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INITIAL CLAIMS: TIME TO GO GRIZZLY?

Takeaway: The labor market continues to positively clip along, but it's becoming an outlier amid an avalanche of negative evidence.

#FullGrizzly?

There's growing uncertainty over the macro outlook. Data seemingly in conflict includes labor data that appears to be solid, but housing and retail sales data that are showing signs of cooling off. 

 

Our choice to use initial claims data as our macro weather vane stems from its accuracy in the last cycle at pinpointing both the top and bottom of the cycles on a real time basis. For example, in the last downturn initial claims began to move higher on a seasonally-adjusted basis in late 2007. Recall that the S&P 500 reached its peak level in October, 2007. Conversely, initial claims peaked and began to roll over sharply in March, 2009, also coincident with the trough in the market.

 

With that in mind, this morning's initial jobless claims data is good, though not great. Seasonally adjusted rolling claims are at 315k, which remains in bull market territory by historical standards. Meanwhile, the year-over-year change in rolling non-seasonally adjusted claims came in at -8.8%, also a strong print (though less strong than the week prior).

 

To be clear, we're getting more defensive here for a number of reasons including our expectation for home prices to decelerate, and further downward pressure on rates, and it doesn't help that the overall market valuation level looks very rich to us. That said, while we are positioning more defensively on the margin, we're not yet turning #FullGrizzly as the labor data is not showing signs of deterioration. Ultimately, that's what's needed to make the short case on the credit cycle. 

 

The Data

Prior to revision, initial jobless claims rose 5k to 317k from 312k WoW, as the prior week's number was revised up by 1k to 313k.

 

The headline (unrevised) number shows claims were higher by 4k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.75k WoW to 315.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -11.3%

 

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Yield Spreads

The 2-10 spread was unchanged at 221 bps week-over-week. 2Q14TD, the 2-10 spread is averaging 223 bps, which is lower by -16 bps relative to 1Q14.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities

Takeaway: Taxable bonds have just put up their 17 consecutive week of inflow assisted by tax-free inflows at 21 consecutive weeks.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period, fund flow in both asset classes was painfully lackluster with both fixed income and equity flow below the year-to-date averages. However the quarter-to-date trends for 2Q14 greatly favor fixed income with $20.0 billion flowing into the total bond category thus far in the quarter versus just $6.8 billion that has flowed in all equity funds. This is highlighted by 17 consecutive weeks of inflow into taxable bonds assisted by 21 consecutive weeks of inflow into tax-free fixed income funds.

 

Total equity mutual funds put up a modest inflow in the most recent 5 day period ending on June 4th with $2.1 billion coming into the all stock category as reported by the Investment Company Institute. The composition of the $2.1 billion subscription continued to be weighted towards international equity funds with $3.2 billion coming into international stock funds which was offset by a $1.1 billion outflow in domestic products. This outflow within domestic equity funds has become an intermediate term trend with now the sixth consecutive week of outflow in the category. The aggregate subscription of $2.1 billion for the recent five day period was below the year-to-date average for equity funds of a $2.6 billion inflow, which is now running below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual fund flows also had a lackluster week of production ending June 4th, with just $1.1 billion flowing into all fixed income funds. This interest level was a deceleration from the $2.0 billion that came into bond products the week prior, however the inflow into taxable products was the 17th consecutive week of positive flow and the inflow into municipal or tax-free products was the 21st consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.0 billion weekly inflow, a vast improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 

 

ETFs had a stronger showing than mutual funds last week with both equity and bond products experiencing inflows above the 2014 year-to-date average. Equity ETFs experienced a decent $4.5 billion inflow, while fixed income ETFs put up a $1.3 billion subscription. The 2014 weekly averages are now a $765 million weekly inflow for equity ETFs and a $1.2 billion weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $4.1 billion spread for the week ($6.6 billion of total equity inflow versus the $2.4 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.0 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 1

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 2

 

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Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 7

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 8

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $4.1 billion spread for the week ($6.6 billion of total equity inflow versus the $2.4 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.0 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 9 

 

 

Quarter-to-date trends for 2Q14 greatly favor fixed income with $20.0 billion flowing into the total bond category thus far in the quarter versus just $6.8 billion that has flowed in all equity funds. This is highlighted by 17 consecutive weeks of inflow into taxable bonds assisted by 21 consecutive weeks of inflow into tax-free fixed income funds. These trends continue to support our favorite long amongst the traditional asset managers, Legg Mason (see Hedgeye LM research here).

 

ICI Fund Flow Survey - 2Q Aggregate Flow Greatly Favoring Fixed Income Over Equities - ICI chart 10

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


LEISURE LETTER (06/12/2014)

Tickers: 0027:HK, MGM, RCL, WYN

EVENTS

  • Thurs June 12: Bally Systems User Conference Mohegan Sun
  • Thurs June 12: Blackstone Investor Day 
  • Thurs June 12: AC May revs released 2pm
  • Wed-Thurs June 18-19:  Hedgeye Cruise survey (pre-CCL F2Q)
  • Thurs June 19: LA May revs released

COMPANY NEWS

Galaxy Entertainment Group 0027:HK – on April 8th of this year, the Company applied for trademark registration for ‘Broadway Hotel and Casino,’ ‘Broadway Casino,’ ‘Broadway Hotel,’ ‘Broadway,’ ‘Broadway Resort’ and ‘Broadway Cotai.’ That application was only published in the Official Gazette on June 4. It is widely believed, if granted, Galaxy will use the "Broadway" name for Phase 2 of Galaxy in Cotai that is scheduled to open in 2015.

Takeaway: Seems like an interesting marketing spin, especially since SCL markets the foreign locations via Venetian and Parisian, why not Broadway? 

 

MGM (McClatchy Tribune) the Massachusetts Gaming Commission voted unanimously to allow MGM Resorts build casino in Springfield.  The Commission will meet for a final vote and award tomorrow, Friday June 13th.  MGM Springfield is planning 3,000 slot machines, 100 table games, 250 hotel rooms and eight restaurants.  The gaming commission indicated that it was willing to be flexible on the actual date it awards the casino to prevent triggering an estimated $200 million in fees and construction obligations that could be undermined by a petition drive to scuttle casinos in Massachusetts.

Takeaway:  This case is going MGM's way as we wait for the final wording on the fee payment conditions.

 

RCL – announced new entertainment offerings for Quantum of the Seas with a focus on music and executed through a "futuristic, technology-driven approach" which will include a unique Drum wall of 136 drums, a vocal percussion jacket, a violin dress as well as the world's largest harp plus the Broadway show, Mamma Mia!

Takeaway: A unique way to appeal to and increase the younger demographic

 

WYN – CEO Geoffrey A. Ballotti sold 3,899 shares of stock on Monday, June 9th at an average price of $75.00 and now directly owns 107,771 shares.

Takeaway: Still more insider selling in the hospitality industry.

INDUSTRY NEWS

Japan Gaming Expansion (Reuters) earlier today, a Japanese opposition politician on Thursday submitted a set of demands to ruling party lawmakers who are proposing a bill to legalize casino gambling, pushing back much-awaited parliamentary debate to next Wednesday at the earliest. Pro-casino lawmakers had aimed to begin debate in the lower house this week - before the end of the regular parliament session on June 22 - and carry the bill over into an expected session in the autumn when they would aim for its passage.

Takeaway: More political talk to reduce hype over passage of casino bill this year.

 

Macau Airport – the airport operator, Macau International Airport Co Ltd, posted results for 2013, which included a 12% increase in total passengers to 5,027,170 and 48,950 aircraft movements.

Takeaway: A long term positive mostly driven on incremental low-cost carrier route additions.

 

Singapore May negative REVPAR (STR) - preliminary numbers show Singapore May REVPAR declined 1.3% YoY in May.

Takeaway: Singapore continues to operate in a tough demand environment

MACRO

China May New Loans - May new Yuan loans were CNY870.8 billion versus consensus expectations of CNY750 billion and CNY774.4 billion in April.

Takeaway: On the margin, a positive.

 

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.

 


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Retail Callouts (6/12): LULU, TGT

Takeaway: Chip’s comments likely were directed at a Board that fired his choice CFO. TGT dividend hike very ill-timed – should have waited for CEO.

COMPANY NEWS

 

LULU - lululemon athletica inc. issues statement

(http://investor.lululemon.com/releasedetail.cfm?ReleaseID=854202)

 

  • "The lululemon Board of Directors and management team have been consistently focused on enhancing shareholder value and will continue to take actions to achieve this objective. The Board's commitment to the value and reputation of the lululemon brand and the constant focus by the Board and management on the Company's mission and core values is critical to enhancing long-term shareholder value."
  • "The Board is overseeing lululemon's strategy to strengthen the Company's foundation, focus its product engine on innovation, and accelerate sustainable and controlled global expansion. By leveraging its design-led roots, strengthening its supply chain and providing an exceptional guest experience, we are confident that lululemon, under new CEO Laurent Potdevin's leadership, will provide guests with the high-quality, technical products they know and love and create value for shareholders."
  • "Contrary to Mr. Wilson's assertions, lululemon's Board members are aligned with the Company's core values and possess the necessary expertise to successfully lead lululemon forward."

 

Takeaway: Something caused Chip to fly off the handle - odds are it was the Board's decision to push Currie out the door. This is still very much Chip's management team and there's no doubt he hand picked Potdevin as the new CEO. The management team in place may be good enough for a company doing $1bil in revenues, but we question how it could manage a $4-$5 billion business. If this is the case and the Board is pushing for real change - then this is a name that we can get behind.

 

TGT - Target Corporation Declares Regular Quarterly Dividend

(http://investors.target.com/phoenix.zhtml?c=65828&p=irol-newsArticle&ID=1939160&highlight=)

 

  • "The board of directors of Target Corporation has declared a quarterly dividend of 52 cents per common share. The dividend is payable September 10, 2014 to shareholders of record at the close of business August 20, 2014."

 

Takeaway: Not a huge surprise that TGT increased its dividend. For now the company's cash priorities are as follows: 1) invest in the business, 2) support the divided, and 3) fund share repo. But it's hard to get behind TGT's use of cash with a shadow executive committee in the C-Suite. When a new CEO is hired, he's going to have his own plan on how to fix the business and it will be expensive. And, its not like this company isn't levered. It would probably be more prudent for the company to tighten the purse strings in anticipation of big changes to the organization. No CEO who will be in spending mode will ever want to inherit a recently (and significantly) increased dividend. Not a prudent decision by the Board.

 

OTHER NEWS

 

TGT - Target Shareholders Back Board

(http://www.wwd.com/retail-news/mass-off-price/target-shareholders-back-board-7726168?module=hp-retail)

 

  • "Despite a call last month from advisory firm Institutional Shareholder Services to oust seven of the company’s 10 directors, the full board was reelected at the company’s annual meeting in Dallas Wednesday. Shareholders also voted down a proposal requesting the board have an independent chairman and approved a proposal to revise compensation packages."

 

BEBE - bebe stores, inc. Announces CEO Transition

(http://investorrelations.bebe.com/press-release/other/bebe-stores-inc-announces-ceo-transition)

 

  • "Bebe stores, inc. today announced that Steve Birkhold has resigned as Chief Executive Officer of bebe stores, inc. effective today. Concurrently, the Board of Directors has appointed Jim Wiggett, currently Chief Executive Office of Jackson Hole Group, as Interim Chief Executive Officer of bebe. "
  • "Mr. Wiggett has been providing advisory services to the Company for the past five years. He joins the bebe team with close to 40 years of retail, merchandising, and business experience. Prior to founding the Jackson Hole Group, a strategic consulting group, Mr. Wiggett held a number of executive positions, with several high-profile companies, most recently Moet Hennessy Louis Vuitton (LVMH). As Executive Vice President at LVMH, Mr. Wiggett provided leadership to the 10 operating companies within the Select Distribution Group and consulting support to many of the non-retail organizations."

 

NKE, UA, ADS.DE - Sports Apparel Market Expects Uptick From World Cup

(http://www.wwd.com/menswear-news/sportswear/sports-apparel-market-expects-uptick-from-world-cup-7726361?module=hp-business)

 

  • "Much like the players on the pitch, Adidas, Nike and Puma will be flexing their marketing muscles and competing for excellence and visibility, each in their own way. 'Brazil is an $11 billion [sports apparel] market, the fourth largest in the world, following the U.S., China and Japan,' said Alexis Frick, a researcher with Euromonitor International, adding that over the past few years the country has experienced a growth rate of 14 percent, 'something developed countries can only dream of.' No surprise then that for global sports brands, Brazil, with an estimated population of 200 million, is a strategic battleground, 'and football presents the largest opportunity.'"

 

PVH - PVH Corp. Licenses Warner's, Olga Brands

(http://www.wwd.com/markets-news/intimates-activewear/pvh-corp-licenses-warners-olga-brands-7725484)

 

  • "PVH Corp. has signed a licensing agreement with Vandale Industries Inc. to design, produce and market women’s shapewear, sleepwear, loungewear, robes, sports bras and athleticwear for the U.S. and Canadian markets bearing the Warner’s and Olga intimates nameplates. The deal includes subbrands Simply Perfect by Warner’s, Blissful Benefits by Warner’s and Body Heaven by Warner’s."
  • "The license runs through 2017. Deliveries of these product categories are scheduled to begin in February for spring."

 

EBAY - EBay Launches Full-Price Designer Shops

(http://www.wwd.com/retail-news/direct-internet-catalogue/ebay-launches-full-price-designer-shops-7721563?module=hp-featuredstories)

 

  • "EBay Inc. is cozying up to designer brands — and trying to shed once and for all the lingering perception that it’s just an auction site."
  • "The e-commerce and payment giant will today unveil Designer Collective at ebay.com/designercollective, a current-season, full-price shopping destination with 16 American-based brands, including Calvin Klein, Nicole Miller and Elie Tahari. EBay worked with the brands to build storefronts within the Designer Collective portion of its main Web site."

 


VIX, OIL & INDIA

Client Talking Points

VIX

We repeat the front month VIX has never held below 10 – NEVER is a very long time. Watch that line of complacency. If you take a look at the long term chart of the VIX this morning you will see what we mean. The last time the VIX hit this level was actually January of 2007. Thereafter, volatility made a steady climb before peaking in October 2008 at ~60.

OIL

Oil price is ripping to the upside. What you have is called TAIL risk to the upside and TAIL risk to the downside on U.S. growth. Our immediate-term risk range for WTIC Oil is 103.21-105.67, we remain bullish trend.

INDIA

Fantastic news in India regarding their success with rate hikes. Inflation is under control. India had the only stock market that was really up. Strong currency, strong policy equates to stronger policy and stronger consumption.

Asset Allocation

CASH 15% US EQUITIES 0%
INTL EQUITIES 10% COMMODITIES 20%
FIXED INCOME 30% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

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.

LM

Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road

TWEET OF THE DAY

$LULU CFO is out. I couldn’t care less what the comp is. This is so positive. What a great event to get more bullish on.

@HedgeyeRetail

QUOTE OF THE DAY

“Order and simplification are the first steps towards mastery of a subject”

-Thomas Mann

STAT OF THE DAY

The World Cup has been held every four years since 1930 with the exception of 1942 and 1946, when it was canceled because of World War II. This will be the 20th World Cup.



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