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THE JOBS SITUATION STUMBLES FURTHER - CLAIMS RISE 16K (12K NET OF THE REVISION)

Things Continue to Get Worse

For the last few months we've been growing incrementally more bearish for two reasons. First, we've become worried about the rising risk of a double dip in the housing market; our Financials vertical will be hosting a conference call on next week. Second, we've become cognizant of the lack of improvement in the employment picture. Since the start of this year, almost six months now, the number of people filing new unemployment insurance claims hasn't fallen one iota. Compare that with the almost straight line of improvement we saw from April 2009 through year-end 2009, where claims were falling at a rate of 23k/month. The reported number this week rose 12k to 472k, but that's after revising the prior week up by 4k so the real increase was 16k. Either way, the bottom line is that claims remain in the ~450-460k range. Rolling claims were actually flat at 463.5k vs 464k the prior week. As a reminder, we need to see initial claims fall to a sustained level of 375-400k in order for unemployment to fall meaningfully and, by extension, lenders' net charge-offs to return to normalized levels.  We remain well above that level, but more importantly we're showing zero signs of progress moving to that level.  

 

THE JOBS SITUATION STUMBLES FURTHER - CLAIMS RISE 16K (12K NET OF THE REVISION) - rolling

 

Below we chart the raw claims data. 

 

THE JOBS SITUATION STUMBLES FURTHER - CLAIMS RISE 16K (12K NET OF THE REVISION) - raw

 

As a reminder, May was the peak month of Census hiring, and it should now be a headwind to jobs from here as the Census winds down.

 

THE JOBS SITUATION STUMBLES FURTHER - CLAIMS RISE 16K (12K NET OF THE REVISION) - census chart

 

Below, we've added a U.S. equities correlations table which regresses the S&P 500 and the nine S&P sectors against weekly jobless claims, the U.S. Dollar Index, and 10-Year U.S. Treasury yields. The highest inverse correlations to weekly jobless claims on a one-year basis are (in order): Consumer Staples (XLP), Consumer Discretionary (XLY), and Technology (XLK). Utilities (XLU) has the lowest inverse correlation of all the sectors during the same duration.

 

THE JOBS SITUATION STUMBLES FURTHER - CLAIMS RISE 16K (12K NET OF THE REVISION) - R

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Darius Dale


THE JOBS SITUATION STUMBLES FURTHER - CLAIMS RISE 16K (12K NET OF THE REVISION)

*** We've added subsector and company correlations to initial jobless claims later in this note. ***

 

Things Continue to Get Worse

For the last few months we've been growing incrementally more bearish for two reasons. First, we've become worried about the rising risk of a double dip in the housing market, which we'll be hosting a conference call on next week. Second, we've become cognizant of the lack of improvement in the employment picture. Since the start of this year, almost six months now, the number of people filing new unemployment insurance claims hasn't fallen one iota. Compare that with the almost straight line of improvement we saw from April 2009 through year-end 2009, where claims were falling at a rate of 23k/month. The reported number this week rose 12k to 472k, but that's after revising the prior week up by 4k so the real increase was 16k. Either way, the bottom line is that claims remain in the ~450-460k range. Rolling claims were actually flat at 463.5k vs 464k the prior week. As a reminder, we need to see initial claims fall to a sustained level of 375-400k in order for unemployment to fall meaningfully and, by extension, lenders' net charge-offs to return to normalized levels.  We remain well above that level, but more importantly we're showing zero signs of progress moving to that level.  

 

Below the jobless claims charts, we show the correlations between initial claims and each of the 30 Financial Subsectors. Not surprisingly, Credit Card and Payment Processing companies show the strongest correlations to initial claims, with R-squared values of .62 and .72 over the last year, respectively.  Surprisingly, some subsectors show a positive correlation coefficient to initial claims - i.e. Financials that go up as unemployment claims go up.  These names are concentrated in the Pacific Northwest Banks and Construction Banks, though these correlations are usually not very high.  

 

THE JOBS SITUATION STUMBLES FURTHER - CLAIMS RISE 16K (12K NET OF THE REVISION) - rolling

In the table below, we found the correlation and R-squared of each company with initial claims, then took the average for each subsector.  For composition of the subsectors, see Chart 5 below.  

 

THE JOBS SITUATION STUMBLES FURTHER - CLAIMS RISE 16K (12K NET OF THE REVISION) - subsector correlation analysis

 

The following table shows the most highly correlated stocks (both positively and negatively correlated) with initial claims. Note that the top 15 negatively correlated stocks have a much stronger correlation on average than the top 15 positively correlated stocks - as you would expect, given that most of the Financial space is pro-cyclical.  

 

THE JOBS SITUATION STUMBLES FURTHER - CLAIMS RISE 16K (12K NET OF THE REVISION) - company correlation analysis

 

Astute investors will note that in some cases the R-squared doesn't seem to reconcile with the square of the correlation coefficient. This is a result of finding the correlation and then averaging. For example, Pacific Northwest Banks have an average correlation coefficient of .32 and an average R-squared of .52 (with CACB, CTBK, FTBK, and STSA strongly positively correlated and UMPQ strongly negatively correlated). The different directions have the effect of canceling out each other out when finding the average correlation coefficient, but do not cancel out when finding the average R-squared. 

 

Below we chart the raw claims data. 

 

THE JOBS SITUATION STUMBLES FURTHER - CLAIMS RISE 16K (12K NET OF THE REVISION) - raw

 

The table below shows the stock performance of each subsector over four durations.   

 

THE JOBS SITUATION STUMBLES FURTHER - CLAIMS RISE 16K (12K NET OF THE REVISION) - tobin chart

 

As a reminder, May was the peak month of Census hiring, and it should now be a headwind to jobs from here as the Census winds down.  

 

THE JOBS SITUATION STUMBLES FURTHER - CLAIMS RISE 16K (12K NET OF THE REVISION) - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


TALES OF THE TAPE

QSR underperformed yesterday on more negative commentary around current trends.

 

The tales from yesterday centered around the underperformance of QSR following the news from SONC.  See the post from yesterday about current QSR trends and outlook.  The most disturbing move yesterday was EAT, which declined 3.3% on big volume: +40%.  The environment is tough for casual dining, with some select companies showing improving trends.  EAT’s fiscal 4Q10 quarter will be sloppy as expected; improving trends are not expected until early fiscal FY11.    

 

It is also worth noting the low short interest in the QSR category.  While takeover speculation does scare investors from being short some of these stocks, the level of short interest will likely increase significantly if the S&P 500 turns down.

 

TALES OF THE TAPE - stocks 620

 

Howard Penney

Managing Director


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THE M3: AGAIN, SMOKING ALLOWED; GALAXY COTAI LOAN UPSIZED; LARGE MACAU OFFICE TRANSACTION

The Macau Metro Monitor, June 16th and 17th, 2010

 

SMOKING TO BE ALLOWED IN CASINOS FOR A THREE-YEAR PERIOD Macau Daily Times

The latest version of the tobacco ban bill draft declares that smoking will be allowed in "venues for adults"--i.e. casinos, bars, terraces and business open areas, massage lounges and dance halls--for a three-year period.  According to Chan Chak Mo, who heads the Second Standing Committee of the Legislative Assembly, pressure from several industries led to this decision. “  After two years, the government says that a revision of the law should be done in order to decide if the suspension continues in the third year or not,” added Chan.

 

GALAXY ENTERTAINMENT GROUP ANNOUNCES CLOSING OF HK$9 BILLION CLUB LOAN Galaxy Entertainment Group

Galaxy has closed its six-year HK$9 billion club loan from a consortium of Asia’s banks.  The loan was upsized to HK $9 billion from HK $8.8 billion.  The lending consortium agreed to undertake a “take and hold” on the loan with no sell down requirement.  The interest rate is HIBOR + 4.5%, substantially below the previous bond rate of 9.875%.


Lui Che Woo, chairman of GEG said: “I am delighted to say that we are in a very strong financial position and that 2010 is shaping up to be a fantastic year for GEG. This club loan, combined with the outstanding credentials of the banks involved, is a clear endorsement of both our future plans and the strength of the Macau market."

 

MACAU OFFICE TOWER SALE SIGNALS MARKET RECOVERY SCMP

Zhu Kuan Mansion was sold to Cheng Long for HK$701 million in the biggest office transaction in Macau since the global financial crisis began in late 2008. The original owner, Capitalsino Properties, bought the property for more than HK$700 million in 2007.  The transaction price of HK$701 million equates to a price of HK$1,443 per square foot, reflecting an initial yield of 3.5%.

 

Franco Liu Pui-lam, a consultant at Savills, which brokered the deal, said that the Macau office market and investor sentiment had picked up after a subdued period last year. According to a Savills report, office demand from gaming and related industries will return and office prices and rents will be supported by extremely limited supply as no new projects have been approved by the government recently.


The Fiat Empire

“A greedy father has thieves for children.”

-Serbian proverb

 

Not unlike those of the Roman Empire, the political fathers of the modern day Fiat Empire purge their citizenry’s hard earned capital in order to attempt to maintain short term popularity. When they run out of funds, they simply borrow more. Then they spend that too.

 

I’m in the midst of reading “Rubicon  - The Last Years of the Roman Republic.” I’ve written about this before, but it’s worth mentioning again. The behavioral parallels between professional politicians circa 100BC was eerily similar to what you see in Western Europe and America today.

 

Sulla (138BC-78BC) was the poster child of what became an untenable Roman dictatorship. Once he captured control, he swept away the ideals that galvanized the Roman Empire’s longstanding pride. The meritocracy that allowed common citizens to rise up against the political aristocracy and lead their country was quashed. The greed and lust for political power in the Republic became disgusting. Tom Holland captures life in the Sulla moment effectively:

 

“As dictator he had thrown the largest parties in Rome’s history. Everyone in the city had been invited. Spit roasts had sizzled in the streets, vintage wines had flowed from public fountains. The citizens had gorged themselves.” (Rubicon, pg 104).

 

This, of course, didn’t end well. Leveraging yourself to the habit of overspending never does. European governments are finally coming to grips with this new reality. While their political resolve continues to be borrow-borrow-borrow, then spend what they borrow, unlike America, at least they are implementing some form of austerity on the spending side of this dysfunctional equation.

 

This morning, markets around the world remain confused. This is mainly a function of professional investors being confused, not the people whose money they are managing. To the citizenry of all nations who are over-geared, the output of austerity is crystal clear – slowing growth and less to gorge.

 

Here are some interesting thoughts from influential Europeans in this morning’s news:

 

1. UK – George Osborne (the new Chancellor of the Exchequer): “At the heart of the crisis was a rapid and unsustainable increase in debt that our macroeconomic and regulatory system utterly failed to identify, let alone prevent.”

 

2. Russia – Igor Shuvalov (First Deputy Prime Minister): “I’d be very cautious about stock investments in this country. I would welcome real investors who can build factories, something new in this country.”

 

3. Italy – Claudio Artusi (CEO of City Life – Milan’s $2.6B real estate project that’s built the tallest building in Italy): “Our investors are more concerned about long term value than short term returns. The project is aimed at the top end of the market and won’t be affected by the economic cycle.”

 

Confusion from the Italian sitting on his perch at Club Myopia and, at the same time, admission of the new Age of Austerity that has been voted into the UK’s political system. All the while Spanish and French governments are trying to convince the Russians to buy their broken promissory notes (more sovereign debt auctions this morning) as the Russians look to start taxing their almighty petrodollars (considering a tax on oil exports from tax-exempt Siberian oil fields).

 

The only way that this unsustainable Piling Debt Upon Debt plan changes is if we change the governments who plan to keep spending. Germany has a much better fiscal position than the US at this stage of the game and has already implemented austerity measures on the order of 2.7% of GDP. Part in parcel with Osborne’s comments in the UK this morning is David Cameron getting rid of the FSA (Financial Services Authority). Why? Because it doesn’t work.

 

You can’t solve problems with politicians who perpetuated the problems. Change is good and it seems to me that those countries who have the political backbone to make changes first will win this race to the bottom in the end (you need to hit bottom before you bounce).

 

Levered markets, politicians, and financiers alike need to take a good, hard, and long look at the bottom before they change their ways. Artusi’s fanciful expectations are a metaphor for an era that’s passing us by. The score for Italy’s latest version of an opulent “City Life” is on the board – only 90 of 390 luxury apartments sold. The Fiat Empire may not be burning yet, but the smell is becoming awfully familiar…

 

We covered our short position in the SP500 (SPY) yesterday on market weakness. That doesn’t mean I’m not bearish. It simply means I think I can re-short the market higher. We will see if I’m right about that. My immediate term support and resistance lines are now 1101 and 1127, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Fiat Empire - V bottom in the Deficit


US STRATEGY – ON THE MARGIN

A key Hedgeye phrase is that “everything that matters happens on the margin.”  On the margin, the news in Europe is getting better (the Euro is rallying) and the news in the US is getting worse (the dollar is getting weaker) - this has been bullish for stocks so far this week.  Soon the news from the US will dominate the headlines and that will likely be bearish.  Yesterday, there was little follow through from Tuesday’s big rally, as the S&P 500 finished down slightly on Wednesday.  

 

Stocks were down as the EURO declined slightly, as another round of speculation emerged that Spain will have to tap the EU's new bailout facility.  The continued concerns surrounding Spain dampened some of the momentum behind the risk trade, but the demand for Spanish bonds in today’s auction is helping the Euro rally in early trading.  The EURO is currently trading up to 1.2388, up 0.6%.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.21) and Sell Trade ($1.23).

 

Treasuries were stronger with the increased aversion for risk, as the VIX rose by 0.2%.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.32) and Sell Trade (32.33). The DXY rallied slightly and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.55) and Sell Trade (86.51). 

 

On the MACRO front in the US, weaker-than-expected housing data was another headwind for the market.   Housing starts posted a larger-than-expected 10% month-to-month decline to an annualized rate of 593,000 in May. The decline was entirely driven by single-family starts, which fell 17.2% to 468,000. Permits were down 5.9% in May and have now fallen 16% since the last peak in March.  In addition, single-family permits were down nearly 10%.

 

The Hedgeye Risk Management Financials team, led by Josh Steiner, hosts our next Black Book release and Conference Call, “Housing Double Dip a Game Changer for Financials in 2011” on Friday June 25th at 11 a.m. EDT.  The call is open to qualified institutional subscribers of Hedgeye's Financials vertical -- and for qualified prospective institutional subscribers. Email if you are interested in learning more about Josh Steiner’s Financials institutional research product.

 

The disappointing housing data contributed to Consumer Discretionary (XLY) being the worst performing sector on the day; followed by Consumer Staples (XLP) and Industrials (XLI).  The S&P homebuilding Index declined by 1.5%, lead by PHM down 1.8%.  The XLY was also hurt by the retail group underperforming the broader market again yesterday, with the S&P Retail Index (0.8%).   The Johnson/Redbook 2-week same-store sales were reported down 0.5% from May.  In addition, earlier in the week, BBY reported weaker-than-expected May quarter results along with continued cautious commentary surrounding consumer spending trends.

 

The three best performing sectors were Technology (XLK) +0.3%, Healthcare (XLV) +0.4% and Utilities +0.6%.   The XLK topped the list of best performing sectors on the back of the AAPL and iPhone sales trends and was able to shrug off a sharp selloff in NOK (10.7%) after the company cut its Q2 outlook.  For the second day in a row, memory names MU +2.2% and SNDK +1.4% helped the SOX +0.4% extend its rally another day. 

 

Oil rallied to $77.67 and the Reuters/Jefferies CRB Index of Commodities posted a sixth straight gain.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade ($75.46) and Sell Trade ($79.60).

 

Copper continues to flash a bearish signal for US/Global growth; selling off this morning to $2.96, well below our long term TAIL line of 3.05.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.89) and Sell Trade (3.05). 

 

Gold remains in a bullish formation and we are long.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,218) and Sell Trade (1,244).   

 

As we look at today’s set up for the S&P 500, the range is 26 points or 1.2% (1,101) downside and 1.1% (1,127) upside.  Equity futures are trading mixed-to-fair value having finished lower yesterday.  On the docket for today is May's CPI and initial jobless claims.   

 

Howard Penney

 

US STRATEGY – ON THE MARGIN - S P

 

US STRATEGY – ON THE MARGIN - DOLLAR

 

US STRATEGY – ON THE MARGIN - VIX

 

US STRATEGY – ON THE MARGIN - OIL

 

US STRATEGY – ON THE MARGIN - GOLD

 

US STRATEGY – ON THE MARGIN - COPPER


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