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Keith's Thoughts on Big Move In Japan

The big move in Japan this week definitely caught me off guard.

 

Now the question becomes: Are we are 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. No, that doesn’t happen very often.

 

Meanwhile, 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.

 

Keith's Thoughts on Big Move In Japan - Nikkei   FXY

 

(Editor's note: This post is a brief excerpt from Hedgeye CEO Keith McCullough's morning research. For more information on how you can sign up and start harnessing the Hedgeye team's award-winning, proprietary research, please click here.)


US Births: Recovery Intact

Takeaway: We continue to expect accelerating growth in US Births in 2Q13/3Q13, but softness in 4Q13/1Q14. Long-term Recovery Thesis remain intact

This note was originally published July 17, 2013 at 15:36 in Healthcare

US Births: Recovery Intact - preggo

NEAR-TERM FORECAST: GROWTH ACCELERATING 2Q13/3Q13

We recently updated our birth regression model for 2Q13 and 3Q13.  Our model continues to call for accelerating growth in the near-term given the trajectory of the underlying factors that drive our model.  Below we discuss the drivers of that forecast as well as recent developments related to our thesis

  1. Women’s employment (20-34 YOA) ACCELERATING: One of our better leading indicators.  Growth has accelerated through most of 2012 and suggests accelerating growth through 3Q13
  2. PKI Human Health Organic Growth ACCELERATING: Product portfolio focuses primarily prenatal and neonatal testing, and has been a strong lead for US Births.  Calling for continued growth through 2Q13.
  3. Household Formation NEUTRAL: Complements of our Financials Team, has been a good coincident read on birth trends.  Although improving sequentially in 2Q13, the 2-yr average (the better read) calls for a slowdown in 2Q13
  4. Home Prices ACCELERATING: The implication here is rising prices are a signal for growing demand for housing.  Has been a surprisingly strong read into US Births.  Current trajectory suggests improvement into 2Q13
  5. DEST 2Q13 SS Sales ACCELERATING: Decent overlay with US Births.  Preannounced accelerating SS sales growth for 2Q13 (the highest the company has seen since 2006), suggesting accelerating growth for 2Q13
  6. HCA/THC 2Q13 Admission Trends NEUTRAL/ACCELERATING: Both companies SS admissions trends are pointing to steady to moderately improving trends in 2Q13.  Note US births represent 25% of hospital inpatient volumes
  7. Hedgeye OB/GYN Survey (July 2013) DECLINING: Our survey asked respondents about the y/y trend in June,  which we created an index off of (base 50). The data suggests both births and pregnancies declined in June.  We will be running the survey again in August.
  8. CSFB Survey NEUTRAL: Anecdotal callout from a competitor’s survey, suggests births were flat y/y in 2Q13.   

 

INTERMEDIATE FORECAST: GROWTH SPUTTERING 4Q13/1Q14

We do not have as strong a read longer-terms since many of the macro factors we track are coincident indicators.  Our two longer-term reads our Women’s Employment and PKI Human Health, which point to slowing, potentially negative trend in 4Q13/1Q13

  1. Women’s employment (20-34 YOA) DECELERATING: Suggests a moderating, but positive trend for births into 4Q13/1Q14
  2. PKI Human Health Organic Growth DECELERATING: Suggests moderating, if not negative, growth in 3Q13/4Q14.  We do note the that 1Q13 results for PKI may be negatively skewed due to externalities (working days/weather)

 

LONGER-TERM FORECAST: RECOVERY THESIS INTACT

One of the major tenets of our forecast is what we refer to as the Deferred Birth Opportunity, which is the number of pregnancies/births that were delayed for economic reasons because of the Great Recession.  Note that the size of primary birth demographic (women aged 20-34) was not only growing, but experienced accelerating growth from 2007-2012, alongside a cumulative decline of 9% in US Births during that period. 

 

Ultimately we see some percentage of that Deferred Birth Opportunity coming back into the system; particularly among first-time mothers, which annually represent 40% of US Births.  We estimate that between 1.0 and 1.5 million births have been deferred during the Great Recession.  Given the currently deflated base of US births (2012 was lowest annual nubmer since 2000), the growth potential could be significant. 

 

Charts below.  Feel free to contact us for more detail, underlying data, or with questions. 

 

 

Thomas W. Tobin

203-562-6500

ttobin@hedgeye.com

@HedgeyeHC

 

Hesham Shaaban, CFA

203-562-6500

hshaaban@hedgeye.com

 

US Births: Recovery Intact - tt1

US Births: Recovery Intact - Births   vs. Women s Employment 2Q13

US Births: Recovery Intact - Births   vs. PKI 2Q13

US Births: Recovery Intact - Births   vs. Household Formation 2Q13

US Births: Recovery Intact - Births   vs. FHFA Home Price Index 2Q13

US Births: Recovery Intact - Births   vs. DEST 2 yr

US Births: Recovery Intact - Survey   OB   June Preg Births

US Births: Recovery Intact - Births   vs. Female pop  1975

US Births: Recovery Intact - Births   Deferred opp growth

 


MCD – RAPID DECELERATION IN TRENDS

Despite relatively strong labor market data and the Bloomberg Consumer Comfort Index rising to a five-year high, top line trends in the restaurant industry remain choppy, at best.

 

First, Knapp reported weak casual dining sales and traffic trends for July, and now, underlying trends in the July sales numbers reported by MCD confirm that the company continues to struggle amidst a difficult macro and increasingly competitive environment.

 

This morning, MCD reported July system-wide and global same-store sales growth of +1.6% and +0.7%, respectively.  While these results appear positive relative to expectations, the two-year average trend for global same-store sales was a mere +0.4%, representing a sequential decline of -230bps from June.  Perhaps more importantly, we believe that the current level of system-wide sales growth is below what the company must generate in order to hit estimates for the quarter.

 

 

Segment Breakdown

 

While expectations were for flat July same-store sales growth in the U.S., the region surprised to the upside by increasing +1.6%.  The two-year average, however, moved lower by -60 bps sequentially to +0.8%.

 

Europe same-store sales disappointed, contracting -1.9% versus expectations of +0.1% growth in the region.  On a two-year average basis, Europe sales moved lower by -390 bps sequentially to -1.3%.

 

The APMEA segment continues to struggle, posting same-store sales of -1.9% versus expectations of -0.7%.  And, on a two-year average basis, the region fell -400 bps sequentially to -1.7%.

 

In aggregate, McDonald’s July comparable sales numbers were uninspiring and consistent with our bearish thesis on the company.  Rapidly decelerating sales trends now suggest, as we have been, that management must respond with a viable plan to improve operational efficiencies and spur long-term, sustainable sales growth.

 

 

MCD – RAPID DECELERATION IN TRENDS - MCD 4 Segments

 

 

 

Howard Penney

Managing Director

 


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DF – Trading A Leg Down On Earnings Outlook

DF reported Q2 2013 results today with a $0.01 miss on EPS and revenue below expectations ($2.23B vs $2.25B). The company cited a challenging environment in which milk volumes appear softer than previously estimated, and flagged that Q3 volumes should be the most challenged in the year. This gives us pause on buying the stock on today’s pullback that broke its trade line of $10.98. Our quantitative levels suggest buying closer to our intermediate term TREND price level of support at $9.81.

 

DF – Trading A Leg Down On Earnings Outlook - zz. df

 

DF milk volumes were down -6% in Q2 year-over-year (vs industry milk down -2.1%) and the company’s U.S. market share dropped to 36.4% in the quarter versus 37.8% in Q1.  The company expects mid single digit declines in milk in 2013, and on the call narrowed its FY adjusted diluted EPS guidance to $0.47 to $0.53 versus a prior $0.47 to $0.55.

 

Despite the negative print, and subdued outlook for Q3, DF, having spun off 67% of Whitewave (WWAV) in May 2013 and reaped $589MM through the sale of its remaining stake of WWAV in July, has bolstered its financial position and is in a strong cash position should it want to make an acquisition in 2H; certainly deployment of this cash could awaken animal spirits on the long side.

 

The company trades at a P/E of 14.4x versus a peer average of 17.2X and EV/EBITDA of 10.6x versus 11.6x. Despite the discount to the group, we are not buyers here and now on today’s pull back. 

 

Matthew Hedrick

Senior Analyst


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 

 

----------------------------------------------------------------------------------------------------------------

 

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

 

 

 


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