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INITIAL CLAIMS: COMING UP ROSES

Takeaway: We wouldn't be surprised to see the elusive 2-handle on the seasonally-adjusted initial jobless claims reading by late 1Q14.

U.S. labor market data continues to come up roses as the most recent non-seasonally adjusted initial jobless claims came in 10.5% lower than a year ago. That's a slight improvement vs. the previous week, which saw a 10.1% improvement, and is a bit ahead of the average for the last 12 weeks, which is -8.8%.

 

INITIAL CLAIMS: COMING UP ROSES - js1

 

Giving exception to the single anomalous data-point 3 weeks ago (-0.2%), we find the average over the last 12 weeks has been a year-over-year improvement of 9.7%, extraordinary for this point in the cycle. This rate of improvement is understated by the seasonally-adjusted data, which also looks quite good. Based on our analysis of the seasonality distortions shifting from headwind to tailwind from September through February, we think the SA number, with no underlying fundamental improvement, will shift from 333k to around 305-310k.

 

There is, however, clear underlying fundamental improvement, so we wouldn't be surprised to see a 2-handle on the SA initial jobless claims reading by late 1Q14. For perspective on just how strong that is, historically, since 1975 we've observed 2-handles in 2Q06, 2H99, 4Q88, 3Q78, or less than 5% of the time. Specifically, 93 of the last 2,014 weeks have seen sub-300,000 SA initial claims weekly prints. 

 


INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE

Takeaway: Labor Market & Confidence both hitting their strongest level since 2007.

We’ve already breached the rarified 2-handle on the downside on the NSA series with non-seasonally adjusted claims printing 287K and 282K the last two weeks, respectively – the first sub-300K prints since September 2007. 

 

Looking forward we see a rising probability that the headline, seasonally-adjusted claims number see's a 2-handle in 1Q14 as well as the seasonal distortion in the data, currently a headwind, again shifts to a tailwind.  

 

Meanwhile, today’s Bloomberg Confidence reading improved to -23.5 from -27, marking its highest reading since December of 2007.

 

Labor Market the strongest it has been since 2007, Confidence improving to its strongest level since 2007 – Who’da thunk? 

 

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

 

- Hedgeye Macro 

 

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Less Than 5% of the Time

Labor market data continues to come up roses as the most recent non-seasonally adjusted initial jobless claims came in 10.5% lower than a year ago. That's a slight improvement vs. the previous week, which saw a 10.1% improvement, and is a bit ahead of the average for the last 12 weeks, which is -8.8%. Giving exception to the single anomalous data-point 3 weeks ago (-0.2%), we find the average over the last 12 weeks has been a YoY improvement of 9.7%, extraordinary for this point in the cycle.

 

This rate of improvement is understated by the seasonally-adjusted data, which also looks quite good. Based on our analysis of the seasonality distortions shifting from headwind to tailwind from September through February, we think the SA number, with no underlying fundamental improvement, will shift from 333k to around 305-310k. There is, however, clear underlying fundamental improvement, so we wouldn't be surprised to see a 2-handle on the SA initial jobless claims reading by late 1Q14.

 

For perspective on just how strong that is, historically, since 1975 we've observed 2-handles in 2Q06, 2H99, 4Q88, 3Q78, or less than 5% of the time. Specifically, 93 of the last 2,014 weeks have seen sub-300,000 SA IC weekly prints. 

 

Our favorite ways to play a stronger-than-realized improvement in the labor market remain financials with levered exposure to home price recoveries as well as unsecured lenders. Capital One (COF) and Bank of America (BAC) remain two of our favorite ideas on the long side.

 

 

The Data

Prior to revision, initial jobless claims rose 7k to 333k from 326k WoW, as the prior week's number was revised up by 2k to 328k.

 

The headline (unrevised) number shows claims were higher by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.25k WoW to 335.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -8.8%

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 1

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 2

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 3

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 4

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 5

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 6

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 7

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 8

 

Yield Spreads

The 2-10 spread rose 2 basis points WoW to 229 bps. 3Q13TD, the 2-10 spread is averaging 225 bps, which is higher by 54 bps relative to 2Q13.

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 9

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 10

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 


Morning Reads on Our Radar Screen

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

Keith McCullough – CEO

Doug Kass: I’m still a bear and Twitter is useless (via MarketWatch)

 

Morning Reads on Our Radar Screen - bullbear

 

Daryl Jones – Macro

LINN Energy Announces Second Quarter 2013 Results (via GlobeNewswire)

Tech Magnates Bet on Booker and His Future (via New York Times)

Carney BOE Rates Guidance Meets Investor Skepticism (via Bloomberg)

 

Darius Dale – Macro

Why China and Japan should have you worried (via Fortune)

 

Josh Steiner – Financials

Arizona’s mortgage delinquencies plummet (via azcentral.com)

Traders Look for New Jobs as Charges Loom Over SAC (via Bloomberg)

Wells Fargo Mortgage lays off 126 in St. Louis (via St. Louis Biz Talk)

 

Jonathan Casteleyn – Financials

Jumbo Shrimp. Random Order. Active ETFs. (via Bloomberg … JC note: The next class of ETFs...active ETFs now being added to fundamental, sampling, and replicate ETFs)

 

Kevin Kaiser - Energy

LINN Energy Announces Second Quarter 2013 Results (via GlobeNewswire)

 

Howard Penney – Restaurants

VIDEO: McDonald’s vs. Franchise Owners? (via Fox Business … HP note: Looks like the $MCD CEO needs to works harder on franchisee relationships)

 

Tom Tobin – Healthcare

Many Docs Don't Follow HPV/Pap Test Guidelines (via Medline Plus)


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INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY

Takeaway: We continue to regard levered credit plays as the best long side thematic trade amid a faster-than-realized improvement in the labor market.

Less Than 5% of the Time

Labor market data continues to come up roses as the most recent non-seasonally adjusted initial jobless claims came in 10.5% lower than a year ago. That's a slight improvement vs. the previous week, which saw a 10.1% improvement, and is a bit ahead of the average for the last 12 weeks, which is -8.8%. Giving exception to the single anomalous data-point 3 weeks ago (-0.2%), we find the average over the last 12 weeks has been a YoY improvement of 9.7%, extraordinary for this point in the cycle. This rate of improvement is understated by the seasonally-adjusted data, which also looks quite good. Based on our analysis of the seasonality distortions shifting from headwind to tailwind from September through February, we think the SA number, with no underlying fundamental improvement, will shift from 333k to around 305-310k. There is, however, clear underlying fundamental improvement, so we wouldn't be surprised to see a 2-handle on the SA initial jobless claims reading by late 1Q14. For perspective on just how strong that is, historically, since 1975 we've observed 2-handles in 2Q06, 2H99, 4Q88, 3Q78, or less than 5% of the time. Specifically, 93 of the last 2,014 weeks have seen sub-300,000 SA IC weekly prints. 

 

Our favorite ways to play a stronger-than-realized improvement in the labor market remain financials with levered exposure to home price recoveries as well as unsecured lenders. Capital One (COF) and Bank of America (BAC) remain two of our favorite ideas on the long side.

 

The Data

Prior to revision, initial jobless claims rose 7k to 333k from 326k WoW, as the prior week's number was revised up by 2k to 328k.

 

The headline (unrevised) number shows claims were higher by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.25k WoW to 335.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -8.8%

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 1

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 2

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 3

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 4

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 5

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 6

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 7

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 8

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 9

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 10

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 11

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 12

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 13

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 19

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 14

 

Yield Spreads

The 2-10 spread rose 2 basis points WoW to 229 bps. 3Q13TD, the 2-10 spread is averaging 225 bps, which is higher by 54 bps relative to 2Q13.

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 15

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


CASUAL DINING TRENDS PREDICTABLY POOR

We’ve been bearish on the casual dining sector since early June, and, last night Malcolm Knapp gave us a glimpse of how ugly sales trends were in July when he released his estimates for the month.

 

Knapp reported that July 2013 same-restaurant sales declined -3.8%, while comparable traffic trends declined -5.1% -- both metrics slowed sequentially over a markedly weak June.  These estimates come against July 2012 comps of 1.1% and -1.3%, respectively.

 

While all four weeks had negative comparable sales and traffic results, we did find positive news on the margin, as Knapp indicated that each successive week in July was sequentially better than the prior.

 

Overall, July sales and traffic trends are in-line, if not slightly worse, with what we expected.  Consistent with what we’ve heard in recent earnings calls, this summer is presenting a challenging top line environment for the casual dining industry.  Our favorite short in the space remains RRGB, as they are set to report 2Q13 earnings a week from today on August 15th.

 

 

 

Howard Penney

Managing Director

 


ALL EYES ON TOKYO

Client Talking Points

YEN

The big move this week definitely caught me off guard. The question now becomes are we past the maximum, short-term "Yen short/Nikkei long" pain? At 96.16, Yen (vs USD) is 3.1 standard deviations oversold in my model. Rest assured, that doesn’t happen very often. In addition, the Nikkei is holding TREND support of 13,445. So yes, I am tempted to buy back the DXJ on that. Waiting on the signal.

EUROPE

European Equities are behaving quite well in the face of this 2-day -5.6% Nikkei drop. Both the FTSE and DAX are still looking healthy on both our TRADE and TREND durations. Russia? Not so much. It is leading the losers again down -0.4% (-12.5% year-to-date) as Brent breaks down below my $107.71 TAIL risk line again. 

COPPER

Looks like someone overstayed their welcome on the short side of copper. It's ripping. The net short position out there is almost at its peak, so I’ll call most of this move short covering. But I could change my mind on that. Please go ahead and ping me if you have any ideas on why it should breakout above its $3.31 TREND line. 

Asset Allocation

CASH 33% US EQUITIES 26%
INTL EQUITIES 19% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road

TWEET OF THE DAY

BREAKING: the SP500 has corrected 1.1% from its all time high; time to freak @KeithMcCullough

QUOTE OF THE DAY

"Mr Bernanke’s exit plan apparently is that he is going to leave his job. He doesn’t want to stick around for the hangover. He doesn’t want to be around for the consequences of what he’s doing." - Jimmy Rogers

STAT OF THE DAY

Shares of Tesla Inc (TSLA) are surging over 15% in premarket trading this morning after the electric car-maker swung to a surprise profit in results released yesterday. The company posted an adjusted profit of 20 cents a share for Q2 and revenue that surged to $405.1M from $26.7M.


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