Takeaway: Adjusting for the effects of Hurricane Sandy this time last year we find that the rate of labor market improvement continues to accelerate.
More Good News on the Labor Front
This week's data shows a continuation and modest acceleration in the rate of improvement in the labor market. As is our convention we largely disregard the seasonally adjusted data and instead look at the year-over-year rate of change in the non-seasonally adjusted data. This week is a bit difficult on that front because we are lapping the impact of Hurricane Sandy. This week last year we saw a 78,000 W/W increase in claims from Sandy. If we adjust the numbers for Sandy we find that the Y/Y rate of improvement this week came in at -8.9%, i.e. claims are lower than last year by 8.9%. This is a modest acceleration in trend from the previous week's -8.4%. On a rolling basis the dynamic is similar, where the rate of improvement strengthened to -8.1% from -5.1%, but we are also coming off the distortion of the California IT hiccup. The net of it is that the labor market continues to gain momentum and this should, on the margin, push up tapering expectations and push up the long end of the yield curve. Beneficiaries include asset sensitive and credit sensitive financials.
Nuts & Bolts
Prior to revision, initial jobless claims rose 3k to 339k from 336k WoW, as the prior week's number was revised up by 5k to 341k.
The headline (unrevised) number shows claims were lower by 2k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.75k WoW to 343.75k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -13.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.9%. This is unadjusted for the Sandy distortion we profile above.
The 2-10 spread rose 5 basis points WoW to 240 bps. 4Q13TD, the 2-10 spread is averaging 230 bps, which is lower by 4 bps relative to 3Q13.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Takeaway: This is your centrally planned market life now. Deal with it.
So, after testing Hedgeye TREND resistance of $81.39, the US Dollar Index (sadly) faded like a wilted flower yesterday.
Reality check: This is your centrally planned market life now. Deal with it.
On a related note, I don’t think there’s a hope in hell that Janet Yellen signals a December taper. Heck, the Yen might even be a long here going into her hearing. That’s how scary dovish she is.
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So after testing our Hedgeye TREND resistance of $81.39, the US Dollar Index (sadly) faded like a wilted flower yesterday. The reality is that this is your centrally planned market life now. Deal with it. On a related note, the Yen might even be a long here going into the Yellen hearing. That’s how scary dovish she is.
UST 10YR YIELD
The 10-Year yield fades at a lower-high and now Hedgeye TREND support of 2.66% comes in play into the Fed front-running circus event in Washington. I don’t think there’s a hope in hell that Janet Yellen signals a December taper. No way, no how. That’s why I am long the long bond (and Gold) here.
Gold does not have the pop Silver (+1.4%) has this morning, but at least its not going down. We’re now long of Gold in Yellen terms (closer to $1262), but Mr Market doesn’t care what we own and where. Today is game day. Gold resistance is $1311, then $1342 after that
|FIXED INCOME||8%||INTL CURRENCIES||20%|
Top Long Ideas
Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged. If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
QUOTE OF THE DAY
"Is the program actually proving effective? My short answer is yes."
-Janet Yellen on the efficacy of QE on 1/8/11
STAT OF THE DAY
Kohl's shares fell sharply this morning after posting earnings and revenue that fell far short of market expectations. Shares stumbled 9% in pre-market trade. Hedgeye Retail Sector Head Brian McGough nailed this call. Click here to watch video from Tuesday.
Continuing our work in the MLP space, we will host an Expert Call on Monday, 11/18 at 1pm EST with Roger Burks, Founder and Managing Director of WG Consulting (WGC) and formerly the Lead Partner for Deloitte’s energy practice.
Given the importance of non-GAAP financial measures to MLPs (distributable cash flow, adjusted EBITDA, maintenance CapEx, etc.), we are looking to gain a better understanding of how and why MLPs use them. We also seek to understand how the use and calculation of non-GAAP measures is audited (independent auditors) and regulated (SEC), if at all.
A few questions on our mind…
- What is “maintenance CapEx”? What is this measure supposed to represent?
- Is “maintenance CapEx” a non-GAAP financial measure? Why isn’t “maintenance CapEx” reconciled back to its nearest GAAP financial measure?
- Why are recurring, non-cash expenses like stock-based compensation and non-cash interest expense added back to non-GAAP financial measures like adjusted EBITDA and distributable cash flow? What is the rationale for doing so?
- To what extent are non-GAAP financial measures audited?
- To what extent are non-GAAP financial measures regulated by the SEC?
- With the SEC’s renewed focus on accounting fraud, do you think that MLPs’ use of non-GAAP financial measures will come under increased scrutiny? Have you any indication of this already happening?
- And more…
Monday, 11/18, 1pm EST
Toll Free Number:
Direct Dial Number:
Conference Code: 536617#
About Roger Burks…
Roger Burks is Founder and Managing Director of WG Consulting (WGC). Mr. Burks is a CPA with over 30 years of experience, including over 20 years with Deloitte & Touche and 10 years as a senior executive in the energy industry. Prior to WGC, Mr. Burks led Deloitte’s energy practice. He served as Lead Partner for many of Deloitte’s energy clients, and led various transaction projects including external audits, acquisitions, divestitures, public and private stock, debt offerings, and merger integration, many involving early Master Limited Partnerships (MLPs). In 2012, Mr. Burks founded a financial advisory firm that was effectively merged into WGC. Today, Mr. Burks and his team at WGC serve as the Interim-CFO for a number of companies and provide all financial, operational, and transactional services to them. Additionally, Mr. Burks serves on the Board of STR Marketplace, The Houston Chapter of CPAs, and has previously served on the Board of Superior Offshore International as well as various other private company and non-profit boards.
A delicate time for the cruisers – we’d like to share our thoughts
Fears that overcapacity in the Caribbean is causing soft bookings volume and down pricing persist. Cruise Week pedaled the weak Q4/Q1 again this week. While not a new theme, it’s not abating.
As pointed out by Cruise Week, agents continue to see RCL as best positioned in the current demand environment. However, we remain cautious as RCL’s capacity in the Caribbean will be at its highest since 2010 due to the debut of Quantum of the Seas in November 2014. Moreover, we’re not sure RCL’s guidance reflects the potentially weak environment.
For CCL, we believe the low yield guidance for 1H 2014 already takes into account the soft picture from the Caribbean, particularly for FQ1. As seen from our recent pricing survey, CCL may be experiencing incremental improvement in that market despite the negative scuttlebutt.
Here is what we are seeing/hearing/feeling:
- On a longer-term trend, the number of cruise passengers has been steady but selling price is down.
- River cruising segment is outperforming ocean cruising by a wide margin particularly in the summer. Onboard spend has been exceptional.
- Luxury cruises have been immune to the recent weakness
- Europe 2014 is trending much higher than 2013
- Onboard yield will continue to go higher
- Bar drink prices not discounted
- Oasis of the Seas and Allure of the Seas getting higher yields due to strong onboard spending
- Mainstream land vacations for Mexico/Florida have been doing well
- OTAs are not having a significant impact on the cruise business
Recent industry news:
- (Nov 7) Costa Cruises will spend 10MM euros for 3 dry docks
- Costa Voyager starting 11/7/13 for about two weeks
- Costa neoRiviera from 11/7/13 to 11/12/13
- Costa Classica from November 12 to December 21.
- (Nov 7) Starting January 2014, the number of cruise ships that are permitted to enter Venice is cut by 20% while in November 2014, any ship over 96k tons will be banned from the Giudecca Canal (lies south of Venice).
- (Nov 11) Small fire on Dawn Princess on 11/8 on New Zealand sailing. There were no passenger or crew injuries and the itinerary did not need to be altered.
- (Nov 11) Due to propulsion problems on Allure of the Seas, the ship may be drydocked in 2014 rather than 2015. The Oasis of the Seas drydock is scheduled for 2014 but may be pushed back to 2015.
- (Nov 13) Starting in 2014, the VAT in Mexico's border states will rise to 16% from 11% previously. This means the cost of goods and services will rise 5% in leading cruise ports like Cozumel, Costa Maya, Ensenada and Cabo San Lucas, among others. Transportation - not subject to VAT anywhere in the country before - will be taxed at 16%. CCL recently learned about the increase and is currently examining the matter.
- (Nov 13) Princess Cruises said it will pay 2% bonus commissions on short cruises departing January through April next year. The 3-5 day cruises leave from Los Angeles and Fort Lauderdale. The bonus applies on bookings made Nov. 15 through April 22.
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