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TCB: CHICAGO TAILWIND

Takeaway: $TCB remains one of our favorite longs. It looks like Chicago is poised to make significant gains and TCB should benefit.

Thesis Continuing to Play Out

One of our primary bullish thesis points on TCB has been the recovery in housing, reflating its distressed collateral. The company has approximately 30% of its residential loan book in Illinois. To date, Chicago has been a laggard among major markets on a home price basis. We think that is likely to change in the coming 12 months. Consider the chart below.

 

We're showing inventory (x-axis) and volume (y-axis) changes on a YoY basis by market as of either January or February, depending on the market. Our work has shown that prices lag both demand (sales volume) and supply (inventory) in housing by 11-18 months. Currently, Chicago is one of, if not the strongest looking market on a prospective basis. The change in inventory over the past year is -41.6%, while the change in demand is +32.3%. Putting those two factors together creates a very powerful tailwind for the coming year. Given how much exposure TCB has to this market, we think they will be a primary beneficiary of Chicago's coming property recovery. For reference, the bubble size corresponds to the LTM change in home prices for that market. The best long plays are small bubbles in the top left quadrant, and vice versa.

 

Interestingly, we also ran across this article (hat tip bankstocks) that profiles the nascent Chicago recovery: Chicago Tribune

 

TCB: CHICAGO TAILWIND - bubble chart

 

TCB: CHICAGO TAILWIND - OLD TABLE

 

Joshua Steiner, CFA

 



Eye-Catching Industrial Data

Takeaway: Here's how industrial production compares between the United States, Europe and Japan right now.

Industrials sector head Jay Van Sciver released a number of charts to his institutional clients earlier this week. Here's one we found very interesting. It compares industrial production in three regions: the United States, Europe and Japan. Van Sciver writes:

 

"The mid-month lull in data is a good chance to step back and look at global industrial activity.  Europe and Japan (note Japan is on the right axis) continue to show year-on-year declines in industrial activity.  Industrial activity in Europe and Japan has continued to contract, although Europe seems to have rebounded from year-end weakness.  Industrial activity in the US has remained positive but continued to slow as of January.  Given stronger US transport data so far in 2013, February and March data may improve."

 

Eye-Catching Industrial Data - Industrials

 


Consumer Staples Snapshot

Takeaway: Here's a fascinating chart of earnings and revenues of companies in the Consumer Staples sector.

Below is a very interesting chart, courtesy of our Consumer Staples sector head, Rob Campagnino. As you'll see, many companies in this space have beaten both revenue and earnings expectations.

 

Consumer Staples  Snapshot - Consumer Staples


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Labor Market Strength

Takeaway: Here's one reason today's initial jobless claims report points to a strengthening labor market.

This past week's non-seasonally adjusted initial jobless claims were lower year-on-year by -7.3%, which is roughly consistent with the rate of improvement over the previous two weeks (-8.9% and -8.0%).

 

This brought the four-week rolling average year-on-year change in non-seasonally adjusted claims to -5.8% as compared with -4.2% in the previous week. What this signals is that the real labor market is experiencing accelerating improvement, and this has been the case for the last five weeks.

 

Here's a chart that shows rolling non-seasonally adjusted claims for the past five years. Note the the decline so far in 2013.

 

Labor Market Strength - Jobless claims


The US Dollar, S&P 500 and Brent Oil

Takeaway: As we say here at Hedgeye, if you get the US dollar right, you get a lot of other things right.

Let's take a look at these two charts below. Our models saw these correlations before they happened.

 

In the first chart, note the performance of the US dollar versus the S&P 500 in the last few months. You'll notice that as the US dollar moves higher, so does the S&P 500.  In fact,did you know the US dollar index is up for the sixth consecutive week? But as with any correlation risk, change can happen fast, so we'll be prepared if and when this correlation changes.

 

The US Dollar, S&P 500 and Brent Oil - usd spx  2

 

In our second chart, we show the relationship between the US dollar and Brent oil. That relationship is negatively correlated, meaning that as the US dollar moves higher, the price of Brent moves lower. Lower oil prices drive consumption growth, which effectively acts as a tax break for consumers. In other words, a strong dollar equals a strong America.

 

The US Dollar, S&P 500 and Brent Oil - usd brent  2


INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES

Takeaway: Consumer, Housing, & Labor Market trends continue to improve. Today's SA & NSA Initial Claims data showed further positive acceleration.

 

The domestic macro data continues to come in strong.  Yesterday’s Retail Sales numbers beat despite the positive January revision, Housing prices continue to accelerate alongside rising demand and falling inventory, and the February Private Employment data (ADP & BLS) was decidedly positive.  This morning’s initial claims data continued to confirm the positive acceleration in labor market trends as both the seasonally adjusted and non-seasonally adjusted series improved w/w. 

 

Meanwhile, the Strong Dollar = Strong Consumption dynamic continues to play out.  Strengthening SPX-$USD correlations (15D=+0.83), continued commodity deflation (15D Brent Correlation to $USD =-0.88, 30D = -0.87 ) alongside ongoing improvement in housing and employment trends still has us bullish on consumption oriented domestic equities, and bearish on treasuries, commodities/commodity exposure, and gold, on balance.   

 

The quantitative setup for equities remains positive with our risk management model signaling a higher high for the SPX.  On an immediate term basis, the next level of TRADE resistance sits at 1568.

 

Also, as a partial aside and update reminder as it relates to the consumer - there was a delay in the IRS processing of income tax refunds this year.  As of the end of February, Individual Income tax refunds were down ~$25B vs. last year which likely exaggerated any payroll tax hike related demand weakness observed in Jan/Feb. 

 

The latest treasury data (3/12) shows we are currently running ~$19B below last year’s pace, so the issue is beginning to resolve.  On the margin, this dynamic should serve as a benefit to demand into 2Q as refunds accelerate & play catch-up.  

 

Below is the weekly detailed analysis of the claims data from our head of Financials, Josh Steiner.  If you would like to setup a call with Josh or trial his research, please contact 

 

Labor Market Strength Accelerates

This past week's NSA (non-seasonally adjusted) initial jobless claims were lower YoY by -7.3%, which is roughly consistent with the rate of improvement over the previous two weeks (-8.9% and -8.0%). This brought the 4-week rolling average YoY change in NSA claims to -5.8% as compared with -4.2% in the previous week. What this signals is that the real labor market is experiencing accelerating improvement, and this has been the case for the last five weeks.

 

On the SA (seasonally-adjusted) front, the numbers also looked good. This is what the market is paying attention to. As a reminder, the SA data is now facing a small, but growing headwind over the coming six months. The first chart in the note tells the story well. 

 

The Data

Prior to revision, initial jobless claims fell 8k to 332k from 340k WoW, as the prior week's number was revised up by 2k to 342k.

 

The headline (unrevised) number shows claims were lower by 10k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2.5k WoW to 346.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -5.8% lower YoY, which is a sequential improvement versus the previous week's YoY change of -4.2%

 

INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES - JS 1

 

INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES - JS 2

 

INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES - JS 3

 

INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES - JS 4

 

INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES - JS 5

 

INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES - JS 6

 

INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES - JS 7

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 

 


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