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INITIAL CLAIMS: WHAT A DIFFERENCE ONE WEEK MAKES

Takeaway: In contrast to last week's soft payroll report, on both an SA and NSA basis, labor conditions improved sharply in the latest week.

Easter Bunny Distortions

The time shifting of Easter has historically been a notable challenge for the seasonality department at the Dept. of Labor. Looking at the latest two weeks of data, we saw claims spike by 28k two weeks ago and then drop by 39k last week (these are both comparisons vs. the unrevised prior number). On the margin, claims were better by 11k over two weeks.

 

Market cheering aside, the trend in SA rolling claims is fulfilling its destiny. A look at the first chart below shows this plainly. SA claims are beginning their steadily rising path that they'll follow through August of this year. In the last three years this has been a major factor contributing to the sector's turn in the Feb-April timeframe. 

 

On an NSA basis the data improved. Last week we lamented that the rate of YoY improvement slowed to almost zero. This week, it jumped to -9.3%, one of the strongest prints we've seen in the last six months. Ostensibly, the two should be averaged, producing a blended YoY improvement of around 4-5%, which happens to be precisely what the rolling NSA YoY trend did (-4.5%).

 

Overall, labor market conditions are holding up well, despite last week's scary headlines. We continue to expec the SA data to deteriorate on the margin over the coming months, but the true, underlying trend is strong.

 

The Numbers

Prior to revision, initial jobless claims fell 39k to 346k from 385k WoW, as the prior week's number was revised up by 3k to 388k. The headline (unrevised) number shows claims were lower by 42k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3k WoW to 358k. The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -4.5% lower YoY, which is a sequential improvement versus the previous week's YoY change of -3.5%

 

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Yield Spreads

The 2-10 spread fell -2.0 basis points WoW to 158 bps. 2Q13TD, the 2-10 spread is averaging 156 bps, which is lower by -12 bps relative to 1Q13.

 

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Joshua Steiner, CFA


Morning Reads From Our Sector Heads

Todd Jordan (GLL):

 

Carnival cruise offers cruise to Caribbean for $38 a night (via ABC15)

 

Brian McGough (Retail):

 

Chinese Sportswear Company Sues MJ (via SGI News)

 

Kevin Kaiser (Energy):

 

Oxy Plus Proxy Would Shake Big Oil (via WSJ)

 

Jay Van Sciver (Industrials):

 

Shanghai in China Confirms Start of Carbon Emissions Trading in June (List of Initial Companies Named) (via IBT)

 


Treasuries And Jobless Claims

If we take a look at the yield of the 10-year Treasury and put it up against non-seasonally adjust (NSA) jobless claims, you can see that there's a correlation. Yields on Treasuries tend to increase after a decrease in jobless claims and vice versa. When things are bad and jobless claims rise, so does the yield on the 10-year. Does this mean that investors are looking for allocate capital to a safe haven like Treasuries when things begin to go to hell in a handbasket? Could be.

 

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The Consumption Game

Client Talking Points

Strong Dollar

Our non-consensus bull case for US growth is something we've been talking about for awhile now and we think that it sells itself. It all revolves around consumption growth which in turn boosts US consumption stocks. The three pillars of our case are:

 

1.       #StrongDollar continues to make a series of higher-lows and higher-highs (vs its 40yr low in 2011)

2.       #CommodityDeflation continues to make a series of lower-highs and lower-lows (vs their 40yr high in 2011)

3.       US Consumption Growth occurs when the real purchasing power of the US currency rises

 

 

 

Changing Our Mind

What would get us to move away from our consumption plan outlined above? Easy: a change in monetary policy. If Bernanke starts printing money again, then we're in for a rough ride. Commodity prices would like jump as the US dollar was debauched. As US food and gas prices increase, consumption in the US decreases. It's as simple as that. We'll have to wait and see what the Fed is up to. Who knows if QE will ever truly end at this rate?

Asset Allocation

CASH 28% US EQUITIES 20%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 26%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.

 

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

"Failed HLF distributor files first lawsuit post-Ackman @nypost Salesman’s suit says $HLF a ‘scheme’, nyp.st/14dXaMC" -@hedgeygrl

QUOTE OF THE DAY

"Laughing at our mistakes can lengthen our own life. Laughing at someone else's can shorten it." -Cullen Hightower

STAT OF THE DAY

U.S. weekly jobless claims drop 42,000 to 346,000


MCD OPERATIONAL ISSUES ARE REAL

One of the concerns we have expressed about MCD for roughly a year now is that self-inflicted wounds are taking a toll on operations and, as a result, speed of service. This has been a  factor behind the decline in the core business.

 

An article in today’s WSJ titled, “McDonald's Tackles Repair of 'Broken' Service” effectively confirms our thesis.

 

Our bearish bias in 2013 has been wrong with MCD up 15.1% year-to-date versus the S&P 500 up 11.4%.  We don’t see any need to change our thesis at this time. Today’s article in the WSJ, coupled with the company’s recent admission that they have a millennial problem, suggests that a snap back in sales is unlikely. 

 

As we have discussed in prior notes, the Street is anticipating an inflection point in McDonald’s sales trends in 2013.  In late 2003, the aggressive push for positive comparable sales growth via the dollar menu did not fix the underlying problems with the business.  The 2013 rehash of this strategy is also unlikely to work.  Sustainable top line growth will be achieved through driving efficiency in the stores, and clearly MCD still has issues to address.  Changes in service standards require training and investment and don’t happen overnight. As a result, addressing the current operational issues will have a negative impact McOpCo store-level margins and franchisee cash flow.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst



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