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This Is What A Recession Looks Like

A chart is worth 1000 words and these Durable Goods numbers say all that needs to be said.

 

This Is What A Recession Looks Like - durable2

 

This Is What A Recession Looks Like - durable1


NatGas Takes On Coal

Takeaway: Coal is cheap and natural gas is above $3/Mcf; power producers in theory should run more coal and less gas.

 

After an astonishing decline in price over the last three years, natural gas has been slowly recovering, clawing back above the $3 /Mcf mark recently with the October futures contract rolling into November’s contract.

 

 

NatGas Takes On Coal  - coalnatgas

 

 

Coal is another form of energy we have massive quantities of here in the United States and has been wallowing at year-to-date lows recently. The standard in the eastern US, Central Appalachia coal, is at $62/ton right now. As coal sits at this price level and natgas heads higher, the latter could run into some headwinds due to coal becoming competitive from a price perspective for power producers (say that five times fast).

Our Energy Sector Head Kevin Kaiser notes that “...on an energy equivalent basis for a power plant, that’s around $3.20/MMbtu - $3.70/MMbtu.  So as nat gas prices move up into that range, coal becomes increasing competitive, so power companies should in theory run more coal and less gas.”

Keep an eye on natgas heading into the end of the year - coal has the ability to shake things up quite a bit.


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


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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.

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

 

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

 

 


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.

 

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ASSET ALLOCATION

 

Cash:                DOWN

 

U.S. Equities:   UP

 

Int'l Equities:   UP   

 

Commodities: Flat

 

Fixed Income:  DOWN

 

Int'l Currencies: Flat  

 

 

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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

  

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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% 

 


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

 


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