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Initial Claims Rise 23k, Offsetting Last Week's 21k Improvement

The headline initial claims number rose 20k last week to 457k (23k net of revisions). Rolling claims came in at 456k, an increase of 2k over the previous week. This wiped out last week’s improvement, and claims still remain in the same band they’ve occupied for the year. We're still a solid 50-75k above where we would need to be in order to see unemployment fall.


QE2 Not Showing Any Signs of Taking Down Claims So Far

Interestingly, in the last round of Quantitative Easing (QE1), we saw almost all of the decline in mortgage rates occur between the time when the program was announced in late 2008 and when the buying commenced in early 2009. We think this time is similar in that mortgage rates have already come in substantially, to all time lows. What's interesting to observe is that mortgage rates have been exceedingly low now for a few months, but we've seen no real improvement in jobless claims. Maybe this is too short a window against which to measure success, but it is interesting to note that so far there appears to have been no transmission of QE2 into lower claims. We would not expect to see long rates drop much further from here, consistent with QE1.






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 recently stabilized with the backup in the 10-year treasury. Yesterday’s closing value of 224 bps is down from 231 bps last week.






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




Our Macro Team's Howard Penney and Rory Green published the following chart yesterday showing that the AAII Bulls-Bears survey has not been more bullish since February of 2007, suggesting downside risk has grown considerably. For reference, peak bearishness occurred on March 5th, 2009, a day before the market bottom.  





Joshua Steiner, CFA


Allison Kaptur


TODAY’S S&P 500 SET-UP - November 4, 2010

As we look at today’s set up for the S&P 500, the range is 15 points or -1.00% downside to 1186 and 0.25% upside to 1201.  Equity futures continue to hold above fair value as the positive reaction to yesterday's announcement by the Fed to purchase $600B of longer-term Treasuries over the next eight months encourages risk appetite.


Today's highlight sees weekly jobless numbers and Q3 Nonfarm Productivity….

  • Chesapeake Energy (CHK): 3Q EPS beat est, raised 2012 production outlook
  • Dendreon (DNDN) forecast 2010 rev. below est. 
  • MercadoLibre (MELI) 3Q rev. missed est.
  • Monolithic Power Systems (MPWR) forecast 4Q rev. below est.
  • News Corp. (NWSA) 1Q EPS ex. tax benefit beat est., maintained 2011 forecast
  • Prudential Financial (PRU) 3Q rev., EPS beat ests.
  • Qualcomm (QCOM) forecast 1Q, 2011 EPS, rev. above ests.
  • Whole Foods Market (WFMI) raised FY2011 profit outlook
  • True Religion Apparel (TRLG) cut its 2010 EPS forecast
  • ValueClick (VCLK) forecast 4Q adj. EPS, rev. above ests.
  • Zumiez (ZUMZ) 3Q EPS, Oct. comps beat ests.


  • One day: Dow +0.24%, S&P +0.37%, Nasdaq +0.27%, Russell 2000 +0.32%
  • Month-to-date:  Dow +0.87%, S&P +1.24%, Nasdaq +1.31%, Russell +1.68%.
  • Quarter-to-date: Dow +3.96%, S&P +4.95%, Nasdaq +7.25%, Russell +5.77%.
  • Year-to-date: Dow +7.55%, S&P +7.43%, Nasdaq +11.95%, Russell +14.35%
  • Sector Performance: Financials +0.99%, Consumer Disc +0.51%, Tech +0.57%, Consumer Spls +0.31%, Energy +0.21%. Industrials +0.15, Healthcare +0.06%, Materials (0.28%), Utilities (0.19%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Hartford Financial +9.18%, Marshall & Ilsley 5.50% and Ford +4.92%/Quanta -9.98%, EOG Resources -9.31% and Pulte -7.68%.


  • ADVANCE/DECLINE LINE: 453 (-988)  
  • VOLUME: NYSE: 1103.41 (+21.61%)
  • VIX: 19.56, -9.32% - YTD PERFORMANCE: (-9.78%)
  • SPX PUT/CALL RATIO: 1.97 from 1.21 +63.216%  


  • TED SPREAD: 17.24, +0.406 (2.412%)
  • 3-MONTH T-BILL YIELD: 0.13%    
  • YIELD CURVE: 2.33 from 2.29


  • CRB: 305.07 +0.09% - up 8 of the last 9 days
  • Oil: 84.69 +0.94% - BULLISH  - up 7 of the last 9 days
  • COPPER: 378.50 -1.41% - BULLISH  
  • GOLD: 1,337.15 -1.43% - BULLISH


  • EURO: 1.4040 +0.03% - BULLISH
  • DOLLAR: 76.481 -0.31%



European markets:

  • European markets saw solid gains from the open buoyed by the US Federal Reserve's decision for an additional $600B of QE and constructive corporate results from European heavy-weight companies.
  • A generally weaker US dollar post the Fed's decision saw commodities higher, with mining shares amongst the leading gainers.
  • All sectors tradomg higher with banks and food & beverage amongst the leading gainers.
  • Market participants await the BOE interest rate decision at 8ET with benchmark interest rate expected to be left unchanged at 0.5%, the focus on any additional QE and ECB is expected to leave interest rates unchanged at 1% at 8:45ET.
  • UK Oct Halifax house price index +1.8% m/m vs con +0.6%
  • France Oct final Services PMI 54.8 vs con 55.3
  • Germany Oct final Services PMI 56.0 vs con 56.6
  • EuroZone Oct final Services PMI at 5ET
  • EuroZone Sep PPI due at 6ET

Asian markets:


  • Asian markets rose today, reacting positively to the Federal Reserve’s quantitative easing announced yesterday.
  • Every sector except pulp and paper rose in Japan, with winning stocks outnumbering losers more than 4-to-1.
  • Property developers lifted Hong Kong on bets that interest rates will remain low for some time to come.
  • Li & Fung rose 2% on announcing it will become a sourcing agent for Li Ning.
  • BHP Billiton led Australia up after Canada blocked its bid for Potash.
  • Energy stocks rose as people assumed they might become targets for cash-rich BHP.
  • Tech players supported South Korea. 

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends














The Macau Metro Monitor, November 4th, 2010


Secretary Tam said that the Human Resources Office is still processing the application for Sites 5 & 6.  He said it is hard to estimate when a result will be ready as the office is also dealing with “a lot of applications [from other enterprises]” at the same time.  Regarding the number of non-local workers, Tam said, “The number isn’t important... but should be around a few thousands... the most important is how many of them will be approved." On the Jacobs lawsuit, Tam stressed that “any person who wants to use improper means to achieve the goal of getting more gaming tables or imported workers must not be able to succeed”.

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Bernanke's Brush Fires

"It does not require a majority to prevail, but rather an irate, tireless minority keen to set brush fires in people's minds."
-Samuel Adams


While I don’t expect any professional politician in Washington or the manic media that gets paid advertising dollars for stock market cheerleading to call this out for what it is until this stock market is a lot lower, I will. The US Federal Reserve is officially and unequivocally politicized.


Yes, Ben Bernanke himself has admitted that Quantitative Guessing (QG) is “unconventional.” But now he is so politicized that he is compelled to write an Op-Ed for the Washington Post on “What The Fed Did And Why: Supporting The Recovery And Sustaining Price Stability.” The Chinese, Hedgeye, and anyone with real-time market quotes, are sitting here staring at their screens this morning with shock and awe.


The US Dollar is making new lows this morning (down -15% since June!). The modern day Roman Empire’s credibility is burning at the global stake.


Notwithstanding unprecedented timing of the Op-ed (on the day of the Fed’s decision – do you think anyone leaked its contents?), or the fact that the words “US DOLLAR” were not mentioned ONCE in his allegedly objective and politically unbiased analysis, allow me to break down Bernanke’s view for you versus reality:


1.  STORYTELLING PREFACE: “Two years have passed since the worst financial crisis since the 1930s…”


KM: That’s always the 1st sentence of the fear-mongering message campaign that will lead you to believe no one notices Wall Street’s 2010 bonus pool.


2.  OUTCOME: “These steps helped end the economic free fall and set the stage for a resumption of economic growth in mid-2009…”


KM: Of course, the professional politicians saved us from the crisis they helped create and now we should pay homage to the banks, never earning a rate of return on our hard earned savings again. Fiscal sobriety and conservatism be damned. Get out there and chase some yield folks.


3.  MANDATE: “Notwithstanding the progress that has been made…” (we saved you)… “the Federal Reserve’s objectives – its dual mandate, set by Congress – are to promote a high level of employment and low, stable inflation…”


KM: Right, you saved us from the evil-doers and completely screwed up the employment picture by fear-mongering employers to stop hiring. Ok. And now we’re seeing the credibility of the US Dollar collapse and, as a result, global commodity prices hit new YTD highs, DAILY. The CRB Commodities index is up +16.4% since Bernanke’s decision to Burn the Buck on August 27th in Jackson Hole.


4.  INFLATION: “Although inflation is generally good, inflation that is too low… can morph into deflation…”


KM: Right, right. China, India, and Australia have raised interest rates in the last few weeks specifically because they (like anyone with real-time quotes) see the inflation implied in expectations. The US Treasury Inflation Protection (TIP) auction yielded -0.55% (lowest EVER) in October (implying outright fear of inflation), but Bernanke keeps Burning the Brush Fire of Fear-Mongering about a great depression that no one in finance has remotely experienced.


5.  ECONOMIC STAGNATION: “falling prices and wages, which can contributed to long periods of economic stagnation.”


KM: How about JOBLESS STAGFLATION (sorry PIMCO, we called it first) = US Government sponsored fear-mongering towards employers + inflation. In the 1970s, Jimmy Carter and the Fed’s panderer, Arthur Burns, didn’t get it. This time around, I don’t expect Obama and Bernanke to either. It’s Keynesian theory versus real-time market realities. The problem here isn’t US Consumer reaction to government policy. It’s government policy itself.


6.  QE2: “so far looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action… lower mortgages will make housing more affordable … and higher stock prices will boost consumer wealth …”


KM: This is the central narrative fallacy of the Bernanke Brush Fire that really lights up the anxieties of anyone observing growth and inflation data on a globally interconnected basis. Re-read what he’s implying here and your jaw should drop:


A)     US Dollar Debauchery – Let’s ignore that chart.

B)     Inflation – I’m willfully blind to that chart too and/or whatever any other major country is currently saying on the matter.

C)     Stock Market – I fundamentally believe that manipulating its price via investor expectation is what drives this economy.

D)     Mortgages – I’m not going to mention that 30-year yields have gone straight UP +65% (from 3.55% to 4.09%) since I moved to QE2 in August.


7.  CONFIDENCE: “we are confident that we have the tools to unwind these policies at the appropriate time…”


KM: What a joke. While virtually every central banker in the world (ex the Fiat Fools in Japan and the EU) have hiked interest rates multiple times since the mid-2009 recovery that Bernanke pats himself on the back for, I can assure you that if he couldn’t raise rates with 6% US GDP growth, he’ll likely never be able to “unwind these policies” at any time. Sadly, the global markets may very well do that for him. And that will be it for this QG experiment going bad.


Don’t take my word for it on all of this. I’m just a man who is selling everything and going to cash. Get some real quotes and study the history of countries who attempted to debauch the currency of their citizenry. Then read some Asian newspapers - or something other than the Washington Post.


Overnight, China’s central bank adviser, Xia Bin, said the Fed’s Quantitative Guessing “amounts to uncontrolled money printing.” Even Japan’s bureaucrat PM, Naoto Kan, said this was “the US pursuing weak-dollar policy.” At least those Op-Eds were short and to the point. They also sound just about right.


My immediate term support and resistance levels for the SP500 are now 1186 and 1201, respectively. My SP500 short position (SPY) is -0.96% against me in the Hedgeye Portfolio, and I intend on shorting the market again today on strength. Being early on the short side here is also called being wrong. I get that. I was early in October/November of 2007 too. Remember, market tops are processes, not points.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bernanke's Brush Fires - bern


Conclusion: CMG’s move into the Asian food segment is interesting but certainly not a guarantee of accretion to shareholder value.  Many good operators have lost focus in the past by “diversifying” and ultimately ended up failing.  PF Chang’s is unlikely to take the challenge lying down!


If I were to guess, I would say that the street will be overwhelmingly bullish about the prospects of CMG repeating the Chipotle business model with an Asian flair.  I hate to be so cynical all the time but I’m blaming that on being a restaurant analyst for so many years.  I know they said it will only be one restaurant in 2011, but there is so much more behind the move into Asian segment.  Just ask any management tried to take share in a new category; there are plenty of them.


The key reasons usually are:

  1. More capital than they know what to do with
  2. Need another growth vehicle
  3. Both reasons lead to management being distracted and lower returns for shareholders - never a good combination.

Then there is the list of failed attempts at multi-branded restaurant companies:

  1. McDonald’s - Fazoli’s and Donato’s (of course they were early on the Chipotle band wagon)
  2. YUM - I forget the name of the company but it was part of the dual-branding strategy
  3. Wendy’s - You can’t forget the Baja Fresh debacle and now, once again, with Arby’s!
  4. JACK tried to get into casual dining
  5. Carl’s Jr and Hardees’s
  6. Darden with China Coast, Smokey Bones and Bahama Breeze
  7. Brinker with Macaroni Grill and On The Border
  8. Outback steakhouse and too many brands to name
  9. Cheesecake tried to expand with Grand Lux
  10. PF Chang’s has been struggling with Pei Wei for years
  11. Cracker Barrel changed the name of the company to CBRL group in a failed attempt to diversify
  12. O’Charley’s buying 99 Restaurant group
  13. Applebee’s tried get into Mexican food


I don’t know Steve Ells personally and he has certainly put together an enviable restaurant business with Chipotle.  The chances of his potential Asian restaurant concept that follows the Chipotle model being successful are slim, in my view.  Mr. Ells is a restaurant entrepreneur and that will never change.  The Chipotle concept is bigger than he is now, which is why he is probably bored and looking to conquer another segment of the restaurant industry with his “food with integrity” mantra.


If he does goes after the Asian segment with the same flair by insulting the quality of other Asian concepts, who will stand up to the challenge?  Will the senior management team at PFCB let him get away with the rhetoric?  The implication that Ells’ restaurant’s food is better than the competition will be more difficult to make in this category than it was with Chipotle.  PF Changs, with Pei Wei and the PF Chang’s frozen food options in particular, are not likely to sit back and allow their market share to be eroded without a fight.


Howard Penney

Managing Director

Footwear & Apparel Sales Meet November Comp Tailwinds

Solid week for both footwear and apparel sales. Nike continues to crush it while regional performance out West is starting to outperform. In looking forward to November, comps are extremely favorable across the athletic industry. It’s important to note, however, that at the same time apparel comps get increasingly more favorable over the next 4-weeks, footwear comps are getting less so on the margin. Below are this week’s key callouts:


Sports Apparel:

  • After facing the toughest comps of the next 12-months, driven by UA’s launch of fitted product and an unseasonably cold October (-2%-3% below average), Sports Apparel sales now faces its most favorable through the first week of December.
  • Sport Retailers continue to outperform both Family Retailers and Mass/Discount channels with underlying trends up mid-to-high single digits – good for DKS, HIBB, FL, FINL, etc.
  • As we look towards November, temps were 3%-4% higher than average throughout the month last year. Based on our limited sample here in New England, we can attest to a rapid turn in temps with the season’s first frost coming on the 1st of the month.
  • We may be starting to see a modest pickup in discounting in the Athletic Specialty channel – though still early make a bigger callout. The ~1% decline in ASP is consistent with pricing throughout October, however, the increase in weekly unit sales suggests promotional activity may be underway particularly with prices firming in other channels.
  • Sales improved across all regions with relative outperformance in the Pacific region over the last 2-weeks a key callout. This comes on the heels of positive commentary out of BGFV on traffic and comp trends throughout Q3 and in the first weeks of Q4.


Athletic Footwear:

  • With comps starting to get progressively less favorable, new product will be the key to sustaining positive momentum.
  • Over the last two weeks, Nike (Air Max LeBron 8), Under Armour (Micro G Inception) and Adidas (TS Beast & adiZero) have blitzed the market with key launches. Given that basketball accounts for ~25% of the athletic footwear sales, we expect sales to reflect the acceleration of new product into the channel.
  • Not only is Nike continuing to post robust sales at both Nike Brand and Brand Jordan, but Converse is also starting to improve on the margin over the past month as well.

Footwear & Apparel Sales Meet November Comp Tailwinds - FW APP New 1Yr 11 3 10


Footwear & Apparel Sales Meet November Comp Tailwinds - FW APP New 2Yr 11 3 10


Footwear & Apparel Sales Meet November Comp Tailwinds - Temp Nov09 11 3 10


Footwear & Apparel Sales Meet November Comp Tailwinds - Fw App APP Table 11 3 10


Footwear & Apparel Sales Meet November Comp Tailwinds - FW App FW Table 1 11 3 10


Casey Flavin


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%