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INITIAL CLAIMS: FINALLY, A MISFIRE

Takeaway: It was starting to look like labor and housing data could do no wrong. This morning serves as a wake-up call on both fronts.

Below is the breakdown of this morning's claims data along with some sector specific strategy from our head of Financials, Josh Steiner.  If you would like to setup a call with Josh or trial his research, please contact 

 

 

Taking a Breather

This morning's headline print for initial jobless claims is clearly weak and the NSA data was weak too, on a one-week basis. This is likely to take the short-term wind out of the sails for Financials, especially when combined with the also lackluster housing starts print this morning. 

 

We have subscribed to a simple philosophy since Lehman Brothers. We consider three macro factors paramount in gauging the overall direction for the sector: labor, housing and the Fed. On that score, YTD all three factors have been moving in the right direction.We continue to view labor and housing as moving in the right direction from an intermediate and longer-term standpoint, and the Fed is unlikely to go anywhere in light of this morning's lukewarm numbers. In the short-term, however, we would expect some weakness. 

 

Contrary to the prior three years, however, where it was unclear whether the weakness constituted a falling knife or buying opportunity, this time around, we would view any weakness as a buying opportunity for those with a horizon beyond a few weeks.

 

Importantly, the rolling NSA data continues to improve YoY at a better-than-expected clip of 8.9%. While that's a sequential deceleration vs. the previous week, it's still a very good rate of improvement.  

 

The Data

Prior to revision, initial jobless claims rose 37k to 360k from 323k WoW, as the prior week's number was revised up by 5k to 328k.

 

The headline (unrevised) number shows claims were higher by 32k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 1.25k WoW to 339.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.0%

 

 

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Joshua Steiner, CFA

 


INITIAL CLAIMS: FINALLY, A MISFIRE

Takeaway: It was starting to look like labor and housing data could do no wrong. This morning serves as a wake-up call on both fronts.

This note was originally published May 16, 2013 at 10:09 in Financials

Taking a Breather

This morning's headline print for initial jobless claims is clearly weak and the NSA data was weak too, on a one-week basis. This is likely to take the short-term wind out of the sails for Financials, especially when combined with the also lackluster housing starts print this morning. 

 

We have subscribed to a simple philosophy since Lehman Brothers. We consider three macro factors paramount in gauging the overall direction for the sector: labor, housing and the Fed. On that score, YTD all three factors have been moving in the right direction.We continue to view labor and housing as moving in the right direction from an intermediate and longer-term standpoint, and the Fed is unlikely to go anywhere in light of this morning's lukewarm numbers. In the short-term, however, we would expect some weakness. 

 

Contrary to the prior three years, however, where it was unclear whether the weakness constituted a falling knife or buying opportunity, this time around, we would view any weakness as a buying opportunity for those with a horizon beyond a few weeks.

 

Importantly, the rolling NSA data continues to improve YoY at a better-than-expected clip of 8.9%. While that's a sequential deceleration vs. the previous week, it's still a very good rate of improvement.  

 

The Data

Prior to revision, initial jobless claims rose 37k to 360k from 323k WoW, as the prior week's number was revised up by 5k to 328k.

 

The headline (unrevised) number shows claims were higher by 32k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 1.25k WoW to 339.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.0%

 

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Yield Spreads

The 2-10 spread rose 14.5 basis points WoW to 170 bps. 2Q13TD, the 2-10 spread is averaging 153 bps, which is lower by -14 bps relative to 1Q13.

 

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Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 


Healthcare: Consensus Too Bearish?

Takeaway: Improving fundamentals and depressed expectations is leading to a bullish set-up in Healthcare stocks.

This is an excerpt of a note that was originally published May 16, 2013 at 09:44 in Healthcare

 

 

We had been vocal about our expectations for weakness in 1Q13, which was evidenced by the majority of companies in our Healthcare index missing 1Q13 consensus revenue estimates, and also the most annual revenue guidance cuts occurring in the first quarter in the last 5 years.

 

However, we’ve also been suggesting an improving fundamental setup moving forward; mainly due to the utilization drivers listed below, but also because the externality setup (weather/working days) reverses from a headwind in 1Q13 to tailwind for the remainder of the year; particularly in 2Q13 (see link below for more detail).  These utilization drivers are coming up against consensus estimates/management guidance that have generally declined following a tough 1Q13 earnings season.

 

That combination of improving fundamentals against depressed expectations makes us incrementally more bullish heading into 2Q13 earnings season. 

 

 

2013 Utilization Drivers

  1. Physician Utilization
  2. Maternity
  3. Deferred Care
  4. Externality Tailwinds 

 


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JACK HITS A SPEED BUMP

Per our most recent post on JACK, describing the upside opportunity in the stock over the next two-and-a-half years, Qdoba is the key component of the long-term story. In fact, we saw no near-term upside from a fundamental perspective as the stock has outperformed the S&P 500 by 18% year-to-date. With Qdoba failing to inspire confidence following 2QFY13 earnings, we believe the upside will take time to materialize. We would advise taking a step back from JACK at these levels.

 

 

Discipline Warranted

 

While JACK reported an in-line quarter, management raising FY EPS guidance was a bright spot for shareholders. However, on aggregate, the quarter was disappointing as the continuing soft performance of Qdoba, underscored by negatively revised unit growth and comp guidance, was the most important takeaway.  With respect to many of the tenets of our long thesis, (valuation, fundamentals, sentiment), we believe that the investment community consensus has caught up with reality. Our confidence in Qdoba’s ability to drive an additional 30-40% in upside has diminished significantly following last night’s earnings release.

 

With this in mind, we are stepping away from our bullish call on the stock (initiated February 2012). That said, we don’t see much downside in the stock as the core Jack in the Box concept continues to perform strongly.

 

 

Solid Quarter But Qdoba Outlook Weak

 

Over the past year, the valuation gap between JACK and its QSR peers has narrowed significantly. While the stock still trades at a discount, we believe further margin expansion at JACK will come from incremental execution – particularly at Qdoba.

 

The company reported operating EPS of $0.33 versus expectations of $0.31.  Same-restaurant sales at Jack in the Box grew 0.9% at company-owned stores. Qdoba comps came in at -2% versus consensus of -1.4%. Management raised guidance slightly to EPS of $1.55-1.65 vs prior guidance $1.48-1.63 and consensus of $1.61.  In addition, management reiterated Jack in the Box same-store sales of +1.5-2.5% and lowered Qdoba  same-store sales to between flat to +1.0% vs prior guidance +1.0-2.0%.

 

The crux of our now-cautious view on Qdoba is that the company had to heavily discount to get to -2% comps.  While, adjusting for weather, the print was within the guided range, the 340 basis point margin decline was a negative indicator of the sustainability of current trends.  

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


INITIAL CLAIMS: FINALLY, A MISFIRE

Takeaway: It was starting to look like labor and housing data could do no wrong. This morning serves as a wake-up call on both fronts.

Taking a Breather

This morning's headline print for initial jobless claims is clearly weak and the non-seasonally adjusted (NSA) data was weak too, on a one-week basis. This is likely to take the short-term wind out of the sails for Financials, especially when combined with the also lackluster housing starts print this morning. 

 

We have subscribed to a simple philosophy since Lehman Brothers. We consider three macro factors paramount in gauging the overall direction for the sector: labor, housing and the Fed. On that score, YTD all three factors have been moving in the right direction.We continue to view labor and housing as moving in the right direction from an intermediate and longer-term standpoint, and the Fed is unlikely to go anywhere in light of this morning's lukewarm numbers. In the short-term, however, we would expect some weakness. 

 

Contrary to the prior three years, however, where it was unclear whether the weakness constituted a falling knife or buying opportunity, this time around, we would view any weakness as a buying opportunity for those with a horizon beyond a few weeks.

 

Importantly, the rolling NSA data continues to improve YoY at a better-than-expected clip of 8.9%. While that's a sequential deceleration vs. the previous week, it's still a very good rate of improvement.  

 

The Data

Prior to revision, initial jobless claims rose 37k to 360k from 323k WoW, as the prior week's number was revised up by 5k to 328k.

 

The headline (unrevised) number shows claims were higher by 32k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 1.25k WoW to 339.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.0%

 

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Yield Spreads

The 2-10 spread rose 14.5 basis points WoW to 170 bps. 2Q13TD, the 2-10 spread is averaging 153 bps, which is lower by -14 bps relative to 1Q13.

 

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AN END TO THE “END OF THE WORLD” TRADE?

Takeaway: If the crashing yen and tumbling JGB market are signaling anything to us, it’s that the end-of-the-world trade appears to be ending.

This note was originally published May 15, 2013 at 16:26 in Macro

SUMMARY BULLETS:

 

  • JGBs are fast falling in price on a combination of improved domestic and global growth expectations and a parabolic increase in domestic inflation expectations. Credit risk is not a meaningful factor in the recent backup in JGB rates.
  • If the crashing yen and tumbling JGB market are signaling anything to us beyond Japan, it’s that the end-of-the-world trade appears to be ending. To varying degrees, these signals are being confirmed across the US Treasury bond market and in the price of gold, which are also breaking down/broken down quantitatively.
  • Could we see a 1994-style or 2003-style backup in super-sovereign interest rates over the next 12 to 18 months? Absolutely – especially if you believe in the reflexive @HedgeyeMacro bull thesis for the US economy: #StrongDollar = #ConsumptionTaxCut; #HouseholdFormationAcceleration; #BabyMakingBacklog; #ParabolicHousingMarket; and #LaborMarketImprovement.
  • The key question investors should be asking as it pertains to their US equity exposure is whether Wednesday’s setup is more akin to 1994 (SPX down -1.5%) or 2003 (SPX up +26.4%). The Weimar Nikkei 225 doesn’t really care all that much, as it appreciated +13.2% in 1994 and +24.5% in 2003 in spite of the commensurate backups in JGB rates.

 

It would be an understatement to say that JGB yields are backing up across the curve. From their respective YTD lows (2/12 for 2Y; 4/4 for 10Y and 4/5 for 30Y), nominal JGB yields have backed up +11bps, +41bps and +79bps on the 2Y, 10Y and 30Y tenors, respectively. Looking to the 2Y and 10Y tenors, specifically, the JGB market’s pricing in of the regime change at the Bank of Japan (unprecedented monetary base expansion; longer maturity purchases) has now been completely unwound.

 

AN END TO THE “END OF THE WORLD” TRADE? - 1

 

Looking to the 10Y JGB tenor specifically, the recent selloff has some investors believing that the time is now as it relates to a JGB market swoon. Irrespective of the fact that a lot of those same investors have been inappropriately making that call for years, we are finally inclined to side with them at the current juncture as yields have finally broken out above our long-term TAIL line of resistance (now support).

 

AN END TO THE “END OF THE WORLD” TRADE? - 2

 

From our macro team’s perspective, there are three primary reasons why a super-sovereign debt security like a JGB, UST or Bund would fall in price:

 

  1. Expectations of #GrowthAccelerating
  2. Expectations of #InflationAccelerating
  3. Credit risk rising

 

Below, we explore all three from Japan’s perspective and offer up our thoughts on what may be the beginning of the end for the #EOW (end-of-world) trade (i.e. long USTs, JGBs, JPY and Gold).

 

#GrowthAccelerating?

As we mentioned in a recent research note, the trend in Japanese economic data is finally starting to improve – which is to be expected given that the country is attempting to confirm an escape from its third recession in the past five years. From an international perspective, we continue to sing the praises of our non-consensus bullish thesis on US economic growth. #StrongDollar commodity deflation has proven to be a marvelous offset to analytically-loose fiscal policy fears (sequestration and tax-hikes) in the year-to-date.

 

AN END TO THE “END OF THE WORLD” TRADE? - UNITED STATES

 

Jumping back to Japan specifically, BOJ Governor Haruhiko Kuroda today rejected an opposition-party member's argument that the recent surge in the Japanese equity market is out of line with Japan's real economy, stating: "At this moment I do not think they are in a bubble."

 

As previously mentioned, JGB yields are starting to back up in aggressive fashion – much like they did back in 1994 and 2003, alongside a commensurate backup in yields across the US Treasury curve. Both were positive signals for Japanese equities then and the current signal is likely indicative of the asset allocation shift we have been calling for in recent months.

 

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To that tune, only 6.8% of Japanese household financial assets are held in equities vs. 14.4% for the Eurozone and 32.8% for the US. Clearly there’s lots of hay to bale for “Mrs. Watanabe” and her 55.2% allocation to currency and deposits – which then are funneled back into JGBs via bank intermediation.

 

This circuitous  method of sovereign financing has saddled roughly one-fourth of Japanese banks balance sheets with low-yielding JGBs – exposing them to a meaningful degree of interest rate risk. Per a 2H12 report out of the BOJ:

 

  • Japanese banks would face a total of 6.7 trillion yen ($84 billion) in losses if rates rise by +100bps;
  • Losses at major banks would total 3.7 trillion yen, while those at regional banks would amount to 3 trillion yen; and
  • The average maturity of Japanese debt held by large lenders is about 2.5 years and about 4 years for regional banks.  

 

Of course, Japanese banks would love for yields to back up in a controlled manner (i.e. at a rate where credit expansion can occur to help offset marked-to-market losses on existing holdings). The average interest rate on new loans across the Japanese banking system has consistently tracked the 10Y JGB yield to new all-time lows over the past 20 years, compressing banks’ net Interest margins and eroding banks’ earnings power in the process.

 

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#InflationAccelerating?

You know where we stand on Policies To Inflate and the likely unintended consequences of Japan burning its currency at the stake, so there’s no sense in wasting anyone’s time rehashing that here. What is worth pointing out, however, is the fact that Japanese breakevens have gone absolutely parabolic, closing at 1.84% on the 5Y tenor. The JGB market is taking Abenomics quite seriously.

 

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On the recently released April Consumer Confidence report (which ticked down -0.3 month-on-month to 44.5), the percentage of Japanese households that expected consumer prices to rise increased +370bps MoM to 82.8% – good for a ~4.5yr high.

 

#CreditRiskAccelerating?

This is probably the least likely cause of the recent plunge in JGB prices. At this point, reminding investors of Japan’s bleak sovereign fiscal situation is not worth the time it would take to type it. That being said, however, the Japanese sovereign itself is not immune to interest rate risk – particularly if the aforementioned backup in rates is being driven by inflation, rather than economic growth.

 

It’s worth noting that debt service already consumes 47.2% of tax and fee revenue in Japan, which also equates to about 4.6% of nominal GDP. The sovereign interest expense alone accounts for 44.5% of debt service and 1.8% of nominal GDP – and that’s on a weighted average cost of capital of 1.2%.

 

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From a credit market perspective, buyers and sellers of CDS contracts on the Japanese sovereign continue to see waning risk of a sovereign default. That’s bad news for crisis sellers across the investment landscape. Again, you won’t ever see us #timestamp a call on sovereign credit risk without some confirming evidence from the credit market itself – of which there is none in Japan at the current juncture.

 

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All told, we see limited signs that the recent backup in JGB yields is being driven by credit risk. The only new news on the Japanese fiscal policy front worth mentioning is the Ministry of Finance’s decision to punt the announcement of its medium-term fiscal reconstruction plan to the SEP G-20 Summit in Russia, originally scheduled for next month’s G-8 meeting in the UK.

 

That’s an extremely loose catalyst for the credit risk camp to hang their hats on here. In fact, the only bearish credit risk scenario we can piece together from that is the fact that it will come after the Upper House elections in late-JUL. By then the LDP will have a likely majority there as well, giving it full reign to enact whatever fiscal policies it pleases – including kicking the can down the road on the first VAT hike, which is scheduled to occur early next year. Recall that former DPJ Prime Minster Yoshihiko Noda staked his political career on getting that piece of legislation ratified.

 

#EOW Ending?

If the crashing yen and tumbling JGB market are signaling anything to us, it’s that the end-of-the-world trade appears to be ending. To varying degrees, these signals are being confirmed across the US Treasury bond market and in the price of gold, which are also breaking down/broken down quantitatively.

 

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AN END TO THE “END OF THE WORLD” TRADE? - 14

 

Could we see a 1994-style or 2003-style backup in super-sovereign interest rates over the next 12-18 months? Absolutely – especially if you believe in the reflexive @HedgeyeMacro bull thesis for the US economy: #StrongDollar = #ConsumptionTaxCut; #HouseholdFormationAcceleration; #BabyMakingBacklog; #ParabolicHousingMarket; and #LaborMarketImprovement.

 

The key question investors should be asking as it pertains to their US equity exposure is whether today’s setup is more akin to 1994 (SPX down -1.5%) or 2003 (SPX up +26.4%). The Weimar Nikkei 225 doesn’t really care all that much, as it appreciated +13.2% in 1994 and +24.5% in 2003 in spite of the commensurate backups in JGB rates.

 


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