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INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES

Takeaway: Claims remain steady but the cycle grows longer in the tooth by the week.

Below is the breakdown of this morning's labor 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 

 

3, 2, 1 ... Countdown

Claims remain on a countdown ...  We're now 19 months into the sub-330k environment. For reference, the last three cycles saw claims stay below 330k for 24, 45 and 31 months, respectively before the cycle gave way to recession. The average of those three cycles is 33 months. This implies ~14mos of track to the average of the last three cycles. Obviously, this is simply a reference point and the duration could more closely resemble that of the late 1980s (24mos), which would imply ~5mos of track remaining, or that of the late 1990s (45mos) implying ~26mos of track. 

 

One thing that's more certain and more imminent is the re-convergence toward zero in the rate of change Y/Y. This week that rate of change compressed to -6.6%, down from -9.1% in the prior week. We're finally lapping the floor in claims and within a month the Y/Y rate of change will be ~0%. From that point on, flagging early stage deterioration in the labor market will be a function of noticing any persistent and/or trending rise in Y/Y claims activity.

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Updated LT Recession Chart normal

 

 

The Data

Prior to revision, initial jobless claims fell 7k to 275k from 282k WoW, as the prior week's number was revised down by -1k to 281k. The headline (unrevised) number shows claims were lower by 6k WoW.

 

Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.5k WoW to 275.75k. The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.1%.

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims2 normal  4

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims3 normal  4

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims4 normal  4

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims5 normal  4

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims6 normal  4

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims7 normal  4

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES

Takeaway: Claims remain steady but the cycle grows longer in the tooth by the week.

3, 2, 1 ... Countdown

Claims remain on a countdown ...  We're now 19 months into the sub-330k environment. For reference, the last three cycles saw claims stay below 330k for 24, 45 and 31 months, respectively before the cycle gave way to recession. The average of those three cycles is 33 months. This implies ~14mos of track to the average of the last three cycles. Obviously, this is simply a reference point and the duration could more closely resemble that of the late 1980s (24mos), which would imply ~5mos of track remaining, or that of the late 1990s (45mos) implying ~26mos of track. 

 

One thing that's more certain and more imminent is the re-convergence toward zero in the rate of change Y/Y. This week that rate of change compressed to -6.6%, down from -9.1% in the prior week. We're finally lapping the floor in claims and within a month the Y/Y rate of change will be ~0%. From that point on, flagging early stage deterioration in the labor market will be a function of noticing any persistent and/or trending rise in Y/Y claims activity.

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Updated LT Recession Chart

 

 

The Data

Prior to revision, initial jobless claims fell 7k to 275k from 282k WoW, as the prior week's number was revised down by -1k to 281k. The headline (unrevised) number shows claims were lower by 6k WoW.

 

Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.5k WoW to 275.75k. The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.1%

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims2

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims3

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims4

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims5

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims6

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims7

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims8

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims9

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims10

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims11

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims19

 

Yield Spreads

The 2-10 spread fell -2 basis points WoW to 146 bps. 3Q15TD, the 2-10 spread is averaging 155 bps, which is lower by -3 bps relative to 2Q15.

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims15

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


 


Keith's Daily Trading Ranges [Unlocked]

Below is a complimentary look at today's Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. Click here to subscribe.

Keith's Daily Trading Ranges [Unlocked] - Slide1

BULLISH TRENDS

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BEARISH TRENDS

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Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

KATE | Why KATE’s 8K Matters

Takeaway: KATE gave additional info to stem neat-term modeling volatility. But it’s what they didn’t say that’s probably more important.

The company filed an 8K in conjunction with its presentation today. A couple quick thoughts…

1) No change in guidance. It’s pretty safe to say that if business has been trending down, or was negative in any way, shape, or form, then KATE would have been obligated to disclose that in this 8K. Given how the stock has been trading, this is critical.

 

2) The company gave additional information related to store count and square footage in the US vs. Int’l. This might sound like a ‘who cares’ event, but given the poor level of disclosure at KATE, it is a step in the right direction.

 

3) Similarly, the company provided new information as it relates to the size of Jack, and Saturday, as well as the top line impact of its efforts to improve Quality of Sale.  Does any of this allow us to build a more accurate 2017 model for units, productivity or margins? No, but it offers up some clarity for people who are scratching their heads wondering why the company is beating on comp, and yet missing on the top line. It won’t matter anymore after the 4Q report. But should stem some of the volatility in results until then.

 

No Change to Our Thesis

We Still think KATE’s top line will double and margins will go from 6.6% last year to the high teens in three years’ time. All in, we’re looking at better than $2.50 in earnings for a stock that can’t seem to stay above $20. The CAGR needed to get to $2.50-$3.00 is well north of 50%, and yet the stock is trading at a high teens multiple on next year’s $1.07. This is a company that hasn’t meaningfully turned a profit since 2008, and once people get visibility into 2016, we think that investor sentiment around its growth and profitability will turn up substantially. This is a name that could, and should double by the end of next year. KATE remains one of our top picks in retail.

 

KATE | Why KATE’s 8K Matters - kate financials

 


CHART OF THE DAY: The Most Over-Owned Stock In Human History

Editor's Note: The chart and excerpt below are from this morning's Early Look written by Hedgeye CEO Keith McCullough. Click here to bid farewell to lousy, consensus research once and for all.

 

...Back to the most over-owned stock in human history (in market cap and manic media news-flow terms), newsflash: “Apple is relatively cheap” @WSJ (today). Really? I didn’t know that. What does the company do again? Right. It’s got big cap beta.

 

Particularly in developing bear markets (born out of economic and profit cycle peaks = 2000, 2007, 2015) never underestimate the power of the alpha turning into beta.

 

CHART OF THE DAY: The Most Over-Owned Stock In Human History  - z app l ll  ll 09.10.15 chartvf


Connecting The Dots

“Connecting the dots and solving a problem by being exposed to more ideas.”

-Gary Klein

 

That’s how cognitive psychologist Dr. Gary Klein opens a fantastic chapter that he titled “Connections” in one of the better #behavioral books I have read since Thinking, Fast And Slow (Kahneman) – it’s called Seeing What Others Don’t.

 

That is the goal, after-all. Why else would you work in this profession? I may not run money anymore (= conflict of interest with you, our subscribers), but I wake up at this godforsaken hour every morning with one goal – trying to see something that consensus hasn’t.

 

For me, “connecting the dots,” is a repeatable process. On 2 hand-written pages in my notebook, I write down market prices, volumes, volatilities, etc. (every day, for 16 years), then I try to connect trades, trends, and themes - i.e. let Mr. Macro Market tell me what to do.

 

Connecting The Dots - z z notebooks

*** Click here to join Keith live this morning at 9:00am ET on The Macro Show.

 

Back to the Global Macro Grind

 

The #process is actually becoming simpler as I add more people and parts. My experience in building Hedgeye for the last 7 years has exposed me to an entirely new generation of thinking. I’ll be forever thankful to my millennial teammates for that.

 

Admittedly, to the more qualitative research crowd, I can be agitating. But #NoWorries, they agitate me too. We’re all just random participants in a dynamic and non-linear ecosystem anyway. Mr. Market doesn’t care what you think about the Apple-Hermes watch.

 

What he (or she) did care about yesterday was this thing that AAPL has though – from a Style Factoring perspective, it’s called US Equity Market Beta:

 

  1. SP500 had a nasty intraday reversal, closing -1.5% on the day, taking its current correction back to -8.8%
  2. Russell2000 continued lower alongside most things beta, taking its draw-down to -11.4% from YTD high
  3. Apple (AAPL) down -1.9% on “we’re gonna sell lots of new products” day, remains bearish TREND @Hedgeye
  4. Biotech (IBB) down -2.2% after failing at TREND resistance (draw-down -13.6% from its all-time #Bubble high)
  5. Oil & Gas Stocks (XOP) down -2.7% and are down -36% from where people chased the “reflation” trade in Q2

 

While these are all different flavors of US Equity Beta Bets, they’ve all been quite painful to be levered-long of during both a top-down growth and inflation slow-down and a bottom-up revenue and earnings one.

 

This is where both the market and I completely disagree with the Lee Cooperman case that this bear developing in the US Equity Market is all about everything but the fundamentals. Connect the dots man – being long Linn Energy (LINE) during #Deflation?

 

Back to the most over-owned stock in human history (in market cap and manic media news-flow terms), newsflash: “Apple is relatively cheap” @WSJ (today). Really? I didn’t know that. What does the company do again? Right. It’s got big cap beta.

 

Particularly in developing bear markets (born out of economic and profit cycle peaks = 2000, 2007, 2015) never underestimate the power of the alpha turning into beta.

 

Japanese stocks are “cheap” (have been for decades). And they recently generated a lot of alpha for Global Equity managers who are long/short (overweight/underweight) other big cap equity markets. But now all that alpha is turning into an equity beta risk. Why?

 

  1. Mr. Market signaled get out of Nikkei on bounces (so we did)
  2. The causal and correlating factor for Japanese Stocks to go down is the Yen going up
  3. If the Fed comes our way on “no rate hike” in SEP = Dollar Down à Yen Up

 

No Lee, that has nothing to do with the machines. So don’t blame them. It has everything to do with connecting the macro dots. Moving along the line items in my notebook, that brings me to what they call the Fed’s “dots” this morning:

 

  1. Fed Fund Futures on a SEP hike have dropped back down to 30% (Mr. Market’s vote on probability of a rate hike)
  2. Larry Summers is still lobbying to be Hillary’s boy with “5 Reasons Why” the Fed shouldn’t hike
  3. Hilsenrath (Fed man @WSJ) is implying the Fed may or may not hike in SEP #thanks

 

Sadly, this means the Fed has NOT yet decided on next week’s rate move and are literally watching the S&P Futures to make a game-time decision about a player (the US economy) that is clearly injured in Q3 GDP slowing terms.

 

Shall we blame risk parity people for that? Confusion, my non-linear friends, breeds contempt in markets. It also perpetuates volatility. And this brings me all the way back to the #1 disconnect between Hedgeye’s forecast for 2015-2016 that isn’t yet consensus:

 

#LateCycle Growth Slowing (globally and locally)

 

From Steve Einhorn (Cooperman’s long-time macro strategist at Omega Advisors) who said on July 20th, 2015 (literally the day AAPL put in its all-time peak at $133) that there’s “still quite a while to go” to almost every consensus economist in the league… the “dots” on both their growth expectations and returns continue to be pushed out.

 

And if you want to connect your own dots on that very basic reality (497 of 500 S&P Companies have reported Q2 = Down -3.5% Revenues, Down -2.2% Earnings), take Einhorn/Omega’s word for it: “fundamentals largely determine how the stock market does.”

 

I’m thanking my notebook and team for seeing that.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.11-2.24%

SPX 1
RUT 1116-1175
Nikkei 17,108-19,137
VIX 21.86-31.70
EUR/USD 1.11-1.13
Oil (WTI) 41.44-48.41

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Connecting The Dots - z app l ll  ll 09.10.15 chartvf


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