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OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE

Takeaway: Year-over-year claims improvement compressed by a fair amount this past week. Meanwhile, the claims/market divergence is at 2 standard devs.

Treading Water

Initial claims were flat last week at 382k (but fell 3k after a 3k upward revision to the prior week's data). Rolling claims rose 2k WoW to 378k and non-seasonally adjusted claims rose 28k to 328k.

 

Our preferred method of looking at the data is to look at the year over year change in the rolling non-seasonally adjusted series because it eliminates the distortion of bad seasonality adjustments. The rolling NSA data declined 7.9% YoY, which compares against -8.3% in the prior week. We would expect to see this improvement steadily converge toward zero, but second derivative inflections are notable. This week's inflection was negative, on the margin. 

 

Frothy

Another takeaway this week is the widening divergence between the S&P 500 and the rolling claims series. We profile this in the chart below entitled "S&P 500 vs. Rolling Initial Jobless Claims". These two series are cointegrated, meaning that they random walk (diverge) over short time frames but tether to each other over longer time periods. For reference, the current level of claims implies an S&P level of  ~1339, which is roughly 8% lower than the current S&P level of 1461. What the chart shows is that the market is currently two standard deviations above fair value, which, based on history, is unsustainable.

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - s p vs claims fair value

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Raw

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Rolling

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - NSA

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Rolling NSA

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - S P

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Fed

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - YoY NSA

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Recessions 1

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Recessions 2

 

Yield Spreads

The 2-10 spread fell 1 bp week-over-week to 150 bps as the 10 year treasury yield rose 1 bp and the 2-year treasury rose 2 bps. QTD, the 2-10 spread is averaging 1.36%, which is 15 bps lower than 2Q12.

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - 2 10

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - 2 10 QoQ

 

Financial Subsector Performance

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

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Subsector

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Companies

 

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. 


2007's Lessons: SP500 Levels, Refreshed

Takeaway: Dips turn into draw-downs when the least amount of people are positioned for them.

POSITIONS: none on the SPY or Sector ETF side of the idea ledger        

 

We came into today long defensive (Consumer Staples, XLP) for the bounce in the US Dollar. Dollar up pounds the beta trade (Oil, Energy Stocks, Financials, etc). That’s why we call it the Correlation Risk. In the immediate-term, it matters, both ways.

 

I sold XLP and made a few short sales that were research driven (HSIC and TXRH) because there is a rising probability that the SP500’s immediate-term TRADE line of 1451 snaps. If and when immediate-term performance chasing snaps in Equities, you’ll see the kind of selling we saw yesterday in Oil. It happens fast.

 

Across our core risk management durations (TRADE, TREND, and TAIL), here are the lines I am focused on:

 

  1. Immediate-term TRADE resistance = 1474 (Friday’s Bernanke short squeeze high)
  2. Immediate-term TRADE support = 1451 (under attack)
  3. Intermediate-term TREND support = 1419

 

In other words, if Growth and Earnings Slowing weren’t a fundamental reality at this point, I’d be buying this dip. But they are, and dips turn into draw-downs when the least amount of people are positioned for them.

 

2007’s Lessons remain crystal clear in my mind. Eventually, hope for central planners to “smooth” the gravity of the economic cycle slowing runs out of catalysts. That’s why long-term tops are processes, not points.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

2007's Lessons: SP500 Levels, Refreshed - 9 20 2012 11 34 15 AM


Healthcare Vs The S&P 500

We took a look at the HRM Index’s average year-over-year sales growth and compared it against the S&P 500 (SPX). What we found was that healthcare outperformed the SPX when growth is accelerating relative to the index. Two points made by Hedgeye Healthcare Sector Head Tom Tobin are below, illustrating headwinds that may occur heading into the back half of the year and onward:

 

• Consensus growth estimates, however, look too optimistic given how fast the macro is slowing; job growth, industrial production, and GDP are all pointing lower into Q412

 

• QE3 could help, but history suggests Federal Reserve actions are weak and largely equivocal as it relates to its impact on employment.

 

Healthcare Vs The S&P 500 - healthcareSPX


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CHART DU JOUR: DECLINING SLOT CONTRIBUTION

Higher margin slot play lagging

 

  • Strip slot revenue as a % of total gaming revenue has been sliding since its near-term peak in April 2009. 
  • This trend is alarming given the higher margin profile of slots versus tables.  The demographics - post baby boomer generations are not playing slots – suggests that the trend will continue.
  • Strong growth in Baccarat play from China drove all of the increase in table revenue vis a vis slot revenue over the past few years.  International visitors accounted for 16% of all Vegas visitors in 2011, up from 13% in 2000.

 

 CHART DU JOUR:  DECLINING SLOT CONTRIBUTION  - STRIP2


UAL: Fare Warning

Takeaway: Margins are under pressure at $UAL as the company faces competition from American Airlines post-bankruptcy and competitive fares.

We’re currently bearish United Continental (UAL) for several reasons, two being real standouts. The cost cuts involved with the American Airlines bankruptcy will allow the airline to emerge leaner with the ability to offer lower fares. American’s gain is UAL’s loss and the company will need to stay competitive in order to compete against American’s cost advantages.

 

Another issue at hand involves fares across the entire industry. July and August ARC data shows fares declining year-over-year, despite rising costs.  This suggests to us that American’s cost reductions are pressuring industry margins.  A “race to the bottom” for the cheapest flights isn’t what’s going on but staying competitive with price is always a concern.

 

 

UAL: Fare Warning - UALchart3mo

 

 

There are myriad other issues UAL faces as well including issues integrating with Continental post-merger and weak industry structure. Keith has shorted UAL as a real time position and has yet to close it out.


ENERGY: Low Inventory

Takeaway: We're busy exporting and demand for fuel is a bit weak - people are trying to conserve gas, not burn it, when it's at $4 a gallon.

US energy product inventories are low, particularly gasoline and diesel fuel. Despite US refineries cranking at full speed and utilizing a high level of capacity, there are several reasons why we’re running low on gas and diesel. First, we’ve been increasing exports of fuel, sending diesel to Europe and gasoline to South America. We’ve also undergone a drop in refined product exports. Lastly, we’ve had weak domestic demand for refined products. People are busy trying to conserve gas when it’s $4 a gallon.

 

Provided the export market stays open, we expect product stocks to remain depressed relative to prior levels, which is positive for refining margins.

 

 

ENERGY: Low Inventory - INVENTORY 1

 

 

ENERGY: Low Inventory - INVENTORY 2

 


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