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INITIAL CLAIMS | ONE STEP BACK FOR THE US AND TWO STEPS BACK FOR ENERGY STATES

Takeaway: Energy states continue to see their labor markets decoupling from the broader US trend.

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

 

EYEING THE ENERGY STATES:  The principal risk to the labor market's otherwise healthy disposition is the potential hit to energy-sector jobs from the collapse in energy prices. In an effort to stay vigilant and monitor the situation, we've been tracking weekly state-level filings for the eight energy-heavy US states relative the country as a whole. Those states include AK, LA, NM, ND, OK, TX, WV, WY and further details on them can be found here: Link

 

What we've observed is that energy state initial claims are diverging from the country as a whole since the fall in oil prices began in earnest in late September last year. The first chart below illustrates. The black line represents US initial jobless claims, while the blue line represents the eight energy-heavy states (indexed into a basket). These are NSA claims so we’re interested in the divergence between the two series. 

 

INITIAL CLAIMS | ONE STEP BACK FOR THE US AND TWO STEPS BACK FOR ENERGY STATES - Claims 18 normal

 

INITIAL CLAIMS | ONE STEP BACK FOR THE US AND TWO STEPS BACK FOR ENERGY STATES - Claims states yoy normal

 

The Data

Prior to revision, initial jobless claims rose 22k to 316k from 294k WoW, as the prior week's number was revised up by 3k to 297k.

 

The headline (unrevised) number shows claims were higher by 19k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 6.75k WoW to 298k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -10.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -16.2%

 

INITIAL CLAIMS | ONE STEP BACK FOR THE US AND TWO STEPS BACK FOR ENERGY STATES - Claims 10 normal

 

INITIAL CLAIMS | ONE STEP BACK FOR THE US AND TWO STEPS BACK FOR ENERGY STATES - Claims 2 normal

 

INITIAL CLAIMS | ONE STEP BACK FOR THE US AND TWO STEPS BACK FOR ENERGY STATES - Claims 3 normal

 

 

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Macro Notebook 1/15: Swiss | Oil | Financials

 

Hedgeye Macro Analyst Christian Drake shares the top three things in Keith's macro notebook this morning.


Hedging the Storm in Energy

Hedgeye’s Macro and Energy teams will host a guest speaker call on Wednesday, January 21st at 1 p.m. EST to discuss current trends in and implications of the commodity hedging practices of US E&Ps, natural gas processors, and various industrial commodity consumers.

 

Hedging the Storm in Energy - E Marketing Image


The call will feature Wayne Penello and Andy Furman of Risked Revenue Energy Associates (“R^2”).  R^2 is an independent hedge advisor serving E&P companies, midstream service providers, and large consumers.  Wayne Penello is the President and Founder of R^2, and has 30 years of experience in commodity options trading, market-making, and asset management.  Andy Furman has 25 years of experience in energy trading and is an expert at valuing and trading options.

 

Topics for Discussion:

  • Overview of R^2’s services, clients, and proprietary risk management systems;
  • The mechanics of entering into a commodity hedge;
  • Assessment of current industry hedge positions;
  • R^2’s commodity price outlook for crude oil, natural gas, and NGLs;
  • Client psychology – what E&Ps are currently thinking and doing in the oil, gas, and NGL markets;
  • The challenge and opportunity in hedging NGLs;
  • And more…

About Risked Revenue Energy Associates:

R^2 is a consultant and market agent in the energy space serving upstream, midstream, and end users of energy-related commodities (including private equity interests).  R^2 brings over 150 years of experience including but not limited to market-making, trading, asset management, and industry expertise. The firm utilizes a patented risk management strategy to help implement and stress test a company’s hedge book, leverage, and cash flows, among a long list of other metrics under various scenarios. R^2 suggests the most relevant hedging strategies and negotiates/executes on behalf of their clients on a daily basis.

 

Wayne Penello is the President and Founder of R^2. He has 30 years of market-making, option trading and asset management experience in the energy industry. Mr. Penello began his career on the New York Mercantile Exchange, where he was a market maker and served as Ring Chairman of options trading. Subsequently, he held positions managing globally distributed energy assets for Vitol S.A., Vitol U.S.A., Tenneco Gas Marketing and Torch Energy. Mr. Penello was formerly a research scientist. He holds a Masters degree in Marine Sciences from Stony Brook University and an undergraduate degree in Marine Biology from Southampton College.

 

Andy Furman was co-founder and CEO of Atlantic Capital Consultants, an options market-making firm on the NYMEX from 1987 – 2001. After leaving the NYMEX trading floor in 2001, Mr. Furman traded for hedge funds. Most recently he held the position of Managing Director for Hudson Capital Group, LLC where as Manager and Trader for Energy Futures and Options he used spread arbitrage and option strategies to achieve consistent profitability. Mr. Furman holds a Bachelor of Science degree in Chemical Engineering from MIT.

 

Macro Team


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LEISURE LETTER (01/15/2015)

TICKERS: CZR, SJM, H, RCL

EVENTS

  • Jan 15:   LA Dec Revs
  • Jan 29:  PENN 4Q CC
  • Feb 2: Cod Manila Grand Opening

COMPANY NEWS

The David Group –  there is chatter that the David Group, a top-10 junket with 3-5% of total VIP rolls in Macau, is closing its VIP rooms. David Group has 2 VIP rooms at Wynn Macau, 1 at Galaxy, 1 at Sands China, 2 at MGM China and 1 at SJM (via 3rd party casino).

 

The junket operator had already closed VIP rooms in the Venetian Macao and City of Dreams last year.

Article HERE

Takeaway:  Should be a drag on VIP and we will see more junkets close up shop. However, it's market dictated and not really an incremental negative.  

 

SJM – Sociedade de Turismo e Diversões de Macau SA (STDM) says it will look into complaints by employees of the Palacio Lisboa restaurant in the Lisboa Hotel that they are overworked and underpaid.

Article HERE

 

CZR has declared voluntary Chapter 11. 

  • CZR's plan, which has received support from more than 80% of first-lien noteholders, is intended to significantly reduce long-term debt and annual interest payments, while providing for significant recoveries for creditors and ensuring no interruption of operations across the company's network of properties.
  • To implement the balance sheet deleveraging, CEOC and certain of its U.S. subsidiaries have voluntarily filed for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois in Chicago. All Caesars Entertainment properties, including those owned by CEOC, are open for business and are continuing to operate in the ordinary course. All properties are continuing to host meetings and events and provide the facilities, amenities and experiences that guests expect.

 

 H – announced the sales of five select service hotels for a total gross sale price of ~$53m. The transactions closed in December 2014. As part of the sales, Hyatt entered into franchise agreements with the purchasers, with all hotels retaining their existing Hyatt Place branding. The purchasers intend to spend a total of approximately $6 million in additional capital expenditures at the hotels. 

Takeaway:  These worn-down upscale properties sold at a low average price per key of $84k. There are consistent with Hyatt's asset recycling strategy.

 

RCL – Azamara Club Cruises is planning one of the largest drydock upgrade programs since it has owned Azamara Quest and Azamara Journey.  While it's preliminary to share details, the vast majority of this 'significant' work will focus on passenger areas and accommodations, according to Azamara president and ceo Larry Pimentel, who called the projects 'an opportunity to ensure the ships stay in the up-market space. 'We're a destination-immersion product,' he added, 'but with this clientele it's incumbent to maintain the appropriate decor.'

 

Azamara Journey would begin its docking at the end of December and Azamara Quest in early January. Each project would stretch an estimated 3.5 to 4 weeks.

Article HERE

Takeaway:  Dry docks costs for Q1 are heading higher.

INDUSTRY NEWS

Higher labor costs – The opening of Studio City and of Galaxy Macau Phase II will require gaming labor to expand by 16,000 to 18,000 within this year, which represents an expansion of 28%-31%. As the currently unemployed population of Macau accounts for just 6,900, labor costs in the industry are expected to soar as operators fight to staff their new resorts.

 

However, and bearing in mind that Galaxy started a recruitment process to hire 8,000 workers this month, MPEL CEO Lawrence Ho admitted that he was “a bit worried” about how this could be achieved.

 

While immigration is the main key to solving the problem, there are two factors that will contribute to increasing labor costs for gaming operators: the competition of gaming operators for the most experienced and talented workers and the prohibition of hiring non-resident workers as croupiers. 

Article HERE

Takeaway:  Finding sufficient labor for the upcoming Cotai resorts are not new news but it is a risk that cannot be discounted this year. Despite negative revenue growth, there is little the concessionaires can do to offset wage inflation.  Volunteer, unpaid leaves of absences are one tool being employed.

 

Reno to NYC  Non-stop flights between Reno and New York City will be offered by JetBlue Airways starting on May 28. The route will make JetBlue the first carrier to offer daily nonstop service between New York City and Reno, which bills itself as the "Biggest Little City in the World."
Article HERE

 

Cyprus – According to Cyprus Commerce and Tourism Minister Yiorgos Lakkotrypis, 13 casino operators have expressed interest in running a casino.

Officials hope to pass casino legislation by end of January. There will be a competition process three weeks after the legislation is passed and to award the project to the successful bidder two months later.

 

Initial cost is projected at 500,000 euros (589,350 U.S. dollars) and the project includes at least 500 luxury rooms, at least 100 gaming tables and at least 1,000 gaming machines.

 

But the chosen operator can establish four other premises outside the casino with a maximum of 50 gaming machines each but no other casino gambling. The operation will be controlled by a 7-member Gaming and Casino Supervision Authority which will be tasked overseeing all casino activities and with making sure that it will be kept away from organized crime.

Article HERE

 Takeaway:  A small expansion opportunity for the Macau operators and slot suppliers. 

MACRO

Singapore macro

Home sales –  According to URA, developers sold 230 units of new homes in December, down 45.6% from the 423 units sold in November 2014. This was the lowest monthly sales figure since January 2009, when just 108 units were sold.   Property sales are typically slower towards the festive year-end period.  Home sales in Singapore have weakened considerably since the Government rolled out a series of cooling measures and loan curbs in recent years.

       Article HERE

 

Retail sales – Retail sales gained 6.5% YoY in November due to strong auto sales. Ex motor vehicles, retail sales fell 0.4% YoY and 0.9% MoM in November 2014.  However, Watches/Jewelry segment rose 4.2% MoM and 3.9% YoY.

Article HERE

Takeaway: Mixed macro signals for Singapore but the trend is tilting worse.

 

Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. 


TGT – Canada Quick Thoughts

Takeaway: Closing Canada from a position of strength. Good move. But if former mgmt. could be so off on this call, what else could be buried here?

Target just announced that it is exiting Canada. Some conclusions…

  1. The market had been expecting this. It’s part of what drove the stock up from $60 to $75 over three months. Nonetheless, it’s clearly good news for TGT.
  2. We outlined in our Black Book in May 2014 why Target would likely never earn money in Canada – counter to the company’s goal for earning $0.80 per share from Canada by Jan 2017. In this release, TGT said it’s clear that Canada would not be profitable until at least 2021. How a company could miss a profitability forecast by 4+-years is simply astounding.
  3. This decision was an easy one for new management. But if the old guard could have been so incompetent, how can we possibly believe that the decision to exit Canada is the last problem Cornell will uncover? Fixing Steinhafel’s mistakes could get expensive.
  4. The timing of this decision makes sense, as new CEO Brian Cornell has been in his seat for 5 months, and TGT is guiding to a 3% comp for the fourth quarter, which is about 50bps better than consensus. He’s making this move from a position of strength, which makes all the sense in the world to us.
  5. But let’s not forget the reason why TGT entered into Canada in the first place. First it exhausted the ‘Tar-Jay’ brand allure by turning 65% of the stores into P-Fresh (glorified supermarkets), converting 20% of its sales to its Red Card, and shifting the mix disproportionately away from Apparel, Home and Hardlines in favor of Food and Household Essentials (see below). In effect, TGT began to look a lot more like Wal-Mart.  With a strategically flawed Store and Brand transformation putting TGT up against four different competitive sets – 1) WMT, 2) Department Stores, 3) Dollar Stores, and 4) Supermarkets – not to mention Amazon growing stronger by the day, TGT’s answer was to go to Canada to find growth. Now that it found out the hard way that it was wrong, it does not mean that the factors that caused it to go North of the border have abated.  In fact, if we really are at the tail end of a retail margin cycle, which we think will become evident in 2015, then a dominant positioning in its core market is as important as ever.

 

Though we were right on the fundamentals with this one, that clearly did not matter – and most importantly we were definitely wrong on the stock.  Rather than rush to cover today, we’re going to a) wait to hear what the company says on the conference call, and b) see where expectations shake out. The reality is that TGT is trading at 16x-17x 2015 EPS (assuming 2-3% comp). Aside from the fact that this is a peak multiple for TGT. It seems high to us for a levered company that has its weakest competitive positioning in a decade, and is likely to grow earnings at a sub-5% rate for the next three years. This name should hardly run away from us on the upside.

 

TGT – Canada Quick Thoughts - 1 15 TGT chart1   42 2

TGT – Canada Quick Thoughts - 1 15 TGT chart2  43 2

TGT – Canada Quick Thoughts - 1 15 TGT chart3   44 3

TGT – Canada Quick Thoughts - 1 15 TGT chart4   45 4


EVENT: P Best Idea SHORT call (TODAY)

Takeaway: Join us for our call TODAY at 1pm EST outlining our Best Idea Short thesis on P. Dialing Instructions below.

We will be hosting a call today outlining our Best Idea Short thesis on Pandora Media (P).  P’s user retention issues and waning TAM create a precarious setup into 2015.  Further, Webcaster IV can derail P's entire business model in 2016.

    

Join us for our call TODAY at 1:00pm EST.

 

 

KEY TOPICS WILL INCLUDE  

  • Users to Decline in 2015: P’s waning TAM isn’t large enough to compensate for its heightened attrition issues.
  • Tug of War: P will need to continue increasing ad load to drive much of its revenue growth, which will exacerbate its attrition issues.
  • Lofty Consensus Revenue: P would require a considerable acceleration in ARPU growth to hit 2015 estimates.  If P falls short in 2015, 2016 would be unattainable.
  • Webcaster IV = Powder Keg: Anything short of the best case scenario won't be good enough.  P may have to curb hours/exit certain markets in 2016, curbing its long-term prospects

 

CALL DETAILS

Toll-Free Number:

Toll Number:

Conference ID/Password: 13598859

Materials: CLICK HERE (link will go live an hour before the call)

 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


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