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INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE

Takeaway: A missing state being double counted is most likely to blame for the moonshot increase in claims this morning. Expect a reversal next week.

Did the Dept of Labor Double Count the "Missing State"?

This week's 49k WoW increase in initial claims is suspicious, just like last week's 28k decline. However, we suspect that the "missing state" from the previous week's data may have been double-counted this past week. Assuming that there was in fact a missing state, it's odd then that the previous week was not significantly upwardly revised. The number was upwardly revised by just 3k from 339k to 342k. It appears that instead, that missing state just lumped two weeks of data into this most recent week, which explains the moonshot increase of 49k this week. To be fair, we haven't seen anything to confirm our theory, but we see no other plausible explanation. As such, we would expect a roughly 25k decrease next week to around 363k, which is essentially in-line with the rolling average of late. For reference, it's also possible that Columbus Day (last Monday) caused some further dislocation in the series.

 

The bottom line is that the trend in jobless claims, i.e. the 4-week rolling average, is still trending lower, as we show in the first chart below. Notice that even after including this morning's huge increase in claims, the rolling average has only moved back to its trendline, which still has a negative slope. This is consistent with our thesis that there's a tailwind distortion in the data that will persist through February, 2013, making the labor market and economy appear stronger than they really are before reversing course in March 2013 and deteriorating through August 2013.

 

The Data  

Initial claims rose 49k last week to 388k (but rose 46k after a 3k upward revision to the prior week's data). Rolling claims rose 0.75k WoW to 365.5k. On a non-seasonally adjusted basis, claims rose 29k to 359k.

 

Hedgeye Take 

The YoY change in the rolling NSA series was roughly flat at -10.0%. This compares with -10.3% in the prior week and -7.4% in the week before that. This larger YoY improvement in the rolling non-seasonally adjusted data is meaningful as it indicates there is real improvement currently occurring in the employment environment.

 

Lastly, the S&P and claims diverged again this week. For reference the current level of claims would imply an S&P level of 1372, which is 6% lower than current levels.

 

INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE - Seasonality

 

INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE - Raw2

 

INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE - Rolling

 

INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE - NSA

 

INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE - NSA rolling

 

INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE - S P and Claims

 

INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE - Fed

 

INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE - YoY

 

INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE - Recessions

 

INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE - Rolling Linear

 

Yield Spreads

The 2-10 spread rose 12 bps WoW to 153 bps. So far 4QTD, the 2-10 spread is averaging 1.44%, which is up 7 bps relative to 3Q12.  

 

INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE - 2 10

 

INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE - 2 10 QoQ

 

Financial Subsector Performance

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

 

INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE - Subsector performance

 

INITIAL JOBLESS CLAIMS: MORE ERRORS IN THE SERIES - NEXT WEEK SHOULD IMPROVE - Companies

 

Joshua Steiner, CFA

 

Robert Belsky

 

 


MGM UP ON THIS?

MGM China announced that they accepted a Land Concession Contract from the Macau government.  The stock is bid up 6% on this news.  We don’t think people fully understand the process of developing a new casino property in Macau.  MGM Cotai still needs to be formally Gazetted and then obtain a construction permit before the 3 year construction timeline can even begin.

 

Here is the timeline for Wynn Cotai:

 

Land Concession Contract:  Sept 12, 2011  

Formal Gazette approval:  May 2, 2012

Building Permit:  ?????

 

Wynn Cotai hasn’t even gotten its construction permit yet.  If this same timeline holds for MGM, then we should expect Gazetting in 8 months and who knows when for the building permit.  Thus, it should be at least a year and more likely two before construction can even begin and 4-5 years before the property would open.  Our original expectation on the timing of the MGM Cotai opening was 2017-2018 so today’s announcement doesn’t change that.

 

We would fade this news.


Chinese Surprise

CHINESE SURPRISE

 

 

CLIENT TALKING POINTS

 

CHINESE SURPRISE

Economic data from China has a lot in common with a fortune cookie: you never know what you’re going to get. China reported 7.4% GDP for Q3 and didn’t surprise on the upside. So far, this GDP number shows a slowdown when compared quarter-over-quarter and year-over-year. While the mainstream media believes that China’s slowdown has “bottomed,” the truth is that we are far from over with this mess. The slowdown will continue on and Chinese stocks can and will continue to get crushed.

 

 

COMMODITIES CORNER

In the US, you can get commodities right if you get the US dollar right. It’s a pretty simple correlation game that traders and investors play. When you look at China, you need to factor in supply and demand as well. Demand is very “toppy” right now for a lot of commodities and it’s not like China is going to have a second housing boom to drive demand for raw materials again. As we stated above, there’s still plenty of room for downside.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                UP

 

U.S. Equities:   DOWN

 

Int'l Equities:   DOWN   

 

Commodities: DOWN

 

Fixed Income:  Flat

 

Int'l Currencies: UP  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

BRINKER INTL (EAT)

Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • 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

 

HCA HOLDINGS (HCA)

While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

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

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“Sell side previews of UA quarter seem to be coming out uniformly bullish.” -@HedgeyeRetail

 

 

QUOTE OF THE DAY

“There's a fine line between genius and insanity. I have erased this line.” -Oscar Levant

                       

 

STAT OF THE DAY

Morgan Stanley reports a net loss of $1 billion for Q3.


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THE M3: MGM COTAI; GREEK MYTHOLOGY TABLES

The Macau Metro Monitor, October 18, 2012

 

 

MGM RESORTS INTERNATIONAL SUBSIDIARY MGM CHINA HOLDINGS RECEIVES APPROVAL TO DEVELOP GAMING RESORT IN COTAI MGM

MGM China has formally accepted a Land Concession Contract in the form of a lease granted by the Macau Government. MGM China paid the Macau Government ~$56MM as the initial payment of the contract premium.  The Macau Government will arrange for the publication of the Land Concession Contract in the Official Gazette of Macau in due course.  With a budget of approximately $2.5 billion, the world-class resort will include approximately 1,600 hotel rooms, 500 gaming tables, and 2,500 slots built on an approximately 17.8 acre site.  The resort will feature over 85% gross floor area of non-gaming offerings, including exciting restaurant, retail and entertainment offerings.

 

Construction is expected to begin after the publication of the Land Concession Contract in the Official Gazette of Macau and is anticipated to take up to 36 months.

 

GRAND LISBOA GETS GREEK MYTHOLOGY TABLES Macau Business

SJM CEO Ambrose So said that 40 gaming tables removed from Greek Mythology in August have been put into operation at the Grand Lisboa casino.  “The move was made about two months ago,” So said.  “Greek Mythology operates under a satellite-casino agreement [with SJM Holdings] and the deal states that if the business drops, the operating rights of some tables can be terminated,” So explained.  SJM also got back 200 employees previously working at Greek Mythology.





River Baptisms

This note was originally published at 8am on October 04, 2012 for Hedgeye subscribers.

“A half-truth is more dangerous than a lie.”

-Saint Thomas Aquinas

 

The aforementioned quote comes by way of Saint Thomas Aquinas, who, to this day, is still considered among the most influential priests in the history of the Catholic Church as a function of his bridging the gap between ancient philosophical works and theology. While this is certainly not the proper forum to discuss religion in any detail, we do think modern-day financial markets could use a scholar of Aquinas’ caliber to help bridge the gap between the prices of many liquid asset classes and the fundamental data underpinning them.

 

Furthermore, the Manic Media outlets tasked with delivering us our economic and financial news could certainly use an army of Aquinas-like editors to help bridge the gap between what has occurred and what is reported.

 

To say that a large portion of the headlines and stories we’ve consumed in recent quarters were delivered in one of the following two formats would be a gross understatement: “ABC Occurred On XYZ Stimulus Speculation” or “[INSERT: Policymaker Name] Signals Further [INSERT: Stimulus Measures; Bailout Funds; etc.]”. In effect, the financial media can be considered guilty of incessantly stoking the broad-based optimism bias of both investors and corporate executives alike in priming news – particularly anything negative – with rumors and expectations for future improvement via “stimulus” or bailouts.

 

For reference, we use quotations around the word “stimulus” because we have shown repeatedly since 2010 that Policies To Inflate do little beyond stoking commodity price inflation that ultimately slows the pace of economic activity. In fact, if we had a burning Bernanke buck for every article in the last three months that anchored on some form of “stimulus”, Hedgeye would have enough capital to create all of the jobs QE3 is allegedly supposed to produce! River baptisms continue to dominate the heavily-biased study of economics in Western academia.

 

Take China, for instance. For much of the year-to-date, just about every occurrence in the Chinese economy was reported on in the context of “stimulus”. Moreover, a great deal of what Chinese policymakers have said publically in the YTD has been interpreted as a general update on the size and scope of China’s pending stimulus package. Alas, the bazooka has yet to be spotted and, perhaps more importantly, we continue see limited scope for and probability of a large-scale Chinese stimulus package over the intermediate term. We have published a compendium of work detailing our thoughts on the subject, analyzing the key data series, political catalysts and rationale(s) of Chinese policymakers pertaining to this topic and are happy email them to you upon request.

 

A couple of the more entertaining rumors emanating from China in recent weeks were centered around actions by the China Securities Regulatory Commission and the National Development and Reform Commission. Last week, it was reported that Chinese stocks rallied over +2% during the last 90 minutes of trading on a rumor that the CSRC was going to hold a press conference to announce measures to boost the stock market after the close. The event turned out to be a previously-scheduled meeting with no major reforms or announcements to speak of. We’re sure you remember the CNY1 trillion of infrastructure initiatives from early SEP that got a large swath of the financial media and international investment community to both celebrate and cheer on further stimulus measures (“globally coordinated easing” was the catch-phrase of the day). Since then, Xu Lin, head of the planning department at the NDRC, has come out and blatantly refuted the consensus interpretation of the event:

 

“The recent accelerated infrastructure project approvals did not mean the government is rolling out more stimulus. These projects are already in our plan... [The] 4-trillion yuan package of state spending and tax cuts announced in 2008 stoked inflation and sparked concern local governments took on more debt than they can afford.”

– Xu Lin speaking to reporters at Peking University on SEP 17, 2012

 

Of course, Chinese policymakers could emerge from Golden Week next week or from their 18th Communist Party Congress in the second week of NOV with plans to materially reflate their ailing economy. The desire to pursue social and economic stability – particularly on the inflation and employment fronts – is great among Communist Party officials and, per the latest China Beige Book from CBB International LLC, the percentage of mainland companies reporting net firings increased +700bps QoQ to 20% in 3Q.

 

Despite obvious growing pressure to “do something” (as IMF Director Christine Lagarde would put it), we continue to take the view that Chinese policymakers have a much longer horizon for economic planning than most Westerners are able to comprehend through the prism of democracy. Xi Jinping and Li Keqiang (China’s likely future President and Premier) will be in power for a decade. Do you think it’s in their best interests to perpetuate China’s “unstable, unbalanced, uncoordinated and unsustainable” growth model (per current Premier Wen Jiabao) by reflating the Chinese economy just ahead of or early in their administration? Perhaps, though we’d argue anyone taking a longer-term view would be keen to anticipate the negative impact of a mid-regime property market bust and subsequent financial crisis upon Chinese economic growth and social stability. Unlike most Western financial market participants, the Politburo does not operate in the vacuum of YTD gains or with respect to some year-end bonus pool.

 

All told, the Chinese economy will continue to grow; it probably just won’t grow as fast or necessarily in the same manner as international investors and corporations have become accustomed to. That’s one of the core tenets of prospect theory, specifically in that myopic loss aversion from the status quo occurs not just from present states, but also from future states that were previously assumed to be true.

 

In this light, how will companies like Caterpillar Inc. and Fortescue Metals Group Ltd. react when the Chinese “stimulus” bazooka they’ve all been anticipating to varying degrees does not show up? How will international investors respond to this potential scenario? After accounting for 43.9% of global real GDP growth since 2008, does China even matter anymore? Why can’t everyone just buy the SPDRs and hold on for dear life until the data starts to improve?

 

While we are certain that none of these questions have easy answers, we are convinced that they need to be pondered by anyone managing risk in today’s choppy Global Macro environment. Best of luck out there, everyone.

 

Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield and the SP500 are now 1770-1786, 106.78-110.99, 79.60-80.23, 1.27-1.29, 1.58-1.69 and 1437-1462, respectively.

 

Darius Dale

Senior Analyst

 

River Baptisms - Chart of the Day

 

River Baptisms - Virtual Portfolio



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