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INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT

Improvement in Single Family Housing Starts Leads Improvement in Unemployment

The folks at Calculated Risk (calculatedriskblog.com) showed an interesting chart yesterday of Single Family Starts versus unemployment.  We’ve recreated this chart below.  As you can see, an improvement in single family starts typically leads an improvement in unemployment by 12-18 months.  (The 2001 recession was an exception.) Single family starts have not been improving in recent months; rather, following the expiration of the tax credit, they’ve trended sharply downward.  This suggests that we are not in for a swift improvement in unemployment from here – in fact, the downward move suggests that unemployment could increase on a reported basis (though clearly the labor force participation rate is affecting the unemployment print, as we demonstrated two weeks ago). 

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 2

 

Initial Claims Climb 

Initial claims rose 12k last week to 465k (rising 15k before the revision).  Rolling claims came in at 462.25k, a decline of 3.25k over the previous week. Reported claims climbed back toward the middle of the range of 450-470k that the series has occupied for all of 2010. While the rolling claims number was incrementally bullish, we are still looking for initial claims in the 375-400k range before unemployment meaningfully improves.

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 3

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 4

 

In the table 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.

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 1

 

Census headwinds should abate at the end of September, as this is the last month in which Census has historically been a drag. 

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 5

 

Joshua Steiner, CFA

 

Allison Kaptur

 

 


CHART OF THE DAY: Real Estate Bubbles

 

 

While the United States of America in 2010 may not “precisely” be Japan of 1997, there are plenty of similarities developing in terms of Big Bureaucratic Government resolve. If you have any recovering friends from Groupthink Inc who make it past the remedial exercise above, please send them our Chart of The Day that overlays the Japanese real estate bubble with ours. *Note the duration.

 

CHART OF THE DAY: Real Estate Bubbles - Japan U.S. Real Estate normal

 

 

 

This chart was extracted from our EARLY LOOK note, available to RISK MANAGER and INVESTOR subscribers in real-time, at 8am ET every morning.  The Early Look is unlocked at 4pm ET for non-subscribers.  To gain access the note in its entirety, please subscribe or sign-up for a free-trial.


INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT

Improvement in Single Family Housing Starts Leads Improvement in Unemployment

The folks at Calculated Risk (calculatedriskblog.com) showed an interesting chart yesterday of Single Family Starts versus unemployment.  We’ve recreated this chart below.  As you can see, an improvement in single family starts typically leads an improvement in unemployment by 12-18 months.  (The 2001 recession was an exception.) Single family starts have not been improving in recent months; rather, following the expiration of the tax credit, they’ve trended sharply downward.  This suggests that we are not in for a swift improvement in unemployment from here – in fact, the downward move suggests that unemployment could increase on a reported basis (though clearly the labor force participation rate is affecting the unemployment print, as we demonstrated two weeks ago). 

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - starts and unemployment

 

Initial Claims Climb 

Initial claims rose 12k last week to 465k (rising 15k before the revision).  Rolling claims came in at 462.25k, a decline of 3.25k over the previous week. Reported claims climbed back toward the middle of the range of 450-470k that the series has occupied for all of 2010. While the rolling claims number was incrementally bullish, we are still looking for initial claims in the 375-400k range before unemployment meaningfully improves.

 

 INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - rolling

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - raw

 

Our firm's expectations for an ongoing economic slowdown relative to the first half of the year will keep a lid on new hiring activity as management teams focus on cost control. All of this raises the risks that a prospective slowdown in GDP will precipitate an incremental slowdown in hiring/pickup in firings, which will, in turn, further pressure growth. We continue to look to claims as the best indicator for the job market, as they are real time and inflections in the series have signaled important turning points in the market in the past.

 

Yield Curve

The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. The 2-10 spread (a proxy for NIM) has been under significant pressure in the past two quarters.  Yesterday’s closing value of 212 bps is down from 224 bps last week.

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - spreads

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - spreads change

 

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

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - subsector perf

 

Census headwinds should abate at the end of September, as this is the last month in which Census has historically been a drag. 

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


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SBUX – INFLATION FORCES STARBUCK’S HAND

Costs are too much to absorb, according to CEO Howard Schultz.

 

August 31, 2010: SBUX says it has no plans to raises prices, even though it expects higher coffee costs to weaken its profits in the upcoming fiscal year.  Management said it is able to maintain its current prices because it has long-term relationships with farmers, traders and co-ops in multiple coffee-growing regions.  Importantly, it also has bought the majority of its coffee for its upcoming fiscal year.  No change in the fiscal 2011 EPS guidance of $1.36 to $1.41, which factors in an expected $0.04 hit from higher coffee prices. 

 

September 21, 2010: At a conference in LA, CEO Howard Schultz predicted a “tough” 2011, with conditions improving the following year.  At the time I thought this was a very odd comment.  What was going to make FY2011 so tough given how strong sales are?  Or have they slowed?

 

September 22, 2010: From the SBUX press release, SBUX is raising some prices “due to the recent dramatic increases in the price of green arabica coffee, currently close to a 13-year high, as well as significant volatility in the price of other key raw ingredients, including dairy, sugar and cocoa.”

 

So what had changed between late August and now?

  • Coffee is up 1.8%
  • Milk is up 3.8%
  • Sugar is up 23.1%
  • Cocoa is up 2.4%

SBUX – INFLATION FORCES STARBUCK’S HAND - sbux eps table

 

While we think same-store sales have slowed in 4Q10 on a one-year basis, the company reiterated its comfort level with current guidance, as management affirmed its forecast for the current fiscal year.

 

SBUX – INFLATION FORCES STARBUCK’S HAND - coffee and milk

 

Going into 2011, expectations will remain high as the company’s FY11 same-store sales guidance of low-to-mid single digit growth assumes a fairly steady improvement in two-year trends.  For reference, +1% same-store sales growth in the U.S. in FY11 would imply a 350bp improvement in two-year average trends from FY10 (assuming 6.5% growth for FY10).  I think same-store sales and margin growth will continue to materialize in FY11 but the rate of growth will slow and the company’s ability to continue to surprise to the upside from both top-line and bottom-line perspectives will likely diminish. 

 

Howard Penney

Managing Director


QE Mees

“Lacking much experience with this option, we do not have very precise knowledge of the quantitative effect of changes in our holdings.”

–Ben Bernanke

 

While it’s entertaining, it’s also quite frightening to watch the same failed policy makers and the pundits that pander to them fundamentally believe that they understand exactly how this “QE” experiment is going to play out. Fortunately, Ben Bernanke is not one of those people.

 

Now that they’ve been liberated from Larry Summers assuring them that he knows exactly what he is doing, here’s a simple risk management exercise for Groupthink Inc in Washington today. Consider this part of your post Summers rehab – baby steps guys:

  1. Re-read the aforementioned quote
  2. Then count how many times you hear the media say QE today
  3. Then re-read that quote again before you go to bed tonight

Now we don’t purport to have “precise knowledge of the quantitative easing effects” on the US economy either. Einstein himself said that “if we knew what we were doing, it wouldn’t be called research, would it?” That said, our fundamental macro research does point us toward Japan’s experiment with QE as being an unsuccessful one.

 

While the United States of America in 2010 may not “precisely” be Japan of 1997, there are plenty of similarities developing in terms of Big Bureaucratic Government resolve. If you have any recovering friends from Groupthink Inc who make it past the remedial exercise above, please send them our Chart of The Day (see below) that overlays the Japanese real estate bubble with ours. *Note the duration.

 

For really advanced stage rehabilitation from the Academic Dogma that’s been driving Ben Bernanke and Larry Summers policy making decisions, you can overlay Japanese Government Bonds Yields (JGBees) with US Treasury Yields (QE Mees). While we don’t have “precise” measurements on how low the rate-of-return on America’s aging population’s hard earning savings accounts can go, we do see ZERO percent as a credible gravitational force.

 

We’ll be expanding our Japanese research effort in Q4, but if you’d like a taste of the contrarian Hedgeye cool-aid, please send an email to and we’ll get you a solid report from our Hedgeye Jedi, Darius Dale, who punched out a not yesterday titled, “Japanese Pensions: Risks to the Global Economy.”

 

Post-rehab students of objective macro-economic research have learned that the Japanese demographic curve started to age before America’s baby boomers did. Importantly, this doesn’t mean America can’t age in due course. Advanced research studies on campus here in New Haven have revealed that time, as a risk management factor, is actually quite hard to reverse.

 

All the while (alongside time), there’s this other little research critter we monitor here at Hedgeye called price. Again, this is getting into the really advanced stuff folks, so try to “dumb this down” if you attempt to explain this to anyone in Congress, but TIME and PRICE are significant factors in a modern day risk manager’s search for more “precise” knowledge about future probabilities.

 

Now let’s go to the future state - if we really want to dial up Washington’s fully loaded rehab research engine we gotta go where Heli-Ben has never gone before. As Buzz Lightyear would say, “to infinity and beyond” – the cosmic galaxy of the hedgie universe – REAL-TIME PRICES!

 

I know, I know… this is deep. But let’s suspend disbelief for a moment and take a gander into the cosmos of Hedgeye REAL-TIME PRICE research and look at what we see:

 

1.  Currencies: The US Dollar is down for the 14th week out of the last 17, breaking to lower-lows that we havn’t seen since mid-April when chaos theorists in New Haven said something about May Showers. Sounds serious, because when you Burn The Buck at the stake, it starts to become a very bad thing - importing crazy critters that Bernanke has never seen (like inflation, shhh…).

 

2.  Bond Yields: US Treasury yields are getting pulverized again this morning on the short end of the curve, with 2-year yields in America hitting their lowest levels ever. Ever, of course, is a long time… and while we can’t tell you “precisely” how poorly this ends for a lot of people in this country, we can assure you this ended poorly in Japan.

 

3.  Equities: US stocks have backed off of the line I said I was going to walk this week (1144 in the SP500), leaving our intermediate term TREND line of resistance intact. Whether or not the perma-bulls want to admit that lower-highs in everything US equities since 2007’s leverage-cycle-peak matter or not is something that Nikkei bulls in Japan have been powdered by since Gordon Gekko’s last 1980’s dance.

 

QE ain’t for me.

 

My immediate term TRADE lines of support and resistance for the SP500 are now 1127 and 1146, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

QE Mees - Japan U.S. Real Estate


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - September 23, 2010

As we look at today’s set up for the S&P 500, the range is 19 points or -0.64% downside to 1127 and 1.03% upside to 1146. Equity futures are trading lower tracking a sell off among European indices. Concerns resurface over the state of the European economies. Banking stocks lead the sell off as Bank of America Merrill Lynch lowers its estimates for US investment banks. Also caution prevails ahead of the jobless claims. Other macro highlights include August Existing Home Sales.

  • Bed Bath & Beyond (BBBY) raised FY 2011 EPS growth forecast to 20% from 15%
  • BioMed Realty Trust (BMR) is offering 13.5m shares to fund acquisitions and repay debt
  • DineEquity (DIN) reported domestic comp sales up 2.7% 3Q through Sept. 19
  • Edwards Lifesciences (EW): Sapien valve prevented more deaths than standard treatment, according to study
  • Red Hat (RHT) reported 2Q rev. $219.8m vs estimate $211.5m
  • Steelcase (SCS) forecast 3Q rev. $625m-$650m vs estimate $627.7m
  • Tessco Technologies (TESS): Discovery Group offered to buy remaining shares outstanding at 31% premium to September 21st close
  • Vertex Pharmaceuticals (VRTX) plans to sell $375m senior convertible notes

PERFORMANCE

  • One day performance: Dow (0.20%), S&P (0.48%), Nasdaq (0.63%), Russell 2000 (1.20%)
  • Month-to-date: Dow +7.24%, S&P +8.10%, Nasdaq +10.43%, Russell +9.08%
  • Quarter-to-date: Dow +9.88%, S&P +10.05%, Nasdaq +10.68%, Russell +7.75%
  • Year-to-date: Dow +2.98%, S&P +1.72%, Nasdaq +2.88%, Russell +5.03%

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -764 (+75)
  • VOLUME: NYSE - 954.65 (-8.91%)  
  • SECTOR PERFORMANCE: 4 sectors up and 5 down.  While another meaningful pullback in the dollar offered some semblance of support for the XLB, it failed to underpin the broader risk trade amid heightened concerns about the potential global economic backlash surrounding a competitive currency devaluation push.
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Carmax +8.46%, Sears +5.31% and Alcoa +4.74%/Adobe -19.23%, New York Times -6.52% and Gannett -6.15%
  • VIX: - 22.51 +0.72%  YTD PERFORMANCE: (+3.83%)          
  • SPX PUT/CALL RATIO:- 2.14 from 2.01 +6.33%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 14.03 0.304 (2.218%)
  •  3-MONTH T-BILL YIELD: 0.16% -0.01%
  • YIELD CURVE: 2.12 from 2.18

COMMODITY/GROWTH EXPECTATION:

  • CRB: 278.89 +0.19%
  • Oil: 74.71 -0.35% - oil continues to flash bearish intermediate term TREND in our model w/ TREND line resist = $76.29; bodes bearish for US economic growth.
  • COPPER: 356.50 +2.41%  
  • GOLD: 1,289 +1.23%

CURRENCIES:

  • EURO: 1.3366 +1.81%
  • DOLLAR: 79.83 -0.76% - US Dollar getting annihilated; breaking to lower-lows like it did in April and August when Dollar Down = bad (as opposed to reflation)

OVERSEAS MARKETS:

Europe

  • UK may be close to introducing additional quantitative easing measures.
  • Disappointing PMIs from across the Eurozone exacerbated the declines.
  • Financial, mining and construction sectors bore the brunt of the limited selling pressure although turnover remains light
  • The Irish Examiner reports, Finance Minister Brian Lenihan, has given the strongest indication yet that the riskiest lenders to Anglo Irish Bank will soon be told they will not get all their money back.
  • Astrazeneca announced positive phase II results for Fostamatinib (Rheumatoid arthritis), sees phase III beginning soon
  • French Economy Minister said that a capital surcharge was not a "panacea" for addressing the risk of systemically important banks, and she favored resolution mechanisms and tighter regulation.
  • Eurozone Sep Advanced Services PMI 53.6 vs cons 55.5, Manufacturing PMI 53.60 vs cons 54.50
  • Germany Sep Preliminary Services PMI 54.6 vs cons 57.0, Manufacturing PMI 55.3 vs cons 57.6
  • France Sep Preliminary Manufacturing PMI 55.4 vs cons 55; Services PMI 58.8 vs cons 60.0

 

Asia

  • In quiet trading with the major bourses across the region closed, Asian markets did not move much today.
  • Australia finished barely higher as the effect of stronger miners marginally outweighed the effect of weaker banks.
  • Taiwan finished flat.
  • South Korea was closed for Chusok.
  • China is closed through 24-Sep for Mid-Autumn Festival.
  • Hong Kong was closed for the day after the Mid-Autumn Festival and will re-open tomorrow.
  • Japan was closed for the Autumnal Equinox.
  • The yen is trading at 84.46 to the US dollar. 
 
Howard Penney
Managing Director
 

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER


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