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INITIAL CLAIMS: BACK TO STEADY

Takeaway: This week we're able to state definitively what's happening in the labor market, but what's less clear is why confidence is plunging.

This note was originally published November 07, 2013 at 11:00 in Financials

Editor's note: What follows below is an abridged report from Hedgeye Financials Sector Head Josh Steiner and Jonathan Casteleyn.

 

The Jury is Back and Has Reached a Verdict (on the labor market)


Last week we lamented the inability to conclude whether a negative inflection in the labor market was occurring based on lagged CA state level data. This week can speak more definitively. The labor market remains strong. The chart below shows the Y/Y trend in NSA initial claims nationally. The red line highlights the trend rate of improvement prior to CA's IT-related fiasco. The data has now resumed that pre-CA trend rate of improvement.

 

We won't belabor the point other than to say that the labor market appears not to have skipped a step as we had potentially feared. One thing we will call out, however, is that consumer confidence/comfort has fallen to a new YTD low. We include a chart later in this note illustrating that. The chart shows the 4-week rolling average of the weekly Bloomberg consumer comfort survey, but the weekly data is no less reassuring. It's unusual to see a divergence between the labor market and the consumer comfort survey data. We'll take a closer look and report back with any worthwhile findings next week.

 

 INITIAL CLAIMS: BACK TO STEADY - 20

 

Nuts & Bolts 


Prior to revision, initial jobless claims fell 4k to 336k from 340k WoW, as the prior week's number was revised up by 5k to 345k.

 

The headline (unrevised) number shows claims were lower by 9k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -9.25k WoW to 347.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -3.4%

 

INITIAL CLAIMS: BACK TO STEADY - 1

 

INITIAL CLAIMS: BACK TO STEADY - 2

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 

Jonathan Casteleyn, CFA, CMT

203-562-6500

jcasteleyn@hedgeye.com


 


ECB Cuts, EURO Plunges!

Who saw the 25bp interest rate cut coming this morning?  We didn’t!  In fact, what puzzles us is that we saw no need to use monetary “powder” this month given improving economic data across the region supporting our call for #GrowthAccelerating. Interestingly, Mario Draghi’s economic and inflation assessment of the Eurozone also didn’t change much today – while he underlined a forecast of a “prolonged period of low inflation”, his subdued inflation outlook (below the 2% target) had been well communicated over the last two meetings, including forecasts for low levels of inflation to extend late into 2014. So why then the cut today, especially if, as Draghi says, the level of the EUR/USD does not factory into the policy rate consideration? ... You got us!

 

Alas, we have to play the game that is front of us.

 

If you’ve been following our research, you’d know one of our Q4 macro themes is #EuroBulls, which included a bullish call on the EUR/USD and German and UK equities.

 

Today’s decision certainly moved markets:  The EUR/USD is down as much as -1.2% intraday, and European equities are shooting to the upside.  From here we’re going to re-access our positioning around the #EuroBulls theme.  However, this morning Keith made some changes to our Real-Time Alerts:

  • We sold our long EUR/USD position (via the etf FXE)
  • We sold our long Germany equity position (EWG)
  • We sold our long Swiss equity position (EWL)

On the currency front, the signal from the central bank currency wars between the USD and EUR is a lot less clear this morning, whereas before this morning we expected the Bernanke/Yellen no taper call (likely out to March 2014) to weaken the Greenback vs the EUR. Of note, we think a relative winner in all of this is the British Pound, which we’re currently long of in our Real-Time Alerts via the eft FXB

 

On the equities front, before today’s meeting we were seeing a strong correlation between the EUR/USD and the DAX.  That’s obviously inflected today. Today’s decision could well facilitate more liquidity in the system, or at least a positive psychological response, which could be bullish for equities. On this front we’re still going to let the dust settle on today’s decision.

 

To read a copy of Draghi’s prepared remarks click here.

 

Here’s a look at our EUR/USD levels going into today’s decision:

 

ECB Cuts, EURO Plunges!  - zzz. eur usd

 

Matthew Hedrick

Associate


INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING

Takeaway: This week we're able to state definitively what's happening in the labor market, but what's less clear is why confidence is plunging.

The Jury is Back and Has Reached a Verdict (on the labor market)

Last week we lamented the inability to conclude whether a negative inflection in the labor market was occurring based on lagged CA state level data. This week can speak more definitively. The labor market remains strong. The chart below shows the Y/Y trend in NSA initial claims nationally. The red line highlights the trend rate of improvement prior to CA's IT-related fiasco. The data has now resumed that pre-CA trend rate of improvement.

 

We won't belabor the point other than to say that the labor market appears not to have skipped a step as we had potentially feared. One thing we will call out, however, is that consumer confidence/comfort has fallen to a new YTD low. We include a chart later in this note illustrating that. The chart shows the 4-week rolling average of the weekly Bloomberg consumer comfort survey, but the weekly data is no less reassuring. It's unusual to see a divergence between the labor market and the consumer comfort survey data. We'll take a closer look and report back with any worthwhile findings next week.

 

 INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 20

 

Nuts & Bolts 

Prior to revision, initial jobless claims fell 4k to 336k from 340k WoW, as the prior week's number was revised up by 5k to 345k.

 

The headline (unrevised) number shows claims were lower by 9k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -9.25k WoW to 347.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -3.4%

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 1

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 2

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 3

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 4

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 5

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 6

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 7

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 8

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 9

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 10

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 11

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 12

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 13

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 19

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 14

 

Yield Spreads

The 2-10 spread rose 12 basis points WoW to 235 bps. 4Q13TD, the 2-10 spread is averaging 228 bps, which is lower by 6 bps relative to 3Q13.

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 15

 

INITIAL CLAIMS: THE LABOR MARKET RETURNS TO STEADY IMPROVEMENT, BUT CONFIDENCE IS DROPPING - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


 


Early Look

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3Q13 GDP: Juiced By Inventories

Summary:  The strength in headline GDP is belied by rising inventory accumulation and decelerating consumption growth. Residential Investment drove further acceleration in total Private Investment while Government Expenditures and Net Exports both returned to positive GDP contributions. All in, domestic economic activity was largely flat sequentially with the headline print modestly overstating underlying strength.  

 

 

REAL GDP:  +2.8% QoQ (vs. 2.5% prior and +2.0% expected)

C: Consumption growth decelerating to +1.5% QoQ from 1.8% last quarter.  Contributed +1.04 to Total GDP.  Sequential growth in Durables was strong, NonDurables moderate, Services flat

I: Investment growth accelerating to +9.5% QoQ.  Biggest contributor to Total GDP at +1.45.

G: Government expenditure growth moving back to positive (barely) after 3 qtrs of negative growth.  Contributing 0.04 to Total GDP.

E: Exports (+4.5% QoQ) growing at a premium to imports with Net Exports contributing +0.31 to Total GDP.

 

Inventories:  Inventories helped juice Headline GDP growth with inventory accumulation providing a positive contribution of +0.8 to GDP.  Up from a positive contribution of +0.4 last quarter. 

 

Inflation:  Core PCE Inflation accelerated to 1.4%, off the near record low of 0.6% recorded in 2Q13.  With Core PCE remaining the Fed’s preferred inflation reading, at 60bps below the 2.0% target, inflationary pressures should not serve as a constraint to a continuation of easy policy. 

 

Real Final Sales (GDP less Inventory Change):  Still healthy at +2.0% QoQ vs +2.1% in 2Q

 

Gross Domestic Purchases (GDP less exports, including imports):  Flat sequentially at 2.5%

 

Real Final Sales to Domestic Purchasers (GDP less exports less inventory change):  In measuring total U.S. demand from both domestic and international sources this measure, arguably,offers the cleanest read on the health of the domestic private sector. Growth in Final Sales to Domestic Purchasers decelerated modestly from  2.1%in 2Q13  to 1.7% 3Q13.   

 

Consumption:  Consumption growth decelerated 30bps QoQ to +1.50% in the third quarter – the lowest pace of growth since 2Q11. 

 

The deceleration was not unexpected as disposable personal income growth, and consumer spending by extension, was constrained in 3Q by the ongoing reduction in the federal workforce and the implementation of sequestration related furloughing of federal employees.   

 

Federal job loss and furloughing has not been inconsequential as salary and wage income for government workers (~17% of the national workforce)  has been growing at -0.6%. 

 

Private sector personal income growth has emerged as a positive offset, however, with wage/salary income accelerating in recent months.   Forthcoming results out of the bipartisan budget committee (tasked with finding a budget resolution and alternate path to sequestration) in early January 2014 will have a meaningful impact on the trajectory of household disposable income and aggregate consumption growth.  

 

Given the existing constraints, and a rising savings rate, consumption growth in 3Q13 could probably be best characterized as 'decent'. 

 

We’ll provide an update on consumer income/spending alongside the detailed release tomorrow. 

 

3Q13 GDP: Juiced By Inventories - 3Q13 GDP Table

 

3Q13 GDP: Juiced By Inventories - GDP   Contribution

 

3Q13 GDP: Juiced By Inventories - UNITED STATES

 

Christian B. Drake

Associate 


IGT: PUNT ON 1ST DOWN

Defensive pressure starts a quarter early

 

 

IGT should not have been “extremely pleased” to report 2013 results and adjusted FQ4 EPS of $0.30, a sizeable miss from consensus of $0.34.  We suspect whisper expectations were for higher EPS.  We and others thought IGT may have been low balling FQ4 when they didn’t change annual guidance following a Q3 beat.  Our focus had been on the 2014/2015 headwinds as discussed in our recent “SLOTHY GROWTH” Black Book and indeed, the company gave pretty weak guidance that probably includes the accretive impact from an announced $200MM accelerated repurchase program.

 

FQ4 was bad across the board.  Here are some quick takeaways and our earnings table:

  • Guidance was weak and likely includes about $0.03 in accretion from the announced $200 million accelerated share repurchase. 
  • Commentary on the recognition of other significant items that are currently not determinable is also sketchy.
    • “GAAP earnings per share from continuing operations for fiscal year 2014 will include acquisition-related expenses, primarily related to DoubleDown, the amount of which is not determinable at this time.  The company may also recognize other items that are not currently determinable, but may be significant. For this reason, the company is unable to provide estimates for full-year GAAP earnings per share from continuing operations at this time.”
  • We already had $200MM in share buyback for our $1.35 estimate, although not accelerated - $0.01 accretive to our model
  • Gaming Ops below projection on all metrics – revs down, yields down, machine count down. What else can we say?
  • Sold 33% more units in NA than last year's but revenues were down 5% YoY due to a 29% decline in ASPs blamed on “product mix” and “targeted promotional activity”
    • The ASP decline isn’t just due to mix.  We had factored in that ~3,500 NA units would be sold at a steep discount of $9k (Video Poker) and used a $13k number for the balance of our estimate – which is about $1k below the average ASP in NA.  Whatever promotions IGT is offering are material.  Poor mix can also imply that their newer higher price boxes aren’t selling and customers are gravitating towards cheaper fixes.  Either way it’s not good.
    • To put the $10k handle ASP in perspective, IGT hasn’t had ASPs below $11k in any quarter since 2006
  • The only positive data point on Product sales was international box shipments which were up for the first time in 4 quarters
  • Product sales gross margins were terrible and reflective of the low ASPs and promotional activity
    • Both NA and International gross margins were the lowest we’ve seen in 3 years.
  • The bright spot on a YoY basis should’ve been Interactive but even here they missed the revenue number with MAU and DAU below our projections
    • Revenues for Double Down were flat QoQ. This is the first time IGT has reported zero QoQ growth for the crown jewel of their portfolio. 
  • SG&A up due to “increased advertising expenses in correlation with growing social gaming revenues” for the Interactive Division among other things.  Not good for this division where growth is clearly slowing. 
    • SG&A increased $21MM QoQ while social gaming revenues were FLAT.  If we strip out all of the other items on IGT’s list of increased expenses, we are still left with a big (~$13MM) QoQ increase on no revenue growth.
      • $2.4MM legal expense
      • G2E expenses are probably in the neighborhood of $3-4MM
      • Higher bad debt expense assumed to be $3MM

IGT: PUNT ON 1ST DOWN - igt


MACAU UNDER THE HOOD - OCTOBER

Strong metrics should carry into November.

 

 

Consistent with what we heard anecdotally, the underlying Macau metrics look even better than the great headline of 32% YoY growth.  The upside to analysts’ initial expectations of 15-20% growth was broad based.  Hold was normal and Mass was off the charts.  VIP volume and revenue growth was at 2 yr highs.  Going forward, we think November could be another 20%+ growth month.  Even December, which confronts a very difficult 20% comp, could be up in the mid-teens.

 

Looking at the concessionaires, LVS performed much better than the headline sequential share decline had indicated.  In reality, October was one of the best months of the year for LVS.  WYNN looks like a same-store growth story again.  In terms of market shares, SJM and Galaxy were the clear winners.  Our favorite stocks remain WYNN and LVS.  

 

We will have a more detailed note out later but here are our initial takeaways:

 

 

Market

  • Including estimated direct play, VIP hold was a normal 3.04% and slightly higher than last year
  • Assuming the same hold % in each period, GGR would’ve grown 27% vs actual of 32%
  • Mass grew a whopping 45%, the highest YoY growth in almost 2 years
  • Rolling Chip volume climbed 21%, the most in almost 2 years as well
  • VIP revenue accelerated 28%
  • Slots were the laggard but still grew 10%, slightly above the YTD average

LVS

  • Overall share fell to 20.3%, its lowest level of the year.  However, the underlying metrics suggest this was actually a terrific month for LVS.
  • However, Mass share increased 130bps from the trailing 3 month average to 31.0% - its highest Mass share since May of 2009
  • LVS held very low on VIP.  Including direct VIP, we estimate hold was only 2.25%, 65bps below normal.
  • So while Rolling Chip volume grew 34% (the 2nd highest of the year), VIP revenue only grew 8%. 
  • Rolling Chip volume share was also the 2nd highest of the year

WYNN

  • Grew GGR 35%, the highest growth rate in 2 years
  • More importantly, Mass grew 29% (also the highest in 2 years)
  • Hold % was normal but significantly above last year
  • Mass share was in-line with recent trends but we expect that to grow with the more aggressive marketing and promotional push at the property

MPEL

  • MPEL’s share continued to decline, driven again by VIP volume
  • Mass share was fairly consistent with trend but Rolling Chip volume share hit its lowest level since November 2007, pre-City of Dreams
  • Hold percentage was normal and in-line with last year
  • On a YoY basis, MPEL’s Mass revenue growth led the market at 77% and was the highest rate since March of 2012 – no issues with their Mass business for now
  • Rolling Chip volume only grew 6% YoY

MGM

  • MGM share at 9.1% fell well below recent trend
  • Hold was below normal in both periods
  • Mass and Rolling Chip share was also below recent trend
  • GGR YoY growth was in-line with the market
  • Overall, MGM looks good on a YoY basis but sequentially weaker

GALAXY

  • Galaxy recorded the biggest sequential jump in share driven mostly by high hold percentage although volumes were strong
  • Hold percentage was well above normal and last year
  • Galaxy had the highest YoY GGR growth rate among the operators at 44%, again driven by high hold %

SJM

  • GGR share at 26.0%, its highest since March driven by high hold
  • GGR grew at the highest rate in 2 years

MACAU UNDER THE HOOD - OCTOBER - macau


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