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LABOR MARKET - THE SEVEN MONTH ITCH

Takeaway: We're 7 months into the sub-330k claims environment. The last 2 cycles lasted 31 (2007) and 45 (2000) months before the market top.

Below is the detailed breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

The next big update on likely Fed direction will be tomorrow's employment report for the month of September. Expectations are relatively high, with consensus looking for a sequential acceleration of over +70k net new jobs to 215k; admittedly, off a disappointing 142k print last month.

 

Last month, in conjunction with our macro team, we published a note that looked at the historical relationship between ADP and NFP (that note can be found here).

 

We found that ADP tended to move in the same direction sequentially as NFP 64% of the time across the 160-month history of the ADP series. For reference, yesterday's ADP print came in at 213k, up sequentially from the 202k in August (revised from 204k). While it appears that consensus is set up right directionally, our analysis revealed no strong correlation on magnitude of sequential change. 

 

Where Are We In the Grand Scheme?

The initial jobless claims data this morning is reasonably strong. SA rolling claims continue to trend lower, coming in just under 295k this week. As the first chart below shows (courtesy of Christian Drake of our Macro Team), the data has now been sub-330k for 7 months. Looking back historically at the last two cycles, rolling SA claims ran at sub-330k for 45 and 31 months, respectively, before the corresponding market peaks in March, 2000 and October, 2007.  

 

LABOR MARKET - THE SEVEN MONTH ITCH - IC 330

 

The Data

Prior to revision, initial jobless claims fell 6k to 287k from 293k WoW, as the prior week's number was revised up by 2k to 295k.

 

The headline (unrevised) number shows claims were lower by 8k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.25k WoW to 294.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.5% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.9%

 

LABOR MARKET - THE SEVEN MONTH ITCH - 2 normal  1

 

LABOR MARKET - THE SEVEN MONTH ITCH - 3 normal  1

 

LABOR MARKET - THE SEVEN MONTH ITCH - 6 normal

 

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT



LABOR MKT - THE SEVEN MONTH ITCH

Takeaway: We're 7 months into the sub-330k claims environment. The last 2 cycles lasted 31 (2007) and 45 (2000) months before the market top.

The next big update on likely Fed direction will be tomorrow's employment report for the month of September. Expectations are relatively high, with consensus looking for a sequential acceleration of over +70k net new jobs to 215k; admittedly, off a disappointing 142k print last month. Last month, in conjunction with our macro team, we published a note that looked at the historical relationship between ADP and NFP (that note can be found here). We found that ADP tended to move in the same direction sequentially as NFP 64% of the time across the 160-month history of the ADP series. For reference, yesterday's ADP print came in at 213k, up sequentially from the 202k in August (revised from 204k). While it appears that consensus is set up right directionally, our analysis revealed no strong correlation on magnitude of sequential change. 

 

Where Are We In the Grand Scheme?

The initial jobless claims data this morning is reasonably strong. SA rolling claims continue to trend lower, coming in just under 295k this week. As the first chart below shows (courtesy of Christian Drake of our Macro Team), the data has now been sub-330k for 7 months. Looking back historically at the last two cycles, rolling SA claims ran at sub-330k for 45 and 31 months, respectively, before the corresponding market peaks in March, 2000 and October, 2007.  

 

LABOR MKT - THE SEVEN MONTH ITCH - 1 2 

 

The Data

Prior to revision, initial jobless claims fell 6k to 287k from 293k WoW, as the prior week's number was revised up by 2k to 295k.

 

The headline (unrevised) number shows claims were lower by 8k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.25k WoW to 294.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.5% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.9%

 

LABOR MKT - THE SEVEN MONTH ITCH - 2

 

LABOR MKT - THE SEVEN MONTH ITCH - 3

 

LABOR MKT - THE SEVEN MONTH ITCH - 4

 

LABOR MKT - THE SEVEN MONTH ITCH - 5

 

LABOR MKT - THE SEVEN MONTH ITCH - 6

 

LABOR MKT - THE SEVEN MONTH ITCH - 7

 

LABOR MKT - THE SEVEN MONTH ITCH - 8

 

LABOR MKT - THE SEVEN MONTH ITCH - 9

 

LABOR MKT - THE SEVEN MONTH ITCH - 10

 

LABOR MKT - THE SEVEN MONTH ITCH - 11

 

LABOR MKT - THE SEVEN MONTH ITCH - 19

 

Yield Spreads

The 2-10 spread fell -10 basis points WoW to 187 bps. 3Q14TD, the 2-10 spread is averaging 199 bps, which is lower by -22 bps relative to 2Q14.

 

LABOR MKT - THE SEVEN MONTH ITCH - 15

 

LABOR MKT - THE SEVEN MONTH ITCH - 16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Retail Callouts (10/2): NKE QUIZ, W, RH, SHLD, WSM, JWN, VFC

Takeaway: QUIZ OF THE DAY: What does this date, 10/2, signify in Nike’s history? Wayfair IPO is one to watch in light of the Zalando dud yesterday.

QUIZ OF THE DAY

What does this date, 10/2, signify in Nike’s history?

Send us your response. Answer to also come in tomorrow's Retail Callouts note.

 

 

EVENTS TO WATCH

 

Today (10/2)

HEDGEYE MACRO: Quarterly Macro Themes Call - 1:00pm

Contact sales@hedgeye.com for details

 

 

COMPANY HIGHLIGHTS

 

W - Wayfair Announces Pricing of Initial Public Offering

(http://www.digitaljournal.com/pr/2229738)

 

Wayfair is finally going public. The deal priced last night at $29. Let's see how it trades after Zalando disappointed yesterday in Germany. Wayfair did $915mm in sales last year under four major sub-brands. It's a bigger player than most people would likely think. To put it in perspective, its sales base is bigger than RH's online business, which stands at about $700mm. The big difference, however, (aside from continuity, quality and price of assortment) is that Wayfair does not make any money. Operating margins are negative. It's unclear what the financial model will look like a few years down the road. Will it move to 2-3% operating margins, but have fierce velocity in its operating asset turns (i.e. 5-6x)? That would peg ROIC in the mid-teens for a fast growing model in a highly fragmented yet consolidating space. This is one to watch.

 

Retail Callouts (10/2): NKE QUIZ, W, RH, SHLD, WSM, JWN, VFC - 10 2 chart1

 

ZAL - Zalando Stock Debut Disappoints

(http://online.wsj.com/articles/zalando-trades-12-above-issue-price-on-stock-exchange-debut-1412149585)

 

  • "Zalando SE's stock market debut was described as disappointing by analysts Wednesday after the online retailer's shares swiftly shed their opening gains."
  • "The stock initially rose 12% above its issue price on the Frankfurt exchange but pared those gains within the first hour of trading."
  • "By midmorning its Zalando's shares were slightly below €23 ($29) compared with their debut of €24.10. The e-commerce company's €21.50 issue price was set at the upper end of its bookbuilding range."

 

Takeaway: Yeah, it might have seemed like a good idea to go public amidst the Alibaba hype. But a better comp for Zalando is Asos. An online apparel-only retailer -- also based in Europe. That chart looks like death, having lost 67% of its value year-to-date. Maybe this name should have listed in the US. 

 

 

SHLD - Sears Holdings Corporation Provides Update on actions to generate liquidity, fund its transformation and evolve its capital structure

(http://searsholdings.mediaroom.com/index.php?s=16310&item=137315)

 

  • "Sears Holdings Corporation today announced that the Company expects to generate up to U.S.$380 million in proceeds from its interest in Sears Canada Inc. by early November 2014, assuming the completion of its previously announced rights offering of Sears Canada shares to the Company's stockholders and the exercise of all such rights. Of this amount, the Company expects to receive at least $168 million in mid-to-late October from the exercise of the rights distributed to them by ESL Partners, L.P. and Edward S. Lampert, Chairman and Chief Executive Officer of Holdings and Chairman and Chief Executive Officer of ESL Investments, Inc., which collectively with their affiliates own 48.5% of Holdings' outstanding common stock."

 

Takeaway:  There are so many pressing details associated with this model and ownership structure right now. But to take a really big picture view on this one -- isn't it noteworthy for a company to have to free up liquidity when the industry in which it competes is at the tail end (peak) of a cyclical margin cycle. What happens to margins and liquidity if the environment goes the other way?

 

 

OTHER NEWS

 

WSM - Williams-Sonoma, Inc. Announces Strategic Franchise Partnership and Expansion to Mexico

(http://www.williams-sonomainc.com/files/press-releases/WSM-OCT2014LIV.pdf)

 

  • "Williams-Sonoma, Inc. announced today that it will bring its family of home furnishings brands to Mexico through a franchise agreement with Distribuidora Liverpool, S.A. de C.V., the country’s leading department store chain. The multi-year agreement includes both store and e-commerce rights in Mexico for the following brands in the Williams-Sonoma, Inc. portfolio: Williams-Sonoma, Williams-Sonoma Home, Pottery Barn, Pottery Barn Kids, PBteen and West Elm. The first stores are expected to open in 2015."

 

SHLD - Sears Holdings Corporation Announces Intent to Conduct Rights Offering of Sears Canada Shares

(http://searsholdings.mediaroom.com/index.php?s=16310&item=137314)

 

  • "Sears Holdings Corporation today announced that the Company's board of directors has approved a rights offering of up to 40,000,000 common shares of Sears Canada Inc. ESL Partners, L.P. and Edward S. Lampert, Chairman and Chief Executive Officer of Holdings and Chairman and Chief Executive Officer of ESL Investments, Inc., have advised Holdings that they intend to exercise their pro rata portion of the subscription rights in full as soon as practicable after such subscription rights have been distributed, though they have not entered into any agreement to do so. Fairholme Capital Management, L.L.C. also has advised Holdings that it expects that certain of its clients will participate in the rights offering at levels to be determined, subject to review of the terms and conditions of the rights offering and regulatory considerations."

 

JWN - Nordstrom Said Eyeing Downtown NYC

(http://www.wwd.com/retail-news/department-stores/nordstrom-said-eyeing-downtown-nyc-7965288?module=Retail-latest)

 

  • "The Seattle-based retailer is said to be looking for space to open a full-line store downtown. Nordstrom in June 2012 revealed plans for its first full-line store in New York City, a 280,000-square-foot flagship, to open in 2018 at the base of a future skyscraper on the north side of 57th Street between Broadway and Seventh Avenue."
  • "A real estate source said Nordstrom is looking for about 250,000 square feet of space downtown. If Nordstrom does find a site, the downtown store won’t necessarily open before the uptown store, the source said."

 

VFC - VF Corporation Senior Vice President & Chief Financial Officer Robert K. Shearer to Retire in March 2015

(http://phx.corporate-ir.net/phoenix.zhtml?c=61559&p=irol-newsArticle&ID=1972801&highlight=)

 

  • "VF Corporation, a leader in branded lifestyle apparel and footwear, announced that Senior Vice President & Chief Financial Officer Robert K. Shearer will retire in March 2015, after 28 years with the company."
  • "VF named Scott A. Roe, 49, currently Vice President, Controller and Chief Accounting Officer, to succeed Shearer in the role of Chief Financial Officer."

 

DG - Dollar General Extends Tender Offer to Acquire Family Dollar to October 31, 2014

(https://investor.shareholder.com/dollar/releasedetail.cfm?ReleaseID=874208)

 

  • "Dollar General Corporation announced that it has extended its tender offer to acquire all outstanding shares of Family Dollar Stores Inc. for $80.00 per share in cash (including associated preferred share purchase rights) to 5:00 p.m. New York City time on October 31, 2014, unless further extended. The tender offer was previously set to expire at 5:00 p.m. New York City time on October 8, 2014. All other terms and conditions of the tender offer remain unchanged."

 

ITX, BABA - Zara Partly Cedes China Web Control to Alibaba to Aid Growth

(http://www.bloomberg.com/news/2014-10-01/zara-ceding-china-web-control-to-alibaba-in-bid-to-boost-growth.html)

 

  • "Since opening its first website four years ago, Inditex SA has maintained full control of online sales for its flagship brand Zara. To gain a stronger foothold in China, the Spanish retailer plans to partially cede both oversight of the chain’s Web sales and a share of its profit."
  • "This month, Zara will open an online store on Tmall, a Chinese website owned by Alibaba Group Holding Ltd. where companies such as Nike Inc., Burberry Group Plc and The Gap Inc. sell their wares."

 

APP - American Apparel Said to Be Open to Keeping Charney

(http://www.bloomberg.com/news/2014-09-30/american-apparel-s-board-said-to-be-open-to-letting-charney-stay.html)

 

  • "The retailer, which ousted Charney as CEO almost four months ago in an acrimonious split, is considering giving him a new role, said the people, who asked not to be identified because the deliberations are private. In the meantime, Charney is serving as a paid strategic consultant."

 

California becomes first state to ban single-use plastic bags

(http://www.chainstoreage.com/article/california-becomes-first-state-ban-single-use-plastic-bags)

 

  • "California Governor Jerry Brown on Tuesday signed legislation for the nation's first statewide ban on single-use plastic bags at supermarkets, drug stores and select other retail outlets."

 

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Poll of the Day | 10-Year Treasury Yield: 2% or 3% Next?

Our macro team’s biggest call this year? Being right on Treasuries. We bucked the consensus tide that the bond bubble was over via our long TLT recommendation which is up 18% YTD. Hedgeye CEO Keith McCullough says there’s no long-term support for the 10yr yield to 1.7%. "Just wait until another bad jobs report and/or multiple GDP misses and Yellen will freak out like Draghi," according to McCullough. It last hit 3% on 12/31/13 and 2% in May 2013.


Restaurant Sector Valuation

Key Takeaways

  • Mixed results for restaurant stocks in September as valuations fluctuated by segment. Casual Dining, Coffee, Family Dining and Sandwich stocks all had multiple expansion during the month, while Fast Casual, Fine Dining and Pizza stocks had multiple contraction.
  • Takovers (BAGL,THI) have driven the multiples in the Coffee segment, which has now overtaken Fast Casual as the most expensive segment on an EV-to-EBITDA basis, with BAGL, DNKN, KKD, SBUX and THI all trading above their average valuations since 2010.
  • Casual Dining, Fast Casual and Fine Dining stocks are currently trading at the most compelling valuations of the bunch relative to their more recent historical means.
  • Casual Dining is trading at one of the lowest multiples out of all of the segments, which we believe means two things: 1) it is likely to attract activist investors and 2) it will pressure management teams to pursue value enhancing initiatives (BLMN).
  • Family Dining is trading near the high end of its range due to the recent activist activity surrounding BOBE.

 

Restaurant Sector Valuation - 1

 

Restaurant Sector Valuation - 2

Restaurant Industry

Restaurant Sector Valuation - 3

Restaurant Sector Valuation - 44

Casual Dining

Restaurant Sector Valuation - 5

Restaurant Sector Valuation - 66

Coffee

Restaurant Sector Valuation - 7

Restaurant Sector Valuation - 8

Family Dining

Restaurant Sector Valuation - 9

Restaurant Sector Valuation - 10

Fast Casual

Restaurant Sector Valuation - 11

Restaurant Sector Valuation - 12

Fine Dining

Restaurant Sector Valuation - 13

Restaurant Sector Valuation - 14

Pizza

Restaurant Sector Valuation - 15

Restaurant Sector Valuation - 16

Sandwich

Restaurant Sector Valuation - 177

Restaurant Sector Valuation - 18

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Keith's Macro Notebook 10/2: RUSSELL 2000 | UST 10YR | OIL


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