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6-Handle: Back in Play as Labor Trends Accelerate?

Takeaway: Today’s Employment data supports our domestic #growthstabilizing view and offers positive confirmation of accelerating Labor Market Trends

Summary Takeaways:

  • Unemployment Rate:  Bullish combination of variable dynamics for unemployment rate improvement as a big delta between the change in employed (+170K M/M) and the change in the unemployed (-300K M/M) drove the Unemployment and the Labor Force Participation rate lower. 
  • Temp & Part-time Workers:  Growth in Temp & Part-time employment continues to decline.  To the extent FT can displace temp/part-time workers, consumption stands to benefit as workers gain benefits, weekly wages rise, and confidence/clarity around future income supports marginal spending decisions.
  • Employment by Age:  The barbell recovery in employment remains in effect as employment growth for 20-35 and 55+ year olds remains healthy while job growth for 35-54 year olds is back to negative.
  • State & Local Employment:  Continues to tread water just below the zero line.  It's still unclear how much of an impact the sequester will have on hiring decisions at the state & local gov’t level
  • Revision:  January’s Private payroll number was revised lower by 26K.   The market should look through the negative revision given the strength in the February number.   Adjusted for the negative revision, the change in private payrolls for February still beat by 50K. 

 

 

Today’s Employment data supports our constructive view on domestic #growthstabilizing, and offers positive confirmation of the accelerating labor market trends observed in both the initial claims and ADP series. 

 

Below we revisit the idea of seeing a 6-handle in unemployment in 2013, and provide a two-pronged breakdown of today’s Labor Market Numbers:  Analysis of the Current Population Survey (Household Survey) which drives the Unemployment Rate & the Establishment Survey (CES) which drives the NFP Number:

 

 

6-Handle?  In a previous scenario analysis, we examined the extent to which the variables driving the unemployment rate would have to move to push unemployment below 7% over 2013 (Will We See 6.5% Unemployment in 2013? ).  While a sub-7% unemployment rate probably wouldn’t represent our baseline case, we wouldn’t view it as a tail probability either.  In fact, the declining labor force participation rate and 200K+ employment gain we saw this month represents the variable dynamic required for a move below 7% over the NTM.   

 

A continuation of February's trend and a run at a 6-handle in unemployment into 2013 year-end would effectively extend our existing investment view – long consumption oriented equities, short bonds and commodities as the growth/employment data would remain equity bullish, $USD Bullish (via shifting policy and interest rate expectations) and bond & commodity (to the extent negative correlations to the $USD hold) bearish. 

 

 

 Household Survey: 

 

Total Employed & Employment By Age:  Total Employment as measured by the household survey was up 170K in February with y/y growth decelerating 2bps sequentially to 1.0%.    

 

The hallmark of the employment downturn thru the Great Recession was the contrast between the extreme job loss among younger cohorts and the relative employment stability among older workers (employment for 55-64 yr. olds never went negative through the great recession).   What we’ve seen over the last three years has been a distinct barbell recovery as employment growth for 20-35 and 55+ year olds has been strong while job growth for 35-54 year olds has failed to gain sustainable traction.  This trend extended itself further in February.

 

As it relates to our bullish view on housing, the 20-35 year old cohort remains the biggest demographic driver of household formation. Continued positive employment growth in that age group should provide an ongoing support to housing demand.  

 

6-Handle:  Back in Play as Labor Trends Accelerate? - Employment by Age

 

Civilian Noninstitutional Population:  Each January the Census Bureau's estimates of the civilian noninstitutional population ages 16 and over are revised back to the base period for intercensal estimation, currently April 2010.  The annual benchmark adjustment is applied without any smoothing or rearward revision and shows up as single bolus in the January release.  

 

The January 2013 adjustment (+138K) was largely benign from a historical perspective.  Following the January Adjustment, growth estimates for the CNP are generally stable for the balance of the year.  Note that is the difference between growth in the CNP and growth in the Total Labor Force (Employed + Unemployed as measured by the BLS Household Survey) that drives the movement in the Labor Force Participation Rate.  

 

6-Handle:  Back in Play as Labor Trends Accelerate? - CNP

 

Unemployment Rate:  The Unemployment rate decreased from to 7.9% to 7.7% m/m.  As an Unemployment 101 reminder, the Unemployment & Labor Force Participation rates are primarily a function of 3 variables:  The growth in the Civilian Noninstitutional Population (CNP), growth in the Employed, and growth in the Unemployed. 

 

The sum of Employed + Unemployed = The Total Labor Force, The Unemployed as a % of the Total Labor Force (i.e. Employed + Unemployed) = Unemployment Rate, and  the Total Labor Force/CNP = Labor Force Participation Rate.  

 

In terms of the variable dynamics, there are a couple of simple relationships to keep in mind.   First, as it relates to the Labor Force Participation Rate, if growth in the Total Labor Force (Employed + Unemployed) is faster than growth in the Civilian Noninstitutional Population, then the labor force participation rate will increase & vice versa.  Second, as it relates to the Unemployment Rate, if growth in the Employed is stronger than growth in the Unemployed or, conversely, if the decline in the unemployed in greater than the decline in the employed, the Unemployment rate stands to benefit. .    

 

Thus, a rising participation rate alongside a declining unemployment rate represents the most bullish factor combination and a declining participation rate alongside a rising unemployment rate the most bearish combination from an economic/end consumption perspective.  A declining participation rate alongside a declining unemployment rate, which is the dynamic we have observed for the better part of the last few years, reflects a mixed labor market picture as the decline in the unemployed has been more a function of individuals dropping out the Labor Force (discouraged, retiring, disabled)  than it was those individuals gaining employment.      

 

The principal driver of the decrease in Unemployment this month was the delta between the change in the employed and the change in the unemployed.   Total Employed increased 170K sequentially while the Total Unemployed declined 300K sequentially, a 407K delta.  In this instance, the -300K change in the numerator (Unemployed/(Employed + Unemployed)  dominates the impact and serves to drive the Unemployment Rate lower.

 

6-Handle:  Back in Play as Labor Trends Accelerate? - Unemployment Rate vs. LFPR

 

Part-time & Temp Employment:  Part-time employment (household survey) increased 102K m/m but growth remains negative on a y/y basis.  Temp employment growth (establishment survey) followed a similar trajectory, increasing 16K m/m while decelerating 140bps sequentially on a y/y basis.   

 

To the extent growth in full-time employment can displace growth in part/temp employment and business can gain some further fiscal policy clarity into mid-year (post sequester, debt ceiling, budget resolution) sustainable real consumption growth stands to benefit as workers gain health/retirement benefits, weekly wages rise, and confidence/clarity around future income supports marginal spending decisions. 

 

6-Handle:  Back in Play as Labor Trends Accelerate? - Temp Employment

 

6-Handle:  Back in Play as Labor Trends Accelerate? - Part Time Employment Qtrly

 

 

Establishment Survey: 

 

Total NFP Gains & Growth:  Total Nonfarm Payrolls increased 236K in January vs. consensus at 165K while Private Payrolls rose 246K on estimates of 166K.  January’s Private payroll estimate was revised lower by 26K.  We’d expect the market to look through the negative revision given the strength in the February number.   Adjusted for the negative revision, the change in private payrolls for February still beat by 50K.  Employment comps get marginally easier as we move through the year.

 

6-Handle:  Back in Play as Labor Trends Accelerate? - Total NFP Qtrly

 

State & Local Government employment:  After a four year run of negative growth, state & local employment growth continues to stagnate just below the zero line.  Collectively, states expect continued tax revenue growth in 2013 with total General fund revenues expected to surpass the 2008 peak in nominal terms. The continued recovery in revenues should be a tailwind for employment and investment, however, sequestration and uncertainty around impending fiscal policy decisions at the federal may be weighing on hiring decisions at the state/local gov’t level currently.  

 

6-Handle:  Back in Play as Labor Trends Accelerate? - State   Local Gov t Employment

 

 

Christian B. Drake

Senior Analyst 

 

 


Still Bullish: S&P 500 Levels, Refreshed

Takeaway: Bearing bearish because we are at a certain price level isn’t a catalyst.

This note was originally published March 08, 2013 at 11:34 in Macro

POSITIONS: 12 LONGS, 6 SHORTS @Hedgeye

 

I’ve been on the road all week seeing clients in California. I’ve been told, multiple times, “you are the most bullish firm we pay right now.” That’s kind of weird to hear. But I kind of like it.

 

Bearing bearish because we are at a certain price level isn’t a catalyst. Neither is trying to call tops or managing career risk associated with not wanting to make the mistakes that were made the last time we were at these levels (i.e. the 2007 top). That’s called baggage.

 

The career risk (draw-downs) we think will be in missing growth stabilizing and accelerating (draw-downs in being long Gold, Treasuries, Yen, etc.). Strong Dollar (6 weeks in a row to a YTD high) is perpetuating Commodity Deflation (6 down weeks in a row). That’s an explicit pro-growth signal; especially for Consumption Growth.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1565
  2. Immediate-term TRADE support = 1527
  3. Intermediate-term TREND support = 1468

 

In other words, there is no resistance to the all-time closing high for the SP500. This market continues to make higher-lows and higher-highs, as the US economic growth picture continues to improve.

 

Enjoy your weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Still Bullish: S&P 500 Levels, Refreshed - SPX


Still Bullish: SP500 Levels, Refreshed

Takeaway: Bearing bearish because we are at a certain price level isn’t a catalyst.

POSITIONS: 12 LONGS, 6 SHORTS @Hedgeye

 

I’ve been on the road all week seeing clients in California. I’ve been told, multiple times, “you are the most bullish firm we pay right now.” That’s kind of weird to hear. But I kind of like it.

 

Bearing bearish because we are at a certain price level isn’t a catalyst. Neither is trying to call tops or managing career risk associated with not wanting to make the mistakes that were made the last time we were at these levels (i.e. the 2007 top). That’s called baggage.

 

The career risk (draw-downs) we think will be in missing growth stabilizing and accelerating (draw-downs in being long Gold, Treasuries, Yen, etc.). Strong Dollar (6 weeks in a row to a YTD high) is perpetuating Commodity Deflation (6 down weeks in a row). That’s an explicit pro-growth signal; especially for Consumption Growth.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1565
  2. Immediate-term TRADE support = 1527
  3. Intermediate-term TREND support = 1468

 

In other words, there is no resistance to the all-time closing high for the SP500. This market continues to make higher-lows and higher-highs, as the US economic growth picture continues to improve.

 

Enjoy your weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Still Bullish: SP500 Levels, Refreshed - SPX


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LV STRIP: EVEN WORSE

Takeaway: Sorry folks but Vegas is not in recovery. MGM numbers at risk

 

 

 

January LV Strip gaming revenues fell 19%, worse than our projection of -8-12%.  If we adjust table and slot hold to historical norm this and last January, gaming revenues fell 20%.  Baccarat was a major contributor of the decline as volumes fell 49%. More troubling was that slot volumes fell 2.4%, reversing two straight months of YoY growth.  We believe February slot volumes will also decline.  Not exactly the start to the year the bulls were expecting.

 

Strip Details:

  • Slot handle fell 2.4% (+1% on a rolling 3-month average).  
  • Slot win was flat as hold was 8.9% compared with 8.7% in January 2012 - both well above average
  • Table volume excluding baccarat dropped 5% YoY (+3% on a rolling 3-month average).  Table hold excluding baccarat was 11.6%, compared with 12.0% on a trailing twelve month average.
    • Baccarat volume tumbled 49% (compared with +163% growth in January 2012)
    • Baccarat win dropped 51% on hold of 12.0% (TTM: 11.9%, 12.5% in January 2012)

 

LV STRIP: EVEN WORSE - Screen Shot 2013 03 12 at 4.11.51 PM


When Can We Short Food Stocks Again?

This note was originally published March 06, 2013 at 18:13 in Consumer Staples

Is this the start of something big?



The question we have received most in the wake of Heinz being acquired by 3G with financing provided by Berkshire Hathaway is “who is next?”  We attempted to answer that question specifically in a prior analysis that highlighted some of the characteristics of Heinz that might have made it attractive to a cost-minded acquirer such as 3G.  Here, we attempt to answer the question behind the question which is whether or not we are poised for a wave of acquisitions across staples, specifically packaged food.

 

We are of the opinion that merger waves are a consequence of industry “disruptions”.  These disruptions don’t have to be single events, but can be built up over a longer duration and comprised of multiple smaller events, rather than a single significant event.  There isn’t a great deal of academic research to fall back on with respect to this topic – Mitchell and Mulherin (1996) argued that industry-specific merger waves occur as a “common response to regulatory, technological and economic shock.”  The new competitive dynamic requires a reallocation of capital within in an industry.

 

Interestingly, most “waves” occur during strong, broader markets with varying theories for this – access to capital or perhaps  a desire on the part of managers to trade “expensive” paper for “real” assets - Maksimovic and Phillips (2001) and Jovanovic and Rousseau (2001).  Interestingly, research suggests (unsurprisingly) that engaging in merger activity in strong markets and subsequent to prior deals in the same industry may not necessarily be a recipe for creating shareholder value.



Looking back at the wave of consolidation in packaged food in 2000 (see below), it appears that it was in response to a shift in the balance of power between manufacturers and retailers brought about by a prior wave of consolidation within food retail.  From 1996 to 2000, assets representing nearly $75 billion of retail sales were consolidated in US food retail, including two of the biggest combinations in history (Albertson’s/American Stores and Kroger/Fred Meyer).



Packaged food manufacturers were faced with a sea change in terms of relative power versus retail counterparts (recall that Wal-Mart was becoming an increasingly more significant participant in food retail at this time as well).  Scale mattered again, and, in fact, became an imperative versus larger retail partners.  The packaged food industry responded in kind.



2000 Was a Huge Year for Packaged Food M&A

 

Unilever approached Best Foods in May of 2000, with the deal price ultimately agreed to in June (approximately 10% higher than the original offer, total consideration of $24.3 billion).    Later that same month (June), Philip Morris (at that point still the tobacco/food conglomerate) agreed to acquire Nabisco for $15.5 billion.  The bidding for Nabisco was robust, with Danone and Cadbury as other engaged parties.



Though not the purchase of a public company, General Mills agreed to purchase Pillsbury from Diageo at the end of July for $10.5 billion.



In a smaller transaction relative to the food deals in 2000, Kellogg acquired Keebler Foods for $3.9 billion in October.  The year wasn’t quite over, as Pepsi acquired Quaker Oats in December for $13.4 billion.



Does the same imperative exist now?

 

We would argue, no.  If anything, we believe that food retail’s relative position has only weakened over the last decade.  Channel blurring is a familiar term for most investors and we have seen data that suggests that fully ¾ of consumers shop more than 5 CPG channels regularly.  Fewer trips and smaller tickets per trip to each retail channel has “spread the wealth” among various retailers and retail concepts to the point where conventional grocers (the catalyst for the last wave of packaged food consolidation) continue to struggle.  Certainly Wal-Mart’s importance continues to grow, but we see an acquisition that could successfully balance a supplier against Wal-Mart as being highly unlikely, if at all possible.



Further, since 2000, an entirely new channel has emerged – the natural and organic store.   The trend toward health and wellness has certainly represented a “shock” in some sense of the word.  Capital has been reallocated by the packaged food manufacturers to address this competitive disruption, but the size of the channel doesn’t allow for “mega” deals, so we don’t see this trend, while certainly powerful and ongoing, as a catalyst for large scale M&A.



Is age a factor?

 

There is some work that suggests that the age of CEO’s within a particular industry might be a catalyst for merger activity.  We only mention this because, Bill Johnson of Heinz, at age 64, was the oldest of the CEO’s in large cap packaged food.  Denise Morrison at Campbell Soup and Irene Rosenfeld at Mondelez are “next in line” at age 59, with Ken Powell of General Mills close behind.

 

Where does this leave us?

 

It appears that some conditions have been met for a “wave” of merger activity – a strong market, access to liquidity and perhaps the age of the relevant CEOs.  However, we are simply not seeing the “shock” to the system that forces companies to pursue acquisitions in an environment where current valuations make the creation of shareholder value through mega deals an uncertain prospect at best.

 

If no more deals, what’s next?

 

We decided to take a look at the performance of the S&P Packaged Food Index into and subsequent to some recent, large transactions, as well as the performance of the indices in 2000.  No question, if we are at the start of a wave of consolidation within packaged food, there is room to run – trough to peak relative performance in 2000 for the index was +46%.  Wrigley in 2008 as a “one off” event represented far less compelling relative performance, but as everyone is well aware, ’08 is a difficult year to which one can (or should) draw analogies given market conditions.  Ralcorp (the first time around) is useful - +8% relative performance; 27 days later (call it a month).  Right now, with Heinz, the numbers stand at +6% relative performance, 14 trading days post-deal.  That suggests to us, using Ralcorp as an example, that we have some more time and price before it becomes “safe” to short packaged food stocks again.



 

When Can We Short Food Stocks Again? - Merger Wave

 

When Can We Short Food Stocks Again? - Wrigley

 

When Can We Short Food Stocks Again? - Cadbury

 

When Can We Short Food Stocks Again? - Ralcorp1

 

When Can We Short Food Stocks Again? - Ralcorp2

 

When Can We Short Food Stocks Again? - Heinz

 

 


Another Day

Client Talking Points

Up And To The Right?

Anyone who has been a perma-bear or has suggested going to 100% cash has been wrong. Plain and simple. The Dow Jones Industrial Average continues to make new highs every day this week, which is an impressive feat unto itself. Next in line for the all-time high prize is the S&P 500, which could get there today. It's almost like a perfect storm is happening right now: you have the US dollar getting stronger and driving commodity prices down which help drive consumption and stocks keep going up and to the right. Just when you thought good couldn't get better, it does. Hence why we continue to be bullish on US equities.

Asset Allocation

CASH 24% US EQUITIES 24%
INTL EQUITIES 24% COMMODITIES 4%
FIXED INCOME 0% INTL CURRENCIES 24%

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.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

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

"US Dollar +3.6% since December FOMC 6% unemp tgt. Markets move first, fundies follow, now down to 7.7% on Feb report." -@Chicagostock

QUOTE OF THE DAY

"There is absolutely no inevitability as long as there is a willingness to contemplate what is happening." -Marshall McLuhan

STAT OF THE DAY

U.S. economy adds 236,000 jobs in February. Unemployment falls to 7.7%, the lowest level since December 2008.

 

 


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