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MAR 2Q2010 CONF CALL NOTES

MAR 2Q2010 CONF CALL NOTES

 

 

“This is an exciting time for Marriott. Business and leisure stays at our hotels are trending up. Revenue per available room increased more than expected in the second quarter and room rates at company-operated hotels in North America rose for the first time in nearly two years. We anticipate even more favorable pricing in the second half of 2010 and into 2011. Combined with productivity improvements achieved over the last year, strong unit growth and increasing demand, we look forward to growing cash flow and strong earnings in 2010 and beyond.”

- J.W. Marriott, Jr., chairman and chief executive officer of Marriott International

 

CONF CALL NOTES:

  • Business is showing strong results which are continuing in the second quarter.
  • In period 5 (May) room rates rose for the first time (1%) and in June, they rose 3% (period 6). Primarily due to mix shift.
  • 75% of their company operated hotels increased rates in period 6. Corporate and premium rates rose 10%.
  • Roughly 15% of their rooms are under price guarantees negotiated previously. When negotiations start this year for group rate, they expect rates to be up.
  • Corporate group nights were up 10% YoY, with 20% booked within 3 months of arrival.
  • Group business for the quarter paid rates that were up 5% YoY.  Revenue is up 10-15% for group business booked 12 months out. Expect Group revenue to be up 2-4% in 2010.
  • Business in Europe and UK remained strong, benefiting from increased American tourism despite weak economies.
  • Asia is very strong, and China is benefiting from the Expo in Shanghai.
  • 3 cents of the upside was due to higher fee revenue and 1 penny was due to better timeshare results
  • Have 22 hotels under construction in China, and will shortly be MAR's largest market outside the US.
  • Have another 5 hotels awaiting conversion to the Autograph brand.
  • Have seen a modest uptick in interest to develop their limited service brands.
  • Timeshare was driven by cost efficiencies, lower marketing, and an 11% increase in rental revenues.
  • Have only 17 hotels on or near the Gulf coast.  Announced a beach guarantee for those hotels that allows guests to cancel if beaches close.
  • Guidance assumes that strong RevPAR growth they are seeing continues through the 2H of the year.
  • Introduced point program to give guests more flexibility to take longer or shorter trips. Also, now that they are selling a system vs. a specific location, they can now build less locations and better leverage sales centers regardless of availability.  This will also lower the % of revenues that are deferred since they will only need to sell developed units.
  • Don't expect to develop any new timeshare product in the foreseeable future.
  • Will reach leverage targets by year end and are turning focus towards value enhancing investments.
  • Acquired Seville hotel in Miami which will be converted into an Edition hotel post renovation.

Q&A

  • Expense reduction program and how they can keep costs in check in the future
    • Think that they can have fewer managers at their hotels.  Obviously hourly staff will grow with occupancy. Can keep the procurement efficiencies.  Zero bonus compensation and frozen base pay are not sustainable.
  • Timeshare margins? 
    • More about not chasing that marginal customer.
    • Think that the will see higher closing percentages with the new points program which means margins can continue to improve.
  • 2H RevPAR system-wide outlook - mix of ADR/Occupancy
    • Expect to continue to see good performance around rate.
    • Rate growth is by and large driven by corporate travel and group; the next few months are leisure driven, so 3rd quarter will be more challenged but expect that to reverse in the 4Q.
    • Occupancy comps will become tougher.
  • Is their increase in room openings this year pull forward some demand from 2011?
    • Feel pretty good about 25-30k gross room openings in 2011 since 50% of their pipeline is under construction.
  • It will take several years to get back to the same levels of hotels paying incentive fees (60-65% in last peak). Their all-time high was 72% of hotels paying fees.
  • Timeshare - former pricing was 25-30k per week.  Average pricing on weeks was up about 5% in the quarter. They dropped their pricing aggressively last year (15-20%) so they expect to do meaningfully less going forward.  Expect pricing to increase.
  • Worldwide house profit margins were up 90bps for both domestic and international
  • Termination fees were also included in their guidance so they claim, at least vs. their guidance, that that didn't drive the upside.
  • Have seen very little cancellation because of the Gulf spill, but expect less bookings.
  • If operating profits in NA move up 20%, then it just moves a small number of hotels into the black.
  • Where did the growth this quarter in incentive fees come from? New additions (especially in Asia) and increases in results from hotels that were already paying and also had $1-2MM of fees accrued in prior quarters paid this quarter. There is some seasonality though in the incentive fees - and 3Q is seasonally a weak quarter since that quarter is driven by leisure. NY is already paying incentive fees. Courtyard that they manage - none are paying incentives today.
  • The incentive fees:
    • In the US, they don't get any fees until an owner priority fee is hit and then can get about 25% of profits.
    • International: no owner's priority but more like a high single digit fee from day one.
  • Giving existing owners the ability to participate in the point program and using the point program for new buyers. Fee to opt into the point program (conversion fees) won't move the needle for them because there are costs associated with switching to this new system.
  • Supply growth that they are seeing this year is primarily limited service and that's impacting the growth in those brands.
  • They aren't seeing any change in corporate demand in Europe, despite the sovereign debt crisis.
  • Color on corporate negotiated rate process
    • It's about 12-15% of their room mix.
    • In a quarter, they will be into those conversions but few will be completed. More of a year-end event.
    • Expect that rates will be up meaningfully over what was negotiated last year.
  • What sectors are driving strength?
    • Generally, it's across the board since everyone was hit last year or at least frightened.
  • Some special corporate rates are down 20% from peak rates. Expect those to be up high single digits on rate for 2011.
  • Share buyback?
    • First, they want to remain investment grade/ below 3x leverage.
    • Second, they want to make good investments.
    • Unlikely to see a buyback in 2010 though, but they do look to return cash to shareholders.
  • Seeing a very modest increase in the booking window.
  • Property level revenue forecast have started to come up closer to their guidance.
  • Had $6MM of termination fees booked in 3Q2009, which will not repeat in 2010.

MORE WEAKENING REALITY

As I stated in the today’s Early Look, until the consensus begins to catch up with the weakening reality, reporting risk continues to be to the downside of expectations. 

 

Consistent with that theme, the Empire Manufacturing Index fell from 19.6 to 5.1 in July.  Consensus expectations looked for a level of 18.  The index has fallen a cumulative 27 points from the 2010 peak of 31.9 reached in April.

  1. New Orders Index dropped 7 points to 10.1.
  2. Shipments Index fell 13 points to 6.3.
  3. Unfilled Orders Index declined 15 points to -15.9 (its lowest level since December).
  4. Delivery Time Index turned negative (a sign that delivery times had shortened)
  5. Inventories Index rose from a level near zero to 6.4 (inventories are building after holding steady in May and June).

 

Along those same lines, the Federal Reserve Bank of Philadelphia’s factory survey index fell to 5.1 in July from 8 last month, again missing consensus estimates.  A Bloomberg survey forecast the measure would rise to 10. 

 

Lastly, the Fed showed industrial production rose 0.1% June, boosted by utility output (hot weather), while manufacturing declined 0.4%.  On this factor, the consensus was bearish enough at -0.1%.

 

No matter where you turn there it is - growth is slowing!  Taken together, NY, NJ and PA make up 15% of the nation’s economy and the market is trading down over 1% on the news. 

 

Tomorrow, we get the preliminary look at the July University of Michigan Consumer Sentiment Index.  The consensus is looking for 74 vs. 76 last month.  Given the plunge in the most recent Conference Board confidence reading, reporting risk continues to be to the downside of expectations. 

 

Howard Penney

Managing Director

 

MORE WEAKENING REALITY - empire state


THE M3: ONE OASIS CASINO?; CHINA GDP 10.3%; S'PORE HOME SALES FALL AGAIN; ARUZE; AND MORE

The Macau Metro Monitor, July 15th, 2010

 

MAYBE A CASINO FOR ONE OASIS Inside Asian Gaming

According to AGI, MPEL has submitted a request to the government for a casino service agreement with the consortium developing One Oasis that would allow MPEL's  gaming license to set up a casino at the planned six-star hotel.  The arrangement would be a 40:55:5 revenue share/franchise model ala SJM's third party arrangements.  One Oasis's 870 residential units are expected to be completed by 2Q 2013, but no completion date has been given for the hotel yet.

 

AGI believes SJM is a more obvious gaming fit for One Oasis because of the partnership Success Universe Group, a One Oasis consortium partner, has with SJM.   But one minority shareholder--Maruhan Corp--of Success Universe Group is not on good terms with SJM because of the underperformance of Ponte 16, which Maruhan blames on the property's focus on Mass rather than VIP, while SJM is unimpressed by Maruhan's inability to deliver Japanese gamblers to the property. 

Other members of the One Oasis partnership include two Hong Kong-based developers,—ITC Properties Group, a Hong Kong-listed company that worked on construction of Altira, and Nan Fung Group, a privately held company with development projects throughout Greater China—Linkeast Investments, a Macau-based company, and ARCH Capital Management, a real estate private equity fund focusing on Greater China, India, Thailand and Vietnam. 

 

CHINA'S ECONOMY SLOWS TO 10.3% SCMP, Channel News Asia, Hedgeye Database

2Q GDP growth slowed to 10.3% from 11.9% in 1Q, missing market forecasts of 10.5% growth.  Outstanding CNY loans growth dropped to 18.2% in June from 21.5% in May.  M2 supply moderated to 18.5% from 21% in May.  CPI fell to 2.9% in June, down from 3.1% in May and below market estimate of 3.3%.  Retail sales growth also eased to 18.3% in June from 18.7% in May.

 

IF YOU CAN'T BEAT 'EM, JOIN 'EM Inside Asian Gaming

An industry source told AGI: "The Western marketing guys have had their chance. Now Pansy [Ho] is bringing in the local junket guys to help with marketing. And from what I hear, they have MGM's blessing."  Some of the people involved in the VIP marketing rescue mission for MGM Macau are the same SJM-linked people who rode to the rescue of Lawrence Ho's  Altira when it teamed up with junket consolidator AMA back in December 2007.

 

PRIVATE HOME SALES IN JUNE FALLS TO 847 UNITS: URA Channel News Asia

The number of new homes sold fell in June to 847 units, down from 1083 transactions in May.

 

WILL NEW PHILIPPINES GOVERNMENT HONOR ARUZE LAND DEAL? Inside Asian Gaming

The new Philippines government is contemplating whether to approve a land ownership provision demanded by Aruze as a condition for investing in construction of a gaming resort at Manila Bay.  It has been nearly two years since Aruze, headed by Mr. Okada, put down a hefty USD$100 million deposit in escrow for the project.  Without ownership of the land, Mr. Okada may walk away from the deal.

 

The administration of President Aquino is also dealing with tax revenue issues with PAGCOR and why so many casino gaming licences had been issued.  "There are so many casinos in places where there are no tourists," Mr Aquino said.

 

TYPHOON ON THE WAY, BUT SHOULDN'T BE TOO HARD Intelligence Macau

IM sees minimal impact from Typhoon Conson (recently downgraded to Tropical Storm). In the past week or so, IM saw strong performance at The Venetian, CoD, Grand Lisboa, L'Arc, Wynn, and MGM.  VIP RC volumes are recovering from the World Cup.


OWN GOAL—CAN HONG KONG AND ITS NEIGHBOURS EVER STAMP OUT UNAUTHORIZED SOCCER BETTING?

SCMP, Inside Asian Gaming

 

SCMP says that because illegal gambling remains rampant,  the Hong Kong Jockey Club's (HKJC) legal monopoly  isn't working in HK and should consider the possibility of licensing private gaming franchises within Hong Kong. To combat unauthorized bookmakers, HKJC has argued that the Club should be allowed to pursue a more aggressive commercial policy including: reducing the tax levied on the bets, increasing the maximum daily dividends allowed, increasing the betting products offered and in developing the way products are delivered to customers.


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INITIAL JOBLESS CLAIMS DROP SHARPLY - SHOULD WE GET EXCITED?

Initial claims fell 29k last week (25k net of the revision), the largest one-week improvement since February and the lowest absolute weekly number since mid-2008.  Rolling claims fell almost 12k to 455k, the largest improvement since November of 2009. While the raw data has been volatile for the last five weeks (moving up or down more than 15k each week), until this week the rolling number had moved only slightly.  This is undeniably a positive move. Initial claims are, however, still elevated at 455k (rolling), and we would have to see this rolling claims figure come down substantially into the 375-400k range before unemployment will meaningfully improve. We prefer a wait and see approach, but if the data continues to trend positively (better for two weeks in a row now) we will begin to change our tune as employment, along with housing, are the keystones of the economy.

 

INITIAL JOBLESS CLAIMS DROP SHARPLY - SHOULD WE GET EXCITED? - rolling

 

INITIAL JOBLESS CLAIMS DROP SHARPLY - SHOULD WE GET EXCITED? - raw

 

Below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.Not surprisingly, Consumer Discretionary has the largest inverse correlation to Initial Claims (r-squared = 0.67) on a 1-year basis. On the flip side, it is a surprise to see that the Financials have the second lowest inverse correlation to Initial Claims (r-squared = 0.22) on a 1-year basis.

 

INITIAL JOBLESS CLAIMS DROP SHARPLY - SHOULD WE GET EXCITED? - 3

 

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.

 

INITIAL JOBLESS CLAIMS DROP SHARPLY - SHOULD WE GET EXCITED? - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


R3: Saucony, Fugu, Nike and Ben & Jerry’s

R3: REQUIRED RETAIL READING

July15, 2010

 

Can’t you tell by the title? This means that last week’s footwear data was as upbeat as what we saw out of apparel – good enough to move the 3-week trend higher. Here are some callouts by brand.  

 

 

TODAY’S CALL OUT

  

Athletic footwear sales for last week mimicked the upswing we noted yesterday in Athletic Apparel. As with apparel, a multi-week downswing was broken, and the all-important 3-week trend ticked up.  In fairness, this is only slightly greater in magnitude than the ISCS Retail Index.  But all three metrics had not necessarily been moving in lock-step year-to-date. The fact that they are now (and the fact that this was not a calendar shift or weather issue) is a positive callout for the beginning of July.  Other nuggets worth calling out on footwear…

  1. The best trending brand that’s not toning-related is…Saucony??? Yes…This is now broken out in the sample. Average growth in the 65% range for the past 3-weeks? Not too shabby.  Too bad it’s only about 5% of sales and 10%+ of PSS’ EBIT. But with core PSS retail flat and brands like Saucony, Sperry and Keds crushing it, this gap closes daily.
  2. Next most impressive brand… Private Label!?! Are you kidding me? Check out the 3-week trend. Very solid. We need to look into this. Historically, private label sneakers sell as successfully as Fugu (Poisonous Blowfish sushi-style) served by a street cart vendor. (Bad joke. The point is…neither sell).
  3. Reebok’s growth dipped below 100% for the first time this summer. Let’s face facts…it’s still stellar. But Herbert Hainer (CEO) YouTubed himself on Bloomberg saying that sales will double again next year in this category for RBK. I don’t doubt that the wholesale shipments will be there. But the margins? I wonder if he can convince the starting 5 of the Miami Heat to walk around in those suckers.  That’s about as likely as… well…who am I kidding. It ain’t happening.
  4. Under Armour still has a whole lot of nothing in the tank. But that’s to be expected. We’re seeing the magnitude of yy sales declines, but the key is that sales, units and ASP are all in line. That’s the key we’re looking for as it relates to a signal from the data on movement of product in, or clearing product out.
  5. Nike’s numbers look good. No surprise there. But Converse and Jordan continue to trend down. We don’t think that this is not a relevance issue for either, but rather a shift in distribution to retailers not included in the sample. Nonetheless, both are massive and more profitable than 80% of other stand along publicly traded footwear companies. We’re going to do more work to research this one.
  6. Did you catch Nike’s answer to the toning shoe? It’s called “Wearing toning shoes to Ben & Jerry’s is not exercise. Get up off your rump, put on these kicks, and do some squats.’ Check out the image below.

 R3: Saucony, Fugu, Nike and Ben & Jerry’s - NKEvsSKX

 

R3: Saucony, Fugu, Nike and Ben & Jerry’s - 2

 

R3: Saucony, Fugu, Nike and Ben & Jerry’s - 3

 

R3: Saucony, Fugu, Nike and Ben & Jerry’s - 4

 

R3: Saucony, Fugu, Nike and Ben & Jerry’s - 5

 

 

LEVINE’S LOW DOWN 

 

- First it was Nike’s Tiger Woods video, then the World Cup teaser, and now Old Spice. In less than two weeks, the brand’s pitchman, Old Spice Guy, has garnered 5.5 million YouTube views. Now if that doesn’t help sales, then nothing will. Talk about bringing a stodgy old brand to a new audience.

 

- Proving that Bergdorf Goodman is in a rarified league of luxury players, the 5th Avenue store has revealed its July windows. Incredibly, they were SIX years in the making. The company’s visual director has been collecting antiques for this presentation, which is called “Beauty Challenged”. We’re just guessing, but this does not sound like a cheap endeavor.

 

- A poll from ShopSmart (part of Consumer Reports) reveals that the average woman spends just $34 on a pair of jeans. Woman ages 18-34 are willing to spend $60 a pair on average, but only 1 in 10 women say they’ll spend over $100. Is premium denim finally losing some luster?

 

 

MORNING NEWS 

 

NRF Expects Average American Family Spend to Increase 10% - The National Retail Federation's 2010 Consumer Intentions and Actions Back to School survey found that the average American family will spend $606.40 on clothes, shoes, supplies and electronics, compared to $548.72 last year, and close to the $594.24 in 2008.  <sportsonesource.com>

Hedgeye Retail’s Take:  If this holds true we’re setting up for a couple of good months ahead on the same store sales front.  This forecast stands out as one of the more bullish NRF predictions, especially compared to those more discretionary forecasts the trade group has made for holidays like Mother’s Day, Valentine’s Day, and Easter. 

 

Zumiez Ends Its Short Pursuit Over West 49 - Zumiez Inc. said it was ending its takeover pursuit of West 49 Inc., leaving the path open for Billabong International Ltd. to continue its deal to buy the Canadian action-sports retailer. Last week, Zumiez approached West 49, saying it was prepared to make an offer exceeding the C$1.30 per share Billabong offered when the two companies entered a definitive agreement to merge last month. <sportsonesource.com>

Hedgeye Retail’s Take:  Looks like ZUMZ will now refocus its efforts on organic Canadian growth.  Recall its first store in Vancouver opened this year. 

 

Li & Fung Nearing Deal to Acquire Jimlar Corp. - Li & Fung Ltd. appears poised to gain a foothold in footwear. Financial sources said Wednesday that LF USA, the U.S. subsidiary of the Hong Kong-based firm, is nearing a deal to acquire footwear firm Jimlar Corp., a $450 million privately held firm that owns the Frye trademark and does business through licenses such as Coach and Calvin Klein. An agreement might not be completed until Li & Fung reports earnings next month, since it is in a “quiet period” under applicable securities law. Li & Fung has been on a buying binge, and last week disclosed three acquisitions involving an initial cash outlay of $140 million for several licensing deals, including a relationship with Sean John for men’s sportswear. <wwd.com/business-news>

Hedgeye Retail’s Take:  Li and Fung continues to raise the bar in acquiring content as a compliment to its core sourcing business.  With a potential “foot” hold in the brown shoe arena, it’s likely we see the company leverage this expertise to grow its footwear sourcing.  Clearly apparel is no longer the dominant category for which Li & Fung sources for its partners. 

 

Tommy Hilfiger's New Lifestyle Collection and Retail Concept - Tommy Hilfiger is out to woo the twentysomething customer with a new men’s and women’s lifestyle collection that has its own retail footprint. Meet Tommy, the brand’s effort to lure customers from American Apparel, Gap, Abercrombie & Fitch and American Eagle Outfitters. The line will target an audience with a median age of 25 and veer away from the preppy looks that are the mainstay of Hilfiger’s collection sold exclusively at Macy’s. Tommy aims to focus on handmade details, distinctive materials and unexpected pairings for unique looks. Tommy is “absolutely a reaction” to the ubiquity of specialty store environments,” said Gary Sheinbaum, chief executive officer of Tommy Hilfiger USA. Knits will sell for $24 to $59, and denim, $79 to $129. Outerwear will start at $129 for men and $139 for women. The Tommy Hilfiger Group will begin selling Tommy in October in three freestanding Canadian stores — two in Toronto and one in Edmonton. The collection also will be introduced that month in dedicated areas of 14 existing Tommy Hilfiger stores in Canada. <wwd.com/business-news>

Hedgeye Retail’s Take:  More Canadian retailing taking center stage as brands and retailers look north for growth. 

 

Inditex Plans Australian and South African Expansion As Well As International E-Commerce - Inditex Group, Europe’s largest clothing retailer and owner of the Zara chain, plans to expand into Australia and South Africa next year as part of a campaign to enlarge its global footprint. The group opened 98 stores in 29 countries during the first quarter, bringing the total to more than 4,700 locations in 76 countries. Zara’s Australian debut would start with a few doors in key large cities in the first year, an Inditex spokesman said. Zara will launch online sales on Sept. 2 in France, Germany, the U.K., Spain, Italy and Portugal. <wwd.com/retail-news>

Hedgeye Retail’s Take:  Finally some ecommerce in key European markets, with the U.S notably absent from the list.  In fairness, leveraging infrastructure across Europe makes a ton of sense.  On the flip side, Zara remains on a very short list of domestic retailers with just an online “lookbook” to satisfy those consumers unwilling or unable to visit a physical store. 

 

JCP Launches Aggressive BTS Campaign Driven by Social Media - J.C. Penney Co Inc. is heading back to school with an aggressive campaign largely built around digital and social media and mobile marketing. For the first time, the department store chain will use haul videos in which consumers assess product, and mobile iAds, signaling Penney’s determination to capture a bigger share of the youth market. This year, on a monthly basis, Penney’s has been lagging its prime competitors, Macy’s and Kohl’s.  <wwd.com/retail-news>

Hedgeye Retail’s Take:  Efforts to reach the youth demo should be noted, but we wonder how much of these efforts will appear “natural” to the consumer vs. contrived.  If you haven’t seen a haul video yet, check out juicystar07 on YouTube. 

 

H&M Reports Strong June Sales - After a dissapointing April comp of -6% and then a weak May where the 2 year trend fell to levels last seen in August 2009 when its stores ran out of inventory, H&M finally got it right this June.  An impressive 9% comp was enough to raise its 2 year trend to +2%.  Sales which grew 20% for the month appear to have gotten slightly weaker in the last week of the month since management commented on June sales through the 22 were up 22% on its mid year report . <www.hm.com/us/press>

Hedgeye Retail’s Take:  While it’s too early to call a turn here based on one month’s data, H&M is one of the few retailers with easy compares on the topline through the remainder of the year.   

 

R3: Saucony, Fugu, Nike and Ben & Jerry’s - H M June 2010

 

Piperlime Sponsors Next Project Runway - Piperlime.com is headed to the small screen. The e-tailer, a subsidiary of Gap Inc., announced today it will sponsor season eight of Lifetime Television’s “Project Runway,” which debuts July 29. As one of the final prizes, the season’s winner will sell an exclusive collection on Piperlime.com. Also part of the collaboration, the show’s accessories wall — which designers use to complete their weekly looks — will now feature products from the site and has been repainted in Piperlime’s signature green. On the e-commerce site, a shopable version of the wall will allow customers to buy the items they see on TV.  <wwd.com/footwear-news>

Hedgeye Retail’s Take:  Interesting to see GPS using TV for its fledgling Piperlime brand while shying away from the mass media with the core Gap.  We suspect this is in part to build the brand as Amazon/Zappos steps up as well as to take advantage of outsized ecommerce growth that is prevalent across most of retail.

 


INITIAL JOBLESS CLAIMS DROP SHARPLY - SHOULD WE GET EXCITED?

Initial claims fell 29k last week (25k net of the revision), the largest one-week improvement since February and the lowest absolute weekly number since mid-2008.  Rolling claims fell almost 12k to 455k, the largest improvement since November of 2009. While the raw data has been volatile for the last five weeks (moving up or down more than 15k each week), until this week the rolling number had moved only slightly.  This is undeniably a positive move. Initial claims are, however, still elevated at 455k (rolling), and we would have to see this rolling claims figure come down substantially into the 375-400k range before unemployment will meaningfully improve. We prefer a wait and see approach, but if the data continues to trend positively (better for two weeks in a row now) we will begin to change our tune as employment, along with housing, are the keystones of the economy.

 

INITIAL JOBLESS CLAIMS DROP SHARPLY - SHOULD WE GET EXCITED? - rolling

 

INITIAL JOBLESS CLAIMS DROP SHARPLY - SHOULD WE GET EXCITED? - raw

 

Below the jobless claims charts, we show the correlations between initial claims and each of the 30 Financial Subsectors. To reiterate, 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.  

 

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

 

INITIAL JOBLESS CLAIMS DROP SHARPLY - SHOULD WE GET EXCITED? - init. claims 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. 

 

INITIAL JOBLESS CLAIMS DROP SHARPLY - SHOULD WE GET EXCITED? - init. claims 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. 

 

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.

 

INITIAL JOBLESS CLAIMS DROP SHARPLY - SHOULD WE GET EXCITED? - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


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