Takeaway: This correction is not like the ones we bought (we shorted this one).
POSITION: 6 LONGS, 8 SHORTS @Hedgeye
I don’t always go net short, but when I do, I prefer Down Dollar and #GrowthSlowing.
This morning’s ISM Services report was the 1st of the major leading indicators (SEP #) in our model confirming what both the bond and currency markets continue to confirm – on the margin (from YTD growth accelerating highs in JUL-AUG), US growth is slowing.
Across our core risk management durations, here are the lines that matter to me most:
- Immediate-term TRADE resistance = 1704
- Immediate-term TRADE support = 1671
- Intermediate-term TREND support = 1660
In other words, this correction is not like the ones we bought (we shorted this one). With Bernanke banning economic gravity on the long end of the curve and the USD getting crushed, you shouldn’t have expected me to execute any other way.
It’s just our process.
Keith R. McCullough
Chief Executive Officer
What can slow the mo in slots? The better question is what will keep it going. Taking IGT off the best ideas list.
Competition among the slot suppliers is as fierce as I’ve seen in covering the space for 17 years. Smaller players are gaining, ASP growth has slowed, and product quality has improved dramatically. At the same time, replacement demand is stagnating again, the number of new casinos and expansions will be lower in 2014, and the differentiation between the best and average performing gaming is narrowing. The base of slots in existing markets continues to decline. I don’t want to use the word commodity but operator cries over the past 15 years that “the product is the building and service, not the slots” may finally be relevant.
Has anyone noticed the worsening economics of the once vaunted participation business? We have. Incremental ROI is near nil for this segment. Most of the CapEx appears to be more maintenance related than ever before. IGT is clearly the most susceptible here.
And we haven’t even gotten to the pink elephant in the room – demographics. Baby Boomers won’t live forever. Younger generations are not playing slot machines! Generation X – my generation – the product of the divorce boom and the first video game generation, do not play slots. Oh, how I miss late night Space Invaders on my Atari when my parents were asleep. If Generation X won’t play slots, can we really expect the younger generations – even more obsessed with skill-based video games – to turn to machines with randomly generated outcomes for entertainment?
So who is at risk? The stocks IGT, BYI, and SGMS for similar and different reasons could be under pressure in the coming year. In fact, we are taking IGT off the Hedgeye Best Ideas list today.
We’ll have more analysis and details on the slots soon. Stay tuned.
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Takeaway: Taxable bond funds captured their first inflow in 7 weeks; Munis still booked outflows and Domestic Equities experienced redemptions.
Editor's note: What follows below is a brief excerpt from a report released earlier this morning by Hedgeye's Financials team. For more information on how you can subscribe to Hedgeye research click here.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Equity mutual funds booked an outflow of $3.5 billion for the 5-day period ending September 25th, a reversal from the $3.3 billion inflow the week prior.
Fixed income mutual funds flow improved sequentially week-over-week, resulting in a $1.2 billion inflow, a reversal from the $2.6 billion outflow last week.
Within ETFs, passive equity products experienced another large inflow with $7.3 billion coming into the equity category. Bond ETFs also had positive trends, with a $1.3 billion inflow in the most recent weekly period.
Despite the short term weekly rebound in bond fund flows in the most recent 5 day period, 2013's year-to-date trends reflect a substantial asset allocation shift from bonds and into equities.
Takeaway: Lenders adjust reserves in response to delinquency rates, which take their cues from initial claims data.
The Data Remains Impressive
Initial jobless claims are the primary determinant of future delinquencies for unsecured lenders, i.e credit card companies. Typically, job loss accounts for the bulk of net credit losses (~60%) while bankruptcies, driven principally by divorce and unexpected medical bills, account for the balance. Claims also predict delinquencies well in advance, which is why we care. It's notable that rolling YoY NSA claims are now 18.3% lower than at the same point last year, which is the fastest rate of improvement seen YTD and is actually the fastest rate of improvement seen since the first half of 2010. In light of the recent weakness in the XLF we'd be looking at credit card operators on the long side as they are relatively immune from compression in the curve and are major beneficiaries of the enormous improvement in the credit environment.
One thing to note: Federal workers are eligible to collect unemployment while furloughed, so we would expect to see next week's claims print rise. That said, we would expect the uplift to be temporary.
We expect Capital One to print another solid result when they post 3Q earnings, predicated largely on the strength in the labor market. Remember that reserve release is being modeled on these claims numbers.
Prior to revision, initial jobless claims fell 2k to 308k from 305k WoW, as the prior week's number was revised up by 2k to 307k.
The headline (unrevised) number shows claims were lower by 1k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4k WoW to 304.75k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -18.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -17.5%
The 2-10 spread compressed 2 basis points WoW to 229 bps from 231 bps. The third quarter shook out at 230 bps, a major sequential increase (+63 bps) vs 2Q's average of 171 bps. Thus far in the fourth quarter, the yield spread is roughly flat, tracking down 4 bps vs the 3Q average.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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