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Labor Market: Tailwinds Morphing?

This week’s initial jobless claims number was positively impacted by snow in Illinois and the New York/Connecticut area as claims fell 25k to 341k from 366k week-over-week. Keep in mind that while the labor market is undergoing a positive transformation of sorts, the end of the seasonal adjustment tailwind will end at the beginning of March. Nothing dramatic will take effect immediately, but over time, a slow headwind will build that will peak in August as the cycle begins again.

 

 

Labor Market: Tailwinds Morphing? - 1 normal

 

 

Another important note is that the rate of improvement in the labor market is slowing. The 4-week rolling average of non-seasonally adjusted claims, which we consider a more accurate representation of the underlying labor market trend, was -3.0% lower year-over-year, which is a sequential improvement versus the previous week's year-over-year change of -0.7%. Bigger picture, the labor and housing markets are continuing to improve providing an ongoing tailwind for deep-value, high beta names within the sector.

 

Labor Market: Tailwinds Morphing? - 2 normal

 

Labor Market: Tailwinds Morphing? - 3 normal


Broken France?

We’ve long had a skeptical eye on Socialist President François Hollande since he entered the stage in May 2012, beginning with his very loud “tax the rich” campaign slogan and lack of focus on reducing France's fiscal fat.  With fears now decidedly marginalized on the dissolution of the Eurozone; no imminent threat of a sovereign needing a bailout; and Draghi’s OMT bazooka still calming markets, we return to France, the region’s second largest economy, for a closer look at the risks we see developing that may be overlooked. 

 

What’s mattered greatly to many investors at the country level since the “crisis” began is countries meeting or exceeding their growth targets and reducing their debt and deficit levels.  France, not unlike what we’ve seen from peripheral countries since 2009, looks to miss its 2013 GDP and deficit targets.   In recent days President Hollande has hinted at a willingness to change the growth forecast from +0.8% to +0.3%-0.4%, however has not backed off the deficit target of 3% of GDP. We think a revision to both is a question of when, not if.

 

Interestingly, the sticking point on when this change in forecast could result may have to do directly with the timing of a European Commission’s economic report on the Eurozone. It is expected to come out in late February and show that French growth should be in the +0.3%-0.4% range and that France is projected to undershoot its deficit reduction target. A recent state audit should also influence Hollande – it revealed that in a scenario of +0.3% growth, inline with current IMF projections, the deficit would be 25bps over the target, or 3.25%, and added that the state has relied too much on tax increases and needs to focus on spending cuts to attain its targets.

 

 

Beyond the Deficit Are Storm Clouds

 

While a miss of its deficit target may not cripple confidence in France, it adds to a perfect storm of negative trending risks, which include:

  • Public debt – pushing 91% (as a % of GDP) - France is above the level of 90% that economists Reinhart and Rogoff have indicated as destructive to growth.
  • Credit Rating – Fitch is the only main agency to maintain its AAA status. S&P is at AA and Moody’s at Aa1. We expect all three to be lined up at AA in 2013 and for this reduction in credit standing to weigh on its public finances, and put upward pressure on yields.  Note: The 10YR is currently trading at 2.26% (versus 1.64% in Germany), and has remained stubbornly low over the intermediate term despite the risk premiums we see, a development that we believe has a high probability of inflecting in 2013.
  • Competitiveness Drag – Hollande’s policy to tax the rich (75% on those making €1MM or more) is not only driving out his countrymen but sending negative investment signals to the business community. Hollande has moved the top rate of capital gains tax from 34.5% to 62.2%. For reference these levels compare with 21% in Spain, 26.4% in Germany and 28% in Britain.
  • Hamstrung Spending – we believe that Hollande will not be able to issue additional spending cuts due to push back on the street against austerity. Politically, Hollande also doesn’t have the popular support to make an estimated €5B in additional cuts to attain the deficit target.
  • Bank Leverage – French banks remain an outside concern due to their leverage to the periphery. While we expect Draghi and Co. to keep the union together at all costs, the weight of a still imbalanced financial sector could sway sovereign sentiment.

 

Economic Misses


Today Eurostat reported initial GDP figures for Q4 2012.  France’s Q4 GDP came in at -0.3% Q/Q versus expectations of -0.2% and +0.1% in Q3. While France outperformed the Eurozone aggregate of -0.6% Q/Q (versus expectations of -0.4%), the high frequency data that we track continues to paint a negative trend for France, one that inflects versus the larger peer economies of Germany and the UK. 

 

France’s PMI Services number for JAN was 43.6 JAN vs 45.2 in DEC and Manufacturing fell to 42.9 in JAN vs 44.6 in DEC, both decidedly under the 50 line representing contraction.

 

Broken France? - 33. gdp

 

Broken France? - 33. pmis

 

Further, the policy measures that Hollande has implemented are showing up in confidence readings. Business Confidence has rolled down the mountain since a high in March 2012, Consumer Confidence has been flat to down since Hollande’s election, and Consumer Spending has been under 1% since mid 2011 and negative for the last 5 consecutive months. 

 

Broken France? - 33. business conf

 

Broken France? - 33. consumer spending

 

 

Given France debt drag, likely misses on 2013 GDP and deficit reduction, and financial and economic constrains, the country is one to watch given the downside risks. From a capital markets perspective the country has been surprisingly resilient, but this could well change.  While the wave of sentiment may be more focused on the governments of Italy and Spain currently, we caution that the risks in France could drive a stagflationary set-up in the country for much longer than is currently being priced in.  We think the Hollande’s political handcuffs will prevent necessary spending cuts and his decidedly anti-business tax policy will chase good money out of the country.  Stay tuned.   

 

Broken France? - 33. indust and manu product

 

 

Matthew Hedrick

Senior Analyst


BLMN: Conflict On Wall Street

This note was originally published February 13, 2013 at 15:02 in Restaurants


Bloomin’ Brands shares could be a good short at this price. 

 

 

Sentiment

 

Sell-side ratings on Bloomin’ Brands shares indicate a strong, bullish bias with 73% of analysts recommending buying the shares.  With casual dining sales trends deteriorating, we believe BLMN is a good candidate for investors looking for short ideas as earnings expectations are unlikely to rise from here.

 

The consensus Price Target, illustrated in the chart below, is below the price of the shares and we do not expect sentiment to rise much further.  Both the multiple (>1.5 turns above casual dining average) and the earnings estimate are not likely to have much upside. 

 

BLMN: Conflict On Wall Street - blmn target price

 

 

Private Equity Profit-Taking

 

Given that 66% of the company, or $2.5 billion in stock, is owned by private equity firms, it is unlikely that there will be a sea-change in sell-side ratings any time soon.  However, we would think that a private equity firm considering current sales trends would be glad to offload shares at $18, or 9.3x cash flow.

 

BLMN: Conflict On Wall Street - blmn valuation comp

 

 


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STAY SHORT THE YEN

Takeaway: Japan’s bleak cyclical data remains the perfect handoff to the structural policy changes outlined in our bearish thesis on the yen.

SUMMARY CONCLUSIONS:

 

  • Do your best to drown out the rhetorical noise coming from the G20 Summit and stay short the yen, which is now down -16.6% vs. the USD since we outlined our bearish bias back on SEP 27.
  • With major policy catalysts hanging in the balance, there is a lot more downside from here in our perspective, despite the trade having now become consensus – particularly among noteworthy Global Macro investors (see: FT article titled, “Hedge Funds Reap Billions on Yen Bets”).

 

MAJOR DEVELOPMENTS: On Tuesday, we published a note titled CURRENCY WAR UPDATE: THE G7 BOWS TO JAPAN; to the extent you may have missed it come through, please review that as a preamble to the brief prose below.

 

  • GDP bomb = recession continues: Japan’s 4Q Real GDP figures were released overnight and they left much to be desired in the way of healthy economic growth: +0.3% YoY from +0.4% prior; -0.1% QoQ from -1% prior vs. +0.1% Bloomberg consensus estimate; -0.4% QoQ SAAR from -3.8% prior vs. +0.4% Bloomberg consensus estimate. This confirms our call for Japan’s recession to extend into a third-straight quarter.
  • Things are picking up, though?: The conclusion of the BOJ’s latest two-day policy meeting produced little in the way of critical policy developments. The ¥76T Asset Purchase Program, ¥25T Bank Credit Program and ¥1.8T of monthly JGB purchases were all left on hold – as was the 0.1% Call Money Rate. What did qualify as news was board upping its view of the Japanese economy to “… appears to have stopped weakening” from “… remains relatively weak” at the prior meeting. This delta is more influenced by the timing of recent fiscal stimulus spending and improved consumer and business confidence figures than actual economic growth indicators – which remained very subdued in JAN-to-date.
  • Shirakawa’s last ride: The next BOJ meeting on MAR 7 will be the final meeting presided over by Governor Masaaki Shirakawa’s and his two deputy governors Hirohide Yamaguchi and Kiyohiko Nishimura. In rejecting Ryuzo Miyao’s call for a pledge of ZIRP until the inflation target is “in sight”, the three amigos signaled they want to ride off into the sunset much like former ECB President Jean-Claude Trichet – appearing uncompromised, unwavering towards market or political demands.
  • The next guys and gals won’t be so lucky:Much like Mario Draghi has become with respect to European banksters and financial market participants, we continue to believe their replacements will become more-or-less puppets of the Abe administration’s broader political agenda for the Japanese economy – which is +5% “monetary math” (+3% nominal growth and +2% inflation). From an intermediate-term TREND and long-term TAIL perspective, we expect whomever is running the BOJ to do “whatever it takes” to meet the aforementioned targets.
  • Minor hiccups may remain though: One very minor hurdle on the track to ‘USD/JPY = ¥100’ is Your Party’s recent pre-rejection of Haruhiko Kuroda and Toshiro Muto as candidates to be the next head of the BOJ because they are ex-MOF officials. That leaves only former BOJ Deputy Governor Kazumasa Iwata as the only consensus candidate remaining that stands to make it past the Upper House vote where the LDP does not have a majority. Dare we say a dark horse currency debaucher will emerge as the next BOJ head?
  • G20 Summit = all eyes on the yen: Another potential hurdle is this weekend’s G20 Summit. If, however, the G7 statement issued earlier this week is any indication of this weekend’s pending takeaways, we continue to anticipate muted international resistance to Japan’s Policies to Inflate. For now, it appears no country is fully prepared to officially stand in the way of the Japanese Cabinet Office’s political objectives. Japan’s awful 4Q GDP miss supports this conclusion in that it likely buys Japan more international goodwill/scope to carry on debauching.
  • Where to from here?: Do your best to drown out the rhetorical noise coming from the G20 Summit and stay short the yen, which is now down -16.6% vs. the USD since we outlined our bearish bias back on SEP 27. With major policy catalysts hanging in the balance, there is a lot more downside from here in our perspective, despite the trade having now become consensus – particularly among noteworthy Global Macro investors (see: FT article titled, “Hedge Funds Reap Billions on Yen Bets”).

 

Darius Dale

Senior Analyst

 

STAY SHORT THE YEN - 1

 

STAY SHORT THE YEN - JAPAN

 

STAY SHORT THE YEN - 3

 

STAY SHORT THE YEN - 4

 

STAY SHORT THE YEN -  Quadrill yen Catalyst Calendar


JNY: We Want Mgmt To Take The Other Route

Takeaway: The leverage in this model is nothing short of extreme. We want JNY to be the next LIZ/FNP. But until management agrees with us, it won't.

This note was originally published February 13, 2013 at 21:25 in Retail


Given how 'out of favor' JNY perennially is we’re tempted to want to go the other way – and today’s beat certainly supports that point. During the quarter, both Domestic Wholesale Jeanswear and Domestic Wholesale Footwear & Accessories confirmed not only the turn we saw last quarter, but a reacceleration in both sales and profitability in these key segments (accounting for 65% of total EBIT). At the same time, despite further revenue deceleration, incremental losses slowed in Domestic Wholesale Sportswear arresting the contracting profit trend reported in each of last four quarters. Not bad at all.

 

The leverage in this model – both operational and financial – is nothing short of extreme. If only a few things go right, this company can print $2 in earnings power – which makes a $12 stock look like a seriously mispriced asset. But there are two ways to get to the earnings power in question. A) improve the entire portfolio of 30+ brands under the JNY banner, or B) take a draconian stab at this portfolio and do to it something akin to what LIZ/FNP did over the past two years.

 

Despite the glaring evidence that things are getting better, the reality is that the risk/reward is still not good enough for us to get involved here. Why? Simply put, management is gunning for option ‘A’. For a portfolio that is simply ‘average’, we can’t bank on broad-based improvement in the macro environment to unleash the earnings, and we don’t have the confidence yet that JNY possesses the tools to keep the recent momentum going. We want option ‘B’.

 

We think that JNY needs to go the way of FNP. It needs to focus its portfolio into the brands the matter most, and dispose of/sell the rest. JNY has over 30 brands, and our sense is that the average investor can’t name the brands representing over a third of JNY’s revenue base.

 

Realistically, the best way to monetize this content will be for department stores to strike exclusive deals with the company for 100% wholesale distribution, or the brands should be sold to the retailer (like FNP did with JCP and the Liz Claiborne Brand).

 

When all is said and done, we think that this will prove to be a more valuable strategy for shareholders than to try to continue to run this company as a multi-brand portfolio.

 

The problem is that management seems to have zero desire to go down this path. They seem to be comfortable running the ship much like it has been run for the past 20 years. Are there call options in footwear and International? Yes. And they’re making great strides today in US Wholesale. Both of these things are great. But they require too many leaps of faith for us at this point, and we don’t like investing based on faith. 


IDEA ALERT: BUYING IGT

Keith recently added IGT to our Real-time Alerts at $16.26.

 

 

With a cheap valuation of 11x forward, rising ship share, improving visibility and strong EPS growth, and better capital deployment away from acquisitions and towards stock buyback, IGT looks attractive.  IGT is clearly a show me stock and we believe that 2013 will be a year of performance.  Aggressive share repurchases should keep a floor on the stock while shareholder activism and a potentially large order from Oregon represent near-term catalysts.  The Oregon Lottery is considering submitting an RFP to refresh its all the units in its 20,000 VLT market.  We don't believe that order is reflected in the estimates or the stock.


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