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Initial Claims: Strength

Takeaway: The trend of "clean" labor data rises to two weeks with this morning's print, and the conclusion remains bullish for Financials.

Editor's note: This is an unlocked excerpt from Hedgeye's Financials team.

Two Clean Weeks

The last two weeks have finally provided a glimpse of normalcy in the labor market. The most recent week of data showed a 9.5% year-over-year improvement in initial claims, while the week prior showed an 8.2% year-over-year (y/y) improvement. The three months preceding that have been riddled with distortions, adjustments and comp issues making them all but unusable. Fortunately, the clean data at year-end reveals a continuation of trend for the labor market: strength. While we would no longer argue that the rate of change y/y is still accelerating, a high single digit rate of y/y improvement at this stage of the recovery is still quite strong. 

 

As we've been arguing for some time now, the strengthening labor data is exerting upward pressure at the long end of the yield curve. Based on this, we continue to expect banks to have a macro tailwind into 1Q14 and builders to have a headwind. 

 

Initial Claims: Strength - daddaught

The Data 

Prior to revision, initial jobless claims fell 1k to 339k from 338k week-over-week (WoW), as the prior week's number was revised up by 3k to 341k.

 

The headline (unrevised) number shows claims were lower by 2k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 9.75k WoW to 357.25k.

 

The 4-week rolling average of NSA claims, which we generally consider a more accurate representation of the underlying labor market trend, was -2.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -10.0%. However, as mentioned above, the distortions that have been present in the data up until just recently have rendered this 4-week rolling average slightly less valuable. We expect that in a few weeks it will again become the most important data point we track on the strength of the labor market.

 

Initial Claims: Strength - bo1

 

Initial Claims: Strength - bo2

 

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Mo Mo?: SP500, Levels Refreshed

Takeaway: With flows (out of bonds into stocks) this bullish, it’s more about time/price right now than anything else.

POSITIONS: 7 LONGS, 5 SHORTS @Hedgeye

 

Do you do the mo mo?

 

After shorting the market too early in Q3 of 2007 (and getting fired for it), I had to teach myself how to not mess up missing the next melt-up to all-time highs. Risk managing bullish immediate-term TRADE momentum within a bullish intermediate-term TREND is a process.

 

With flows (out of bonds into stocks) this bullish, it’s more about time/price right now than anything else. So my levels are really important to me. Across our core risk management durations here are the levels that matter to me most:

 

  1. Immediate-term TRADE resistance = 1858
  2. Immediate-term TRADE support = 1833
  3. Intermediate-term TREND support = 1758

 

In other words, over the intermediate-term (now through June) you have a 100 point SP500 range of risk to consider (1).

 

In the immediate-term, it’s more a question as to whether or not Mr. Macro Market’s signal is right that we are going to continue to see a series of higher-lows (1833 support) and higher-highs (1858 resistance).

 

That is all. We held 1833 TRADE support this morning, so I bought Tesla (TSLA) instead of SPY (more mo mo in TSLA!).

KM

 

Keith McCullough

Chief Executive Officer

 

Mo Mo?: SP500, Levels Refreshed - SPX



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Best Ideas Update: Removing ROYT and BBEP "Shorts"

We are removing "short" ROYT and BBEP from our Best Ideas list.

 

Short ROYT has worked well since we added it to our Best Ideas list on 7/2/13 at $17.99/unit.  We believe that the NAV of the trust is ~$9.00 – 10.00/unit; it’s still overvalued, but not the opportunity that it was when it was trading at $18 before the insiders unloaded units.

 

There could be a trading opportunity in ROYT in 2Q14, so we may revisit.  ROYT has 2,000 bpd (45% of production) of Brent crude swapped at $115/bbl through March 31, 2014.  After that date, the trust will be 100% exposed to spot pricing (California crudes: Midway-Sunset and Buena Vista).  Thus, depending on those spot prices in April 2014, there could be a steep decline in the monthly distribution in June, as the June distribution will be paid from April production and prices; that distribution will be announced around May 23rd, 2014.  We’ll be watching the California crude prices closely over the coming months.

 

---

 

Short BBEP has not worked since we added it to our Best Ideas list on 7/2/13 at $18.42/unit.  Our negative thesis was built on BBEP’s understated maintenance CapEx, aggressive non-GAAP accounting, aggressive hedging strategies and accounting, weak capital efficiency (F&D), excess leverage, its need to raise dilutive equity capital, poor corporate governance, and valuation.

 

We don’t believe that we are wrong on the fundamentals here, but they don’t seem to matter at the moment (and that’ll happen).  Long-term, we are still negative.  But we believe that there are better short opportunities in the MLP space, and in the E&P MLP space in particular, than BBEP here and now.  BBEP almost went away in 2008/9; it’s our view that at some point it'll be staring down the barrel of that gun again.  For relative performance-focused investors, we expect BBEP to continue to underperform the broader MLP sector, especially if it weakens, given BBEP’s outsized leverage, serial acquisition business model, and understated maintenance CapEx.

 

Ping me for any of the old ROYT and/or BBEP notes.

 

Kevin Kaiser

Managing Director

 


INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS

Takeaway: The trend of "clean" labor data rises to two weeks with this morning's print, and the conclusion remains bullish for Financials.

Two Clean Weeks

The last two weeks have finally provided a glimpse of normalcy in the labor market. The most recent week of data showed a 9.5% year-over-year improvement in initial claims while the week prior showed an 8.2% y/y improvement. The three months preceding that have been riddled with distortions, adjustments and comp issues making them all but unusable. Fortunately, the clean data at year-end reveals a continuation of trend for the labor market: strength. While we would no longer argue that the rate of change y/y is still accelerating, a high single digit rate of y/y improvement at this stage of the recovery is still quite strong. 

 

As we've been arguing for some time now the strengthening labor data is exerting upward pressure at the long end of the yield curve. Based on this we continue to expect banks to have a macro tailwind into 1Q14 and builders to have a headwind.For more on that, see our publication from 11/22/13 entitled #Rates-Rising: A Current Look at Rate Sensitivity Across Financials.

 

The Data 

Prior to revision, initial jobless claims fell 1k to 339k from 338k WoW, as the prior week's number was revised up by 3k to 341k.

 

The headline (unrevised) number shows claims were lower by 2k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 9.75k WoW to 357.25k.

 

The 4-week rolling average of NSA claims, which we generally consider a more accurate representation of the underlying labor market trend, was -2.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -10.0%. However, as mentioned above, the distortions that have been present in the data up until just recently have rendered this 4-wk rolling average slightly less valuable. We expect that in a few weeks it will again become the most important data point we track on the strength of the labor market.

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 1

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 2

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 3

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 4

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 5

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 6

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 7

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 8

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 9

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 10

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 11

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 12

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 13

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 19

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 14

 

Yield Spreads

The 2-10 spread rose 11 basis points WoW to 265 bps. In 4Q13, the 2-10 spread averaged 241 bps, which is higher by 7 bps relative to 3Q13.

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 15

 

INITIAL CLAIMS: WIDENING SPREADS & RISING EMPLOYMENT = GOOD FOR BANK STOCKS - 16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


2014. Welcome.

Client Talking Points

ASIA

It was an ugly session for Asian stocks which kicked off 2014 with Thailand down -5.2%; KOSPI in South Korea down -2.2% (it broke its Hedgeye TREND); India down -1.3% and China down -0.3% (after being down almost -4% for 2013.) What's that all about? Inflation expectations rising are not good for Asian growth.

SILVER

So, Silver is up over +3% to start the year after totally crashing in 2013. It's leading the whole inflation expectations rising move this morning as Oil, Copper, etc. are all showing some follow through from what was a strong December of price performance. Thankfully, we covered our Platinum short on red.

UST 10YR

No, it's not normal for the 10-year to stay pinned up here and also have precious metals rally. But there’s no such thing as a perpetual normal in macro, so embrace it. 3.03% on the 10-year is signaling more of the same (higher-lows and higher-highs for yields)

Asset Allocation

CASH 50% US EQUITIES 10%
INTL EQUITIES 10% COMMODITIES 3%
FIXED INCOME 0% INTL CURRENCIES 27%

Top Long Ideas

Company Ticker Sector Duration
FXB

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.

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.

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

Yield Spread (10yr minus 2yr) widens out to a fat +265bps for the Financials $XLF #bullish @KeithMcCullough

QUOTE OF THE DAY

Every man should be born again on the first day of January. Start with a fresh page.” -Henry Ward Beecher

STAT OF THE DAY

The richest people on the planet got even richer in 2013, adding $524B to their collective net worth, according to the Bloomberg Billionaires Index, a daily ranking of the world’s 300 wealthiest individuals. Bill Gates was the biggest gainer. The 58-year-old tycoon’s fortune increased by $15.8B to $78.5B, according to the index, as shares of Microsoft rose 40%. (Bloomberg)

 


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