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IRAN NUCLEAR DEAL: Key Catalysts

Takeaway: A big boost in Iranian crude exports is not likely until the middle of 2016 in a best-case scenario.

With all of the geopolitical hurdles that must be jumped, we expect a significant increase in crude exports to be delayed until early to mid-2016 at the earliest.

 

Below we outline the key catalysts to watch in the Iranian Nuclear Deal which was endorsed by the U.N. on Monday. Today Iran’s Minister of Industry, Mohammad Reza Nematzadeh, trumpeted a $185Bn investment target in oil and gas by 2020. While Iran’s energy resources are immense, the timetable and feasibility is uncertain at this point. With a myriad of undecipherable noise around the nuclear deal currently we hope to provide a more straightforward overview of the most important developments to watch:

  • Can Congress pass enough votes in the next ~50days to avoid a presidential veto (2/3rds majority)? Likely not.

Congress provides the statutory basis for most U.S. sanctions. However, the executive branch is the party responsible for interpretation and implementation. Most importantly, POTUS has the authority to waive all or some of any repealed measures from Congress.

In May, President Obama signed into law provisions for congressional review that place restrictions on his prerogative to waive sanctions. Under this law, the House and Senate foreign relations committees have 60 days to review the agreement. During this 60 day period, Obama cannot loosen sanctions. However, for Congress to derail an agreement, it would not only have to vote it down but muster a two-thirds majority to override a presidential veto.

  • If all goes smoothly, what will it take for Iran to prove to the IEAE (International Atomic Energy Association) that it has taken steps to reduce its stockpiles of fissile materials and centrifuges?

In 1974, Iran signed the IAEA Safeguards Agreement. Under the agreement, it promised to never become a nuclear-armed state. In the early 2000s, indications of work on Uranium enrichment renewed international concerns which started several rounds of initial sanctions from the U.N., EU, and U.S. attempting to block Iran’s access to the necessary materials needed to develop nuclear capabilities. The root of current Iranian Sanctions dates back to 2005 when the IAEA (International Atomic Energy Association), part of the U.N., found that Tehran was not compliant with its international obligations. The U.S., U.N., and EU have since hit Iran with a multitude of sanctions which have had crippling effects on Iran’s access to international capital. 

Some sanctions will be lifted if Iran can prove to the IAEA that it has taken steps to reduce its stockpiles of fissile materials and centrifuges. The beginning of this proving period won’t commence for at least several months.

  • When will Iranian crude potentially be released onto global markets?

In November of 2013, Iran and the P5+1 signed the JPA Agreement (joint plan of action) that provided some sanctions relief and access to $4.2Bn in previously frozen assets. Tehran agreed to limit uranium enrichment while permitting international inspectors to access geographical sites of interest.

This joint plan of action capped Iran’s crude exports at 1.1MM B/D (they are right at 1.1MM B/D in exports currently, down from 2.4MM B/D as recently as 2007).

Washington and Brussels will keep the terms of the JPA in effect until the IAEA has verified that Iran has followed through on an agreed-upon set of steps to limit its nuclear program, which, as mentioned, will likely come several months after the July 14 agreement.

Richard Nephew is the Program Director for Economic Statecraft, Sanctions and Energy Markets at the Center on Global Energy Policy at Columbia. He outlined the lengthy steps needed just for Iran to prove its compliance with the IAEA before most IOCs can even begin their capital plans in a REPORT  last week.

“First, the agreement involves an extensive procedure for ascertaining the support of home legislative and other legal bodies for it. In the US system, this will take at least 30-60 days as Congress will need to receive the text of the deal, hold hearings on it, and decide what to do.

Second, the implementation will itself take months. Iran’s list of nuclear steps is long, as is appropriate considering they are the party in need of building the most confidence. I’ve noted for a long time that removal and storage of centrifuges will be the long-pole in the timing tent, and nothing in the text contradicts this. Based on the schedule in the document, all of this work will not even start until after 90 days from today (the end of October) and it will take months from that point to fully execute the remaining changes to Iran’s nuclear program.

Third, sanctions relief itself will not flow until these nuclear steps are completed.”

  • Will Iran Change the incentive structure for IOCs to make the riskiness of fixed investment worthwhile? Even if IOCs take the plunge

The National Iranian Oil Company (NOIC) is responsible for all upstream oil and nat. gas projects. The Iranian constitution prohibits foreign or private ownership of natural resources. However, international oil companies can participate in the exploration and development phases through buyback contracts:

Here’s how it works currently…

An IOC puts up its own capital through an Iranian subsidiary (service-type contract).  After the project is developed and the field is producing, the projects operatorship refers back to NIOC or relevant subsidiary.  IOC gets no equity rights and NIOC uses oil and gas revs to pay back IOC for capital cost.  The annual repayment rates are set at a pre-determined percentage of the field’s production at a rate of return usually in the 12-17% range.

------

A quick look at global production will tell you that a surplus of crude oil is still coming out of the ground at an increasing rate globally. While a reversal in the USD from March to June and signs of declining U.S. production gave the market a psychological boost, much of the production increase has come from OPEC members, Iran included.  

Although Iranian exports are capped at 1.1MM B/D under current sanctions, Iranian crude production has increased by double digits YY and they have an estimated 20MM barrels in storage, ready to release onto the global market when sanctions are lifted. Iran has used its domestically produced crude by satisfying a much higher percentage of its growing energy needs internally. With that being said, we believe it will take an extended period of time before exports pick-up. The Iranian catalyst adding to the global supply picture is more noise than anything for now.

 

Global Production Picture: Crude Everywhere

 

IRAN NUCLEAR DEAL: Key Catalysts - Global Production Monitor

 

IRAN NUCLEAR DEAL: Key Catalysts - OPEC Crude Production

 

IRAN NUCLEAR DEAL: Key Catalysts - chart 3 global crude production

 

IRAN NUCLEAR DEAL: Key Catalysts - chart4 monthly production surplus

 

Sanctions Effect on the Iranian Economy:

  • Iran has not had a new oil field enter production since 2007
  • Nearly all western companies have pulled investment
  • Few Chinese and Russian Companies are still participating (CNPC, Sinopec, PEDCO)

IRAN NUCLEAR DEAL: Key Catalysts - Foreign Direct Investment

 

Trade Impact:

  • Iranian crude oil and condensate exports have dropped from 2.5MM B/D in 2011 to 1.1 MM B/D in 2013 due to tighter U.S. and European sanctions
  • In 2012 came the insurance and re-insurance bans from the E.U. (European insurers underwrite the majority of insurance policies for the global tanker fleet).

Iranian crude sales, even in Asia, were impeded by the insurance ban.  Iranian exports dropped to less than 1MM B/D in July 2012 as Japanese, Chinese, Korean, and Indian buyers scrambled to find insurance alternatives.  

 

IRAN NUCLEAR DEAL: Key Catalysts - Crude Exports

 

Fiscal and Currency Impacts:

  • Value of the Rial declined by 56% between January 2012 and January 2014, a time in which inflation reached 40%
  • The IMF estimates that Iran's break-even point, the price per barrel at which the country can balance its budget, is $92.50.
  • Iran’s energy prices are heavily subsidized (particularly gasoline). At the end of 2010 the government initiated the first phase of subsidy reform, decreasing the subsidies on energy prices to discourage waste. Subsidies have been a huge fiscal drag. 

IRAN NUCLEAR DEAL: Key Catalysts - Iran Fiscal Breakeven

 

  • Oil production, given the lack of capital investment, has also declined significantly

IRAN NUCLEAR DEAL: Key Catalysts - Iran Crude Productionm

 

Reworking the Addressable Market:

  • Iran has now become somewhat of a closed energy economy for the time being.  Growing domestic demand needs have been met internally. The country has continued to increase its refining capacity
  • Meanwhile, Iran has found opportunity in the highest growing regions; Iran has refocused its key customers to Asia and India where the highest global demand rates are forecasted

IRAN NUCLEAR DEAL: Key Catalysts - Domestic Refining Capacity

 

IRAN NUCLEAR DEAL: Key Catalysts - Iran Trading Partners

 

IRAN NUCLEAR DEAL: Key Catalysts - Opec Forecasted Demand Growth

 

IRAN NUCLEAR DEAL: Key Catalysts - Opec Forecasted Demand Growth 2

 

Energy Potential

 

The potential in the energy space in Iran is immense, and Iran’s potential trading partners are not limited to high growth, eastern countries. A year before the 2012 sanctions, the EU was the largest importer of Iranian oil, averaging 600,000 barrels per day, according to the Congressional Research Service) :

  • 4th largest proved crude oil reserves (10% of global crude reserves)
  • 2nd-largest natural gas reserves (17% of world’s proved natural gas reserves (2nd only to Russia)
  • Despite the fixed investment crippling sanctions, Iran still ranks among the top 10 oil producers and top 5 natural gas producers. Crude oil production is up double digits Y/Y (+370K B/D)
  • Almost all of Iran’s export increases have been to China and India, and other Asian countries

As mentioned previously, with all of the geopolitical hurdles that must be jumped, we expect a major increase in exports to be delayed until mid-2016 at the earliest. Even then, the risk for IOCs is immense should Iran fail to comply with strict requirements from the IAEA. Sanctions relief will permit new business with Iran, but uncertainty over Iranian compliance and US politics will deter long-term deals for the next 18 months. But, if these steps cross the sanctions line, the Obama Administration has made clear that it will be forced to act which could provide a huge risk for capital that is tied-up.  

 

Ben Ryan

Analyst

 

 

 

 

 



UA – KILLER GROWTH IS GETTING COSTLY

Takeaway: What’s hotter, Brand or cost structure? At some point, EPS has to grow. It will, but at 15x a best case EBITDA # 5-yrs out, timing matters.

Every headline out there today will talk about how UA is simply killing it – and it’s well-deserved. UA’s brand heat continues to roll full steam ahead, and the company is proving itself out to be one of the true generational growth stories in Consumer.

 

That said, we think it's more than fair to point out that Revenue growth is accelerating, but earnings growth is decelerating. In fact, this company has not grown earnings since 4Q14. When 2015 is said and done, we’re likely to see revenue, EBIT and EPS grow at 25%, 15%, and 10%, respectively. That’s not the kind of ‘World Class’ growth algorithm that we’d expect from a World Class Brand like UA.

 

We understand that the company is investing today in order to capitalize on (and create outright) growth opportunities tomorrow. We like when companies play offense like that. But at 75x earnings and 36x EBITDA, is it too much for us to expect that earnings grow faster than Wal-Mart? We don’t think so.

 

We’ve always said that the cost of growth in this space is headed higher. In fact, UA was fairly explicit on its call in saying that it would capitalize on brand heat in 2H by spending more on athletes and endorsements. While that makes sense academically, and probably financially if executed right (which UA probably will) the reality is that Nike will make this very difficult.

 

Keep in mind that this is the first time Nike and UA will truly be going toe to toe in a meaningful way since UA came along and created a space (compression apparel) that Nike arguably had the technology for first – but failed sorely to execute on. We got a little taste of the endorsement battle with Kevin Durant, which UA fortuitously lost to Nike to the tune of ~$30mm/yr.

 

As a point of reference, Durant represented 33% of UA’s existing endorsement obligations this year, but only 3% for Nike. UA ‘lost’ Durant, but stuck it to Nike with Spieth, Copeland, Curry. In other words…Nike is not happy right now. NKE’s Sports Marketing group is feeling heat it has not felt in over a decade. Do you think that just MAYBE Nike is going to step up its marketing spend by a couple hundred million to secure its dominance? You betcha.

 

UA – KILLER GROWTH IS GETTING COSTLY - ua endorsement

 

We’re not saying that Nike will secure dominance – we’re just saying that it is going to spend in its attempt to get there. Also keep in mind it has a brand new CFO who comes from the brand side of the house, who is more likely than Don Blair (one of the best CFOs we’ve seen in all of Consumer Discretionary in 23 years) to rubber stamp spending that might be ROIC dilutive.    

 

The bottom line on the stock is that as much as we like the multi-year top line growth potential, we’re reasonably certain that it will come at the expense of margins and ROIC. But that’s hardly a reason for us to be short a name that’s earned its spot as the clear #2 player in a global oligopoly where retailers are begging for an alternative to Nike. But even if we assume that UA continues to grow mid to high 20% EVERY year for five years resulting in $9bn in sales, AND overcomes near-term margin pressures and pops back up to 12% EBIT margins, we get to an even $3.00 in earnings. That’s a 32.5x p/e and 15.5x EBITDA multiple on a number 5-years out that takes a whole lot of positive assumptions to get to. We’re simply going to sit back until the research call suggests a more asymmetric setup – in either direction.

 

SOME HIGHLIGHTS FROM THE CALL

1) Top line continues to look very very strong accelerating on a 2yr basis. Int'l and footwear (the two categories where UA is still establishing a beachhead) ticked up on a 2yr basis and now both account for over 10% of revenue. The guidance raise of $60mm after a $20mm beat with no lift to margin dollars was enough for the bulls to get excited about.

 

UA – KILLER GROWTH IS GETTING COSTLY - UA footwear intl

 

2) On the margin front -- the company cited  gross margin pressure from Fx, connected fitness dilution, and extra air freight cost for the 160bps whack in op margins, but that doesn’t explain the 70bps decline in the NA business. Brand Houses (ie the 30,000 sq. ft. store on Michigan Ave in Chicago) are significantly more expensive on a unit basis then the legacy Outlet locations, but we'd expect a little more leverage on 22% revenue growth in its biggest region.

3) The athletic footwear and apparel market in the US had a monster 2Q. NKE and UA grew at 13% and 22% respectively totaling $560mm in revenue. That’s good for at least 3 points of growth for the entire athletic footwear and apparel market alone which did about $16.75bil in LY's 2Q. DTC at UA kicked it up in a big way growing 33% in the quarter -- up 1200bps sequentially on the 1yr and 700bps on the 2yr trend line.

4) As noted above the investment cycle is no where near close to being over. On the call management talked a number of times about the fact that fulfillment rates and global infrastructure is not anywhere close to where it needs to be as evidenced by the 50bps hit or $4mm in incremental air freight expense during the quarter. That makes sense given the fact that Int'l penetration has grown by 5 percentage points on a TTM basis over the past 18 months. There is a lot of track that needs to be built in order to support this global network.

5) The last piece of the puzzle is the company's move to a sports/category focused org. structure rather than the simple 2 dimensional structure that exists today. UA has been hiring leadership talent to facilitate this transition, but if we use Nike as the model when it switched to the category offense -- we are looking at least 3 years of growing pains before the model is optimized – and that’s if it executes perfectly.  Given UA’s impressive execution track record, management will probably get it right by hiring all the right people into the appropriate roles. But this takes time.  


UA – Killer Growth is Getting Costly

Takeaway: What’s hotter, Brand or cost structure? At some point, EPS has to grow. It will, but at 15x a best case EBITDA # 5-yrs out, timing matters.

Every headline out there today will talk about how UA is simply killing it – and it’s well-deserved. UA’s brand heat continues to roll full steam ahead, and the company is proving itself out to be one of the true generational growth stories in Consumer.

 

That said, we think it's more than fair to point out that Revenue growth is accelerating, but earnings growth is decelerating. In fact, this company has not grown earnings since 4Q14. When 2015 is said and done, we’re likely to see revenue, EBIT and EPS grow at 25%, 15%, and 10%, respectively. That’s not the kind of ‘World Class’ growth algorithm that we’d expect from a World Class Brand like UA.

 

We understand that the company is investing today in order to capitalize on (and create outright) growth opportunities tomorrow. We like when companies play offense like that. But at 75x earnings and 36x EBITDA, is it too much for us to expect that earnings grow faster than Wal-Mart? We don’t think so.

 

We’ve always said that the cost of growth in this space is headed higher. In fact, UA was fairly explicit on its call in saying that it would capitalize on brand heat in 2H by spending more on athletes and endorsements. While that makes sense academically, and probably financially if executed right (which UA probably will) the reality is that Nike will make this very difficult.

 

Keep in mind that this is the first time Nike and UA will truly be going toe to toe in a meaningful way since UA came along and created a space (compression apparel) that Nike arguably had the technology for first – but failed sorely to execute on. We got a little taste of the endorsement battle with Kevin Durant, which UA fortuitously lost to Nike to the tune of ~$30mm/yr.

 

As a point of reference, Durant represented 33% of UA’s existing endorsement obligations this year, but only 3% for Nike. UA ‘lost’ Durant, but stuck it to Nike with Spieth, Copeland, Curry. In other words…Nike is not happy right now. NKE’s Sports Marketing group is feeling heat it has not felt in over a decade. Do you think that just MAYBE Nike is going to step up its marketing spend by a couple hundred million to secure its dominance? You betcha.

 

UA – Killer Growth is Getting Costly - ua endorsement

 

We’re not saying that Nike will secure dominance – we’re just saying that it is going to spend in its attempt to get there. Also keep in mind it has a brand new CFO who comes from the brand side of the house, who is more likely than Don Blair (one of the best CFOs we’ve seen in all of Consumer Discretionary in 23 years) to rubber stamp spending that might be ROIC dilutive.     

 

The bottom line on the stock is that as much as we like the multi-year top line growth potential, we’re reasonably certain that it will come at the expense of margins and ROIC. But that’s hardly a reason for us to be short a name that’s earned its spot as the clear #2 player in a global oligopoly where retailers are begging for an alternative to Nike. But even if we assume that UA continues to grow mid to high 20% EVERY year for five years resulting in $9bn in sales, AND overcomes near-term margin pressures and pops back up to 12% EBIT margins, we get to an even $3.00 in earnings. That’s a 32.5x p/e and 15.5x EBITDA multiple on a number 5-years out that takes a whole lot of positive assumptions to get to. We’re simply going to sit back until the research call suggests a more asymmetric setup – in either direction.

 

SOME HIGHLIGHTS FROM THE CALL

1) Top line continues to look very very strong accelerating on a 2yr basis. Int'l and footwear (the two categories where UA is still establishing a beachhead) ticked up on a 2yr basis and now both account for over 10% of revenue. The guidance raise of $60mm after a $20mm beat with no lift to margin dollars was enough for the bulls to get excited about.

UA – Killer Growth is Getting Costly - UA footwear intl

2) On the margin front -- the company cited  gross margin pressure from Fx, connected fitness dilution, and extra air freight cost for the 160bps whack in op margins, but that doesn’t explain the 70bps decline in the NA business. Brand Houses (ie the 30,000 sq. ft. store on Michigan Ave in Chicago) are significantly more expensive on a unit basis then the legacy Outlet locations, but we'd expect a little more leverage on 22% revenue growth in its biggest region.

3) The athletic footwear and apparel market in the US had a monster 2Q. NKE and UA grew at 13% and 22% respectively totaling $560mm in revenue. That’s good for at least 3 points of growth for the entire athletic footwear and apparel market alone which did about $16.75bil in LY's 2Q. DTC at UA kicked it up in a big way growing 33% in the quarter -- up 1200bps sequentially on the 1yr and 700bps on the 2yr trend line.

4) As noted above the investment cycle is no where near close to being over. On the call management talked a number of times about the fact that fulfillment rates and global infrastructure is not anywhere close to where it needs to be as evidenced by the 50bps hit or $4mm in incremental air freight expense during the quarter. That makes sense given the fact that Int'l penetration has grown by 5 percentage points on a TTM basis over the past 18 months. There is a lot of track that needs to be built in order to support this global network.

5) The last piece of the puzzle is the company's move to a sports/category focused org. structure rather than the simple 2 dimensional structure that exists today. UA has been hiring leadership talent to facilitate this transition, but if we use Nike as the model when it switched to the category offense -- we are looking at least 3 years of growing pains before the model is optimized – and that’s if it executes perfectly.  Given UA’s impressive execution track record, management will probably get it right by hiring all the right people into the appropriate roles. But this takes time.  

 


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INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973?

Takeaway: SA claims just hit their lowest level since 11/24/73. The labor market faces extreme resistance against improving much further from here.

Below is the 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 

 

Multi-Decade Lows & Energy Re-Coupling

The chart below shows that seasonally adjusted initial claims just hit 255k, the lowest level in forty two years. The last time claims were lower was November 24, 1973, when the reading came in at 233k. While this exemplifies extreme strength in the labor market, it also represents a point of extreme resistance against claims going any lower.

 

We continue to point out that this party has an expiration date, which we estimate to be about five quarters from now. In the last three cycles, once claims dipped below 330k they remained there for 24 months, 45 months, and 31 months, in the late 1980s, late 1990s/early 2000s, and 2006-2008 period, respectively before the economy went into recession. In the current cycle, claims have been below 330k for a little more than 16 months and counting. The average of these last three cycles is 33 months, which would translate to another ~5 quarters of track.

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims20

 

While we were hesitant last week, given holiday distortion, to make a definitive statement on improving energy state claims, the improvement has sustained itself through the week ending July 11. The chart below shows that since the week ending June 27, the spread between indexed energy state claims and the country as a whole has tightened from 15 to 3. 

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims18

 

The Data

Initial jobless claims fell 26k to 255k from 281k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4k WoW to 278.5k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -7.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.1%

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims2

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims3

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims4

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims5

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims6

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims7

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 



McCullough: Apple Is the Most Over-Owned Stock In Human History

Editor’s Note: Below is an exchange between Hedgeye CEO Keith McCullough and a reporter from London’s City A.M. who asked McCullough his thoughts on Apple, tech stocks, and whether we’re in another bubble. To read the original City A.M. article click here.

*  *  *  *  *

McCullough: Apple Is the Most Over-Owned Stock In Human History - z app

 

1. Do you think Apple and tech stocks in general are overvalued?

 

A) Apple isn’t a value stock – it’s the most over-owned stock in human history where “valuation” comes into the debate on down days. It’s actually a product-cycle stock, and all cycle stocks should look relatively “cheap” at the peak of a cycle

 

B) What Morgan Stanley calls “New Tech” trades at an average P/E of 149.5x forward earnings. Overvalued is an understatement. It’s obviously a bubble.

 

2. Is there potential for tech firms across the world to lose a lot of value?

 

Yes.

 

If/when product cycles slow, multiples compress. Most people don’t realize that advertising is a #LateCycle revenue gainer. As the economic cycle slows, advertising slows – and so will some “social tech” ad revenues.

 

3. In Europe there was a big drop across equity markets today, driven largely by tech performances - do you see this potentially continuing? Is there a risk to European and Asian tech stemming from Apple and other US stocks' performances?

 

Yes.

 

#EuropeSlowing is a Top 3 Global Macro Theme @Hedgeye right now. Consensus is confusing the political panic in Europe with the causal factor that is economic growth slowing. “Old” (or Industrial) Tech is slowing as the global cycle does.

 

4. Is this another tech bubble? Does this look like the dotcom bubble?

 

Yes (see above).

 

Across market histories, from tulips to dot.bombs, every bubble is unique. Instead of the internet, I think we’ll call this one the cloud of expectations.

*  *  *  *  *

McCullough discussing Apple with Maria Bartiromo on Fox Business. 


INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973?

Takeaway: SA claims just hit their lowest level since 11/24/73. The labor market faces extreme resistance against improving much further from here.

Multi-Decade Lows & Energy Re-Coupling

The chart below shows that seasonally adjusted initial claims just hit 255k, the lowest level in forty two years. The last time claims were lower was November 24, 1973, when the reading came in at 233k. While this exemplifies extreme strength in the labor market, it also represents a point of extreme resistance against claims going any lower. We continue to point out that this party has an expiration date, which we estimate to be about five quarters from now. In the last three cycles, once claims dipped below 330k they remained there for 24 months, 45 months, and 31 months, in the late 1980s, late 1990s/early 2000s, and 2006-2008 period, respectively before the economy went into recession. In the current cycle, claims have been below 330k for a little more than 16 months and counting. The average of these last three cycles is 33 months, which would translate to another ~5 quarters of track.

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims20

 

While we were hesitant last week, given holiday distortion, to make a definitive statement on improving energy state claims, the improvement has sustained itself through the week ending July 11. The chart below shows that since the week ending June 27, the spread between indexed energy state claims and the country as a whole has tightened from 15 to 3. 

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims18

 

The Data

Initial jobless claims fell 26k to 255k from 281k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4k WoW to 278.5k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -7.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.1%

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims2

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims3

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims4

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims5

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims6

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims7

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims8

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims9

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims10

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims11

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims19

 

Yield Spreads

The 2-10 spread fell -11 basis points WoW to 161 bps. 3Q15TD, the 2-10 spread is averaging 170 bps, which is higher by 12 bps relative to 2Q15.

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims15

 

INITIAL JOBLESS CLAIMS | PARTY LIKE IT'S 1973? - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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