prev

Cartoon of the Day: Meow!

Cartoon of the Day: Meow! - Deflation cartoon 12.17.2015

 

"Investors who haven't understood our #Deflation call (for the past 18 months) got sucked into yesterday's transitory stocks market rally," Hedgeye CEO Keith McCullough wrote earlier today.


Meltdown: Jobs Market In U.S. Energy States

Takeaway: Energy jobs are sliding off the cliff into the abyss. Our energy tracker spread broke to a new higher high in the latest week.

Editor's Note: Below is an excerpt from an institutional research note from our Financials team today with an update to their previous note on energy-dependent state jobless claims. For more information on how you can become a subscriber please send an email to sales@hedgeye.com.

 

Meltdown: Jobs Market In U.S. Energy States - Oil cartoon 12.08.2015

 

The jobs market in energy states remains in accelerating meltdown. With energy companies set around year end to lose the last remaining cushion of their previously established hedges, job cuts in the 8 states with the most energy-dependent economies (AK, LA, NM, ND, OK, TX, WV & WY) are blowing out versus the rest of the country.

 

The chart below shows that in the week ending December 5, the spread between the indexed series of claims in energy states versus the indexed series of claims in the country as a whole increased from 47 to 51. That is the largest the spread has been since our analysis' May 2014 starting point. 

 

Meltdown: Jobs Market In U.S. Energy States - Claims18 large

 

Last week, we were asked why we didn't include the state of Colorado in our 8-state basket. Our response was that our basket was borne out of this article, which showed the 8 states with the highest energy-related employment as a % of total as of 2011.

 

We were then sent an interesting paper detailing the exposure of Denver to the oil and gas industry. In a nutshell, 11% of downtown Denver's workforce is employed in the oil and gas industry at an average level of compensation roughly 3x the rest of the workforce. From 2005-2014, one-third of the new jobs created in the downtown Denver area were oil and gas jobs. The point here is that while these 8 states represent some gauge of the fallout from energy's collapse, there are many other areas that are being impacted.

 

Apart from the carnage in energy claims, national claims data continues to show that the economy is late stage and the Fed's rate increase yesterday is unlikely to extend the duration of the recovery. 


INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES

Takeaway: Energy jobs are sliding off the cliff. Our energy tracker spread broke to a higher high in the latest 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 

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims1 2 normal

 

ENERGY JOBS

The jobs market in energy states remains in accelerating meltdown. With energy companies set around year end to lose the last remaining cushion of their previously established hedges, job cuts in the 8 states with the most energy-dependent economies (AK, LA, NM, ND, OK, TX, WV & WY) are blowing out versus the rest of the country. The chart below shows that in the week ending December 5, the spread between the indexed series of claims in energy states versus the indexed series of claims in the country as a whole increased from 47 to 51. That is the largest the spread has been since our analysis' May 2014 starting point. 

 

Last week we were asked why we didn't include the state of Colorado in our 8-state basket. Our response was that our basket was borne out of THIS article, which showed the 8 states with the highest energy-related employment as a % of total as of 2011. We were then sent an interesting paper detailing the exposure of Denver to the oil and gas industry. In a nutshell, 11% of downtown Denver's workforce is employed in the oil and gas industry at an average level of compensation roughly 3x the rest of the workforce. From 2005-2014, one-third of the new jobs created in the downtown Denver area were oil and gas jobs. The point here is that while these 8 states represent some gauge of the fallout from energy's collapse, there are many other areas that are being impacted. If you'd like a copy of the paper (PDF) just let us know.

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims18 normal

 

Apart from the carnage in energy claims, national claims data continues to show that the economy is late stage and the Fed's rate increase yesterday is unlikely to extend the duration of the recovery. 


THE BIG PICTURE

Some might argue that, as the first chart below shows, a cycle usually has significant track left following its first rate hike. However, while the Fed announcement this week marks the first increase in the fed funds rate this cycle, the Fed has actually been tightening policy for some time, ostensibly since late 2013 when it began tapering QE3. The Fed actually quantifies the effect of the current cycle's non-traditional policy action and the tapering thereof in the second chart below with a measure called the Wu-Xia Shadow Fed Funds Rate (HERE). The Shadow Rate is basically the rate the Fed has set by implementing non-traditional policies. The following chart shows that we have been in a rising rate environment since April, 2014 and the effective Fed Funds rate has risen ~300 bps to 0% from -3%. This is one of the main reasons why a) growth is now slowing and b) the cycle is late stage.

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims13 normal

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims12 normal

 

The Data

Initial jobless claims fell 11k to 271k from 282k WoW as the prior week's number was not revised. The 4-week rolling average of seasonally-adjusted claims fell -0.25k WoW to 270.5k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -7.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -8.3%

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims2 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims3 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims4 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims5 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims6 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims7 normal  1

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES

Takeaway: Energy jobs are sliding off the cliff into the abyss. Our energy tracker spread broke to a new higher high in the latest week.

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims1 2

 

ENERGY JOBS

The jobs market in energy states remains in accelerating meltdown. With energy companies set around year end to lose the last remaining cushion of their previously established hedges, job cuts in the 8 states with the most energy-dependent economies (AK, LA, NM, ND, OK, TX, WV & WY) are blowing out versus the rest of the country. The chart below shows that in the week ending December 5, the spread between the indexed series of claims in energy states versus the indexed series of claims in the country as a whole increased from 47 to 51. That is the largest the spread has been since our analysis' May 2014 starting point. 

 

Last week we were asked why we didn't include the state of Colorado in our 8-state basket. Our response was that our basket was borne out of THIS article, which showed the 8 states with the highest energy-related employment as a % of total as of 2011. We were then sent an interesting paper detailing the exposure of Denver to the oil and gas industry. In a nutshell, 11% of downtown Denver's workforce is employed in the oil and gas industry at an average level of compensation roughly 3x the rest of the workforce. From 2005-2014, one-third of the new jobs created in the downtown Denver area were oil and gas jobs. The point here is that while these 8 states represent some gauge of the fallout from energy's collapse, there are many other areas that are being impacted. If you'd like a copy of the paper (PDF) just let us know.

 

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims18

 

Apart from the carnage in energy claims, national claims data continues to show that the economy is late stage and the Fed's rate increase yesterday is unlikely to extend the duration of the recovery. 


THE BIG PICTURE

Some might argue that, as the first chart below shows, a cycle usually has significant track left following its first rate hike. However, while the Fed announcement this week marks the first increase in the fed funds rate this cycle, the Fed has actually been tightening policy for some time, ostensibly since late 2013 when it began tapering QE3. The Fed actually quantifies the effect of the current cycle's non-traditional policy action and the tapering thereof in the second chart below with a measure called the Wu-Xia Shadow Fed Funds Rate (HERE). The Shadow Rate is basically the rate the Fed has set by implementing non-traditional policies. The following chart shows that we have been in a rising rate environment since April, 2014 and the effective Fed Funds rate has risen ~300 bps to 0% from -3%. This is one of the main reasons why a) growth is now slowing and b) the cycle is late stage.

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims13

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims12

 

 

The Data

Initial jobless claims fell 11k to 271k from 282k WoW as the prior week's number was not revised. The 4-week rolling average of seasonally-adjusted claims fell -0.25k WoW to 270.5k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -7.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -8.3%

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims2

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims3

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims4

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims5

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims6

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims7

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims8

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims9

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims10

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims11

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims19

Yield Spreads

The 2-10 spread was unchanged WoW at 130 bps. 4Q15TD, the 2-10 spread is averaging 138 bps, which is lower by -15 bps relative to 3Q15.

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims15

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


INSTANT INSIGHT | Recessionary Data Is Not "Transitory"

Takeaway: The latest round of economic data is the "cycle" rolling over. No, it's not "transitory."

INSTANT INSIGHT | Recessionary Data Is Not "Transitory" - fed in a box

 

We think you deserve the truth.

 

Yesterday, the divide between truth and economic storytelling stretched to the point of ridiculousness. Between the Fed, Old Wall and the mainstream media we just don't know what to say anymore.

 

Forget this troika of economic storytellers. Here's the reality that the market told us yesterday as summarized by Hedgeye CEO Keith McCullough in a note to subscribers earlier this morning:   

 

"Wait ... I thought they 'raised rates' yesterday? This is what I mean by the market read-through being dovish on growth – UST 10yr down -7bps this morning, Yield Spread (10s minus 2s) testing YTD low at +123bps, and Utilities (XLU) led the relief rally +2.5% on the day!"

 

INSTANT INSIGHT | Recessionary Data Is Not "Transitory" - treausry 10yr

 

The fact that #LowerForLonger rate proxies rallied yesterday — i.e. XLU and Housing stocks (ITB) — while credit did nothing and commodities continued to crash — see Oil and Dr. Copper below — confirms what we've long argued about growth, namely the Fed just hiked into an industrial and corporate profit slowdown.

 

INSTANT INSIGHT | Recessionary Data Is Not "Transitory" - CRB crash

INSTANT INSIGHT | Recessionary Data Is Not "Transitory" - oil fed

INSTANT INSIGHT | Recessionary Data Is Not "Transitory" - copper fed

 

Yellen & Co. continues to assert that these #LateCycle indicators are "transitory." While crashing industrial production or sustained deflation may appear "transitory" to the academic central planners in Washington, other Americans would likely disagree.

 

Talk to the 10,000 workers at Caterpiller (CAT) who are projected to lose their jobs in the coming year. Or ask a cattle rancher — beef cattle prices are off more than 25% this year — whether these factors feel "transitory" or not. We are confident that you'll hear a much different story. 

 

Clearly, we disagree with the Fed. We think there's a more apt term for the recent spate of data that's been rolling over since the beginning of the year. It's cyclical. This data is undoubtedly cyclical and falling off its peak. 

 

Of course, time will tell but we're sticking with our original conviction perhaps best articulated by Hedgeye Senior Macro analyst Darius Dale during our coverage of the Fed yesterday:

 

“This is the most obvious slow-moving economic train wreck that we’ve ever seen.” 

 

And that's not transitory...

 

To hear more economic truths (with tons of analysis) from McCullough and Dale on the Fed's economic storytelling, click here to watch a replay of our post-FOMC coverage yesterday.   


PIR | Our Best Bull vs Bear

Takeaway: We think the Bull and Bear cases both have a lot of merit. Unfortunately, the Bull weakened slightly since August, and the Bear got angry.

Conclusion: The call here is simple. It’s not easy, but it is simple. If you DON’T think we’re headed into a recession, or are not concerned about growth slowing incrementally from here…then you’re looking at a 20% FCF yield and 6% dividend yield as PIR recovers from a 3-year investment to build its online business from 1-20%. In a normal economy next year, this stock could be a 4-bagger.  But if you’re in the other camp, then the equity value could go away entirely.  That’d be a great buy for some financial buyer at just $200mm – but it wouldn’t help equity holders much. Since we put PIR on our Best Ideas List in mid-August, the margin recovery part of the story really has not changed, and valuation looks extremely attractive. Unfortunately the Bear case gained serious momentum – most notably with premium players like RH even calling out the promotional nature of the space (if it gets to RH’s level, you know its bad). We still think that the upside to a $20-something stock is there. But so is potential downside to zero.  That’s a push from where we sit. A ‘push’ is not good enough for us to stand behind this one, as such it’s being relegated to our Idea Bench.

 

Our Best Bear Case:

Does Pier 1 Imports really need to exist? Seriously, if the chain went away entirely overnight, would the consumer really miss a beat? Probably not. They’d buy their rattan furniture and decorative nick-nacks at Target, Wayfair, or one of the other thousand places to buy cheap goods from China. The company seemingly has no real product strategy – at least that’s what someone listening to the call (like us) would surmise. All the company talks about is its tactical marketing plan needed to drive more people into the store. In this business, great product can get by with mediocre marketing, while mediocre product needs world class marketing. Also, the company talks about how [these volatile consumer shopping patterns are changing how we think about and plan our business.] Really? Couldn’t the company anticipate that traffic would be under pressure? It’s been written in the cosmos for the past three years at a minimum. We’d be a lot more comfortable with a clear vision as to how PIR can lead the consumer to create its own destiny as opposed to having to make tactical adjustments everytime Target or Wayfair burps in the wrong key. Comps were negative this quarter for the second time in five years, and we have yet to see any Gross Margin recovery from its e-commerce build-out initiatives over the past three years.  SG&A (-9%) made the quarter, and while much of this is sustainable, the reality is that the company is reactionary in planning more TV advertising, which kind of shoots the SG&A leverage angle in the foot for 2017 (Jan). Ultimately, PIR is in a relatively good category in retail – one that does not have anywhere near the volatility as apparel. So will PIR be here in 5-years? Yes, it will. It’ll likely have 2/3 the number of stores it does today, but it will still probably be around. That, however, does not mean that the equity needs to be worth anything. With the stock approaching $5 and a market cap of $450mm, it’s entering no-man’s land. There’s not a very big pool of institutional investors out there who are going to step in and load up on a marginal quality, levered, home furnishings retailer, with a footprint that’s too large, a market cap that’s too small, when we’re at the tail end of an economic cycle. Sheer gravity could cut this stock in half again from here.

 

Our Best Bull Case

As noted when wearing the Bear hat, this is a relatively stable category, and PIR is an established brand that has relevance across a very wide age demographic. Brand weakness has not driven earnings down in recent years, it’s been investment in the infrastructure. By and large, PIR’s product has always been primed perfectly for on-line distribution. But as recently as three years ago, on-line as a percent of total was only 1%. Yes o-n-e percent. So the company invested to build its capability to make small shipments to many individual customers instead of only making large shipments to a much smaller number of stores. This investment cost PIR over 500bp in margin, and our math suggests that about 300bp is recoverable. About 20% of sales is on-line today.  At the same time, the investment the company made in e-comm is clearly rolling over, with capex coming down 33% and SG&A off 9% in the quarter. The company’s commentary suggests a conservative guide for FY17, and even on a – flattish comp we’re still looking at $0.60 in earnings, and better yet, a $30mm sequential positive change in cash flow. If you look at valuation today, you’ve got 0.3x EV/Sales, which is about as low as it’s going to get unless you think the business is going away, which we don’t. Despite the volatility in the stock, on an annual basis revenue and EBITDA are fairly predictable. Yes, the company has around $200mm in debt ($150mm net) but we don’t have any maturities till 2021, when we’ll be in a completely different economic cycle. We think that PIR earns about $0.60 next year, or about $100mm in free cash flow – that’s less than 8x earnings, about a 20% FCF yield and a 6% dividend yield.

 

PIR | Our Best Bull vs Bear - PIR EV SALES

 

Details on the quarter... 

 

Top Line

PIR put up only its 2nd negative comp number since 2Q10 (Aug ’09). That’s an impressive string for a company who sells marginal home goods, but is further evidence of the fragmentation in the market place. The question we have to ask ourselves now with a -2% to -4% comp on the horizon in 4Q and ‘conservative’ topline planning in FY17 is, has something fundamentally changed in the industry that makes a name like PIR a secular loser? Essentially the Wayfair question. When we look at the numbers – PIR is operating in a $175bn category, with $27bn of that done online. PIR now competes in the online arena, it didn’t 3 years ago, and has just over 1% of the total market share. The largest player in the space, Ashely Home Furnishing has ~2.5% share of the market. In that type of competitive environment we don’t think that there is a net loser and a net winner. PIR has inflicted a lot of wounds to itself over the past 18 months, but we don’t think that the competitive environment is so vastly different that it can’t produce the 2% top line growth it needs for this model to work.

 

Gross Margin

Merch margins were down another 380bps in the quarter with supply chain inefficiencies accounting for 200bps of the decline and the balance attributed to an increase in promotional activity. For the year, merch margin guidance stands at 55% down from the 58%-58.2% guide giving on the 4Q15 conference call. Supply chain inefficiencies have continued to dilute the gross margin line and will continue longer than previously anticipated through 1H17. 140bps of the decline is from executional issues on the DC front, tack on another 60bps from inventory clearance issues in 2Q16 and another 30bps in 4Q15 and we get to 230bps from supply chain issues that will start to roll off in 2Q17. In light of the promotional environment, it’s likely that PIR will compete some of that gain back in the form of price, but the margin leverage from efficiency measures + lease negotiations/store closures + e-comm fulfillment scale = a nice gross margin lever in 2017.

 

SG&A

PIR made the number on SG&A leverage with dollars down 9% YY, that largest decrease since Aug ’09. The obvious whole in the cost structure is the marketing spend which was down 16% in the quarter as the company pulled back on national TV media spend. But, let’s not forget that PIR is reaching the tail end of a 3yr e-comm buildout that not only ate away gross margin in the process but required a significant amount of spend on the SG&A side.

 

Balance Sheet

Big improvement in working capital with inventory growth down 6% YY. The sales to inventory spread went into positive territory for the first time in 2 years, and inventory per square foot was down 5% from the big build up headed into Holiday 2014. But, there is still a lot of wood to chop on that line as inventory per square foot sits at levels 36% higher than in 3Q12. You could make the argument that with e-commerce now in the mid-teens as a percent of sales and exclusive online content making up a portion of the inventory balance, that the comparison isn’t apples to apples. But, we think that a 10%-15% drop is more than possible. By our math that would free up about $60mm in working capital.

 

PIR | Our Best Bull vs Bear - PIR INV SQFT


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next