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Ask Yourself 5 Simple Questions

“Always my soul hungered for less than it had.”

-T.E. Lawrence

 

Here are some risk management questions to consider:

  1. Will the supposed leaders of this country allow an un-elected man to keep devaluing America’s Currency?
  2. Will Ben Bernanke and Janet Yellen be allowed to impose a perpetual depression on American Savers?
  3. Will @FederalReserve’s latest “communication tool” be to drive uncertainty, locking in a YTD VIX low?
  4. Will the all-time high for the US stock market (SPX 1725) be another Bernanke Bubble top?
  5. Will there ever be a bull case America believes in that doesn’t include a #StrongDollar and real growth?

Ask Yourself 5 Simple Questions - ben1

I for one am Hungering For Less government intervention in our currency and bond markets. I’m hungering for a life that doesn’t include having to wake up worrying about what some sub-regional-anti-dog-eat-dog-federal-reserve-vice-president says on CNBC next.

 

I’m hungering for what has always reflected the strength and character of any nation – confidence in both the currency and resolve of its people to be the change born out of crisis.

 

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INITIAL CLAIMS: FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK?

Takeaway: Strong claims data will beget strong NFP numbers between now and year end. A detailed analysis of this morning's Claims & GDP data below.

The strength in the domestic labor market remains impressive, to say the least. 

 

The 4-week rolling average in both the non-seasonally adjusted and seasonally adjusted Initial Jobless Claims series continued to accelerate in the latest week.  The strengthening continued despite the true up in the data stemming from technology upgrades in CA and NV that had positively impacted the figures over the last few weeks. 

 

As it relates to next week's payroll data, bloomberg currently has consensus estimates for nonfarm payrolls marked at 175K.  This compares with 169K for august and 3-month and 6-month averages of 148K and 160K, respectively. 

 

With strength in Initial claims accelerating over the last month and the seasonal distortion in the data now shifting to a tailwind, we think the balance of risk is to the upside vs expectations, as they sit currently, over the next few months.   

 

Below is the breakdown of this morning's claims data, along with a detailed analysis of the historical relationship between Claims and Nonfarm Payrolls, from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

INITIAL CLAIMS:  FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK? - NFP Seasonality

 

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

 

Should We Care about the Tail or the Dog?

We would make two points with respect to this morning's labor market data. 

 

First, the data is exceptionally strong. For perspective, SA rolling initial jobless claims are now at levels last seen in April 1999 and January 2006. Recollect the market environment in both those periods. Consider the chart below.

 

INITIAL CLAIMS:  FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK? - JS 1

 

Second, since the market seems obsessed with the NFP report that will come out next Friday, here are a couple thoughts on how claims do/don't relate to NFP.

 

a) The first chart below looks at the time series data back to the start of 1999. Rolling initial claims are in red on the left axis while private payrolls are in blue on the right axis and are inverted to make the relationship more apparent visually. We think that the visual makes it quite obvious that there is a relationship between these two series.

 

b) The second chart below shows the same data but on a scatterplot. The RSQ is somewhat low at 0.528, but nevertheless the relationship is still quite clear, we think. The blue series is monthly data from 1999 to Present, while the green box is the most recent data for August 2013. Just by coincidence, the most recent data pair was almost exactly on the pin of the regression line. This month's claims data, for reference, would suggest private payrolls of 195k for September, by the way. Unfortunately, the standard error is significant. It is too large to have much conviction in the accuracy of the estimate. 

 

c) The final point worth making is that these two data series are cointegrated. The best definition I could find online for cointegration is the following: "The old man and the dog are joined by one of those leashes that has the cord rolled up inside the handle on a spring. Individually, the dog and the man are each on a random walk.   They cannot wander too far from one another because of the leash.  We say that the random processes describing their paths are cointegrated." - Link. We ran an ADF test (augmented dickey fuller) to see whether claims and NFP are, in fact, cointegrated and the p-value was 0.038. In other words, there is a 3.8% chance they are not cointegrated, and a 96.2% they are. Cointegration matters because it means that as claims go, eventually private NFP will go, just as the man with the leash will ultimately determine where the dog on the leash ends up.

 

INITIAL CLAIMS:  FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK? - JS 2

 

INITIAL CLAIMS:  FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK? - JS 3

 

 

The Data

Prior to revision, initial jobless claims fell 4k to 305k from 309k WoW, as the prior week's number was revised up by 1k to 310k.

 

The headline (unrevised) number shows claims were lower by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.75k WoW to 308k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -17.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -16.2%

 

INITIAL CLAIMS:  FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK? - JS 4

 

INITIAL CLAIMS:  FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK? - JS 5

 

 

 

2Q13 GDP:  Final 2Q13 GDP largely a non-event.  A review of the highlights below:

 

Net Exports:  the upward revision to the advance GDP estimate (advance estimate was 1.7 vs the 2.5 prelim/final)) was driven primarily by the positive revision to net exports.  

 

Generally, we view GDP upside stemming from the balance of external trade as equivocal from an analytical perspective.  Relative import declines are positive from an accounting convention perspective but, from a macro perspective, import growth is generally associated with positive economic growth. 

 

While debt financed consumer (end) consumption of imports could be viewed negatively, an increase in capital equipment and raw material imports is supportive of domestic production and ultimately a net positive for national income. So long as the rise in imports didn’t come at the expense of resource utilization domestically, it’s constructive for domestic economic activity. 

 

Consumption:  Growth in Consumption was down sequentially in 2Q13, decelerating on a QoQ basis and providing a smaller positive contribution to GDP on the quarter. 

 

Given the soft, real disposable income growth observed thus far in 3Q13 (due to the combination of furloughing and continued job loss at the federal level and ongoing, muted wage inflation broadly) and the flat savings rate, were not expecting material acceleration in consumer spending in the very near term.  

 

Weak Dollar policy out of the fed and the prospective flow through to commodity inflation presents another headwind to an acceleration in consumption growth from here.     

 

Domestic Demand:  Real Final Sales (GDP ex-Inventory Change), Gross Domestic Purchases (GDP including imports, excluding exports) & Real Final Sales to Domestic Purchasers (perhaps the cleanest read on total domestic demand as it measures GDP including imports but excluding both exports and Inventory change) all accelerated strongly sequentially.

 

Investment:  Growth in Private investment was revised lower by 70bps in the 2nd revision, but still very strong for the quarter at +9.2%.   

 

Government:  Government expenditure growth remained negative on the quarter but was less of a drag than in 1Q13.  Government spending grew -0.4% in 2Q (vs -4.2% in 1Q), contributing -0.07% to GDP (vs -0.82 in 1Q).

 

Inflation:  The GDP Price Index and Core PCE inflation were revised lower with both coming in at 0.6%.  With Core PCE being the Fed’s preferred read on inflationary pressures, the disinflation currently prevailing remains supportive of the committee’s dovish policy lean.    

 

INITIAL CLAIMS:  FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK? - GDP Summary 2Q13F 092613

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

Christian B. Drake

 

 


McCullough: Where I Stand Now

Takeaway: We are less sanguine on the market and macro economic picture.

The Bernanke Fed's decision not to taper throws a monkey wrench into the markets and economy. We are consequently less sanguine on the overall macro picture going forward.

 

McCullough: Where I Stand Now - monkey

 

Some Additional Thoughts

  • This is the first 2013 US stock market “correction” that I will not buy
  • Bernanke has confused the entire growth picture
  • Expectations of the Fed getting out of the way were critical to American confidence and growth prospects
  • Bernanke's gravity bending experiment is killing confidence
  • US Dollar is starting to look like hell again
  • All-time highs in growth vs slow growth stocks may be in as well
  • Still thinking year-to-date low for Fear (VIX) is probably in
  • We remain short the MLP Kinder Morgan (KMP) in #RealTimeAlerts.

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MKC: Not Much to Love About Spices

Quick-hit update: still not much to like about MKC

 

Today’s Q3 2013 release was very much an extension of last quarter’s call:

  • The quarter did arrest the last 5 straight quarters of revenue declines with sales growing at +4%, versus +1.9% last quarter, but 3% of it was driven by its acquisition of Wuhan Asia Pacific Condiments (WAPC) in May 2013
  • The company expects to deliver +7% sales and eps next quarter, which we think is a stretch (despite an easier Hurricane Sandy comp)
  • We expect the weakness that management cited in quick service restaurants (QSR) and geographically in China and USA, and a lagging industrial business to continue into year-end despite slight offsets as we move into a heavier buying season around the holidays and an increased $10MM marketing spend
  • Our macro call is that Bernanke is pulling the confidence cord in issuing his “no taper” call which we expect will translate to subdued confidence into year end. With Europe seeing only slight improvement off of low levels, China still at depressed levels (compared to recent year comps) and slowing, and Latin America (mostly Mexico for MKC) a mixed picture, we’re not comfortable that the macro will be playing at MKC’s back
  • Also, spice consumers remain very sensitive to price and typically purchase last minute: the company has not taken up price (or perhaps been willing to) in 2 years. It is planning to implement a 3 cent price increase next quarter – we’ll have to see how the consumer reacts
  • The stock has underperformed its peer group over recent months, and we don’t expect this trend to inflect. We’ll let the chart below of our levels on MKC do the talking: it is bearish over its immediate term TREND:

MKC: Not Much to Love About Spices - zz. mkc

 

Matt Hedrick


INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY

Takeaway: Strong claims data will beget strong NFP numbers between now and year end. We remain bullish on the consumer lenders: COF & BAC.

Should We Care about the Tail or the Dog?

We would make two points with respect to this morning's labor market data. 

 

First, the data is exceptionally strong. For perspective, SA rolling initial jobless claims are now at levels last seen in April 1999 and January 2006. Recollect the market environment in both those periods. Consider the chart below.

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 9

 

Second, since the market seems obsessed with the NFP report that will come out next Friday, here are a couple thoughts on how claims do/don't relate to NFP.

 

a) The first chart below looks at the time series data back to the start of 1999. Rolling initial claims are in red on the left axis while private payrolls are in blue on the right axis and are inverted to make the relationship more apparent visually. We think that the visual makes it quite obvious that there is a relationship between these two series.

 

b) The second chart below shows the same data but on a scatterplot. The RSQ is somewhat low at 0.528, but nevertheless the relationship is still quite clear, we think. The blue series is monthly data from 1999 to Present, whiel the green box is the most recent data for August 2013. Just by coincidence, the most recent data pair was almost exactly on the pin of the regression line. This month's claims data, for reference, would suggest private payrolls of 195k for September, by the way. Unfortunately, the standard error is significant. It is too large to have much conviction in the accuracy of the estimate. 

 

c) The final point worth making is that these two data series are cointegrated. The best definition I could find online for cointegration is the following: "The old man and the dog are joined by one of those leashes that has the cord rolled up inside the handle on a spring. Individually, the dog and the man are each on a random walk.   They cannot wander too far from one another because of the leash.  We say that the random processes describing their paths are cointegrated." - Link. We ran an ADF test (augmented dickey fuller) to see whether claims and NFP are, in fact, cointegrated and the p-value was 0.038. In other words, there is a 3.8% chance they are not cointegrated, and a 96.2% they are. Cointegration matters because it means that as claims go, eventually private NFP will go, just as the man with the leash will ultimately determine where the dog on the leash ends up.

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 17

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 18

 

 

The Data

Prior to revision, initial jobless claims fell 4k to 305k from 309k WoW, as the prior week's number was revised up by 1k to 310k.

 

The headline (unrevised) number shows claims were lower by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.75k WoW to 308k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -17.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -16.2%

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 1

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 2

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 3

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 4

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 5

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 6

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 7

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 8

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 10

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 11

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 12

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 13

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 19

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 14

 

Yield Spreads

The 2-10 spread fell -8 basis points WoW to 228 bps. 3Q13TD, the 2-10 spread is averaging 234 bps, which is higher by 63 bps relative to 2Q13.

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 15

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure

Takeaway: The trend of smaller bond fund outflows continued in the most recent week but still both taxable and tax-free bond funds booked outflows

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Equity mutual fund inflow decelerated week-to-week to $3.4 billion for the 5 day period ending September 18th, down from the $5.2 billion inflow the week prior but remained well above last year's weekly average

 

Fixed income mutual fund outflows improved sequentially W-o-W but still resulted in a $2.6 billion withdrawal by investors, an improvement from the $6.7 billion draw down last week

 

Within ETFs, passive equity products experienced the largest weekly inflow in at least 2 years, with $25.8 billion coming into the equity category. Bond ETFs also had positive trends, although on a much smaller scale, with an $850 million inflow in the most recent weekly period


 

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 1 revised

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 2 revised

 

 

For the week ending September 18th, the Investment Company Institute reported a deceleration in equity fund flow trends although with fund flow still positive for stocks and an improvement in fixed income mutual fund flows, however with bond trends simply booking a smaller outflow. Total equity fund flow totaled a $3.4 billion inflow which broke out to a $3.3 billion inflow into international equity products and a $44 million inflow in domestic stock funds. These trends decelerated from the prior week's total equity fund inflow of $5.2 billion. Despite this slow down in stock fund flows, the year-to-date weekly average for 2013 now sits at a $2.6 billion inflow for total equity mutual funds, a substantial improvement from the $3.0 billion outflow averaged per week in 2012.

 

On the fixed income side, outflow trends continued for the week ending September 18th with the aggregate of taxable and tax-free bond funds combining to lose $2.6 billion in fund flow. The taxable bond category specifically shed nearly $900 million, the smallest weekly outflow in 6 weeks and a vast improvement from the $2.8 billion loss last week. Tax-free or municipal bonds continued their sharp outflow trends losing another $1.7 billion in the week ending September 18th, an improvement from last week's $2.7 billion outflow but none-the-less the 11th consecutive week over the $1.5 billion outflow mark. Franklin Resources (BEN) continues to have the most exposure in our coverage group to declining Municipal bond trends with over 10% of its assets-under-management in the tax-free category. The 2013 weekly average for fixed income fund flow has now drastically declined from 2012, now averaging a $521 million weekly outflow this year, a far cry from the $5.8 billion weekly inflow averaged last year.

 

Hybrid funds, or products that combine both fixed income and equity allocation, continue to be the most stable category bringing in another $1.5 billion in the most recent weekly period, an improvement from the $1.2 billion inflow the week prior. The year-to-date weekly average inflow for hybrid products is now $1.6 billion for '13, almost a 100% increase from 2012's $911 million weekly average.

 

 

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 3

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 4

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 5

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 6

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 7

 

 

Passive Products - Largest Weekly Equity ETF Inflow In Our Dataset:

 

 

Exchange traded funds experienced wildly positive trends on the equity side and mildly positive trends in fixed income for the week ending September 18th. Equity ETFs gained $25.8 billion, the biggest weekly inflow in our data set with balanced inflow into international, sector focused, and large-cap products. Including this week's inflow, 2013 weekly average equity ETF trends are averaging a $3.4 billion weekly inflow, an improvement from last year's $2.2 billion weekly inflow average.

 

Bond ETFs also had a mildly positive week with an $850 million inflow, which was a slight decline from last week's $1.4 billion subscription. Including this sequential drop in the most recent period, the 2013 weekly bond ETF average is now just a $388 million inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow from 2012.

 

 

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 8

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 9

 

 

HEDGEYE Asset Management Thought of the Week: The Market is Tapering the Long End Itself:

 

While the U.S. central bank continues to peg its bond buying programs to backward looking forecasts, the bond market continues to taper the long end of the curve itself and has pushed the 10 year Treasury yield up from a low of 1.6% in May to its current level of 2.6% this week. Hedgeye's Macro Team has introduced the thought that the continued accelerating improvement in year-over-year weekly jobless claims will eventually be reflected in the monthly Non Farm Payroll (NFP) numbers (despite different bias' in these data-sets) and that next week's NFP print for September on Friday, October 4th may finally prove out a closer relationship between these two employment variables. Thus, the 10 year Treasury yield may again spike up to recent highs on renewed Fed tapering expectations. In the event of a back up in 10 year rates again, we continue to observe the correlation between 10 year Treasury yields and Franklin Resources (BEN) stock which has strengthened over recent weeks. This investment manager with a large exposure to Municipal bond trends and Global Bond flows has been trading on the trajectory of long term yields under the thought that as bonds sell off, the fixed income and retail nature of BEN's assets-under-management levels will be negatively impacted. When we first spotted this developing correlation, the R-squared between BEN and the US10YR was 0.32. The R-squared currently is 0.50 and continues to bear watching especially if U.S. macro economic data continues to improve.

 

 

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 10

 


 

 

 

Jonathan Casteleyn, CFA, CMT

 

 

 

 

 

 

Joshua Steiner, CFA

 

 


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