimate impact on asset classes and prices.

 

I highlight the quote above not because I necessarily agree with Romney, but rather because I want to highlight that the political debate is going to only accelerate in the coming months heading into the nominating conventions and ultimately the general election in November.  Romney’s statement above is very accurate in one sense, this election, as they usually are, will be about the performance of the incumbent and the economy under the incumbent.

 

Later today President Obama will be giving a speech that will be the beginning of his campaign’s attempt at taking back the economic debate.  Based on early previews, Obama is likely to focus less on the last three years, a time in which he will claim he shored up the economy, and more on the future prospects for the U.S. economy.  As it relates to the future, Obama will attempt to juxtapose Romney, a wealthy private equity investor, with middle class Americans.   The insinuation being that Romney’s policies will only enrich the wealthy, while Obama will help the middle class.

 

The challenge that Obama faces, especially if he uses only rhetoric and has no new tangible plans, is that the middle class has very much struggled under his Presidency.   The two statistics that the Romney camp repeatedly cites, which are largely accurate, are that no net new jobs have been created under Obama and that median household incomes have declined somewhere in the range of $4,000 per annum under Obama.

 

In the Chart of the Day, we highlight our proprietary Hedgeye Election Indicator (HEI).  The HEI is driven by real time economic price data that correlates closely with polls and ultimately establishes a probability of an Obama re-election.  In line with Romney’s statement that talk is cheap as it relates to economic performance, the HEI bears this out as it has declined to its lowest level in five months at 54%.  As the economy goes, so goes Obama’s re-election chances.

 

In Europe this morning, we are getting increasing evidence that not only is talk cheap, but action itself is cheap.  Specifically, Spanish 10-year yields touched 7.0% overnight.  This is a 91 basis point increase from Monday morning’s bailout lows.  It seems the attempt at containing European sovereign debt issues by adding more debt, without long term structural reform, is actually now being perceived as mere talk by the market, even if the Eurocrats see it as action.

 

Later today we will be publishing a note on Italy.  As much of the media attention is rightfully focused on the pressure points of Spain and Greece, Italy is the third largest economy in the Eurozone , so a much bigger problem than Spain, and its yields and CDS are starting to trade in line with Spain at 6.3% on the 10-year and 554 basis points on 5-year CDS.  With a 120% debt-to-GDP, it should be no surprise that adding more debt in Europe to bail out Spain is not a positive catalyst for Italy.

 

The unintended consequences of failed European bailouts are not only being seen in Italy’s sovereign debt markets, but also broadly in European companies.  This morning the Swiss banks are getting punished.  Credit Suisse is down -8.0% after the Swiss National Bank said they need a “marked increase” in capital this year to prepare for possible escalation of Euro-zone risks.  The Swiss National Bank also recommended that UBS boost capital. 

 

On a more micro level, our Restaurant team led by Howard Penney will be hosting a call on the restaurant industry’s franchise model, and its latent risks, with restaurant finance expert John Hamburger (yes, that is his real name). The crux of the debate is as follows:

 

“The interests of franchisees and franchisors do not always align; in fact, in today’s environment of tight capital supply for small businesses and increasing competitiveness among restaurant companies, they can sometimes diverge.  Through franchising, franchisors gain more stable cash flow, protection from swings in variable costs, and lower expenses.  In turn, franchisees, ideally, gain operational expertise from companies and brand recognition while assuming much of the operational risk of the business.  Most of the decision-making authority pertaining to the business remains with the company and, in difficult business conditions, this can be a source of contention.

 

As franchisors seek to grow royalty fees, decisions made by corporate restaurant executives in the past few years have tended to focus on promotional strategies and capital-intensive store and process alterations.  Of course, as long as the consumer and financing environments cooperate, this behavior may not meaningfully impact the franchisee’s bottom line.  However, with the backdrop of a fragile economy, volatile commodity costs, tight access to capital, and increasing labor costs, there is a potential for friction.  The addition of any controversial business decisions that magnify franchisees’ difficulties all but guarantees disharmony between management and the franchise community.  Examples over the past few years are numerous, from Kentucky Grilled Chicken at KFC to bun toasters at Wendy’s to 99 cent double cheeseburgers at Burger King.”

 

So, in effect are the perceived benefits to the franchisee really just talk?  If you are an institutional investors and would like to join the call and trial our restaurant vertical please email .

 

As it relates to talk and action, I will leave you with one last quote from President Roosevelt:

 

“The man who really counts in the world is the doer, not the mere critic-the man who actually does the work, even if roughly and imperfectly, not the man who only talks or writes about how it ought to be done.”

 

Indeed.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $96.11-98.85, $81.91-82.46, $1.24-1.26, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Cheap Talk - Chart of the Day

 

Cheap Talk - Virtual Portfolio


Dancing With the Bear

This note was originally published at 8am on May 31, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Theory helps us to bear out ignorance of facts.”

-George Santayana

 

I have a good friend whose dad is legendary for giving his sister’s suitors a difficult time.  As it’s been told to me, this young lady will bring guys she is dating home and her father will take them for a little walk outside and basically warn these young lads that they don’t want to dance with the bear – the bear being him.  Since he is a small town burly Canadian fire chief, the daughter’s suitors are pretty clear on the message.

 

As it relates to being stock market operators, I don’t think any of us enjoy dancing with bear markets.  A good friend of mine, and former colleague, is one of the head traders at a major mutual fund complex.  Every day I get his morning internal news summary which leads off with the ACWI etf, which is a proxy for global large cap equities.  On April 2ndhis note had the ACWI up +11.9% and on May 29thhe had the ACWI up +0.76%.  In effect, any investor who has a long only mandate has had to dance with the bears over the past couple of months and likely, just due to the inflexibility of their mandate, had to endure giving back performance.

 

But even as many of us have had to dance with U.S. and global equity bears, the Japanese have perhaps had it the worst.  The most populous bear in Japan is the Asian black bear, also called the moon or white chested bear, which is medium sized and, luckily enough, largely a herbivore.  While the Asian Black Bear is mostly focused on eating plants, the Japanese stock market has been focused on eating investors whole. Specifically, overnight the Nikkei close -1.1% and finished the month down -10.3%.

 

Our bearish thesis on Japan is, hopefully, at this point relatively well known.  In late February we hosted a conference call with a 100 page presentation (email us at sales@hedgeye.com if you aren’t a subscriber of our macro product and would like to trial and view the presentation) that outlined our view that Japan is facing a debt, deficit and demographic reckoning.  It seems Japanese equities are agreeing with us.  

 

One of the key catalysts we highlighted back then was the potential for a sovereign debt downgrade.  Early last week this catalyst came to fruition as Fitch downgraded Japan’s long-term local-currency sovereign debt rating one notch to A+; additionally, the agency reduced the country’s long-term foreign currency debt rating two notches to the same level.  As the other rating agencies follow suit and the ratings continue to tumble downwards, the larger risk is that the Japanese banking system has to do a massive capital raise in the future to keep their Tier 1 capital ratio at appropriate levels.  This is an increasingly realistic risk that you may want to bear in mind.

 

By the time you get this missive, the U.S. will have reported GDP and jobless claims this morning.  Both our predictive tracking algorithms and the stock market have been telling us that GDP is slowing and we would expect the data this morning to reflect the same.  On some level, of course, slowing growth is starting to be priced into the market.  Currently, in the Virtual Portfolio we are leaning slightly net long and have 8 longs and 7 shorts. 

 

The three most recent positions that we have added to the Virtual Portfolio on the long side are as follows:

 

1.   Apple (APPL) – As oil and commodities deflate, from a macro perspective the outlook for the iEconomy improves.  Additionally, and not that I have any edge of course, Apple is cheap at 10x forward earnings but also growing the top line, based on the last quarter, at north of 30%.  The simple fact is that many investors still don’t get that Apple is not a hardware company; it is a software company with long term sustainably high margins (think moat and barriers to entry).

 

2.   Amazon (AMZN) – Amazon, much like Apple, is a play on consumption which we believe continues to improve as oil, and energy input costs generally, continue to break down.  As my colleague Brian McGough wrote about Amazon yesterday:

 

“Let's not forget that it is the Haley’s Comet of retail. It's a retailer with $48bn in revenue growing at 40% with 2% EBIT margins that's investing on its balance sheet and p&l at a rate to make a third of retailers alive today extinct in 5+ years.”

 

3.   Utilities (XLU) – On our quantitative model, utilities are the only sector that is bullish on both TRADE and TREND durations.  This is in part due to the predictability of the cash flow streams in utilities and thus relatively safety, but also a compelling dividend yield of right around 4% which, when compared to the government bond market, is downright juicy.

 

So, even in the doldrums of dancing with the bear market, we’ve been able to find some compelling long ideas.  Time and price will tell whether they are rentals or names that, like Starbucks, we will hold for multiple years.  But the bottom line is this: if you are going to dance with the bear, be prepared to keep your hands, feet, and portfolio moving.

 

In fact as Wikihow instructs us, the top three tips for avoiding bear attacks are as follows:

  1. Avoid close encounters;
  2. Keep your distance; and
  3. Stand tall, even if the bear charges you.

For stock market operators, the last point is probably the most instructive and translates into buying high quality names when the bear market is charging away and providing a compelling entry point.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1546-1571, $103.27-106.97, $81.99-83.24, $1.23-1.26, and 1295-1334, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Dancing With the Bear - Chart of the Day

 

Dancing With the Bear - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 14, 2012


As we look at today’s set up for the S&P 500, the range is 17 points or -0.75% downside to 1305 and 0.54% upside to 1322. 

                                            

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1a

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 6/13 NYSE -1219
    • Down from the prior day’s trading of 1640
  • VOLUME: on 6/13 NYSE 707.13
    • Decrease versus prior day’s trading of -2.32%
  • VIX:  as of 6/13 was at 24.27
    • Increase versus most recent day’s trading of 9.87%
    • Year-to-date increase of 3.72%%
  • SPX PUT/CALL RATIO: as of 6/13 closed at 2.08
    • Up from the day prior at 1.47 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.60
    • Increase from prior day’s trading at 1.59
  • YIELD CURVE: as of this morning 1.31
    • Up from prior day’s trading at 1.30 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Current Account Balance, 1Q, est. -$131.9b (prior -124.1b)
  • 8:30am: CPI (M/m), May, est. -0.2% (prior 0.0%)
  • 8:30am: CPI Ex Food & Energy (M/m), May, est. 0.2% (prior 0.2%)
  • 8:30am: Initial Jobless Claims, June 9, est. 375k (prior 377k)
  • 9:45 am: Bloomberg Consumer Comfort, June 10
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas change
  • 11am: U.S. Fed to purchase $1.5b-2.25b notes in 2/15/2036 to 5/15/2042 range
  • 1pm: U.S. to sell $13b 30-yr bonds (Reopening) 

GOVERNMENT:

    • President Obama visits World Trade Center site in NYC
    • Deadline set by federal judge for EPA to propose standards for soot pollution sought by environment groups
    • SEC holds closed meeting on enforcement matters, 2pm
    • Senate in session, House in recess
    • Senate Energy and Natural Resources holds hearing on competition between U.S., China on clean energy, 9:30am
    • House Oil and National Security Caucus holds discussion on gas prices, 12pm
    • World Bank President Robert Zoellick speaks at a luncheon at Peterson Institute, 12pm 

WHAT TO WATCH:  

  • Moody’s cuts Spain’s credit rating 3 steps to Baa3
  • Spanish-German 10-yr. yld spread widens to euro-era record
  • Italy sells EU3b of 3y bonds in first time after Spain bailout
  • Nokia to cut 10,000 jobs globally by end 2013, trims outlook
  • Swiss central bank pledges to defend franc cap
  • Microsoft said to be in discussions to buy Yammer
  • Felda Global Ventures said to raise $3.3b in IPO
  • U.S. consumer prices probably fell for first time in 2yrs
  • ABC, NBC, Fox said to finish ad sales orders for next season
  • U.S. foreclosure filings fall 4% as lenders increase short sales
  • Vector Capital raises Technicolor offer to EU2-shr 

EARNINGS:

    • Pier 1 Imports (PIR), 6am, $0.16
    • Smithfield Foods (SFD) 6am, $0.53
    • Kroger (KR) 8:15am, $0.73 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG) 

  • BofA Beating JPMorgan After French Lenders Retreat: Commodities
  • Gold Advances for a Fifth Day in London on Stimulus Speculation
  • Oil Trades Near Eight-Month Low as OPEC Reviews Output Targets
  • Copper Seen Rising on Speculation About Further U.S. Stimulus
  • Cocoa at Four-Month High as Dry Weather May Reduce Next Harvest
  • Ore-Ship Rates to Reach 22-Year Low as More Vessels Leave Yards
  • U.K. Gas Falls as Norway Supply Rises, Work Halts Pipe Exports
  • Europe Fuel Exports to Be Eclipsed by U.S. Boom: Energy Markets
  • Rain, Pests Imperil India’s Wheat Crop as Warehouses Full
  • Venezuela Overtakes Saudis to Hold World’s Biggest Oil Reserves
  • OPEC Set to Keep Output Ceiling Unchanged Amid Europe Crisis
  • Aluminum May Decline 7.3% on Topping Pattern: Technical Analysis
  • Gulf Nations’ Break-Even on Oil Drops to $80: Deutsche Bank
  • Japan Buys LNG From Spain, Brazil as Spot Soars Near Record
  • South African Union Fight Threatens Biggest Platinum Suppliers
  • Guar Futures Trading Suspension in India May End Next Month
  • Indian Regulator Wants Banks Allowed in Commodity Futures 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


USD – get the Dollar right and you’ll get a lot of other things right; USD finally found an immediate-term TRADE oversold level in the morning yesterday; that took the immediate-term bloom off Gold’s rose; we’reregistering a lower-high of resistance for Gold at $1633 now (was at 1648 yest) and oil continues to crash (down -24% since Feb).

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


ITALY – plenty of jib jab about Greece and Spain, meanwhile Italy continues to crash, down another -1% this morn and down -25% since March 19th (Spain is down -26% from its YTD top). Italy has economic stagflation, and that has historically traded at 7-8x EPS, so be careful calling things “cheap” (1970s stagflation is cheap).

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


ASIA – sold off across the board after more US Growth Slowing data (US Retail Sales missed and Consumer Discretionary led the market lower, -1.5% yest); China continues to make fresh 3mth lows and the bailout guys keep begging for more rate cuts – maybe they should cut every other day? Indonesia led decliners -1.8%; Japan remains a mess.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


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