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The Effect Of Jobless Claims On The XLF

Takeaway: Looking at the $XLF and the past two years of jobless claims, there's a shocking lack of correlation.

 

If you go back to 2007 and look at the relationship between jobless claims numbers and the Financial Sector SPDR (XLF), there’s not to discuss. Relatively little correlation, nothing to write home about. See the chart below for a visualization:

 

 

The Effect Of Jobless Claims On The XLF  - XLF Jobs

 

 

Now, if you examine the last two years only, you’ll find a more shocking correlation – zero. That’s right, jobless claims and the XLF have had zero correlation over the last two years. What does this mean? It means that even though jobless claims have improved over the last 104 weeks, moving from roughly 488k to 355k, there has not been a higher move in financial stocks.

 

 

The Effect Of Jobless Claims On The XLF  - XLF 2years

 

 

As Hedgeye Financials Sector Head Josh Steiner points out:

 

For reference, that same move has driven a 302 point rise in the S&P 500 (+27.4%). Financials have been and should be more sensitive to changes in jobs than other sectors as their primary P&L driver is credit, which reflects frequency and severity of loss. Frequency of loss is driven by newly unemployed people, which is reflected in initial jobless claims.”


Big Bonds

BIG BONDS

 

 

CLIENT TALKING POINTS

 

BIG BONDS

Keith appeared on CNBC’s Fast Money Halftime Report yesterday and discussed why he’s shorting the S&P 500. In a nutshell, August feels a lot like March. And In March, we went bearish on stocks and bullish on bonds. Thus, we are a buyer of Treasuries and have maxed out our fixed-income asset allocation to 33%. It’s increasingly looking like we’re due for a reversal in equities, especially with the VIX coming precariously close to 13. Short SPY, Long TLT is the name of the game.

 

 

MITT’S OUTCOME

Our Director of Research Daryl Jones wrote an interesting piece this morning comparing the (slight) edge that President Obama has compared to Mitt Romney in terms of the polls and the electoral college. The battleground states that Romney will essentially need to win include: Colorado, Florida, Iowa, Nevada, New Hampshire, North Carolina, Ohio, Virginia, and Wisconsin. Wisconsin may come easier with the addition of Ryan to the ticket. Jones sees voter engagement as a key factor that gives Republicans an edge. This election cycle, the Republicans are certainly giving it their all in an effort to get Romney into office.

 

A USA Today / Gallup poll earlier this week which showed that 74% of Republicans are thinking “quite a lot” about the election, while only 61% of Democrats are doing the same. You never know, but that could make all the difference.

 

 

CAN YOU FIX SPAIN?

Doubtful. Though the 2-year bond yield slide a few basis points (see our State of the Day below), there’s no economic growth occurring in the country. The IBEX is up +7% over the last three days and is up a whopping +30% in less than a month. That’s short term market rallying, but Keynesian stimulus can only go so far for so long. Spain’s long-term TAIL risk line remains intact at 7835 (resistance).

 

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ASSET ALLOCATION

 

Cash:                  Flat

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  UP

 

Int'l Currencies: Flat   

 

 

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TOP LONG IDEAS

 

JACK IN THE BOX (JACK)

This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

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THREE FOR THE ROAD

 

TWEET OF THE DAY

“We have to find ways to encourage non-violence, compassion and respect for others’ rights to achieve a better world in the future.” -@DalaiLama

 

 

QUOTE OF THE DAY

“We do not know what we want and yet we are responsible for what we are - that is the fact.” – Jean-Paul Sartre

                   

 

STAT OF THE DAY

Spain’s two-year note yield slid 24 basis points, or 0.24 percentage point, to 3.75 percent


FL: Early Read

Takeaway: Solid qtr as FL heads into a more favorable 2H setup. With $3 in earnings power next year, we expect this one to continue to work higher.

 

Solid quarter out of FL coming in at $0.38 (adj.) vs. $0.34E and in-line with our $0.38 expectation. Top-line growth of +7.2% despite a -3.4% Fx hit suggest concerns over European performance are in check. Comps came in at +9.8% slightly higher than our +9% estimate and well above consensus (+7%). We’ll get more color on the call (at 9amEST), but we suspect domestic comps came in LDD offset by a slight drag from the international business. We’ll get the customary month-to-date comp update and expect it to reflect an acceleration in sales headed into Q3. In an effort to keep this in perspective, August is the easiest comp of the quarter up MSD last year with Sept up HSD and Oct up LDD.


Gross margins and SG&A both came in a hair better than we expected. We expect merchandise margin to account for the 8bps differential coming in at a wash instead of a drag as management suggested despite higher costs reflecting the strength of current demand and product. SG&A was tightly managed leveraging 122bps against the highest incremental spend last year. We suspect the marketing costs accounted for the difference, but expect that delta to moderate in 2H as we head into the key BTS and holiday selling season.


Inventories marked the eleventh consecutive quarter of a positive sales/inventory spread flat sequentially with Q1 at +10% despite higher cost inventory. This puts FL in a very good position to manage merchandise margin challenges near-term and is gross margin bullish for 2H.


It’s also worth noting that the 2H will mark the first time since 2006 that FL reported an increase in net store openings reflecting slowing domestic closures offset by continued international growth – a positive tailwind given better productivity.

FL has emerged from a significantly more challenging 1H with flying colors printing earnings +12% ahead of expectations in each of the last two quarters. Headed into the 2H we’re looking at easing compares and a period where we expect more opportunity for upside in performance. With $2.50 in EPS now in view this year, we expect this one to continue to work higher as investors start looking out to $3 in earnings power next year (we’re at $2.86 vs the Street at $2.64) and the multiple begins to reflect the fact that this ship is no longer run by Matt Serra, but Ken Hicks.


Casey Flavin

Director

 

FL: Early Read - FL S

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

THE M3: GEG STOPS HIRING less than 21; POLICE RAID DETAIL; SOUTH CHINA TYPHOON; S'PRE EXPORTS

The Macau Metro Monitor, August 17, 2012

 

 

GALAXY STOPS HIRING UNDER 21S AS CASINO WORKERS Macau News

In anticipation of the new law that will take effect on November 1, Galaxy has stopped hiring people under the age of 21 to work at its 6 casinos. "We’ve anticipated the change for a long time and there are only a small number of our team members who will be under 21 [when the new law is effective],” Martin said, adding that since there is a transition period allowed by the new law for such casino staff, he did not “expect the [new] law to have any great impact on the business at all”.  Less that 2% of GEG's workforce will be under the age of 21 in November when the law takes effect

 

LARGEST POLICE OPERATION OF THE YEAR RESULTS IN 303 DETENTIONS  Macau Daily Times

A press conference was held yesterday to release the details of an operation that involved the arrest and detention of  303 people between July 9 and August 8.  Dubbed as "Thunderbolt 12", which was conducted under the coordinated efforts of the Macau, Hong Kong and Chinese authorities, the sting was the largest operation undertaken this year raiding local casinos, saunas, karaoke parlors and other venues in an effort to combat "cross border crime, especially concerning drug trafficking, human trafficking, theft, pimping and money laundering”.

 

SOUTH CHINA BRACES FOR TYPHOON KAI-TAK China Daily

Flights were canceled and alerts upgraded in south China on Friday morning, as Typhoon Kai-Tak was forecast to make landfall there around noon. According to the latest updates from China's Central Meteorological Observatory, Kai-Tak was expected to make landfall in the coastal regions between Dianbai and Xuwen counties in southern province of Guangdong, packing a maximum wind speed of 35 meters per second in the center of the storm and bringing downpours.

 

SINGAPORE EXPORT GROWTH SLOWS WSJ

Exports rose 5.8% in July missing the 6.1% forecast from Dow Jones Newswires poll of economists and represents further slowdown from the 6.6% growth rate in June.  Decelerating growth is attributed to economic struggles in the West, but shipments to China grew.  

 



The Election

“People can forsee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome.”

-George Orwell

 

In life generally and life as stock market operators in particular, our biggest enemy is often ourselves.  As humans, we have mental biases.  As much as we do to train ourselves out of them, they still broadly exist.  In global macro analysis, an important area in which we see biases manifest themselves is political analysis.  Particularly in the United States, people are tied to a political party, so have a difficult time seeing the world outside of that specific lens.

 

Stepping back, as many of you perhaps already know, in analyzing the top down prospects for a country and in particular the currency, we focus on three key factors: growth, inflation, and policy.  In many instances, the policy and/or perception of future policy is the most critical factor.  In the United States, the President, and his or her party if they control Congress, have the power to set the economic agenda, especially related to fiscal outcomes.  Moreover, they appoint the Federal Reserve Board which has independent (in theory) control of monetary policy.

 

Understanding this, makes one realize that having a view of politics is important.  The negative thing about analyzing politics, as I noted above, is that most people have their partisan biases.  The positive aspect is that there is a lot of data to help us establish an unbiased view.  This morning I’m going to spend some time going through the relevant data.  That said, I’ll get to the punch line: Obama has the consistent edge.  That might not make everyone happy, but that is a fact for now. 

  1. National Polls – There have been six major national polls in August that look at Obama versus Romney in the general election.  In aggregate, Obama has won four of these polls and his average edge over Romney is +3.5 points.  Since the margin of error for these polls collectively is right around 3.0, this is a statistically significant edge.  On the positive side of the spectrum, in the last two major polls, Romney has a slight edge, which may be indicative of some positive momentum from the Ryan announcement.
  2. Electronic Predictive Markets – The most prominent electronic predictive markets that have a contract that enables people to “bet” on the outcome of the Presidential election are Intrade and the Iowa Electronic Markets.  On Intrade, Obama currently has a 56% to 43% edge over Romney.  On the Iowa Electronics Market, Obama has a slightly more superior edge at 60% to 39%.  Both of these markets measure the probability of either candidate getting elected.
  3. Economic Projections – Once again the key economic models that we look at, our own Hedgeye Election Indicator and Yale Professor Ray Fair’s model, both show a higher probability that Obama gets re-elected than Romney winning the Presidency.  Currently, on the Hedgeye Election Indicator, which uses real time market and economic data to predict an outcome for the election, we have a 59.5% probability of Obama getting re-elected.  Currently on Ray Fair’s model, a model that focuses on growth and growth surprises as the primary factors, the Democratic candidate is predicted to win 49.5% of the vote and the Republican candidate to get 46.3% of the vote. 

On these broad national indicators, Obama has an edge, even if a slight one.   The closeness of the aforementioned indicators suggests that this election will once again come down to the key battleground states and the overall electoral college map.

 

Based on the most recent polls, Obama has 237 electoral college votes and Romney has 191 electoral college votes.  This is based on state level polls that are outside the margin of error.  Even as Obama has an edge, 270 votes are needed to obtain the Presidency, so his edge is simply that, an edge.  The states that remain in the toss up category combine for 110 votes and include: Colorado, Florida, Iowa, Nevada, New Hampshire, North Carolina, Ohio, Virginia, and Wisconsin.   Ultimately, this election will be won or lost in those states.

 

For those of you who haven’t stopped reading and gotten bored because of my political meanderings this morning, you probably think that I’m painting a negative picture for Romney.  And on some level you are correct, although I’m not painting but rather just relaying the facts.  In that vein, there are a couple of facts that also auger positively for Romney – Obama’s approval rating and voter engagement.

 

In terms of approval rating, Obama’s approval rating is low for a President that hopes to get re-elected.  According to Gallup, the most long running pollster in this category, Obama’s approval rating is currently 45 and his term average is 49.  The only Presidents with lower approval ratings were Truman, Carter, and Nixon.  Obviously, this not an enviable bunch and an approval rating that is broadly indicative of dissatisfaction with the Obama administration.

 

The more interesting wild card in this election will be voter engagement.  This is the factor that led to the Republicans doing much better than expected in the midterm elections.  As well, this is likely a key reason that Romney selected Paul Ryan, a conservative and Tea Party favorite, to motivate the base.  Getting out to your base is from Karl Rove’s electoral strategy 101 and is a fundamental reason why George W. Bush won two elections.

 

So, not to pour cold water on the positive picture I’ve just painted above for partisan Democrats, but early indicators suggest that Republicans may be much more engaged that Democrats this electoral cycle.  The most recent evidence  comes from a USA Today / Gallup poll earlier this week which showed that 74% of Republicans are thinking “quite a lot” about the election, while only 61% of Democrats are doing the same.  This may be a meaningful and relevant edge for the election.

 

This election is likely to be tight, with Obama having a slight edge currently, but Romney has a number of factors that could swing his way, especially as he begins to outspend Obama this fall.  Some suggest he may be able to outspend Obama almost 2:1 in key states.  Regardless of your political affiliation, as a stock market operator if you get policy right, you will get a lot of other things right.  And policy starts with politics.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Election - Chart of the Day

 

The Election - Virtual Portfolio


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