Takeaway: The good news is claims are hitting new lows. The caveat is this has been a dangerous place historically over the intermediate/long term.
Credit Quality Tailwinds
Last week we wrote that jobless claims dropped to a new low of 281k - for perspective that was lower than at any point in the peak of the economic expansion in 2005/2006. This week, claims are unch'd at 281k again. Meanwhile, our gauge of rate of change looks at the y/y change in the rolling NSA claims, which accelerated further to its fastest rate YTD at -21%. The progress in the labor market remains substantial. Credit-sensitive financials still have the wind at their back.
Just as the day is always darkest before dawn, the reverse holds true too. The sun is always brightest before night, or something like that. The chart below is really the point. At 281k rolling initial claims the economy is now in-line with the all-time lows put in during each of the last three economic cycles (2006, 2000 and 1988).
Prior to revision, initial jobless claims rose 4k to 287k from 283k WoW, as the prior week's number was revised up by 1k to 284k.
The headline (unrevised) number shows claims were higher by 3k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -0.25k WoW to 281k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -20.7% lower YoY, which is a sequential improvement versus the previous week's YoY change of -19.5%.
The 2-10 spread fell -3 basis points WoW to 182 bps. 4Q14TD, the 2-10 spread is averaging 186 bps, which is lower by -13 bps relative to 3Q14.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Takeaway: Las Vegas operations disappoint and it WASN'T due to hold percentage
MGM’s Las Vegas properties clearly disappointed. Management points out in the press release that low table hold vs last year cost them $18m in EBITDA in Las Vegas. A few observations regarding that selective disclosure:
- Wholly owned Las Vegas EBITDA was $262 million in Q3 versus the Street at $304 million
- Table hold percentage at wholly owned casinos was 19.8%, almost exactly in the middle of management’s historical guidance of 18-22% (as discussed on conference calls and in 10Qs)
- Analysts typically model Las Vegas to normal hold, so the $42m Las Vegas EBITDA miss was apples to apples
- In Q2, wholly owned table hold % was 21.3% vs 18.1%, a 320bp delta. In Q3 it was 19.8% vs 21.5%, only a 170bp delta. Last quarter management didn’t emphasize that they got a huge boost from higher hold YoY nor did they quantify what would’ve been a much bigger delta than the slightly lower YoY hold experienced in Q3. In fact, we pointed out in a note last quarter that Las Vegas EBITDA would’ve been flat with normal hold in both periods. Here is what we wrote in our 8/5/14 note “MGM & MACAU OBSERVATIONS: NOT GOOD”:
- “MGM reported wholly owned adjusted EBITDA of $414 million, up 10% over last year. However, if you normalize hold in both periods, EBITDA was roughly flat. That seems disappointing to us given the excitement about a surging Las Vegas recovery and the solid RevPAR gain of 6% generated in the quarter.”
We still maintain that the Vegas recovery is concentrated in the hotel business and this past quarter was another indication that the Strip casino segment is stagnant. However, the hotel business nationwide is doing quite well and actually better than the mid-single digit Strip RevPAR gains.
Takeaway: Our Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and proprietary quantitative market context.
CLICK HERE to view the document. In today’s edition, we highlight:
- How the recent spate of domestic economic data suggests you should continue to remain overweight Treasuries and munis as we await mass capitulation from both buy-side and sell-side consensus on bonds
- Adding ultra long-term Treasuries (EDV) to our Top-5 global macro long ideas in lieu of the Japanese yen, which is not providing us with the counter-cyclical exposure we had originally anticipated (inflation instead of deflation in Japan = lower real interest rates = less defensive when cross-asset volatility spikes)
Best of luck out there,
Associate: Macro Team
Takeaway: With this [soon-to-be-revised-down, pre-election Q3 GDP print], the U.S. economy is squarely in #Quad4 and should remain there throughout Q4
This note was originally published October 30, 2014 at 08:49 in Macro
It’s busy morning for our Macro Team here at Hedgeye with Keith live on Fox Business with Maria Bartiromo for the 9am hour, this Q3 GDP release and a busy day of customer meetings in New York. Fortuitously, we have a #process that allows us to quickly and appropriately contextualize this Q3 GDP “beat”:
Yes, that’s #Quad4, and yes, #Quad4 is bearish for asset prices:
The good news for growth bulls is that the YoY number (i.e. the one 20 years of backtest data suggests the market actually cares about) came in above our +1.9% estimate at +2.3%. The bad news is that that figure is still down from +2.6% in Q3.
#GrowthSlowing, in rate-of-change terms.
Refer to our note from last night titled, “NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU…” for more details on why the U.S. economy is set to slow further here in Q4. The 20 charts in that note are very easy to consume and startling, to say the least.
Best of luck out there!
Associate: Macro Team
Takeaway: We saw what we needed to from RL. HBI is flirting with the penalty box. TGT free shipping math is perplexing.
EVENTS TO WATCH
COLM - Earnings Call: 5:00pm
RL - 2Q15 Earnings
This wasn't a perfect quarter by any means. Regardless of the EPS beat (off sandbagged guidance) the company deleveraged +4.1% revenue growth into a (-3.4%) EBIT decline, and 1.3% EPS growth. Hardly something we'd expect from one of the preeminent companies in retail. But we moved the name from our Long Bench to our Core Longs last week, and we're glad we did. Our rationale is that this is a quality name that is investing in both the P&L and balance sheet to reaccelerate growth in a Brand that probably has room to double globally. Not many companies have that kind of opportunity. When we see a depressed multiple on a quality company that is doing the right thing to grow its footprint in a profitable way, we definitely get interested. We saw enough in the quarter that gives us confidence that RL earns at least $10/share next year suggesting a 16x p/e on a name that should have accelerating sales, margins and cash flow.
HBI - 3Q14 Earnings
Takeaway: We've had HBI on our Long Bench -- not because we like the base business -- but because the company has such meaningful upside in earnings and cash flow due to its acquisitions. We'll rarely laud a company that is a serial acquirer, but the reality is that it is diversifying away from a business with fierce competition, commodity pricing, and an unstable distribution base (at least on the department store side). But with consolidated EBIT growth slowing from 34% in 1Q, to 27% in 2Q, and now 23% in 3Q -- we're definitely less enthused. The DBA deal should accelerate in the upcoming quarter -- though it appears that this at least partially in company guidance. If there's one reason we're hanging in and doing more work, it's that we should soon start to see the positive impact of the 34% draw down in cotton costs over the past five months.
Apple Pay Rival CurrentC Hacked During Test of Payments Tech
- "CurrentC, the retailer-backed mobile-payment system touted as an alternative to Apple Inc.’s platform, was hacked during a test of the technology, resulting in some e-mail addresses being stolen."
Takeaway: Unfortunately, when your credibility is entirely based on delivering a secure payment mechanism and you get hacked during your maiden voyage, it's potentially terminal.
Marc Jacobs, for Marc Jacobs, by Marc Jacobs
While this is hysterical at face value, Jacobs -- who is likely to go public at some point -- occasionally does satirical things like this with product. This was a particularly good one. "Jacobs by Marc Jacobs for Marc Jacobs in collaboration with Marc Jacobs for Marc by Marc Jacobs"
TGT - Shipping Pencils
Takeaway: We already know that Target fired the first shot across competitors' bow with free shipping this holiday on everything -- with no spending threshold. So we tested it out. Here's an order for a package of pencils for $1.22. The company claims to pay the $5.49 for shipping. In reality, the real shipping charge is nowhere near that. It's probably closer to $1.50. But do the math. $1.22 at a 30% GM = $0.37 in gross profit. There's the labor cost to handle the order -- but let's give TGT the benefit of the doubt that this is included in the $1.50 shipping charge. We're talking a loss of ($1.13) on an order of $1.22. Not good. We're not exactly concerned about mass ordering of pencils, hair scrunchies, and cheap lipstick. It's not financially material. But we are very concerned that this sets a precedent for future discounting behavior. Retailers are realizing that free shipping (and ultimately free returns) is a (temporary) competitive advantage. We still think that shipping charges will be a distant memory to consumers within 2 years. Bad for retailers with a low basket size like TGT and KSS.
KATE - THE KATE SPADE GAP KIDS COLLECTION HAS US BASICALLY ALL WISHING WE COULD BE A KID AGAIN
- "Big things are once again happening in the Spade family world. Kate Spade New York and Jack Spade have partnered up with Gap Kids to launch a holiday line exclusively for the little ones. On Oct. 30, kiddos can shop the collection during its two-week run. The collaboration is a pretty big deal for the Spades — it’s the first time the husband-and-wife duo have paired up to design a line and marks their debut into the children’s world."
M - Macy’s introduces Holiday Arcade in-store shops
- "For the upcoming holiday season, Macy’s is introducing the Holiday Arcade---in-store gifting shops that will launch at six Macy’s locations from late October through mid-November, including Macy’s South Coast Plaza in Costa Mesa, Calif., Macy’s Union Square in San Francisco, Calif., Macy’s Dadeland in Miami, Fla., Macy’s State Street in Chicago, Macy’s Herald Square in Manhattan, N.Y., and Macy’s Center City in Philadelphia."
- "Holiday Arcade gifting items will include: Build-A-Bear Workshop shop-in-shops at the Costa Mesa, San Francisco, Chicago, Manhattan and Philadelphia locations, as well as Seedling stocking stuffers, a Paddington Bear toy and apparel collection, Harry Barker dog gifts, Curious George merchandise, Madame Alexander dolls, Lionel trains, and Boo & Grumpy Cat toys from Gund."
KATE - Study: Kate Spade provides best online customer service in September
- "Kate Spade provided the best overall customer service in Sept. 2014. This marks the retailer’s first time topping Stella Benchmarks from customer service research firm Stella Service in 2014. The retailer ranked in every area measured across fulfillment and customer care."
LOW - LOWE’S TESTS CUSTOMER SERVICE BOTS IN THE U.S.
- "The robots are coming. Lowe‘s is testing whether new bots on wheels can improve its customer service, like helping a shopper find a match for something as simple as a nail."
- "Four robots are being tested an Orchard Supply Hardware store owned by Lowe’s Companies Inc. in San Jose, California."
- "The robots dubbed OSHbots look like white columns with two large black screens on either side of them, and wheels to help them move. They are equipped with 3D cameras so they can scan and identify items. And customers can research items they want to buy on their screen. Then the robot can lead them to the aisle where an item is located."
RSH - RadioShack Hires Ex-Treasury Adviser to Help With Comeback
- "RadioShack Corp. (RSH) named former U.S. Treasury Department adviser Harry Wilson as its chief revitalization officer, enlisting a turnaround expert who helped restructure General Motors and Chrysler."
- "Wilson, founder of the advisory firm Maeva Group, will report to RadioShack’s board and Chief Executive Officer Joe Magnacca, the Fort Worth, Texas-based company said today in a statement."
JWN - Study: Nordstrom--online and in-store--top luxury retailer
- "According to the group's 2014 Luxury Multichannel Engagement Index, Nordstrom had the highest incidence of customers spending online (26%) and in-store (45%). It also led in its share of total fashion spend (17%)."
- "Bergdorf Goodman was the top-rated luxury retailer for in-store engagement with an in-store LMEI score of 8.17 out of 10. Ranking second for in-store engagement is Barneys New York (7.90), and Neiman Marcus (7.85) ranked third."
Boohoo Opening First Physical Store
- "With prices mirroring Forever 21, production cycles similar to those of Zara and a focus on content production à la Asos, Boohoo.com is in a prime position to take on the U.S. market."
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