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TREASURY YIELDS VS. JOBLESS CLAIMS

Takeaway: The rate of improvement in the US labor market accelerated again last week.

As we've mentioned before, we prefer to look at the non-seasonally adjusted (NSA) jobless claims numbers. There’s not a whole lot of distortion there. NSA claims were better by 8.2% vs last year, as compared with the 8.0% improvement in the previous week. To be clear, not only is the labor market improving, but it is doing so at an accelerating rate. 

 

Meanwhile, rolling NSA claims vs. the 10YR still looks good, but has diverged directionally over the last few weeks.  

 

Bottom line: If we do get a correction in the coming weeks, we'd view it as a buying opportunity as the underlying health of both the labor and housing markets continue to show accelerating rates of improvement.

 

TREASURY YIELDS VS. JOBLESS CLAIMS - 10Y vs NSA claims 053013


Morning Reads From Our Sector Heads

Takeaway: A quick look at what we're reading this morning.

Keith McCullough - CEO

Treasuries Head for Steepest Loss in Three Years on Fed (via Bloomberg)

Shirakawa Gets Bonus as Kuroda Tackles Deflation (via Bloomberg)

U.K. Home Prices Rise Most in 18 Months (via Bloomberg)

 

Kevin Kaiser – Energy

OPEC Shifts Its Oil Trade Map After Shale (via Reuters)

 

Daryl Jones - Macro

German Companies Sip From Pool of Spain’s Young Joblesss (via CNBC)

Taking It Apart: The US LNG Export Fight (via Platts)

 

Rob Campagnino - Consumer Staples

China's Food Play Extends Its Reach, Already Mighty (via (New York Times)

 

Josh Steiner - Financials

Sallie Mae to Split Into Two Companies as Remondi Named CEO (via Bloomberg)

Citi CEO Corbat: Legal Costs to 'Stay Elevated for a While' (via WSJ)


INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE

Takeaway: The labor market is showing very strong momentum for 5 of the last 6 weeks, providing an ongoing credit and loan tailwind to the sector.

Labor Market: Very Solid Momentum

The rate of improvement in the labor market accelerated again last week. NSA claims were better by 8.2% vs last year, as compared with the 8.0% improvement in the previous week. The SA data, meanwhile, showed deterioration of 10k WoW. The divergence is attributable to the faulty seasonality adjustment dynamic we often highlight. To be clear, not only is the labor market improving, but it is doing so at an accelerating rate. We've hypothesized that a possible contributing factor to this is relatively low-paying service sectors like restaurants and hotels reducing hours to fall under the 30-hour "Obamacare" cap and hiring additional part-time or temp workers to compensate for the shortfall. 

 

In the past three years, the seasonal adjustment factor headwind dynamic has more than offset the underlying rate of improvement in the labor market, causing the appearance of a stagnating/deteriorating labor market from March through August (see first chart below). This has been a primary factor in the Spring to Fall selloff in 2010, 2011 and 2012. Thus far, 2013 is bucking that trend on the labor front, and we're seeing the obvious follow through from Financials with the XLF continuing to act well. We are now significantly beyond the starting point of correction in any of the previous three years. 

 

To reiterate, if we do get a correction in the coming weeks, we'd view it as a buying opportunity as the underlying health of both the labor and housing markets continue to show accelerating rates of improvement.

 

The Data

Prior to revision, initial jobless claims rose 14k to 354k from 340k WoW, as the prior week's number was revised up by 4k to 344k. The headline (unrevised) number shows claims were higher by 10k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 6.75k WoW to 347.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.1% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.4%

 

INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE - 1

 

INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE - 2

 

INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE - 3

 

INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE - 4

 

INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE - 5

 

INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE - 6

 

INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE - 7

 

INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE - 8

 

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INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE - 10

 

INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE - 11

 

INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE - 12

 

INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE - 13

 

INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE - 14

 

Yield Spreads

The 2-10 spread rose 13.7 basis points WoW to 182 bps. 2Q13TD, the 2-10 spread is averaging 158 bps, which is lower by -10 bps relative to 1Q13.

 

INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE - 15

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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Best Ideas in Healthcare - 2Q13 Healthcare Themes Call Today

Best Ideas in Healthcare - 2Q13 Healthcare Themes Call Today  - healthcarethemesDial2 05.30.13

 

Please join the Hedgeye Healthcare Team, led by Tom Tobin, today at 11:00am EDT for a discussion on the current Healthcare Themes and the best ways to play these scenarios. 

   

 

CALL DETAILS

  • Date: Today, May 30th at 11:00am EDT
  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 326981#
  • Materials: CLICK HERE 

 

Below is an overview of the themes and ideas that will be reviewed in depth on the call. 

 

Physician Utilization Accelerating

  • We will look at the macro factors that matter, our forecast, and how we track our progress.
  • We will also discuss some perceived headwinds such as High Deductible Health Plan and Cost Shifting which seem far less important than is widely perceived.
  • Best Long Ideas: HOLX, HCA, MD
  • Best Short Idea: UNH

Baby Bust 

  • Is the largest maternity decline in 40 Years Over?
  • We'll review our expectation for a 2013 recovery.
  • Maternity is a significant driver of hospital inpatient and outpatient visits.
  • Pregnant women and newborns have a higher than average frequency of physician visits.
  • Best Long Ideas: MD, HCA
  • Best Short Idea: UNH

Affordable Care Act Accretion

  • The ACA is expected to increase the number of insured people in the U.S. by 15M in 2014, leading 95% of all Americans to be carrying health insurance longer term.  Is this a  reasonable expectation?
  • What changes can we expect to medical consumption?  The newly insured will be young, and in specific categories, we can identify products and services which may increase significantly beginning in 2014.
  • We'll also look at some of the headwinds that may derail what appear to be optimistic consensus outlook.
  • Best Long Ideas: HOLX, HCA

 

Please email for further details or if you are having trouble accessing the presentation.

 

 


PNK/ASCA: THINGS TO THINK ABOUT

PNK wants this deal so a forced sale of properties to comply with the FTC is likely.

 

 

The big catalyst for PNK has gotten less attractive thanks to Big Government.  The FTC’s ruling yesterday will likely force PNK to divest assets in Lake Charles and St. Louis and delay the closing until the end of the year.  Forced sales are rarely value creating for the seller and this situation could be even worse - there just aren’t a lot of buyers.  We calculate $2.50 to $3.00 per share in lost value although some of that was reflected in the stock yesterday.

 

We assume PNK will divest its Lumiere Place in St. Louis and the yet to open Ameristar Lake Charles.  Assuming 7x 2015 EBITDA multiples and the time value of the delay, we project the “new” deal will cost the stock $2.50-3.00 in value.  The multiple for Ameristar Lake Charles is debatable and could even be considered high.  Texas is likely to legalize casinos at some point, in the future, which would likely decimate the profitability of these border town casinos.  PENN has indicated in the past that it is not interested in the Lake Charles market because of this threat.  For this reason and its similar concentration as PNK in St. Louis, we do not believe PENN would be a buyer of these properties.

 

The deal is still worth doing, in our opinion, and PNK seems to believe the same.  However, even with the 8% drop in the stock yesterday, we are less positive than most with the stock at $19.  While we’ve been right on the fundamentals, we’ve been wrong on the stock.  However, the catalyst has been pushed off and sentiment could turn negative.  Here are some of our thoughts:

  • PNK is doubling down on a space that faces the huge secular headwind of dying customers.  Baby Boomers appear to be the last generation of slot players.  Approximately 90% of regional gaming profits is derived from slots.  We’ve written extensively on the demographics and the lack of younger players.  Slot volumes continue to fall despite better economic conditions.  We’re not sure how regional gamers can overcome this potentially disastrous trend.
  • Yes, housing is getting better but the wealth effect takes time to build.  We’ve also written extensively on the strong impact of housing prices on gaming revenues over the last 15-20 years.  The statistical relationship is there but we feel it will take time and continued increases in home prices for this correlation to resume.  It hasn’t yet.
  • Texas – we think it’s inevitable.  Over 60% of PNK’s property EBITDA is derived in Louisiana.  Sure, this percentage will fall with the ASCA buyout and Ameristar Lake Charles divestiture but leverage is going way up.
  • May might look better in the regional markets but June is likely to move back into negative SSS territory.  Slot volumes are not going to surge anytime soon in our opinion which makes estimates still look aggressive.  Following the acquisition, leverage will increase to 6.0-6.5x which will look even worse in a declining estimate environment.   
  • We don’t believe PNK can cut the full $55 million in corporate expense out of ASCA.  It may not be widely known that ASCA actually allocates some costs to corporate that most operators push out to the properties.  This accounting treatment contributes to industry high property margins but also higher corporate expense as a % of revenues.  We think $35-40 million in expense reduction is the right number. 
  • The FTC delay increases the probability of a competing bid

Gong Show Rages On

Client Talking Points

JAPAN

The certified central planning gong show continues as this little critter called volatility enters the matrix for #WeimarNikkei bulls. Yen strengthens toward 100 with 10yr JGBs rallying to 0.88% (down 4bps). Nikkei tumbles -5.2%;  overnight, down -13% in the last week. Happy month end.

OIL

With the USD/YEN oversold, Gold is overbought, and Oil turns south first – this is what US consumption #GrowthAccelerating bulls want to see. Brent Oil is -8% YTD, but we haven’t seen bulls capitulate like I think they did in Gold. Failing at $103.98 TRADE resistance helps the bear case.

USD

Holding all lines of support on the US Dollar Index during this week’s correction. Higher-lows and higher-highs is what we call healthy. EUR/USD looks like an interesting short again at 1.30. We’ll consider putting that on this morning after we see the river card (jobless claims).

 

Asset Allocation

CASH 30% US EQUITIES 22%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 30%

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.  

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 

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.

Three for the Road

TWEET OF THE DAY

"We're short both the Yen and JGBs: I don't get asked why I'm not long Nikkei anymore"

@KeithMcCullough

QUOTE OF THE DAY

"I believe that the biggest problem that humanity faces is an ego sensitivity to finding out whether one is right or wrong and identifying what one's strengths and weaknesses are." - Ray Dalio

STAT OF THE DAY

10,000,000: The estimated number of people who watch Netflix without paying a dime.


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