COF, WFSL, NARA ALL WELL POSITIONED FOR IMPROVEMENT IN CLAIMS

As we highlight each week, initial unemployment insurance claims have for the last six weeks been moving higher. They've broken out of the three standard deviation channel we consider an important barometer. Given that claims are starting to go in the wrong direction, we've screened the Financials universe looking for the stocks with the highest R-Squared values to initial claims. The following chart shows the 45 stocks most correlated with initial claims. For reference, our screen looked at 170 Financial companies.

 

COF, WFSL, NARA ALL WELL POSITIONED FOR IMPROVEMENT IN CLAIMS - jan 08 to present correlation

 

A quick caveat. Are all of these stocks actually being driven by claims to the extent suggested above? The answer is clearly no. Some of these high R-Squared values seem spurious. For instance, Aflac (AFL) appears to have 85% of the movement in its stock price explained by changes in claims, yet Aflac's principal business is disability insurance in Japan. So in this case, we think the correlation is more coincidental than causal. On the other hand, Capital One (COF), which shows a R-Squared value of 0.74, has a tight connection between earnings and general levels of employment, so in this case the high R-Squared value seems appropriate.

 

So what do we expect out of claims going forward? Our view is that claims are likely to resume their downward trend in the coming months for two reasons. First, there were numerous reports that the snowstorms throughout January/February adversely impacted the data. This wouldn't be the first time. For instance, in January 1996 a blizzard not unlike what we experienced this past month left most of the East Coast of the United States at a standstill. In the following weeks, initial claims rose 82k to 415k from 333k, only to then drop back down in the following weeks. Second, we think the census hiring will provide a tailwind for claims on the margin, as that hiring ramps up in earnest in March, April and May. The following chart shows census staffing levels by month over the last two censuses. This census is expected to require approximately two times the number of people needed in the last census.

 

COF, WFSL, NARA ALL WELL POSITIONED FOR IMPROVEMENT IN CLAIMS - 1

 

If we're right about claims moving lower over the next few months, we would recommend long exposure to the high R-Squared names that have also seen their stock prices drop in the last six weeks - the duration over which claims have been on the rise. The following chart shows graphically which companies may be best positioned to benefit from a recovery in claims. On the x-axis is the R-Squared to claims. On the y-axis is the percentage change in stock price since January 15, 2010 - the date of the first of six negative prints on claims.

 

COF, WFSL, NARA ALL WELL POSITIONED FOR IMPROVEMENT IN CLAIMS - scatter plot

 

For those uncomfortable taking a view on claims, the following are some of the names with low, or no correlation to claims.

 

COF, WFSL, NARA ALL WELL POSITIONED FOR IMPROVEMENT IN CLAIMS - correlations low

 

Finally, we republish our claims chart below for reference.

 

COF, WFSL, NARA ALL WELL POSITIONED FOR IMPROVEMENT IN CLAIMS - claims

 

Joshua Steiner, CFA

 

 

 

 


Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more