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JOBLESS CLAIMS: CREDIT CARDS VIE

Takeaway: Cards remain a safe spot on the long side for now. Claims, and by extension credit trends, show no sign of turning at the moment.

This note was originally published April 25, 2013 at 09:23 in Financials


Long in the Tooth, but OK for Now ...

Both seasonally adjusted and non-seasonally adjusted initial claims posted sharp improvement in the latest week. In the past we've shown how initial claims are the best leading indicator for forward delinquency metrics at credit card lenders, on a 13-week lead/lag. Clearly, card results were better than expected in the first quarter of 2013 and the claims data we're seeing currently suggests further progress in second quarter from Discover Financial Services (DFS) and Capital One (COF), and American Express (AXP) to a lesser extent.

 

We've argued in the past that renormalized delinquency levels, i.e. reaching DQ levels consistent with 2005/2006 averages, would herald an end to reserve release tailwinds, and, by extension, usher in earnings growth headwinds. This ongoing positive trend in claims, however, coupled with Krugman's "Jobless Trap" - the segment of the population now perpetually long-term unemployed - has enabled a continued fall in DQ rates since this former core subprime cohort is now "non-underwriteable".

 

This curious confluence of positive selection (vs. adverse), fast turning assets and secular credit tailwinds has pushed operators to take down coverage further than we would have thought prudent or possible. While this sets the stage for ongoing improvement in the short/intermediate term, we continue to fret about the long-term implications of making all-time lower low DQ rates in a low-growth, highly competitive asset class. Auto is perhaps an even more glaring example, as we noticed in the weekend paper a local credit union offering 0.99% on terms up to 48 months. How that will even cover normalized credit losses in this newly emerging environment of falling used car collateral values I have no idea. But for now, everything's good. 

 

The Numbers

Prior to revision, initial jobless claims fell 13k to 339k from 352k week-over-week, as the prior week's number was revised up by 3k to 355k.

 

The headline (unrevised) number shows claims were lower by 16k week-over-week. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.5k week-over-week to 358k.

 

The 4-week rolling average of non-seasonally adjusted claims, which we consider a more accurate representation of the underlying labor market trend, was -6.3% lower year-over-year, which is a sequential improvement versus the previous week's year-over-year change of -3.8%

 

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Ground And Pound

The British Pound rallied today after reports from the U.K. Office for National Statistics showed the economy expanded by 0.3% in the first quarter, exceeding expectations of a 0.1%. Against the Euro, the Pound gained considerably, which is outlined in the GBP/EUR currency cross chart below. While the growth isn't spectacular, it's a heck of a lot better than the situation in Spain and elsewhere across Europe.

 

Ground And Pound - GBPEURCROSS


Morning Reads From Our Sector Heads

Keith McCullough (CEO):

 

South Korea summons Japan envoy over PM's remarks on history (via Reuters

 

Lightning's Martin St. Louis takes over scoring lead in win over Leafs (via ESPN)

 

Brian McGough (Retail):

 

Sophia Vergara Talks Shapewear at Kmart (via WWD)

 

Matthew Hedrick (Europe):

 

Crisis for Europe as trust hits record low (via The Guardian)

 

Todd Jordan (GLL):

 

Barges explode in river near Mobile, Alabama (via Reuters)

 

Tom Tobin (Healthcare):

 

Assessing the Effects of the Economy on the Recent Slowdown in Health Spending (via Kaiser Family Foundation)

 

Jay Van Sciver (Industrials):

 

United Announces First-Quarter 2013 Results (via United)

 

Howard Penney (Restaurants):

 

Taiwan confirms first H7N9 bird flu case outside China (via France 24)





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MATERIALS: Conference Call: MCD New Best Short Idea

We will be adding McDonald's (MCD) as a short to Hedgeye's Best Ideas List today as we host a conference call at 11:00am EDT titled, "MCD: FLYING TOO CLOSE TO THE SUN" to detail our bearish stance on MCD FY13 EPS versus expectations.  

  

 

CALL OVERVIEW  

  • MCD stock is too far ahead of underlying fundamental performance of the company
  • MCD needs a new "Plan to Win"
  • Changing consumer preferences and competitive pressures are impacting U.S. business

 

CALL DETAILS

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INITIAL CLAIMS: CREDIT CARD TAILWINDS PERSIST

Takeaway: Cards remain a safe spot on the long side for now. Claims, and by extension credit trends, show no sign of turning at the moment.

Long in the Tooth, but OK for Now ...

Both SA and NSA initial claims posted sharp improvement in the latest week. In the past we've shown how initial claims are the best leading indicator for forward delinquency metrics at credit card lenders, on a 13-week lead/lag. Clearly, card results were better than expected in 1Q13 and the claims data we're seeing currently suggests further progress in 2Q from DFS and COF, and AXP to a lesser extent.

 

We've argued in the past that renormalized delinquency levels, i.e. reaching DQ levels consistent with 2005/2006 averages, would herald an end to reserve release tailwinds, and, by extension, usher in earnings growth headwinds. This ongoing positive trend in claims, however, coupled with Krugman's "Jobless Trap" - the segment of the population now perpetually long-term unemployed - has enabled a continued fall in DQ rates since this former core subprime cohort is now "non-underwriteable".

 

This curious confluence of positive selection (vs. adverse), fast turning assets and secular credit tailwinds has pushed operators to take down coverage further than we would have thought prudent or possible. While this sets the stage for ongoing improvement in the short/intermediate term, we continue to fret about the long-term implications of making all-time lower low DQ rates in a low-growth, highly competitive asset class. Auto is perhaps an even more glaring example, as we noticed in the weekend paper a local credit union offering 0.99% on terms up to 48 months. How that will even cover normalized credit losses in this newly emerging environment of falling used car collateral values I have no idea. But for now, everything's good. 

 

The Numbers

Prior to revision, initial jobless claims fell 13k to 339k from 352k WoW, as the prior week's number was revised up by 3k to 355k.

 

The headline (unrevised) number shows claims were lower by 16k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.5k 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 -6.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -3.8%

 

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Yield Spreads

The 2-10 spread rose 0.2 basis points WoW to 147 bps. 2Q13TD, the 2-10 spread is averaging 152 bps, which is lower by -16 bps relative to 1Q13.

 

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Joshua Steiner, CFA


CL, Better than PG, Better than Feared, but no EPS Upside and No Reason to Chase the Multiple

CL reported Q1 2013 EPS this morning and we would expect a bit of a “relief” (if you can call it that after the move the stock has had recently) rally in the name on strength of a very good organic sales growth number (+6.0%) and an EPS result that matched consensus ($1.32).  However, at 20.7x calendar ’13 earnings, there seems to be a whole lot of good news already in CL’s stock price, and we can’t come up with any reason to be involved in this name at these levels any way other than on the short side.



What we liked:

  • EPS met consensus
  • +6.0% organic revenue growth versus a reasonably difficult comp (+6.5%)
  • Organic volume growth across segments and regions (even Hill’s)
  • 33 bps improvement in gross margins (against the easiest comparison of the year)
  • Some modest leverage as +2.7% reported sales growth translated into +3.7% operating income growth
  • 13.5% increase in FCF despite higher capital spending

What we didn’t like:

  • Most difficult sales comp of the year coming up in Q2 (+8.0%) on both a one and two year basis
  • Gross margin comparisons get substantially more difficult as the year progresses
  • Margin weakness in Latin America and Hill’s

It’s tough for us to get excited about CL at these levels, even with a good organic sales growth number in the books – however, we said that at $110 as well.  Bottom line, the results are reasonable, the multiple is not.

 

Call with questions,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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P:

 

Matt Hedrick

Senior Analyst



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