Weekly jobless claims spiked this morning up to 448,000, taking the 4 week moving average up for the 2nd week in a row to 393,000. In order to understand macro, I always look back before I take a shot at looking forward. In a historical context to prior US recessions and consumer spending depressions (1), this run rate of unemployment claims is alarming.
Peaks in jobless claims in 1990 and 2001 were reported at 500,000 and 480,000, respectively. There is little doubt in my mind that this cycle sees those prints. The big question is can the US employment picture deteriorate to the 560,000 and 620,000 levels in claims that we saw at the peaks of 1972-74 and 1981-83 cycles, respectively.
The US Consumer is hostage to deteriorating RIPTE “Trends” until the facts bear out otherwise.
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CEO Howard Schultz said they are seeing signs now in the U.K. that emerged in the U.S. in the beginning of the year as it relates to consumer spending. He also said that the “very, very tough economy” in Spain has caused management to alter its growth plans because they don’t want to expand when consumers are under a lot of pressure. Management commented that they are facing significant challenges during the afternoon day part. They see the current economy as a tremendous headwind that has prevented them from moving the needle on improving traffic and the environment has proven more difficult than they anticipated back in January.
- So how is this good? Starbucks had grown accustomed to 20%-plus revenue growth and 5%-plus same-store sales growth results. Three consecutive quarters of negative comparable sales and traffic, 9% sales growth and about 500 bps of U.S. margin compression in 3Q has forced management to make real changes.
- U.S. company-operated store unit growth had been in the 13%-19% range YOY, and now management is forecasting a negative 60 net new stores in FY09 as the announced store closures will exceed store openings. Capital Expenditures as a percent of sales have been moving up rather significantly, from 7.8% in 2004 to 11.5% in 2007, despite declining returns. Based on the company’s revised guidance, however, capital expenditures are expected to be $1 billion in FY08 and $750 million in FY09, a 7% and 30% decline, respectively from 2007. This more disciplined spending will generate incremental free cash flow and yield better returns for shareholders. To that point, it was encouraging to learn that the company is seeing incremental sales at the stores that are in proximity of the 50 stores that have already been closed.
The company also lowered its international unit growth targets to 825 net new stores in FY08 (from prior guidance of 975) and 900 net new stores in FY09 (from 1,050). Management said they are taking “learnings from [their] U.S. market experience and approaching international growth with cautious optimism, given the current environment.”
- Relative to overall traffic declines, management indicated that it is seeing an uptick in afternoon traffic as a result of its Vivanno and Sorbetto beverage launches, which they highlighted as an incremental positive as afternoon traffic “has been the burden for the past six months or so or even more than that.”
Mr. Schultz reiterated that there is “no silver bullet” and that he cannot predict the economy, but that they are managing the things they can control. That being said, I remain convinced as Mr. Schultz said, “Starbucks is going to win.”
The second time is a charm here - if you are net long the US market that is. This is our second test of the high end of my S&P 500 “Trade” range in the last two weeks. The first of course was the 88 point, +7.3%, S&P 500 rally from the oversold 1201 intraday print on July 14th – the latest was a 50 point, +4.1%, move in the last 48 hours. Positive short term “Trade” momentum in the US Dollar, US small caps, and anything with high short interest has appreciably improved.
Fortunately, I’ve been running net long. That said, I have been nervous about being net long the whole way up! I am not going to stick around and wait for a third rally. I will not regret saying that I missed it, if it occurs. In the last 2 weeks I have moved to 85% cash. I think patience in the next 2 weeks will pay. There is going to be too much pin action into and out of tomorrow’s employment report for my liking. Sometimes doing nothing is the best decision I can make.
Could the S&P breakout for a shark bite squeeze if the US employment report is more bullish than I am expecting tomorrow? Definitely. Could the US financial system crash on any given trading day this summer? Definitely. For every short term bullish fact on my sheet, there’s an equally bearish intermediate one.
The question from here is one of duration. I’m more comfortable taking a step back so that I can see the next week of facts. I want to let this psychological fire breathe how it may. I’m having a great year so far, and the last thing I am going to do is put my hard earned capital at risk betting on an employment number or Ben Bernanke. What I think he should do at next week’s FOMC meeting, and what the political winds could force him to do, are two very different things.
I wrote a few intraday notes in the portal yesterday that speak to the bullish “Trade” case from here. Volatility (measured by the VIX) and Oil under 21.52 and $127.46 respectively are bullish market factors driven by a US Dollar Index holding its head above the 72.69 line. Bernanke could support these emerging bullish macro factors if he raises interest rates, and breaks inflation’s back. He could also blow it up if he panders to the political winds and devalues the American currency again at game time.
The Fed extended its emergency lending facilities yesterday to January! In plain English, that means that “Helicopter Ben” will drop cheap money onto Wall Street for the foreseeable future. This is a cute, but more appropriate, nickname than any other for Bernanke until he stands up, provides some leadership for the US Dollar, and moves away from Greenspan’s easy money air show.
Respect in any game is earned, not appointed. For now, team Bernanke/Paulson is running out of time on the clock and, for now, I am not ready to bet on their coming out of this looking like they won mine.
Best of luck out there today,
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