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INITIAL CLAIMS: JENGA

Takeaway: The Labor Market is the most critical piece in Economic (Inverse) Jenga, and it continues to show accelerating improvement.

In the game Jenga, each player, in turn, pulls a wooden block out of a stacked tower with the goal of not causing the tower to collapse.  It idiom speak, its tantamount to trying to avoid pulling the straw that breaks the camel’s back. 

 

The economy over the last 4 years has been a kind of Inverse Jenga with policy makers, economists, and strategists speculating on what combination of policy and macro factor(s) need to be in place for the ethereal economic edifice to not only not re-implode, but to propagate a positive reflexive economic cycle. 

 

Are those requisite ‘pieces’ in place currently?

 

For thought experiment sake, let’s suppose you just recently crawled out from under your Edward Snowden hideout rock to find the following dynamics.  While you don’t want to be long everything equities at every price, on balance, would you provide a persistent short bid given the following macro realities?

 

  • Labor Market:  Breaking a 4 year trend and showing accelerating improvement in the face of a negative seasonal headwind and a discrete fiscal policy drag
  • Credit:  Household Debt/GDP has retraced back to trend, household credit growth has moved back to the zero line and consumer and commercial loan demand and credit availability are both improving.
  • Confidence:  After a 5 year tread-sideways stint, all measures of consumer and business confidence are legitimately breaking out.
  • Private Sector Balance Sheet:  Financial assets are making new nominal highs (largely a boon to the top 10%) and home prices (broad populace ownership) are retracing their losses and now growing double digits.  Some measure of wealth effect should follow on the back of significant NTM asset re-flation.  Corporate cash remains solid, corporate balance sheets have been buttressed by a multi-year cost cutting run, and corporate earnings as a % of GDP are still near peak.  Mean reversion from peak margins remain an obvious risk to prices, but an acceleration in investment spending presents an similarly positive prospect for TREND economic growth. 
  • Flows:  Flows can amplify and/or dominate fundamentals for extended periods and, at present, flows to equities, and U.S. equities in particular, have inflected.  Funds continue to flow out of Fixed Income alongside #RatesRising, EM equities/bonds/currencies hold negative leverage to both #StrongDollar & #RatesRising, as does Gold the broader commodity complex.    
  • Fed:  Central Bank intervention, despite its supportive role, has increased market uncertainty and served to both shorten economic cycles and amplify market volatility.  The Fed has used its ‘communication tool’ and consensus has begun to accept the impending end of unprecedented market intervention – whether they are doing it b/c organic trends are good or to avoid burgeoning asset price imbalances is probably a secondary point.  In reality, it is probably some combination of the two. 
  • Valuation:  Market valuation is getting a bit rich on a measure like the Shiller P/E, but still has headroom for a turn or two on a convention P/E basis, earnings yield basis, etc.  Valuation, in itself, is not a catalyst over the immediate and intermediate terms.  

 

Of course, on the other side, muted Inflation, stall-speed real wage growth, slack capacity, rising oil/gas prices, Congress and rest of world risk - among others - remain ongoing concerns. 

 

The Jenga question is whether the confluence of the positive dynamics above represent a macro factor cocktail sufficient for catalyzing a self-reinforcing upswing domestically?  

 

YTD market performance has clearly backed pro-growth positioning, and with sentiment still middling, the domestic macro data coming in good, and the quantitative setup for equities still bullish, we’re inclined to stick with a constructive outlook for the U.S.   

 

In short, we don’t think improving employment,  #StrongDollar, #RisingRates are negative dynamics and expect an equity sell-off to be met with a bid as we move towards support.   The levels we’re watching for on the SPX are TRADE Support at $1659 and TREND support down at $1631.    

 

 

INITIAL CLAIMS:  ANOTHER NEW LOW

 

NSA:  Non-seasonally adjusted claims, our preferred read on the underlying labor market trend, made a new absolute low for the cycle at 280K -  marking its third consecutive sub-300K reading in a row and the lowest since September 2007.  On a YoY basis, initial claims accelerated to -11.7% from -9.9% the week prior with the 4-week rolling average improving 50bps to -8% from -7.5% the week prior. 

 

Excluding the (seemingly) anomalous data point for the week ending 7/19, the average YoY improvement over the last twelve weeks is -9.8% - a very strong rate of improvement and one that continues to defy the trend of the last three years (see the slope of the linear trend lines in the 1st chart below).  Improvement in the 4-wk rolling measure of YoY Claims should show marked improvement next week as the one weak data point of the last 17 weeks rolls off.  

 

SA:  The seasonally adjusted, headline claims number printed its best number of the year, and best number since October 2007, at 320K.  This weeks data represents an accelerating YoY rate of improvement of  -12.8% YoY (vs -9% the week prior) with 4-wk rolling average down 4K WoW.   

 

As Josh Steiner and our financials team re-highlighted last week:

 

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.

 

The Labor Market is probably the most critical piece in Economic (Inverse) Jenga, and it continues to show acceleratign improvement. 

 

INITIAL CLAIMS:  JENGA - Claims 081513

 

INITIAL CLAIMS:  JENGA - Claims SA 081513

 

INITIAL CLAIMS:  JENGA - 10Y vs GDP PCE SPX Conditional

 

INITIAL CLAIMS:  JENGA - USA   ALTERNATIVE SCENARIO

 

Christian B. Drake

Senior Analyst 

 


STAYCATION NOT HERE TO STAY?

Priceline survey indicate optimism on lodging and leisure industry

 

 

Priceline.com's annual Summer Travel Survey showed that the number of Americans who plan to take a staycation in 2013 - choosing to vacation near home - declined to 17%.  This was much lower than in the past five years when some surveys cited as high as 50% of Americans taking a break close to home.  While Americans are aware of rising airfare, gasoline, and hotel rates, the survey said that some are saving some money on their travels by driving nonstop to their destination and stretching their food budget.

 

We believe this trend is positive for hotels, vegas, cruiselines and online travel agencies.  Americans continue to be very resilient on leisure spend.

 


INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT

Takeaway: The number of people filing initial jobless claims continues to drop at an accelerating rate. It's what happens on the margin that matters.

Tapering Probability Grows 

There remains no let-up in the positive data flowing from the initial jobless claims series. The most recent week saw non-seasonally adjusted claims drop by -11.7% YoY, an improvement vs the preceding week's change of -9.9%. The last 10 weeks of data have averaged 9.3% improvement YoY, so this week's change is strong. While the rolling 4-wk average NSA data showed a modest acceleration to -7.8% from -7.6%, next week is likely to show sharp improvement as we'll be replacing the one week data point in the last 17 weeks of data with a presumably stronger number next week. 

 

It's worth noting that as the rate of improvement in the labor market accelerates, so too does the expectation for the Fed to taper asset purchases. Hence the sea of red on the screen today in response to such healthy labor market data. Next week, my colleague Jonathan Casteleyn is planning on putting together an analysis of the likely tapering impact on equities across different durations. Stay tuned.

 

Last week we commented that based on our analysis of the seasonality distortions shifting from headwind to tailwind from September through February, we thought the SA number, with no underlying fundamental improvement, will drop from 333k to around 305-310k. Given this week's SA print of 320k, we think the seasonality distortion dynamics may actually push the series sub-300k with no further fundamental improvement, even though there is considerable fundamental improvement occurring based on the NSA data stream. For perspective on what a sub-300k claims series means, historically, since 1975 we've observed sub-300k data in 2Q06, 2H99, 4Q88, 3Q78, or less than 5% of the time. Specifically, 93 of the last 2,015 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 fell 13k to 320k from 333k WoW, as the prior week's number was revised up by 2k to 335k.

 

The headline (unrevised) number shows claims were lower by 15k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4k WoW to 332k.

 

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 improvement versus the previous week's YoY change of -7.6%

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 1

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 2

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 3

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 4

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 5

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 6

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 7

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 8

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 9

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 10

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 11

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 12

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 13

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 19

 

INITIAL CLAIMS: ANOTHER WEEK OF ACCELERATING IMPROVEMENT IN THE LABOR MKT - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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USA AIN'T ASIA

Client Talking Points

CHINA

The Shanghai Composite had a big move off its lows... all the way up to our 2,123 TREND line... and then it failed. China's stock market is now down two consecutive days (-1.2%) from a critical signaling line in our model. The only major economic indicator that went less bearish was the Chinese Yield Spread (+44 basis points). Incidentally, Japan was also in the red down -2.1% overnight. Bottom line? Cisco's recent comments summarize our Global Macro view – USA is not Asian demand right now.

UK

Across the pond, the economic data continues to surprise on the upside. UK Retail Sales for July were up +3% year-over-year vs up +2.2% in June. We call that #GrowthAccelerating. And now, both the Pound and the FTSE are bullish TREND in our Hedgeye model. No, we have not seen that combination in a long time. Yes, I need to buy both.

OIL

The rip of the morning? It belongs to Brent. It jumped +1.1% to $111.39. Now that rip is certainly not going to help anyone in this world other than those folks who are long of it. Our long-term TAIL risk line for Brent is $108.11. So keep a close eye on that on your screens. We have no position here.

Asset Allocation

CASH 28% US EQUITIES 27%
INTL EQUITIES 23% 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: SP500 closes down -0.52% on the day, extending correction from all-time high to a whopping -1.4% @KeithMcCullough

QUOTE OF THE DAY

It is better to remain silent and be thought a fool than to open one's mouth and remove all doubt. - Mark Twain

STAT OF THE DAY

It will cost an estimated $241,080 for a middle-income couple to raise a child born last year for 18 years, according to a U.S. Department of Agriculture report released yesterday. That's up almost 3% from 2011 and doesn't include the cost of college.



Moody Markets

“How far is it wise to respond to a mood?”

-Frank Oppenheimer

 

Since yesterday’s Early Look focused on asking ourselves baseline risk management questions, I’ll roll with a good one that particle physicist Frank Oppenheimer asked his older brother in the 1930s. Here’s how Robert Oppenheimer answered it:

 

“… my own conviction is that one should use moods, but not be greatly deflected by them; thus one should try to use the gay times to do those things one wants to do that require gaiety, and the sober moods for the work one wants, and the low moods for giving oneself hell.” (American Prometheus, pg 95)

 

I’m a moody guy. So that answer spoke to me. Sober every morning, working. Giving myself hell about all my market mistakes come the afternoon. Sounds about right.

 

Back to the Global Macro Grind

 

Markets are moody too. They rarely cooperate with all of your positions. And they don’t care whatsoever about your views. Tough relationship we have with this Mr. Market, I know. That’s why I am lobbying the Fed to call her Mrs.

 

Early last week I polled you asking whether you thought the latest #EOW (end of the world) correction in US stocks would be on the order of 1, 2, or 5%. Since only one client answered 1%, I figured the probability of that being the correct answer was going up.

 

If you answered 5%, please don’t go all caps or moody on me. Take a breath. It’s just an opinion. And we all have one or we wouldn’t be playing this game. Currently the correction (from the all-time closing high of 1709 in the SP500) is -1.4%.

 

Now what? Well, let’s redo the poll with some forward looking information:

  1. Immediate-term TRADE support is 1680 = -1.7% from the all-time high
  2. Intermediate-term TREND support is 1637 = -4.2% from the all-time high
  3. Immediate-term risk range for US Equity Volatility (VIX) = 11.62-13.71

So, what do you think?

 

A)     1% correction (i.e. the market closes up today and yesterday was it)

B)      2% correction (somewhere between today and early next week, that’s it)

C)      4% correction (re-testing the TREND line, which we haven’t done since late June)

 

I’m going with B again.

 

If the market closes up on the day today, that will make me and everyone else (other than anonymous client Mr. X) who answered the poll last week wrong. If that happens, we can all just give ourselves hell.

 

What would have been really hellish in 2013 is missing this call on US employment #GrowthAccelerating. Again, we don’t care about the line-items in the BLS data; we only care about the slope of the line in the only leading indicator we can find for the bond market: NSA (non-seasonally adjusted) rolling US jobless claims. Most of the monthly payroll data is statistically useless.

 

We’ll get that weekly US Jobless Claims data point this morning – and if there’s one data point that matters to both the long-end of the US Treasury curve (and the US stock market), that is it. So let’s put this morning’s number in the context of recent history:

  1. Last week’s NSA claims number came in -10.5% year-over-year (slight improvement vs the previous week)
  2. The average for the last 12 weeks is claims falling -8.8% year-over-year
  3. Giving exception to a single anomalous data point 3 weeks ago, avg y/y improvement over 12 weeks = -9.7%

Yes, that’s a lot better than your parroting partisan pundit would lead you to believe. It’s also our definition of not only what matters to the employment vs Fed story, but what Mr. Market trades on – the 10yr US Treasury Yield fits NSA rolling claims like a glove.

 

Oh, and there’s seasonal headwinds in this jobless claims series that become tailwinds in September (that can run through February). Most (other than Mr. Bond and Stock Market) don’t expect to see the jobs picture improve, so it probably will.

 

One other way to measure the moodiness of it all is the weekly II Bull/Bear Spread:

  1. Last week, Bulls dropped from 51.6 to 47.4%
  2. Last week, Bears rose from 18.5 to 20.6%
  3. Last week, Bull/Bear Spread re-tested its most bearish level since Q2 at 2680 basis points wide

Yep – everyone says everyone is bullish. But they aren’t. Less than 50% are bullish. That’s really bearish. And the last time we saw a 2600bps handle on the Bull/Bear spread was in the 1st week of July. The SP500 proceeded to move from 1631 (our new TREND support) to 1709 within a month.

 

So, if you are all beared up (on stocks) this morning, just remember that bullish gaiety can quickly become a mid to late month-end move. The profitable bearish mood is in bonds. We’ll see if this morning’s jobless claims print reiterates that. September is coming.

 

UST 10yr 2.64-2.75%

SPX 1

VIX 11.62-13.71

USD 80.94-82.02

Yen 97.37-99.45

Brent 108.11-111.49

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Moody Markets - Claims 080813

 

Moody Markets - Virtual Portfolio


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