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MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN

The May Payroll data improved sequentially, confirming the ongoing strength observed in the NSA Jobless Claims numbers over the last month.   Private and Nonfarm Payrolls both improved sequentially, the Unemployment Rate increased to 7.6%  with mixed job growth across age demographics, Temp employment growth accelerated for a third consecutive month and State & Local government employment growth went positive for the first time since June 2009.   After seeing a collective +114K revision for Feb/March in the April release, today's NFP estimates reflected a net two month revision of -12K with March revised from +138K to +142K while April was revised from +165K to +149K.

 

Conclusion:  On balance, today’s employment report leaves our fundamental view in the same place it has been for the YTD.   The Macro data (Labor/Housing/Confidence/Credit) in the U.S. continues to look good on an absolute basis and better than good on a relative basis vs. the EU, China, Japan, Russia, and the bulk of emerging markets.  

 

The domestic growth dynamics along with an improving federal fiscal position and incrementally hawkish monetary policy outlook still has us liking #StrongDollar, favoring domestic consumption and growth positive equity exposure, and disliking negative dollar/growth leverage (Gold, Commodities, Russia, select EM markets).

 

6% Unemployment:  Given the Fed’s explicit targeting of 6.5% unemployment and the likelihood for market expectations to continue to attempt to front run the slope in the unemployment rate – how do the numbers have to move for the unemployment rate to move below 7% in 2013?   

 

If we make the simplifying assumptions of stable population growth and a static Labor Force Participation Rate from here we need to average net payroll adds of ~253K/mo over the next 7 months to breach 7% on the downside in December. 

 

If we use Nonfarm Payrolls as our proxy for monthly employment gains, year-over-year growth would need to average ~1.85% over the balance of the year.  With NFP employment growth averaging 1.57% and 1.61% over the last 6M and 12M, respectively, this equates to ~27bps acceleration from current levels. 

 

Below is a summary review of the April employment trends observed across both the Current Population Survey (Household Survey), which drives the Unemployment Rate, and the Establishment Survey (CES) which drives the NFP Number.

 

Non-Farm Payrolls (Establishment Survey):  NonFarm Payrolls rose 175K in May on expectations of 163K and 165K prior with y/y growth accelerating a marginal 3bps sequentially to +1.58%.   Private payrolls rose 178K on expectations of 175K and 176K prior with y/y growth accelerating 5bps sequentially to +1.9%.   The revision to the March and April estimates  saw March revised +3K from +138K to +142K while April was revised lower by 16K from +165K to +149K.

 

Household Employment:  BLS’s Household survey of employment showed total employment increased 319K m/m with y/y employment growth flat sequentially.

 

Unemployment Rate:  The Unemployment rate increased to 7.6% in May from 7.5% with Total Employmed rising +319K and Total Unemployed rising +101K.  Recall that the Unemployment Rate simply = Unemployed/(Employed + Unemployed) – thus, if the rise in the numerator is higher on a percentage basis than the rise in the denominator, as occurred in May, the unemployment rate will rise.  Note also, if you carry the unemployment rate out an extra decimal point, the unemployment rate increased 5bps sequentially from 7.51% in April to 7.56% in May. 

 

Labor Force Participation:  The Labor Force Participation rate (LFPR) ticked up 12 bps to 63.44% in April vs 63.32% in March, essentially flat with recent trough levels. As a reminder, the LFPR = Total Labor Force (Employed + Unemployed)/Civilian Non-institutional Population.  The Civilian non-institutional population was up +188K m/m  while the total Labor Force rose by +420K.  Here, the greater relative increase in the numerator = a marginal increase in the Labor Force Participation Rate. 

 

Employment By Age:  Employment by age demographics were mixed in May with 25-44 YOA and 65+YOA accelerating while all other age buckets slowed sequentially.  Employment growth remains positive across all age cohorts on both a monthly and quarterly basis with the exception of 45-54 year olds where, after managing to go positive briefly in 2012, payroll growth has remained mired in negative territory. 

 

Part-Time & Temp Employment: Part-time employment (household survey) increased 150K m/m while Temp employment (establishment survey) rose 26K in May.  While the growth trend in part-time employment remains one of deceleration, growth in Temp Employment accelerated on both a 1Y and 2Y basis for the 3rd consecutive month.  

 

Obamacare remains a factor we continue to monitor as it relates is the potential for accelerating part-time and Temp employment.  Corporate attempts to manage worker hours under the 30-hr threshold dictated under Obamacare would serve as a tailwind for employment growth but likely act as a drag across hours worked and weekly earnings metrics.  The re-acceleration in Temp hiring appears supportive of the thesis while the trend in hours worked and real weekly earnings (which has been positive the last 3 months) are largely equivocal at present. 

 

State & Local Gov’t Employment:  After five years of negative growth, collective State & Local Gov’t employment growth managed to go positive in May, growing 0.08% y/y.   With labor trends positive and state tax revenues making higher nominal highs we expect employment & investment trends at the state and local level to remain positive, on balance.

 

Average Weekly Hours:   After declining 0.6% m/m in April, average weekly hours for private employees held at 34.5 hrs in May,  flat m/m and +0.3%  y/y.

 

 

BLS Household Survey Data

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - Unemployment Rate

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - CES vs CPS

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - Employment by Age Qtrly

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - Unemployment Rate vs LFPR Monthly

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - Parttime

 

 

 

BLS Establishment Survey Data  

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - NFP Qtrly

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - NFP   Household Survey 2Y

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - Temp Employment

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - State   Local Govt empl

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - Ave Weekly Hours of Private EMployees

 

Christian B. Drake

Senior Analyst 


ARE YOU SHORT CHINA [AND OTHER EMERGING MARKETS] YET?

Takeaway: The case for shorting Chinese financials stocks, frontier markets and EM LC and USD debt is becoming stronger by the minute.

SUMMARY BULLETS:

 

  • Next Wednesday, June 12th at 11AM EST, we will be hosting a flash call titled: “Are You Short China [and Other Emerging Markets] Yet?”. The format of the call will be as follows: 10-15 minutes of prepared remarks and 10-15 mins (or more, depending on interest) of live Q&A. Specifically, we are now adding the following four ideas to our Best Ideas list and we will detail exactly why on next week’s call: Short CHIX, Short FRN, Short EMLC and Short EMB.
  • In addition to these latest editions to our Best Ideas list, we are content to “book” the gain in our EEM short call. The ETF is down -2.6% since we introduced the idea on our 4/23 conference call titled: “Emerging Market Crises: Identifying, Contextualizing and Navigating Key Risks in the Next Cycle”.
  • While 260bps may not seem like all that much, we were able to extract a considerable amount of alpha from the position – particularly relative to our favorite equity market (USA); the EEM ETF has underperformed the SPY by a whopping 693bps since we introduced the thesis. While we still think there is room for this spread to widen, we are focusing our sights on the aforementioned new tickers, as we seek out more “juice” amid rising conviction in our views (see: Stanley Druckenmiller’s mantra on “spreading your wings”).

 

Next Wednesday, June 12th at 11AM EST, we will be hosting a flash call titled: “Are You Short China [and Other Emerging Markets] Yet?”. The format of the call will be as follows: 10-15 minutes of prepared remarks and 10-15 mins (or more, depending on interest) of live Q&A.

 

Normally, we aim to provide more lead time to get our Black Books and conference calls into your respective calendars, but the recent volatility across Global Macro markets has provided us with a strategic opportunity to expand upon our #EmergingOutflows theme. To that tune, the $5.5B in EM equity fund outflows per the most recent week of data was the largest weekly withdrawal since AUG ’11!

 

Specifically, we are now adding the following four ideas to our Best Ideas list and we will detail exactly why on next week’s call:

 

 

As an aside, we like to use ETFs in order to #TimeStamp our positions, but for those of you whose funds are larger in size and require additional liquidity, we encourage you to express these views at the asset class level as well.

 

In addition to these latest editions to our Best Ideas list, we are content to “book” the gain in our EEM short call. The ETF is down -2.6% since we introduced the idea on our 4/23 conference call titled: “Emerging Market Crises: Identifying, Contextualizing and Navigating Key Risks in the Next Cycle”.

 

ARE YOU SHORT CHINA [AND OTHER EMERGING MARKETS] YET? - 1

 

While 260bps may not seem like all that much, we were able to extract a considerable amount of alpha from the position – particularly relative to our favorite equity market (USA); the EEM ETF has underperformed the SPY by a whopping 693bps since we introduced the thesis. While we still think there is room for this spread to widen, we are focusing our sights on the aforementioned new tickers, as we seek out more “juice” amid rising conviction in our views (see: Stanley Druckenmiller’s mantra on “spreading your wings”).

 

At any rate, if you plan to join us live next Wednesday at 11AM EST or plan catch the replay, we encourage you to review our 4/23 EM Crises presentation, as that will form the basis for our upcoming discussion(s):

 

 

Our sales team will be out momentarily with the dial-in details to the call; email if you don’t receive them by Monday morning.

 

Lastly, if you're getting bear'd up here, don't lazily join the consensus crowd that has been getting squeezed trying to short US equities throughout the YTD. Short stuff like Emerging Markets that A) have a legitimate bear case and B) will actually decline in value for more than 1-3 days.

 

Have a great weekend,

 

Darius Dale

Senior Analyst


Morning Reads From Our Research Team

Takeaway: A quick look at what's on the Hedgeye radar screen.

Keith McCullough – CEO

Feeling Like Gatsby? Net Worth Hits Another Record (via BloombergBusinessWeek)

Fed Seen Reducing Asset Buying by Smaller Amount (via Bloomberg)

Russia's Vladimir Putin and wife Lyudmila divorce (via BBC)

Defiant Turkish PM Erdogan urges end to protests (via BBC)

 

Howard Penney - Restaurants

Taco Bell CEO: Traditional marketing no longer works (via Nation’s Restaurant News)

 

Daryl Jones – Macro

Carter: A Guide to Washington’s Scandals (via Bloomberg)

 

Josh Steiner - Financials

Mortgage rates ticked down 18 bps day-over-day to 3.98% (via Bloomberg)

 

Tom Tobin - Healthcare

Health insurance costs to rise for Ohioans, state says (via ModernHealthcare.com)

 

Kevin Kaiser – Energy

Centrica in shale talks with Cuadrilla (via Financial Times)

 

Matt Hedrick – Macro

Police brutality threatens restart of EU-Turkey talks (via euobserver.com)

 

Morning Reads From Our Research Team - reading


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

UA: Exceeding Our Expectations

Takeaway: UA exceeded our expectations at its Analyst Meeting. We wouldn't chase it here. But to short it you need a rev miss. Increasingly unlikely.

This note was originally published June 06, 2013 at 08:20 in Retail

 

UA: Exceeding Our Expectations - ua

 

Conclusion: UA exceeded our expectations at its Analyst meeting in Baltimore. We had UA on our Best Ideas list on the short side due to our concern that increasing capital costs to facilitate growth would erode margins in 2H. For reasons discussed below, we don't think we'll see that. We were wrong on the research here, and are not going to sit idle and hope it turns in our favor -- especially with a company where we believe so strongly that it will be a long-term share gainer. There are plenty of other lower-risk places we can look on the short side. UA officially off our list.  We're taking up our EPS estimates by a dime this year, and $0.20 in 2014 to $1.46 and $1.72, respectively, due to lower SG&A spend and slightly higher gross margins. We definitely would not chase the stock here at 40x earnings. Even though some of our best ideas are expensive (and deserve to be), this valuation is stratospheric. But to be short UA here, you need either a revenue miss, which we don't think we'll see, or a pick-up in opex, which now seems increasingly less likely.

 

 

DETAILS

Anyone who cares about the story likely heard the headline already -- that UA endorsed a $4+bn top line forecast in 2016 (revenue CAGR of about 22%).  By and large, that's consistent with what we're seen in recent years -- so no real shocker there.  But it's not really the revenue story that we doubted. After all, this is one of the few 'power brands' in retail that has blue sky revenue growth opportunities.

 

Our concerns have been two-fold. First and foremost, it was the cost of the growth. We believed that UA would have to take up its level of SG&A and Capital Spending to support growth in areas (footwear and international) that have higher barriers to entry, more competitive pressure, and are  inherently lower margin. Nike and Adidas, for example, have 90% of the global soccer/football market locked up, and they won't roll over and play dead in this space (a critical sport needed to reach every country except US).  In other words, we thought that UA would succeed in growing, but would go the way of other brands that came before it like Reebok, which had to take down margins from 11% to a high-single-digit rate in order to achieve its lofty growth goals.

 

Secondly, we were concerned about the revolving door of talent that started with changes in the supply chain organization two years ago through the departure of Footwear SVP Gene McCarthy in January of this year. Rarely have we seen so many executive departures without some kind of adverse consequences.   

 

But at the meeting yesterday, a few things became clear to us:

1)  Finally The Right Team? The team Kevin Plank has in place to take the company to the next level is probably the right one. We were most surprised by what we saw coming out of the footwear team. The irony is that we're finally seeing the beginning of a sustainable business AFTER McCarthy departed, which is ironic because he is one of the most talented executives in the space (at least that's our opinion). But for whatever reason, those skills did not translate well to UA. Don't get us wrong, some of the footwear product on the display wall was downright ugly -- most notably on the basketball wall (think of a dozen unmatched colors poured into a blender and then molded into a shoe). But then again, I (McGough) am hardly the authority on what product is 'cool' vs not. I'm probably a good contra-indicator. Personal preference aside, what I can make an authoritative statement on is that I was impressed by the company's focus on new platforms of product.

 

2) Why do platforms matter? Think way back to Nike versus Reebok. What makes Nike so successful is that it invests R&D dollars to come up with new platforms which become new lines of business. This dates back to Nike Air, but also includes Shox, Free, Lunar and FlyKnit.  In the Case of Reebok, they'd make a lot of noise about producing a new Iverson shoe -- which simply replaced the same shoe they sold at a different price point a year ago, but would rarely add new platforms. That's not a growth mentality. Under Armour is tearing a page out of Nike's playbook. It started with its Spine technology in Footwear, and is also doing it with the new Speed Form, which will be released en masse over the next 12 months. In apparel, we're seeing this with the Alter Ego line (think compression apparel meets superhero unitards). Sounds crazy, I know. But it was the best selling product in all of 1Q13 despite the fact that it only sold in March. We're seeing the same 'platform' development in apparel with things like Storm, InfraRed, ColdBlack, Scent Control, ArmourBra and a new men's underwear line. Products flop all the time, but platforms rarely fail in this business unless the R&D or the Marketing is severely botched.

 

We're doing further analysis on the specific areas of revenue growth potential for UA based on new information given at the analyst meeting (including international, retail and a deeper dive in footwear), and will return with more depth thereafter.


June 7, 2013

June 7, 2013 - tradingranges

 

Bullish Trends

June 7, 2013 - 10yr

June 7, 2013 - dxy2

 

Bearish Trends

June 7, 2013 - VIX

June 7, 2013 - oil

June 7, 2013 - gold

June 7, 2013 - copper


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 7, 2013


As we look at today's setup for the S&P 500, the range is 62 points or 0.96% downside to 1607 and 2.86% upside to 1669.       

                                                                                                                    

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.76 from 1.79
  • VIX closed at 16.63 1 day percent change of -4.97%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Change in Nonfarm Payrolls, May, est. 165k (prior 165k)
  • 8:30am: Change in Private Payrolls, May, est. 175k (prior 176k)
  • 8:30am: Chg in Manufacturing Payrolls, May, est. 4k (prior 0k)
  • 8:30am: Unemployment Rate, May, est. 7.5% (prior 7.5%)
  • 1pm: Baker Hughes rig count
  • 3pm: Consumer Credit, April, est. $13.3b (prior $7.966b)

GOVERNMENT:

    • House not in session; Senate schedule TBA
    • 8:30am: Mental Health America holds conf. on wellness breakthroughs, whole health
    • 10am: House Transportation and Infrastructure panel field hearing on improving the rail service in the northeast corridor
    • 11am: ABA, Economic Advisory Committee news conf. to present monetary policy predictions, consensus economic forecast, including consequences of sequester, spending cuts, housing recovery, whether banks are prepared to finance stronger consumer and business spending

WHAT TO WATCH

  • Job gains probably restrained in May amid U.S. fiscal cutbacks
  • Aso says Japan won’t intervene in market after surge in yen
  • Apple, other tech cos., deny giving U.S. access to servers
  • Glaxo may get Avandia reprieve after FDA panel vote on risks
  • Fed seen reducing asset buying by smaller amount: survey
  • Microsoft unveils trade-in rights for games on Xbox One console
  • AT&T 2Q customer growth improves as margins shrink
  • German exports rose more than economists forecast in April
  • Bundesbank cuts German growth forecasts while signaling recovery
  • Pimco defends $8.5b BofA mortgage accord as “outstanding”
  • U.S. Retail Sales, BOJ, Iran, U.S. Open: Week Ahead June 8-15

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Fewest Hedge Funds Invest in Gold Since ’10 as Assets Slump
  • Gold Traders Most Bullish Since Bear Market Began: Commodities
  • Urals Exports Plunge as Russia Refiners Keep Oil: Energy Markets
  • Tin Miners in Indonesia Stop Output on Raid Concern, Arsani Says
  • Gold Premiums in India Double as Imports Decline on Restrictions
  • Soybeans Head for Best Weekly Run in Four Years on Export Sales
  • EU Suspends Some Licenses to Import Sugar After Tender in May
  • Rubber Books Fourth Weekly Loss on Strong Yen, Demand Concerns
  • WTI Crude Heads for First Weekly Gain in Four Before Jobs Data
  • Low Dry Bulk Rates Boost Scrapping, Control Fleet Growth
  • Palm Oil Heads for Fifth Weekly Gain as Stockpiles Seen Dropping
  • LME Chief Abbott Plans to Leave After $2.2 Billion Takeover
  • Dalian Soymeal Gains Limited by Bollinger: Technical Analysis
  • Commodities Daybook: Gold Traders Most Bullish Since Bear Market
  • Gold Heads for Best Weekly Run Since March Before U.S. Jobs Data

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team


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