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INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE?

Takeaway: The real labor market continues to improve, albeit modestly. California is to blame for the last three weeks of volatility.

Blame California

Three weeks ago, California was omitted causing initial jobless claims to drop 28k. Two weeks ago, California was double-counted causing claims to rise 46k. Last week, California was back to normal so claims dropped 23k. Net net, in the last three weeks, the 4-week rolling average for seasonally-adjusted jobless claims has gone from 364k three weeks ago to 368k in the most recent week. 

 

As we show in the first chart, the trend in claims since the start of September is lower. This is consistent with our expectation, and we would expect to continue to see claims move steadily lower through February 2013, owing to the faulty seasonal adjustment factors that have been warping the data for the last 3.5 years. The same distortion occurs in non-farm payrolls, incidentally. This perception of a steadily improving labor market should be a tailwind for credit-sensitive financials.

 

What's Really Going On?

Looking past the distorted SA numbers, the reality is that the labor market is still improving in spite of the recent spate of headlines about sizeable layoffs in the private sector. We measure this by evaluating the YoY change in rolling non-seasonally-adjusted initial jobless claims. This morning's print brought that series to -8.4%, slightly worse than the prior week's print of -10%. A larger decline in YoY claims is, of course, better. We don't put too much emphasis on one or two or even three weeks of data, but if we see the 8.4% YoY change from this morning continue to converge toward zero at a rapid rate over the next 3-4 weeks, that will be indicative of a real problem starting to take hold in the labor market. Interestingly, the rest of the market will be unlikely to notice this since the SA tailwinds will appear to make the data go sideways.

 

The Data

Last week initial claims fell 19k to 369k. After incorporating a 4k upward revision to the prior week's data, claims fell 23k. Rolling claims rose 1.5k WoW to 368k. The non-seasonally adjusted series fell 20k to 343k. The NSA YoY change was -8.4%.

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Seasonality

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Raw

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Rolling

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - NSA claims

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - NSA rolling

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - S P

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Fed

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - YoY

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Rolling  Linear

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Initial Claims Linear

 

Yield Spreads

The 2-10 spread fell 4 bps WoW to 150 bps. So far 4QTD, the 2-10 spread is averaging 1.45%, which is up 8 bps relative to 3Q12.  

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - 2 10

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - 2 10 QoQ

 

Financial Subsector Performance

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

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Subsector

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Companies

 

Joshua Steiner, CFA

 

Robert Belsky

 


EXPERT CALL ON AG PRICES

On Monday, October 29th at 1:00pm EST, the Hedgeye Macro Team and Restaurants Team will be hosting a Agricultural and Consumer Economics Expert Call with Professor Darrel Good of the University of Illinois. Good has been part of the faculty since 1976 and took part in developing a comprehensive farm risk management website (www.farmdoc.uiuc.edu). His efforts are now focused on the performance of grain futures contracts as well as corn and soybean yield trends.  This call will be instructive for investors focused on the following names within restaurants and food processing:

 

Restaurant Tickers: DRI, BLMN, TXRH, WEN, JACK, MCD, PNRA, PZZA, DPZ, YUM, CAKE, EAT & CMG 
Food Processing Tickers:
 TSN, SAFM, SFD, HRL, PPC, CAG, DF & MON 

 

Topics will include: 

  •  Supply side - planting intentions and farmer's economics
  • Demand side - key drivers of demand - ethanol, protein, consumption (domestic and abroad)
  • General long term trends to think about for farming - utilization, fertilizers, seed evolution
  • Thoughts on USDA projections, and their historical accuracy and what the implications are now
  • View on supply, demand, key drivers and prices for:
    • Corn
    • Wheat
    • Soybeans
    • Cattle
    • Chicken

Please contact if you would like to trial our research or obtain access to this conference call. Current subscribers of our Macro and/or Restaurant verticals will receive the dial-in information automatically.  

 

 

Good's Background

 

Darrel Good has a comprehensive understanding of the agricultural markets and economic implications. "There was a time period in the early seventies when grain markets changed dramatically," said Good. "Russia started importing grain, prices just exploded to the upside and there was renewed interest in markets and prices. I was hired to help develop a very extensive educational program in marketing and risk management."  

  • Professor in the department of Agricultural and Consumer Economics, is marking his 33rd year with the University of Illinois
  •  Good and two other faculty members developed a seminar called "Price Forecasting and Sales Management"
  • One of the founding members of the farmdoc team
  • He writes one of the featured newsletters on the farmdoc site, Weekly OUTLOOK , and he is a primary contributor to the AgMAS section
  • Current research includes:
    • Evaluation of the pricing performance of agricultural market advisory services
    • Evaluation of USDA production and price forecasts
    • Evaluation of pricing performance of Illinois corn and soybean producers  

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


WYNN GOES EARLY AND BIG

Quarter was solid with good Macau commentary.  Special dividend was sizable and probably in the whisper range but the announcement came early.

 

 

Stock will be up this am and it probably should be.  The quarter was solid with some surprisingly strong volumes in Las Vegas.  Wynn is clearly taking share on the Strip both in slots and the tables.  The Macau performance was almost exactly in-line with our projections (way to go Anna!) but the forward commentary was bullish.  Wynn’s share is down so far in October but that is likely due primarily to hold.  More importantly, management made positive comments that trends are getting better especially with the liquidity conditions of the junkets.

 

The question is where do we go from here?  We remain positive on Macau, so directionally we’re biased on the upside for all the Macau stocks.  However, we see stronger company catalysts elsewhere (LVS and MPEL) and until Wynn Cotai opens, market share will remain under pressure.  We’re on the sidelines for now on WYNN.

 

 

Dividend no longer just Special:

Wynn announced a special dividend of $7.50 payable to shareholders of record on November 7th.  This year's special represents a 50% increase in what was paid out in 2011. While most investors expected a dividend in this range, the surprise came in the timing.  Last year the special dividend announcement came on November 2nd, after the Company’s shareholder meeting and was payable to shareholders on record right before Christmas on Dec 21st.

 

In addition, WYNN doubled its regular quarterly dividend from $0.50 to $1.00/share.  Given the hefty 3.5% yield, the increase in dividend should attract a new set of income oriented investors.

 


Macau


Wynn reported net revenue of $911MM which was 2% below our estimate, while Adjusted EBITDA of $292MM was 1% higher than we estimated.   

  • Net VIP table win was $14MM lower than we estimated
    • RC volume fell 12% YoY and 9% QoQ, but was $560MM better than we estimated due to direct VIP RC play coming in at 10% vs. our estimate of 8%
    • Hold was 12bps lower than we estimated, resulting in gross table win that was $15MM below our estimate
    • The rebate rate was 30.4% or 94bps, in-line with our estimate
    • We estimate that all junket commissions & rebates were 42.2%, a little lower than we estimated and impressive in the current “aggressive” promotional environment that Wynn described.  However, we won’t know for sure until Wynn Macau files.
    • The property’s historical hold rate since opening, inclusive of this quarter, has been 2.93%.  Using the historical hold rate, net revenues would have been $29MM lower and EBITDA would have been $8MM lower.
  • Mass table win was $3MM better than we estimated
    • Drop declined 3% YoY and was 5% less than we estimated but the win % was 1.8% better
    • We believe that higher mass hold rates are sustainable and therefore, we no longer normalize for high hold on mass
  • Slot win was in-line with our estimate
    • Slot handle was down 11% YoY
    • Hold was 5.4%, 40bps better than we estimated
  • We  estimate that fixed expenses totaled $101MM, $1MM below our estimate and down $1MM QoQ

 

Las Vegas


Las Vegas revenues and EBITDA exceeded our estimate by 2% on both metrics and beat the Street’s EBITDA estimate by 10%. The beat came from strong volumes on both tables and slots and better F&B revenues.

  • Net casino revenues were $3MM above our estimate
    • Table drop grew 17% YoY vs. our estimate of 10% growth but hold was 1% lower than we estimated, resulting in table win being $4MM above our estimate
    • Slot win was $6MM better than we estimated
      • Slot handle was 8% better than we estimated and win % was 40bps higher at 6.4%
  • Total gaming discounts and promotions totaled 21% of gross casino win, higher than the 17.7% discount rate in 2011 but lower than last quarter’s rate of 22%

 


Early Look

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HOT BEAT DRIVEN ENTIRELY BY BAL HARBOUR AND LOWER SG&A; 4Q GUIDANCE BELOW CONSENSUS

Takeaway: HOT's quarter was weaker than the headline suggests and in-line with our thesis of weakening lodging fundamentals. 4Q outlook below Street

HOT BEAT DRIVEN ENTIRELY BY BAL HARBOUR AND LOWER SG&A; 4Q GUIDANCE BELOW CONSENSUS

 

While the headline number was strong, if you look beneath the surface of Starwood’s quarter, it appears that fundamentals are decelerating.  The beat in the quarter was driven by better residential sales at Bal Harbour and lower SG&A. 

 

Factors that contributed to operating cash flow that was $11MM above our estimate:

  • Residential gross margin was $12MM above our estimate ($17MM vs. $5MM).  We’re not sure why there is a $5MM gap between Residential earnings and GM
  • Fees were $2MM above our estimate, driven by $5MM of higher amortization of deferred gains, termination fees and other one-time fees, offset by lower mgmt, franchise and incentive fees
  • $5MM of lower SG&A expense.  SG&A decreased 1% YoY vs management 2012 guidance of a 4-5% increase
  • Offset by:
    • Owned, leased and JV came in $5MM lower
    • Vacation ownership came in at $5MM 

 

Detail:

  • Owned, leased and consolidated JV
    • Revenue was disappointing but cost discipline helped mitigate some of the impact to the bottom line
    • Reported (non same-store) margins on owned, leased and consolidated JV’s was unchanged YoY
    • We estimate that room revenues declined 4% while F&B and other revenues were down 2% YoY.  The declines are largely a reflection of asset sales.  RevPOR was $324.91, essentially flat YoY.
    • CostPAR was $266.05, down 0.2% YoY.  FX obviously helped keep costs down – not just revenues.  We estimate that without FX, CostPAR would have increased around 4%.
  • RevPAR came in lower than we estimated on an absolute $ basis across the board.  A lot of this is FX but still, numbers were disappointing.  We clearly can’t model SS so our numbers aren’t apples to apples.
  • Fee income came in 1% above our estimate and 2% below the Street; the mix was lowish quality.  Base, franchise and incentive fees grew 8% YoY, below management guidance of 9-11% growth.
    • Base fees of $88MM, increased just 2% YoY.  We expected more growth given the 8% increase in managed rooms.
    • Franchise fees of $53MM, were up 10% YoY, $1MM better than we expected.  Franchised rooms grew 4% YoY.
    • Incentive fees were $1MM above our estimate, at $39MM
    • There were $21MM of amortization of gains included in “Other Management & Franchise Revenues”
  • VOI was in-line.  The business looks stable with a 4% increase in average price per vacation units sold, offset by a 1% decrease in signed contracts and lower tour flow
    • Margins improved 90bps YoY
  • Bal Harbour sales of $67MM and profit of $12MM came in ahead of management’s guidance of $5MM in profit contribution
  • SG&A was lower than we expected- kudos to HOT for managing the quarter. This marks the second Q of YoY declines in SG&A.
  • HOT repurchased 1.6MM shares in the Q.  Despite the recent buybacks, basic shares still increased by 3MM since 2011 and diluted shares are up by 1MM.
  • More notably, HOT increased its regular dividend by 150% to $1.25/year, representing a 2.3% dividend yield
  • Other observations:
    • New brands like Aloft & Element are becoming a smaller driver of new room growth
    • EPS was aided by higher equity earnings, slightly lower interest expense and $1MM of gains
  • 4Q outlook is below consensus even taking into account this quarter's asset sales. 

MINI BUBBLES

Client Talking Points

MINI BUBBLES

There are plenty of mini-bubbles out there to take note of and recognize. Everything from shipbuilding to capital expenditures in industrials; all you have to do is look for the clues to help guide you. Mining spending is another one that’s about to pop. Companies like Caterpillar, etc. are realizing that #GrowthSlowing is very much a part of earnings season, like it or not. 

Asset Allocation

CASH 64% US EQUITIES 6%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 18% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
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.

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.

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.

Three for the Road

TWEET OF THE DAY

“Norway Tells Largest Sovereign Wealth Fund to Buy on Dip bloom.bg/THCwJi” -@JohnLothian

QUOTE OF THE DAY

“The love of truth lies at the root of much humor.” -Robertson Davies

STAT OF THE DAY

US jobless claims come in at 369,000.


CRI: Get in Now

Takeaway: No change to our thesis. We expect this to play out in Q4 and into 1H F13.


CRI beat and we’ll give them that. We went into the quarter and outlined in our CRI Black Book on 10/15 that we didn’t expect a miss due to an inflection in margins (i.e. product costs turn favorable), but that we expect the reality of our thesis – lack of product differentiation resulting in pricing/margin pressure – to play out more visibly in Q4 and into 1H F13. There is no change to our call. If the stock is up today on Q3 numbers, now is the time to short it. (please contact  if you are interested in seeing the full details of our call and CRI Black Book)

  • Wholesale numbers came in significantly lighter than expected offset in part by International results with stronger profitability driven by higher gross margins accounting for stronger EPS.
  • Notably, CRI’s Q4 outlook calls for sales over 200bps higher than consensus, but EPS a penny lighter. This suggests significant margin weakness relative to expectations. If this is indeed related to sell-in at Carter’s wholesale (i.e. JCP) it suggests sales are coming at substantially lower margin. It also begs the question of what happens following sell-in when accounts start pressing CRI on margin at the same time.
  • In addition to Q3 wholesale sales turning negative for the first time in 9 quarters, retail comps remain a concern. Both Carter’s and OshKosh decelerated meaningfully on a 2yr basis despite a more favorable setup and comps get much tougher over the next 2 quarters. Growth at retail continues to be driven almost entirely by lower productivity new store growth and e-commerce. Given the lack of product differentiation across channel, we expect this impact on owned-retail to continue.
  • Inventories were good though the sales/inventory spread turned down sharply in quadrant 1 reflecting the full integration of Bonnie Togs. Excluding BT, inventories were up +11% last quarter so the -3% inventory growth this quarter is sequentially positive.
  • Given the mixed Q4 guidance, our primary focus on the call will be 1) how much of the incremental lift in Q4 sales is lower margin wholesale business, and 2) where are AUR trends shaking out now that the company has gone dark on disclosure just at its outlook would suggest that pricing is under fire.

CRI: Get in Now - CRI S









 


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