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JOSHUA STEINER: JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS?

Is Labor Improving?


The headline number certainly suggests the labor market is roaring ahead, and this is consistent with our view that the seasonality tailwinds will run full force through the end of February. That said, the non-seasonally adjusted data appears to be deteriorating. On a rolling, year-over-year basis, the improvement in the latest week slipped to -4.3% from -7.0% the week prior and -9.7% the week prior to that. We've long argued that looking at the rolling NSA data is a better barometer of the underlying health of the labor market because there are so many errors currently plaguing the seasonally-adjusted data. As such, we think it's a fair question to ask whether the labor market's underlying health is starting to weaken. We'll want to see more data before drawing any firm conclusions. 

 

There was no revision to the prior week's data, so the 5k WoW decrease to 330k from 335k is apples to apples. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -8k WoW to 351k.

 

As mentioned above, the 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -4.3% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.0% 

 

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Yield Spreads Continue to Widen

The 2-10 spread rose +1 basis point WoW to 159 bps. 1Q13TD, the 2-10 spread is averaging 161 bps, which is higher by 18 bps relative to 4Q12.

 

JOSHUA STEINER: JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - JS 12

 

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Joshua Steiner, CFA

 

 

 


UA: The Most Bearish News Imaginable

Takeaway: We need to peel layers off the onion to find out why good managers fail in delivering results. With $UA, we think it comes down to capital.

The sell side is hot and heavy this morning in previewing UA’s quarter, which is to be released next Thursday. That officially does not matter one iota. The announcement that Gene McCarthy, head of Footwear, has resigned is one of the most bearish datapoints imaginable for UA.

 

As background, Gene is no joke. He was one of the people responsible for taking Brand Jordan at Nike from a $100mm shoe line to a $1bn+ brand. He was hired to revive the ailing ‘yellow boot’ business at Timberland, where he was met with early success – to the extent that CEO Jeff Schwartz invoked the Peter Principle and made him the co-President of the company instead of leaving him in charge of the urban lifestyle division where he was making serious inroads. Then Kevin Plank made what we though at the time was one of UA’s best hires yet when he hired McCarthy to run footwear.

 

That said, three years after the hire, despite all the hype around new products such as ‘Spine’, UA is still struggling to break above 1% market share of the US footwear market. Far less powerful sports brands are sitting at 5-7% share, and yet UA can’t pierce the 1% veil? Clearly, either McCarthy was not what we expected, or there is something structurally impaired with UA’s approach to the footwear business.

 

How could someone who is so good produce such weak results?

 

We think that the answer does not boil down to leadership, but rather capital deployment. Kevin Plank could have Phil Knight in charge of footwear and it would still not be growing at the rate necessary to win. The reason is that for UA to print outsized growth in footwear, we need a more significant working capital and SG&A commitment that would take aggregate operating margins down to the 8% range (and would take returns along with it). (Think Reebok when it was struggling to grow against Nike)

 

As a frame of reference, to add another $400mm in sales, the impact would be EBIT-neutral with an incremental $44mm in SG&A spending associated with growing the business. In all reality, $40-$50mm is not a lot of capital when it comes to hiring the additional staff and aligning all the design, development and marketing resources to grow into a space with such high barriers to entry. If spending steps up, which we think needs to happen, we could see the top line pick up, but EBIT stay steady.

 

We don’t think it’s too relevant if McCarthy left on his own accord or was pushed out. If UA’s visibility was clear he would have stayed and Plank would never let him leave. Now we’re stuck with the COO of the company running a business that perennially disappoints relative to high expectations. McCarthy was influential with his staff, and we would not be surprised to see more departures. This kind of risk profile is not what a company with UA’s multiple can afford to exhibit. We think the 4% sell-off we're seeing today is mild given the new disclosure. 


JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS?

Takeaway: Consistent with the last few years, the labor market is saying one thing but doing another: early signs of deterioration.

Is Labor Improving?

The headline number certainly suggests the labor market is roaring ahead, and this is consistent with our view that the seasonality tailwinds will run full force through the end of February. That said, the non-seasonally adjusted data appears to be deteriorating. On a rolling, year-over-year basis, the improvement in the latest week slipped to -4.3% from -7.0% the week prior and -9.7% the week prior to that. We've long argued that looking at the rolling NSA data is a better barometer of the underlying health of the labor market because there are so many errors currently plaguing the seasonally-adjusted data. As such, we think it's a fair question to ask whether the labor market's underlying health is starting to weaken. We'll want to see more data before drawing any firm conclusions. 

 

There was no revision to the prior week's data, so the 5k WoW decrease to 330k from 335k is apples to apples. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -8k WoW to 351k.

 

As mentioned above, the 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -4.3% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.0% 

 

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JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - 11

 

Yield Spreads Continue to Widen

The 2-10 spread rose +1 basis point WoW to 159 bps. 1Q13TD, the 2-10 spread is averaging 161 bps, which is higher by 18 bps relative to 4Q12.

 

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JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - 13

 

Joshua Steiner, CFA



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SBUX EPS TONE SHOULD BE POSITIVE

Starbucks’ top and bottom lines are facing favorable conditions, versus last year, and we expect management commentary on today’s earnings call to be bullish.

 

We expect some positivity from Seattle after the close today.  As we wrote two weeks ago, CPG and international growth offer talking points for management to highlight the growth runway still facing this company on a global basis.  An improving employment picture in the US could be an important driver of the company’s most important market. 

 

Below, we show the same-restaurant sales chart for the US and, in the third chart, the year-over-year change in restaurant operating margins versus the year-over-year change in the spot coffee price. 

 

1. US Employment has been improving, as underlined by this morning’s initial jobless claims data, which came in at 330k vs 355k expected, and this increases our confidence in Starbucks’ ability to continue to drive industry-leading same-restaurant sales growth in the US.


SBUX EPS TONE SHOULD BE POSITIVE - inital jobless claims

 

SBUX EPS TONE SHOULD BE POSITIVE - sbux americas sss cons

 

 

2. Coffee needs are locked through 1HFY14 but, given the continuing softness in spot market prices since the company's most recent guidance, more positive news on input costs seems likely either on today’s conference call or at some point in the near future. 

SBUX EPS TONE SHOULD BE POSITIVE - sbux pod 2 coffee prixe

 

 

3. EMEA SSS will likely be negatively impacted by the UK market, where Starbucks has experienced some negative publicity related to its contribution to Her Majesty’s Revenue and Customs relative to the revenue the company sources in the country.


SBUX EPS TONE SHOULD BE POSITIVE - sbux emea sss cons

 

SBUX EPS TONE SHOULD BE POSITIVE - sbux cap sss cons

 

 

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


Time It Right

Client Talking Points

Go With The Flows

You can’t fight a tidal wave, but you can surf with it and use it to reach the beach. That’s what happens when fund flows move to US equities and the big asset managers start buying stocks. You might have a stock that seems like a great idea for a short and all of the math adds up...until it doesn’t, because some fund manager is buying a huge block of it and driving the price up. This is why timing is more important than ever right now. You can’t fight big beta, so embrace it and make sure that if you’re going to fight against the majority, you get the timing right.

Asset Allocation

CASH 52% US EQUITIES 12%
INTL EQUITIES 12% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

ADM

ADM has significantly lagged the overall market in 2012 over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist. Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry. Merchandising and handling results were at the mercy of a smaller U.S. corn harvest. Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground. With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“I DON"T FLIPPING BELIEVE IT!! Mary Jo White has been nominated for head of the SEC. Another Lawyer who doesn't understand markets.” -@SapienQuis

QUOTE OF THE DAY

“Life isn't fair. It's just fairer than death, that's all.” -William Goldman

STAT OF THE DAY

US weekly jobless claims fall by 5000 to 330,000 in the week ended Jan. 19, the fewest since the same week in 2008.


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