With very easy year-over-year comps, we thought it would be instructive to look at 2 year comps as a gauge of the underlying trends.
It is no secret that RevPAR has been getting less bad. Certainly, lodging stocks seem to reflect that trend. It remains to be seen, however, whether the underyling demand is actually getting stronger sequentially. Year-over-year comps are very easy.
The following chart tracks RevPAR, occupancy, and average daily rate on a two year comp basis. Here, the trends are not so conclusive. On the one hand, occupancy looks like it is on an upward trajectory. However, the ADR trend is negative and RevPAR may be as well. Certainly, the recent 3 week moving averages are not comforting, not even occupancy. In fact, on a two year basis, weekly RevPAR declines eclipsed 30% in two out of the last three weeks and three out of the last seven. Even on a one year comp basis, the the slope of the moving averages has turned down. The coming weeks should be enlightening.
Our Financials Sector Head Josh Steiner looks at the relationship between initial unemployment claims and the unemployment rate:
The 444k initial unemployment claims figure this morning was up 11k from 433k last week (revised down 1k from 434k).
As such, the 4-week rolling average claims improved this week to 441k from 450k last week - an improvement of 9k, well ahead of the slope of 5.4k/week since March (9 months of data).
The following chart shows why this metric is important to track.Over the last 20 years, unemployment begins falling in earnest once rolling claims break into the 375-400k range. At the 9-month trajectory of -24k/month we are 1.8 months away from 400k and 2.7 months away from 375k. As such, by the March/April timeframe we should be at a level where unemployment begins to fall steadily, which will put a long-term tailwind behind consumer lenders.
For those wondering how to interpret a possible inflection in rolling claims should we see one in late January/February, we would suggest using a positive slope of 7.2k/week as an outer risk band. This is the fastest weekly rate at which rolling claims increased over a two week period since the trend of improvement began in March. Alternatively, in the absolute, one can use 475-480k as a near-term rolling upper limit based on the downward channel that's been in place since March.
Joshua Steiner, CFA
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“Drove my Chevy to the levy but the levy was dry
And them good 'ole boys were drinking whiskey and rye singin . . . ”
-Don McLean, American Pie
Our Financials Sector Head Josh Steiner had some insightful comments this morning on President Obama’s proposed bail-out levy on banks. The idea of a levy made me think of Don McLean’s well known song, American Pie. In contrast to the levy in that song, the Investment Banking Levy, is far from dry.
In fact, President Obama believes that he can raise ~$90BN from the Investment Banking Levy. The proposal is a 15 basis point, or 0.15 percent, charge on the excess liabilities of large institutions and would apply only to the those institutions with assets of more than $50BN.
The levy is not a very egalitarian sharing of the monies still owed under TARP. Obviously some banks borrowed less, paid back all they borrowed and so forth. Also, other sectors, like the auto sector borrowed money and will not be subject to the Levy. Regardless of whether it is fair, this could actually help President Obama on a number of levels. First, it is $90BN that can be used against the deficit, which is a positive for the fiscal health of the United States. Second, the inordinate executive compensation of the large banks is a populist rally cry. So to the extent that the masses are against gross and indulgent pay for bankers, this will improve President Obama’s approval rating on the margin, which obviously needs some help.
According to the most recent Real Clear Poll aggregate, President Obama’s approval rating is 47.7 percent, which is the lowest of his Presidency. This is consistent with the Rasmussen Daily Tracking poll in which only 25% Strongly Approve and 46% Totally Approve of President Obama. On the Ramussen Poll, these numbers are effectively the lowest of his Presidency.
While the Investment Banking Levy may help on the margin, clearly President Obama and the Democrats are looking at a potential world of electoral hurt heading into the midterms. We are in the middle of creating our internal projections on the upcoming midterms, but President Obama’s approval is a sufficient leading indicator to suggest the direction of political power will shift in the United States Congress.
Currently, the most closely watched race is for Senator Ted Kennedy’s former seat in the Commonwealth of Massachusetts. Recent polls are all over the map, with Democrat Coakley ahead by anywhere from 15 points to Republican Scott Brown ahead by one point. A win for Brown would not only shift the power in the Senate, it would also be a dark omen for the Democrats’ chances of holding ground in the midterms. In fact, even a close race in this liberal bastion is likely a bad sign.
Ultimately, the Democrats will likely retain the seat, but on some level it is hard to argue with Scott Brown when he responded to a question on CNN yesterday about sitting in the late Ted Kennedy’s seat:
“Well, with all due respect, it’s not Ted Kennedy's seat, and it’s not the Democrats’ seat, it’s the people’s seat.”
Daryl G. Jones
As it relates to our stance on the US Dollar, we started out 2009 with the theme “BREAKING THE BUCK” and ended the year with the “BOMBED OUT BUCK”, which focused on the bottoming-out process for the Dollar. For 1Q10, we are now BULLISH on the dollar; hence we’ve named one of our major themes for this quarter, “BUCK BREAKOUT.”
In the last weeks Keith has made it abundantly clear that while the inverse correlation between the SP500 and the US Dollar that we pick up on in February of 2009 (see our note to President Obama from 2/24/09 titled, “Breaking The Buck”) held for the balance of much of the year with a high R-squared, correlations are not perpetual, especially when they become consensus.
On January 4, 2010 we bought the US Dollar via the etf UUP in our model portfolio, a position anchored on our belief that despite Federal Reserve Ben Bernanke’s current strangle hold on interest rates, even “He Who Sees No Bubbles” (Bernanke) will have to signal an end to “extended and exceptionally” low interest rates because the economic forecast embedded in that view is simply unreasonable and unsustainable: US inflation continues to break out (the latest CPI reading was 1.8% Y/Y) and we expect this number to climb when December CPI is released on Friday.
Our bet is that raising rates should translate into the citizenry earning a higher rate of return on their savings and a flight by investors to the US Dollar as a safe haven. From a macro perspective, we think this aligns well with recent economic and political developments shaking global markets. The debt leverage and balance sheet issues associated with countries like Greece and Dubai continue to make headlines. As such issues persist (for example we continue to see a negative correlation with ME markets and the price of oil), we see the USD as attractive on a relative basis.
To substantiate our conviction on the Greenback, we shorted the Euro versus the USD via the etf FXE on 1/11/10. Additionally, our call that Chinese growth will slow in 1H10 (for more see our post on 1/13, Chinese Ox in a Box), should be bullish for the USD on the margin.
On the intermediate term TREND (3 months or more) we are bullish on the USD. The TREND line for the Dollar Index is 76.24, which we’re comfortably above, with TAIL resistance up at 80.29. Since the beginning of December, the US Dollar Index is up 2.8%.
A sustained recovery in QSR stocks will be dependent upon macro headwinds abating and same-store sales picking up.
Almost without exception, QSR companies presenting at the Cowen and Company conference outlined their strategies along the lines of “strengthening the brand, using product innovation to drive traffic, and increasing financial flexibility”. While we anticipated that the timing of the conference would lead to more qualitative than quantitative commentary, there were some interesting discussions about the current macro backdrop, with regard to regional performance (Texas, in particular) and the impact of rising unemployment.
During the JACK presentation, Chairman and CEO Linda Lang stated that unemployment was the primary macroeconomic issue impacting their business. She pointed out that Texas, California, and Nevada have seen adverse economic trends of late, with unemployment among the young (especially Hispanics and males) being a particularly acute problem. While 16-19 year olds are a key customer base for all QSR concepts, Lang admitted that JACK’s customer base skews at least one-third more Hispanic than major competing QSR chains. The chart below illustrates the unemployment picture for young Hispanics.
This group is also a vital source of business for TAST; the company hinges much of its future growth strategy on its Hispanic brand restaurants, “Pollo Tropical” and “Taco Cabana”. During the Carrols presentation at the Cowen and Company conference, Chairman of the Board and CEO Alan Vituli’s presentation discusses how the company is “well positioned to capitalize on growing Hispanic trends” such as Hispanic population growth and Hispanic disposable income being “projected to rise to $1.4 trillion by 2013 (+8% CAGR from 1990)”. The source for the disposable income statistic is cited as “Article appearing in the third quarter 2008 edition of ‘Georgia Business and Economic Conditions’, a publication of the Terry College of Business, The University of Georgia.” We are going to make a wild assumption that this study was put together before the third quarter, when the economic landscape of America changed drastically. While Hispanic disposable income will undoubtedly grow over the long term, the unemployment picture among young Hispanics is far more relevant than the stale statistic cited by TAST’s presentation.
Some 27% of JACK’s system units, and 30% of company units, are in Texas. Other QSR companies with significant exposure to Texas include TAST and SONC. Consumer spending has fallen in step with unemployment rising and this is reflected in the second chart below showing sales tax data for the Dallas metropolitan area. Trends in the Houston, San Antonio, and Austin metropolitan areas are almost identical.
For QSR in general, however, unemployment is a national issue and it is adversely affecting traffic in all areas of the country. A sustained recover in QSR stocks will be dependent upon macro headwinds abating and same-store sales picking up. As we wrote about in “I’LL HAVE ONE JOB, HOLD THE BURGER”, on 01/08/10, the 16-19 year old demographic is extremely important for QSR chains. The chart below shows the high rate at which this age group is losing jobs.
We also noted that several of the management teams that presented at the conference are projecting flat operating margins going forward despite their expectations for continued softness in top-line trends, which led me to consider another important employment-related issue for restaurant operators. In the event of the Employee Free Choice Act passing this year, labor costs would increase materially. We did not hear any QSR management teams discuss this topic during presentations this week. Unions are disappointed over the public option and with politicians needing campaign help, we could hear more about unionization in the coming months ahead of 2010 mid-terms.
Hedgeye Risk Management’s Macro and Healthcare sectors have been monitoring the theme of unionization closely. This is a highly relevant topic for QSR companies. For instance, McDonalds employs more than 600,000 U.S. restaurant workers, many earning less than $10 per hour. This makes the chain an attractive target for union organizers, a point McDonald’s recently elected President and COO Don Thompson was apparently aware of when he urged 2,400 franchisees to write to their US senators and representatives to oppose the Employee Free Choice Act, which would effectively end secret ballots and lead to binding arbitration for labor contracts. Rick Berman, a lobbyist for the food industry in Washington, D.C., says that the bill is “a huge threat to fast food and … the long-term health of the industry”.