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INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING

Takeaway: Tomorrow's NFP print will be the main event on the labor front, but we think we already have a pretty clear picture of what's happening.

Labor is Slowing, but Only Modestly

The strength of the labor market has cooled off modestly. We key off the year-over-year rate of change in rolling NSA (non-seasonally adjusted) initial jobless claims. This week the data was better by 5.5% vs the same period last year. However, if you compare that with the preceding three weeks of data, it reflects a modest deceleration. The last four prints have been: -8.5%, -7.9%, -7.2% and -5.5%. It's important to remind investors that initial claims tend to hit a frictional resistance around 300k. As such, the closer we get to 300k the more we'd expect the rate of improvement to converge toward zero. As such, it's not surprising that the rate of improvement is slowing, but we're more interested in the short-term acceleration/deceleration relative to the trendline rate of change. On that basis, the last four weeks represent a bit more of a slowdown than what the trendline would suggest. To be clear, we're not overly concerned here, but in light of the weak ISM print and the elevated overseas concerns it's important to keep tabs on whether we're in the early days of a real slow down or just a short, counter-trend speedbump.

 

The Numbers

Prior to revision, initial jobless claims fell 17k to 331k from 348k WoW, as the prior week's number was revised up by 3k to 351k.

 

The headline (unrevised) number shows claims were lower by 20k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.75k WoW to 333.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -5.5% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.2%

 

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Yield Spreads

The 2-10 spread rose 3 basis points WoW to 235 bps. 1Q14TD, the 2-10 spread is averaging 244 bps, which is higher by 4 bps relative to 4Q13.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


[video] Crash Goes the $40B Market Cap: $TWTR Report Validates Original Bear



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FLASHBACK: Penney Shorts Casual Dining (He Nailed It)

Takeaway: It pays to listen to Hedgeye's Howard Penney.

Does Howard Penney have a crystal ball? No. He’s just one of the best (if not the best) restaurant analysts on Wall Street.

 

Earlier this week, Malcolm Knapp released sales results for January, estimating that same-restaurant sales and guest counts declined -2.6% and -4.4%, respectively, versus January 2013.

 

In other words, bad news for restaurants.

 

As you can see in the HedgeyeTV video below from a month ago, Penney was all over this bearish trend and well ahead of Old Wall consensus in making his call.

 

 

Join the Hedgeye Revolution.


Retail Callouts (2/6): CVS, COST, LB, M, ANF, JWN, AdiBok,

Takeaway: Gotta respect the CVS tobacco move – even if you smoke. AdiBok does something positive? COST leaves the field in the dust. LB M ANF JWN

EVENTS TO WATCH OVER THE NEXT 24 HOURS

 

BEBE - Earnings Call: Thursday 2/6, 4:30 pm

 

COMPANY NEWS

 

ADDYY - Topshop and Adidas Originals Team Up

(http://www.wwd.com/fashion-news/fashion-scoops/teaming-up-7412358?module=Fashion-Fashion%20Scoops-bullet)

 

  • "Topshop is launching a collection in collaboration with Adidas Originals. Topshop’s design team and Adidas Originals have created a 20-piece collection — called Topshop X Adidas Originals…" 
  • "Among the styles in the collection are three-stripe track pants...along with cotton tank tops..and sweatshirts adorned with a print inspired by London landmarks, created by Topshop’s designers. Footwear is also part of the mix, with Adidas Originals’ Superstar, Tech Super and Attitude sneaker styles reworked in new leather and print combinations."
  • "The collection will be launched March 6 in select U.K. Topshop stores and all the retailer’s U.S. stores, alongside its Hong Kong store and 64 other international locations. It will also be carried at topshop.com and nordstrom.com and at 80 Adidas stores internationally. Prices for the collection start at $35 for a cotton tank top and run through to $135 for the Tech Super sneakers."

 

Retail Callouts (2/6): CVS, COST, LB, M, ANF, JWN, AdiBok, - chart1 2 6

 

Takeaway: Adidas is no stranger to collaborations with brands and designers. They've largely been hit or miss. This one, however, is pretty smart, as it's attaching itself to one of the fastest growing fashion apparel retailers. Better yet, Topshop will be responsible for the design of the merchandise -- and therefore has greater accountability to getting the goods sold.

 

CVS - CVS to Stop Selling Cigarettes, Tobacco Products by October

(http://www.bloomberg.com/news/2014-02-05/cvs-caremark-to-stop-selling-cigarettes-tobacco-by-october.html)

 

  • "CVS Caremark...plans to stop selling cigarettes and tobacco-related products across the nation by Oct. 1 in an effort to support the health of its patients and customers."
  • "CVS...would be the first national pharmacy chain to take this step, the Woonsocket, Rhode Island-based company said in a statement today. The decision will cut annual revenue by about $2 billion, equating to 17 cents a share, CVS said."

 

Takeaway: Kudos to CVS for one of the boldest moves we recall seeing from a retailer in years. Giving away $2bn is a big big deal, particularly when you consider that cigs are a traffic driver. We're not suggesting that people come in to buy smokes and also walk away with loofahs and baby wipes and hair gel, but there's a strong attachment rate with other items at the front of the store like gum, breath mints, soft drinks and candy. CVS can do the analysis far better than we can, and its data still suggested that the right thing to do is walk away. Just in time for the dollar stores (DG and FDO), who are embracing tobacco as a business driver. The key strategy for CVS now is to parlay its move into a better public image to improve loyalty with the 82% of adults that don't smoke. 

 

COST - Costco Wholesale Corporation Reports January Sales Results

(http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-newsArticle&ID=1897484&highlight=)

 

  • "Costco Wholesale Corporation today reported net sales of $7.99 billion for the month of January, the four weeks ended February 2, 2014, an increase of six percent from $7.51 billion during the similar four-week period last year."

 

Retail Callouts (2/6): CVS, COST, LB, M, ANF, JWN, AdiBok, - chart2 2 6

 

Takeaway: Not all retailers whiffed the month. COST comes out ahead.  Some highlights…. a) Traffic up around 4.5%. b) Avg transaction -1.5% but FX hurt transaction value by 2.25%. c) Cannibalization hurt comps by about 50bps. d) Geographies: US saw strongest results in Southeast and Midwest. International saw strongest results in Mexico, Taiwan, Korea and Canada. e) food up msd, f) hardlines up lsd, g) Softlines +mid-high single digits. h) fresh food up ldd.

 

LB - L Brands Reports January 2014, Fourth Quarter 2013 And Fiscal Year 2013 Sales; Updates Fourth Quarter Earnings Guidance

(http://phoenix.corporate-ir.net/phoenix.zhtml?c=94854&p=irol-newsarticle&ID=1897536)

 

  • "L Brands, Inc. reported comparable store sales for the four weeks ended Feb. 1, 2014 increased 9% compared to the four weeks ended Feb. 2, 2013."

 

Takeaway: LB essentially bought the comp in the last month of the Quarter. 10% comp at VS but margins down significantly. The one thing we can't get over is that direct was down 12%.

 

M - Shaq Attacking Tailored Clothing

(http://www.wwd.com/menswear-news/sportswear/shaq-attacking-tailored-clothing-7411076)

 

  • "Peerless Clothing...has signed National Basketball Association legend Shaquille O’Neal to headline a new collection of suits that will be sold exclusively at Macy’s. The line, which is being introduced for spring, quietly made its appearance on the Macy’s Web site this week and will begin rolling out to stores between now and March 1."
  • "The collection of suit separates and sport coats is available in both regular and big and tall sizes and retails at $400 for the jacket and $150 for the pants."

 

Retail Callouts (2/6): CVS, COST, LB, M, ANF, JWN, AdiBok, - chart3 2 6

 

Takeaway: There's a few cardinal rules in retail. But one is that huge spokespeople don't sell product. When Shaq was endorsed by Nike, he couldn't sell a thing. Same goes for Kevin Garnett, Tim Duncan, and Yao Ming. Now…we acknowledge that the tailored clothing business is different from selling shoes. But we'd argue that even the average 'really big guy' still can't really associate with Shaq (we have to take their word on it -- big and tall stores won't let McGough in). Shaq should stick to promoting Gold Bond Hand Lotion (though we have no idea how that deal exists and subsequently adds value).

 

ANF - Tech Firm Hire Latest Move in A&F Reboot

(http://www.wwd.com/retail-news/marketing-consumer-behavior/af-hires-first-insight-7410287)

 

  • "...A&F has hired First Insight Inc., a Pittsburgh-based technology firm that guides stores on product, design and pricing decisions."
  • "First Insight taps consumer perceptions through online social engagement tools, including gaming. The company said it will provide its consumer-driven predictive analytics to help A&F make faster and more accurate design, buying and pricing decisions and reduce markdowns and risks associated with product introductions. It added that thousands of products and designs will be analyzed months before they are brought to market. 'We look forward to driving measurable results' for A&F, said Greg Petro, First Insight’s president and chief executive officer."

 

Takeaway: We're massive ANF critics, but we'll always give credit to a company that looks elsewhere for help getting more productive. But sadly, the best move the company can make remains to get a new CEO. At this point, we'd say that we like Ullman better than Jeffries.

 

JWN - Nordstrom to Shutter Two Department Stores

(http://www.wwd.com/retail-news/department-stores/nordstrom-to-shutter-two-department-stores-7411272)

 

  • "Nordstrom Inc. will close two full-line department stores, one in Portland, Ore., and the other in Vancouver, Wash., within a year…"
  • “'These two locations just haven’t performed to the level we need them to, and investing in remodels to possibly make them more successful didn’t pencil out,' said Erik Nordstrom, president of stores at the Seattle-based retail firm. 'We never like to close a store, but we came to the difficult conclusion that it doesn’t make good business sense to continue operating them after our agreements end.'

 

 

INDUSTRY NEWS

 

U.S. E-Tailers' Cross-Border Sales to Hit $45B: Study

(http://www.wwd.com/business-news/financial/us-e-tailers-cross-border-sales-to-hit-45b-study-7411762)

 

  • "The Web is bringing the world’s customers to U.S.-based e-tailers — which are expected to grow their international business fourfold to $45 billion by 2020, according to a new study."
  • "That’s just the fastest growing part of an already expanding business. U.S. e-tailers are expected to see their domestic sales shoot up 56 percent to $234 billion by 2020, according to research from OC&C Strategy Consultants and Google. The study, titled 'Retail e-mpires,' estimated the value of the online retail export market by analyzing 2011-13 Google search volumes from across the world."
  • U.S. e-tailers are projected to get 16 percent of their business from abroad by the end of the decade, up from 7 percent last year.
  • "Interest in American e-tailers is rising most sharply in Russia, where searches for U.S. retailers grew at a compounded annual growth rate of 51 percent from 2011 to 2013. Also growing keener were Web searchers in Brazil, up 40 percent, and Mexico, 39 percent."
  • "All told, U.S. consumers bought $470 million more in fashion from sites overseas than American companies sold abroad. (The U.K. was the largest net exporter of fashion, selling $1.22 billion more than consumers in that country bought from abroad.)"

 

Shoppers battle weather to take advantage of deals

(http://www.fibre2fashion.com/news/technology-result-news/newsdetails.aspx?news_id=159410)

 

  • "Euclid, the leader of in-store retail analytics, measured data on nearly 25 million domestic shopping sessions during January, revealing that shoppers remained quite active in January despite the effects of bad winter weather across much of the country. "
  • "Shopper traffic and window conversion showed improvement over last year for another month in a row as shoppers looked to capitalize on a very promotional January."
  • "Traffic in January decreased 17.6% compared to the previous month, but increased 1.4% compared to the same month last year. Shopping visits grew despite harsh winter storms across much of the country this year."
  • "Window conversion in January, defined as the number of shoppers who enter a store as a percentage of the total foot traffic, rose to 8.4% from 7.3% last year. This was a slight decline from the 8.9% seen in December 2013."

 


Volatility (Can You Feel It?)

Client Talking Points

VIX

Volatility is in a bullish breakout TREND in our Hedgeye model and will continue to be provided that front-month VIX is greater than 14.91. The key question going into and out of the January jobs report tomorrow is whether the VIX breaks out above the October 2013 highs of 20.41? That would be bad.

EUROPE

Italy, Spain, DAX all jumped about 1% on the bounce. European Equities continue to beat US Equities year-to-date. But careful, this bounce A) is a low-volume bounce and B) It still isn’t back above important TREND lines like 3049 in the EuroStoxx50. We are watching this closely. 

UST 10YR

So the 10-year yield bounced off its year-to-date lows to 2.68%. But it looks the same as everything US equities – bounce to lower-highs, but remains below our Hedgeye TREND resistance of 2.79% into the jobs report. Bonds are still saying US #GrowthSlowing. 

Asset Allocation

CASH 50% US EQUITIES 4%
INTL EQUITIES 5% COMMODITIES 15%
FIXED INCOME 10% INTL CURRENCIES 16%

Top Long Ideas

Company Ticker Sector Duration
FXB

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

JPM

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.

Three for the Road

TWEET OF THE DAY

JAPAN: Nikkei continues to suck wind, down another -0.2% to -13.1% YTD #bearisk TREND @KeithMcCullough

QUOTE OF THE DAY

"If you deliberately set out to be less than you are capable, you'll be unhappy for the rest of your life." - Abraham Maslow

STAT OF THE DAY

In its first report as a publicly traded company, Twitter witnessed the wrath of Wall Street, when its monthly user numbers came in lighter than predicted. Its frothy stock has plummeted 22% in pre-market trading.


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