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INITIAL CLAIMS: INCONCLUSIVE

Takeaway: Taking the data at face value, it's less good. However, it's unclear whether California is still causing a meaningful distortion.

This note was originally published October 31, 2013 at 10:06 in Financials

Editor's note: This is an abbreviated excerpt from a Hedgeye Financials Sector report issued earlier this morning by Josh Steiner and Jonathan Casteleyn. For more information on how you can reap the benefits of Hedgeye research click here.

 

INITIAL CLAIMS: INCONCLUSIVE - jon7

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The labor market appears to have lost a step in the latest week, but conflicting reports over whether California's tech issues are finally out of the data make it hard to state definitively what is happening. The year-over-year rate of improvement in non-seasonally adjusted initial jobless claims slowed to 6.6% from 9.8% in the prior week. The state level California data, which is only available on a 1-week lag, is showing that CA claims were still running above the prior year level by ~15k.

 

Assuming this 15k was still present in the data in the current week it would significantly alter the conclusion, as the data would instead appear to be resuming its pre-California/Govt shutdown run-rate. We expect greater clarity in the week ahead as we'll be able to see next week whether California's level of claims for this week were distorted.

Nuts & Bolts 

Seasonally adjusted initial jobless claims fell 10k to 340k week-over-week (WoW) and there was no revision to the prior week's data. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 8k WoW to 355.25k.

 

The 4-week rolling average of non-seasonally adjusted (NSA) claims, which we consider a more accurate representation of the underlying labor market trend, was lower by 3.8% year-over-year (YoY), which is a sequential deterioration versus the previous week's YoY change of -5.8%

 

INITIAL CLAIMS: INCONCLUSIVE - stein1

 

INITIAL CLAIMS: INCONCLUSIVE - 2

 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 

Jonathan Casteleyn, CFA, CMT

203-562-6500

jcasteleyn@hedgeye.com

 


SAM - Hard to Argue with Results – But Up on a Rope Remains A Risk

Takeaway: Trade around today's weakness

Generally it is hard to poke any holes in the third quarter’s results:  SAM beat top and bottom line consensus expectations on double digit growth versus the previous-year quarter.  The stock is taking a hit this morning on management narrowing its FY 2013 guidance by 5 cents to $5.05 – $5.35 versus $5.10 - $5.40. We think the move is overdone. 

 

We remain bullish on SAM into year-end, however cognizant that the stock is up on a rope: +78% YTD and +38% over the last three months, and is expensive with a P/E of 40.4x vs a peer average of 23.3x. That said, we see 2014 as a very balanced year for SAM to meet and beat expectations on strong healthy growth from Sam Adams and continued support from Twisted Tea and Angry Orchard. We expect the company’s increased cap-ex spend to build brewery capacity (including a new bottling and can line, announced last quarter) to boost 2014 shipping volumes and reverse recent bottle necks resulting from overcapacity and the higher costs associated with using third party breweries.  The company raised depletion trends for FY13 to 21-24% vs previous guidance of 17-22%, and we expect the trend of superior growth of top craft brewers, in which SAM is a leader, to continue over the medium term.

 

From a quantitative perspective, we’d be buyers of SAM above our intermediate term TREND level of support at $220. Today the stock broke through its previous immediate term TRADE level of support at $246 to become its new line of resistance.

 

SAM - Hard to Argue with Results – But Up on a Rope Remains A Risk - zz. sam levels

 

SAM - Hard to Argue with Results – But Up on a Rope Remains A Risk - zz. sam

 

 

What We Liked:

  • Net revenue of $216.4MM beat consensus of $200.4MM, an increase of $50.0 million or 30% over the same period last year
  • Net income for the third quarter was $25.7 million, or $1.89 per diluted share that beat consensus at $1.82, an increase of $4.9 million or $0.36per diluted share from the third quarter of 2012, an increase of 24%
  • Depletions growth of 26% in the quarter, from growth in Sam Adams, Twisted Tea, and Angry Orchard
  • FY 2013 depletion trends raised to 21-24% vs previous guidance of 17 – 22%
  • FY 2013 capital spending estimate narrowed to $100MM to $120MM vs previous guidance of $100MM to $140MM
  • Maintained its FY gross margin range of between 52% and 54%
  • Expects price increase of ~ 1% in Q4 to offset higher input and labor costs
  • Tax rate of 38% for FY
  • On Industry Trends: Jim Koch said he’s seeing some signs of variety fatigue with retailers, who are choosing to stick with well defined crafts with high consumer awareness and appeal. From the retailer’s side, this also prevents staff confusion and kegs that don’t turn quickly enough.   Broadly he sees the variety in craft, citing 2-3 new craft breweries opening every day in the U.S., as a positive sign for growth in the category.

What We Didn’t Like:

  • FY 2013 EPS are now estimated to be between $5.05 to $5.35, a decrease from the previously range of $5.10 to $5.40 due to the land write-down and increased brand investments that are estimated to be partially offset by increased shipment volumes
  • In the quarter, Gross Margin declined to 53% vs 56% in the year-ago quarter, on increased brewing costs, higher ingredient costs, and product mix effects 

Matthew Hedrick

Associate


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INITIAL CLAIMS: INCONCLUSIVE

Takeaway: Taking the data at face value, it's less good. However, it's unclear whether CA is still causing a meaningful distortion.

The Fed’s innovative and, thus far, enigmatic “communication tool” continues to propagate both investor uncertainty and asset volatility as speculative handicapping of every domestic macro data point on prospective policy adjustment timing is back to serving as the prevailing driver of daily price action. 

 

The dollar is up and treasury yields are both higher in today’s iteration as the Chicago PMI surged to its highest level since March 2011 and initial claims declined modestly. 

 

Bloomberg’s weekly reading of consumer confidence, meanwhile, declined again sequentially as the hangover in confidence stemming from the Gov’t shutdown continues to manifest across the preponderance of age and income demographics.    

 

With the immediate term correlation between the dollar and equities strongly inverse at -0.86, stocks are red this morning on stronger data.   However, we continue to view the combination of #StrongDollar + #RatesRising as a pro-growth signal and are looking for a sustained return to that dynamic (which characterized much of the YTD) to stay bullish on U.S. growth prospects over the intermediate term.   

 

This morning’s initial jobless claims numbers aren’t adding any clarity to the macro picture as residual noise from California continues to complicate a clear discernment of the underlying Trend in the domestic labor market.  We should have improved clarity come next week. 

 

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

 

-  Hedgeye Macro

 

INITIAL CLAIMS: INCONCLUSIVE - Confidence Table

 

 

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Processing, Processing, ...

The labor market appears to have lost a step in the latest week, but conflicting reports over whether California's tech issues are finally out of the data make it hard to state definitively what is happening. The year-over-year rate of improvement in non-seasonally adjusted initial jobless claims slowed to 6.6% from 9.8% in the prior week. The state level California data, which is only available on a 1-week lag, is showing that CA claims were still running above the prior year level by ~15k. Assuming this 15k was still present in the data in the current week it would significantly alter the conclusion, as the data would instead appear to be resuming its pre-California/Govt shutdown run-rate. We expect greater clarity in the week ahead as we'll be able to see next week whether California's level of claims for this week were distorted.

 

Nuts & Bolts 

Seasonally adjusted initial jobless claims fell 10k to 340k WoW and there was no revision to the prior week's data. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 8k WoW to 355.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was lower by 3.8% YoY, which is a sequential deterioration versus the previous week's YoY change of -5.8%

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


ICI Fund Flow Survey - Record Domestic Equity Inflow

Takeaway: Domestic equity funds put up a record weekly inflow last week above the prior record from the first week of '13 and also higher than 2007

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Total equity mutual fund flow broke to near all-time highs for the week ending October 23rd with a $13.5 billion total inflow into both domestic and world equity funds. Domestic equity mutual fund flow of $9.1 billion last week was an all-time record for U.S. stock funds in any 5 day period and eclisped the prior weekly record of $7.7 billion from the first week of 2013.  As a result, total equity mutual fund trends in 2013 now tally a $2.8 billion weekly average inflow, a complete reversal from 2012's $3.0 billion weekly outflow 

 

Fixed income mutual funds conversely continue to have persistent outflows. This week's tally, although a sequential improvement, measured another $2.3 billion withdrawn from bond funds which has pushed the 2013's weekly average fund flow to a negative $719 million. This compares to very strong trends which marked last year when bond mutual funds averaged a $5.8 billion weekly inflow

 

ETFs also experienced strong subscriptions last week, with inflows in both equity and fixed income products. Passive equity products experienced inflows of $13.0 billion for the 5 day period ending October 23rd with bond ETFs contributing $1.3 billion during the same time period. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results

 

ICI Fund Flow Survey - Record Domestic Equity Inflow - ICI 1

 

 

For the week ending October 23rd, the Investment Company Institute reported the second strongest weekly inflow into both domestic and world stock products in the history of the data set of $13.5 billion. The only other larger weekly inflow for total equities was during the first week of 2013 where $14.3 billion came into both fund classes. The domestic equity result of a $9.1 billion inflow was the largest U.S. weekly stock fund in history, larger than the prior record of $7.7 billion in the first week of the year and over 2.5x the best week in 2007. World stock fund inflows totaled $4.3 billion last week, the best 5 day result since the beginning of February 2013 and resulting in now 25 consecutive weeks of foreign stock fund flow. Including this week's new record high in domestic stock fund flows, the year-to-date weekly average for 2013 for all equity mutual funds has moved to a $2.8 billion inflow, a complete reversal from the $3.0 billion outflow averaged per week in 2012.

 

On the fixed income side, bond funds continued their weak trends for the 5 day period ended October 23rd with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $2.3 billion outflow, a sequential improvement from the $5.7 billion lost in the 5 day period prior, but still exhibiting weak trends. Both categories of fixed income contributed to outflows with taxable bonds having outflows of $1.3 billion, which joined a $1.0 billion outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 16 of the past 21 weeks and municipal bonds have had 21 consecutive weeks of outflow. While the sharp outflows that marked most of the summer and the start of the third quarter have moderated, the appetite for bonds has hardly rebounded. The 2013 weekly average for fixed income fund flows is now a $719 million weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.

 

 

ICI Fund Flow Survey - Record Domestic Equity Inflow - ICI 2

ICI Fund Flow Survey - Record Domestic Equity Inflow - ICI 3

ICI Fund Flow Survey - Record Domestic Equity Inflow - ICI 4

ICI Fund Flow Survey - Record Domestic Equity Inflow - ICI 5

ICI Fund Flow Survey - Record Domestic Equity Inflow - ICI 6

 

 

Passive Products:

 

 

Exchange traded funds mirrored the trends in mutual funds with a strong result from equity ETFs and a weak performance from fixed income passives. Equity ETFs posted a $13.0 billion inflow, the third largest weekly inflow for equity ETFs all year. The 2013 weekly average for stock ETFs is now averaging a $3.3 billion weekly inflow, a 50% improvement from last year's $2.2 billion weekly average inflow.

 

Bond ETFs managed an inflow for the 5 day period ending October 23rd with a $1.3 billion subscription, breaking a trend of 3 consecutive weeks of passive bond outflows, but hardly a robust number. Despite this slight net new subscription in bond ETFs, 2013 averages are flagging with just a $275 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.

 

 

ICI Fund Flow Survey - Record Domestic Equity Inflow - ICI 7

ICI Fund Flow Survey - Record Domestic Equity Inflow - ICI 8

 

 

Jonathan Casteleyn, CFA, CMT

 

 

 

 

 

 

Joshua Steiner, CFA

 

 


INITIAL CLAIMS: INCONCLUSIVE

Takeaway: Taking the data at face value, it's less good. However, it's unclear whether CA is still causing a meaningful distortion.

Processing, Processing, ...

The labor market appears to have lost a step in the latest week, but conflicting reports over whether California's tech issues are finally out of the data make it hard to state definitively what is happening. The year-over-year rate of improvement in non-seasonally adjusted initial jobless claims slowed to 6.6% from 9.8% in the prior week. The state level California data, which is only available on a 1-week lag, is showing that CA claims were still running above the prior year level by ~15k. Assuming this 15k was still present in the data in the current week it would significantly alter the conclusion, as the data would instead appear to be resuming its pre-California/Govt shutdown run-rate. We expect greater clarity in the week ahead as we'll be able to see next week whether California's level of claims for this week were distorted.

 

Nuts & Bolts 

Seasonally adjusted initial jobless claims fell 10k to 340k WoW and there was no revision to the prior week's data. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 8k WoW to 355.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was lower by 3.8% YoY, which is a sequential deterioration versus the previous week's YoY change of -5.8%

 

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Yield Spread

The 2-10 spread rose 4 basis points WoW to 223 bps. 4Q13TD, the 2-10 spread is averaging 227 bps, which is lower by 7 bps relative to 3Q13.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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