Summary: A second week of “clean” initial claims data confirms a return to the Trend rate of improvement, ISM New Orders and Employment both continued their respective advances to multi-year highs and, while Bloomberg’s weekly confidence data deteriorated marginally WoW, the positive reversal for consumer sentiment in December was unanimous across all the primary survey’s.
INITIAL CLAIMS: The YoY rate of change in non-seasonally adjusted claims improved 170bps WoW to -9.5% while headline claims fell 1K vs the prior weeks revised 338K.
Josh Steiner, head of Hedgeye Financials, offered some summary context for this morning’s data with respect to the broader trend:
- The last two weeks have finally provided a glimpse of normalcy in the labor market. The most recent week of data showed a 9.5% year-over-year improvement in initial claims while the week prior showed an 8.2% y/y improvement. The three months preceding that have been riddled with distortions, adjustments and comp issues making them all but unusable. Fortunately, the clean data at year-end reveals a continuation of trend for the labor market: strength. While we would no longer argue that the rate of change y/y is still accelerating, a high single digit rate of y/y improvement at this stage of the recovery is still quite strong.
(source: Hedgeye Financials)
ISM MANUFACTURING: The headline ISM index declined -0.3 to 57 in December but the New Orders and Employment sub-indices, the better lead indicators in the index, both advanced sequentially, posting their best readings since April 2010 and June 2011, respectively.
The TREND in the manufacturing data remains one of strength with the trailing 3M/6M/TTM figures still improving across the headline, New Orders, and Employment indices to close the year.
Notably, the Supplier Deliveries sub-index (i.e. how long purchase managers are waiting to receive orders/supplies) is getting interesting here as it moves into the high 50’s as higher waiting times are generally indicative of rising demand.
Elsewhere, despite the inventory build juicing third quarter GDP, inventory angst appears relatively muted across the manufacturing base according to ISM with the Business inventory and Customer Inventory readings both running sub-50.
Separately this morning, the final Markit PMI reading for December showed commensurate strength, improving +0.3 MoM to a new 11-month high.
CONFIDENCE: Bloomberg’s weekly read on consumer comfort deteriorated -1.3 to -28.7 week-over-week, but the index remains north of the -30 Mendoza line and the positive reversal in confidence in December has been discrete.
Indeed, with the +6.1 point jump in the conference board’s consumer confidence survey reported on Tuesday, the positive, post-gov’t shutdown, reversal across the major survey’s in December has been unanimous.
Confidence, of course, is coincident-to-leading for a bevy of economic activity indicators and with seasonality building as a positive support in the reported domestic macro data through 1Q14 and without a discrete negative catalyst imminent on the calendar, the path of least resistance is probably higher.
Christian B. Drake
Joshua Steiner, CFA
Takeaway: The trend of "clean" labor data rises to two weeks with this morning's print, and the conclusion remains bullish for Financials.
Editor's note: This is an unlocked excerpt from Hedgeye's Financials team.
Two Clean Weeks
The last two weeks have finally provided a glimpse of normalcy in the labor market. The most recent week of data showed a 9.5% year-over-year improvement in initial claims, while the week prior showed an 8.2% year-over-year (y/y) improvement. The three months preceding that have been riddled with distortions, adjustments and comp issues making them all but unusable. Fortunately, the clean data at year-end reveals a continuation of trend for the labor market: strength. While we would no longer argue that the rate of change y/y is still accelerating, a high single digit rate of y/y improvement at this stage of the recovery is still quite strong.
As we've been arguing for some time now, the strengthening labor data is exerting upward pressure at the long end of the yield curve. Based on this, we continue to expect banks to have a macro tailwind into 1Q14 and builders to have a headwind.
Prior to revision, initial jobless claims fell 1k to 339k from 338k week-over-week (WoW), as the prior week's number was revised up by 3k to 341k.
The headline (unrevised) number shows claims were lower by 2k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 9.75k WoW to 357.25k.
The 4-week rolling average of NSA claims, which we generally consider a more accurate representation of the underlying labor market trend, was -2.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -10.0%. However, as mentioned above, the distortions that have been present in the data up until just recently have rendered this 4-week rolling average slightly less valuable. We expect that in a few weeks it will again become the most important data point we track on the strength of the labor market.
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Takeaway: With flows (out of bonds into stocks) this bullish, it’s more about time/price right now than anything else.
POSITIONS: 7 LONGS, 5 SHORTS @Hedgeye
Do you do the mo mo?
After shorting the market too early in Q3 of 2007 (and getting fired for it), I had to teach myself how to not mess up missing the next melt-up to all-time highs. Risk managing bullish immediate-term TRADE momentum within a bullish intermediate-term TREND is a process.
With flows (out of bonds into stocks) this bullish, it’s more about time/price right now than anything else. So my levels are really important to me. Across our core risk management durations here are the levels that matter to me most:
- Immediate-term TRADE resistance = 1858
- Immediate-term TRADE support = 1833
- Intermediate-term TREND support = 1758
In other words, over the intermediate-term (now through June) you have a 100 point SP500 range of risk to consider (1).
In the immediate-term, it’s more a question as to whether or not Mr. Macro Market’s signal is right that we are going to continue to see a series of higher-lows (1833 support) and higher-highs (1858 resistance).
That is all. We held 1833 TRADE support this morning, so I bought Tesla (TSLA) instead of SPY (more mo mo in TSLA!).
Chief Executive Officer
We are removing "short" ROYT and BBEP from our Best Ideas list.
Short ROYT has worked well since we added it to our Best Ideas list on 7/2/13 at $17.99/unit. We believe that the NAV of the trust is ~$9.00 – 10.00/unit; it’s still overvalued, but not the opportunity that it was when it was trading at $18 before the insiders unloaded units.
There could be a trading opportunity in ROYT in 2Q14, so we may revisit. ROYT has 2,000 bpd (45% of production) of Brent crude swapped at $115/bbl through March 31, 2014. After that date, the trust will be 100% exposed to spot pricing (California crudes: Midway-Sunset and Buena Vista). Thus, depending on those spot prices in April 2014, there could be a steep decline in the monthly distribution in June, as the June distribution will be paid from April production and prices; that distribution will be announced around May 23rd, 2014. We’ll be watching the California crude prices closely over the coming months.
Short BBEP has not worked since we added it to our Best Ideas list on 7/2/13 at $18.42/unit. Our negative thesis was built on BBEP’s understated maintenance CapEx, aggressive non-GAAP accounting, aggressive hedging strategies and accounting, weak capital efficiency (F&D), excess leverage, its need to raise dilutive equity capital, poor corporate governance, and valuation.
We don’t believe that we are wrong on the fundamentals here, but they don’t seem to matter at the moment (and that’ll happen). Long-term, we are still negative. But we believe that there are better short opportunities in the MLP space, and in the E&P MLP space in particular, than BBEP here and now. BBEP almost went away in 2008/9; it’s our view that at some point it'll be staring down the barrel of that gun again. For relative performance-focused investors, we expect BBEP to continue to underperform the broader MLP sector, especially if it weakens, given BBEP’s outsized leverage, serial acquisition business model, and understated maintenance CapEx.
Ping me for any of the old ROYT and/or BBEP notes.