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Jobless Claims: Bullish Overtones

Today's initial jobless claims came in at 342,000 on a seasonally-adjusted basis, the lowest reading since January 2008. As a result of the improving economy, the US stock market has rallied on the news. The chart below shows where we are in the context of past cycles. Currently, at 342,000, initial jobless claims are still a fair amount above their historical cycle troughs in the 300k range. This suggests the bull market still has legs from a fundamental recovery standpoint. As long as we don't undergo a sharp reversal, we're likely to continue to see an upward trend in the market.

 

Jobless Claims: Bullish Overtones - image001


INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING

Takeaway: Something interesting is happening in the labor market.

The last four weeks have seen a notably positive divergence from both trend and historical perspectives. The last two weeks have shown the sharpest improvements. Our preferred method for evaluating labor conditions is the year-over-year rate of change in the non-seasonally adjusted initial jobless claims. In the last three weeks, that figure has been -3.8%, -6.2% and today -8.6%. In other words, rolling NSA claims are 8.6% lower than last year. 

 

One of our central tenets in thinking about the big picture for Financials has been this recurring dynamic in seasonal distortions, as it has correlated tightly with sector performance for the last three years. Interestingly, the strength in the underlying labor market over the last few weeks is strong enough to more than offset the seasonality distortions. This is, for now, turning the sell-in-May dynamic on its head. It doesn't hurt that the housing metrics are also strengthening, though this shouldn't be surprising as the two (labor & housing) are closely co-integrated.

 

How Low Can Claims Go?

Thinking longer term about the setup, rolling claims (SA) are currently at 342k with the most recent week at 324k. The first chart below shows the claims history (rolling SA) back to 1967. Every economic cycle since the late 1970s has seen claims trough at around 300k. To be precise, in prior cycles, claims bottomed at:

 

* 312k  November, 1978

* 287k  January, 1989

* 266k  April, 2000

* 286k  February, 2006

 

This works out to an average of 288k with a standard deviation of 19k (on a very small sample). In other words, we're still 54k above historical cycle troughs or roughly 2.8 standard deviations, a pretty healthy margin of error for the bull case.

 

The Numbers

Prior to revision, initial jobless claims fell 15k to 324k from 339k WoW, as the prior week's number was revised up by 3k to 342k.

 

The headline (unrevised) number shows claims were lower by 18k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -16.5k WoW to 342.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -6.2%

 

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Yield Spreads

The 2-10 spread fell -4.7 basis points WoW to 143 bps. 2Q13TD, the 2-10 spread is averaging 150 bps, which is lower by -17 bps relative to 1Q13.

 

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Joshua Steiner, CFA

 


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FINALLY A NICE Q OUT OF MGM - BULLISH

Yes, hold was a little high but Vegas beat our number and we were above the Street.  As we pointed out in our positive MGM preview note on 4/18/13, Macau held low in the Q but should post around $200 million in hold adjusted EBITDA.  Since they hit our actual estimate of $180 million we are sticking to our hold adjusted estimate – a definite positive for the stock. City Center also likely had high hold, but high hold seems to be more of the norm for that property. 

 

Stock will be up obviously on the open but we think the momentum could persist through the quarter.  Management should be very bullish on the LV turnaround and Q2 trends to date.  They didn’t mention the hold impact in Macau in the release but they should be on the call.  MGM Macau is a legitimate $200 million per quarter property.  We know April finished up 13% for the market and our expectation is that growth will accelerate in May.

 

We also think there is incentive for MGM to do an equity deal at higher levels to de-lever.  Therefore, they probably won’t hold back on this call.  We remain concerned over the long-term with US gaming demographic and slot trends but MGM could go a lot higher over the near and intermediate term.

 

FINALLY A NICE Q OUT OF MGM - BULLISH - mgm1


Morning Reads From Our Sector Heads

Keith McCullough (CEO):

 

J.C. Penney Apologizes in Ad Developed Under Former CEO (via Bloomberg)

 

Japan Builds Sri Lanka Ties With Aso Visit as China Clout Grows (via Bloomberg)

 

Yuan Jumps to 19-Year High on Biggest Fixing Boost Since October (via Bloomberg)

 

Todd Jordan (GLL):

 

Beijing apoints “tough cop” to watch Macau casinos (via Macau Daily Times)

 

Princess Cruises Discounts Alaska and Europe Up to 50 Percent (via Cruise Industry News)

 

Howard Penney (Restaurants):

 

Watch Your Domino's Pizza Being Made On Live Webcam (via AdAge)

 

Josh Steiner (Financials):

 

Small Banks Seek Exemption in U.S. Collection of Fee Data (via Bloomberg)

 

Ally Says Bondholder Group Pulls Support for ResCap Bankruptcy (via Bloomberg Businessweek)

 

Jay Van Sciver (Industrials):

 

EXPEDITORS REPORTS FIRST QUARTER 2013 EPS OF$.39 PER SHARE (via Expeditors)

 

Kevin Kaiser (Energy):

 

C&J Energy Services Announces First Quarter 2013 Results (via C&J Energy Services)

 


HST YOUTUBE

In preparation for HST's 1Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

 

March 19: HOST HOTELS & RESORTS, INC. ANNOUNCES PRICING OF $400 MILLION OF 3.75% SENIOR NOTES DUE 2023 BY HOST HOTELS & RESORTS, L.P.

  • The Offering is expected to close on March 28, 2013, subject to the satisfaction or waiver of customary closing conditions. 

FEBRUARY 25: HOST HOTELS & RESORTS, INC. ANNOUNCES STANDARD & POOR'S UPGRADE OF THE COMPANY'S SENIOR UNSECURED DEBT RATING TO INVESTMENT GRADE

  • On February 21 Standard & Poor's ("S&P") raised Host Hotels & Resorts, L.P.'s senior unsecured debt rating to 'BBB-' from 'BB+', which represents an investment grade rating by S&P.  The upgrade reflects S&P's expectation that the Company's credit measures will improve in 2013 to a level that represent a cushion relative to their thresholds at the new rating.

HST YOUTUBE - hst22

 

YOUTUBE FROM 4Q CONFERENCE CALL

  • "While our occupancy levels now exceed our 2007 performance, we have not yet reached our historic peak levels which exceeded 78%, and we believe that there is still upside potential, especially on the group side of our business. Our overall occupancy level is about 0.5 point higher than where we were in 2007, but we have not yet achieved the 78%-plus occupancy we reached at the end of the 1990s. Average rate is still 6% short of 2000 levels on an absolute basis and closer to 17% below if you adjust for inflation."
  • "As we look at lodging fundamentals over the next few years, we expect supply will continue to be constrained, especially in the upper-upscale segments. We would expect demand growth will exceed supply growth as international visitation continues to grow and group demand continues to improve. As group demand improves, we would expect that the hotels will benefit from continued mix shift and be able to increase rates across all segments. As a result, we would expect that RevPAR would be driven more by increases in rates, but we would still expect to experience further increases in occupancy."
  • "Our group booking pace is up 4% in room nights for the full year 2013 and up 6.5% in revenues. Revenues for the last three quarters of the year are up more than 8%, and overall, we expect a strong year from our group segment. Transient bookings are also well ahead of last year's pace, and we are seeing solid rate growth in virtually all segments."
  • "Our RevPAR growth for the first month and a half is averaging more than 9%. While March results are expected to slow, primarily because of the early Easter holiday, we are certainly encouraged by our initial results. Transaction activity across our various markets generally matched the pace we experienced in 2011, although both the U.S. and Europe saw more activity in the second half of the year."
  • "On the disposition front, we remain focused on reducing our exposure to non-core hotels located in suburban and airport locations."
  • "We expect to be active on both the acquisition and disposition fronts as we look to increase our investment in target markets and look to reduce our exposure in non-core locations. On the margin, we would still intend to be a net acquirer in 2013. Our guidance does not assume the benefit of any acquisitions, nor does it assume the impact of any sales beyond the transactions we have already closed."
  • "As we think about sales going forward in 2013, we would certainly love to do sales in at least that same level [$400MM]. But, as always, since it's not liquidity driven or event driven, it's really going to be around what price we can get when we go to be a seller."
  • "In addition to transaction activity, we will continue to look to invest in income-generating additions to our portfolio, which typically drive returns well in excess of our cost of capital."
    • "In 2013, we hope to commence the final phase of the San Diego Marriott Marquis & Marina which will provide a new ballroom and exhibit hall."
    • "We are working on is the repositioning of the Newark Airport Marriott which will include a 10,000-square-foot ballroom which is scheduled to be completed before the 2014 Super Bowl which will occur in the MetLife Stadium just outside of New York."
  • Outlook for 2013:  "We anticipate that hotel demand will continue to grow as the U.S. economy improves, leading to demand growth which will slightly exceed the less than- 1% supply growth projected for 2013. The increase in net demand, combined with solid group bookings, suggests we should experience both occupancy and rate growth in our portfolio."
  • "Looking to our valuation, despite the fact that interest rates are at historic lows and supply is low, our stock is currently trading at approximately a 40% discount to replacement cost and near its average 10-year multiple. When we look at all these factors, it gives us confidence that Host is well positioned to outperform in 2013."
  • Geographic outlook:
    • "We expect the Los Angeles market to continue to perform well in 2013."
    • "We expect Seattle to be one of our top-performing markets in 2013 due to growth in both transient and group demand which will help to drive rate and RevPAR growth."
    • "We expect Hawaii to be a solid market in 2013 due to good group bookings. Results for 2013 will be affected by the construction of the timeshare project adjacent to the Hyatt Maui and a rooms' renovation at the Fairmont Kea Lani in the second half of the year."
    • "We expect our Houston hotels to have a good 2013 due to better demand, which will allow us to shift the mix of business to higher-rated segments."
    • "We expect that the San Francisco market will have a decent year in 2013, although results will be affected by the rooms' renovation of the San Francisco Marriott Marquis in the first half of the year."
    • "The outperformance was driven by both group business, which created compression to drive rate. We expect our Boston hotels to have another good year due to solid in-house group bookings" 
    • "We expect our Chicago hotels to continue to perform well in 2013 due to group demand and ADR improvement through better business mix and overall rate increases."
    • "We expect New York to be one of our top performing markets in 2013 due to an increase in both group and transient demand, less renovation disruption, and no Hurricane Sandy."
    • "With the inauguration in January, RevPAR for the month for our four downtown hotels was up over 24% and RevPAR for all 11 of our D.C. hotels was up 21%. While we expect 2013 to be better than last year, weakness in government travel will limit RevPAR growth."
    • "We expect the 18 European joint venture properties, excluding the Sheraton Roma which was under major renovation in 2012, and including the five hotels recently acquired, to have RevPAR growth in the 2% to 3% range for 2013."
  • "Looking forward to 2013, we expect that RevPAR primarily will be driven by rate growth. The additional rate growth should lead to solid rooms flow-through, even with growth in wage and benefit cost. We expect unallocated costs to increase more than inflation, particularly for rewards in sales and marketing, for higher revenues will increase costs."
  • "Margin expansion for 2013 will be negatively affected by projected above-inflationary increases in both property insurance, primarily due to Hurricane Sandy losses, and property taxes which, when combined, result in a 17- basis-point impact on margins. In addition, a couple of initiatives from the brands, including incremental cost for Marriott CITY initiative and Starwood's paid search revenue initiative which, when combined, results in an incremental 10 basis points in margin as well."
  • "There are two items in particular that impact the comparability of EBITDA and FFO between 2012 and 2013. The first is the sale of the land to the Hyatt Maui timeshare joint venture. We recognized an $8-million gain on the sale in 2012, which reflected the profit we received from Hyatt for their one-third portion of the land. In 2013, the JV expects to start the marketing process for the timeshare and our portion of the expenses will total roughly $4 million, with no offsetting income, resulting in a $12-million decline in EBITDA from 2012 to 2013.  The second item is $9 million of business interruption proceeds related to the New Zealand earthquake that we received in 2012. While the ibis Christchurch reopened in September of last year and we expect the Novotel Christchurch to reopen later this year, the EBITDA generated will be approximately $7 million less than the 2012 EBITDA. When combined, these items generated roughly $19 million of EBITDA and FFO that will not be repeated in 2013."
  • "We have two debt maturities in 2013, the 4.75%, $246-million loan on the Orlando World Center Marriott that is due in the second quarter and an 8.5%, $33-million loan on the Westin Denver Downtown that goes into hyperamortization in December, both of which we intend to repay with available cash."
  • "I think what we've been pretty consistent about saying is that we'd like to get to about three times leverage."
  • "Our focus in Europe is really at this point primarily in Germany, because the portfolio is not well-invested in Germany and that represents a market we have wanted to get some exposure to. And then I also think that if we could find something that was priced appropriately, we'd be interested in buying into London, although we would probably prefer to be buying more off of 2013 numbers than 2012, given that the Olympics was there last year."
  • "We continue to be very bullish on the Brazil market. The initial investment we have made in that market has performed extremely well and so we would like to invest some more capital there. I think in that area – on the full-service side, it would be in the form of acquiring existing assets because we would feel comfortable."
  • "When we look at Asia, the market that's most intriguing to us right now is Australia. The performance of the assets that we have acquired in Australia to date has been very strong. And, as we look at how we expect Australia to perform going forward, I think we have a good understanding that demand will continue to grow"
  • "Just to make it clear to everybody where we're most interested in owning at this point, it's really Boston, New York, D.C., South Florida, Chicago, Seattle, San Francisco, L.A., and San Diego. Those gateway markets are the markets that we think in the long run are going to outperform. We would like the bulk but I don't think I'd say 100%, but certainly the bulk of our EBITDA in the U.S. to be coming out of those markets. I think we're at the point right now where we're probably at about 70% to 75% of our EBITDA coming from those markets."
  • "And then as it relates to the special corporate discussions, I think we're – I think what we've generally seen is plus or minus 5% to 6% in terms of special corporate rate increases." 

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