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Each week we provide an update on initial jobless claims because we think it's one of the best leading indicators for the credit-sensitive names we follow and history has shown there to be a very high correlation. The reality, however, is that there has been quite a divergence that has taken place in the last four to five months.


Let's just get this week's data out of the way first. Claims for the most recent week, out this morning, dropped 24k to 456k from 480k (revised down 4k) in the prior week. This caused the rolling 4-week average to actually increase by 3k to 459.5k from 456.8k.


We hate to be the ones to take away the punchbowl, but consider this. As the charts below show, at 456,000, claims are at the same level they were at on 11/28/09 (457,000). In other words, claims have gone nowhere in almost five months. Compare this with the colossal improvement in claims from April 2009 through November 2009. In stark contrast to recent claims trends, the XLF has barreled higher some 17% over the last 4.5 months, with high-beta Financials rising by multiples of this.


While we've been patient in our weekly posts, waiting for claims to resume their downtrend, we think that enough data (20 weeks now) is in to begin to warrant some caution around prospective performance in the XLF. If claims continue to trend sideways at these levels, it will be difficult, and, frankly, unlikely, for Financials to continue to move higher if the backdrop of further employment gains stagnates. Because claims are a leading indicator, we treat them with greater significance than the unemployment rate. We have other reasons to be cautious heading into the seasonal summer doldrums, namely renewed housing concerns. Couple this with the blowout 1Q10 results so far, and layer on the marked increase in consensus expectations around normalized earnings, and it is starting to feel like the Financials are better positioned for correction than further gains. We don't want to be alarmist with this call, but the reality is that it was the inflection in jobless claims that marked the bottom at the March 2009 lows, and claims are now sending us a new signal so it's time to pay attention.


As a final word around the census, we've been bullish on the lift the census would add going into its peak employment months, but we're almost at the point now where it's time to start focusing on the drag it will create on the backside as the peak month of employment, May, is just 8 days away.




The following chart shows the raw claims data.





The following chart shows the census hiring timeline.




Joshua Steiner, CFA


Allison Kaptur





MAR reported a solid quarter this morning - as expected. However, guidance was particularly strong, especially the RevPAR guidance.  We need to really step back and digest the results, guidance and implications, but below are some quick thoughts.  Bottom line, we believe that this asset light model will still perform well in an inflationary recovery and MAR is a lot cheaper than the real estate lodging plays out there.


1Q2010 Results:

  • The upside vs. our estimates came from better incentive fees and timeshare results.
  • Franchised room growth was very strong - exceeding out estimates by 2.7% or 7.6k rooms.  Minimal attrition in the quarter was also quite impressive. 
  • ADR declines in the quarter were a little higher than our estimate while occupancies were better on the limited service brands


  • We know that RevPAR trends are strong, but frankly we are surprised by the how good MAR's RevPAR guidance is. We'll learn more on the call. All we can add is that their comps are much easier for 2Q and 3Q then 1Q - so that's certainly part of it. 
  • We suspect that MAR's capex is working well for them in securing better room growth by providing some key money to franchisees and managers.


Outstanding earnings driving volume and price, overall market fears persist.


Looking at the table below, it is clear to see that the combination of positive momentum and an increase in the stock price was largely reserved for those companies that reported earnings.  That is hardly surprising given the earnings/preannouncements that were released yesterday.  The moves in price have been less pronounced than the moves in comps and earnings, certainly, and this is possibly due to the waning momentum seen in the market yesterday.


Yesterday morning, MCD’s earnings were strong and, although the stock only moved 3 bps on strong volume despite the noticeably positive tone evident in management’s commentary.  Perhaps in anticipation of the 4.2% U.S. comparable sales number, perhaps not, the stock ran up 2% from Friday to yesterday morning before the release.  


After the close, SBUX posted extremely strong numbers also, with comparable store sales increasing 7% during the past quarter, driven by healthy increases in both traffic (+3%) and average check (+5%) in the U.S. with the international division also posting a +7% comp.  As you can see below, the positive move in price and volume followed but it was hardly a moon shot.  SBUX is up 1.65% premarket.  Interestingly, GMCR, which announces earnings next week, is also trading up 1.3% in premarket trading.  It should be noted that Starbucks CEO, Howard Schultz said last night that he has a watchful eye on GMCR and its success with the Keurig... “Stay tuned”.


PNRA posted a +10% comparable sales number Tuesday and saw its stock outperform since then; yesterday the stock rose 2.3% on strong volume.  With consensus estimates up 2.4% over the past week, expectations are for equally strong bottom line numbers being released on 4/27.


CMG beat the quarter handily on both top and bottom lines.  The company’s margins and growth trajectory are some of the best in the industry.  With same-store sales seemingly showing a healthy recovery, CMG joined PNRA as the strongest performer in QSR yesterday with a strong boost in price and volume ahead of the earnings release.  The stock is up an additional 4.9% premarket. 


It also should be note that EAT was up 1.2% on a 50% increase in average volume.  The strong performance despite a 10.3% decline in consensus estimates for next fiscal year EPS - the worst in casual dining.


TALES OF THE TAPE - stocks 4.22


TALES OF THE TAPE - commds 4.22



Howard Penney

Managing Director

Early Look

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Ocean Day

“How appropriate to call this planet Earth, when clearly it is Ocean.”

-Arthur C. Clarke


Today is Earth Day.  For those that didn’t know, Earth Day was founded 40 years ago by Senator Gaylord Nelson as a day to inspire awareness and appreciation for the environment.  That’s pretty simple, and, to use an overused phrase, it is what it is.


Personally, I’ve never really studied environmental issues, so I’m willing to admit what I don’t know.  Maybe Al Gore is a story teller.  Maybe he is not.  One thing I am willing to accept, though, is that respecting the environment is ultimately a good thing.  To that end, I drive a hybrid.  Yes, this right leaning, hockey playing, Alberta born, thirty something bachelor drives a hybrid.  There it is.


Just as in Arthur Clarke’s quote above, sometimes we just have to call things at face value.  Ultimately, I think that is the issue that Goldman Sachs is facing.  I don’t need to scrutinize the SEC’s case against them to know that they probably did something wrong, nor do I need to hear their high priced New York lawyered excuses to know that they can probably justify what they did. 


Warren Buffett famously said that it takes a life time to create a reputation and 10 minutes to destroy it.  Time will tell whether this is the 10 minutes of reputation destruction for Goldman.  My guess is it probably isn’t.  There are too many fine people that work at Goldman, some of whom we are honored to call friends, for the firm not to endure.


In the short term though, as we’ve outlined in the chart of Goldman Sachs below, there is an impact on the company’s valuation, and currently there is limited support for Goldman Sachs’ stock.  More critically, the Political War on Wall Street will accelerate with an enduring impact on Goldman and its peers.  As point in fact, and highlighted by NPR’s Planet Money blog, a Google search of "Goldman Sachs SEC" provides an advertisement for www.barackobama.com and “financial reform that protects main street”.  We’ve posted a picture of this below.


Ocean Day - goldman1


It is unlikely that Goldman Sachs will come out and admit wrongdoing in this instance, but being forthright and transparent may well be their most effective tool for taking the political momentum out of the sails of those who will now be focused on reforming Wall Street.  Imagine if Lloyd Blankfein stood up in front of Congress and said: “We failed our clients in this instance. And we will work to repair that trust.”  His stock would probably be on its way back towards $200 per share. 


Financial reform is a topic that will impact your investments over the coming month, so we want to highlight a few key dates as it relates to financial reform, which starts today:


1)      Today (4/22/10) - Senate likely to begin debate on Senator Dodd's (D-CT) Financial Reform bill.

2)      Today (4/22/10) - UK general election debate between PM Brown and Conservative Candidate Cameron will likely focus heavily on the GS/Financial Reform issue. US politicians may watch closely to gauge voters response to different posturing around this issues.

3)      Today (4/22/10) - President Obama will visit Manhattan to deliver a speech on the importance of Financial Reform at Cooper Union; an interesting choice of location, for it was there that President Abraham Lincoln galvanized New Yorkers for the first time in his quest to become President with one of his most famous speeches decrying slavery. 

4)      Thursday (5/6/10) - UK general election for Prime Minister.

5)      Memorial Day (5/31/10) - This is the Date President Obama has given to Congress to have a Financial Reform bill on his desk. After Memorial Day, Congress will go into full swing campaign mode, and passing any meaningful legislation will become difficult.


In completely non-sequitur fashion, I’m going to give one of our analysts, Howard Penney, a tire pump this morning.  He nailed his long call on Starbucks.  Since he recommended the stock, the unrealized return in our virtual portfolio is up ~120%. Last night, Starbucks reported same store sales that were +7%, which is the highest level in 4-years.


Like most large multinational companies, Starbucks also provides Macro analysts with some interesting nuggets.  As it relates to consumer spending, Starbucks’ comps were driven by a 5% increase in ticket prices (the amount spent per purchase).  In the year ago quarter, ticket prices declined by 3%.  The simple point as it relates to the consumer spending is that based on this Starbuck Proxy, consumers are willing to spend more and accept marginally higher prices.  Clearly, there are some inflation implications here.


If you don’t have access to our stock picks or Howard’s fine research, email us at .  While our research isn’t free, we’ll let you trial it for a few weeks and are confident you will be impressed.


We would be remiss this morning if we didn’t also mention Fitch’s warning on Japan’s credit worthiness.  While ratings agencies are typically lagging indicators, the reality is that Japan is a lesson for those nations that continue to Pile Debt Upon Debt. While Japan is not at imminent risk of a default, the unintended consequence of its massive government balance sheet was long term deflation, and hence its equity market has done nothing for more than 20-years.  That’s not good.


Enjoy Ocean Day!


Keep it real,


Daryl G. Jones

Managing Director


Ocean Day - Goldman


With yesterdays mixed performance, waning upside momentum remains the greatest concern.  The S&P 500 finished down 0.1% on a 6% uptick in volume, and breadth was very weak.  Yesterday’s headwinds centered around increased signs that there is momentum in Washington for a financial regulatory overhaul.  This was compounded by the disappointing guidance out of the healthcare sector as it relates to reform legislation. 


Some of the trades we did yesterday:


BUYING ICE  - We want some long exposure to the exchanges (transparency in OTC derivatives pricing) ahead of tomorrow's political circus that will be held in Washington.

BUYING XLV - Healthcare is getting crushed today.  Beyond $31.41 the XLV is 2.5 standard deviations oversold; buying red as the long term TAIL of support holds.

SHORTING GIL - Everyone knows GIL's quarter is going to be good, but everything has a price and this stock is immediate term overbought as cotton prices head higher.  KM

BUYING WFMI - We have no doubt that the higher-end income earners of this developing high-low society will continue to eat well. Immediate term TRADE line of support = 37.19.  KM

COVERING FXE - On this the Hedgeye Morning Call (830AM) we said we'd cover the Euro at 1.33, so I'll do that here. We remain bearish on the Euro with a new immediate term range of 1.33-1.35.  KM


Yesterday we also traded out of our VIX position. 


One of our key themes for 2Q is Sovereign Debt Dichotomy.  As we look at the macroeconomic environment ahead, what’s certain is that investor fears associated with sovereign debt default (globally) will persist.  In early trading, European markets are down after the European Union said Greece's budget deficit last year was worse that it previously forecast and could top 14% of GDP.     


The two best performing sectors yesterday were Industrials (XLI) and Consumer Discretionary (XLY).  Household Durables helped the XLY higher, lead by the Homebuilders (XHB +2.4%).  The home builders appeared to gain momentum as mortgage applications jumped just over 10% last week, while applications for refinancing surged nearly 16%.  At the same time, mortgage rates fell sharply for a second straight week.


Yesterday, Technology (XLK) took center stage with Q1 results from AAPL, which was up 6% on the day.  AAPL beat on both the top and bottom line, with help from better-than-expected iPhone and iPad demand.  On the other hand, YHOO declined 5.1% amid disappointment surrounding the performance in search.  The semis were also back on the defensive today, with the SOX down 1.1%.


With the Chinese market waning of late (down 1.1% last night), the Materials (XLB) is proving to be much more sensitive than the broader market to some of the recent macro headwinds.  FCX (3%) was a notable laggard despite posting strong operating results for Q1.   Steel stocks were mostly weak again yesterday.   Additionally, a stronger dollar is putting some pressure on the REFLATION trade and the commodity-related sectors. 


Yesterday, Healthcare (XLV) was the worst performing sector with Biotech BTK down 1.5% and the HMO index down 1.8%.  GILD sold off sharply after reducing its 2010 product sales guidance to reflect the impact of healthcare reform legislation.


In early trading, equity futures are trading at mixed-to-fair value as markets digest sovereign debt concerns among Europe's peripheral states with corporate earnings which continue to beat on EPS. As we look at today’s set up, the range for the S&P 500 is 37 points or 0.6% (1,199) downside and 0.6% (1,214) upside. 


Today’s MACRO calendar:

  • March PPI
  • Jobless claims
  • March RPX Composite
  • March Existing Home Sales
  • House Price Index

Howard Penney

Managing Director


Probably a better quarter than the competition but the real story is beyond FQ3.


We expect WMS to print an in-line quarter after the close on April 26th.  Given that the stock has run over 20% since we wrote “WMS: NOW OR LATER?” on 3/10/2010, we’re not as confident that in-line will be good enough.  While we doubt that anyone expects a beat, we do think that the consensus is WMS makes the quarter.  The challenged replacement cycle and weak state revenues limit the opportunity for quality upside to earnings.


However, WMS is not a FQ3 story.  WMS should be able to beat consensus estimates by a few cents next quarter and we believe that there is upside to FY2011 consensus numbers.  We refer people to our WMS Black Book which we released two weeks ago for the long-term analysis.


Below is some detail behind our estimates for F3Q2010:

  • Product sales of $123.7MM at a 53% gross margin
    • 4.2k NA unit sales and 2.7k international units sales
      • WMS should ship more replacement shipments to NA this quarter than last, since March is a seasonally better quarter for replacements
      • We also believe that international units will be up YoY given WMS’s recent entry into Australia and Mexico
    • ASP of $15.5k
      • Originally, WMS thought that they would be shipping more legacy Bluebird cabinets to Mexico.  However, units shipped to Mexico have been primarily BB2 in a somewhat stripped down form.  Lower priced unit shipments to Australia this quarter should be quite small and have little impact on pricing.
  • Gaming operations revenue of $78.7MM at a 83% margin
    • Increase in average daily win given shift towards WAP
    • 250 incremental WAP placements, loss of 25 LAP units, flat standalone units
  • Other stuff:
    • R&D expense of $28.3MM
    • Selling & Admin expense of $39MM
    • D&A of $17.4MM
    • Interest income of $1MM
    • Tax rate of 37%




Growth Opportunities

  • “The new Bluebird xD platform, the customer response has exceeded our expectations. When this gaming machine receives regulatory approval with a commercial launch expected in the June quarter, we believe it should prove instrumental in keeping our momentum strong for increasing our market share based upon the high player preference and earnings performance being achieved at our beta test site.”
  • “Another favorable factor arising from our recent discussions with casino operators here is that the improved economic environment in Europe seems to be translating into an increased sentiment toward expanding their capital budgets. This is similar to what we're hearing from our North American customers.”
  • Italy:  “Much effort is still needed before the first products are placed, which is anticipated to start this summer and we'll keep you updated on our progress.”
  • “Through these two important [Italy and Australia] new market opportunities, coupled with ongoing success in Mexico and other international jurisdictions, plus the launch of our Helios gaming cabinet, we expect to continue to expand our global presence and achieve further growth.”
  • “As we received regulatory approval for WAGE-NET and our initial portal applications in the coming months and quarters, we expect to benefit from the rollout of our network gaming strategy in numerous regional and travel casinos across the country.” 


  • “We anticipate to be slightly above the top end of our fiscal 2010 operating margin guidance of 20.5% to 21%.” 
  • “Supported by the high mix of WAP units and typical seasonal influences that are generally favorably impact the March and June quarters, we expect to remain above the high end of our average revenue per day guidance and record further modest gains throughout the balance of fiscal 2010.”
  • “With the continued strong performance of our Bluebird 2 gaming machines, and the positive response by customers for the new Bluebird xD gaming machines, which will carry a premium price when launched this spring, we expect the upward trends in ASPs will continue. I'd note that the expected future ASP increase will be partially mitigated, particularly in the current quarter by the introduction of the value priced Helios gaming machines and the launch of products in Australia through a distributor. We expect the average selling price to continue to remain above the high end of our guidance of 15,000 per unit through the second half of our fiscal year.
  • “The improving trend in the replacement cycle is likely to offset the lower number of units we expect from new casino openings and major expansions compared to calendar 2009. Specifically, we expect WMS's new unit volumes to increase year-over-year in the March quarter and further ramp upwards in the June quarter reflecting; one, incremental and growing volume from distribution to new markets for WMS, such as Mexico, Class II, Australia and the launch of the Bluebird xD and Helios gaming cabinets. Two, further growth to our ship share; and three, improving -- the improving replacement cycle. Reflecting this improving trend for the second half of fiscal 2010, but also the slower pace of unit sales in the first half of the year, we expect unit volumes to be at or just below the low end of our annual guidance for unit sales”
  • “Based on positive customer feedback, we returned from G2E with an accelerated development program for certain R&D projects, including a ramp-up in the March quarter. As a result, we expect our fiscal 2010 R&D expense will run slightly higher than originally targeted which will result in R&D expenses in a range of 14% to 15% of total revenues for the full year.”
  • “I would note that in future quarters, we may see an upward bias in additions to gaming operation's capital spending as we roll out the first Bluebird 2 participation gaming machines and pursue attractive expansion opportunities to invest our capital in the Italian VLT business.”

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