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INITIAL CLAIMS: STAGNATION MIRAGE

Takeaway: On a seasonally-adjusted basis, the labor market is showing signs of cooling off. This is the same illusion that's been there for 3 years.

Below is the breakdown of this morning's claims data from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact .

 

 

Labor Market: Divergences Finally Becoming Apparent

The funny thing about economic data series is that the inflection breaks often aren't apparent until well after the fact, i.e. 20-20 hindsight. That's why its important to spot things early and try and understand a) why they're happening and b) the implications. 

 

With that in mind, the divergence between the SA and NSA initial claims data is finally beginning to become apparent. As the first chart below shows, the seasonally-adjusted data is now almost flat in the March to present time period (the purple hatched line is almost level). This is an inflection from the August 2012-February 2013 environment of notable negative slope (steadily improving claims). The inflection is expected as it is following the same trend over the past three years, owing to faulty seasonal adjustment factors in the government's model. It's important because the market still cues off the SA data, so, to the market's eye, the data is beginning to stagnate.

 

In the second chart we show the NSA data, which continues to improve at a well-above trend rate. Note the negative slope in the black line vs. the positive slopes in the previous years' lines. In this case, negative is good, because it depicts accelerating improvement.

 

To the extent the recent sell-off continues, likely on the back of the Fed-in-a-box narrative (good news = bad, bad news = bad), we think this labor market data makes it clear that investors should be buying red, but doing so with the understanding that the labor data will continue to appear to deteriorate through August (3 more months) before again beginning to turn positive.

 

 

INITIAL CLAIMS: STAGNATION MIRAGE - JS 1

 

INITIAL CLAIMS: STAGNATION MIRAGE - JS 2

 

 

The Data

Prior to revision, initial jobless claims fell 8k to 346k from 354k WoW, as the prior week's number was revised up by 3k to 357k.

 

The headline (unrevised) number shows claims were lower by 11k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.5k WoW to 352.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -6.9%

 

INITIAL CLAIMS: STAGNATION MIRAGE - JS 4

 

INITIAL CLAIMS: STAGNATION MIRAGE - JS 5

 

INITIAL CLAIMS: STAGNATION MIRAGE - JS 6

 

INITIAL CLAIMS: STAGNATION MIRAGE - JS 7

 

INITIAL CLAIMS: STAGNATION MIRAGE - JS 8

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Morning Reads From Our Research Team

Takeaway: A quick look at some articles on the Hedgeye radar screen.

Todd Jordan - Gaming, Lodging & Leisure

Lawyer Trashes Las Vegas Luxury Suite 'Hangover' Style (via Las Vegas Review-Journal)

 

Keith McCullough CEO

China Export Gains Seen Halved With Fake-Data Crackdown (via Bloomberg)

India Boosts Gold Import Tax to Curb Record Deficit, Demand (via Bloomberg)

North and South Korea Agree to First Dialogue in Years  (via New York Times)

 

Daryl Jones – Macro

Defending 15,000 (via The Reformed Broker)

Thursday: Weekly Unemployment Claims, Flow of Funds Report (via Calculated Risk)

 

Rory Green – Restaurants

The Recession Really Hurt Dinner Visits (via Restaurant Finance Monitor)

Restaurants can expect beef prices to keep rising (via Nation’s Restaurant News)

 

Josh Steiner – Financials

As Investors Bail Out, SAC Shows a Brave Face (via New York Times)

S.E.C. Proposes Changes in Money Funds (via New York Times)

 

Tom Tobin – Healthcare

U.S. Physicians Reveals Downward Trend In Profitability For The Year Ahead, With Healthcare Reform Fueling Top Operational Challenges (via Virtualization Journal)

 

Brian McGough – Retail

Apparel and Footwear Imports Rebound In April (via Sourcing Journal)

Jos. A. Bank Emerges as Bidder for Lucky Brand (via WWD)

 

Morning Reads From Our Research Team - reading


ISLE F4Q 2013 CONFERENCE CALL NOTES

Regional recovery? Not yet

 

 

"Consistent with other regional gaming companies, the quarter presented a difficult operating environment in our markets, as the combination of continuing economic challenges, changes in payroll tax rates and the delay in income tax refunds led to softer business levels at our casinos.  In addition, when compared to the extremely mild winter in fiscal 2012, there was significant impact from weather-related disruptions in the fiscal 2013 quarter.  Finally, the fourth quarter of fiscal 2012 contained an extra 14th week compared to 13 weeks in this year's quarter.  Adjusting for the extra week in fiscal 2012 and last year's insurance recoveries, we believe our results were in-line with other regional casino operators."

 

-ISLE CEO Virginia McDowell 

 

 

CONF CALL

  • Continues to invest marketing dollars to Cape Girardeau 
  • Cape Girardeau ramp slower than expected 
  • Boonville casino floor renovations will be completed in June
  • Debt: $1.16 billion; ($155MM outstanding on revolver; Senior 5 7/8% Notes: $350MM; Senior Notes 7.75%: $300MM; Subnotes $350MM; $4MM other debt

Q&A

  • Slight uptick in spend per visit from rated players; overall visitation was down (flat-to-slightly down visitation for rated players)
  • Other than Bettendorf project, not much in terms of large scale developments
  • Bank line: $150MM drawn on $300MM revolver; $90MM excess capacity; covenant leverage: 6.4%-6.5%
  • If you take out extra week impact, results still lower YoY
  • Wouldn't buy back stock until leverage goes to 5x
  • No comments on selling company
  • Drew customers from Caruthersville due to increased marketing spend at Cape G.  But will rationalize that spend going forward.
  • More conservative on insurance costs going forward 
  • Houston market remains underpenetrated
  • Weather impact: Davenport closed for 8 days due to flooding
  • Mississippi: cashed $9.5MM in tax refund checks last year; this year, it was <$7.5MM
  • Philly casino: at most, capital investment would be $25MM
    • Expect a decision by regulatory authority by the end of the year
  • SSS April was down 4-5% across regional markets; overall regional trends pretty steady
  • May trends: no change in consumer behavior or patterns

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INITIAL CLAIMS: STAGNATION MIRAGE

Takeaway: On a seasonally-adjusted basis, the labor market is showing signs of cooling off. This is the same illusion that's been there for 3 years.

Labor Market: Divergences Finally Becoming Apparent

The funny thing about economic data series is that the inflection breaks often aren't apparent until well after the fact, i.e. 20-20 hindsight. That's why its important to spot things early and try and understand a) why they're happening and b) the implications. 

 

With that in mind, the divergence between the SA and NSA initial claims data is finally beginning to become apparent. As the first chart below shows, the seasonally-adjusted data is now almost flat in the March to present time period (the purple hatched line is almost level). This is an inflection from the August 2012-February 2013 environment of notable negative slope (steadily improving claims). The inflection is expected as it is following the same trend over the past three years, owing to faulty seasonal adjustment factors in the government's model. It's important because the market still cues off the SA data, so, to the market's eye, the data is beginning to stagnate.

 

In the second chart we show the NSA data, which continues to improve at a well-above trend rate. Note the negative slope in the black line vs. the positive slopes in the previous years' lines. In this case, negative is good, because it depicts accelerating improvement.

 

To the extent the recent sell-off continues, likely on the back of the Fed-in-a-box narrative (good news = bad, bad news = bad), we think this labor market data makes it clear that investors should be buying red, but doing so with the understanding that the labor data will continue to appear to deteriorate through August (3 more months) before again beginning to turn positive.

 

INITIAL CLAIMS: STAGNATION MIRAGE - 1

 

INITIAL CLAIMS: STAGNATION MIRAGE - 2

 

The Data

Prior to revision, initial jobless claims fell 8k to 346k from 354k WoW, as the prior week's number was revised up by 3k to 357k.

 

The headline (unrevised) number shows claims were lower by 11k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.5k WoW to 352.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -6.9%

 

INITIAL CLAIMS: STAGNATION MIRAGE - 3

 

INITIAL CLAIMS: STAGNATION MIRAGE - 4

 

INITIAL CLAIMS: STAGNATION MIRAGE - 5

 

INITIAL CLAIMS: STAGNATION MIRAGE - 6

 

INITIAL CLAIMS: STAGNATION MIRAGE - 7

 

INITIAL CLAIMS: STAGNATION MIRAGE - 8

 

INITIAL CLAIMS: STAGNATION MIRAGE - 9

 

INITIAL CLAIMS: STAGNATION MIRAGE - 10

 

INITIAL CLAIMS: STAGNATION MIRAGE - 11

 

INITIAL CLAIMS: STAGNATION MIRAGE - 12

 

INITIAL CLAIMS: STAGNATION MIRAGE - 13

 

INITIAL CLAIMS: STAGNATION MIRAGE - 19

 

INITIAL CLAIMS: STAGNATION MIRAGE - 14

 

Yield Spreads

The 2-10 spread fell -2.3 basis points WoW to 180 bps. 2Q13TD, the 2-10 spread is averaging 160 bps, which is lower by -7 bps relative to 1Q13.

 

INITIAL CLAIMS: STAGNATION MIRAGE - 15

 

INITIAL CLAIMS: STAGNATION MIRAGE - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


SHORT THE YEN, BUY THE NIKKEI?

Takeaway: If you’re bearish on US growth, get long the yen and short the Nikkei with impunity. Do the opposite if you’re constructive on US growth.

This note was originally published June 05, 2013 at 13:28 in Macro

SUMMARY BULLETS:

 

  • The "Third Arrow" of Shinzo Abe's "Abenomics" agenda wildly disappointed investor expectations. We detail those disappointments and a widely-misunderstood critical policy delta in the first part of the note below.
  • Increasingly, it appears that we remain among the few firms left with an explicitly bullish outlook for US economic growth and we’ll maintain that view until our leading indicators tell us reverse course. For now at least, 10Y bond yields (bullish TREND & TAIL), the SPX (bullish TREND & TAIL), the DXY (bullish TREND & TAIL), Gold (bearish TREND & TAIL) and Oil (bearish TREND & TAIL) all continue to state that the positive trend in US economic growth remains intact. The recent ISM data definitely sounds the alarm bells, but determining if there is an actual fire to put out requires more than one month of data.
  • As such, we continue to be inclined to short the yen and buy the dollar with respect to the intermediate-term TREND. As the USD/JPY cross nears the low end of our immediate-term risk range, we think now is a good spot to add to positions or put the full trade back on to the extent you have previously booked gains.
  • While we are certainly not ones to catch falling knives, we do think this is as good of a buying opportunity in Japanese equities as “investors” have gotten since we were calling for Japanese equity reflation last NOV – especially in the context of our base case scenario of 110 and 125 on the USD/JPY cross by EOY ’13 and EOY ’14, respectively.
  • That is, of course, if the Nikkei 225 Index’s TREND line (under major duress as of the latest close) holds. If the breakdown is confirmed, however, expect us to start sending you “shorting Japanese equities” trade alerts in the near future.
  • All told, if you’re bearish on US growth from here, get long the yen and short the Nikkei with impunity. If, however, you’re constructive on US growth from here – like us – do just the opposite. Don’t make this policy-induced gong show any more complicated than that.

 

"THIRD ARROW" OR "FIRST RODEO"? 

Today, Japanese Prime Minster Shinzo Abe unveiled the “Third Arrow” of his Abenomics agenda, which mostly consisted of a series of grand targets for various economic measures with little-to-no details for how to achieve them:

 

  • Promote a +¥1.5M increase in gross national income per capita over 10 years – implying a CAGR of +3.4%;
  • Increase capital spending by +10% to ¥70T over the next three years;
  • Deregulate the energy, health and infrastructure sectors;
  • Boost power-related investment +150% to ¥30T;
  • Set up special economic zones in Tokyo and other large cities to attract foreign investment;
  • Double FDI to ¥35T by 2020;
  • Double exports from small and medium-sized companies by 2020;
  • Double farm exports by 2020;
  • Triple infrastructure exports, such as bullet trains and nuclear plants, to ¥30T; and
  • Have 70% of all exports covered by free trade deals – including the Trans-Pacific Economic Partnership – by 2018 (up from 19% now).

 

Taken in their entirety, these goals are designed to perpetuate an average of +3% nominal GDP growth and +2% real GDP growth over the next decade. Also worth noting is the disappointing lack of targets for reforming Japan’s public pension allocation and lowering corporate taxes, which, at 37%, are the second highest in the OECD.

 

It goes without saying that there’s a lot of politicized junk food to sift through from Abe’s speech today, but the updated GDP targets were by far the most important takeaway as it relates to Japanese and globally-interconnected financial market risk. If these nominal and real GDP targets are, in fact, accurate, this inherently takes down the LDP’s former +2% inflation target to +1%. Ultimately, this implies that the BOJ doesn’t have to be as aggressive in pursuing its monetary easing agenda.

 

SHORT THE YEN, BUY THE NIKKEI? - dari

 

It is rather unclear to us how Abe & Co. plan to adhere to a potentially lower inflation target in the context of what would be an unprecedented string of wage growth with respect to the post-bubble Japanese economy. More clarity in needed as it relates to whether or not the CPI target has truly been revised down -100bps to +1%; we’ll learn for sure by the end of next week (ether during the upcoming “Third Arrow” ratification process that is scheduled to take place JUN 12-14 in the Diet or at the BOJ’s JUN 11 board meeting).

 

THE ABENOMICS TRADE: WHERE TO FROM HERE?

All in, the JPY is up +3.8% vs. the USD since MAY 22, which compares to about +1.7% for the EUR (likely dragged up on a correlation-weighted basis). Going back to our 5/10 note titled: “TRADING ABENOMICS FROM HERE”, the sustainability of the Abenomics trade we authored (short yen; long Japanese equity reflation) has become primarily a function of the slope of US economic growth expectations and not a function of Japanese policy as it had been prior to then.

 

The only meaningful Japanese catalyst left is the JUL Upper House elections, but even that is turning out to be less of a catalyst as its outcome becomes increasingly obvious: per a recent Nikkei Newspaper poll, almost half of voters planned to vote for the LDP, compared with 6% for the next largest party (DPJ). An LDP majority would give Abe & Co. free reign to delay fiscal reform to the extent they aren’t getting the results they are currently hoping for on the GDP growth front several quarters from now. Recall that outgoing Prime Minster Yoshihiko Noda of the DPJ staked his political career and his Party’s fate on passing the VAT hike legislation.

 

On the flip side, the only probable catalysts we see that could derail the Abenomics trade are likely to continue coming from Japan at this point – much akin to today’s disappointing “Third Arrow” speech and Friday’s news that Japan’s FSA tightened rules on forex margin trading, which were designed to “protect investors” and “limit speculation”.

 

Needless to say, the latest US mini-growth scare we’ve experienced over the past 2-3 weeks has weighed on the USD. Ironically, to us at least, the scare is being perpetuated by rising interest rates – which have historically signaled an acceleration in the trend growth rate(s) of US GDP. Consensus has become so hooked on financial repression that investors are broadly missing what may wind up being the most obvious economic signal in recent memory.

 

SHORT THE YEN, BUY THE NIKKEI? - 2

 

Increasingly, it appears that we remain among the few firms left with an explicitly bullish outlook for US economic growth and we’ll maintain that view until our leading indicators tell us reverse course. For now at least, 10Y bond yields (bullish TREND & TAIL), the SPX (bullish TREND & TAIL), the DXY (bullish TREND & TAIL), Gold (bearish TREND & TAIL) and Oil (bearish TREND & TAIL) all continue to state that the positive trend in US economic growth remains intact. The recent ISM data definitely sounds the alarm bells, but determining if there is an actual fire to put out requires more than one month of data.

 

SHORT THE YEN, BUY THE NIKKEI? - UST 10Y

 

SHORT THE YEN, BUY THE NIKKEI? - SPX

 

SHORT THE YEN, BUY THE NIKKEI? - DXY

 

SHORT THE YEN, BUY THE NIKKEI? - GOLD

 

SHORT THE YEN, BUY THE NIKKEI? - OIL

 

SHORT THE YEN, BUY THE NIKKEI? - ISM Manfuacturing   Services

 

As such, we continue to be inclined to short the yen and buy the dollar with respect to the intermediate-term TREND. As the USD/JPY cross nears the low end of our immediate-term risk range, we think now is a good spot to add to positions or put the full trade back on to the extent you have previously booked gains.

 

SHORT THE YEN, BUY THE NIKKEI? - USDJPY

 

Indeed, the Abenomics trade has experienced a fairly meaningful correction in recent weeks (the Nikkei 225 is down -16.7% from its 5/22 YTD peak; the USD/JPY cross is down -3.8% from its 5/17 YTD peak); on the heels of this demonstrable pullback, the Nikkei 225 Index is now broken TRADE and TREND on our quantitative risk management score.

 

While we are certainly not ones to catch falling knives, we do think this is as good of a buying opportunity in Japanese equities as “investors” have gotten since we were calling for Japanese equity reflation last NOV – especially in the context of our base case scenario of 110 and 125 on the USD/JPY cross by EOY ’13 and EOY ’14, respectively. That is, of course, if the Nikkei 225 Index’s TREND line (under major duress as of the latest close) holds. If the breakdown is confirmed, however, expect us to start sending you “shorting Japanese equities” trade alerts in the near future.

 

SHORT THE YEN, BUY THE NIKKEI? - 10

 

All told, if you’re bearish on US growth from here, get long the yen and short the Nikkei with impunity. If, however, you’re constructive on US growth from here – like us – do just the opposite. Don’t make this policy-induced gong show any more complicated than that.

 

Darius Dale

Senior Analyst


Playing to Win

Client Talking Points

JAPAN

Was it a bird? Was it a plane? Nope. It was Shinzo Abe (on the cover of The Economist last month flying with a Superman cape). But let's remember, he’s still the same PM who failed in Japan last time. And now the Nikkei has snapped both our TRADE and TREND lines of support (TREND = 13,841). Overnight down another -0.85% and down -17.4% since May 22. Yen has a wall of resistance in the 97-98 range vs USD so this will remain volatile

CHINA

So the Chinese did make up the export numbers last month and decided to make them up at a slower rate this month (May Exports +7% vs 14% last month). Both Chinese and Hong Kong stocks got blasted with -1.1% drops. The Hang Seng is now bearish TREND in our model with TREND line resistance confirmed up at 22,621.

10YR UST

The next 48 hours...They will be critical on the employment #GrowthAccelerating side of the equation. We've got jobless claims on tap today, which have been fantastic as of late, and the jobs report tomorrow, where expectations are low. The 10yr Yield is in a Bullish Formation (bullish across all 3 durations in our model) with no resistance to 2.23%. Higher-lows of immediate-term support down at 2.01% into the data.

Asset Allocation

CASH 23% US EQUITIES 30%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 29%

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

"The Japanese economic gravity smoothing experiment doesn’t seem to be going so swell"

QUOTE OF THE DAY

“There are no environments where you're only going to win, because life just isn't like that.”

- Bobby Orr

STAT OF THE DAY

American men spend 53% of their leisure time on weekends and holidays watching television, 4% of their time reading.


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