Takeaway: But the certain fact about inflation is that, sooner or later, it must come to an end. It is a policy that cannot last. -Ludwig von Mises
Takeaway: YTD, labor data has shown signs of steadily decelerating improvement, but this week the data went in a new direction.
Playing the Inflection
The labor market could be characterized as showing decelerating improvement since the start of January this year. This week marks an inflection from that trend. The year-over-year change in NSA initial claims came in at -13.4% this week, the strongest print since January 3, 2014 and a moonshot compared with the -5.0% print last week. This week was so strong, in fact, that it brought the rolling NSA y/y to -7.1%, up from -3.5% last week. We'll see in the weeks ahead whether the trend is beginning to reverse. One of the arguments put forward in support of the generally weak 1QTD data has been weather. If weather is playing a role in suppressing the strength of the data then one would expect that as we move from the winter to the spring months we could reasonably expect to see improvement in the data. The next few weeks of data should be important in this regard, as they may serve to answer this fundamental question.
It's important to note that one of our favorite intermediate-term trade ideas on the long side is Capital One (COF). We initiated that call in late January on the basis that seemingly every year Cap One misses 4Q and crushes 1Q. We argued for buying it post the 4Q wash-out, holding it through 1Q14 results and exiting ahead of 2Q results. The claims data this morning is certainly supportive of that call. Almost all new loss content comes from newly unemployed people with the balance coming from divorce and illness (major medical expenses). Unsecured lenders like Capital One are hugely correlated with initial claims data, and claims tend to lead the fundamentals by ~13 weeks giving some visibility into what's coming down the pike. It didn't hurt, either, that COF got the Fed's stamp approval for its robust capital return program last night through CCAR.
Prior to revision, initial jobless claims fell 9k to 311k from 320k WoW, as the prior week's number was revised up by 1k to 321k.
The headline (unrevised) number shows claims were lower by 10k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -9.5k WoW to 317.75k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.1% lower YoY, which is a sequential improvement versus the previous week's YoY change of -3.5%
The 2-10 spread fell -10 basis points WoW to 225 bps. 1Q14TD, the 2-10 spread is averaging 240 bps, which is lower by -1 bps relative to 4Q13.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
When you’re right, you’re right.
Hedgeye CEO Keith McCullough pulled no punches during his hour-long conversation on Monday with Fox Business’ Maria Bartiromo where he spelled out his current market and economic concerns, in particular, the growing bubble in social media stocks.
The timing was especially prescient given the bubblicious market spectacle that ensued including Candy Crush’s disastrous IPO, Facebook’s $2B purchase of Oculus, and Twitter getting hammered 9% this week.
As he told Bartiromo, 74% of the companies that have come public in the last six months do not make any money -- only eclipsed by the dot-com bubble in 2000 when 80% of companies that went public didn’t make any money.
“If you’re long the S&P 500, don’t worry,” he joked. “It won’t top for another couple of months.”
Take a look at the video beginning at the 4:15 mark where McCullough advised investors:
“Buy some [social media] protection. While you’re in the rental mode, go buy some protection—bombed out puts, August and September puts in social media stocks.”
“Big social media stocks, don’t forget, are tied to the advertising cycle. The advertising cycle is pro-cyclical. So if we’re at the end of an economic cycle, you’re going to wake up at some point this year—and Twitter looks like it’s already pricing this in—to some kind of a disappointment on revenues from an advertising-based social media stock. That’s what I’d be looking for. I have no idea which one it’s going to be, but you can buy puts on a pretty good basket of those.”
As he wrote in today’s Morning Newsletter:
I know no one wants to call it a bubble. There’s career risk in calling something what it is. But seriously mo bros, with Facebook (FB) -17% since March 10th (coincided with the all-time-bubble-high in US stocks) and Twitter (TWTR) -30% YTD, what’s the fuss?
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TICKERS: CZR, LVS, MPEL, RCL
EVENTS TO WATCH: UPCOMING EARNINGS/CONFERENCES/RELEASES
Friday, March 28
- Nevada gaming revenues release for February
- MPEL board meeting
- Wynn Macau board meeting
Tuesday-Thursday, April 8-10
- Mid-America Gaming Congress (Columbus, OH)
Wednesday, April 9
- SHO Investor Day
Thursday, April 10
- HST Investor Day
CZR – announced its intention to close Harrah’s Tunica in Mississippi on June 2, resulting in 1,300 job losses. "There’s just too much supply in that market. The Harrah's has not been profitable for a while,” said John Payne, president of the company's central markets division.
TAKEAWAY: Another sign of the tough times. Interesting there are no interested buyers for the property...or maybe there is a lack of funding for such acquisitions.
CZR – the company announced, via an SEC filing, it received correspondence from a law firm representing a group of its bond holders who want the company to shutter Caesars Growth Partners. The bond holders assert the parent company violated its fiduciary duties to the creditors when the parent company opted to sell certain assets to the Caesars Growth Partners.
TAKEAWAY: Never attempt to run-over your bondholders as they never forget and doing so will jeopardize future borrowing negotiations.
MPEL – unveiled final plans for its newest hotel at City of Dreams. The 40 story hotel will include 780 guestrooms, suites, and villas as well as spa, ultra lounge, and sky pool. The property will open in early 2017.
TAKEAWAY: City of Dreams needs the additional hotel capacity.
LVS – reduced the payout for blackjack at its Venetian and Palazzo tables from 3:2 to 6:5, resulting in the payout falling from $15 to $12 on a $10 bet.
TAKEAWAY: Hold could be higher for the coming quarters. Media contrasting that with Sheldon's "concern" for the average joe who could be duped with on line gaming.
LaQuinta – proposed ticker LQ, offering 37.2m shares, IPO Price $18-$21, proceeds of $678 million used to prepay long-term debt. Post offering Blackstone to own 66.7% or 63.8% if underwriters option exercised.
TAKEAWAY: We're favorably inclined on the lodging cycle although near-term revpar may be under pressure.
Four Season Hotels – recently has made several announcements regarding leadership appointments at the executive vice president level.
TAKEAWAY: While we didn’t take note individually of each appointment/promotion, when viewed in totality, it would appear Four Seasons is getting ready to go public.
RCL – RCL introduced a more flexible dining program for its newbuilds Quantum of the Seas and Anthem of the Seas. Called Dynamic Dining, the new program will give passengers a choice of 18 restaurants, of which seven will be fee-free for all guests: four full-service and three casual eateries. A new reservations system also will be used onboard so passengers can decide when, where and with whom they want to eat each night.
TAKEAWAY: This innovative change will help onboard spending - an area which RCL had led in growth recently
US Gaming Industry to vet gamblers funds – the United States Department of Treasury Financial Crimes Enforcement Network (FinCEN) is considering rules which would require US casinos to fully vet the source and origin of a gambler’s funds. FinCEN is also investigating possible compliance lapses at other Las Vegas casinos.
TAKEAWAY: The US Treasury efforts are to explicitly regulate casinos like a financial institution in an attempt to crack down on potential money laundering activities. Political payback to Wynn and Adelson?
Las Vegas casinos subject to anti-money laundering probe – the United States Department of Treasury Crimes Enforcement Network is currently investigating un-named Las Vegas Casinos for possible anti-money laundering compliance lapses. This investigation follows, Las Vegas Sands August 2013 agreement with the Department of Justice to pay $47 million fines for anti-money laundering lapses at LVS’ Venetian and Palazzo properties in Las Vegas.
TAKEAWAY: Stay tuned, more headlines and fines forth coming...
New Jersey Casino Expansion Bill – despite outspoken opposition by various elected officials, legislation was introduced to allow casinos at Meadowlands and Monmouth Park racetracks. As we noted last week, officials indicated no expansion of gaming would be considered until after 2016, when the Atlantic City revitalization plan expires.
TAKEAWAY: We doubt this legislation will pass given the Governor's vocal opposition.
Federal Legislation to ban internet gaming – legislation was introduced in the US House of Representatives and the US Senate to reinstate the Wire Act of 1961 regulations which would thus make internet gambling illegal.
TAKEAWAY: The proposed legislation appears to strictly prohibit all existing and considered forms of internet gambling including online poker and lottery activities. No grandfathering provisions were offered. We doubt this passes.
Hedgeye remains negative on consumer spending and believes in more inflation. Following a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.
Takeaway: We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.
Client Talking Points
They don’t have Facebook in the Italian MIB index which is up well over +11% year-to-date. Guess what? Asian and European stocks didn’t particularly care about what happened in the growing US Social Media bubble yesterday. Impressively, the DAX and EuroStoxx50 are both up this morning, holding TREND supports. Meanwhile, US Social Media bubbles are popping as the Candy $KING gets crushed.
The only sub-sector in the US stock market that has already gone bearish on both our TRADE and TREND durations is US Consumer Discretionary (XLY down -4.1% year-to-date). We'll say it again: again #InflationAccelerating slows consumption growth.
The 10-year yield is doing precisely what it should be doing (falling) as consensus comes to the realization that US #GrowthSlowing in 2014 isn’t just about the weather. 2.70% on the 10-year is compressing the Yield Spread (10-year minus 2-year) by 7 basis points on the week.
|FIXED INCOME||20%||INTL CURRENCIES||20%|
Top Long Ideas
Construction activity remains cyclically depressed, but has likely begun the long process of recovery. A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating. Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms. As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.
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.
Three for the Road
TWEET OF THE DAY
UK Retail Sales +3.7% in FEB as #StrongPound powers the purchasing power of The People @KeithMcCullough
QUOTE OF THE DAY
"It’s not what you look at that matters, it’s what you see..." - Henry David Thoreau
STAT OF THE DAY
Connecticut lawmakers have become the first in the country to pass legislation that would increase a state’s minimum wage to $10.10 an hour by 2017, the same rate President Obama wants for the federal minimum wage. The bill passed the General Assembly, which Democrats control, largely along party lines. (New York Times)
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