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INITIAL CLAIMS DROP 15K WITH ROLLING CLAIMS HITTING NEW YTD LOWS

Initial Claims Fall 15k ... Consistent with late-2009 trends

The headline initial claims number fell 15k (17k after the revision) last week to 421k.  Rolling claims fell to 427.5k, 4k lower than the previous week and a new YTD low, but the reported series moved off of the lows significantly. We continue to remind investors that the unemployment rate won't improve until we see claims move into the 375-400k range - this is based on our analysis of past cycles. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.5%, it's 11.5%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.5% actual rate as opposed to the 9.5% reported rate. Regardless, today's data is positive.

 

 

INITIAL CLAIMS DROP 15K WITH ROLLING CLAIMS HITTING NEW YTD LOWS - rolling

 

 

INITIAL CLAIMS DROP 15K WITH ROLLING CLAIMS HITTING NEW YTD LOWS - raw

 

 

Another Positive for Financials .... the Yield Curve Steepens

We track the 2-10 spread as a proxy for industry NIM. The 2-10 spread has expanded sharply in the last few weeks, expanding 19 bps in the last week alone. Yesterday’s closing value of 262 bps is up from 243 bps last week. More to the point, the sequential change from 3Q10 to 4Q10 is now up 11 bps to 2.25% from 2.14%.

 

INITIAL CLAIMS DROP 15K WITH ROLLING CLAIMS HITTING NEW YTD LOWS - 2 10 spread time series

 

INITIAL CLAIMS DROP 15K WITH ROLLING CLAIMS HITTING NEW YTD LOWS - 2 10

 

INITIAL CLAIMS DROP 15K WITH ROLLING CLAIMS HITTING NEW YTD LOWS - 2 10 QoQ

 

 

Financial Subsector Performance

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

 

INITIAL CLAIMS DROP 15K WITH ROLLING CLAIMS HITTING NEW YTD LOWS - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


Community Health Systems Makes Hostile $7.3B Bid For Tenet


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - December 8, 2010

 

As we look at today’s set up for the S&P 500, the range is 36 points or -1.57% downside to 1206 and 1.36% upside to 1245.  Equity futures continue to hold above fair value but weekly jobless numbers out before the open may determine whether recent strength can be maintained amid deteriorating volumes. Rising bond yields are offering support to financials while the asset class as a whole continues to benefit from a hoped boost to consumption emanating from the extension to tax cuts

  • Diamond Foods (DMND) boosted 2011 sales, EPS forecasts
  • Linn Energy LLC (LINE) plans 10m-unit offering
  • Martek Biosciences (MATK) 1Q EPS forecast below est.
  • SAIC (SAI) FY2012 EPS, rev. forecasts below est.
  • Stryker (SYK) raises qtr div. 20% to 18c from 15c
  • Verint Systems (VRNT) boosted lower end of yr rev. forecast

PERFORMANCE

  • One day: Dow +0.12%, S&P +0.37%, Nasdaq +0.41%, Russell 2000 (0.05%)
  • Month-to-date: Dow +3.33%, S&P +4.04%, Nasdaq +4.44%, Russell +5.09%;
  • Quarter-to-date: Dow +5.42%, S&P +7.63%, Nasdaq +10.16%, Russell +13.00%;
  • Year-to-date: Dow +9.06%, S&P +10.15%, Nasdaq +14.98%, Russell +22.17%
  • Sector Performance: Financials +1.8%, Tech +0.9%, Consumer Spls +0.3%, Healthcare +0.1%, Telecom 0.00%, Consumer Disc (0.1%), Industrials (0.3%), Energy (0.3%), Utilities (0.5%), Materials (0.9%)

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -685 (-701)  
  • VOLUME: NYSE 1092.73 (-32.65%)
  • VIX:  17.74 --1.39% YTD PERFORMANCE: -18.17%
  • SPX PUT/CALL RATIO: 2.05 from 1.29 +59.33%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 16.73 0.000 (0.001%)
  • 3-MONTH T-BILL YIELD: 0.15% +0.01%  
  • YIELD CURVE: 2.63 from 2.61

COMMODITY/GROWTH EXPECTATION:

  • CRB: 316.87 +0.40%
  • Oil: 88.28 -0.46%
  • COPPER: 410.05 +1.26%
  • GOLD: 1,381.94 -1.90%

CURRENCIES:

  • EURO: 1.3227 -0.56%
  • DOLLAR: 79.997 +0.18%

 

OVERSEAS MARKETS:

 

EUROPEAN MARKETS:

  • European markets opened higher before paring or reversing gains as comments by the ECB over rising unemployment weighed. Corporate results met with a mixed response whilst UK economic news disappointed.
  • BOE leave its 0.5% benchmark interest rate and QE measures unchanged.
  • France Q3 non-farm payroll +0.2% q/q and prior +0.3%
  • Germany Nov Final CPI +1.5% y/y vs prelim +1.5%
  • UK Nov Halifax house price index (0.1%) m/m vs con (0.5%), posted first annual fall in a year
  • UK Oct trade deficit unexpectedly widened to (£8.53B)
  • The pound and the euro are trading at $1.5768 and $1.3211 respectively euro pressured by ECB monthly report saying rising unemployment was concerning, requires effective policy response in order to avoid a persistent increase in structural unemployment and market talk of fund liquidating a long position in illiquid trading conditions.

ASIAN MARKTES:

  • Nikkei +0.5%; Hang Seng 0.3%; Shanghai Composite (1.32%)
  • Most Asian markets followed Wall Street up today.
  • South Korea posted a solid gain; the Bank of Korea’s decision to maintain interest rates did not affect the market.
  • Australia rose on a strong jobs report. Banking and resource stocks gained, but retailers declined in sympathy with The Reject Shop, which plunged 21% after lowering FY guidance.
  • In Taiwan, Quanta Computer rose 4% on a report it got a contract to assemble the iPad 2.
  • On expectations they will benefit from higher long-term interest rates, financials led Japan to a small gain.
  • In Hong Kong, China Unicom gained 3% when it cut rates for its entry-level 3G plan.
  • Japan Q3 GDP growth revised to +4.5% y/y from preliminary +3.9% y/y.
  • Australia November unemployment 5.2%, matching expectations. November jobs added 54,600 vs consensus 19K.

Howard Penney

Managing Director

 

THE DAILY OUTLOOK - levels and trends 129

 

THE DAILY OUTLOOK - s p 129

 

THE DAILY OUTLOOK - vix 129

 

THE DAILY OUTLOOK - usd 129

 

THE DAILY OUTLOOK - oil 129

 

THE DAILY OUTLOOK - gold 129

 

THE DAILY OUTLOOK - copper 129


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Mandelbrot Math

“He doesn’t spend months or years proving what he has observed.”

-Professor Heinz-Otto Peitgen, on Benoit Mandelbrot

 

Benoit Mandelbrot was one of the most important contributors to my multi-factor, multi-duration, global macro risk management model. After publishing “The Fractal Geometry of Nature” in 1982, Mandelbrot eventually landed in New Haven as a professor in Yale’s math department. He finally earned his tenure as I was leaving campus for Wall Street in the late 90’s. Over time, he’s been recognized as one of the forefathers of fractal math.

 

On October 14th of this year, Professor Mandelbrot passed away in Cambridge, MA.  He was 85 years old. A few days later, one of our analysts, Matt Hedrick, sent me a nice tribute that Jascha Hoffman wrote for Mandelbrot in The New York Times. That’s where the aforementioned quote came from and it was followed by this one (which is taped on the insert of my notebook):

 

“But if we talk about impact inside mathematics, and applications in the sciences, he is one of the most important figures of the last 50 years.”

-Professor Heinz-Otto Peitgen (“Benoit Mandelbrot, Novel Mathematician, Dies at 85”, by Jascha Hoffman, NYT, October 16, 2010)

 

Amen Professor Peitgen. And thank you Jascha Hoffman. Benoit Mandelbrot was no one’s yes man. He wasn’t academically dogmatic either. He kept learning and re-thinking. As a result, I think the principles of Mandelbrot Math will be applied by global macro risk managers for decades to come.

 

I call this out this morning as I just got back from an investor trip that took me to Western Canada. The contours of the Rocky Mountain tops would most certainly fascinate Mandelbrot inasmuch as they would the fractal dimension of the Pacific Ocean’s coastline. Anyone flying across this world attempting to consider its deep simplicity from a top down perspective probably gets what I mean. It’s what make this game fun.

 

When you wake-up every morning trying to make a global macro market “call”, you need a place to start from. In order to attempt to know where you are going with that “call”, you most certainly need to know where you’ve been. By the time that market’s bell rings, you don’t have “month or years to prove what you have observed.” You have minutes. This is the game.

 

This morning’s global macro game is confusing. The US stock and bond markets are sending completely different messages as Asian stocks and bonds continue to break down.  All the while European sovereign risk premiums continue to fluctuate like twitter.

 

Let’s look at US markets first:

  1. The SP500 had its 1st up day in the last 3, making a bullish comeback from an outside reversal on the day prior, hitting a new YTD high at 1228.
  2. The SP500 is now up +81.7% from its March 2009 lows and down -21.5% versus its October 2007 highs.
  3. The immediate-term TRADE range for the SP500 moves to 1, with the daily downside risk being about equal with upside reward.
  4. Volatility (VIX) at 17.74 is testing a breakdown towards its April lows; while this is a bearish contrarian signal, the VIX could easily test 16.
  5. US stock market Volume and Breadth studies continue to flash bearish, despite higher prices, there is a very negative skew.
  6. In our SP500 Sector Studies, 2/9 sectors are bearish (XLV, and XLU) and 7/9 bullish from an immediate-term TRADE perspective.
  7. The US Dollar Index continues to flash bullish on both our TRADE and TREND durations, with intermediate term TREND support at $79.49.
  8. US Treasury Yields continue to boom to the upside with 2s, 10s, and 30s all busting out into what we call Bullish Formations.
  9. The Yield Spread (10s minus 2s) continues to widen at +10bps for the week-to-date, supporting the rally in Financials (XLF).

Overseas, the immediate-term game is much less confusing:

  1. Chinese equities were down another -1.3% overnight and remain bearish from an immediate-term TRADE perspective at -14.3% YTD.
  2. Indian equities got tagged for another -2.3% drop overnight as the BSE Sensex broke its intermediate term TREND line of 19,655.
  3. Japanese equities are the only bullish immediate-term TRADE market in Asia as the POSITIVE correlation to the USD reigns supreme.
  4. Australia’s central banking guru, Glenn Stevens, continues to prove that raising rates and seeing unemployment drop can work together.
  5. Germany, Russia, and the Netherlands continue to flash bullish TRADE and TREND signals in both stocks and bonds.
  6. Spain, Italy, and Greece continue to flash bearish TRADE and TREND in both stocks and bonds.
  7. Brazil looks like India, as stocks on the Bovespa are down every day this week and now bearish on both TRADE and TREND durations.
  8. The Euro continues to flash bearish on both our TRADE and TREND durations with intermediate-term TREND resistance = $1.34.

Global Commodities markets continue to confirm what almost every country’s central banker who has real-time quotes sees – inflation:

  1. The CRB Commodities Index closed at 316 yesterday = +21% higher than Bernanke’s decision in Jackson Hole to Quantitatively Guess.
  2. Oil is in a Bullish Formation with immediate-term TRADE lines of support and resistance of $87.17 and $91.47, respectively.
  3. Copper prices are testing ALL-TIME highs again this morning = +29% since The Ber-nank opted to sponsor inflation.

Gold, meanwhile, looks a little bit less-like most commodities all of a sudden. To a degree, if real-interest rates continue to push higher, the gold bulls will have to compete with that yield. That’s new. Tops are processes, not points, but Gold will need to get back above its immediate-term TRADE line of $1390/oz to get me interested in getting long it again (I sold our GLD position on Monday).

 

Altogether, if you take the beginning and end of 2010, you can draw plenty of conclusions that are now crystal clear. From my global macro model’s vantage point, the deep simplicity of all of these global macro factors and what they mean prospectively to the global markets remains as follows: Growth Slowing, Inflation Accelerating, and Interconnected Risk Compounding.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Mandelbrot Math - mandelbrot


THE M3: JUNKETS; GENTING; GUANGZHOU-ZHUHAI MRT

The Macau Metro Monitor, December 9th, 2010


NEED TO REVISE JUNKET RULES: JORGE OLIVEIRA macaubusiness.com

Jorge Oliveira, Macau Gaming Commission's former legal affairs chief, said more casino regulation and an overhaul of the junkets are needed.  Mr Oliveira also opposed the concentration of more economic activities in the hands of casino operators and resists the idea that Macau should fully open its casino industry.

 

GENTING SINGAPORE SEEKS $4.2BN Reuters

According to Reuters basis point, RWS is seeking to borrow around S$4.2 billion to pay off an existing loan.  The refinancing comprises a S$3.5 billion seven-year amortizing term loan and a revolving credit facility.  The term loan, which has an average life of 4.13 years, will pay an initial interest rate of 160 basis points over the Singapore dollar swap offered rate.  If the debt-to-EBITDA ratio falls to 2.5 times or lower, the interest will fall to 120 bp over SOR.  Bank of Tokyo-Mitsubishi UFJ, DBS, HSBC, Oversea-Chinese Banking Corp and Sumitomo Mitsui Banking are lead arrangers and joint bookrunners for the loan.

 

GUANGZHOU-ZHUHAI MRT OPERATIONAL END OF DECEMBER Xinhua News

The Guangzhou‐Zhuhai Intercity Mass Rapid Transit (MRT) will come into operation by the end of December.  The train began trial operation last Tuesday.  The trial train runs four to eight times from Jinding to Guangzhou at a speed up to 350km. Construction of the Zhuhai Station in Gongbei is still under way and to be completed by the end of 2011.  The train from Zhuhai to Guangzhou will take 45 minutes.


Clever Enough

This note was originally published at 8am this morning, December 08, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The individual’s power to operate something with a deficit is very limited.”

-Ludwig von Mises

 

I think people who run their own companies (or lives) without government bailout support get this very simple point. It’s Darwinian.

 

Most modern day federal governments, however, don’t have to have any experience in the simple matter of balancing a budget. As the late Austrian economist, Ludwig von Mises, astutely pointed out, “for the government, conditions are different. The government can run a deficit, because it has the power to tax people.” (Economic Policy, von Mises’ 3rd Lecture, “Interventionism”, page 28)

 

Well what happens if a government that’s running a deficit doesn’t have the political spine to tax people? Simple answer. The risk associated with that government’s sovereign debt goes up. That’s the price of fiscal irresponsibility. Try this at home with your credit card debt and you’ll get the point.

 

Yesterday was a fascinating day in the US stock market. In risk management speak we call what happened an “outside reversal.” Essentially, outside reversals occur when some buy-and-hope event (extending the Bush tax cuts) sends US stock market futures soaring to fresh YTD highs… but then they fade intraday on heavy volume… and close below the prior YTD closing high. An outside reversal is a bearish immediate-term signal.

 

The 2010 YTD high for the SP500 is 1225. Intraday, the market registered readings as high as 1234 (on the open at 945AM EST when emotional decisions run rampant), but sold off hard into the close to settle down at 1223.

 

All the while, US Treasury yields were screaming higher. They were telling you, Mr. Shortermism of Political Career Risk Management, that CUTTING taxes when you have a massive deficit problem = sovereign debt risk.

 

So, if you are a government… and you have a debt financed deficit spending problem… and you can’t tax anyone… what do you do? This is not a trick question. There’s only one answer the Fiat Fools have for this – INFLATE.

 

In fact, it was the forefather of Big Government Intervention, John Maynard Keynes himself, who wrote in his 1936 manifesto, the General Theory of Employment, Interest and Money, that “if one devalues the currency and the workers are not clever enough to realize it, they will not offer resistance against a drop in real wage rates, as long as nominal wage rates remain the same.”

 

Sorry to Messrs Bush, Obama, and The Ber-nank. This Canadian American’s workers are Clever Enough.

 

If the ideological submission by the Keynesians is that:

  1. Markets are rational, and
  2. American workers are stupid…

I’ll comfortably sit on the common man’s side of that trade.

 

If the conclusion is that we can load American 301ks with bond fund allocations and no one will notice when they get ploughed, we’ll take the other side of that theoretical trade too. Inflation is bad for bonds.

 

Both US and Global Bond Yields are all of a sudden making a credible threat to break out into what we call a Bullish Formation (bullish on all 3 of our core investment durations: TRADE, TREND, and TAIL). The corollary to this is that sovereign bonds (including US Treasuries) are moving into a Bearish Formation. This is not what The Ber-nank ordered.

 

The following lines are the bullish intermediate-term TREND lines of support across the US Treasury Yield Curve:

  1. 2-year yields = 0.46%
  2. 10-year yield = 2.66%
  3. 30-year yields = 3.90%

In other words, bond yields are trading significantly above their intermediate-term TREND lines of support and bond funds are breaking down, hard, as a result. Maybe that’s why this morning’s ABC Consumer Confidence reading remains astonishingly low at -45 (that’s a minus 45, less than 10 points off its all-time lows) on the weekly print, despite the US stock market having a monster move of +2.9% to the upside in that week.

 

Maybe Americans don’t own as many stocks as they did when they had 401ks…

 

Maybe someone stuffed their 301ks with bond fund allocations at a bond market top…

 

Maybe Americans are Clever Enough to know what’s happening to their money when A) the government can’t tax and B) has chosen to inflate…

 

My immediate term support and resistance levels for the SP500 are now 1206 and 1239, respectively. I’ve dropped the Hedgeye Asset Allocation to Bonds to 6% in the last month and I remain short the SP500 via the SPY in the Hedgeye Portfolio.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Clever Enough - EL dec 8 chart


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