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August Employment: Something For Everyone

Ahead of this morning’s Employment Report, Keith tweeted All that matters in the BLS # is the market reaction to it”.  That seems especially fitting for the August employment data.  There was something for everyone. 

 

Consider the following:  The unemployment rate dropped to 7.3%, but did so on the back of a lower participation rate and negative household employment gains.  Private Payrolls declined sequentially and NFP missed estimates, but on a YoY & 2Y growth basis both measures were actually flat to slightly better sequentially.  The two month revision was negative at -74K, but PT employment for economic reasons declined, U-6 unemployment fell below 14%, weekly hours ticked higher and hourly earnings accelerated sequentially.  The Business Survey (which drives the NFP figure) showed a net gain of +165 but the Household Survey (which drives the Unemployment Rate) showed employment declining by -115K.

 

What do we do with that equivocality?  From a positioning or allocation perspective, not much unless the price signal changes.  

 

The Quantitative Risk Management setup remains positive for equities here and, on balance, today’s data doesn’t materially impact our Trend view of fundamentals – particularly with the initial claims data continuing to show accelerating improvement, the preponderance of domestic macro data in July/Aug strengthening, the seasonal headwind (which impacts the NFP data also) beginning to reverse in September, and a diminishing fiscal drag moving tangibly closer on the timeline.    

 

Maybe there’s a case that today’s data adds some incremental uncertainty to Taper prospects, maybe Putin vs. Obama escalates, maybe Congress delivers a negative policy surprise.  Maybe not.  

 

All in, similar to last month, we wouldn’t view today’s employment data in isolation as a real catalyst in either direction. 

 

We provided a more detailed analysis of the Labor Force Participation Rate in today’s Early Look.  You can link to that here >> Early Look: Cyclical vs. Secular

 

A summary review of the August Employment data below:


NFP:  Net Non-Farm payrolls gained sequentially coming in at +169K - holding flat on a YoY growth basis at +1.65% and accelerating marginally to 1.67% on a 2Y basis

NFP Revision:  The net two month revision was -74K with June revised from +188K to 172K and July revised from +162K to +104K.  

Household Survey:  The net employment gain as measured by the Household Survey was negative at -115K vs. +227K in July

Employment by Age:  Employment growth accelerated for 20-24 yr. olds and 65+ yr olds, decelerated for 55-64 year olds, and held flat for the balance of age cohorts

Unemployment Rate:  The Unemployment Rate dropped to 7.3% from 7.4%  as the total labor force declined -312K alongside a -198K decline in Total Unemployed and -115K decline in Total Employed. 

Labor Force Participation:  A positive +203K change in the working age population alongside a net decline in the labor force pushed the Labor Force Participation Rate down to 63.22% from 63.40%.

Part-time/Temp Employment:  Part-time employment declined by -234K while Temp employment gained +13K, registering its 11th consecutive month of net gains.  

Industry Employment:  Information and Finance were the only losers with employment declining 18K and 5K, respectively in August.  Manufacturing gained +14K on the month, reversing a 5 month run of net job loss.

Ave Weekly Hours for Private Employees:  Hours increased to 34.5 from 34.4 MoM and were up 0.1 vs  year ago levels.

 

August Employment:  Something For Everyone - Employment Summary Table

 

August Employment:  Something For Everyone - Cycle Profile

 

August Employment:  Something For Everyone - NSA Claims 090613

 

August Employment:  Something For Everyone - Employment by Age

 

August Employment:  Something For Everyone - Unemployment Rate 

 

August Employment:  Something For Everyone - CES vs CPS 2Y

 

August Employment:  Something For Everyone - Employment CES vs. CPS

 

August Employment:  Something For Everyone - Unemployment Rate vs LFPR

 

Christian B. Drake

Senior Analyst

 


CHINA GOES BULLISH TREND ON THE ONLY POSITIVE DATA POINT THAT ACTUALLY MATTERS

Takeaway: The Shanghai Composite Index closed above its 2,123 TREND line today on really meaningful – and potentially very positive – news.

SUMMARY BULLETS:

 

  • The Shanghai Composite Index closed above its 2,123 TREND line today. While this move needs to confirm itself on a closing price basis over the next few days and weeks, we’d be remiss not call out this groundbreaking quantitative signal as anything other than that.
  • Perhaps the most important part about China closing above its TREND line today was that it happened amid some really meaningful news:
    • The Politburo plans to speed up the development of the Shanghai free-trade zone (to be launched later this month), with the intention that it will take the lead in financial reform – eventually rivaling Hong Kong as China’s main international financial center with intentions for it to become a global financial center by 2020.
    • In the free-trade zone, 19 commercial sectors are to be liberalized with the banking sector being the most important of the 19, considering the plans for the Shanghai free-trade zone to be at the forefront of interest rate liberalization in China.
    • Additionally, regulators will authorize full capital account conversion on a trial basis, though it remains to be seen how much the exchange rate will be allowed to fluctuate because of it.
  • All in all, this could wind up being extremely positive as it relates to offsetting China’s structural liquidity headwinds with new sources of capital, but we simply need more data to confirm that hypothesis.
  • The one thing we can tell you is that if the market thinks the Shanghai free-trade zone will be meaningful enough to help offset the structural liquidity constraints we see weighing on Chinese economic growth over the long term, then we do as well. Unlike the consensus US equity bears in 2013, we’re not and never will be smarter than the market…
  • We’ll be on the sidelines awaiting more details as it relates to these developments and we suggest you do the same; at the bare minimum, investors should no longer be shorting China here. A small loss on the short side is always better than getting royally squeezed for an even bigger one (NOTE: the MSCI China Financials Index is up +1.3% since we turned bearish on Chinese financials and property developers back on JUN 7).

 

Roughly three weeks ago on AUG 15, we published a note titled, “ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE?” where we thoroughly dissected the confirming and disconfirming evidence underpinning the current rally in the Chinese equity market – particularly with respect to its sustainability on our intermediate-term TREND duration. We greatly expanded upon that analysis on slides 58-72 in our AUG 30 presentation titled, “PADDLING UPSTREAM?: NAVIGATING #EMERGINGOUTFLOWS” and in our SEP 3 note titled, “HUNTING FOR ASIAN EQUITY ALPHA: LONG SOUTH KOREA VS. SHORT CHINA?”.

 

In each piece, we ultimately concluded that the recent recovery in Chinese economic growth was not sustainable; thus, we concluded that the Chinese equity market’s dead-cat bounce off its late-JUN lows was likely beginning to fade. In the interest of brevity, we’ll refer you to the aforementioned slides and research notes for the analysis supporting this economic and financial market call.

 

Needless to say, that was the wrong call to make. Since AUG 15, the Shanghai Composite Index has advanced +2.8%, which is good for the 2nd best gain throughout all of Asia and well ahead of the regional median equity market delta of -0.2% over that time frame. More importantly, the Shanghai Composite Index closed above its 2,123 TREND line today. While this move needs to confirm itself on a closing price basis over the next few days and weeks, we’d be remiss not call out this groundbreaking quantitative signal as anything other than that.

 

CHINA GOES BULLISH TREND ON THE ONLY POSITIVE DATA POINT THAT ACTUALLY MATTERS - China SHCOMP

 

The worst thing we can do as one of your trusted resources in Global Macro Risk Management is pound the table on the short side in light of the aforementioned delta. That would be disingenuous and inconsistent with our proven, repetitive investment idea generation process:

 

CHINA GOES BULLISH TREND ON THE ONLY POSITIVE DATA POINT THAT ACTUALLY MATTERS - 2

 

Perhaps the most important part about China closing above its TREND line today was that it happened amid some really meaningful news:

 

  • The Politburo plans to speed up the development of the Shanghai free-trade zone (to be launched later this month), with the intention that it will take the lead in financial reform – eventually rivaling Hong Kong as China’s main international financial center with intentions for it to become a global financial center by 2020.
  • In the free-trade zone, 19 commercial sectors are to be liberalized with the banking sector being the most important of the 19, considering the plans for the Shanghai free-trade zone to be at the forefront of interest rate liberalization in China.
  • Additionally, regulators will authorize full capital account conversion on a trial basis, though it remains to be seen how much the exchange rate will be allowed to fluctuate because of it.

 

All in all, this could wind up being extremely positive as it relates to offsetting China’s structural liquidity headwinds with new sources of capital, but we simply need more data to confirm that hypothesis.

 

The one thing we can tell you is that if the market thinks the Shanghai free-trade zone will be meaningful enough to help offset the structural liquidity constraints we see weighing on Chinese economic growth over the long term, then we do as well. Unlike the consensus US equity bears in 2013, we’re not and never will be smarter than the market…

 

We’ll be on the sidelines awaiting more details as it relates to these developments and we suggest you do the same; at the bare minimum, investors should no longer be shorting China here. A small loss on the short side is always better than getting royally squeezed for an even bigger one (NOTE: the MSCI China Financials Index is up +1.3% since we turned bearish on Chinese financials and property developers back on JUN 7).

 

Moreover, to the extent our fears (i.e. the market’s cheers) are confirmed, a positive inflection in China’s structural economic outlook would obviously have meaningful implications for the supply/demand/price dynamics across key commodity markets, broader EM economic growth and investor sentiment surrounding EM capital and currency markets (NOTE: the latest BofA flows data shows a rolling-3M outflow from EM stock and bond funds of $60B, which is the largest rolling 3M outflow since 2008).

 

Sit tight and stay tuned for more clarity is the best advice we can give you at the current juncture. Anything more than that would also be disingenuous, as knowing when and what you don’t know is often times as important as knowing when you’re flat-out wrong.

 

Have a great weekend,

 

Darius Dale

Senior Analyst


Working Women

Takeaway: Here’s why employment among your women is increasing.

Here’s a number from today’s jobs report that most overlook – the employment growth among women aged 20 to 34. As the chart below shows, that year-on-year employment growth among those women is accelerating.

 

Those numbers dovetail with Healthcare Sector Head Tom Tobin’s theme of rising birth rates as employment often comes with health insurance, which is pretty much a necessity before having a child.

 

Working Women  - wecantdoit

 

Working Women  - women


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KSS: Risk Of Share Loss Is Greater Than Most People Think

Takeaway: We think KSS stole as much as $800mm in sales from JCP. JCP wants it back. Succeed or not, JCP will inflict damage on KSS as it tries.

Conclusion: We think that KSS stole as much as $800mm in sales from JCP last year. JCP wants it back. Succeed or fail, JCP will inflict damage on KSS that is not appreciated.

 

We’d been assuming for much of the past year that the primary beneficiaries of JCP’s share loss have been Macy’s and GPS (Gap and Old Navy US). At face value, the sheer dollar shift in 2012 supported this thesis. But our recent work has presented us with new data that make us think we’ve been negative on the wrong names. Specifically, we recently conducted an extensive consumer survey to understand why consumers have shifted dollars away from JCP, and where the share has gone. And the big winner (and soon to be loser) turned out to be Kohl’s. Macy’s came in at number two, but by a wide margin. Gap looked surprisingly good.

 

Survey Says: As outlined in the chart below, consumers claim that almost 19% of items that they shifted away from JCP are now being purchased at Kohl’s. The math is pretty simple. $4.3bn in sales lost * 18.6% share shift = $800mm.  But the obvious counter-attack is “That can’t be right. KSS has been putting up horrible numbers – that’s way too high as KSS only gained $475mm in net sales in 2012”. It’s a logical question, and we’d ask the same one.

 

But our sense is that what’s actually happening is that the $475mm sales gain includes upwards of $800mm in sales gains from JCP.  In other words, sales on an organic basis were likely down at JCP last year by several hundred million.

 

We understand that there is sampling error associated with every form of survey – ours included. But we should note that this is not a typical ‘ask a bunch of people at the Garden State Plaza Mall what they think’ kind of survey. We put this up any other one out there.

 

Even if you do want to adjust for sampling error, these numbers are still so high that we can raise a very large red flag for anyone modeling KSS’ comp or Gross Margin out over the next 1-2 years. Customers are never easy to win back, but we surveyed how consumers would respond to pricing, promotions, private label and remodels, and we feel pretty confident that KSS is going to have a problem on its hands.

 

Stores Shopped Instead of JCP (blue column) vs Items Dispersion of Where Items Where Purchased (Gray)

KSS: Risk Of Share Loss Is Greater Than Most People Think  - shareshift

Source: Hedgeye Research

 

Share Gain From JCP By Income

KSS: Risk Of Share Loss Is Greater Than Most People Think  - share2

Source: Hedgeye Research


Labor Pains?

Takeaway: Here’s how to really understand what the labor force participation rate really means.

Lots of Tweets tweeted. Lots of ink spilled. Lots of pundits, well, punditing. Lots of noise. It’s the first Friday of the month after all, and the government just released its monthly unemployment report. As Keith says, all that really matters in today’s report is how the market reacts to it.

 

You will hear, though, a lot about the labor force participation rate today, which today’s report showed declined to 63.2% in August, its lowest level in 25 years, and down from 63.4% last month.

 

Rather than just making noise about this topic, we have been doing real research on it. Here’s an excerpt from a note that Macro Analyst Christian Drake wrote about the labor force participation rate.

 

Despite its descent to old-hat, punditry talking point over the last five years, Trend movement in labor participation remains critical to the forward growth outlook. 

 

After all, if population growth is slowing and the share of that population that is working is declining, productivity has some heavier lifting to do to keep real per capita output going in the right direction. 

 

Demographic, cultural, and institutional trends are generally glacial and collectively serve to drive the broader, directional Trend in the Labor Force Participation Rate (LFPR).  Over the last 5 years, the straightforward, central question facing economists is what temporary (and potentially permanent) impact the shock of the Great Recession had on labor participation. 

 

From a research perspective, the aspirational goal has been to discern what the prevailing gap is between where we are currently on the LFPR and where we would have been without the cyclical impacts. 

 

Academic literature over the last 5 years is replete with analyses attempting to decompose the cyclical and secular components impacting labor force participation.  On average, the research suggests around 40-60% of the decline in the LFPR since 2007 could be attributed to cyclical factors. 

 

The truth is that attempting to parse the Cyclical and Trend components of Labor Force Participation, with precision, is a quixotic pursuit.  It’s some amorphous combination of the two. 

 

From an investment perspective, understanding the principal drivers of the LFPR, the key considerations facing the forward outlook, and the highest probability TREND trajectory hold more practical significance than decomposing the Cycle/Trend impacts with exact precision.   

 

With that in mind, let’s take an abbreviated, Socratic tour of Labor Force Participation.   

 

What has been the larger Trend in Labor Force Participation?

Taking a long-term view, the Chart of the Day below illustrates the 3 primary labor participation trends which have prevailed over the last 65 years.  Briefly, from 1948 to the mid 1960’s, participation was largely stable. 

 

From the 1960’s until the turn of the century, driven by Baby Boomers (born 1946-1964) entering prime working age (24 – 54) and a secular increase in female participation, LFPR showed a persistent increase. 

 

From 2000 to present, the trend has been one of decline as the median age of the workforce rose, Boomers began matriculating towards retirement and dual recessions all weighed on the participation rate.

 

Is Labor Force Participation sensitive to the Business Cycle?

The correlations aren’t exceedingly strong, but yes.  Here, it’s sufficient to simply observe the LFPR in the post-recessionary periods in the chart below.  In each instance, the participation rate dips in the wake of the cyclical downturn. 

 

So, labor participation shows some economic/business cycle dependence and the broader Trend since the turn of the century has been one of decline.  With no peri-recession tailwinds from cyclical or secular factors, the fact that Labor Force Participation declined in the wake of the Great Recession is not a surprise. 

 

What has been the impact of domestic demographic Trends?

We’ll explore the multitude of factors impacting the LFPR in more detail in a subsequent note.  Here, we’ll consider the impact of age demographics on the Trend movement in the LFPR. 

 

Historically, different age groups have shown typical, largely fixed, participation rates.  Labor Participation peaks progressively from age 16 into the mid 40’s, gradually declines to age 64, then drops precipitously.  Thus, as population shares of the different age groups change it impacts the prevailing, aggregate participation rate. 

 

In addition to plotting the actual LFPR (blue line), in the Chart of the Day, we show the estimated trajectory of participation based on the average 1997-2007 participation rate by age for those aged 16 years and older (orange line).  The extrapolation suggests greater than ~40% of the decline in the LFPR post-2007 could be attributed purely to age demographic trends.

 

Extending the forecast, demographic trends, in isolation, would predict LFPR to decline to 64.1% in 2015 and a further decline to 62.5% in 2020.  Clearly, the Trend remains one of decline. 

 

What sits as a primary swing factor for LFPR over the intermediate term?

The level of long-term unemployed associated with the great recession was unprecedented.  If the long-term unemployed do come back then we can expect upward ‘cyclical’ pressure on labor force participation as economic conditions improve. 

 

If, however, the LT unemployed fail to return to the labor force, the recessionary shock could be viewed to have changed the structural and secular outlook for labor market participation.  In effect, shifting the LFPR Trend line lower, compressing the existent cyclical gap (i.e. the spread between the orange & blue lines below), and lowering the potential upward pressure on the LFPR (& unemployment rate) as economic conditions improve. 

 

Regardless of the cyclical impacts on Labor Participation, growth in the supply of labor will continue to slow vs the multi-decade average. 

 

A TREND deceleration in working age population growth alongside a decline/flattening in labor force participation rate will put secular pressure on domestic labor supply, serving as a headwind to potential GDP and a tailwind to real wage growth.   As a result, productivity gains will be an increasingly important driver of real output growth over the coming decade(s).

 

Innovation drives productivity.  Human Capital drives innovation.  Circumstance will necessarily drive our collective pursuit of human capital.  We’ll be increasingly responsible for our own (economic) fate – fancy that.   

 

Labor Pains? - Jobs

 

Labor Pains? - LFPR Demographics


Jobs and Bonds

Client Talking Points

Jobs and More Jobs

Today’s unemployment report came in largely as expected, but don’t get too fixated on it. We don’t believe the government’s monthly report  is necessarily predictive of economic growth – we take our cues from the non-seasonally adjusted jobless claims numbers, and those numbers are showing their fastest rate of improvement in more than a year.  We’ve been making the call that the economic growth is accelerating and that the jobs picture is improving for months now.

Bills and Bonds and Rates, Oh My

They say, “Don’t fight the fed.” We say, “Don’t fight economic gravity.” If you look at soaring yields on two-year and ten-year Treasurys, the bond market is doing anything but fighting economic gravity. It’s telling us economic growth is real.

S&P 500

The Institutional Investor survey just  his year-to-date lows in the percentage of investors who call themselves bullish (37.1%).  Will the S&P  to hit its all-time high of 1709? That number is in play just as most investors are not positioned for it.

Asset Allocation

CASH 28% US EQUITIES 25%
INTL EQUITIES 23% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

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.

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.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

“Was there an eclipse? France is considering cutting the corporate tax rate from 33% to 30%.”

--@KeithMcCullough

QUOTE OF THE DAY

“Losers assemble in little groups and complain. Winners assemble as a team and find ways to win.” – Emlen Tunnell

STAT OF THE DAY

7 and 43, The number of touchdown passes Denver quarterback Peyton Manning threw in last night’s NFL season opener. It was the first time in 43 years that a quarterback threw that many touchdown passes in a single game.


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