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JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND?

Takeaway: Initial jobless claims moved sharply lower last week, beginning a trend we expect to run through February.

***The following note comes from our Financials team led by Managing Director Josh Steiner. If you aren't yet receiving their work on the space, including their seminal work on the U.S. housing market, please email sales@hedgeye.com if you're interested in setting up a trial.***

 

 

Seasonality Steals the Driver's Seat

Initial jobless claims fell sharply last week, dropping 26k to 359k from 385k. This was well below consensus estimates for 375k. Rolling initial claims fell 4.5k to 374k. There are a couple possible explanations for the sharp drop. It's possible we're seeing the reversal of a temporary post-Isaac spike. It's also possible that there's a recurring week 38/39 distortion. Note that in 2011 a comparable decline occurred on the same week (there's a one-week mismatch due to the leap year). Regardless the cause, the bottom line is that this put claims back on a path of improvement, which we think is likely to be the dominant trend for the next five months, through February, 2013. We've harped on seasonality a lot, but to again reiterate, we think the two charts below speak for themselves. They illustrate quite plainly that in the last three years, ALL improvement in both initial jobless claims and nonfarm payrolls occurs in the September through February period while March through August stagnates or deteriorates. This seasonality distortion will again be present this year and next year. 

 

So, the question is, aside from the seasonality issue, what's really going on? To answer that question, we look at the YoY trend in rolling non-seasonally adjusted claims. This week, that measure was down 7.9% vs. the same point last year. That compares with a decline of 7.9% in the prior week and 8.3% two periods earlier. Essentially, it's unchanged, which means that the trajectory of improvement is intact, for now.

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 1

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 2

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 3

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 4

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 5

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 6

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 7

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 8
 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 9

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 10

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 11

 

Joshua Steiner, CFA

 

Robert Belsky


JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND?

Takeaway: Initial jobless claims moved sharply lower last week, beginning a trend we expect to run through February.

Seasonality Steals the Driver's Seat

Initial jobless claims fell sharply last week, dropping 26k to 359k from 385k. This was well below consensus estimates for 375k. Rolling initial claims fell 4.5k to 374k. There are a couple possible explanations for the sharp drop. It's possible we're seeing the reversal of a temporary post-Isaac spike. It's also possible that there's a recurring week 38/39 distortion. Note that in 2011 a comparable decline occurred on the same week (there's a one-week mismatch due to the leap year). Regardless the cause, the bottom line is that this put claims back on a path of improvement, which we think is likely to be the dominant trend for the next five months, through February, 2013. We've harped on seasonality a lot, but to again reiterate, we think the two charts below speak for themselves. They illustrate quite plainly that in the last three years, ALL improvement in both initial jobless claims and nonfarm payrolls occurs in the September through February period while March through August stagnates or deteriorates. This seasonality distortion will again be present this year and next year. 

 

So, the question is, aside from the seasonality issue, what's really going on? To answer that question, we look at the YoY trend in rolling non-seasonally adjusted claims. This week, that measure was down 7.9% vs. the same point last year. That compares with a decline of 7.9% in the prior week and 8.3% two periods earlier. Essentially, it's unchanged, which means that the trajectory of improvement is intact, for now.

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - Seasonality

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - Nonfarm

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - Raw

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - Rolling

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - NSA

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - Rolling NSA

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - S P

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - FED

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - YoY NSA

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - Recessions

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - Rolling Claims Line

 

Yield Spreads

The 2-10 spread compressed 13 bps WoW, driven by a 16 bps compression at the long end of the curve. QTD, the 2-10 spread is averaging 1.36%, which is down 15 basis vs 2Q12. 

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 2 10

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 2 10 qOq

 

Financial Subsector Performance

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

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - Subsector Performance

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - companies

 

Joshua Steiner, CFA

 

Robert Belsky

 

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Falling Down

FALLING DOWN

 

 

CLIENT TALKING POINTS

 

FALLING DOWN

Today, we’re not going to talk about the hit 1993 Michael Douglas film where a pissed off, unemployed American is sick of his situation and is out for revenge; we have that occurring on a daily basis already in our country. Instead, let’s focus on how stocks have been down 7 out of the last 8 sessions. Since Bernanke announced he’d be buying every mortgage-backed security he can find, the S&P 500 has dropped -2.8%. With this sort of correction, we’re ready to start buying stocks and that’s what Keith did yesterday if you go and check our Real-Time Alerts. 

 

We covered shorts, we bought Consumer Discretionary (XLY) and you know why? Because we manage the risk and the range out there. Global Macro signals, quantitative setups and managing risk - that’s the name of the game we play.

 

 

MANAGE THE RISK

Correlation risk has been discussed before but now it has become more important than ever. Two metrics you need to focus on are the CBOE Volatility Index (VIX) and the US Dollar. Get the US Dollar right, you’ll get a lot of other things right, including gold and the euro, should that be your kind of trade. For the VIX, you can look at it to make an educated trade on the S&P 500. Yesterday, the VIX was overbought, up +20% this week. Selling that index is what we would recommend.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                DOWN

 

U.S. Equities:   UP

 

Int'l Equities:   UP   

 

Commodities: Flat

 

Fixed Income:  DOWN

 

Int'l Currencies: Flat  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

NIKE (NKE)

Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

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

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • 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

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“The harder it gets to manage this immediate-term price volatility, the more insider trading (cheating) you'll see” -@KeithMcCullough

 

 

QUOTE OF THE DAY

In the land of the blind, the one-eyed man is stoned to death.” –Joan D. Vinge

                       

 

STAT OF THE DAY

U.S. 2Q GDP Growth Revised Down to 1.3% 

 


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SBUX TRYING TO MAKE THE QUARTER?

Takeaway: $SBUX is stepping up its K-Cup discounting into quarter-end. Not a good sign for its K-Cup business or the overall K-Cup category

Last minute deals in the final days of the quarter?  Since this is not a typical Starbucks move, the question is: are they straining to hit estimates for the quarter?

 

The following offer from Starbucks has come to our attention:

 

“Starting Thursday (9/27) through Sunday (9/30), when you buy any 12-count box of Starbucks K-Cup packs you will receive a 2nd pack free.”

 

Early this morning, our limited and brief survey of a couple of Starbucks stores revealed no knowledge of the K-Cup promotion.  We are left with the following questions?

  • Was this promotion a last-minute strategy decision by the company?
  • Were the K-Cups not selling well?
  • Is there too much inventory at the moment?
  • Has Green Mountain’s pricing strategy slowed the share gains Starbucks was seeing?

The company began selling K-Cups on June 12th yet already we have discounting like $7.99 for a box of 10 and now, in the final days of the quarter, a buy-one-get-one-free offer has come about.  If demand for K-Cups is so strong, why are we seeing such aggressive discounting across the board?

 

Starbucks has taken approximately 15% market share in the K-Cup market and this, clearly, has been a negative for other players in the category.  Margins are likely to be pressured in the K-Cup business going forward.

 

SBUX TRYING TO MAKE THE QUARTER? - stabucks LTO

 

Estimates & Outlook

 

Consensus 4QFY12 of $0.45 – 21% growth versus 4QFY11 – look aggressive but we expect the company to make the quarter.  5-5.5% same-store sales is a reasonable range to assume for 4QFY12 but we think that the 1QFY13 estimate of 4.9% may not be conservative enough.  Recent commentary from management suggests that the results from EMEA could, once again, disappoint in 4QFY12. The consensus EMEA same-store sales number, per Consensus Metrix, is 0.5%.  We believe a negative comp is in play.  The China/Asia Pacific consensus estimate of 11.7% looks possible; both McDonald’s and Yum Brands continue to post strong numbers in that region.

 

Overall, we remain concerned that Starbucks are growing expenses faster than revenues as they pursue an aggressive growth strategy on several different fronts.  At a point, we will become positive on Starbucks again, but for now we are waiting and watching. 

 

 

Howard Penney
Managing Director



Rory Green
Analyst

 


Bernanke's Mess

This note was originally published at 8am on September 13, 2012 for Hedgeye subscribers.

“It took a lot of hard work to get us into this mess.”

-Neil Barofsky’s Dad

 

The more I learn, the scarier Washington, D.C. gets. The aforementioned quote didn’t come from a politician. It came from Barofsky’s freshly printed tell-all book about crony socialism, Bailout (page 32). That time it was about TARP. This time it’s about Qe. Unless you want to wander on into the next politically perpetuated crisis willfully blind, I highly recommend you read it.

 

I wasn’t born in this country, but I do love it – and I will fight for its liberties. Hell would freeze over before the Founding Fathers of the Unites States of America signed off on a centrally planned market event like the one an un-elected academic will host today.

 

Whether he wants to accept responsibility or not, Ben Bernanke has signed off on the #1 thing that has been driving stock and commodity markets for the last 2 months – expectations. Up or down, whatever happens today will be Bernanke’s Mess.

 

Back to the Global Macro Grind

 

A)     Market up = mess for the economy: that’s right, if the man pushes 0% money out to 2015, 2016, then infinity and beyond, that’s a mess for a lot of people in this country. Just ask a retiree living on a fixed income, or a small business owner. When your cost of living is rising faster than your income, that’s called a tax hike.

 

B)      Market down = mess for the market: yep, since corporate revenue growth is slowing at its fastest rate since 2008, where do you think corporate margins go from their all-time peak? What do you think a collapse in the Fed’s final bubble (1st it was internet stocks, 2nd housing; now it’s commodities) is going to do to companies like Caterpillar (CAT) who aren’t prepared for that?

 

But, like it was in October 2007 (up double digits YTD), the “market is up” and we don’t hold the Fed accountable to its mandate? As a reminder, that mandate is:

  1. Price Stability
  2. Full Employment

Meanwhile, this is what we have:

  1. Price Volatility like markets have never ever seen (ever is a long time)
  2. Unemployment that’s higher than where it was on January 20, 2009 (7.8%)

So we better empower this guy to do more of whatever has not worked. And I mean really beg for it. If this insanity can only end in a blow up, I say get on with it so that I can start hiring again and get on with my day.

 

Since I have nothing else to write about this morning, let’s just review where we stand pre-game (1230PM Bernanke release):

  1. Financials (XLF) are up +3.83% in less than 2 weeks, front-running the Fed
  2. Energy stocks (XLE) are up +3.96% in less than 2 weeks, front-running the Fed
  3. Basic Materials (XLB) are up +3.76% in less than 2 weeks, front-running the Fed

Front-running? Bad word, for people who actually take on the Orange Jump Suit risk to be in the know pre-game. But that’s the game of expectations Ben Bernanke and his group-thinkers have perpetuated; that’s where the money’s at. Follow the money.

 

If 2 weeks of causality (Fed policy expectations) is too short-term for you, let’s look at the last month instead. Here are the inverse correlations between the US Dollar (down) and everything big that people are being forced to chase (30 day correlations):

  1. Gold -0.96
  2. Silver -0.95
  3. CRB Commodities Index -0.94
  4. Eurostoxx600 -0.86
  5. SP500 -0.74

In other words, get the US Dollar right, and you get everything but the US Economy right. Gold, last I checked, is not a “Full US Employment” trade. It wasn’t in the 1970s either.

 

Back to the two risk management words never uttered by our Central Planner in Chief (Correlation Risk), if I shorten that back up to 2 week correlations front-running Bernanke, the SP500’s inverse correlation to the US Dollar goes higher to -0.86. That’s because it’s closer to the main event. And that’s being driven by the aforementioned moves in the Financials and Commodities.

 

As Neil Barofsky says at the end of Chapter 2, “I might be completely on my own” (page 38) in calling Bernanke out on this mess of expectations at this point. But I doubt it.

 

When I started this firm in early 2008, I vowed to fight Old Washington and Wall Street for the truth. “What is the truth?” If that ruffles the odd feather, I’m doing my job. That’s what Canadian-American Patriots fighting for the purchasing power of their dollars do.

 

My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Russell2000, and the SP500 are now $1709-1756, $114-116.22, $79.45-80.94, $1.26-1.29, $1.69-1.77%, 830-846, and 1419-1451, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bernanke's Mess - Chart of the Day

 

Bernanke's Mess - Virtual Portfolio


THE M3: SHERATON MACAU; FISHERMAN'S WHARF 2ND CASINO; STUDIO CITY; UNEMPLOYMENT

The Macau Metro Monitor, September 27, 2012

 

 

GREAT START FOR SHERATON Macau Business

Sheraton Macao Hotel achieved 100% occupancy on Saturday, and 90% occupancy on Sunday, according to a press release from Sands China Ltd.  “Occupancy rates for Sheraton Macao Hotel’s opening weekend far exceeded our expectations,” said Gunther Hatt, executive vice president of operations for Venetian Macau.

 

FISHERMAN'S WHARF PLANS SECOND CASINO: REPORT Macau Business

Macau Legend Development has plans to build a second casino as part of its HK$5 billion (US$645 million) redevelopment plan for its Macau Fisherman’s Wharf theme park.  The gaming facility would operate under SJM's gaming licence as a third-party promoted casino and it should be ready by 2016 at the latest.

 

The government’s revised land grant for Macau Fisherman’s Wharf was yesterday published in the official gazette.  The grant detailed enlarging the park’s area by over 23,500 square metres, to 133,000 square metres, but failed to mention a second casino.  Macau Legend also owns the five-star Macau Landmark hotel, which includes the Pharaoh’s Palace Casino.

 

CE DENIES CONFLICTING MESSAGES OVER STUDIO CITY

Macau CEO Fernando Chui Sai On denied that the Secretary for Economy and Finance Francis Tam and the Secretary for Transport and Public Works Lau Si Io were giving conflicting messages over a possible casino for Studio City, which Chui said is eligible to apply for a gaming floor. 


He was quoted by TDM as saying that the project originally contained a casino in the construction application submitted to the government, but the project was later transferred to MPEL, which did not include a casino in its first construction plan submitted to the Secretariat of Transport and Public Works.  Only later on did Melco file an application to a department under the Secretariat for Economy and Finance for a gaming venue inside Studio City.  

 

EMPLOYMENT SURVEY FOR JUNE - AUGUST 2012 DSEC

Macau unemployment rate for June-August 2012 held stable at 2.0% in comparison with the previous period (May-July 2012).  Total labor force increased to 351,000; the labor force participation rate stood at 72.3%, up by 0.1% point over the previous period. 


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